<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMMONWEALTH INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3245741
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
500 WEST JEFFERSON STREET, 19TH FLOOR
LOUISVILLE, KENTUCKY 40202-2823
(502) 589-8100
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------
MARK V. KAMINSKI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMMONWEALTH INDUSTRIES, INC.
500 WEST JEFFERSON STREET, 19TH FLOOR
LOUISVILLE, KENTUCKY 40202-2823
(502) 589-8100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ROBERT W. DOWNES WINTHROP B. CONRAD, JR.
SULLIVAN & CROMWELL DAVIS POLK & WARDWELL
125 BROAD STREET 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10004-2498 NEW YORK, NEW YORK 10017
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- --------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- --------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.................. 5,750,000 shares(2) $20.1875 $116,078,125 $35,176
Rights to purchase Participating Preferred
Stock........................................ 5,750,000 rights(2) None None None
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 750,000 shares of Common Stock (attaching rights to purchase
Participating Preferred Stock) which the Underwriters have the option to
purchase to cover over-allotments, if any.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 31, 1997
5,000,000 SHARES
COMMONWEALTH INDUSTRIES, INC.
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY COMMONWEALTH
INDUSTRIES, INC. (THE "COMPANY"). THE COMMON STOCK OF THE COMPANY IS QUOTED
ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CMIN." ON JULY 30, 1997,
THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET WAS $21 3/8 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
PER SHARE................................. $ $ $
TOTAL(3).................................. $ $ $
</TABLE>
- ---------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $600,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30
DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 750,000
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY DAVIS POLK & WARDWELL, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1997 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN
IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO.
, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[PICTURES AND GRAPHICS INCLUDING PICTURES OF THE COMPANY'S MELTING AND CASTING,
COLD ROLLING, HOT ROLLING AND FINISHES PROCESSES AND GRAPHICS OF THE
COMPANY'S DIRECT CHILL ALUMINUM SHEET PRODUCTION PROCESS AND
CONTINUOUS CAST ALUMINUM SHEET PRODUCTION PLANT]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Incorporation of Certain Information by Reference.......................................................... 4
Available Information...................................................................................... 4
Prospectus Summary......................................................................................... 5
Risk Factors............................................................................................... 10
Use of Proceeds............................................................................................ 13
Price Range of Common Stock................................................................................ 13
Dividend Policy............................................................................................ 13
Capitalization............................................................................................. 14
Unaudited Pro Forma Condensed Consolidated Statement of Operations......................................... 15
Selected Financial Data.................................................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19
Business................................................................................................... 23
Management................................................................................................. 33
Ownership of Common Stock.................................................................................. 35
Description of Capital Stock............................................................................... 37
Underwriters............................................................................................... 40
Validity of Shares......................................................................................... 41
Experts.................................................................................................... 41
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
3
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), are incorporated by reference in this Prospectus: (a) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, (b) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31 and June 30, 1997, (c) the Company's Current Reports on Form 8-K
filed September 26, 1996 and April 29, 1997, and (d) the description of the
Company's Common Stock contained in the Company's Registration Statement on Form
8-A filed under Section 12 of the Exchange Act, including any amendment or
report updating such description. All documents filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the initial filing of the Registration Statement and prior to the
termination of this offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the respective dates of the filing of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of any such person, a
copy of any and all of such documents (other than exhibits to such documents
which are not specifically incorporated by reference into such documents).
Requests for such copies should be directed to the Secretary, Commonwealth
Industries, Inc., 500 West Jefferson Street, 19th Floor, Louisville, Kentucky
40202-2823 (telephone number 502-589-8100).
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act and
in accordance therewith files annual and quarterly reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, as well as at
the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov. The Company's Common
Stock is quoted on the Nasdaq National Market. Reports, proxy and information
statements and other information concerning the Company can also be inspected at
the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (including all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933 (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits and schedules thereto on file
with the Commission pursuant to the Securities Act and the rules and regulations
of the Commission thereunder. For further information with respect to the
Company and its Common Stock, reference is made to the Registration Statement
and the exhibits and schedules thereto. Statements contained in this Prospectus
regarding the contents of any agreement or other document filed as an exhibit to
the Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at certain of its Regional Offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
The Company is one of North America's leading manufacturers of aluminum
sheet and, through its Alflex Corporation unit ("Alflex"), of electrical
flexible conduit and prewired armored cable.
The Company's aluminum sheet products are produced using the conventional,
direct-chill rolling ingot casting process at its multi-purpose aluminum rolling
mill at Lewisport, Kentucky, one of the largest in North America, and by the
continuous casting process at its facilities at Uhrichsville, Ohio, and Carson,
California. The Company operates coating lines at the Lewisport mill and at
Company facilities in Bedford, Ohio, and Torrance, California. It also operates
tube mills at the Bedford and Carson locations. The electrical flexible conduit
and prewired armored cable products are manufactured at the Alflex facilities at
Long Beach, California.
On September 20, 1996, the Company purchased CasTech Aluminum Group Inc.
("CasTech") for $285 million. The Ohio and California facilities and businesses
were acquired in the CasTech acquisition. Unless otherwise stated, the
information in this Prospectus includes the acquired operations of CasTech only
from September 20, 1996. The net proceeds from the sale of the Common Stock
offered hereby (the "Offering") will be used to repay a portion of the
indebtedness incurred to finance the acquisition, bringing the consolidated debt
to total capitalization ratio at June 30, 1997 from 59% to a pro forma estimated
43% as of that date.
The aluminum sheet products manufactured by the Company are generally
referred to as common alloy products. They are produced in a number of aluminum
common alloys with thicknesses (gauge) of 0.010 to 0.250 inches, widths of up to
72 inches, physical properties and packaging, in each case to meet customer
specifications. These products are sold to distributors and end-users,
principally for use in building and construction products such as roofing,
siding, windows and gutters; transportation equipment such as truck trailers and
bodies and automotive parts; beverage cans; and consumer durables such as
cookware, appliances and lawn furniture. The Bedford and Carson facilities also
fabricate aluminum sheet into welded tube products for various markets.
Substantially all of the Company's aluminum sheet products are produced in
response to specific customer orders. Following the acquisition of CasTech in
September 1996, the aluminum sheet operations of the Company have been conducted
as a single unit, with consolidated buying of aluminum scrap and other raw
materials and marketing of products as well as scheduling of plant production to
optimize the use of the direct-chill and continuous-cast mills. Production
capacity is expected to exceed one billion pounds of aluminum sheet products in
1997. In 1996, the North American market for aluminum sheet products, excluding
sheet used to produce cans, was approximately five billion pounds.
Alflex manufactures metallic (aluminum and steel) and non-metallic (plastic)
electrical flexible conduit and prewired armored cable, utilizing aluminum sheet
manufactured by the Company. These products provide mechanical protection for
electrical wiring installed in buildings in accordance with local building code
requirements. Armored cable differs from electrical conduit in that it is
prewired by Alflex, whereas end-users must pull wiring through electrical
conduit when conduit is installed. These products are used primarily by
electrical contractors in the construction, renovation and remodeling of
commercial and industrial facilities and multi-family dwellings. They also are
used in the heating, ventilating and air-conditioning, original equipment
manufacturers and Do-It-Yourself ("DIY") markets. The product lines include
preassembled and prepackaged items for commercial and DIY markets and commercial
pre-fabricated wiring systems which provide significant savings in labor and
installation costs for end-users.
5
<PAGE>
The Company believes that the flexibility permitted by its direct-chill
multi-purpose rolling mill and its continuous-cast minimills give it a
competitive advantage, enabling the Company to provide a broad range of products
at lower cost by optimizing the mix of products produced at the low cost
continuous-cast mills and the more flexible, but higher cost, direct-chill mill.
The Company increased its production of aluminum sheet products from 471 million
pounds in 1992 to 718 million pounds in 1996 (942 million pounds giving pro
forma effect for 1996 to the CasTech acquisition), a 52% (100% pro forma)
increase. During the six-month period ended June 30, 1997, production totaled
518 million pounds, up from 469 million pounds pro forma for the comparable 1996
period. The Company believes it is the largest supplier of common alloy aluminum
sheet to North American distributors, with an estimated 22% share of this market
in 1996. The Company's 1996 sales also accounted for about 23% of the building
and construction market and 17% of the transportation industry market for
aluminum sheet products.
The Company has decreased its unit cost of converting metal to aluminum
sheet products by 11% between 1992 and the first six months of 1997. The Company
believes its conversion costs are among the lowest in the industry.
In April 1997, the Company name, formerly Commonwealth Aluminum Corporation,
was changed to Commonwealth Industries, Inc. to recognize that, with the
acquisition of the Alflex electrical conduit and armored cable business, the
Company's business now extends beyond aluminum. The aluminum sheet operations,
which are conducted through subsidiary corporations, continue to be conducted
under the Commonwealth Aluminum name.
