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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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
Baltimore, Maryland 21286
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 494-4500
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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
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As of March 30, 1999, the registrant had 729,892.5 shares of Common Stock
outstanding.
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TABLE OF CONTENTS
Page
PART I ....................................................................... 1
Item 1. Business ............................................................1
Item 2. Properties .........................................................10
Item 3. Legal Proceedings ..................................................10
Item 4. Submission of Matters to a Vote of Security Holders ................10
PART II ......................................................................11
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ............................................................11
Item 6. Selected Financial Data ............................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........20
Item 8. Financial Statements and Supplementary Data ........................21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................41
PART III .....................................................................41
Item 10. Directors and Executive Officers of the Registrant ................41
Item 11. Executive Compensation ............................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management ....45
Item 13. Certain Relationships and Related Transactions ....................46
PART IV ......................................................................48
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ........................................................48
SIGNATURES ...................................................................49
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PART I.
ITEM 1. BUSINESS
The following description of Wells Aluminum Corporation ("Wells" or the
"Company"), the aluminum extrusion industry, and the Company's business contains
statements which constitute forward looking statements, and not historical
facts, within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places and include statements
regarding the intent, belief or current expectations of the Company or its
officers primarily with respect to the future prospects, financial condition and
operating performance of the Company. Any such forward looking statements
regarding the Company, the aluminum extrusion industry, and the Company's
business are not guarantees of future performance and involve risks and
uncertainties. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward looking statements.
THE COMPANY
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Wells Aluminum Corporation was incorporated in Maryland in November 1967 as
the successor to an aluminum extrusion business which began in the early 1950's.
Gibbons, Goodwin, van Amerongen ("GGvA") is the sole general partner of Wells
Holdings Limited Partnership, which currently owns 76.7% of the outstanding
shares of the Company's common stock. As a result, GGvA has the controlling
interest in the Company and has the power to elect a majority of the directors
of the Company and to control all matters submitted to the stockholders of the
Company, including approving business combinations involving the Company.
Wells is a custom extruder, finisher and fabricator of soft alloy aluminum
products, principally for the building/construction, transportation, consumer
durables and equipment/electrical markets. In addition to the production of mill
finished extrusions, the Company's operations include painting, anodizing and
fabrication, which enables the Company to provide its customers with
assembly-ready aluminum components and assemblies. The Company shipped
approximately 166.3 million pounds of aluminum extrusions in 1998, an increase
of 11.4 million pounds, or 7.4%, over the 1997 shipments of 154.9 million
pounds.
The Company's network of plants consists of seven facilities in six states
in the midwestern and southeastern United States. These facilities contain
twelve extrusion presses, sizes 7" to 10", and are located to meet various
regional demands, minimize transportation costs, balance production requirements
among plants and provide single source reliability to large customers. The
Company also operates its own casting facility for aluminum billet, enabling the
Company to manage its internal billet requirements as well as to recycle its
scrap for use in its extrusion operations. The Company believes that its ability
to cast the majority of its billet needs provides a cost advantage over those
extruders without an internal casting capability.
The Company sells its products to approximately 800 customers primarily in
the building/construction, transportation, consumer durables and
equipment/electrical markets. In 1998, the Company's top ten customers received
approximately 38% of the Company's shipped volume in pounds sold, with the top
twenty-five customers accounting for approximately 57%. In 1998, one customer,
Navistar International Corporation, accounted for 10.4% of the Company's gross
sales measured in dollars.
The Company focuses on long-term customer relationships to maintain and
enhance its business prospects. Approximately two-thirds of the Company's 1998
sales in extrusion pounds shipped were made to customers that have been
customers of the Company for more than ten years. The Company believes that its
relatively stable customer base is attributable, in part, to the Company's
ability to provide a high level of customer service, engineering expertise and
quality products at competitive prices.
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PRODUCTS
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Through its regional plant system, Wells is able to produce a broad range of
extruded, finished and fabricated aluminum products used by its customers in the
manufacture of their end products. In 1998, over 90% of the products sold by the
Company were designed and manufactured according to individual customer
specifications. The Company believes that the large share of customized products
sold by the Company can be attributed to the Company's product quality, high
level of customer service, the coordination between its sales force and
engineering staff at each plant, engineering design capabilities, and its
extensive extrusion, finishing and fabrication capabilities.
Building/Construction
In the building/construction market, the Company produces extrusions and
fabricated products for residential and commercial window and door frames, storm
doors, vents and louvers, railings, stadium seating systems, patio enclosures
and a variety of architectural specialty applications. The Company also
manufactures and markets a proprietary line of sliding patio doors and a line of
commercial entrance doors and storefront systems. In 1998, shipments to
customers in the building/construction market represented approximately 44% of
the Company's total pounds sold. Of the pounds sold in this market,
approximately 58% were shipped to customers in the residential segment with the
remaining pounds being shipped to customers in the commercial segment.
Transportation
In the transportation market, the Company produces extrusions and fabricated
products for truck cabs, commercial truck trailers, recreational vehicles, golf
carts, utility trailers and automotive accessories. The Company also produces a
number of complex assemblies, including complete door frames and structural sub
frames for use in Class 8 truck tractors and complete window assemblies for use
in school buses and delivery vans. In 1998, approximately 25% of the Company's
total pounds sold were shipped to customers in the transportation market.
Consumer Durables
In the consumer durables market, the Company produces extrusions and
fabricated products for a wide variety of applications, including the
manufacture of high-end office furniture and pleasure boats. In 1998, shipments
to customers in the consumer durables market represented approximately 10% of
the Company's total pounds sold.
Equipment/Electrical
In the equipment/electrical market, the Company produces extrusions and
fabricated products for applications such as heat sinks and electronic component
mounting systems, electrical distribution and commercial lighting systems,
material handling systems, and industrial guarding and fixturing systems. In
1998, approximately 8% of the Company's total pounds sold were shipped to
customers in the equipment/electrical market.
Distributors
For the distributor market, the Company produces extruded products which the
distributors then resell to manufacturers, contractors and other industrial end
users. The Company's focus in the distribution market is on producing
application specific components, which are sold via specialty, value added
distributors. The Company does not regularly participate in the stock
shape/metal service center portion of the distribution market. Thus, the Company
believes that the end use of products produced for distributors and then resold
tends to parallel the uses of customers which the Company serves directly. In
1998, shipments to distributors represented approximately 13% of the Company's
total pounds sold.
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MANUFACTURING
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Wells' manufacturing processes involve casting, extruding, finishing and
fabricating soft alloy aluminum. The Company's operations and engineering
activities are directed by its Vice President of Operations, from the Company's
corporate headquarters. Management of production activities is structured to
provide strong decentralized plant operations in combination with certain
centralized corporate functions. Each plant location, of which there are seven,
is managed by an operations manager, who in most cases, is supported by a plant
manager. Operations management focuses on plant site issues, such as customer
service, delivery, product quality, productivity, operating costs and labor,
that are directly under operations control.
Casting
The Company has two casting furnaces and ancillary equipment which are used
to produce aluminum billet. The first step in the casting process is to melt
primary aluminum and aluminum scrap in a large furnace. The molten aluminum is
either directly alloyed in this furnace or transferred to another furnace where
the alloying materials are added. The aluminum is then cast into logs of varying
diameters with lengths of up to 16 feet. Next, these logs are heated and then
cooled at a controlled rate to allow the cast aluminum to achieve the optimally
distributed chemical composition for extrusion, a process called homogenization.
Afterwards, some aluminum logs are cut into shorter lengths called billets, the
main raw material for the production on aluminum extrusions. Aluminum logs and
billets are then transferred to the Company's extrusion plants for subsequent
production of aluminum extrusions.
Extrusion
The Company operates five extrusion plants which have in the aggregate
twelve extrusion presses producing varying sizes of extrusions. Extrusion is a
manufacturing process by which aluminum billet is heated and pushed by a press,
or extruded, through a die to produce a piece of metal in the shape of the die
and at the desired length. Extrusions are then straightened by stretching and
cut to the required lengths which range from 8 to 50 feet. Most extrusions are
hardened by aging in large ovens from 6 to 12 hours. Typically, 75% of the
results of the extrusion process are salable products; the remaining 25% is
aluminum scrap, which is either recast into aluminum billet by the Company or
sold on the open market to metal dealers. Almost all of the Company's dies are
designed to produce aluminum extrusions according to individual customer
specifications.
Finishing
The Company has extensive finishing capabilities with two painting and two
anodizing facilities providing coverage of markets from the East Coast through
the Midwest. In addition, the Company uses contract painters and anodizers to
augment its finishing capabilities. These combined finishing capabilities allow
the Company to provide its customers a single source for components and
assemblies ready for processing. Often additional finishing-related services are
provided, including two-tone painting and taping of painted surfaces for
protection during the customer's manufacturing process. These services enhance
the Company's value to its customers and provide appreciable added income and
profit margin.
Fabrication
The Company has six fabrication operations, of which two are dedicated
fabrication plants. The Company employs a variety of fabrication processes,
including notching, bending, punching, drilling, tight tolerance cutting,
computerized numerical control ("CNC") machining, manual and robotic welding,
and assembly. These fabrication operations differ in complexity, ranging from
Tier #3 activities, which include welding, high tolerance machining and
assembly, to Tier #1 activities, which involve light punching, manual sawing and
drilling, and hand deburring. Fabricated products may range from a simple
cut-to-length extrusion notched and punched for use as a door threshold, to a
step assembly for a truck cab, to a curved and fully formed trim cap for use on
an
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office partition, to a panel van window assembly complete with glass. In 1998,
the Company's two Tier #3 operations received QS9000/ISO9002 certification
demonstrating the Company's commitment to the production of quality products.
The Company's fabrication operations are attractive to those customers
interested in outsourcing certain manufacturing in order to better control
operating costs, manage inventory, accommodate growth, or more sharply focus
their own operations. The Company's fabrication operations provide additional
opportunities to enhance profit margins and help protect the business from
market penetration by other competitors.
Backlog
Extrusion turnaround time is generally sufficiently short as to permit the
Company to fill customer orders for most of its products in a short time period.
Accordingly, the Company does not consider backlog to have a material effect on
its business.
RAW MATERIALS
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Wells' principal raw material for aluminum extrusions is aluminum billet,
the majority of which the Company produces at its own casting facility. The main
materials used in the production of billet are primary aluminum ingot and
aluminum scrap. In 1998, the Company purchased its primary aluminum requirements
pursuant to supply agreements with five North American suppliers at current
market prices at the delivery dates. Over 60% of the aluminum scrap required in
1998 was sourced from the Company's own manufacturing processes. The remaining
requirements for primary ingot and scrap were purchased from a variety of metal
and scrap brokers and dealers.
For 1999, the Company has secured commitments with six North American
suppliers to purchase primary aluminum for its casting requirements at current
market prices at the delivery dates. Over 60% of the aluminum scrap required for
1999 is expected to be sourced from the Company's own manufacturing processes.
The Company believes that its remaining requirements for primary ingot and scrap
are readily available in the open market from metal and scrap brokers and
dealers.
Aluminum Cost Recovery
Aluminum is subject to extensive price volatility in the world market,
reflecting both domestic and international economic demand as well as activities
by financial hedge investment funds. The Company seeks to reduce its exposure to
the volatility in aluminum prices by fixing the cost of metal by hedging against
committed fixed price sales or by passing cost increases through to customers by
systematic market indexed sales pricing. The Company limits its hedging
activities to committed sales and does not engage in speculative hedging. As a
further control technique, the Company maintains its inventory at levels
consistent with operating needs (35 days on hand) through centralized purchasing
and logistics, and sells any excess primary aluminum in the open market, closely
matching the cost of metal purchased to the price of such metal sold.
Notwithstanding the Company's efforts, any increase in the cost of aluminum
purchases could have an adverse effect on the Company's financial condition and
operations if the Company is unable to pass such increases to its customers or
it does not effectively hedge against such aluminum price changes.
CAPITAL IMPROVEMENTS
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Capital expenditures for 1998 totaled $3.3 million, with expenditures of
$1.6 million on extrusion press upgrades, $0.3 million on finishing
capabilities, $0.5 million on cast house improvements, $0.6 million on
additional fabrication capabilities, and $0.3 million on other capital items.
Since the middle of 1995, the Company has focused its capital investment on
technology and productivity improvements in extrusion and casting that support
the Company's marketing initiatives. These investments generally have expected
paybacks of less than 18 months and have increased capacity without requiring
the acquisition of major new equipment. In 1998, the Company upgraded its 10"
extrusion press and ancillary equipment, including the installation of an
isothermal control system, at its North Liberty, Indiana facility, improving
productivity by 15%. The Company also installed an isothermal
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control system on the 8" extrusion press at its Kalamazoo, Michigan facility,
increasing productivity in excess of 15%. In 1998, the Company replaced a small
homogenization oven with a new high capacity unit and modernized an existing
homogenization oven at its casting facility. A billet cooling system was also
replaced to support this new capacity and to improve the metallurgical
properties of the aluminum billet cast. In 1998, the Company improved its
fabrication capabilities through investments in additional CNC bending and
machining equipment, two new precision saws, a robotic welding system and two
new CNC routers capable of machining large subassemblies.
The Company plans to make capital expenditures of approximately $4.0 million
in 1999 and $3.5 million annually from 2000 through 2003. The Company intends to
continue to expand capacity by upgrading its equipment rather than purchasing
expensive new equipment. Over the next five years, the Company plans to update
and modernize two extrusion presses per year, increasing extrusion capacity by
at least 10% per press and reducing scrap generated in the process by 1.5%. The
Company believes that by upgrading its extrusion presses, the Company will
receive 90% of the productivity benefits realized by replacing equipment but at
50% of the capital investment required. The Company will continue to invest
selectively in advanced computer isothermal control equipment, which the Company
believes can increase extrusion press capacity by at least 11%.
