<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-12374
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[LOGO ALUMAX INC.]
(Exact name of registrant as specified in its charter)
Delaware 13-2762395
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3424 Peachtree Road, N.E., Suite 2100, Atlanta, Georgia 30326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 846-4600
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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
--- ---
Number of shares of common stock of
registrant outstanding at April 30, 1998: 53,866,045
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<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
ALUMAX INC.
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
--------- ----------
(In Millions,
Except Per Share Amounts)
<S> <C> <C>
NET SALES $ 775.3 $ 701.8
--------- ----------
Cost and expenses:
Cost of goods sold.............................. 582.0 545.6
Selling and general............................. 61.5 60.9
Depreciation and amortization................... 39.3 37.1
Alcoa merger costs.............................. 2.5 -
--------- ----------
685.3 643.6
--------- ----------
EARNINGS FROM OPERATIONS............................. 90.0 58.2
Other income (expense), net.......................... 0.3 (0.3)
Interest expense, net................................ (17.0) (13.4)
--------- ----------
EARNINGS BEFORE INCOME TAXES......................... 73.3 44.5
Income tax provision................................. (29.3) (17.8)
--------- ----------
NET EARNINGS APPLICABLE TO COMMON SHARES............. $ 44.0 $ 26.7
========= ==========
Basic earnings per common share...................... $ 0.82 $ 0.49
========= ==========
Diluted earnings per common share.................... $ 0.81 $ 0.48
========= ==========
Weighted average basic shares outstanding............ 53.5 54.8
========= ==========
Weighted average diluted shares outstanding.......... 54.6 55.8
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 3
ALUMAX INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Millions of Dollars,
Except Per Share Amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents..................................... $ 47.9 $ 27.0
Accounts receivable, less allowance
for doubtful accounts
(1998-$12.4; 1997-$13.2).............................. 468.3 487.1
Inventories.............................................. 495.5 533.8
Other current assets..................................... 102.5 118.4
--------- ---------
Total current assets.................................. 1,114.2 1,166.3
--------- ---------
Noncurrent Assets:
Property, plant and equipment at cost,
less accumulated depreciation
and amortization (1998-$1,314.6; 1997-$1,320.0)....... 2,014.4 2,026.9
Other assets............................................. 263.7 259.8
--------- ---------
Total noncurrent assets............................... 2,278.1 2,286.7
--------- ---------
TOTAL ASSETS.................................................. $ 3,392.3 $ 3,453.0
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 140.1 $ 145.3
Accrued liabilities...................................... 229.7 220.3
Current maturities of long-term debt..................... 57.6 46.4
--------- ---------
Total current liabilities............................. 427.4 412.0
--------- ---------
Noncurrent Liabilities:
Long-term debt........................................... 831.9 955.6
Other noncurrent liabilities............................. 463.8 463.7
--------- ---------
Total noncurrent liabilities.......................... 1,295.7 1,419.3
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Common stock of $.01 par value........................... 0.6 0.6
Paid-in capital.......................................... 942.1 935.8
Retained earnings........................................ 802.0 758.0
Accumulated other comprehensive income................... (16.4) (13.6)
Common stock in treasury, at cost........................ (59.1) (59.1)
---------- ---------
Total stockholders' equity............................ 1,669.2 1,621.7
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $ 3,392.3 $ 3,453.0
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 4
ALUMAX INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
-------- -------
(Millions of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................. $ 44.0 $ 26.7
Reconciliation of net earnings to net cash provided by
operating activities:
Depreciation and amortization.............................. 39.3 37.1
Provision for doubtful accounts............................ 0.5 0.7
(Gain) loss on sales of assets............................. 0.1 (2.2)
Deferred income taxes...................................... 26.0 6.3
Other noncash items........................................ 6.3 6.1
Changes in working capital................................. 53.0 (26.8)
Net change in other noncurrent assets and liabilities...... (2.8) (17.1)
-------- -------
Net cash provided by operating activities............... 166.4 30.8
-------- -------
INVESTING ACTIVITIES:
Dispositions.................................................. 0.8 3.0
Capital expenditures.......................................... (33.8) (37.6)
-------- -------
Net cash used in investing activities...................... (33.0) (34.6)
-------- -------
FINANCING ACTIVITIES:
Repayments of debt............................................ (112.5) (18.7)
-------- -------
Net cash used in financing activities................... (112.5) (18.7)
-------- -------
Net increase (decrease) in cash and equivalents.................... 20.9 (22.5)
Cash and equivalents at beginning of year.......................... 27.0 34.6
-------- -------
Cash and equivalents at end of period.............................. $ 47.9 $ 12.1
======== =======
Supplemental Cash Flow Information:
Income tax refunds (payments)................................. $ 25.6 $ (5.3)
Interest paid, net of amounts capitalized..................... $ (16.2) $ (13.7)
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 5
ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. PRESENTATION
These unaudited interim condensed financial statements of Alumax Inc. ("Alumax"
or the "Company") should be read in conjunction with the audited financial
statements for the year ended December 31, 1997. In Management's opinion, all
adjustments necessary for a fair presentation are reflected in the interim
periods presented.