STRATEGY
The Company's objective is to enhance its position as one of North America's
leading manufacturers of aluminum sheet, electrical flexible conduit and
prewired armored cable. Its strategy to achieve this objective focuses on
increasing production capacity and sales, reducing costs, utilizing effective
management systems, providing superior customer service and product quality and
increasing financial flexibility.
INCREASE PRODUCTION CAPACITY AND SALES. The Company intends to continue to
increase production capacity by focusing upon products that can be produced most
efficiently, improving labor productivity, eliminating production bottlenecks,
emphasizing on-time production and delivery to minimize scheduling disruptions,
improving production yield and improving plant maintenance to increase machine
utilization, as well as through the further realization of the benefits and
exploitation of the opportunities presented by the CasTech acquisition. In
addition, the Company intends to expand capacity through capital expenditures
and, if appropriate, further acquisitions. Increased production capacity will
permit the Company to continue to increase its sales. The Company is focusing on
those markets where its competitive strengths in manufacturing and timely
delivery of high quality products enable it to sell its higher margin products
and continue to increase its market share.
REDUCE COSTS. The Company continues to reduce the unit costs of its
operations by increasing production throughput, improving employee productivity
and achieving higher machine utilization rates and greater manufacturing
efficiencies.
UTILIZE EFFECTIVE MANAGEMENT SYSTEMS. The Company believes that the
continued implementation of its management systems, which have been designed to
improve all aspects of its business, is key to its ability to continue to
improve its operating performance and to integrate new businesses, including
acquisitions, quickly and efficiently.
PROVIDE SUPERIOR CUSTOMER SERVICE AND PRODUCT QUALITY. The Company is
dedicated to maintaining and increasing customer satisfaction and plans to
maintain its commitment to superior customer service and product quality.
6
<PAGE>
INCREASE FINANCIAL FLEXIBILITY. The Company seeks to maintain a capital
structure that will both provide reasonable financial stability during business
down cycles and support the growth of its business.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 5,000,000 shares
Common Stock to be outstanding after the
Offering................................... 15,207,500 shares (1)
Use of proceeds.............................. Repayment of a portion of the Company's term
loan
Nasdaq National Market Symbol................ CMIN
</TABLE>
- ------------------------
(1) Based upon the number of shares outstanding at June 30, 1997. Excludes
385,000 shares issuable upon the exercise of outstanding options at a
weighted average exercise price of $15.62 per share.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE COMPANY. SEE "RISK FACTORS."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated statement of operations,
operations and balance sheet data for the Company for the periods indicated. The
historical financial information is derived from the audited consolidated
financial statements of the Company for 1994, 1995 and 1996 and the unaudited
condensed consolidated financial statements of the Company for the six-month
periods ended June 30, 1996 and 1997. Such unaudited condensed consolidated
financial statements include all adjustments (which were of a normal and
recurring nature) which management considers necessary for a fair presentation
of the data for such periods. The results of the six months ended June 30, 1997
are not necessarily indicative of results to be expected for the full year. This
information should be read in conjunction with, and is qualified by reference
to, the consolidated financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997
(PRO (PRO
1994 1995 1996 FORMA)(1) 1996 1997 FORMA)(2)
--------- --------- --------- --------- --------- --------- -----------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................... $ 496,529 $ 671,501 $ 739,218 $1,033,598 $ 327,216 $ 559,431 $ 559,431
Cost of goods sold.......................... 455,123 606,751 689,906 955,953 308,535 511,138 511,138
--------- --------- --------- --------- --------- --------- -----------
Gross profit............................ 41,406 64,750 49,312 77,645 18,681 48,293 48,293
Selling, general and administrative
expenses.................................. 21,144 22,510 28,841 43,463 12,200 21,687 21,687
Amortization of goodwill.................... -- -- 1,209 4,409 -- 2,240 2,240
--------- --------- --------- --------- --------- --------- -----------
Operating income........................ 20,262 42,240 19,262 29,773 6,481 24,366 24,366
Halco income(3)............................. 2,635 1,636 -- -- -- -- --
Other income (expense), net................. (44) 2,670 76 425 (247) 497 497
Interest expense, net....................... (62) (3,473) (9,875) (21,955) (1,122) (16,421) (12,386)
--------- --------- --------- --------- --------- --------- -----------
Income before income taxes and
extraordinary loss.................... 22,791 43,073 9,463 8,243 5,112 8,442 12,477
Income tax expense (benefit)................ 700 9,286 (5,293) 3,297 617 2,111 3,119
--------- --------- --------- --------- --------- --------- -----------
Income before extraordinary loss........ 22,091 33,787 14,756 $ 4,946 4,495 6,331 $ 9,358(4)
--------- -----------
--------- -----------
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $0.1
million................................... -- -- (1,355) -- --
--------- --------- --------- --------- ---------
Net income.................................. $ 22,091 $ 33,787 $ 13,401 $ 4,495 $ 6,331
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income before extraordinary loss per common
share(5).................................. -- $ 3.32 $ 1.44 $ 0.33 $ 0.44 $ 0.62 $ 0.62
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Net income per common share(5).............. -- $ 3.32 $ 1.31 N/A $ 0.44 $ 0.62 N/A
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding............................... -- 10,191 10,197 15,197 10,196 10,207 15,207
Dividends per common share(5)............... -- $ 0.15 $ 0.20 $ 0.20 $ 0.10 $ 0.10 $ 0.10
OPERATIONS DATA:
Depreciation and amortization............... $ 17,397 $ 18,600 $ 22,452 $ 26,202 $ 8,963 $ 18,293 $ 18,123
Capital expenditures........................ $ 19,662 $ 15,153 $ 14,841 $ 23,664 $ 4,822 $ 8,929 $ 8,929
Net pounds shipped(6)....................... 568,970 587,932 712,480 950,949 314,581 524,375 524,375
</TABLE>
(FOOTNOTES ON NEXT PAGE)
8
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
<S> <C> <C>
ACTUAL PRO FORMA(7)
--------- --------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................... $ 219,575 $ 226,475
Total assets......................................................................... 824,734 823,236
Total debt........................................................................... 341,250 246,850
Total stockholders' equity........................................................... 233,037 326,314(4)
</TABLE>
- ------------------------
(1) Adjusted to give pro forma effect to the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $20 per
share and the application of the estimated net proceeds therefrom and the
CasTech acquisition, in each case as if such transactions had occurred as of
January 1, 1996. See "Use of Proceeds" and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations."
(2) Adjusted to give pro forma effect to the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $20 per
share and the application of the estimated net proceeds therefrom as if such
transactions had occurred as of January 1, 1997. See "Use of Proceeds." The
pro forma interest expense was determined by giving effect to (i) the
reduction in interest expense of $3,304 related to repayment of a portion of
the term loan under the Company's credit agreement, (ii) the reduction in
interest expense of $561 on the revolving credit facility due to the assumed
75 basis point reduction in interest rates that would have been available to
the Company under the terms of the revolving credit facility had the term
loan balance been reduced at the beginning of the period and (iii) the
reduction in the amortization expense of capitalized debt financing cost of
$170. The pro forma interest expense reflects assumed interest rates of
6.25% for long-term debt and 10.75% for the Senior Subordinated Notes. If
the assumed interest rate for long-term debt was changed by 0.25%, pro forma
interest expense would change by $187. For the six months ended June 30,
1997 the pro forma provision for income taxes was calculated by applying the
Company's estimated effective income tax rate of 25% to the Company's pro
forma income before income taxes and extraordinary loss for such period. If
the pro forma provision for income taxes had been calculated by applying the
combined federal and state statutory income tax rate of 40% for the six
months ended June 30, 1997, the Company's pro forma provision for income
taxes would have been $4,991, net income would have been $7,486 and income
before extraordinary loss per common share would have been $0.49. For the
year ended December 31, 1996, the pro forma provision for income taxes was
calculated utilizing the combined federal and state statutory income tax
rate of 40%. The historical effective income tax rate of the Company for
such period was negative, as discussed in Note 9 to the consolidated
financial statements of the Company.
(3) Prior to March 1995, the Company had an interest in Halco (Mining) Inc. and
received dividends and income from bauxite sales. This investment was
distributed to Comalco Limited in a transaction associated with the
disposition of Comalco's interest in the Company.
(4) The Company expects to incur an extraordinary loss of approximately $1,123
(net of income tax benefit of $374) related to the write-off of certain
capitalized debt financing costs upon the early repayment of indebtedness.