SALES AND MARKETING
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Wells' sales and marketing activities and its field sales force are directed
by its Senior Vice President, Sales and Marketing, from the corporate
headquarters. The centralized sales and marketing organization is accountable
for market research and all product and market development activities, including
promotional materials and activities. These activities include the development
and implementation of customer strategies and the strict maintenance of pricing
discipline throughout the Company. All extrusion pricing is centrally managed
and administered by the Vice President, Business Selection and Capacity
Management, who reports to the Senior Vice President, Sales and Marketing.
Two regional sales managers, located in the Southeast and Midwest, have
day-to-day responsibility for directing the sales force and implementing
agreed-to market and customer strategies. The regional sales managers work
hand-in-hand with the operations managers at each plant location to coordinate
customer service and tailor their sales activities to meet the business needs of
the plants. This arrangement allows field sales and operations personnel to
react to changing market conditions, while facilitating a uniform approach to
the market and the reassignment of production requirements among plants when
warranted to maintain customer service or plant utilization. In addition to the
regional sales managers, the Company employs nine direct sales persons and
utilizes six independent manufacturers' representatives for its extrusion and
fabrication businesses. The Company also utilizes a number of specialty
representatives for its patio door and commercial doors businesses. Compensation
for the direct sales force is comprised of salary plus performance-based
bonuses.
The Company has implemented a program to upgrade its field sales
organization, which is expected to continue in 1999. Key elements include
increasing the responsibility of sales managers and representatives for account
strategy development and forecasting, providing easy access to the Company's
central data bases via portable laptop computers, adding additional employed
sales personnel, and tying sales manager compensation to account profitability.
Customer Service
Wells seeks to provide high quality customer service for the markets it
serves by capitalizing on its marketing experience, manufacturing flexibility
and technical expertise. The Company believes that its strategic network of
facilities and the integration among marketing, sales and manufacturing provide
it with a competitive advantage by
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allowing it to respond quickly to customer demands. Customer service
organizations are located at each of the Company's plants, reporting to the
operations manager, in order to ensure sensitivity and facilitate quick response
to customer needs and inquiries. Customer service representatives are
responsible for order entry, and in coordination with the field sales force,
routinely initiate day-to-day contact with long-standing customers. The Company
believes that this close, local contact between experienced customer service
personnel and its established customers is a critical factor in maintaining
strong customer relationships.
Pricing and Hedging Programs
The Company offers its customers three basic pricing alternatives: forward
sales contracts, formula pricing, and market pricing. These alternatives can be
tailored to meet a customer's specific market and risk management requirements.
Forward sales contracts, which accounted for approximately 43% of total
pounds sold by the Company in 1998, are "take or pay" agreements negotiated with
long-standing customers. These contracts fix the sales price at which the
Company agrees to sell and the customer agrees to purchase a specified quantity
of aluminum extrusions in the future. These contracts typically cover a
substantial portion of the customer's requirements for a three to six month
period. The fixed sales price is based on the price at which aluminum can be
hedged for future delivery plus a conversion spread to cover operating costs and
provide a profit margin.
The Company also offers to long-standing customers a formula pricing
mechanism which adjusts pricing monthly based on aluminum price movements.
Monthly price changes are based on the Midwest Transaction Price Average (the
"MWTP"), plus a negotiated spread covering conversion costs and profit margin.
Formula pricing allows the Company to stay current with the aluminum market,
balancing upward and downward movements on a monthly basis. In 1998,
approximately 37% of total pounds sold were sold by the Company using the
formula pricing mechanism.
The Company also quotes individual orders, based on the MWTP in the previous
month, for its remaining open market accounts. Profit margins on such market
accounts are often higher than on forward sales contracts or formula priced
accounts. In addition, the Company's exposure to aluminum price movements is
nominal since such orders are based on 30 day delivery, enabling the Company to
manage its metal cost.
Fabricated components and assemblies, including the Company's patio door and
commercial door product lines, are typically priced quarterly utilizing a
formula mechanism based on the previous quarter's average metal cost. Aluminum
costs are generally a less significant element of such product costs, which
typically include purchased parts and substantial fabrication and assembly
labor. Pricing, however, is tightly controlled via a quote process during which
purchased parts are quoted and internal costs are established and then
appropriate burden rates and target profit margins are added. The quarterly
metal price adjustments allow for a "natural" hedge in the first month, which
minimizes the risk of changes in metal prices. In certain cases, the Company
will enter into aluminum futures contracts to hedge against price volatility in
the second and third months based on expected purchases, although such hedges
have certain risks because customers are not bound to purchase fixed volumes.
The Company takes forward positions in the aluminum market, but only when
supported by forward sales contracts or by firm orders for fabricated products.
As a matter of corporate policy, the Company does not engage in speculative
hedging activities regarding future aluminum price movements.
Product Delivery
In 1998, Wells distributed approximately 75% of its products through its own
fleet of 32 tractors and 140 trailers. All of the Company's tractors are leased
whereas all of its trailers are owned. The Company believes that its selected
use of its tractor-trailer fleet enhances the level of service to its
long-standing customers by
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enabling more timely delivery with less damage. The Company also uses motor
common carriers for certain hauls, such as partial truck loads and situations
where no back haul of aluminum scrap is available, when cost effective.
COMPETITION
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The North American aluminum extrusion market is fragmented and highly
competitive in that there are over 100 extruders who operate more than 170
extrusion plants with more than 450 extrusion presses. Recently, however,
competitors in the market have begun consolidating as evidenced by William L.
Bonnell, Inc.'s acquisition of three extrusion facilities from Reynolds Metals
Company and its acquisition of Exal Aluminum Inc. adding another two extrusion
facilities. In addition, ALCOA Inc. acquired Alumax, Inc., including its
thirteen extrusion facilities.
In the U.S. aluminum extrusion market, the Company believes that competition
is regionally oriented and that aluminum extrusion end users are typically
looking for "local" plants with a strong focus on customer service, quality and
a reputation for fair market pricing. In addition, competition is based on
delivery time and specialty engineering/design/production capabilities. The
Company also believes that a regional network of plants is important to large
end users in order to meet the needs of their multi-plant locations and to
ensure continuity of sourcing.
Competitors in the U.S. aluminum extrusion market include the extrusion
businesses of primary aluminum producers, such as ALCOA Inc. and Kaiser Aluminum
Corporation, and sizeable multi-plant independent extruders, such as Aluminum
Shapes, Inc., Easco, Inc., William L Bonnell Company, Inc., and V.A.W. of
America, Inc. Competitors also include small local operators, such as Elixir
Industries, Western Extrusions Corp., Jordan Company, and Astro Shapes, Inc.,
and Canadian and Mexican exporters, such as Caradon Indalex and Cuprum S.A. de
C.V.
Material Substitution
A factor potentially affecting the Company's future operating performance is
material substitution. Other materials, such as vinyl and rolled steel, may be
used as substitutes for aluminum extrusions in certain markets and under certain
circumstances. In recent years, vinyl, with its penetration of the residential
window and door market, has been the most commonly used substitute for aluminum
extrusions. Industry forecasts indicate that the movement away from aluminum in
this market has slowed and that aluminum should essentially maintain its unit
volume (though not its market share in the window and door market) through the
end of the 1990's. In areas where the Company does significant business, such as
window components for the modular and mobile home segments, which represented
approximately 12% of pounds sold by the Company in 1998, vinyl is not a good
substitute due to cost and strength limitations. Rolled steel may be another
substitute for aluminum when aluminum costs rise to such an extent that rolled
steel becomes a viable economic alternative for certain manufacturing needs.
However, the Company estimates its participation in markets which may utilize
rolled steel to be approximately 2% of the pounds sold by the Company in 1998.
An increase in the use of substitutes for aluminum extrusions could have a
material adverse effect on the financial condition and operations of the
Company.
EMPLOYEES
As of December 31, 1998, Wells employed 1,483 full time employees, 830 of
whom are covered by collective bargaining agreements at five plant locations.
These collective bargaining agreements are with local unions of the United Steel
Workers of America, representing workers at two plant locations, the
International
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Brotherhood of Teamsters, representing workers at two plant locations, and the
International Union of United Automobile, Aerospace and Agricultural Implement
Workers (the "UAW"), representing workers at one plant location. The Company's
collective bargaining agreements are independently negotiated at each plant
location and expire on a staggered basis.
The Company believes that its labor relationships with employees, union and
non-union, are generally satisfactory. In 1998, the Company experienced a work
stoppage at its North Liberty, Indiana facility, the only work stoppage in the
last five years. In late February 1998, the Company's collective bargaining
agreement with the local union of the UAW expired, and shortly thereafter, the
local union initiated a work stoppage. In late March 1998, the Company and the
local union of the UAW reached agreement on a new collective bargaining
agreement. During the work stoppage, the Company operated the affected plant
using salaried personnel from within the Company and temporary employees. The
work stoppage did not have a material adverse effect on the financial
performance of the Company. However, there can be no assurance that there will
be no further work stoppages in the future. A future work stoppage could have a
material adverse effect on the financial performance of the Company.
ENVIRONMENTAL MATTERS
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Wells is subject to extensive and evolving environmental laws, regulations
and rules that have been enacted in response to technological advances and
increased concern over environmental issues. These regulations are administered
by the U.S. Environmental Protection Agency and other federal, state and local
environmental, transportation, and health and safety agencies. The Company
believes that over time there will continue to be increased legislation,
regulation and regulatory enforcement actions.
In order to operate its business, the Company must obtain and maintain in
effect one or more permits for each of its facilities and comply with complex
regulations and rules governing air emissions, waste water discharges, the use,
storage, treatment and disposal of solid and hazardous wastes and other items
which might affect environmental quality. As a result, the Company from time to
time is required to make expenditures for pollution control equipment and for
other purposes related to its permits and compliance.
Among the laws that may affect the Company are the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") and
analogous state laws that impose joint and several liability, without regard to
fault, on persons that own or operate locations where there has been, or is
threatened to be, a release of any hazardous substances into the environment, as
well as persons who arranged for the disposal of such substances at such
locations. Such persons may become liable for the costs of investigating and
remediating such substances. There are often also substantial legal and
administrative expenses incurred in dealing with remediation claims and
activities.
The Company has been notified by either the U.S. Environmental Protection
Agency or other persons that it is considered to be a "potentially responsible
party" for the costs of investigating and remediating hazardous substances at
several locations owned and operated by third persons. At each such location,
the Company understands that it is one of many "potentially responsible
parties." The Company believes that the volume of hazardous substances, if any,
for which it may be held responsible at each such location is not significant.
While the Company believes that it may have valid defenses to liability claims
at these locations, it has been settling such claims where an opportunity to do
so is presented at a cost which probably would not exceed the expenses of
asserting such defenses through available administrative and judicial processes.
The Company believes that none of these contingencies, individually or in the
aggregate, could have a material adverse impact on the Company's operations or
financial condition.
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Environmental Issues
Certain of the Company's manufacturing facilities have been in operation for
several decades and, over such time, these facilities have used substances and
generated and disposed of wastes which are or may be considered hazardous. For
example, certain of these facilities have in the past stored or disposed of
wastewater treatment sludge in on-site catch ponds, lagoons or other surface
impoundments. Although the Company believes that these facilities are in
substantial compliance with current environmental laws and regulations
applicable to such storage and disposal activities, it is possible that
additional environmental issues and related matters may arise relating to such
past activities which could require additional expenditures by the Company.
In 1998, the Environmental Protection Division of the Georgia Department of
Natural Resources approved the Company's work plan for the modification of its
waste water treatment facilities at its Moultrie, Georgia facility. Under the
work plan, which calls for the end of direct discharge of treated waste water
and connection to the City of Moultrie sewer system, three settling ponds on the
Company's property would be removed from services and their remaining structural
components stabilized and capped in place. Phase 1 of the work plan, the
reinforcement of pond berms, is scheduled to be completed in April 1999. Phase 2
of the work plan, the stabilizing and capping of the ponds, is scheduled to be
completed in 2000. The total cost of the work plan will be approximately $2.1
million.
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted, or what environmental conditions may be found to
exist. Enactment or more stringent laws or regulations or more strict
interpretation of existing laws and regulations could require additional
expenditures by the Company, some of which could be material.
PATENTS AND TRADEMARKS
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Wells owns certain patents and trademarks but does not believe that its
business is dependent on its intellectual property rights.
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ITEM 2. PROPERTIES
Wells has seven production facilities, which enable the Company to serve
customers effectively in markets in the East, Midwest and Southeast, as follows.
None of the owned properties is subject to an encumbrance that is material to
the Company's operations.