NOTE 2. PROPOSED MERGER
On March 8, 1998, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Aluminum Company of America ("Alcoa") and AMX
Acquisition Corp., a wholly owned subsidiary of Alcoa ("Purchaser"), which
provides for the acquisition of the Company by Alcoa in a two-step transaction.
On March 13, 1998, pursuant to the Merger Agreement, Purchaser commenced a
tender offer (the "Offer") to purchase up to 27,000,000 shares of common stock
of the Company ("Common Stock") at a price of $50.00 per share, net to the
seller in cash. The Offer, which was originally scheduled to expire on April 9,
1998 and was subsequently extended until May 7, 1998, has been further extended
until June 5, 1998.
The Merger Agreement also provides that, following the purchase of the shares of
Common Stock pursuant to the Offer, the Company will be merged with and into the
Purchaser (the "Merger"), which will be the surviving corporation. In the
Merger, each issued and outstanding share of Common Stock (other than shares
purchased in the Offer or otherwise owned by Alcoa, the Purchaser, the Company,
or any of their respective subsidiaries, and dissenting shares) will be
converted into, and become exchangeable for, the right to receive: (i) 0.6975 of
a share of common stock of Alcoa, if the Purchaser purchases at least 27,000,000
shares of Common Stock or such other number of shares which represents an
absolute majority of the outstanding shares of Common Stock on a fully diluted
basis (except those that are issuable upon exercise of employee or director
stock options); or (ii) a combination of cash (representing a prorated portion
of the cash remaining available from the Offer) and a fraction of a share of
Alcoa common stock (each as described in the Merger Agreement) if the Purchaser
purchases fewer shares than such absolute majority.
The Merger is subject to a number of closing conditions, including, among
others, the approval of the stockholders of the Company and the expiration or
termination of all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
For additional information concerning the Offer and the Merger, see the Merger
Agreement which was filed as an exhibit to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated March 13, 1998 and
which is incorporated herein by reference.
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<PAGE> 6
ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVENTORIES
Components of inventories at March 31, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Raw materials .......................... $284.3 $ 300.6
Work in process......................... 99.3 110.7
Finished products....................... 111.9 122.5
------ -------
Total................................ $495.5 $ 533.8
====== =======
</TABLE>
Approximately 81 percent and 78 percent of inventory at March 31, 1998 and
December 31, 1997, respectively, have been determined on the LIFO cost basis.
The excess of replacement cost over the LIFO basis of such inventory was
approximately $63.0 and $82.6 at March 31, 1998 and December 31, 1997,
respectively.
NOTE 4. INCOME TAX PROVISION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Federal.................................. $23.8 $14.5
Foreign.................................. 2.6 1.5
State.................................... 2.9 1.8
----- -----
Total.................................. $29.3 $17.8
===== =====
</TABLE>
The effective tax rates for these periods differ from statutory rates because of
provisions for state and foreign taxes. As a result of the tax deductible
interest portion of a 1997 payment to the Internal Revenue Service related to a
United States Tax Court's decision concerning an alleged income tax deficiency,
the Company applied for and received federal income tax refunds of $25.2 in the
first quarter of 1998 related to 1997 estimated tax payments.
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<PAGE> 7
ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. EARNINGS PER COMMON SHARE
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 128,"Earnings per Share." Prior year amounts
have been restated in accordance with this Statement. Basic earnings per share
was computed by dividing net earnings available to common stockholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share was computed similarly but reflects the potential dilution
that could occur if options were exercised or convertible securities were
converted into common stock. The following table calculates basic earnings per
common share and diluted earnings per common share at March 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Basic earnings per common share:
Net earnings applicable to common shares....... $44.0 $26.7
Average common shares outstanding.............. 53.5 54.8
----- -----
Basic earnings per common share..................... $0.82 $0.49
===== =====
Diluted earnings per common share:
Net earnings applicable to common shares....... $44.0 $26.7
Average common shares outstanding.............. 53.5 54.8
Add - Options and performance accelerated
restricted stock awards...................... 1.1 1.0
----- -----
Average diluted shares outstanding............. 54.6 55.8
----- -----
Diluted earnings per common share................... $0.81 $0.48
===== =====
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant or identified as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and similar state laws by governmental agencies and
private parties at 38 pending waste disposal sites which, in most instances,
were owned and operated by third parties. Management periodically evaluates such
matters and records or adjusts liability reserves for remediation and other
costs and potential damages when expenditures for such costs are considered
probable and can be reasonably estimated.