See "Use of Proceeds." As this is a non-cash, non-recurring expense directly
related to the Offering, the amount has not been included in the Pro Forma
Statement of Operations Data. The amount has been included in the "Pro
Forma" total stockholders' equity.
(5) Income before extraordinary loss, net income and dividends per common share
have not been presented for 1994 when the Company was a wholly-owned
subsidiary of Comalco Limited.
(6) Net pounds shipped excludes certain shipments of raw materials.
(7) Adjusted to give pro forma effect to the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $20 per
share and the application of the estimated net proceeds therefrom as if such
transactions had occurred as of June 30, 1997. See "Use of Proceeds" and
"Capitalization."
9
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE
FOLLOWING FACTORS, AS WELL AS THE OTHER INFORMATION INCLUDED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.
THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND
INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE
COMPANY, ITS DIRECTORS OR ITS OFFICERS PRIMARILY WITH RESPECT TO THE FUTURE
OPERATING PERFORMANCE OF THE COMPANY. PROSPECTIVE PURCHASERS OF THE SHARES OF
COMMON STOCK ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET
FORTH BELOW, IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
COMPETITIVE INDUSTRY
The market for aluminum sheet products is highly competitive. The Company
competes in the production and sale of common alloy aluminum sheet products with
some 27 other aluminum rolling mills in the United States and Canada, including
large, single-purpose can sheet mills, and with imported products. Many of these
competitors are part of large, integrated aluminum companies and have greater
financial and technical resources than the Company.
Aluminum also competes with other materials such as steel, plastic and glass
for various applications. Higher or lower aluminum prices tend to make aluminum
products less or more competitive with these alternative materials.
The consolidated results of operations of the Company will be significantly
affected by competitive factors. See "Business--Competition."
ALUMINUM METAL PRICE VOLATILITY
The Company's profitability depends importantly upon the margin between the
cost to the Company of aluminum metal and the selling price of its aluminum
sheet products. Aluminum metal prices for scrap and primary metal are subject to
significant cyclical price fluctuations. Purchase of metal for forward delivery
and hedging with futures and options contracts are used to reduce the Company's
aggregate exposure at any time to the risk of changes in metal prices. While it
is the Company's intention to base the selling prices of its products upon the
associated metal costs as set by purchases for forward delivery or hedging,
there can be no assurance that the Company will be able to pass all increases in
aluminum metal costs through to its customers. Significant increases in the
price of aluminum metal, if not offset by product price increases, would have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
CYCLICALITY OF END-USE MARKETS
The markets served by the Company are cyclical and are significantly
affected by changes in general and local economic conditions. These conditions
include the level of economic growth, employment levels, financing availability,
interest rates, consumer confidence and housing demand. Decreases in demand for
the Company's products resulting from these conditions can have a material
adverse effect on the prices which the Company may receive for its products and
on unit sales volumes.
10
<PAGE>
DEPENDENCE ON SEVERAL CUSTOMERS
During 1996, the Company's largest customer accounted for 11%, and the
Company's 10 largest customers accounted for 52%, of its revenues. See
"Business--Customers and Markets." The Company expects that sales to a small
number of major customers will continue to constitute a significant percentage
of its revenues. The loss of any of these major customers could have a material
adverse effect on the consolidated financial condition, results of operations or
cash flows of the Company.
LIMITATIONS ON PLANT CAPACITY; LEWISPORT CASTING FACILITIES; IMCO
The Company's manufacturing capacity has been sold out in each of the last
five years and in the six-month period ended June 30, 1997. Capacity to support
increased unit sales has depended, and may continue to depend, upon increases in
production capacity as a result of improved production efficiencies and capital
expenditures. There can be no assurance as to the extent to which such
efficiencies can be achieved or capital expenditures effectively made. The
Company's 1997-1999 capital expenditures program includes $19.5 million to
expand the capacity of ingot casting facilities at its Lewisport plant, an
expansion expected to add an estimated 55 million pounds to the Lewisport mill's
annual production capacity.
Approximately 60% of the direct-chill casting facilities at the Lewisport
plant are not expected to meet the more stringent clean air environmental
regulations expected to come into effect in 2002. The Company is developing a
plan to spend an estimated $16 million to $25 million during the 1998-2001
period to bring these facilities into compliance with the new regulations and to
update and improve plant infrastructure associated with these facilities. A
decision to proceed with this plan awaits the publication of proposed
regulations by the federal authorities and a review of their requirements.
IMCO Recycling Inc. ("IMCO") processes aluminum scrap acquired by the
Company to supply substantially all of the requirements for the Company's Ohio
rolling mill. Production disruptions or other factors affecting IMCO could
interrupt or temporarily reduce the supply of aluminum metal to the Ohio rolling
mill and adversely impact the Company.
AVAILABILITY OF ALUMINUM METAL
The principal raw materials used by the Company in the manufacture of its
aluminum sheet products are aluminum scrap and primary aluminum metal. The
Company purchases aluminum scrap primarily from or through aluminum scrap
dealers and brokers. Remaining requirements are met with purchased primary
metal, principally metal produced in Russia that generally sells at a discount
from other primary aluminum prices. Demand for aluminum scrap has increased and
the availability of lower grades of Russian metal has decreased in recent
periods. There is no assurance that the Company will continue to be able to
purchase scrap and Russian metal at the discounts from primary metal prices that
it has enjoyed.
FINANCIAL LEVERAGE
At June 30, 1997, after giving pro forma effect to the sale of 5,000,000
shares of Common Stock at an assumed public offering price of $20 per share and
the application of the estimated net proceeds therefrom, the Company would have
had approximately $246.9 million of total indebtedness, and the percentage of
total debt to total capitalization on a consolidated basis would have been
approximately 43%. The degree to which the Company is leveraged may limit the
Company's flexibility in planning for or reacting to changes in market
conditions, may increase the Company's vulnerability in the event of a downturn
in its business and may limit its ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other
purposes.
11
<PAGE>
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise.
Future success will depend in large part on the Company's ability to retain
talented management and skilled employees. There is no assurance that such
individuals will remain with the Company.
EXPIRING COLLECTIVE BARGAINING AGREEMENTS
The collective bargaining agreements for the Company's hourly employees at
its Ohio and Kentucky facilities expire in December 1997 and July 1998,
respectively. The Company cannot predict the terms of any new agreements or
whether it will experience any work stoppages in connection with the negotiation
of new agreements. Increased labor costs or work stoppages could have a material
adverse effect upon the consolidated financial condition, results of operations
or cash flows of the Company.
ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to increasingly stringent environmental
laws and regulations governing air emissions, wastewater discharges, the
handling, disposal and remediation of hazardous wastes and employee health and
safety. While the current cost of environmental compliance does not have a
material adverse effect upon the Company, there can be no assurance that future
costs of compliance will not have a material adverse effect upon the Company's
consolidated financial condition, results of operations or cash flows.
Future environmental regulations, including those under the Clean Air Act,
are expected to impose stricter requirements on the aluminum industry, and these
regulations will require additional measures at certain of the Company's
facilities, including Lewisport as discussed under "Business--Aluminum Sheet
Products--Casting and Rolling."
In addition, manufacturing activities at current and formerly owned
properties and adjacent areas have resulted in environmental impacts requiring
remediation. The Company's loss contingency accrual for environmental matters
covers all environmental loss contingencies relating to these properties and
areas that the Company has determined to be probable and reasonably estimable.
It is not possible, however, to predict the amount or timing of costs for future
environmental matters which may subsequently be determined. The outcome of any
such matters, to the extent they exceed any applicable accrual, could have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows. See "Business--Environmental Matters."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and By-laws contain provisions
that could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise. These provisions include advance
notice procedures for stockholders to submit proposals for consideration at
stockholders' meetings or to nominate persons for election as directors and
provide for a staggered Board of Directors. In addition, the Company is subject
to Section 203 of the Delaware General Corporation Law, which limits
transactions between a publicly held company and "interested stockholders"
(generally, those stockholders who, together with their affiliates and
associates, own 15% or more of the company's outstanding capital stock). This
provision of Delaware law also may have the effect of deterring certain
potential acquisitions of the Company. In addition, the Company has entered into
a Stockholder Protection Rights Agreement which may have certain anti-takeover
effects. See "Description of Capital Stock."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $20 per share
are estimated to be approximately $94.4 million ($108.7 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to apply the net proceeds to repayment of a portion of the term loan outstanding
under its bank credit agreement. The term loan is repayable in quarterly
installments over the period ending on September 1, 2001. On June 30, 1997, the
blended interest rate under the Company's term loan was 7.32%.
PRICE RANGE OF COMMON STOCK
The following table sets forth for the periods indicated the high and low
sale prices for the Common Stock as reported on the Nasdaq National Market since
the Company's initial public offering in March 1995.