<TABLE>
<CAPTION>
Site Facilities
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Location Operations Acres Own/Lease Sq. Ft. Own/Lease
-------- ---------- ----- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Monett, Missouri Extrusion, painting, 21.1 Owned 185,000 Owned
casting 0.3 Leased
Cassville, Missouri Fabrication 9.6 Owned 32,224 Owned
0.5 Owned
North Liberty, Indiana Extrusion, anodizing, 48.9 Owned 215,890 Owned
fabrication
Kalamazoo, Michigan Extrusion, complex 23.3 Owned 132,784 Owned
fabrication
Sidney, Ohio Complex fabrication 3.7 Leased 102,400 Leased
4.8 Owned
Belton, South Carolina Extrusion, painting, 54.5 Owned 165,000 Owned
fabrication
Moultrie, Georgia Extrusion, anodizing, 24.1 Leased 315,352 Leased
fabrication 65.3 Owned
</TABLE>
The Company considers the condition of its properties to be good and the
capacity of its facilities to be adequate for the immediate needs of its
business. The principal executive office of the Company is located at 809
Gleneagles Court, Suite 300, Baltimore, Maryland 21286.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Wells is a party to legal actions in the normal course of
its business. The Company is not currently involved in any legal proceedings
that it believes would have a material adverse effect upon its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Wells held its annual meeting of stockholders on December 9, 1998 during
which the stockholders voted on: (1) the election of eight directors of the
Company to serve until the 1999 annual meeting of stockholders and until their
respective successors are duly elected and qualified, (2) the ratification of an
amendment to the Company's 1997 Stock Incentive Plan (the "Plan"), whereby the
total number of options available under the Plan was increased from 65,000 to
75,650, and (3) the appointment of Ernst & Young LLP as the Company's auditors
to serve at the discretion of the Board of Directors. The directors nominated
and duly elected are Russell W. Kupiec, W. Russell Asher, Lynn F. Brown,
Elizabeth Varley Camp, Todd Goodwin, Edward R. Heiser, Leo A. McCafferty, Jr.
and Lewis W. van Amerongen. The stockholders approved all actions presented to
them at the annual meeting.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Wells' common stock is not registered under the Securities Act of 1933, as
amended, and is not traded on any organized securities market. In December 1998,
the Board of Directors of the Company declared a cash dividend of $2.64 per
share, or $1.9 million, to the holders of its common stock, which was paid in
January 1999.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary financial data with respect to Wells
for the periods ended and as of the dates indicated. The summary historical
financial data for the five years ended December 31, 1998 are derived from the
audited financial statements of the Company. The following table should be read
in conjunction with the Company's financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the other financial information included elsewhere herein. All
amounts are in thousands.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------------------------------
Statement of Operations Data: 1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales ...........................$ 251,191 $ 267,349 $ 228,161 $ 232,555 $ 197,991
Cost of sales ....................... 209,368 225,681 191,206 194,414 168,810
----------- ---------- ---------- ---------- ----------
Gross profit ........................ 41,823 41,668 36,955 38,141 29,181
Selling, general and
administrative expenses ........... 16,093 17,446 15,877 16,211 14,536
Compensation from
settlement of employee
stock options ..................... -- 4,070 -- -- --
----------- ---------- ---------- ---------- ----------
Operating profit .................... 25,730 20,152 21,078 21,930 14,645
Interest expense (a) ................ 10,806 8,390 5,176 7,087 8,443
Income taxes ........................ 6,157 5,073 7,059 6,262 3,016
----------- ---------- ---------- ---------- ----------
Earnings before extraordinary
losses (b) ....................... $ 8,767 $ 6,689 $ 8,843 $ 8,581 $ 3,186
=========== ========== ========== =========== ==========
As of December 31,
Balance Sheet Data: 1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
Cash and cash equivalents .......... $ 7,619 $ 5,352 $ 277 $ 342 $ 1,827
Working capital .................... 32,306 29,989 18,175 19,355 19,813
Inventories ........................ 20,394 20,209 19,838 19,972 24,665
Property, plant and equipment, net.. 28,276 27,269 26,723 26,489 28,241
Total assets ....................... 124,478 125,383 108,726 112,261 124,800
Total indebtedness ................. 105,000 105,000 40,091 51,683 69,064
Total stockholders' equity ......... (12,779) (16,068) 34,472 25,246 17,142
</TABLE>
Notes to Selected Financial Data:
(a) Interest expense includes amortization of debt issuance costs of $622, $593,
$495, $570 and $474 for the years ended December 31, 1998, 1997, 1996, 1995
and 1994, respectively, and is net of interest income of $504 and $452 for
the years ended December 31, 1998 and 1997.
(b) Earnings before extraordinary loss excludes an extraordinary loss of $1,292
(net of applicable income taxes of $826) on the refinancing of debt in 1997
and an extraordinary loss of $1,092 (net of applicable income taxes of $698)
on the refinancing of debt in 1994.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Wells Aluminum Corporation is a custom extruder, finisher and fabricator of
soft alloy aluminum products, serving principally the building/construction,
transportation, consumer durable and equipment/electrical markets. The Company
operates a network of seven facilities with 12 extrusion presses, located in six
states in 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 years ended 1998, 1997 and 1996 is based on the historical,
audited 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. All amounts are in
thousands except for per pound data.
Adjusted EBITDA is defined as earnings before interest expense, income
taxes, depreciation and amortization of goodwill, and excludes LIFO charges or
income, extraordinary items, charges for the capping of settling ponds, gain
from the curtailment of a pension plan and compensation from settlement of
employee stock options. 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.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Statement of Operations Data:
Net Sales - Products ................................$ 247,662 $ 235,467 $ 208,634
Net Sales - Metal ................................... 3,529 31,882 19,527
--------------- --------------- ----------------
Net Sales ....................................... 251,191 267,349 228,161
Cost of Sales - Products ............................ 208,636 192,201 173,988
Cost of Sales - Metal ............................... 3,492 31,409 19,550
LIFO Charges (Income) ............................... (2,760) 2,071 (2,332)
--------------- --------------- ----------------
Cost of Sales ................................... 209,368 225,681 191,206
Gross Profit ........................................ 41,823 41,668 36,955
Operating Profit .................................... 25,730 20,152 21,078
Net Earnings ........................................ 8,767 5,397 8,843
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Other Measurement Data:
Pounds of Product Shipped ........................... $ 166,260 $ 154,930 $ 138,380
Gross Sales - Products .............................. $ 259,269 244,760 217,764
Gross Sales Price per Pound .......................... 1.559 1.580 1.574
Adjusted EBITDA ..................................... 26,765 29,970 22,285
Adjusted EBITDA per Pound ........................... 0.161 0.193 0.161
Average Market Price of Aluminum per Pound .......... 0.672 0.775 0.725
Market Price of Aluminum per Pound at Period-End .... 0.599 0.797 0.736
</TABLE>
Aluminum Prices. For the periods indicated, approximately 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, and generally have had
little impact on the Company's level of profitability for the periods described
herein.
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 ability 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. In addition, the
Company monitors Adjusted EBITDA, as it is relevant for debt covenant analysis
under the New Credit Agreement (as defined herein) 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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company's net sales decreased to $251.2 million in 1998 from $ 267.3
million in 1997, a decrease of $16.1 million or 6.0%. Net sales - products
increased to $247.7 million in 1998 from $235.5 million in 1997,
13
<PAGE>
an increase of $12.2 million or 5.2%. Gross sales of value added products
increased $7.4 million, or 5.5%, to $142.2 in 1998 from $134.8 million in 1997.
Gross sales of mill finished extrusions increased $7.0 million, or 6.4%, to
$117.0 million in 1998 from $110.0 million in 1997. The gross sales price per
pound declined by 1.3%, reflecting a higher percentage of mill finished sales as
compared to value added sales, the effect of a decrease of $0.103 in the average
market price per pound of aluminum, and a changing customer and product mix in
value added sales, offset by an improved customer and product mix in mill
finished sales.
Pounds of product shipped increased 11.4 million pounds, or 7.4%, to 166.3
million in 1998 from 154.9 million pounds of product shipped in 1997. Shipments
to commercial construction increased 2.2 million pounds, with increased
shipments for several large architectural projects offsetting decreased
shipments to the commercial door and window market. In residential construction,
shipments increased 1.2 million pounds, reflecting increased shipments to
suppliers to the mobile and manufactured home market counteracting decreased
shipments to suppliers to the residential door and window market. Shipments to
transportation increased 4.0 million pounds, with increased shipments to
manufacturers of truck trailers, golf carts and utility vehicles and
manufacturers of specialty automobile and truck accessories, offsetting declines
in delivery van accounts. In consumer durables, shipments increased 2.1 million
pounds, reflecting increased shipments to manufacturers of pleasure boats and
office furniture. Shipments to equipment/electrical decreased 1.0 million
pounds, primarily due to decreased shipments to one specialty industrial account
that was adversely impacted by a General Motors strike in 1998. The increase of
2.9 million pounds of shipments to distributors/other resulted mainly from
increased shipments to distributors of specialty products serving the
southeastern and midwestern markets and increased shipments to distributors in
Puerto Rico serving the Caribbean basin.
Cost of sales decreased to $209.4 million in 1998 from $225.7 million in
1997, a decrease of $16.3 million or 7.2%. Cost of sales - products increased to
$208.6 million in 1998 from $192.2 million in 1997, an increase of $16.4 million
or 8.5%. This increase resulted from a $8.8 million increase in operating costs
and a $7.6 million increase in aluminum costs. Variable costs per pound
increased to $0.442 in 1998 from $0.423 in 1997, a change of $0.019 per pound.
This increase was primarily due to additional costs associated with a major
upgrade of an extrusion press, the effect of a 4 1/2 week work stoppage at one
plant location, additional overtime costs incurred in response to the increase
in sales volume and the effect of initial lower productivity related to the use
of temporary help and the hiring of new personnel.
Gross profit increased to $41.8 million in 1998 from $41.7 million in 1997,
an increase of $0.1 million or 0.2%.
Selling, general and administrative expenses decreased to $16.1 million in
1998 from $21.5 million in 1997, a decrease of $5.4 million or 25.1%. This
decrease is primarily attributable to a decrease in compensation expense of $5.4
million, of which $4.1 million related to the settlement of employee stock
options as part of the Recapitalization (as defined herein) and $1.3 million
related to reduced incentive compensation. A gain of $1.6 million from the
curtailment of the Retirement Plan for Salaried Employees offsets an increase in
costs of $1.6 million for environmental remediation.
Operating profit increased to $25.7 million in 1998 from $20.2 million in
1997, an increase of $5.5 million or 27.2%.
Interest expense, net of interest income, increased to $10.8 million in 1998
from $8.4 million in 1997, an increase of $2.4 million or 28.6%. This increase
was mainly attributable to the increase in debt outstanding and higher effective
interest rates as a result of the Recapitalization, offset in part by an
increase in interest income. Income tax expense increased to $6.2 million in
1998 from $5.1 million in 1997, an increase of $1.1 million, or 21.6%. The
effective tax rates for the years ended December 31, 1998 and 1997 were 41.3%
and 43.1%, respectively, which differed from the federal statutory rate of 35%
due to the goodwill amortization and state income taxes.
14
<PAGE>
In 1997, the Company incurred an extraordinary loss of $1.3 million (net of
applicable income taxes of $0.8 million) on the refinancing of debt related to
the Recapitalization.
As a result of the above factors, net earnings increased to $8.8 million in
1998 from $5.4 million in 1997, an increase of $3.4 million or 63.0%.
Adjusted EBITDA, as previously defined herein, decreased to $26.8 million in
1998 from $30.0 million in 1997, a decrease of $3.2 million or 10.7%. The
decline in Adjusted EBITDA consisted of a decrease in sales spread of $2.4
million and an increase in operating costs of $4.5 million, offset by $3.7
million from increased sales volume. The decrease in sales spread was affected
by a continuing decrease in aluminum prices in 1998 since market indexed prices
charged to customers declined more rapidly than the costs charged from aluminum
inventory. Adjusted EBITDA per pound decreased $0.032 to $0.161 in 1998,
reflecting both lower Adjusted EBITDA and increased pounds of product shipped.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company's net sales increased to $267.3 million in 1997 from $ 228.2
million in 1996, an increase of $39.1 million or 17.1%. Net sales - products
increased to $235.5 million in 1997 from $208.6 million in 1996, an increase of
$26.9 million or 12.9%. Gross sales of value added products increased $8.1
million, or 6.4%, to $134.8 in 1997 from $126.7 million in 1996. Gross sales of
mill finished extrusions increased $18.9 million, or 20.7%, to $110.0 million in
1997 from $91.1 million in 1996. The gross sales price per pound increased by
0.4%, reflecting an increase of $0.051 in the average market price per pound of
aluminum and an improved customer and product mix in value added sales, offset
by the effect of a higher sales mix of mill finished extrusions.
Pounds of product shipped increased 16.5 million pounds, or 11.9%, to 154.9
million in 1997 from 138.4 million pounds of product shipped in 1996. Shipments
to commercial construction decreased 1.3 million pounds, resulting mainly from
the loss of a curtain wall/store front account, the completion of a contract
involving a bridge renovation project, and the loss of a commercial door
account. In residential construction, shipments increased 2.3 million pounds as
a result of increased shipments to door and window manufacturers and to
suppliers to the mobile and manufactured home market despite a decision to shift
capacity to the more profitable distributor market. Shipments to transportation
increased 7.8 million pounds, due to increased shipments to major truck, utility
vehicle and trailer manufacturers. In consumer durables, shipments decreased 1.0
million pounds, resulting mainly from decreased shipments to manufacturers of
pleasure boats and other consumer durable products, offset in part by increased
shipments to office furniture manufacturers. Shipments to equipment/electrical
increased 2.0 million pounds due to the continuing strong performance of several
niche accounts, particularly manufacturers of electrical products. The increase
of 6.7 million pounds of shipments to distributors/other resulted mainly from
continuing sales efforts to increase custom extrusion business with select
distributors, including a Puerto Rico based distributor who is expanding
throughout the Caribbean basin.
Cost of sales increased to $225.7 million in 1997 from $191.2 million in
1996, an increase of $34.5 million or 18.0%. Cost of sales - products increased
to $192.2 million in 1997 from $174.0 million in 1996, an increase of $18.2
million or 10.5%. This increase resulted from a $4.5 million increase in
operating costs and a $13.7 million increase in aluminum costs. Variable costs
per pound, however, decreased to $0.423 in 1997 from $0.444 in 1996, an
improvement of $0.021 per pound. This improved performance was due to effective
utilization of capacity, continuing extrusion press and casting efficiencies,
and effective control of variable spending.