The Company's ultimate liability in connection with present and future
environmental claims will depend on many factors, including its volumetric share
of the waste at a given site, the remedial action required, the total cost of
remediation and the financial viability and participation of the other entities
which also sent waste to the site. Based upon current law and information known
to the Company concerning the size of the sites known to it, anticipated costs
of remediation, their years of operation, and the number of other potentially
responsible parties, Management believes that it has adequate reserves for the
Company's probable share of the estimated aggregate liability for the costs of
remedial actions and related costs and expenses and that such liability and
related costs and expenses should not have a material adverse effect on the
financial condition or ongoing results of operations of the Company. In
addition, the Company establishes reserves for remedial measures required from
time to time at its own facilities. Any expenditures for remediation programs it
may be required to undertake, either individually or in the aggregate, are not
expected to have a material adverse effect on the financial condition or ongoing
results of operations of the Company. The Company's environmental reserves
totaled $29.4 at March 31, 1998 and $29.6 at December 31, 1997. Management
believes that the reasonably probable outcomes of these matters will not
materially exceed established reserves. Although the Company believes it has
coverage for some environmental claims under certain insurance policies,
insurance recoveries are not considered in estimating
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<PAGE> 8
ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
the Company's share of remediation costs at a site unless an insurance carrier
has agreed to pay a portion of such costs. Insurance recoveries were not
considered in establishing reserves for any of these sites absent an agreement
between the carriers and the Company.
Management does not anticipate that commitments, operating expenses or capital
expenditures for environmental compliance through and including the next fiscal
year will have a material adverse effect on the Company's financial condition or
results of operations. Based on historical trends towards tighter environmental
standards, it appears likely that the Company will incur additional expenditures
to remain in compliance with federal and state environmental laws.
For information regarding additional commitments and contingencies, see Note 9
to the Financial Statements in the Company's 1997 Annual Report on Form 10-K.
NOTE 7. OTHER COMPREHENSIVE INCOME
The Company adopted FAS No. 130 "Reporting Comprehensive Income" in the first
quarter of 1998. Other comprehensive income (expense) for the first quarter was
$(2.8) and $(4.1) for 1998 and 1997, respectively, and consisted entirely of
foreign currency translation adjustments.
-8-
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Unaudited; millions of dollars, except per share, per
tonne and per pound amounts)
INTRODUCTION
Net earnings totaled $44.0, or $0.82 per common share for the quarter ended
March 31, 1998 compared with net earnings of $26.7, or $0.49 per common share,
in the quarter ended March 31, 1997. Net earnings in the three months ended
March 31, 1998 included after-tax expenses of $1.5 incurred in connection with
the proposed acquisition of Alumax Inc. ("Alumax" or the "Company") by Aluminum
Company of America ("Alcoa"). Net earnings in the first quarter of 1997 included
an after-tax gain of $1.3 on the sale of assets.
In the fourth quarter of 1997, the Company announced a performance improvement
plan, with an initial target of increasing the Company's annual pretax operating
earnings by approximately $100 by 1999, without regard to any changes in
aluminum pricing. In April 1998, the Company announced a $75 increase in the
annual pretax operating earnings performance improvement target to bring the
total under the plan to $175 by the year 2000. The Company is targeting
approximately $140 of the performance improvements to come from operating cost
efficiencies and from actions to bring all of Alumax's operations up to a level
of the Company's best practices. In addition, approximately $22 of the
performance improvements are targeted to come from gains in productivity and
workforce attrition. An additional $13 in charges and write-offs incurred in
1997 as part of the consolidation and action plan at the Company's semi-solid
forging operations are also included in the improvement level. There are also
ongoing efforts to increase the level of targeted performance improvements under
the plan.
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<PAGE> 10
RESULTS OF OPERATIONS
Earnings from operations for the three months ended March 31, 1998 totaled
$90.0, compared with operating earnings of $58.2 for the comparable 1997 period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
NET SALES(1)
Primary aluminum products...................... $ 347.4 $ 363.1
Semi-fabricated products....................... 493.6 450.1
Fabricated products............................ 137.0 125.7
Intercompany................................... (202.7) (237.1)
------- -------
$ 775.3 $ 701.8
======= =======
EARNINGS FROM OPERATIONS
Aluminum processing ........................... $ 104.4 $ 70.0
Corporate...................................... (11.9) (11.8)
Alcoa merger costs............................. (2.5) -
------- -------
$ 90.0 $ 58.2
======= =======
PRODUCTION AND SHIPMENTS (THOUSANDS OF TONNES)
Sources of metal
Primary aluminum production.................... 178.9 173.8
Aluminum purchases............................. 93.3 95.4
------- -------
272.2 269.2
======= =======
Metal shipments(1)
Aluminum processing
Primary aluminum products...................... 203.5 202.8
Semi-fabricated products....................... 172.0 157.8
Fabricated products(2)......................... 24.7 26.0
Intercompany................................... (122.3) (135.1)
------- ------
277.9 251.5
======= =======
</TABLE>
(1) Certain reclassifications have been made to prior years' information to
conform with the 1998 presentation.