<TABLE>
<CAPTION>
1995 HIGH LOW
- -------------------------- ----- -----
<S> <C> <C>
March 10-March 31 $14 1/4 $ 14
Second Quarter 19 3/4 14
Third Quarter 24 15/16 17 1/8
Fourth Quarter 19 3/4 15 1/4
1996
- --------------------------
First Quarter $18 7/8 $ 15 3/8
Second Quarter 18 1/2 15 1/2
Third Quarter 17 5/8 13 5/8
Fourth Quarter 17 3/4 14 1/8
1997
- --------------------------
First Quarter $20 1/4 $ 15 3/8
Second Quarter 21 16
Third Quarter (through 21 7/8 19 1/4
July 30, 1997)
</TABLE>
On July 30, 1997, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $21 3/8 per share. At June 30, 1997, there were
approximately 162 holders of record of the Common Stock and an estimated total
of 4,500 beneficial holders.
DIVIDEND POLICY
Since its initial public offering in March 1995, the Company has paid
quarterly cash dividends of $.05 per share. The payment of dividends is at the
discretion of the Board of Directors of the Company and is dependent upon the
Company's financial condition, results of operations, cash requirements, future
prospects and other factors deemed relevant by the Board, including limitations
upon dividends contained in the Company's bank credit agreement and the
Indenture relating to its outstanding 10 3/4% Senior Subordinated Notes Due
2006.
13
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term indebtedness and
total capitalization of the Company as of June 30, 1997 and as adjusted to give
effect to the sale of the 5,000,000 shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom of approximately $94.4
million (assuming an offering price of $20 per share). See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current portion of long-term debt (term loan)............................................ $ 8,750 $ 1,850
---------- -----------
---------- -----------
Long-term debt:
Term loan.............................................................................. $ 87,500 $ --
Revolving credit facility.............................................................. 120,000 120,000
10 3/4% Senior Subordinated Notes Due 2006............................................. 125,000 125,000
---------- -----------
Total long-term debt............................................................... 332,500 245,000
---------- -----------
Stockholders' equity(1):
Common stock, $.01 par value, 50,000,000 shares authorized,
10,207,500 shares issued and outstanding, 15,207,500 shares issued and outstanding,
as adjusted(2)....................................................................... 102 152
Additional paid-in capital............................................................. 301,467 395,817
Accumulated deficit(3)................................................................. (66,877) (68,000)
Unearned compensation.................................................................. (1,655) (1,655)
---------- -----------
Total stockholders' equity......................................................... 233,037 326,314
---------- -----------
Total capitalization............................................................. $ 565,537 $ 571,314
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The Company's authorized capital stock includes 1,000,000 shares of
Preferred Stock, $.01 par value, none of which is outstanding.
(2) Excludes 385,000 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options at a weighted average exercise price
of $15.62 per share.
(3) Includes a reduction of $1,123 (net of income tax benefit of $374) for the
one-time, non-cash charge to earnings for the extraordinary loss on the
early extinguishment of debt related to the write-off of capitalized debt
financing costs upon the repayment of indebtedness. See "Use of Proceeds."
As this is a non-cash, non-recurring expense directly attributable to the
Offering, the amount has not been included in the "Unaudited Pro Forma
Condensed Consolidated Statement of Operations."
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1996 was prepared assuming the
CasTech acquisition and the Offering had occurred on January 1, 1996. The
CasTech acquisition was accounted for using the purchase method of accounting.
Under purchase accounting, tangible and identifiable intangible assets acquired
and liabilities assumed are recorded at their respective fair values. The
Company's historical financial statements for the year ended December 31, 1996
include the results of operations of CasTech from September 20, 1996.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations is
based upon and should be read in conjunction with the historical consolidated
financial statements of the Company and CasTech, including the notes thereto,
included in this Prospectus or incorporated by reference herein. The Unaudited
Pro Forma Condensed Consolidated Statement of Operations presented herein is
based on certain assumptions, is for informational purposes only and does not
necessarily reflect future results of operations or what the results of
operations would have been had such transactions occurred at the beginning of
the periods presented.
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------
CASTECH
COMPANY CASTECH ACQUISITION ACQUISITION OFFERING
HISTORICAL HISTORICAL(1) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.............................. $739,218 $294,380 $ -- $1,033,598 $-- $1,033,598
Cost of goods sold..................... 689,906 264,479 1,568(2) 955,953 -- 955,953
---------- ------------- ----------- ------------ ------ ----------
Gross profit....................... 49,312 29,901 (1,568) 77,645 -- 77,645
Selling, general and administrative
expenses............................. 28,841 15,541 (919)(3) 43,463 -- 43,463
Amortization of goodwill............... 1,209 579 (579)(4) 4,409 -- 4,409
3,200(2)
---------- ------------- ----------- ------------ ------ ----------
Operating income................... 19,262 13,781 (3,270) 29,773 -- 29,773
Other income (expense), net............ 76 151 198(4) 425 -- 425
Interest expense, net.................. (9,875) (1,933) (17,975)(5) (29,783) 7,828(7) (21,955)
---------- ------------- ----------- ------------ ------ ----------
Income (loss) before provision
(benefit) for income taxes and
extraordinary loss............... 9,463 11,999 (21,047) 415 7,828 8,243
Provision (benefit) for income taxes... (5,293) 8,289 (2,830)(6) 166 3,131(6) 3,297
---------- ------------- ----------- ------------ ------ ----------
Income before extraordinary loss... $ 14,756 $ 3,710 $ (18,217) $ 249 $4,697 $ 4,946
---------- ------------- ----------- ------------ ------ ----------
---------- ------------- ----------- ------------ ------ ----------
Income before extraordinary loss per
common share......................... $ 1.44 $ 0.02 $ 0.33
---------- ------------ ----------
---------- ------------ ----------
Weighted average common shares
outstanding.......................... 10,197 10,197 15,197
</TABLE>
- ------------------------------
(1) CasTech's Unaudited Historical Statement of Operations for the period from
January 1, 1996 through September 20, 1996 was derived by adding (i) with
respect to the three months ended March 31, 1996, amounts presented in
CasTech's Form 10-K for the year ended March 31, 1996 (by subtracting
amounts presented in CasTech's Form 10-Q for the nine months ended December
31, 1995 from the amounts presented in CasTech's Form 10-K for the year
ended March 31, 1996), (ii) with respect to the three months ended June 30,
1996, amounts presented in CasTech's Form 10-Q for the three months ended
June 30, 1996, and (iii) with respect to the period from July 1, 1996
through September 20, 1996, the related amounts as derived from CasTech's
accounting records, excluding certain non-recurring charges directly
attributable to the acquisition of CasTech, which consist principally of
severance benefits and payments for outstanding stock options totalling
approximately $10,900 and $12,300, respectively.
(2) To record depreciation ($1,568) and amortization ($3,200) related to the
revaluation of property, plant and equipment and the excess of purchase
price over net tangible and identifiable intangible assets acquired.
Acquired property, plant and equipment is being depreciated over
approximately 12 years, the estimated remaining useful life. The excess of
purchase price over net assets acquired is being amortized over 40 years.
(3) To eliminate certain non-recurring charges directly attributable to the
acquisition.
(4) To eliminate the amortization of goodwill ($579) and capitalized debt
financing costs ($198) recorded by CasTech.
(5) To record the estimated incremental interest expense related to borrowings
necessary to finance the CasTech acquisition and to refinance long-term debt
of the Company and CasTech, including amortization of capitalized debt
financing costs. The pro forma interest expense was determined using assumed
interest rates of 7.00% for long-term debt and 10.75% for the Senior
Subordinated Notes.
(6) The pro forma provision for income taxes was calculated by applying the
combined federal and state statutory income tax rate of 40% to the Company's
pro forma combined income before provision for income taxes. The historical
effective income tax rate of the Company for such period was negative, as
discussed in Note 9 to the consolidated financial statements of the Company.
(7) To record (i) the reduction in interest expense of $6,608 related to
repayment of a portion of the term loan under the Company's credit agreement
at an assumed interest rate of 7.00%, (ii) the reduction in interest expense
of $868 on the revolving credit facility due to the assumed 75 basis point
reduction in interest rates that would have been available to the Company
under the terms of the revolving credit facility had the term loan balance
been reduced at the beginning of the period and (iii) the reduction in the
amortization expense of capitalized debt financing cost of $352. The pro
forma interest expense reflects assumed interest rates of 6.25% for
long-term debt and 10.75% for the Senior Subordinated Notes. If the assumed
interest rate for long-term debt was changed by 0.25%, pro forma interest
expense would change by $289.