Gross profit increased to $41.7 million in 1997 from $37.0 million in 1996,
an increase of $4.7 million or 12.7%.
Selling, general and administrative expenses increased to $21.5 million in
1997 from $15.9 million in 1996, an increase of $5.6 million or 35.2%. This
increase is primarily attributable to an increase of $4.1 million in
compensation related to the settlement of employee stock options as part of the
Recapitalization (as defined herein)
15
<PAGE>
and an increase of $0.8 million in incentive compensation. Other selling,
marketing, general and administrative costs increased $0.7 million, reflecting
the increased level of business activity and the development of sales and
marketing programs.
Operating profit decreased to $20.2 million in 1997 from $21.1 million in
1996, a decrease of $0.9 million or 4.3%.
Interest expense, net of interest income, increased to $8.4 million in 1997
from $5.2 million in 1996, an increase of $3.2 million or 61.5%. This increase
was mainly attributable to the increase in debt outstanding and higher effective
interest rates as a result of the Recapitalization, offset in part by an
increase in interest income. Income tax expense decreased to $5.1 million in
1997 from $7.1 million in 1996, a decrease of $2.0 million or 28.2%. The
effective tax rates for the years ended December 31, 1997 and 1996 were 43% and
44%, respectively, which differed from the federal statutory rate of 35% due to
the goodwill amortization and state income taxes.
In 1997, the Company incurred an extraordinary loss of $1.3 million (net of
applicable income taxes of $0.8 million) on the refinancing of debt related to
the Recapitalization.
As a result of the above factors, net earnings decreased to $5.4 million in
1997 from $8.8 million in 1996, a decrease of $3.4 million or 38.6%.
Adjusted EBITDA, as previously defined herein, increased to $30.0 million in
1997 from $22.3 million in 1996, an increase of $7.7 million or 34.5%. The
improvement in Adjusted EBITDA consisted of $7.0 million from increased sales
volume, $0.5 million from a net reduction in operating costs (as previously
discussed) and $0.5 million of income from excess metal sales, offset by a
decrease in sales spread of $0.3 million. Adjusted EBITDA per pound, in turn,
increased $0.032 to $0.193 in 1997 since the increase in Adjusted EBITDA was
substantially greater than the increase in pounds shipped.
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 December 31, 1998, the Company had $105 million of New Notes (as
defined herein) outstanding and no borrowings under the New Credit Facility (as
defined herein). The significant indebtedness incurred by the Company as a
result of the Recapitalization has several important consequences, the foremost
being that interest expense is substantially higher than prior to the
Recapitalization. The ability of the Company to satisfy its obligations pursuant
to such indebtedness, including pursuant to the New Notes and the Indenture
(under which the New 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 currently believes that cash flow from operating activities,
together with borrowings available under the New 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 in 1998, 1997 and 1996 was $8.7 million, $5.3
million and $14.1 million, respectively. In 1998, cash flow increased primarily
because of improved net earnings and continued emphasis on
16
<PAGE>
working capital management, particularly accounts receivable and inventories. In
addition, cash flow increased as a result of decreases in accounts receivable
and inventories from decreased aluminum prices despite the increased level of
business activity. In 1997, cash flow decreased primarily as a result of reduced
net earnings, reflecting the non-recurring compensation charge and increased
interest costs. In addition, cash flow decreased as a result of increases in
accounts receivable and inventories resulting from increased levels of business
activity and increased aluminum prices. In 1996, cash flow increased reflecting
a modest improvement in profit performance and continued emphasis on working
capital management.
Total working capital (excluding current portion of long-term debt) at
December 31, 1998, 1997 and 1996 was $32.3 million, $30.0 million and $18.2
million, respectively. In 1998, cash and cash equivalents increased $2.3 million
to $7.6 million. Decreases in current assets of $1.1 million were offset by
larger decreases in current liabilities, particularly accounts payable relating
to metal purchases. In 1997, cash and cash equivalents increased $5.1 million to
$5.4 million due in part to the terms and conditions of the Notes (as defined
herein) outstanding (see Cash Flows from Financing Activities). Increases in
other working capital accounts reflected the impact of increased business
activity, the effect of rising aluminum prices, and the change in timing of
interest payments. In 1996, lower aluminum prices and inventory levels resulted
in slightly lower working capital requirement than 1995.
Cash Flows from Investing Activities
Expenditures for property, plant and equipment in 1998, 1997 and 1996 were
$3.3 million, $3.0 million and $2.6 million, respectively. During the last three
years, the Company has successfully increased its casting capacity by 15% and
capacities on two extrusion presses by an average of 11% without the acquisition
of expensive new equipment. The Company also made investments in CNC mills,
benders, saws and presses to increase its fabrication capabilities. 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 for the years 2000
through 2003. The Company plans to update and modernize two extrusion presses
per year, including the installation of advanced isothermal extrusion control
equipment, where cost justified. The Company expects to increase extrusion
capacity by 10% per press and reduce scrap generated in the process by 1.5%.
Approximately $1.0 million of the annual expenditure for the years 1999-2003 is
expected to be used for maintenance capital with the remainder invested in
productivity improvements and capacity enhancements.
Cash Flows from Financing Activities
Cash used in financing activities was $3.1 million in 1998 as compared to
cash provided by financing activities of $2.8 million in 1997 and cash used in
financing activities of $11.6 million in 1996. Cash used in financing activities
in 1998 included the repurchase of common stock (as described herein). Cash used
in financing activities in 1996 reduced borrowings under the Old Credit Facility
(as defined herein).
On May 28, 1997, the Company issued and sold $105.0 million principal amount
of 10.125% Series A Senior Notes (the "Notes") due 2005. The Company is required
to make semi-annual payments of interest on the Notes on June 1 and December 1
of each year. As of May 28, 1997, the Company used a portion of the proceeds
from the issuance of the Notes to repay an existing credit facility (the "Old
Credit Facility") of $21.2 million outstanding (including accrued interest and
agency fees) and to retire its $16.3 million (including accrued interest and a
prepayment penalty for the early retirement of debt) of 14.125% Senior
Subordinated Notes due 2001 (the "Subordinated Notes"). Upon the issuance of the
Notes, the Company entered into a new credit facility (the "New Credit
Facility"), which provides a $15.0 million secured line of revolving credit
maturing on the last business day of June 2002. Under the New Credit Facility,
the Company is required to make payments of interest on a monthly or quarterly
basis. As of December 31, 1998 and 1997, there were no loans outstanding under
the New Credit Facility.
The offering of the Notes, the repayment of the Old Credit Facility, the
retirement of the Subordinated Notes, and the entering into of a New Credit
Facility were part of an overall recapitalization of the Company (the
17
<PAGE>
"Recapitalization"). As part of the Recapitalization, the Company used a
substantial portion of the proceeds received from the issuance and sale of the
Notes to pay a special cash dividend to holders of its common stock, settle
existing employee stock options, and repurchase, or offer to repurchase, shares
of common stock held by certain stockholders.
In 1997, the Company paid a special cash dividend of $62.00 per share, or
$56.0 million, to holders of common stock, paid an aggregate of $37.5 million
for the repayment and retirement of debt, and paid $1.2 million for the
repurchase and retirement of 152,100 shares of Class A Common Stock from certain
shareholders. The Company also incurred $4.1 million of compensation expense and
issued 158,042.5 shares of Class A Common Stock related to the settlement of
employee stock options. The compensation expense represents the difference
between fair market value and the exercise price on the settlement of 57,000
employee stock options and $0.9 million of bonuses paid to satisfy a portion of
income taxes incurred by option holders as a result of receiving shares of
common stock.
On November 7, 1997, the Company consummated an exchange of 100% of the
Notes for $105.0 aggregate principal amount of 10.125% Series B Senior Notes
(the "New Notes") due 2005, which are registered under the Securities Act of
1933, as amended.
In October 1998, the Company entered into a Stock Purchase Agreement to
repurchase all of the shares of Class A common stock of the Company owned by CVG
Industria Venezolana de Aluminio, C.A. ("Venalum") for an aggregate purchase
price of $3.1 million. On November 13, 1998, the repurchase was completed, and
as of that date, Venalum no longer owned any shares of common stock of the
Company.
Declaration of Cash Dividend
On December 9, 1998, the Board of Directors of the Company declared a cash
dividend of $2.64 per share of Class A common stock, or $1.9 million, to the
holders of its Class A common stock, which was paid on January 12, 1999.
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 December 31, 1998, the Company was party to $18.8 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between January 1999
and December 1999, covering 30.9 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 December 31, 1998
was $17.5 million. The Company does not engage in any speculative trading of
aluminum 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 years ended December 31,
1998, 1997 and 1996.
18
<PAGE>
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 the manufacturing equipment and
facilities are compliant with the Year 2000 requirements. The Company is in the
process of evaluating its other computer systems, microprocessors, EDI systems
and other computer based applications for Year 2000 compliance. The Company
expects to complete any required Year 2000 remediation prior to any anticipated
impact on its operations. The Company believes that with modifications to
existing software and conversions to new systems, where required, the Year 2000
issue will not pose significant operational problems for its computer systems,
manufacturing equipment or facilities. However, if such modifications or
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.
The Company is contacting 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 an adverse effect on the Company's
systems.
The Company is currently inquiring of its significant suppliers and
subcontractors that do not share information systems with the Company ("external
agents"). To date, 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 that 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, 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
19
<PAGE>
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
In 1998, as disclosed herein, the Company recorded a gain of $1.6 million
related to the curtailment of the Retirement Plan for Salaried Employees. In
1999, the Company expects to record expense of approximately $1.1 million
associated with settling the Retirement Plan for Salaried Employees.
Commitments and Contingencies
At December 31, 1998, the Company has commitments with eleven North American
suppliers to purchase 101.4 million pounds of primary aluminum and aluminum
billet from January 1999 through December 1999 at current market prices at the
specified delivery dates. Management expects that such quantities of aluminum
will be utilized in the normal course of operations during the terms of these
agreements.
In the normal course of business, 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.
The Company is also 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 1. Business - Pricing and Hedging Programs" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Contracts and Forward Sales Contracts."
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ..............................................................22
Balance Sheets as of December 31, 1998 and 1997 .............................................23
Statements of Operations for the years ended December 31, 1998, 1997 and 1996 ...............24
Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 .....25
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ...............26
Notes to Financial Statements ...............................................................27
Schedule II -- Valuation and Qualifying Accounts ............................................40
</TABLE>
21
<PAGE>
Report of Independent Auditors
The Board of Directors
Wells Aluminum Corporation
We have audited the balance sheets of Wells Aluminum Corporation (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 of Wells Aluminum Corporation
as of December 31, 1998 and 1997, and the results of operations and its cash
flows for each of the three years ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 19, 1999
Baltimore, Maryland
22
<PAGE>
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ---------
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................$ 7,619 $ 5,352
Accounts receivable, principally trade, less allowances of $442
and $825 26,213 30,599
Inventories ........................................................... 20,394 20,209
Other current assets .................................................. 2,319 1,444
Total current assets .............................................. 56,545 57,604
Property, plant and equipment, at cost less accumulated depreciation ...... 28,276 27,269
Debt issuance costs, net of accumulated amortization of $984 and $362 .... 3,765 4,387
Goodwill, net of accumulated amortization of $13,662 and $12,474 .......... 33,362 34,550
Other assets .............................................................. 2,530 1,573
---------- ---------
Total assets ......................................................$ 124,478 $ 125,383
========== =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable, principally trade ...................................$ 14,186 $ 20,253
Accrued expenses ...................................................... 10,053 7,362
---------- ---------
Total current liabilities ......................................... 24,239 27,615
Long-term debt, less current portion ...................................... 105,000 105,000
Deferred income taxes ..................................................... 5,446 5,804
Deferred benefit plan obligations ......................................... 2,572 3,032
---------- ---------
Total liabilities ................................................. 137,257 141,451
---------- ---------
Stockholders' equity:
Common stock, Class A, par value $0.01 per share, 1,100,000 shares
authorized, 728,642.5 and 909,005.0 shares issued ................. 7 9
Additional paid-in capital ............................................ -- 1,215
Accumulated deficit ................................................... (11,811) (16,805)
Additional minimum pension liability .................................. (975) (487)
---------- --------
Total stockholders' equity ........................................ (12,779) (16,068)
---------- --------
Total liabilities and stockholders' equity ........................$ 124,478 $125,383
========== ========
</TABLE>
See accompanying notes.
23
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------------- ------------ ----------
<S> <C> <C> <C>
Net sales .................................................$ 251,191 $ 267,349 $ 228,161
Cost of sales ............................................. 209,368 225,681 191,206
-------------- ------------ ----------
Gross profit .............................................. 41,823 41,668 36,955
Selling, general and administrative expenses .............. 16,093 17,446 15,877
Compensation from settlement of employee stock options .... -- 4,070 --
-------------- ------------ ----------
Operating profit .......................................... 25,730 20,152 21,078
Interest expense, net of interest income .................. 10,806 8,390 5,176
-------------- ------------ ----------
Earnings before income taxes and extraordinary item ....... 14,924 11,762 15,902
Income taxes .............................................. 6,157 5,073 7,059
-------------- ------------ ----------
Earnings before extraordinary item ........................ 8,767 6,689 8,843
Extraordinary loss on refinancing of debt,
net of applicable income taxes of $826 ............... -- (1,292) --
-------------- ------------ ----------
Net earnings ..............................................$ 8,767 $ 5,397 $ 8,843
============== ============ ==========
</TABLE>
See accompanying notes.