(2) Included in Fabricated products' metal shipments for the three months
ended March 31, 1998 and 1997, were billet shipments of 8.4 and 10.2
thousand tonnes, respectively.
NET SALES AND SHIPMENTS
The Company generated quarterly sales of $775.3 on aluminum shipments of 277,900
tonnes in the first quarter of 1998 compared with sales of $701.8 on aluminum
shipments of 251,500 tonnes in the first quarter of 1997. The increases in net
sales were principally a result of increased shipments.
The London Metals Exchange (the "LME") cash price averaged $1,463 and $1,596 per
tonne during the three months ended March 31, 1998 and March 31, 1997,
respectively. The Company's net sales are sensitive to changes in the world
pricing of primary aluminum. This price sensitivity impacts substantially all of
the Company's products to varying degrees, with less impact on the more
specialized and value-added products.
Primary products' net sales for the three months ended March 31, 1998 decreased
four percent. This decrease was primarily attributable to a five percent
decrease in average primary aluminum product pricing during the quarter due to
lower LME pricing compared to the prior year.
-10-
<PAGE> 11
Semi-fabricated products' net sales for the three months ended March 31, 1998
increased 10 percent on increased shipments. The increase in shipments was
primarily related to the continued growth in the Company's extrusions and mill
operations, mainly in the transportation and distributors markets.
Fabricated products' net sales for the three months ended March 31, 1998
increased nine percent on decreased shipments. The increase in net sales was due
to improved pricing and increased shipments in the Company's architectural
operations, offset in part by lower secondary aluminum shipments.
COSTS AND EXPENSES
The Company's costs and expenses were $685.3 for the three months ended March
31, 1998 compared with costs and expenses of $643.6 for the three months ended
March 31, 1997. Included in 1998 were $2.5 in merger costs related to the
pending merger with Alcoa. The increase was primarily due to increased
shipments, partially offset by $20.7 in savings realized in the first quarter of
1998 under the performance improvement plan.
Cost of goods sold increased seven percent in the three months ended March 31,
1998 versus the comparable 1997 period. The increase was the result of higher
shipments from the Company's extrusions, foils and mill operations. As a
percentage of sales, cost of goods sold decreased from 77.7 percent to 75.1
percent, primarily due to savings realized under the performance improvement
plan.
Selling and general expenses remained relatively flat in the three months ended
March 31, 1998 in comparison with the same period of the prior year.
Depreciation and amortization increased six percent in the three months ended
March 31, 1998 versus the comparable 1997 period. These increases were
commensurate with the Company's historical level of capital spending.
OTHER ITEMS AFFECTING NET EARNINGS
Other Income (Expense), Net
Other income (expense), net for the three months ended March 31, 1998, was $0.3
compared with $(0.3) for the same period in 1997.
Interest Expense, Net
Gross interest expense was $18.9 for the three months ended March 31, 1998, an
increase of $4.0 from the comparable period in 1997. This increase was a result
of higher average borrowings, offset slightly by a decrease in the Company's
average borrowing interest rate. Interest income was $1.4 for the three months
ended March 31, 1998, compared with $0.6 for the same period in 1997.
Capitalized interest was $0.5 for the three months ended March 31, 1998,
compared with $0.9 for the same period in 1997.
Income Taxes
The income tax provision for the three months ended March 31, 1998 was $29.3,
compared with $17.8 for the same 1997 period. The effective tax rates for these
periods differ from statutory rates because of provisions for state and foreign
taxes.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Operations provided $166.4 and $30.8 of cash during the first three months of
1998 and 1997, respectively. Increased cash flows during 1998 were directly
related to the increase in earnings from operations and changes in working
capital. Changes in working capital of $53.0 during the first quarter of 1998
included a reduction in inventory levels of $38.3 and a reduction of accounts
receivable of $18.3 due to improved collections. Also included in the change in
working capital is a federal income tax refund. As a result of the tax
deductible interest portion of a 1997 payment to the Internal Revenue Service
related to a United States Tax Court's decision concerning an alleged income tax
deficiency, the Company applied for and received federal income tax refunds of
$25.2 in the first quarter of 1998 related to 1997 estimated tax payments. These
cash flows from working capital are offset by a $28.8 decrease in other working
capital.
Investing Activities
Cash used by investing activities was $33.0 for the three months ended March 31,
1998, compared with $34.6 of cash used in the first three months of 1997.
Capital expenditures were $33.8 during the first three months of 1998 compared
with $37.6 in the first three months of 1997.
Additionally, during 1996, the Company entered into a joint venture with Yunnan
Aluminum Processing Factory (the "Joint Venture") in Kunming, China, for the
annual production of 8,000 to 10,000 tonnes of light-gauge aluminum foil for
China's packaging market. As of March 31, 1998, the Company had invested $31 of
cash in the Joint Venture, including $7 invested in the first quarter of 1998.
The Company intends to invest an additional $7 by the end of the third quarter
of 1998. Total capital spending in 1998, including investments in the Joint
Venture, is expected to be approximately $170.