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, operations and balance sheet data for the Company for the periods
indicated. The historical financial information is derived from the audited
consolidated financial statements of the Company for 1992, 1993, 1994, 1995 and
1996 and the unaudited condensed consolidated financial statements of the
Company for the six-month periods ended June 30, 1996 and 1997. Such unaudited
condensed consolidated financial statements include all adjustments (which were
of a normal and recurring nature) which management considers necessary for a
fair presentation of the data for such periods. The results of the six-months
ended June 30, 1997 are not necessarily indicative of results to be expected for
the full year. The information should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 400,314 $ 413,036 $ 496,529 $ 671,501 $ 739,218 $ 327,216 $ 559,431
Cost of goods sold....................... 379,654 407,561 455,123 606,751 689,906 308,535 511,138
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 20,660 5,475 41,406 64,750 49,312 18,681 48,293
Selling, general and administrative
expenses............................... 15,835 21,462 21,144 22,510 28,841 12,200 21,687
Amortization of goodwill................. -- -- -- -- 1,209 -- 2,240
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).............. 4,825 (15,987) 20,262 42,240 19,262 6,481 24,366
Halco income(1).......................... 2,337 4,504 2,635 1,636 -- -- --
Other income (expense), net.............. 937 111 (44) 2,670 76 (247) 497
Interest expense, net.................... (122) (164) (62) (3,473) (9,875) (1,122) (16,421)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
cumulative effect of accounting
change and extraordinary loss...... 7,977 (11,536) 22,791 43,073 9,463 5,112 8,442
Provision (benefit) for income taxes..... 207 42 700 9,286 (5,293) 617 2,111
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change and
extraordinary loss................. 7,770 (11,578) 22,091 33,787 14,756 4,495 6,331
Cumulative effect of change in accounting
principle(2)........................... -- (66,415) -- -- -- -- --
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $0.1 million............ -- -- -- -- (1,355) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ 7,770 $ (77,993) $ 22,091 $ 33,787 $ 13,401 $ 4,495 $ 6,331
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary loss
per common share(3).................... -- -- -- $ 3.32 $ 1.44 $ 0.44 $ 0.62
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share(3)........... -- -- -- $ 3.32 $ 1.31 $ 0.44 $ 0.62
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding............................ -- -- -- 10,191 10,197 10,196 10,207
OPERATIONS DATA:
Depreciation and amortization............ $ 16,061 $ 16,538 $ 17,397 $ 18,600 $ 22,452 $ 8,963 $ 18,293
Capital expenditures..................... $ 16,647 $ 12,092 $ 19,662 $ 15,153 $ 14,841 $ 4,822 $ 8,929
Net pounds shipped(4).................... 458,505 511,887 568,970 587,932 712,480 314,581 524,375
</TABLE>
(FOOTNOTES ON NEXT PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE
----------------------------------------------------- 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $ (20,300) $ (15,197) $ 134,026 $ 153,292 $ 207,061 $ 219,575
Total assets.................................. 357,103 357,557 439,454 420,684 794,582 824,734
Total debt (5)................................ 125,000 125,000 -- 48,375 342,250 341,250
Total stockholders' equity (5)................ 171,540 93,824 242,690 213,063 227,223 233,037
</TABLE>
- ------------------------
(1) Prior to March 1995, the Company had an interest in Halco (Mining) Inc. and
received dividends and income from bauxite sales. This investment was
distributed to Comalco Limited in a transaction associated with the
disposition of Comalco's interest in the Company.
(2) Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). This standard requires companies
to accrue the cost of postretirement health care and life insurance benefits
within the employees' active service periods. The Company elected to
recognize the accumulated postretirement benefit obligation immediately upon
adoption of SFAS 106, resulting in a one time charge of $66.4 million at
January 1, 1993.
(3) Income (loss) before extraordinary loss per common share and net income per
common share has not been presented for 1992 through 1994 when the Company
was a wholly owned subsidiary of Comalco Limited.
(4) Net pounds shipped excludes certain shipments of raw materials.
(5) Reflects the contribution to equity in December 1994 of $125 million due to
Comalco Limited, then the parent of the Company, and the distribution of $50
million to Comalco Limited in 1995 in a transaction associated with the
disposition of Comalco's interest in the Company.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Trends in the demand for aluminum sheet products in the United States and in
the prices of aluminum primary metal, aluminum scrap and copper affect the
business of the Company. The Company's operating results also are affected by
factors specific to the Company, such as the margins between selling prices for
its products and its cost of raw material ("material margins") and its unit cost
of converting raw material into its products ("conversion cost"). While changes
in aluminum and copper prices can cause the Company's net sales to change
significantly from period to period, net income is more directly impacted by
fluctuations in material margins.
Although the demand for aluminum sheet products is cyclical, over the longer
term demand has continued to increase, reflecting general population and
economic growth and the advantages of aluminum's light weight, high degree of
formability, resistance to corrosion and recyclability.
The price of aluminum metal affects the price of the Company's products and
in the longer term can have an effect on the competitive position of aluminum in
relation to alternative materials. The price of primary metal is determined
largely by worldwide supply and demand conditions and is highly cyclical. For
example, during the past 10 years the average annual cash price per pound of
aluminum for transactions on the London Metal Exchange peaked at $1.17 in 1988,
declined to $0.52 in 1993, rose to $0.82 in 1995 and declined to $0.68 in 1996,
and on June 30, 1997 was $0.71. The price of primary aluminum in world markets
influences the price of aluminum scrap, the Company's principal raw material.
Significant movements in the price of primary aluminum can affect the Company's
margins because aluminum sheet prices do not move simultaneously nor necessarily
to the same degree as the primary markets. The Company seeks to manage its
material margins by focusing on higher margin products and by accessing the
scrap and primary metal markets in the most cost-effective manner, including the
use of futures contracts to hedge anticipated raw material requirements and
firm-priced sales orders.
The Company's material margins declined in the early 1990s, principally due
to excess capacity in the industry and reduced demand as a result of
recessionary economic conditions which caused aluminum sheet prices to decrease
faster than raw material prices. Margins increased during 1994 and 1995 due to a
change in product mix to higher margin products and increased demand. During
1996, margins declined to the lowest level since 1993 as distributors and
end-users reduced inventory levels and activity in some end-use markets
declined. While demand for aluminum sheet products increased during the first
six months of 1997, this increased demand has not resulted in improved material
margins as these margins contracted slightly in the second quarter of 1997 as
compared to the fourth quarter of 1996 and the first quarter of 1997. The margin
between the price of aluminum scrap and the price of primary aluminum decreased
during the first half of 1997 as compared to the first half of 1996.
During the past five years, the Company has lowered its unit conversion
costs by increasing production throughput and by reducing costs. This has been
achieved generally through improved employee productivity, higher machine
utilization rates and greater manufacturing efficiencies. The Company believes
its conversion costs to be among the lowest in the industry.
Shipments of electrical conduit and cable continued to increase during 1996
and the first half of 1997 as demand in the construction, renovation and
remodeling markets remained strong. Recent increases in the Company's electrical
conduit and cable manufacturing capacity have resulted in higher production
levels to support increased demand for the Company's products.
On September 20, 1996, the Company acquired CasTech for $285 million.
Concurrently with the acquisition, the Company prepaid its existing indebtedness
and that of CasTech. The acquisition and prepayments were financed with a new
$325 million senior secured bank credit facility and the proceeds from the issue
and sale of $125 million principal amount of 10.75% Senior Subordinated Notes
Due 2006.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET SALES. Net sales for the six month period ended June 30, 1997 increased
71% to $559 million from $327 million for the same period in 1996. The increase
is due to the CasTech acquisition along with increased sales volumes at all
facilities. On a pro forma basis including CasTech, unit sales volumes of
aluminum increased 12%, including a 5% increase at Lewisport and a 24% increase
at the continuous-cast mills formerly operated by CasTech, and Alflex increased
its unit sales volume by 13%, in each case over the comparable 1996 period.
GROSS PROFIT. Gross profit for the six months ended June 30, 1997 increased
to $48.3 million from $18.7 million for the same period in 1996. This increase
was attributable to the CasTech acquisition, increased unit sales volumes and
lower manufacturing unit costs. The Company's unit manufacturing costs decreased
compared to the same period in 1996 as a result of the higher unit volumes and
mill optimization practices.
OPERATING INCOME. The Company produced operating income of $24.4 million
for the first half of 1997 compared with $6.5 million for the first half of
1996. Selling, general and administrative expenses during the 1997 period were
$21.7 million, compared with $12.2 million in the 1996 period. This increase
along with the amortization of goodwill recorded in the first half of 1997 of
$2.2 million is due to the CasTech acquisition. Contributing to the increase
were corporate relocation, severance and other costs related to the integration
of the businesses. Selling, general and administrative expenses were $21.7
million for the first half of 1997 compared with $22.8 million on a pro forma
basis including CasTech for the first half of 1996, or a decrease of 5%, most of
which savings were realized during the second quarter of 1997 and resulted from
the integration of the two companies.