24
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumu- Additional
Additional lated Minimum
Common Paid-In Earnings Pension
Stock Capital (Deficit) Liability Total
----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ... $ 9 $ 24,360 $ 1,722 $ (845) $ 25,246
----------- ------------ ----------- ------------ ----------
Net earnings for 1996....... -- -- 8,843 -- 8,843
Change in additional minimum
pension liability, net
of tax ................. -- -- -- 353 353
----------- ------------ ----------- ------------ ----------
Comprehensive income
(expense) .............. -- -- 8,843 353 9,196
Exercise of stock options .. -- 30 -- -- 30
----------- ------------ ----------- ------------ ----------
Balance at December 31, 1996 ... 9 24,390 10,565 (492) 34,472
----------- ------------ ----------- ------------ ----------
Net earnings for 1997 ...... -- -- 5,397 -- 5,397
Change in additional minimum
pension liability, net of
tax..................... -- -- -- 5 5
----------- ------------ ----------- ------------ ----------
Comprehensive income
(expense) .............. -- -- 5,397 5 5,402
Dividend declared .......... -- (24,390) (31,600) -- (55,990)
Repurchase of common stock . (2) (48) (1,167) -- (1,217)
Settlement of stock options. 2 1,263 -- -- 1,265
----------- ------------ ----------- ------------ ----------
Balance at December 31, 1997 ... 9 1,215 (16,805) (487) (16,068)
----------- ------------ ----------- ------------ ----------
Net earnings for 1998 ...... -- -- 8,767 - 8,767
Change in additional minimum
pension liability, net
of tax .................. -- -- -- (488) (488)
----------- ------------ ----------- ------------ ----------
Comprehensive income
(expense)............... -- -- 8,767 (488) 8,279
Repurchase of common stock . (2) (241) (2,823) -- (3,066)
Dividend declared .......... -- (974) (950) -- (1,924)
----------- ------------ ----------- ------------ ----------
Balance at December 31, 1998 ... $ 7 $ -- $ (11,811) $ (975) $ (12,779)
=========== ============ =========== ============ ==========
</TABLE>
See accompanying notes.
25
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net earnings .......................................... $ 8,767 $ 5,397 $ 8,843
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ................. 4,130 4,270 4,034
Settlement of employee stock options .......... -- 1,263 --
Deferred income taxes ......................... (278) 30 (704)
Extraordinary loss on refinancing of debt ..... -- 1,292 --
Changes in operating assets and liabilities:
Accounts receivable, net .................. 4,386 (8,320) 2,362
Inventories ............................... (185) (371) 134
Accounts payable and accrued expenses ..... (5,825) 2,471 (930)
Other assets and liabilities .............. (2,328) (728) 348
------------ ------------- ------------
Net cash provided by operating activities ............. 8,667 5,304 14,087
------------ ------------- ------------
Investing activities:
Purchase of property, plant and equipment ............. (3,334) (3,035) (2,589)
------------ ------------- ------------
Net cash used in investing activities ................. (3,334) (3,035) (2,589)
------------ ------------- ------------
Financing activities:
Principal payments on long-term debt .................. -- (69,791) (93,793)
Proceeds from long-term debt .......................... -- 134,700 82,200
Payment of debt issuance costs ........................ -- (4,749) --
Proceeds from the exercise of stock options ........... -- -- 30
Payment of cash dividend ............................. -- (55,990) --
Prepayment penalty on early retirement of debt ........ -- (149) --
Purchase of common stock .............................. (3,066) (1,215) --
------------ ------------- ------------
Net cash (used in) provided by financing activities ... (3,066) 2,806 (11,563)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents .. 2,267 5,075 (65)
Cash and cash equivalents at beginning of year ........ 5,352 277 342
------------ ------------- ------------
Cash and cash equivalents at end of year .............. $ 7,619 $ 5,352 $ 277
============ ============== ============
</TABLE>
See accompanying notes.
26
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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. Gibbons, Goodwin, van Amerongen ("GGvA") is the sole
general partner of Wells Holdings Limited Partnership, which currently owns
76.7% of the outstanding shares of the Company's common stock.
Reclassification
Certain amounts previously reported have been reclassified to conform with
the 1998 presentation.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments
with original maturities of three months or less.
Inventories
The aluminum component of inventories, representing 67% and 68% of total
inventories at December 31, 1998 and 1997, 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.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to operations when incurred, while expenditures having the effect of
extending the useful life of an asset are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$2,321,000, $2,489,000 and $2,351,000, respectively.
Debt Issuance Costs
Costs incurred to obtain financing are capitalized and amortized using the
straight-line method over the term of the related financing. Amortization of
debt issuance costs is included in the Statements of Operations as an item of
interest expense, net of interest income.
27
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Goodwill
The excess of the purchase price of the Company over the fair value of the
net assets acquired was recorded as goodwill. Amortization is recorded on the
straight-line method over forty years. On a periodic basis, the Company
estimates its future undiscounted cash flows of the business to which goodwill
relates in order to ensure that the carrying value of such goodwill has not been
impaired.
Credit Risk
The Company is potentially subject to concentrations of credit risk with
accounts receivable and futures contracts. Although the Company has a diverse
customer base, 31% and 34% of the accounts receivable balance was due in
aggregate from five customers as of December 31, 1998 and 1997, respectively.
The Company performs ongoing credit evaluations of customers and does not
require collateral for accounts receivable. The Company evaluates the
creditworthiness of the counterparties to the futures contracts and considers
nonperformance risk to be remote.
Pension Plans and Other Postretirement Benefits
The Company is in the process of terminating its defined benefit pension
plan for salaried employees, with benefits under the plan curtailed effective
September 30, 1998. The Company plans to implement a defined contribution plan
for salaried employees, with benefits retroactive to January 1, 1999.
The Company sponsors several defined benefit pension plans covering
substantially all employees. The Company uses the "projected unit credit"
actuarial method for financial reporting purposes and the "entry age normal"
actuarial method for funding purposes.
The Company has historically provided postretirement medical insurance and
life insurance benefits (primarily for salaried employees). The Company accounts
for postretirement benefits by accruing such benefits during the employees'
years of service.
Forward Sales Contracts and Futures Contracts
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of extruded
aluminum at scheduled intervals whereby the cost of the aluminum component of
the contract is fixed for the duration of the contract, based on market price 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 to purchase aluminum, based on scheduled deliveries under the
forward sales contracts. Gains and losses on futures contracts designated and
effective as hedges of aluminum price exposure are recorded as adjustments to
the cost of inventory. If it becomes probable that the anticipated transaction
will not occur as expected, the deferred gain or loss on the hedging transaction
applicable to the portion of the transaction that will not occur will be
recognized in income currently.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted for years beginning after June 15, 1999. Early
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Forward Sales Contracts and Futures Contracts (Continued)
adoption of SFAS No. 133 is permitted as of the beginning of any fiscal quarter
after its issuance. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that do not qualify
as hedges under the new standard must be adjusted to fair value through income.
If a derivative qualifies as a hedge, depending on the nature of the hedge,
changes in fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
value will be immediately recognized in earnings.
The Company has not yet determined when it will adopt SFAS No. 133, although
early adoption is considered possible. The Company has not yet determined what
effect SFAS No. 133 will have on its earnings and financial position.
Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Company
purchased aluminum from CVG Industria Venezolana de Aluminio C.A. ("Venalum"),
previously an owner of 180,362.5 shares of Class A common stock, with total
amounts purchased of $5,371,000, $69,606,000 and $69,288,000, respectively.
Amounts payable to Venalum at December 31, 1997 were $6,344,000.
In 1987, the Company entered into an agreement with GGvA, pursuant to which
GGvA provides financial advisory and other services to the Company. For such
services, GGvA was paid an annual retainer of $250,000 in 1996 and 1997, and
$350,000 in 1998, plus reimbursement for its out-of-pocket expenses. In
addition, GGvA received a fee of $500,000 for financial advisory and other
services in connection with the Recapitalization (as herein defined) in 1997.
Stock-Based Compensation
As described in Note 12, the Company has elected to follow the provisions of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, for stock based compensation. Pro forma disclosures required under
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, are not included herein since the information is not
materially different from the amounts reported.
Business Segments
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted effective December 31, 1998, and requires, among other
things, that the Company provide financial and descriptive information about its
operating segments. Under SFAS No. 131, operating segments are components of an
enterprise about which separate financial information is available that is
regularly evaluated by the enterprise's chief operating decision maker deciding
how to allocate resources and in assessing performance. The Company has
evaluated the adoption of the new standard and has concluded that it has only
one reportable operating segment.
29
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Business Segments (Continued)
In 1998 and 1997, one customer, Navistar International Corporation,
accounted for 10.4% and 9.6%, respectively, of the Company's gross sales
measured in dollars.
2. Inventories
A summary of inventories at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Cost for aluminum and FIFO cost for other components:
Raw materials .........................................$ 10,233 $ 11,840
Finished goods and work-in-process .................... 9,589 10,658
Supplies .............................................. 572 471
-------------- ------------
$ 20,394 $ 22,969
Less LIFO reserve ..................................... -- (2,760)
-------------- ------------
$ 20,394 $ 20,209
============== ============
</TABLE>
3. Property, Plant and Equipment
A summary of property, plant and equipment at December 31 follows (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Land ..................................................$ 816 $ 816
Buildings and improvements ............................. 9,138 9,075
Machinery and equipment ................................ 50,304 45,847
Construction in progress ............................... 576 1,848
-------------- ------------
60,834 57,586
Less accumulated depreciation .......................... (32,558) (30,317)
-------------- ------------
$ 28,276 $ 27,269
============== ============
</TABLE>
4. Recapitalization
On May 5, 1997, 125,000 shares of Class B common stock were converted to
125,000 shares of Class A common stock, increasing the total shares of Class A
common stock outstanding to 903,062.5.
In May 1997, the Company issued and sold $105,000,000 principal amount of
10.125% Series A Senior Notes ("Series A Notes") due 2005. In connection with
the consummation of the issuance and sale of the Notes, the Company repaid
existing indebtedness and entered into a new bank credit facility (see Note 8
herein) providing a secured working capital line of $15,000,000, which matures
in 2002.
The offering of the Series A Notes, the repayment of $20,992,000 of
indebtedness under an old bank credit facility, the retirement of $15,000,000 of
14.125% Senior Subordinated Notes ("Subordinated Notes") due 2001, and the
entering into of a new bank credit facility were part of an overall
recapitalization of the Company ("Recapitalization"). As part of the
Recapitalization, the Company used a substantial portion of the proceeds
received from the issuance and sale of the Series A Notes to pay a special cash
dividend to holders of its common
30
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Recapitalization (Continued)
stock, settle existing employee stock options, and repurchase, or offer to
repurchase, shares of common stock held by certain stockholders.
In 1997, the Company paid a special cash dividend of $62.00 per share, or
$55,990,000, to the holders of common stock, paid an aggregate of $37,467,000
related to the repayment or retirement of debt, and paid $1,217,000 for the
repurchase and retirement of 152,100 shares of Class A common stock from certain
shareholders. The Company also incurred $4,070,000 of compensation expense and
issued 158,042.5 shares of Class A common stock related to the settlement of
employee stock options. The compensation expense represents the difference
between fair market value and the exercise price on the settlement of 57,000
employee stock options and $900,000 of bonuses paid to satisfy a portion of
income taxes incurred by option holders as a result of receiving shares of
common stock.
In November 1997, the Company consummated an exchange of 100% of the Series
A Notes for $105,000,000 aggregate principal amount of 10.125% Series B Senior
Notes due 2005, which are registered under the Securities Act of 1993, as
amended.
At December 31, 1997, there were 909,005.0 shares of Class A common stock
outstanding.
5. Repurchase of Common Stock
In October 1998, the Company entered into a Stock Purchase Agreement to
repurchase all of the shares of Class A common stock of the Company owned by
Venalum for an aggregate purchase price of $3.1 million. On November 13, 1998,
the repurchase was completed, and as of that date, Venalum no longer owned any
shares of common stock of the Company.
At December 31, 1998, there were 728,642.5 shares of Class A common stock
outstanding.
6. Declaration of Cash Dividend
On December 9, 1998, the Board of Directors of the Company declared a cash
dividend of $2.64 per share of Class A common stock, or $1.9 million, to the
holders of its common stock, which was paid on January 12, 1999.
7. Accrued Expenses
A summary of accrued expenses at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest................................................ $ 900 $ 886
Salaries, wages and other compensation.................. 1,160 3,697
Environmental remediation............................... 2,100 ---
Unrealized loss on futures contracts.................... 1,280 ---
Cash dividend on common stock........................... 1,924 ---
Other................................................... 2,689 2,779
------------ ------------
$ 10,053 $ 7,362
============ ============
</TABLE>
31
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt
A summary of long-term debt at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Credit agreement:
Revolving loan facility....................................... $ -- $ --
Senior notes:
10.125% Series B senior notes (see Note 4).................... 105,000 105,000
-------------- -------------
105,000 105,000
Less current portion -- --
-------------- -------------
$ 105,000 $ 105,000
============== =============
</TABLE>
Aggregate maturities of long-term debt for each of the five years succeeding
December 31, 1998 are $0.
Credit Agreement
In December 1994, the Company entered into a $62,000,000 credit agreement
("1994 Credit Agreement") with Banque Indosuez (now known as Credit Agricole
Indosuez), New York Branch ("Agent"). In May 1997, the Company entered into a
$15,000,000 credit agreement ("1997 Credit Agreement") with Credit Agricole
Indosuez by amending and restating the 1994 Credit Agreement.