Financing Activities
Cash used in financing activities was $112.5 in the first three months of 1998,
compared with cash used of $18.7 in the first three months of 1997. This
increase was a result of repayments of long-term debt. As a result of strong
cash flow from operations, the Company paid $90 of its outstanding revolving
credit facility in addition to $22.5 of scheduled repayments on the Lauralco
project financing. At March 31, 1998, the Company's total debt to capital ratio
was 34.8 percent, down from 38.2 percent at December 31, 1997.
Proposed Merger with Aluminum Company of America
On March 8, 1998, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Aluminum Company of America ("Alcoa") and AMX
Acquisition Corp., a wholly owned subsidiary of Alcoa ("Purchaser"), which
provides for the acquisition of the Company by Alcoa in a two-step transaction.
On March 13, 1998, pursuant to the Merger Agreement, Purchaser commenced a
tender offer (the "Offer") to purchase up to 27,000,000 shares of common stock
of the Company ("Common Stock") at a price of $50.00 per share, net to the
seller in cash. The Offer, which was originally scheduled to expire on April 9,
1998 and was subsequently extended until May 7, 1998, has been extended until
June 5, 1998.
The Merger Agreement also provides that, following the purchase of the shares of
Common Stock pursuant to the Offer, the Company will be merged with and into the
Purchaser (the "Merger"), which will be the surviving corporation. In the
Merger, each issued and outstanding share of Common Stock (other than shares
purchased in the Offer or otherwise owned by Alcoa, the Purchaser, the Company,
or any of their respective subsidiaries, and dissenting shares) will be
converted into, and become exchangeable for, the right to receive: (i) 0.6975 of
a share of common stock of Alcoa if the Purchaser purchases at least 27,000,000
shares of Common Stock or such other number of shares which represents an
absolute majority of the outstanding shares of Common Stock on a fully diluted
basis (except those that are issuable upon exercise of employee or director
stock options) on the expiration
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<PAGE> 13
date of the offer, or (ii) a combination of cash (representing a prorated
portion of the cash remaining available from the Offer) and a fraction of a
share of Alcoa common stock if the Purchaser purchases fewer shares than such
absolute majority.
The Merger is subject to a number of closing conditions, including, among
others, the approval of the stockholders of the Company and the expiration or
termination of all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
For additional information concerning the Offer and the Merger, see the Merger
Agreement which was filed as an exhibit to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated March 13, 1998,
and which is incorporated herein by reference.
Risk Management
The Company utilizes certain financial instruments in connection with its risk
management. The risk of loss related to counterparty nonperformance under
financial instrument agreements at March 31, 1998 and December 31, 1997 was not
significant.
The Company enters into forward fixed price arrangements that are required by
certain customers and suppliers. The Company may utilize futures or option
contracts to hedge risks associated with forward fixed price arrangements. The
Company may also utilize futures or option contracts to manage price risk
associated with changes in inventory levels. Gains or losses with respect to
these positions are reflected in earnings concurrent with consummation of
underlying fixed price transactions. Periodic value fluctuations of the futures
contracts approximately offset the value fluctuations of the underlying fixed
price transactions. The net amount of such contracts was approximately 328,050
tonnes at March 31, 1998, and included varying maturity dates through 2003. If
these contracts had been terminated at March 31, 1998, the Company would have
incurred a loss of approximately $25.2. The net amount of such contracts was
approximately 313,425 tonnes at December 31, 1997 and included varying maturity
dates through 2003. If these contracts had been terminated at December 31, 1997,
the Company would have incurred a loss of approximately $20.3.
The Company also may, from time to time, establish a floor selling price for
varying quantities of future production. This may be accomplished by entering
into forward sales of primary aluminum, purchasing put options, or by entering
into forward sales of primary aluminum and purchases of call options, which
together provide the same price protection as purchasing put options in a manner
which correlates with the Company's production and sales of primary aluminum.
This strategy may be modified from time to time. At March 31, 1998, the
Company's commitments with respect to these financial instruments covered
approximately 203,750 tonnes of future production. The book value and market
value of these financial instruments were $4.1 and $26.4, respectively, at March
31, 1998. At December 31, 1997 the Company's commitments with respect to these
financial instruments covered approximately 234,450 tonnes of future
production. The book value and market value of these financial instruments were
$5.4 and $22.5 at December 31, 1997.
Certain of the Company's foreign operating expenditures are denominated in
currencies other than the operations' functional currencies, which expose the
Company to exchange rate risks. In order to mitigate its exposure to exchange
rate risk where these conditions exist, the Company may utilize forward or
option contracts on foreign currencies. The gains or losses related to these
contracts are deferred and included in the measurement of the related foreign
currency denominated transactions. At March 31, 1998, the Company had
outstanding $290.2 in such contracts which mature at various dates through July
1999. If these contracts had been terminated at March 31, 1998, the Company
would have incurred a gain of approximately $3.6. At December 31, 1997, the
Company had outstanding $214.9 in such contracts which mature at various dates
through June 1999. If these contracts had been terminated at December 31, 1997,
the Company would have incurred a loss of approximately $4.5.