NET INCOME. Net income was $6.3 million for the six months ended June 30,
1997, compared with $4.5 million for the same period in 1996. Interest expense
was $16.4 million for the six months and $1.1 million for the comparable 1996
period, an increase due to borrowings associated with the CasTech acquisition.
Income tax expense was $2.1 million in the six months ended June 30, 1997,
compared to $0.6 million for the same period in 1996.
YEARS 1996, 1995 AND 1994
NET SALES. Net sales for 1996 increased 10.1% to $739.2 million from $671.5
million in 1995. The acquisition of CasTech accounted for about $109.5 million
of 1996 net sales. Average selling prices for aluminum sheet products decreased
13.2% to $0.99 per pound from $1.14 per pound in 1995. This decline reflected
lower metal costs, with the average London Metals Exchange traded cash
settlement price for primary aluminum declining to $0.68 per pound in 1996 from
$0.82 per pound in 1995, and competitive pressures as demand weakened. Despite
these competitive pressures, unit sales increased 21.2% to 712.5 million pounds
as the result of the Company increasing its market share.
In 1995, net sales grew 35.2% as the Company expanded its production
capacity and market share, the average selling price of the Company's aluminum
sheet products increased 31.0% and unit sales increased 3.3% to 588 million
pounds.
GROSS PROFIT. Gross profit declined 23.8% (to 6.7% of net sales) in 1996
after a 56.4% increase (to 9.6% of net sales) in 1995. The 1996 decrease was
primarily a result of a reduction in the material margin to approximately $0.30
per pound from $0.36 in 1995. This is in contrast to a 1995 increase of $0.04
from the $0.32 level in 1994. The decline in metal margin offset the benefits of
increased unit sales volume and lower conversion costs.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 33.5% in 1996, primarily due to the CasTech
acquisition, staffing changes and the cost of professional services. The 1995
figure was up 6.5% over 1994, primarily due to additional compensation charges.
OPERATING INCOME. Operating income declined by 54.4% in 1996 to $19.3
million, compared with a 1995 increase of 108.5% to $42.2 million, in each case
reflecting the factors mentioned above.
HALCO INCOME. Prior to March 1995, the Company had an interest in Halco
(Mining) Inc., and received dividends and income from bauxite sales amounting to
$1.6 million in 1995 and $2.6 million in 1994. The investment was distributed to
the Company's prior owner in March 1995 in a transaction associated with the
disposition of the owner's interest in the Company.
OTHER INCOME (EXPENSE), NET. Other income in 1995 included $2.6 million
resulting from the favorable settlement of a dispute with the Kentucky Revenue
Cabinet over energy taxes.
INTEREST EXPENSE. The increase in interest charges in 1996 is due primarily
to charges incurred with respect to the borrowings made to finance the CasTech
acquisition. Interest expense in 1995 includes interest charges with respect to
a $50 million term loan borrowed in March 1995 to fund a distribution of that
amount to the former owner in a transaction associated with the disposition of
the owner's interest in the Company and borrowings for working capital purposes
under the Company's revolving credit facility. In 1994, the Company was financed
primarily by a $125 million interest-free advance from the former owner, which
was converted to equity in December 1994.
PROVISION (BENEFIT) FOR INCOME TAX. Income tax provisions (benefits) in
1996, 1995 and 1994 reflect the use of the Company's net operating loss
carryforwards ("NOLs") to offset taxable income for federal income tax purposes.
At December 31, 1996, the Company had remaining available NOLs of $127 million.
These NOLs will expire in various amounts through 2008. The amount of taxable
income that can be offset by NOLs arising prior to the initial public offering
of the Company in March 1995 is subject to an annual limitation of approximately
$9.6 million plus certain gains included in taxable income which are
attributable to the Company prior to the initial public offering.
The Company recognized a net income tax benefit in 1996 of $5.3 million as a
result of revisions to prior year tax estimates and adjustment to the estimated
utilization of NOLs.
NET INCOME. Net income for 1996 decreased 60.3% to $13.4 million, after a
52.9% increase in 1995 over 1994, in each case reflecting the factors described
above for each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are cash flows from operations and
borrowings under its $225 million revolving credit facility.
The Company's cash flow from operations in the six months ended June 30,
1997 and the years 1996, 1995 and 1994 was $11.8 million, $42.0 million, $20.2
million and $10.5 million, respectively. The Company's cash flow from operations
declined in the first six months of 1997 from $15.0 million in the comparable
1996 period, primarily due to an increase in working capital.
Borrowing under the Company's revolving credit facility is based upon the
sum of stated percentages of its eligible accounts receivable and eligible
inventory. Availability also is subject to satisfaction of certain covenants and
other requirements. At June 30, 1997, the full amount of $225 million was
available, of which $120 million was outstanding. The maximum amount outstanding
at any time since the facility was established on September 20, 1996 was $160.5
million. The facility expires on September 1, 2001.
Working capital amounted to $220 million at June 30, 1997 and $207 million
on December 31, 1996.
The term loan is to be repaid in quarterly installments through September 1,
2001 and the Company is required to make prepayments from excess cash flow (as
defined) and net proceeds from assets sales and
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<PAGE>
issuance of debt or equity. On June 30, 1997, $96.2 million of this loan
remained outstanding. A portion of this loan will be repaid with the net
proceeds from the Offering.
Capital expenditures were $8.9 million during the first half of 1997, and
$14.8 million plus the cost of the CasTech acquisition, $15.2 million and $19.7
million in 1996, 1995 and 1994, respectively. Total capital expenditures for
1997 are expected to be between $20 million and $26 million, principally related
to upgrading the Company's manufacturing and other facilities and meeting
environmental requirements.
The indicated annual rate of dividends being paid on the Common Stock is
$0.20 per share, or an annual total of approximately $3.0 million after giving
effect to the Offering.
The Company believes that its sources of liquidity set forth above will be
sufficient to fund its working capital requirements, capital expenditures, debt
service and dividend payments at least through 1998. Although the Company is not
currently in active discussions regarding any acquisition, in the event that the
Company successfully completes an acquisition in the future, additional
financing may be required.
FINANCIAL INSTRUMENTS
Market and credit risk is managed by the Company through an active risk
management program. This program focuses on inventory, purchase commitments and
committed and anticipated sales. The Company utilizes futures contracts and
options to protect against exposures to price risk in the aluminum market. The
Company is exposed to losses in the event of non-performance by the
counterparties to these agreements; however, the Company does not anticipate
non-performance by the counterparties. Prior to conducting business with a
potential customer, credit checks are performed on the customer to determine
creditworthiness and assess credit risk. In addition, an indirect credit
exposure review is performed on all customers. Trading partners (brokers) are
evaluated for creditworthiness and risk assessment prior to initiating trading
activities with the brokers. However, the Company does not require collateral to
support broker transactions. In addition, all brokers trading on the London
Metal Exchange with United States clients are regulated by the Commodities
Trading and Futures Commission, which requires the brokers to be fully insured
against unrealized losses owed to clients. At June 30, 1997 and December 31,
1996, uncommitted credit lines totaling approximately $52 million and $53
million, respectively, were available at various brokerages used by the Company.
Gains, losses and premiums on futures contracts and options which
effectively hedge exposures are deferred and included in income as a component
of the underlying sales transaction. The Company had deferred realized gains
(losses) of $(1.1) million, $0.4 million and $0.2 million as of June 30, 1997,
December 31, 1996 and 1995, respectively, on closed futures contracts and
options which are recorded as a reduction of the carrying value of inventory.
At June 30, 1997, the Company held purchase and sales commitments through
1997 totaling $87 million and $248 million, respectively. At June 30, 1997 and
December 31, 1996 and 1995, the Company's position with respect to aluminum
futures and options was as follows (in millions):
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN (LOSS)
----------- -------------
<S> <C> <C>
June 30, 1997........................................................... $ 39.2 $ (0.9)
December 31, 1996....................................................... $ 57.9 $ 2.2
December 31, 1995....................................................... $ 69.5 $ 0.4
</TABLE>
Futures contracts and options are valued at the closing price on the last
business day of the year.
The Company uses interest rate swap agreements to manage interest rate risk
on its floating rate debt portfolio. At June 30, 1997, the Company had interest
rate swap contracts with a notional amount of approximately $116 million. The
counterparties to interest rate contracts are major commercial banks and
management believes that losses related to credit risk are remote.
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BUSINESS
GENERAL
The Company is one of North America's leading manufacturers of aluminum
sheet and, through its Alflex Corporation unit ("Alflex"), of electrical
flexible conduit and prewired armored cable.