The 1994 Credit Agreement with the Agent consisted of 1) a $22,000,000
working capital line of credit ("1994 Revolving Loan Facility"), which would
mature on December 31, 2000, 2) a $33,000,000 term loan ("Term A Loan"), which
would mature on December 31, 2000, and 3) a $7,000,000 term loan ("Term B
Loan"), which would mature on March 31, 2001. The proceeds under the 1994 Credit
Agreement were used to refinance existing debt.
Outstanding balances of the 1994 Revolving Loan Facility were subject to
interest, at the Company's option , at either 1.5% over the Agent's prime
lending rate or 2.75% over LIBOR. On or after January 1, 1996, either rate was
subject to a reduction of 0.25% or 0.50% if the Company met certain financial
criteria stated in the 1994 Credit Agreement. The Company met these financial
criteria and as such the interest rates were reduced by 0.25%. In addition, the
Company paid a commitment fee of 0.50% per annum on the average daily unused
amounts. The 1994 Revolving Loan Facility included available letters of credit
of $5,000,000 which were not used by the Company. In May 1997, outstanding
balances of the 1994 Revolving Loan Facility were paid in full as part of the
Recapitalization. As a consequence of paying off the 1994 Revolving Loan
Facility, the Company recorded an extraordinary loss of $370,000, consisting of
$606,000 of unamortized costs, net of an income tax benefit of $236,000.
The Term A Loan required quarterly principal payments of $1,375,000, through
December 31, 2000 and was subject to interest, at the Company's option, at
either 1.5% over the Agent's prime lending rate or 2.75% over LIBOR. On or after
January 1, 1996, either rate was subject to a reduction of 0.25% or 0.50% if the
Company met certain financial criteria stated in the 1994 Credit Agreement. The
Company met these financial criteria and as such the interest rates were reduced
by 0.25%. In May 1997, the remaining balance due under the Term A Loan was paid
in full as part of the Recapitalization. As a consequence of retiring the Term A
Loan, the Company recorded an extraordinary loss of $555,000, consisting of
$910,000 of unamortized costs, net of an income tax benefit of $355,000.
32
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt (Continued)
The Term B Loan, payable in full on March 31, 2001, was subject to interest,
at the Company's option, at either 2.0% over the Agent's prime lending rate or
3.25% over LIBOR. On or after January 1, 1996, either rate was subject to a
reduction of 0.25% or 0.50% if the Company met certain financial criteria stated
in the 1994 Credit Agreement. The Company met these financial criteria and as
such the interest rates were reduced by 0.25%. In May 1997, the remaining
balance due under the Term B Loan was paid in full as part of the
Recapitalization. As a consequence of retiring the Term B Loan, the Company
recorded an extraordinary loss of $118,000, consisting of $193,000 of
unamortized costs, net of an income tax benefit of $75,000.
The 1997 Credit Agreement with the Agent is comprised of a $15,000,000
secured line of revolving credit maturing on the last business day of June 2002.
Outstanding balances under this agreement are subject to interest, at the
Company's option, at either 1.0% over the Agent's prime lending rate or 2.25%
over LIBOR. In addition, the Company pays a commitment fee of 0.35% per annum on
the average daily unused amounts. The 1997 Credit Agreement includes available
letters of credit of $5,000,000, which have not been used by the Company. There
are no additional fees with respect to unused letters of credit.
The 1997 Credit Agreement contains numerous covenants, including: (a) a
limitation on the payment of dividends or the repurchase of common stock; (b) a
restriction on redemption or purchase of any indebtedness or the alteration of
terms of any indebtedness; (c) a restriction on the incurrence of future
indebtedness, capital expenditures, investments, liens, transactions with
affiliates and disposition of assets; and (d) the maintenance of specified
financial rations and minimum net worth. The Company was in compliance with
these covenants at December 31, 1998.
The Company's obligations under the 1997 Credit Agreement are secured by
substantially all of the Company's inventories and accounts receivable. No
borrowings were outstanding under the 1997 Credit Agreement as of December 31,
1998.
Subordinated Notes
In 1987, the Company issued $15,000,000 of 14.125% Junior Subordinated Notes
with a required mandatory redemption of $7,500,000 on June 15, 1998 and final
maturity on July 15, 1999. In December 1994, the Company entered into an
Exchange and Amendment Agreement whereby the original notes were exchanged for
the Subordinated Notes. The Subordinated Notes were redeemable at the option of
the Company, assuming no notes were held by original note holders, at a price of
105.375% of the principal amount redeemed, with the prepayment penalty reducing
annually thereafter to 100.0%. In connection with the Recapitalization, the
Company placed funds in escrow in May 1997 to be used to redeem the Subordinated
Notes at 101.625% on July 15, 1997. As a consequence of retiring the
Subordinated Notes, the Company recorded an extraordinary loss of $249,000,
comprised of $244,000 of prepayment penalty and $165,000 of unamortized costs,
net of an income tax benefit of $160,000.
During 1995, the Company entered into a 7.50% interest cap agreement which
had the effect of limiting exposure to fluctuating interest rates on its
variable rate debt under the 1994 Credit Agreement. The interest rate cap
agreement was terminated in June 1997 in connection with the Recapitalization.
33
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Interest Expense, Net of Interest Income
A summary of interest expense, net of interest income, for the years ended
December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- -------------- -------------
<S> <C> <C> <C>
Interest expense .............................$ 10,688 $ 8,249 $ 4,681
Amortization of debt issuance costs .......... 622 593 495
---------------- -------------- -------------
11,310 8,842 5,176
Interest income .............................. (504) (452) --
---------------- -------------- -------------
Interest expense, net of interest income......$ 10,806 $ 8,390 $ 5,176
================ ============== =============
</TABLE>
Cash paid for interest amounted to $10,674,000, $8,375,000 and $5,015,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
10. Financial Instruments
Statement of Financial Accounting Standard No. 107, Disclosures about Fair
Values of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying value reported in the balance
sheets for cash, accounts receivable and accounts payable approximate their fair
values. The carrying value for long-term debt as of December 31, 1998 was
$98,175,000 whereas the carrying value of long-term debt as of December 31, 1997
approximated its fair value.
11. Income Taxes
Significant components of deferred tax liabilities and assets at December 31
follow (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment .........................$ 6,281 $ 6,372
Inventory ............................................. 167 237
---------------- -------------
Total deferred tax liabilities ............................ 6,448 6,609
---------------- -------------
Deferred tax assets:
Pension and benefit plan liabilities .................. 17 568
Accrued liabilities ................................... 318 319
Environmental remediation ............................. 819 --
Allowance for doubtful accounts ....................... 172 322
---------------- -------------
Total deferred tax assets ................................. 1,326 1,209
---------------- -------------
Net deferred tax liabilities ..............................$ 5,122 $ 5,400
================ =============
</TABLE>
Deferred income taxes are included in the Balance Sheets in other current
assets and deferred income taxes. For the years ended December 31, 1998 and
1997, there was no valuation allowance for any deferred tax assets.
34
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
11. Income Taxes (Continued)
A reconciliation of the statutory income tax to the income tax expense
included in the Statements of Operations for the years ended December 31 follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------- ------------
<S> <C> <C> <C>
Income tax expense calculated at the statutory
federal income tax rate .................. $ 5,224 $ 4,117 $ 5,566
Amortization of goodwill ...................... 416 416 416
State taxes, net of federal benefits .......... 644 518 683
Prior years' income taxes ..................... -- -- 313
Other ......................................... (127) 22 81
---------------- ------------- ------------
Income tax expense ............................ $ 6,157 $ 5,073 $ 7,059
================ ============= ============
1998 1997 1996
---------------- ------------- ------------
Current taxes ................................. $ 6,435 $ 5,043 $ 7,763
Deferred taxes ................................ (278) 30 (704)
---------------- ------------- ------------
Income tax expense ............................ $ 6,157 $ 5,073 $ 7,059
================ ============= ============
</TABLE>
Cash paid for federal and state income taxes amounted to $4,575,000,
$4,490,000 and $6,883,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
12. Leases
The Company leases various facilities and equipment under short-term rental
and operating lease agreements. Rent expense under these agreements amounted to
$1,760,000, $1,752,000 and $1,496,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Future minimum payments under noncancellable
operating leases as of December 31, 1998 are: $1,176,000 in 1999, $866,000 in
2000, $580,000 in 2001, $319,000 in 2002, $254,000 in 2003 and $573,000
thereafter.
13. Pension Plans and Other Postretirement Benefits
The Company is in the process of terminating its defined benefit pension
plan for salaried employees, with the curtailment of benefits effective
September 30, 1998. The Company plans to implement a defined contribution
retirement plan for salaried employees, with benefits retroactive to January 1,
1999.
The following table sets forth the funded status of the defined benefit and
postretirement plans, and amounts recognized in the Balance Sheet (thousands of
dollars). Assets of the defined benefit pension plans consist principally of
equity securities, debt securities, mutual funds and cash equivalents. Defined
postretirement benefits consist of unfunded health care plans that provide
certain postretirement medical and life insurance benefits for employees
(primarily salaried employees) who retire under certain eligibility
requirements. The postretirement benefits are contributory and include certain
cost-sharing features, such as deductibles and co-payments.
35
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
13. Pension Plans and Other Postretirement Benefits (Continued)
<TABLE>
<CAPTION>
Pension Benefits: Plans Other Postretirement
in the United States Benefits: All Plans
-------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of
year ..........................$ 15,661 $ 12,657 $ 3,821 $ 3,124
Service cost ...................... 832 803 239 183
Interest cost .................... 1,030 1,005 247 243
Participants' contributions ....... -- -- 49 --
Actuarial (gains) losses .......... 1,802 1,687 (73) 358
Benefit payments .................. (616) (491) (93) (87)
Plan amendments ................... -- -- 54 --
Curtailment (gains) losses ........ (2,190) -- -- --
Settlements ....................... (2,228) -- -- --
---------- --------- ---------- -----------
Benefit obligation at end of year.. $ 14,291 $ 15,661 $ 4,244 $ 3,821
========== ========= ========== ===========
Change in Plan Assets:
Fair value of plan assets at
beginning of year ............ $ 13,142 $ 9,710 -- --
Actual return on plan assets ..... 1,476 1,072 -- --
Employer contributions ........... 2,825 2,850 -- --
Benefit payments ................. (616) (491) -- --
Settlements ...................... (2,228) -- -- --
---------- --------- ---------- -----------
Fair value of plan assets at
end of year .................. $ 14,599 $ 13,141 -- --
========== ========= ========== ===========
Funded Status:
Funded status at end of year .... $ 30 $ 2,520) $ (4,244) $ (3,821)
Unrecognized net actuarial
(gain) loss .................. 2,220 1,705 (209) (148)
Unrecognized prior service cost .. 1,132 1,070 50 --
Unrecognized net asset at date of
adoption, net of amortization. -- -- 2,300 2,444
---------- --------- ---------- -----------
Prepaid (accrued) benefit cost.. $ 3,660 $ 255 $ (2,103) $ (1,525)
========== ========= ========== ===========
Amounts Recognized in the
Balance Sheet:
Prepaid benefit cost ........... $ 2,287 $ -- -- --
Accrued benefit liability ...... (469) (1,192) (2,103) (1,525)
Intangible asset .............. 243 648 -- --
Accumulated other comprehensive
income ..................... 1,599 799 -- --
---------- --------- ---------- -----------
Net amount recognized........... $ 3,660 $ 255 $ (2,103) $ (1,525)
========== ========= ========== ===========
</TABLE>
36
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
13. Pension Plans and Other Postretirement Benefits (Continued)
The net periodic benefit cost related to the defined benefit pension plans
included the following components (dollars in thousands):
<TABLE>
<CAPTION>
Pension Benefits: Plans in the United States
--------------------------------------------
1998 1997 1996
--------------- ------------- ------------
<S> <C> <C> <C>
Service cost .................................$ 832 $ 803 $ 825
Interest cost ................................ 1,030 1,005 884
Expected return on plan assets ............... (1,031) (836) (702)
Amortization of prior service cost ........... 132 118 95
Recognized actuarial (gain) loss ............. 21 20 44
--------------- ------------- ------------
Net periodic benefit cost .................... 984 1,110 1,146
Curtailment (gain) loss ...................... (1,724) -- --
Settlement (gain) loss ....................... 160 -- --
--------------- ------------- ------------
Net period benefit cost after curtailments and
settlements ..............................$ (580) $ 1,110 $ 1,146
=============== ============= ============
Weighted average assumptions as of December 31:
Discount rate .............................. 6.75% 7.25% 7.75%
Expected return on plan assets ............. 8.00 8.00 8.00
Rate of compensation increase .............. -- 4.50 4.50
</TABLE>
The net periodic benefit cost related to the defined benefit postretirement
plans included the following components (dollars in thousands):
<TABLE>
<CAPTION>
Other Postretirement Benefits: All Plans
----------------------------------------
1998 1997 1996
------------ --------------- -----------
<S> <C> <C> <C>
Service cost .................................$ 239 $ 183 $ 186
Interest cost ................................. 247 24 220
Amortization of transition obligation ......... 144 144 144
Amortization of prior service cost ............ 4 -- --
Amortization of net actuarial (gain) loss ..... (12) (2) --
------------ --------------- -----------
Net periodic benefit cost ....................$ 622 $ 568 $ 550
============ =============== ===========
Weighted average assumptions as of December 31:
Discount rate ............................... 6.75% 7.25% 7.75%
</TABLE>
The health care cost trend rate used to determine the postretirement benefit
obligation was 7.0% for 1998, decreasing gradually to an ultimate rate of 5.0%
in 2001 and remains at that level thereafter. The trend rate is a significant
factor in determining the amounts reported. The effect of a one-percentage-point
change in these assumed health care cost trend rates would have the following
effects (dollars in thousands):
<TABLE>
<CAPTION>
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost component .... $ 88 $ (67)
Effect on postretirement obligation ....................... 723 (487)
</TABLE>
37
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
14. Stock Option Plans
In November 1993, the Board of Directors of the Company approved a stock
option plan which authorized up to 60,000 shares of Class A common stock for the
plan. The plan provided for the granting of options to officers, other key
employees and directors at an exercise price not to exceed the fair market value
on the date of the grant as determined by the Board of Directors. Under the
terms of the plan, the maximum term for the options granted was ten years with
the options vesting ratably over a period of four years. The options granted
were exercisable at a price of $10.00 per share. All options granted under the
plan were settled on May 28, 1997 as part of the Recapitalization of the
Company.