The Company's debt instruments and related interest rate hedges are susceptible
to market fluctuations based on changes in the cost of borrowing. At March 31,
1998, the fair value of total debt approximated book value. The Lauralco credit
facility, which has a variable interest rate, required the Company to establish
facilities to effectively limit the interest rate exposure of the commitment. To
meet this requirement, the Company has obtained interest rate swaps with
notional amounts totaling $400 through October 26, 2000 and interest rate caps
with a notional amount of $150 expiring October 26, 1998. This program is
designed to effectively cap interest rate exposure at a maximum of approximately
nine percent through October 26, 2000. The effective rate on this debt amounted
to 8.7 percent for the three months
-13-
<PAGE> 14
ended March 31, 1998. The Company would have paid approximately $33.5 or $32.3
to terminate these interest rate agreements at March 31, 1998 or December 31,
1997.
The Company also purchases natural gas for its operations and enters into
forward contracts to manage the volatility in prices. At March 31, 1998 and
December 31, 1997, none of these contracts was material.
For further information regarding the Company's risk management, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 15 to the Financial Statements in the Company's 1997 Annual
Report on Form 10-K.
Environmental Matters
The Company has been named as a defendant or identified as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and similar state laws by governmental agencies and
private parties at 38 pending waste disposal sites which, in most instances,
were owned and operated by third parties. Management periodically evaluates such
matters and records or adjusts liability reserves for remediation and other
costs and potential damages when expenditures are considered probable and can be
reasonably estimated.
The Company's ultimate liability in connection with present and future
environmental claims will depend on many factors, including its volumetric share
of the waste at a given site, the remedial action required, the total cost of
remediation and the financial viability and participation of the other entities
which also sent waste to the site. Based upon current law and information known
to the Company concerning the size of the sites known to it, anticipated costs
of remediation, their years of operation, and the number of other potentially
responsible parties, Management believes that it has adequate reserves for the
Company's probable share of the estimated aggregate liability for the costs of
remedial actions and related costs and expenses and that such liability and
related costs and expenses should not have a material adverse effect on the
financial condition or ongoing results of operations of the Company. In
addition, the Company establishes reserves for remedial measures required from
time to time at its own facilities. Any expenditures for remediation programs it
may be required to undertake, either individually or in the aggregate, are not
expected to have a material adverse effect on the financial condition or ongoing
results of operations of the Company. The Company's environmental reserves
totaled $29.4 at March 31, 1998 and $29.6 at December 31, 1997. Management
believes that the reasonably probable outcomes of these matters will not
materially exceed established reserves. Although the Company believes it has
coverage for some environmental claims under certain insurance policies,
insurance recoveries are not considered in estimating the Company's share of
remediation costs at a site unless an insurance carrier has agreed to pay a
portion of such costs. Insurance recoveries were not considered in establishing
reserves for any of these sites absent an agreement between the carriers and the
Company.
Management does not anticipate that commitments, operating expenses or capital
expenditures for environmental compliance through and including the next fiscal
year will have a material adverse effect on the Company's financial condition or
ongoing results of operations. Based on historical trends toward tighter
environmental standards, it appears likely that the Company will incur
additional expenditures to remain in compliance with federal and state
environmental laws.
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the Company's computer programs that have two digit
date-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of operation, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
-14-
<PAGE> 15
Management estimates that the total cost to be incurred in connection with the
Year 2000 Issue will range from $10 to $13, and all major systems are expected
to be in compliance by December 31, 1998. The cost of the project is being
funded through operating cash flows. Approximately one-third of the total cost
reflects the redeployment of existing internal information technology resources
and should not be incremental costs to the Company.
Management has evaluated the potential impact of the Year 2000 Issue on the
Company and the potential exposure of the Company to related problems of its
customers and suppliers and believes that it will not have a material effect on
the Company's business, financial condition or results of operations. There can
be no assurance, however, that such exposures or the costs of remediating any
problems associated therewith will not materially affect the Company's future
business, financial condition or results of operations.
Cautionary Statement Regarding Forward-Looking Information
Certain statements and information contained in this Quarterly Report on Form
10-Q, including in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and under "Legal Proceedings" in Part II,
Item 1, are forward-looking statements that reflect Management's current plans,
objectives and expectations for the future, which are based on prevailing
circumstances and information available at this time. Accordingly, such
statements and information involve inherent risks and uncertainties, and actual
results may differ materially from those discussed therein. Forward-looking
statements contained herein include: (i) statements made concerning Management's
expectations with respect to the Company's strategic plan for growth and its
performance improvement plan (including all statements of targeted performance
improvements) and (ii) statements made regarding the Company's current
expectations or beliefs with respect to the outcome and impact on the Company's
business, financial condition or results of operations of the Year 2000 Issue
and pending litigation and other claims, disputes or legal proceedings. Factors
that could cause actual results to differ from those discussed in the
forward-looking statements include: fluctuations in commodity prices (including
prices of aluminum and alumina), changes in competitive conditions, government
regulation, aluminum market conditions, changes in labor relations, the outcome
of pending litigation and other claims, domestic and international market
conditions and general economic conditions. In addition, actual results may
differ as a result of other factors not enumerated herein, as well as changes in
current circumstances, that are impossible to predict at this time.