The Company's aluminum sheet products are produced using the conventional,
direct-chill rolling ingot casting process at the Company's multi-purpose
aluminum rolling mill at Lewisport, Kentucky, one of the largest in North
America, and by the continuous casting process at its facilities at
Uhrichsville, Ohio, and Carson, California. The Company operates coating lines
at the Lewisport mill and at Company facilities in Bedford, Ohio, and Torrance,
California. It also operates tube mills at the Bedford and Carson locations. The
electrical flexible conduit and prewired armored cable products are manufactured
at the Alflex facilities at Long Beach, California. The Ohio and California
facilities and businesses were acquired through the purchase by the Company of
CasTech.
The aluminum sheet products manufactured by the Company are generally
referred to as common alloy products. They are produced in a number of aluminum
common alloys with thicknesses (gauge) of 0.010 to 0.250 inches, widths of up to
72 inches, physical properties and packaging, in each case to meet customer
specifications. These products are sold to distributors and end-users,
principally for use in building and construction products such as roofing,
siding, windows and gutters; transportation equipment such as truck trailers and
bodies and automotive parts; beverage cans; and consumer durables such as
cookware, appliances and lawn furniture. The Bedford and Carson facilities also
fabricate aluminum sheet into welded tube products for various markets.
Substantially all of the Company's aluminum sheet products are produced in
response to specific customer orders. Following the acquisition of CasTech in
September 1996, the aluminum sheet operations of the Company have been conducted
as a single unit, with consolidated buying of aluminum scrap and other raw
materials, scheduling of plant production and marketing of products. Production
capacity is expected to exceed one billion pounds of aluminum sheet products in
1997. In 1996, the North American market for aluminum sheet products, excluding
sheet used to produce cans, was approximately five billion pounds.
Alflex manufactures metallic (aluminum and steel) and non-metallic (plastic)
electrical flexible conduit and prewired armored cable, utilizing aluminum sheet
manufactured by the Company. These products provide mechanical protection for
electrical wiring installed in buildings in accordance with local building code
requirements. Armored cable differs from electrical conduit in that it is
prewired by Alflex, whereas end-users must pull wiring through electrical
conduit when conduit is installed. These products are used primarily by
electrical contractors in the construction, renovation and remodeling of
commercial and industrial facilities and multi-family dwellings. They also are
used in the heating, ventilating and air-conditioning ("HVAC"), original
equipment manufacturers ("OEM") and Do-It-Yourself ("DIY") markets. The product
lines include preassembled and prepackaged items for commercial and DIY markets
which provide significant savings in labor and installation costs for end-users.
Pre-fabricated wiring systems consisting of armored cable cut to specified
lengths with pre-installed end connectors and junction boxes have recently been
introduced by Alflex, and the Company is optimistic that installations of this
product will increase as contractors become more familiar with the labor saving
potential of these systems.
The Company estimates that at June 30, 1997 it had a backlog of firm orders
for which product specifications have been defined of 230.1 million pounds of
aluminum sheet products with an aggregate sales price of $246.2 million,
compared to an estimated backlog of 175.8 million pounds with an aggregate sales
price of $163.2 million at December 31, 1996. Backlog is not a significant
factor for the Company's electrical products.
The Company's principal executive offices are located at 500 West Jefferson
Street, 19th Floor, Louisville, Kentucky 40202-2823, and its telephone number is
502-589-8100.
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<PAGE>
INDUSTRY OVERVIEW
Aluminum semi-finished and finished products produced from primary aluminum
and aluminum scrap include aluminum sheet, plate and foil; rod, bar and wire;
extruded, forged and cast products; and aluminum powder and paste. United States
production of these products in 1996 totaled 20.7 billion pounds, of which some
45% were aluminum sheet products.
Although demand for aluminum sheet products in the United States is
cyclical, over the longer term demand has continued to increase, reflecting
general population and economic growth and the advantages of aluminum's light
weight, high degree of formability, resistance to corrosion and recyclability.
During the 10 years ended December 31, 1996, domestic consumption of aluminum
sheet products grew from 6.8 billion pounds to 7.7 billion pounds and domestic
consumption has continued to increase in 1997. Over the same 10-year period, the
average selling price per pound of the Company's aluminum rolled products
fluctuated from $1.09 in 1984, increasing to $1.33 in 1988 and declining to
$0.81 in 1993 before increasing again in 1996 to $1.02.
The largest use of aluminum sheet, representing approximately 51% of United
States domestic aluminum sheet shipments in 1996, is for the manufacture of
beverage cans. Other significant end-use markets for aluminum sheet are the
building and construction, transportation and consumer durables markets. In
1996, the distribution market represented 16% of total United States aluminum
sheet shipments. Distributors principally resell to building and construction,
transportation and consumer durables end-users. Distributors have been
increasing their share of the domestic aluminum sheet market in recent years.
During the past decade, changes have been occurring in the rolling mill
industry.
- In the mid and late 1980s manufacturers of aluminum rolled products
increased their production capacity, eventually resulting in overcapacity
in the rolled products market. This excess capacity, and an overall
recessionary economic climate in the early 1990s, resulted in depressed
selling prices and lower material margins for aluminum rolling mills, many
of which did not have sales volume sufficient to support operation at full
capacity.
- A number of older, noncompetitive rolling mills have closed.
- Some rolling mills began to be operated or managed as independent business
units, rather than as one element in the production and distribution chain
of an integrated aluminum company. Accordingly, selling prices of rolled
products, and the cost structure of rolling mills, may no longer be
influenced by the cross subsidies available in an integrated operation,
and mills are being evaluated upon their stand-alone financial
performance.
- There has been movement in the industry, in part led by the Company, to
quote prices for aluminum sheet products in terms of the published primary
metal price plus a stated margin. This unbundling facilitates the
allocation of metal price risk between the buyer and seller.
- The rolling mill industry has become more specialized. Large mills have
been constructed for the single purpose of producing aluminum sheet used
in the manufacture of beverage cans and aluminum foil. Some multi-purpose
mills have focused on those products which they can produce most
efficiently.
- The industry continues to rationalize existing facilities, shedding
non-economic capacity or downstream businesses while investing in select
areas of manufacturing expertise.
- The barriers to entry in the rolling mill business or to major new
facilities remain high because of the high capital cost of mills of
economic size and advanced technology requirements.
As a result of these factors, and due to an improvement in general economic
conditions, domestic rolling mill capacity utilization rates, as estimated by an
independent research organization, increased from
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<PAGE>
73% for 1993 to 82% for 1994. Aluminum sheet consumers overpurchased in 1995,
driving capacity utilization and sheet prices higher. The excesses of 1995
brought about a counter-balancing decline in industry capacity utilization,
estimated by the Company at 77% in 1996. See "Risk Factors--Cyclicality of
End-Use Markets" and "--Aluminum Metal Price Volatility."
The two sources of aluminum metal for rolling mills are primary metal and
aluminum scrap. While the rolling industry uses some primary aluminum, it also
uses a high level of aluminum scrap. The recycling of aluminum in the United
States increased from 6.9 billion pounds in 1992 to 8.6 billion pounds in 1996,
primarily as a result of economic and environmental factors and legislative
initiatives. The use of recycled aluminum scrap in the production of aluminum
products offers substantial cost and energy savings over production of such
products from primary aluminum.
Historically, electrical wires were housed in rigid pipes in the walls of
buildings. Rigid pipe remains the most widely used means of protecting wiring in
commercial and other non-residential construction. Electrical flexible conduit
made from steel was introduced in the 1920s. Flexible conduit is significantly
easier to install than rigid pipe, resulting in cost savings to the installer.
Aluminum flexible conduit, introduced to the market by Alflex, has become a
significant factor due to its ease of installation, lighter weight and ease of
cutting as compared to steel flexible conduit or rigid pipe. In wet, harsh or
corrosive environments, non-metallic or plastic jacketed steel flexible conduit
may be used. Armored cable (conduit with pre-installed wire) made of steel or
aluminum has captured an increasing share of the market due to its pre-assembly,
ease of installation and overall cost effectiveness.
STRATEGY
The Company's objective is to enhance its position as one of North America's
leading manufacturers of aluminum sheet and electrical flexible conduit and
prewired armored cable. The Company's strategy to achieve this objective focuses
on increasing production capacity and sales, reducing costs, utilizing effective
management systems, providing superior customer service and product quality and
increasing financial flexibility.