<TABLE>
<CAPTION>
1997 1996
---------------- ------------
<S> <C> <C>
Options outstanding at January 1 ....................... 57,000 53,000
Options exercised ...................................... -- (3,000)
Options settled ........................................ (57,000) --
Options granted ........................................ -- 7,000
Options canceled ....................................... -- --
---------------- ------------
Options outstanding at December 31 ..................... -- 55,000
================ ============
Options exercisable at December 31 ......................... -- 42,750
================ ============
</TABLE>
The Company recognized $4,070,000 in compensation expense relating to the
57,000 options settled in 1997 and $250,000 in compensation expense relating to
the 7,000 options granted in 1996.
In June 1997, the Board of Directors of the Company approved a stock option
plan which authorized up to 65,000 shares of Class A common stock for the plan.
The plan provides for the granting of options to officers, other key employees
and directors at an exercise price not to exceed the fair market value on the
date of the grant as determined by the Board of Directors. Under terms of the
plan, the maximum term for the options granted is ten years with the options
vesting ratably over a period of four years. In November 1998, the Stock Option
Committee of the Company approved and amended the number of shares authorized
from 65,000 to 75,650. The options granted have exercise prices ranging from
$8.00 to $17.00 a share. All of the options granted and canceled in 1997 were at
an exercise price of $8.00. In 1998, the Company granted 13,000 options to
various Company employees at a weighted average exercise price of $12.29. The
weighted average exercise price of options canceled in 1998 was $8.00. As of
December 31, 1998, the Company had 60,450 options outstanding at a weighted
average price of $8.92 with 12,425 options exercisable at a weighted average
exercise price of $8.00. The weighted-average remaining contractual life of the
options outstanding as of December 31, 1998 approximates 8.7 years.
<TABLE>
<CAPTION>
1998 1997
---------------- ------------
<S> <C> <C>
Options outstanding at January 1 ........................... 51,700 --
Options exercised .......................................... -- --
Options granted ............................................ 13,000 61,350
Options canceled ........................................... (4,250) (9,650)
---------------- ------------
Options outstanding at December 31 ......................... 60,450 51,700
================ ============
Options exercisable at December 31.......................... 12,425 --
================ ============
</TABLE>
38
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
15. Futures Contracts
The Company, in the normal course of business, enters into futures contracts
to manage the risk of fluctuations in the price of aluminum. Fluctuations in the
price of aluminum can have a significant impact upon the operations of the
Company. These instruments involve elements of credit and market risk that are
not reflected on the Company's balance sheet. Entering into these contracts
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts, but also of movements in market value of the
futures contracts. The Company is required to place amounts on deposit with
brokers based on the market value of certain contracts. These margin deposits
bear interest based on the rate of certain U.S. Treasury instruments and are to
be refunded as the market value changes or contracts are closed.
As of December 31, 1998 and 1997, the Company has contracts outstanding with
a notional principal amount of $18,842,000 and $19,469,000, respectively, all of
which the Company has used to hedge forward sales contracts. The unrealized loss
related to these contracts approximates $1,280,000 at December 31, 1998.
16. Environmental Remediation
In 1998, the Environmental Protection Division of the Georgia Department of
Natural Resources approved the Company's work plan for the modification of its
waste water treatment facilities at its Moultrie, Georgia facility. Under the
work plan, which calls for the end of direct discharge of treated waste water
and connection to the City of Moultrie sewer system, three settling ponds on the
Company's property would be removed from services and their remaining structural
components stabilized and capped in place. In the fourth quarter of 1998, the
Company recorded $1.85 million of selling, general and administrative expense
related to the stabilizing and capping of the settling ponds at its Moultrie
facility, which is scheduled to be completed in 2000.
17. Commitments
At December 31, 1998, the Company has commitments with eleven North American
suppliers to purchase 101.4 million pounds of primary aluminum and aluminum
billet from January 1999 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.
18. 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.
The Company is also a party to a number of other lawsuits and claims arising
out of the conduct of its business. Although the ultimate results of lawsuits or
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 or its operations.
39
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WELLS ALUMINUM CORPORATION
December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------------- ----------- -------------------------- ------------ -----------
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End
Description of Period Expenses Accounts of Period
- ------------------------------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful $ 825 $ 150 -- $ (533)(1) $ 442
----------- ------------ ------------ ------------ -----------
Total $ 825 $ 150 -- $ (533) $ 442
=========== ============ ============ ============ ===========
Year Ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful $ 1,170 $ 150 -- $ (495)(1) $ 825
----------- ------------ ------------ ------------ -----------
Total $ 1,170 $ 150 -- $ (495) $ 825
=========== ============ ============ ============ ===========
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful $ 925 $ 548 -- $ (303)(1) $ 1,170
----------- ------------ ------------ ------------ -----------
Total $ 925 $ 548 -- $ (303) $ 1,170
=========== ============ ============ ============ ===========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries and adjustments.
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table set forth certain information with respect to the
individuals who are the directors and executive officers of Wells.
<TABLE>
<CAPTION>
Name Position
- ------------------------------------- -----------------------------------------------------------
<S> <C>
Russell W. Kupiec ....................51 President, Chief Executive Officer and Director
W. Russell Asher .....................56 Senior Vice President, Chief Financial Officer and Director
Lynn F. Brown ........................54 Senior Vice President, Sales and Marketing and Director
Leo A McCafferty .....................61 Vice President, Operations and Director
William J. Milam .....................58 Vice President, Business Selection and Capacity Management
Geoffrey A Nelson ....................58 Vice President, Human Resources
David J. Raymonda ....................41 Controller, Secretary and Treasurer
Elizabeth Varley Camp ................41 Director
Todd Goodwin .........................67 Director
Edward R. Heiser .....................63 Director
Lewis W. van Amerongen .............. 58 Director
</TABLE>
Each director of the Company holds office until the next annual meeting of
the stockholders of the Company or until his or her successor has been elected
and qualified. Officers of the Company are elected by and serve at the
discretion of the Board of Directors. See "Certain Relationships and Other
Transactions."
Russell W. Kupiec joined the Company in April 1991. Mr. Kupiec has been
President and Chief Executive Officer since April 1996. From March 1995 to April
1996, he served as Chief Operating Officer. From November 1991 to March 1995,
Mr. Kupiec served as Vice President, Manufacturing. From April 1991 to November
1991, he served as Vice President, Administration. Mr. Kupiec has been a
director of the Company since 1991.
W. Russell Asher, a certified public accountant, joined the Company in
January 1994 and has been Chief Financial Officer since that time. From December
1991 to January 1994, he served as Chief Financial Officer of the Federal
Emergency Management Agency. Prior thereto, Mr. Asher was Vice President,
Finance of MB America Inc., a packaging and printing business, and President and
General Manager of AmeriForms Inc., a printing company which was a subsidiary of
MB America Inc. Mr. Asher has been a director of the Company since 1994.
Lynn F. Brown joined the Company in January 1996 and has been Senior Vice
President, Sales and Marketing since that time. From December 1994 to January
1996, he served as Executive Vice President, Sales and Marketing of Terra Green
Technologies, a start-up business in the ceramics industry. From July 1986 to
December 1994, Mr. Brown was Business Manager of International Paper's
Fountainhead Products Group. Mr. Brown has been a director of the Company since
June 1997.
Leo A. McCafferty joined the Company in October 1995 and has been Vice
President, Operations since July 1996. From October 1995 to July 1996, he served
as Vice President, Manufacturing. From May 1993 to October 1995, Mr. McCafferty
was President of Solutions Et Al, a consulting company engaged in strategic
planning and operations control. From 1986 to May 1993, he was President of PEMS
Service and Repair, a company engaged in ground water treatment and control. Mr.
McCafferty has also held vice president and
41
<PAGE>
general manager positions at Black & Decker Corporation, where he was employed
for twenty years. Mr. McCafferty has been a director of the Company since
December 1997.
William J. Milam joined the Company in 1971. Mr. Milam has been Vice
President, Sales and Product Management since 1991, and prior thereto, held
various regional sales management positions.
Geoffrey A. Nelson joined the Company in October 1998 as Vice President,
Human Resources. From March 1997 to October 1998, he served as Head of Labor
Relations for AMP Incorporated, a producer of electrical devices and
connections, and from September 1993 to March 1997, he was Vice President, Human
Resources for Joyce International, an office products business. Mr. Nelson has
27 years of human resource and labor relations experience.
David J. Raymonda joined the Company in 1982. Mr. Raymonda has been
Controller and Secretary of the Company since February 1989 and Treasurer since
September 1993.
Elizabeth Varley Camp has been a Vice President at Goldman, Sachs & Co.
since August 1997 and has served a director of the Company since July 1987. Ms.
Varley Camp joined GGvA in 1986 and was a Partner of GGvA from 1992 until July
1997.
Todd Goodwin has been a Partner of GGvA since 1984 and has served as a
director of the Company since July 1987. Mr. Goodwin is a director of Schult
Homes Corporation, The Rival Company, Inc., Johns Manville Corporation and U. S.
Energy Systems, Inc.
Edward R. Heiser retired as President and Chief Executive Officer of the
Company in April 1996, a position which he had held since 1991. Mr. Heiser has
been a director of the Company since 1991.
Lewis A. van Amerongen has been a Partner of GGvA since 1970 and has served
as a director of the Company since July 1987. Mr. van Amerongen is also a
director of Agrifos LLC and Erickson Air-Cranes Co., LLC, two privately held
companies.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or
deferred, to Wells's Chief Executive Officer and its other four most highly
compensated executive officers (collectively, the "Named Officers") for services
rendered in all capacities to the Company during the years ended December 31,
1998, 1997 and 1996.
42
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
Awards
Securities
Annual Compensation Underlying
Name and Principal Position Year Salary Bonus Options
--------------------------- ---- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Russell W. Kupiec ................ 1998 $ 233,750 $ 132,000 --
President and 1997 $ 233,750 $ 1,434,955 15,000
Chief Executive Officer 1996 $ 187,500 $ 175,000 1,300
W. Russell Asher ................. 1998 $ 144,664 $ 75,000 --
Senior Vice President and 1997 $ 140,000 $ 991,042 10,000
Chief Financial Officer 1996 $ 130,000 $ 110,000 1,000
Lynn F. Brown .................... 1998 $ 140,608 $ 50,000 --
Senior Vice President, 1997 $ 136,100 $ 167,210 5,000
Sales and Marketing 1996 $ 130,000 $ 50,000 500
Leo A. McCafferty ................ 1998 $ 140,608 $ 52,000 --
Vice President, 1997 $ 120,900 $ 180,000 5,000
Operations 1996 $ 87,500 $ 65,000 --
William J. Milam ................. 1998 $ 113,000 $ 22,000 --
Vice President, 1997 $ 112,067 $ 487,571 1,500
Sales and Product Management . 1996 $ 106,562 $ 25,000 --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of options made to the Named Officers during fiscal
year 1998.
The following table provides information on the valuation of options held by
the Named Officers. Twenty-five percent of the options granted to the Named
Officers in 1997 will vest and become exercisable on each of the first through
the fourth anniversaries of the date of grant. Twenty five percent of the
options held by the Named Officers were eligible for exercise during fiscal
1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
ptions at Fiscal Year End At Fiscal Year End (1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C>
Russell W. Kupiec ................... 3,750/11,250 $33,750/$101,250
W. Russell Asher .................... 2,500/7,500 $22,500/$67,500
Lynn F. Brown ....................... 1,250/3,750 $11,250/$33,750
Leo A. McCafferty ................... 1,250/3,750 $11,250/$33,750
William J. Milam .................... 375/1,125 $3,375/$10,125
</TABLE>
(1) The value of the in-the-money options is based upon a market value of $17.00
per share at December 31, 1998. In November 1998, 180,362.5 shares of Class A
common stock were repurchased at $17.00 per share.
PENSION BENEFITS
- ----------------
The following table provides the estimated annual retirement benefits
payable under the Company's pension plan to participating employees, including
the Named Officers, in the remuneration and years of service classifications
indicated. The Company is in the process of terminating its tax-qualified
benefit pension plan, which covered most officers and salaried employees on a
non-contributory basis. Benefits under the plan were curtailed
43
<PAGE>
effective September 30, 1998. The Company plans to implement a defined
contribution plan for salaried employees with benefits retroactive to January 1,
1999.
<TABLE>
<CAPTION>
Pension Plan Table
Years of Service
Remuneration 10 15 20 25 30 35
- ------------------ ------------ ------------ -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000 .......... $ 15,360 $ 23,040 $ 30,720 $ 38,400 $ 46,080 $ 53,760
$ 125,000 .......... $ 19,200 $ 28,800 $ 38,400 $ 48,000 $ 57,600 $ 67,200
$ 150,000 .......... $ 23,040 $ 34,560 $ 46,080 $ 57,600 $ 69,120 $ 80,640
$ 175,000 .......... $ 24,576 $ 36,864 $ 49,152 $ 61,440 $ 73,728 $ 86,016
$ 200,000 .......... $ 24,576 $ 36,864 $ 49,152 $ 61,440 $ 73,278 $ 86,016
</TABLE>
Compensation used in calculating the annual normal retirement benefit
amounts reflected in the Pension Plan Table is the current annual base salary.