-15-
<PAGE> 16
Part II. Other Information
Item 1. Legal Proceedings.
The Internal Revenue Service (the "IRS") asserted that Alumax and certain of its
subsidiaries were improperly included in the 1984, 1985 and 1986 consolidated
income tax returns of AMAX Inc. and on that basis assessed a federal income
tax deficiency against Alumax of $129. In response to the IRS' notice of
deficiency, the Company filed a petition in the United States Tax Court (the
"Court") seeking a redetermination in respect of the purported deficiency. The
parties waived their rights to a trial and the matter was submitted to the Court
for decision based upon the pleadings, stipulations, memoranda and other
documents submitted to the Court by the parties. On September 30, 1997, the
Court entered a decision in favor of the IRS opining that AMAX Inc. did not
have the 80 percent control necessary to consolidate. As a result of the ruling,
the Company recorded a charge of $108.6 in the third quarter of 1997. The
expected deficiency and accrued interest was recorded as a noncurrent liability
in the Company's September 30, 1997 financial statements. On October 27, 1997,
the Company paid an aggregate of $411 to the IRS, representing the expected
deficiency and accrued interest. The payment was funded from cash on hand and
borrowings of $355 under the Company's revolving credit facility. On December
24, 1997, the Company filed a notice of appeal of the Court's decision to the
United States Court of Appeals for the Eleventh Circuit. See "Legal Proceedings
- - Tax Dispute Regarding Consolidation with Amax" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
On December 11, 1997, the Ninth Circuit Court of Appeals, after hearing oral
argument on the plaintiff's appeal of orders, entered by the United States
District Court for the Central District of California, granting the Aluminum
Association's motion to dismiss for lack of personal jurisdiction and summary
judgment in favor of the defendant primary aluminum producers as well as the
District Court's order denying the plaintiff's motion for reconsideration,
entered an order affirming the decisions of the District Court. The plaintiff, a
California bicycle manufacturer, filed a purported class action against the
Company and four other primary aluminum producers along with The Aluminum
Association, an industry trade association, in March 1996, alleging violations
of California's antitrust law (the Cartright Act). See "Legal Proceedings -
Other Legal Proceedings - Antitrust Action" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
On October 3, 1997, the various defendants in a patent infringement action,
initiated by the Company in August 1995, against Hot Metal Moldings, Inc. and
subsequently expanded to include Ormet Primary Aluminum Corporation and certain
subsidiaries and affiliates of Buhler International AG, filed counterclaims
against the Company alleging violations of Section 1 and 2 of the Sherman Act
and Section 4 of the Clayton Act for which they seek injunctive relief and
treble damages in an unspecified amount. The Company believes these
counterclaims are without merit and intends to vigorously oppose them. Trial of
the patent claims is scheduled for June 1998. See "Legal Proceedings - Other
Legal Proceedings - Patent Infringement Action" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Following the March 9, 1998 announcement of the proposed acquisition of Alumax
by Aluminum Company of America ("Alcoa") and its acquisition subsidiary (the
"Purchaser"), five putative class actions on behalf of stockholders of Alumax
were filed in the Delaware Court of Chancery against Alumax and certain Alumax
directors, four of which also named Alcoa as a defendant. The plaintiffs in
those actions allege, among other things, that the director defendants have
agreed to an acquisition of Alumax at an inadequate price, that they have failed
to provide Alumax's stockholders with all necessary information about the value
of Alumax, that they failed to make an informed decision as no market assessment
of Alumax's value was obtained and that the acquisition is structured to ensure
that stockholders will tender their shares and is coercive. On March 18, 1998,
an amended class action complaint was filed in one of the five cases that adds
the Purchaser as a defendent and which, in addition to its previous allegations,
includes a claim that various governmental filings by Alumax, Alcoa and the
Purchaser purportedly failed to disclose certain information necessary for
Alumax's stockholders to make an informed decision regarding
-16-
<PAGE> 17
the tender offer for Alumax's shares. The amended complaint further alleges that
the Merger Agreement purportedly creates disabling conflicts of interest by
conferring extraordinary benefits on the Company's senior management, that the
individual defendants allegedly failed to act in an informed manner and to
maximize shareholder value, and that Alcoa allegedly aided and abbetted the
breaches of fiduciary duty committed by the individual defendants. Plaintiffs
seek to enjoin the acquisition or to rescind it in the event that it is
consummated and to cause Alumax to implement a "full and fair auction" for the
Company. Plaintiffs also seek compensatory damages in an unspecified amount,
costs and disbursements, including attorneys' fees, and such other relief as the
Delaware Court of Chancery deems appropriate.
For additional information concerning these putative class actions, see the
complaints filed as exhibits to Aluminum Company of America's Tender Offer
Statement on Schedule 14D-1 dated March 13, 1998 and the amended complaint filed
as an exhibit to Amendment No. 1 to Aluminum Company of America's Tender Offer
Statement on Schedule 14D-1/A dated March 20, 1998, which are incorporated
herein by reference.
Item 2. Changes in Securities and Use of Proceeds.
(b) In March 1998, the Company redeemed the rights granted under the Rights
Agreement, which was adopted by the Company in February 1996, at a redemption
price of $0.01 per right. Prior to the redemption, each outstanding share of the
Company's Common Stock represented one right.
-17-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.01 Agreement and Plan of Merger, dated as of March 8, 1998, among
Aluminum Company of America, AMX Acquisition Corp. and Alumax
Inc. (incorporated by reference to Exhibit 99.3 to the
Schedule 14D-9 filed by Alumax Inc. on March 13, 1998).
27.01 Financial Data Schedule (for SEC use only).
99.01 Complaint filed by Giannone v. Alumax et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 9, 1998 (incorporated by reference to Exhibit
(g)(1) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.02 Complaint filed by Kwalbrun v. Brown et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 9, 1998 (incorporated by reference to Exhibit
(g)(2) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.03 Complaint filed by Roncini v. Alumax et al., Court of Chancery
of the State of Delaware in and for New Castle County, March
9, 1998 (incorporated by reference to Exhibit (g)(3) to the
Schedule 14D-1 filed by Aluminum Company of America on March
13, 1998).
99.04 Complaint filed by Levine v. Brown et al., Court of Chancery
of the State of Delaware in and for New Castle County, March
11, 1998 (incorporated by reference to Exhibit (g)(4) to the
Schedule 14D-1 filed by Aluminum Company of America on March
13, 1998).
99.05 Complaint filed by Kretschmar v. Alumax et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 12, 1998 (incorporated by reference to Exhibit
(g)(5) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.06 Amended Class Action Complaint filed as of right pursuant to
Rule 15(a) in Kwalbrun v. Brown, et al., Court of Chancery of
the State of Delaware in and for New Castle County, March 18,
1998 (incorporated by reference to Exhibit (g)(2)(i) to the
Schedule 14D-1/A filed by Aluminum Company of America on March
20, 1998).
</TABLE>
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the Company filed Current Reports on
Form 8-K on March 10, 1998 and March 13, 1998 and an amendment to Current Report
on Form 8-K/A on March 16, 1998. The Report filed on March 10 disclosed the
execution of the Agreement and Plan of Merger with Aluminum Company of America
and AMX Acquisition Corp., while the Report filed on March 13 and amended on
March 16 disclosed the redemption of the rights granted under the Rights
Agreement adopted by the Company in February 1996.
-18-
<PAGE> 19
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.
Alumax Inc.
By /s/ Helen M. Feeney
---------------------------------------
Helen M. Feeney
Vice President and Corporate Secretary
By /s/ Kevin J. Krakora
---------------------------------------
Kevin J. Krakora
Vice President and Controller
Date: May 15, 1998
-19-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.01 Agreement and Plan of Merger, dated as of March 8, 1998,
among Aluminum Company of America, AMX Acquisition Corp. and
Alumax Inc. (incorporated by reference to Exhibit 99.3 to
the Schedule 14D-9 filed by Alumax Inc. on March 13, 1998).
27.01 Financial Data Schedule (for SEC use only).
99.01 Complaint filed by Giannone v. Alumax et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 9, 1998 (incorporated by reference to Exhibit
(g)(1) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.02 Complaint filed by Kwalbrun v. Brown et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 9, 1998 (incorporated by reference to Exhibit
(g)(2) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.03 Complaint filed by Roncini v. Alumax et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 9, 1998 (incorporated by reference to Exhibit
(g)(3) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.04 Complaint filed by Levine v. Brown et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 11, 1998 (incorporated by reference to Exhibit
(g)(4) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.05 Complaint filed by Kretschmar v. Alumax et al., Court of
Chancery of the State of Delaware in and for New Castle
County, March 12, 1998 (incorporated by reference to Exhibit
(g)(5) to the Schedule 14D-1 filed by Aluminum Company of
America on March 13, 1998).
99.06 Amended Class Action Complaint filed as of right pursuant to
Rule 15(a) in Kwalbrun v. Brown, et al., Court of Chancery
of the State of Delaware in and for New Castle County, March
18, 1998 (incorporated by reference to Exhibit (g)(2)(i) to
the Schedule 14D-1/A filed by Aluminum Company of America on
March 20, 1998).
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q OF ALUMAX INC. FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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