The normal retirement age for pension plan purposes is age 65.
The respective years of service credited for pension purposes as of December
31, 1997, and the estimated years of service at age 65 for each of the Named
Officers are as follows, assuming the Company was not in the process of
terminating the tax-qualified defined benefit pension plan for salaried
employees:
<TABLE>
<CAPTION>
Years of Service Years of Service
at December 31, 1998 at Normal Retirement
-------------------- --------------------
<S> <C> <C>
Russell W. Kupiec ............................ 7.76 21.31
W. Russell Asher ............................. 5.00 13.60
Lynn F. Brown ................................ 3.00 14.23
Leo A. McCafferty ............................ 3.21 6.56
William J. Milam ............................. 27.53 33.84
</TABLE>
The Pension Plan Table reflects the annual benefit payable commencing on the
participant's 65th birthday in the form of an annuity for the participant's
life. The benefits reflected in the Pension Plan Table will be offset by 0.486%
of the participant's Covered Compensation, as defined by the Internal Revenue
Service, and any prior plan benefits.
EMPLOYMENT AGREEMENTS
- ---------------------
Two of the Named Officers, Messrs. Russell W. Kupiec and W. Russell Asher
have employment agreements with the Company. Among other things, each
arrangement provides for a term of employment in a specific executive position,
a specified annual base salary and participation in any additional incentive
compensation or bonus programs of the Company. The employment agreements with
Messrs. Kupiec and Asher continue until December 31, 1999 and annually
thereafter unless otherwise terminated. If either Mr. Kupiec or Mr. Asher is
terminated other than for cause or disability, the Company is obligated to
continue paying the base salary amount through the end of the contract term,
subject to an offset for earnings from other full-time employment, and to
maintain benefits for such executive through the end of the contract term. If
certain Change in Ownership (as defined in such agreements) events occur during
the term of these agreements, the term of employment is automatically extended
for three years from the date the executive is notified of the Change in
Ownership. In the event of a Change in Ownership, the executive is given the
right to terminate his agreement if he is dissatisfied with his salary or
performance review to be given approximately 18 months after the Change in
Ownership. If, after a Change in Ownership, the executive terminates his
employment due to such dissatisfaction or is discharged
44
<PAGE>
other than for cause or disability, the Company's obligation to continue paying
his base salary through the end of the contract term is not subject to any
offset and the Company is obligated to maintain benefits for such executive
through the end of the contract term.
STOCK OPTION PLAN
- -----------------
In June 1997, the Company adopted and the stockholders of the Company
subsequently approved the 1997 Stock Incentive Plan (the "Plan") pursuant to
which officers, directors and other key employees of the Company will be granted
stock options to purchase shares of Class A common stock. The Plan is
administered by either the Stock Option Committee (the "Committee") of the Board
of Directors or the Board of Directors (the "Board"). The Committee or the Board
will have the discretion to determine the exercise price, the duration and other
terms and conditions of such options. The Committee or the Board will have the
authority to interpret and construe the Plan, and any interpretation or
construction of the Plan by the Committee or the Board will be final and
conclusive. Twenty five percent of such outstanding options will vest and become
exercisable on each of the first through fourth anniversaries of the date of the
grant. In November 1998, the Company adopted and the stockholders of the Company
subsequently approved an amendment to the Plan, whereby the number of options
available for grant was increased from 65,000 options to 75,650 options. During
the year ended December 31, 1998, 13,000 stock options were granted and 4,250
stock options were canceled, both pursuant to the Plan. As of December 31, 1998,
there were 60,450 options outstanding, none of which had been exercised.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Wells is authorized to issue 1,100,000.0 shares of Class A common stock, par
value $0.01 per share (the "Common Stock"). As of December 31, 1998, 728,642.5
shares of common stock were issued and outstanding.
The following table sets forth certain information as of December 31, 1998,
with respect to the shares of the Common Stock of the Company beneficially owned
by each person or group that is known by the Company to be a beneficial owner of
more than 5% of the outstanding Common Stock and by all directors and executive
officers of the Company.
<TABLE>
<CAPTION>
Beneficial Ownership
Security Ownership Number of Shares Percentage of Total
------------------ -------------------- -------------------
<S> <C> <C>
Wells Holdings Limited Partnership(a)
600 Madison Avenue
New York, New York 10022......................... 560,000.0 76.86%
Russell W. Kupiec(b).............................. 38,560 5.26%
W. Russell Asher(c)............................... 43,625 5.97%
Lynn F. Brown(d).................................. 4,187.5 *
Leo A. McCafferty(e).............................. 1,250 *
William J. Milam(f)............................... 12,975 1.78%
David J. Raymonda(g).............................. 29,750 4.08%
Todd Goodwin(a)................................... 560,000 76.86%
Edward R. Heiser(h)............................... 16,000 2.20%
Lewis van Amerongen(a)............................ 560,000 76.86%
All executive officers and
directors as a group (11 persons)................ 706,347.5 95.69%
- -------------------
</TABLE>
* Denotes less than 1%.
(a) Wells Holdings Limited Partnership ("Wells Holdings") is a limited
partnership of which GGvA is the general partner. As such, GGvA exercises
sole voting and investment power with respect to the shares owned by Wells
Holdings. Messrs. Goodwin and van Amerongen, directors of the Company, are
partners in GGvA, with the shared power to direct the actions of GGvA, and
may be deemed to beneficially own the shares owned by Wells Holdings by
virtue of their status and rights as such partners. The address for Messrs.
Goodwin and van Amerongen is c/o Wells Holdings. Wells Holdings is the
successor limited partnership to The Fulcrum III Limited Partnership and
The Second Fulcrum III Limited Partnership (collectively, "Fulcrum III").
Fulcrum III was a limited partnership of which GGvA was the sole general
partner. GGvA has informed the Company that all of the shares owned by
Fulcrum III have been transferred to Wells Holdings.
(b) The address for Mr. Kupiec is c/o the Company. The number of shares held by
Mr. Kupiec includes 3,750 shares issuable upon exercise of outstanding
options.
(c) The address for Mr. Asher is c/o the Company. The number of shares held by
Mr. Asher includes 2,500 shares issuable upon exercise of outstanding
options.
(d) The address for Mr. Brown is c/o the Company. The number of shares held by
Mr. Brown includes 1,250 shares issuable upon exercise of outstanding
options.
(e) The address for Mr. McCafferty is c/o the Company. The number of shares
held by Mr. McCafferty includes 1,250 shares issuable upon exercise of
outstanding options. In March 1999, Mr. McCafferty exercised these options.
(f) The address for Mr. Milam is c/o the Company. The number of shares held by
Mr. Milan includes 375 shares issuable upon exercise of outstanding
options.
(g) The address for Mr. Raymonda is c/o the Company. The number of shares held
by Mr. Raymonda includes 375 shares issuable upon exercise of outstanding
options.
(h) The address for Mr. Heiser is 33 Gray Heron Retreat, Savannah, Georgia
31411.
45
<PAGE>
AGREEMENTS WITH STOCKHOLDERS
- ----------------------------
In connection with the acquisition of the Company in 1987, the Company
entered into a Stock Purchase Agreement with Fulcrum III. Subject to certain
restrictions, Fulcrum III had certain demand and "piggyback" rights to have its
shares of Class A common stock registered under the Securities Act. The Company
had agreed to pay the costs and expenses associated with two such registrations,
except for discounts and commissions. As successor to Fulcrum III, Wells
Holdings has succeeded to these rights.
In 1988, the Company entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with CVG Industria Venezolana de Aluminio, C.A.
("Venalum"), whereby Venalum purchased 180,362.5 shares of Class A common stock
of the Company. The Stock Purchase Agreement provided that, upon certain
issuances of equity securities, Venalum would have rights to maintain its
percentage of equity interest in the Company's capital stock by purchasing a
portion of such equity securities. Subject to certain conditions, Venalum had
certain "piggyback" rights to have its shares of Class A common stock registered
under the Securities Act. The Company agreed to pay the costs and expenses
associated with two such registrations, except for any discounts and
commissions.
In connection with Venalum's acquisition of Class A Common Stock, the
Company entered into a Shareholders' Agreement (the "Shareholders Agreement")
with Fulcrum III and Venalum. The Shareholders Agreement provides that if
Fulcrum III transfers its shares of Class A Common Stock under certain
circumstances, Venalum may participate in such transfer. The transfer of shares
from Fulcrum III to Wells Holdings did not trigger Venalum's right to
participate in such transaction. Pursuant to the Shareholders Agreement, the
Company agreed to nominate for election to the Board of Directors two persons
designated by Venalum. Fulcrum III agreed to vote its shares of Class A Common
Stock so that the two persons designated by Venalum shall be elected to the
Board of Directors, and Venalum agreed to vote its shares of Class A Common
Stock in favor of the Company's slate of nominees for election to the Board of
Directors.
In October 1998, the Company entered into a Stock Repurchase Agreement to
repurchase all of the shares of Class A common stock owned by Venalum for an
aggregate purchase price of $3.1 million. On November 13, 1998, the repurchase
was completed, and as of that date, Venalum no longer owned any shares of the
common stock of the Company. Accordingly, Venalum no longer has rights under the
Stock Purchase Agreement and the Shareholders Agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Prior to 1998, the Company was party to an agreement (the "Supply
Agreement") with Venalum pursuant to which Venalum supplied primary aluminum and
aluminum billet to the Company. This contract accounted for approximately 60-65%
of the aluminum purchased by the Company from outside suppliers. Prices were
based on the MWTP from the prior month. The Company believed that the terms of
the Venalum Agreement were no less favorable to the Company than would have been
obtained in an arms' length transaction.
The Supply Agreement commenced in 1988 and was renewed on numerous
occasions. During 1997, negotiations to extend the Venalum Agreement or enter
into a new supply agreement were not successful. The Supply Agreement expired on
December 31, 1997, although the last scheduled delivery of primary aluminum and
aluminum billet under the Supply Agreement was received in January 1998.
Pursuant to the Venalum Agreement, the Company purchased $5.4 million, $69.6
million and $69.3 million of primary aluminum and aluminum billet from Venalum
in 1998, 1997 and 1996, respectively.
46
<PAGE>
In 1987, the Company entered into an agreement with GGvA, pursuant to which
GGvA provides financial advisory and other services to the Company. For such
services, GGvA was paid an annual retainer of $250,000 in 1996 and 1997, and
$350,000 in 1998, plus reimbursement for its out-of-pocket expenses. In
addition, GGvA received a fee of $500,000 for financial advisory and other
services in connection with the Recapitalization in 1997.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. Financial Statements
The following financial statements of the Company are included in
Item 8 of this report:
- Report of Independent Auditors
- Balance Sheets as of December 31, 1998 and 1997
- Statements of Operations for the years ended December 31, 1998,
1997 and 1996
- Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996
- Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
- Notes to the Financial Statements
2. Financial Statement Schedules
The following financial statement schedule of the Company is included
in Item 8 of this report:
- Valuation and Qualifying Accounts and Reserves
Other schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instruction or are not applicable and, therefore, have been omitted.
(b) Exhibits
27.1 Financial Data Schedule.
(c) Reports on 8-K
The Company did not file any reports on Form 8-K during the year ended
December 31, 1998.
48
<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, in the City of Baltimore, State of
Maryland, on March 30, 1999.
Wells Aluminum Corporation
By: /s/ Russell W. Kupiec
---------------------
Russell W. Kupiec
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1993, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------- ------------------------------------------- ---------------------
<S> <C> <C>
/s/ Russell W. Kupiec Principal Executive Officer and Director March 30, 1999
- -------------------------------
Russell W. Kupiec
/s/ W. Russell Asher Chief Financial Officer and Director March 30, 1999
- -------------------------------
W. Russell Asher
/s/ David J. Raymonda Principal Accounting Officer March 30, 1999
- -------------------------------
David J. Raymonda
/s/ Lynn F. Brown Director March 30, 1999
- -------------------------------
Lynn F. Brown
/s/ Leo A. McCafferty Director March 30, 1999
- -------------------------------
Leo A. McCafferty
/s/ Elizabeth Varley Camp Director March 30, 1999
- -------------------------------
Elizabeth Varley Camp
/s/ Edward R. Heiser Director March 30, 1999
- -------------------------------
Edward R. Heiser
Director March __, 1999
- -------------------------------
Todd Goodwin
Director March __, 1999
- -------------------------------
Lewis W. van Amerongen
</TABLE>
49
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000828737
<NAME> WELLS ALUMINUM CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,619
<SECURITIES> 0
<RECEIVABLES> 26,655
<ALLOWANCES> 442
<INVENTORY> 20,394
<CURRENT-ASSETS> 56,545
<PP&E> 60,834
<DEPRECIATION> 32,558
<TOTAL-ASSETS> 124,478
<CURRENT-LIABILITIES> 24,239
<BONDS> 105,000
0
0
<COMMON> 7
<OTHER-SE> (12,886)
<TOTAL-LIABILITY-AND-EQUITY> 124,478
<SALES> 251,191
<TOTAL-REVENUES> 251,191
<CGS> 209,368
<TOTAL-COSTS> 225,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 10,806
<INCOME-PRETAX> 14,924
<INCOME-TAX> 6,157
<INCOME-CONTINUING> 8,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,767
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