INCREASE PRODUCTION CAPACITY AND SALES. The Company intends to continue to
increase production capacity by focusing upon products that can be produced most
efficiently, improving labor productivity, eliminating production bottlenecks,
emphasizing on-time production and delivery to minimize scheduling disruptions,
improving production yield and improving plant maintenance to increase machine
utilization, as well as through the further realization of the benefits and
exploitation of the opportunities presented by the CasTech acquisition. In
addition, the Company intends to expand capacity through capital expenditures,
including, if appropriate, further acquisitions. The Company increased its
production of aluminum sheet products from 471 million pounds in 1992 to 718
million pounds in 1996 (942 million pounds after giving pro forma effect for
1996 to the CasTech acquisition), a 52% (100% pro forma) increase. During the
six-month period ended June 30, 1997, production totaled 518 million pounds, up
10% from 469 million pounds pro forma for the comparable 1996 period. The
Company's plan to spend $19.5 million during the period 1997-1999 to expand its
ingot casting facilities at Lewisport is expected to add an estimated 55 million
pounds to the annual production capacity of the Lewisport mill. This expansion,
together with other improvements, should raise the annual capacity of that mill
to 720 million pounds and total Company capacity to 1.1 billion pounds.
Increased production capacity will permit the Company to continue to
increase its sales. The Company is focusing on those markets where its
competitive strengths in manufacturing and timely delivery of high-quality
products enable it to sell its higher margin products and continue to increase
its market share.
REDUCE COSTS. The Company continues to reduce the unit costs of its
operations by increasing production throughput, improving employee productivity
and achieving higher machine utilization rates and greater manufacturing
efficiencies. The Company decreased its unit cost of converting metal to
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<PAGE>
aluminum sheet products by 11.4% between 1992 and the first six months of 1997.
The Company has identified opportunities to further reduce its conversion costs,
including through the further optimization of production runs at its
direct-chill and continuous-cast mills, the elimination of bottlenecks and waste
and the improvement of machine reliability.
UTILIZE EFFECTIVE MANAGEMENT SYSTEMS. The Company believes that the
continued implementation of its management systems, which have been designed to
improve all aspects of its business, is key to its ability to continue to
improve its operating performance and to integrate new businesses, including
acquisitions, quickly and efficiently. With the acquisition of CasTech, the
Company is now employing its management systems in a multiple business unit
environment with new technology, products and markets and five additional
manufacturing sites. The Company believes its management systems have enabled it
to realize quickly the synergies of the CasTech acquisition and will position it
to integrate additional businesses, including any further acquisitions.
PROVIDE SUPERIOR CUSTOMER SERVICE AND PRODUCT QUALITY. The Company is
dedicated to maintaining and increasing customer satisfaction and plans to
maintain its commitment to superior customer service. Customer returns
represented only about 1% of pounds shipped in the first six months of 1997.
On-time (within the week promised) deliveries improved from 81% in 1992 to 85%
for the six-month period ended June 30, 1997. Lead times for deliveries are kept
relatively short by carefully managing the acceptance of orders. The Company's
direct-chill and continuous-cast mills permit the Company to produce high
quality aluminum rolled products to increasingly exacting customer standards. In
addition, the Company's coating lines and finishing capabilities make it an
industry leader in the production of superior quality coated aluminum products.
INCREASE FINANCIAL FLEXIBILITY. The Company seeks to maintain a capital
structure that will provide reasonable financial stability during down cycles
and will support the growth of its business. The Offering is intended to reduce
the financial leverage resulting from the Company's indebtedness incurred in
connection with the acquisition of CasTech and to position the Company to
continue to build value for its stockholders through further investments or
possible acquisitions. While the Company is not currently in active discussions
regarding any business acquisition, it reviews acquisition opportunities from
time to time.
ALUMINUM SHEET PRODUCTS
MANUFACTURING
The Company's aluminum sheet manufacturing facilities are comprised of the
Lewisport, Kentucky, rolling mill and the former CasTech rolling mills at
Uhrichsville, Ohio, and Carson, California, coating facilities at Bedford, Ohio,
and Torrance, California, and tube mills at Bedford and Carson.
The Lewisport mill uses the conventional, vertical direct-chill, rolling
ingot casting process. This process permits the production of aluminum sheet
with strength, hardness, formability, finishing and other characteristics
preferred for many applications. The flexibility permitted by this multi-purpose
rolling mill permits the Company to target higher margin products, manufacture a
variety of products with consistent high quality and respond quickly to shifts
in market demand. In 1996, the Lewisport mill produced 619 million pounds of
aluminum sheet products, up from 459 million pounds in 1992. Production during
the first six months of 1997 was 329 million pounds, up 8% from 305 million
pounds in the corresponding period of 1996. The increase in production was
achieved by focusing upon plant operating efficiencies, improving labor
productivity, eliminating manufacturing bottlenecks, emphasizing on-time
production and delivery to minimize scheduling disruptions, improving plant
yields, improving plant maintenance practices to increase machine utilization
and increasing market share by emphasizing quality, on-time delivery and
customer service. Increased production has reduced the unit costs of production,
in part because a large portion of the costs of a rolling mill are fixed costs
which do not vary with production volume. Unit costs of
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converting metal to aluminum sheet products at Lewisport declined by 10% from
1992 to the six-month period ended June 30, 1997 and are believed to be among
the lowest in the industry for plants using the conventional process. The
Company plans to further increase production capacity at Lewisport by continuing
the programs that have steadily increased production over the past five years.
This increase will require an increase in casting capacity as mentioned below
under "--Casting and Rolling."
The Uhrichsville and Carson mills use low-cost, scrap-based twin-belt
mini-mill continuous casting production technology. This process permits the
efficient production of aluminum sheet alloys used in building and construction
and other applications not requiring the more complex alloys or the physical
characteristics better provided by the conventional casting method. The process
eliminates several steps associated with conventional casting, thereby reducing
manufacturing costs. Capital costs also are significantly lower than for mills
using the conventional casting process. Since 1993, the annual capacity of the
Uhrichsville and Carson mills has been increased by over 50% from approximately
250 million pounds to 380 million pounds. The increased capacity and a
continuous improvement strategy resulted in a significant reduction in sheet
production costs. The Company believes that its continuous cast mill at
Uhrichsville has the lowest conversion costs per pound in the world. An upgrade
of the cold mill at Uhrichsville in 1996 increased throughput and significantly
improved surface, gauge and flatness control.
ALUMINUM SUPPLY
Most of the aluminum metal used by the Company's rolling mills is purchased,
principally from or through aluminum scrap dealers or brokers, in the form of
aluminum scrap. The Company believes it is one of the largest users of aluminum
scrap other than beverage can scrap in the United States, and that the volume of
its purchases assists it in obtaining scrap at competitive prices. The Company's
remaining requirements are met with purchased primary metal, including metal
produced in Russia to specifications that differ from the industry standard for
primary aluminum but that is appropriate for the Company's needs. The Russian
metal generally sells at a discount from other primary aluminum prices.
CASTING AND ROLLING
At Lewisport, scrap, in some cases after processing in the Company's
recycling facilities, and primary aluminum are melted in induction or
reverbatory furnaces. Small amounts of copper, magnesium, manganese and other
metals are added to produce alloys with the desired hardness, formability and
other physical characteristics. The molten aluminum is then poured through a
mold surrounded by circulating water, which cools and solidifies an ingot about
24 inches thick and weighing as much as 40,000 pounds. The cooled ingot is
transferred for processing in the rolling mill. The Company's 1997-1999 capital
expenditures program includes $19.5 million to upgrade and expand the capacity
of ingot casting facilities at Lewisport, adding an expected 55 million pounds
to the Lewisport mill's annual production capacity. In addition, the Company is
developing a plan to spend an estimated $16 million to $25 million during the
1998-2001 period to bring the casting facilities at Lewisport constructed in
1965, which currently supply 60% of its ingot casting needs, into compliance
with the more stringent clean air regulatory regulations expected to come into
effect in 2002 and to update and improve plant infrastructure associated with
those facilities. A decision to proceed with this plan awaits the publication of
proposed regulations by the federal authorities and a review of their
requirements.
The rolling ingots are heated to a malleable state in soaking pits or tunnel
furnaces. Then, in the next two stages--hot and cold rolling--the ingot is
passed between rolls under pressure, causing it to become thinner and longer.
The first rolling stage takes place in a "reversing" mill, so named because the
ingot is passed back and forth between the work rolls, reversing itself after
each pass. After it passes through the reversing mill the aluminum sheet moves
through a continuous hot mill, and then is cooled and cold rolled to its final
thickness.
27
<PAGE>
The Uhrichsville and Carson rolling mills employ the continuous casting
process in which molten aluminum is fed into a caster which produces a
continuous thin slab that is immediately hot rolled into semi-finished aluminum
sheet in a single manufacturing process. The aluminum sheet is then cooled and
cold rolled to its final thickness as in the conventional process. The
Uhrichsville and Carson mills use twin-belt thin-slab continuous casting, which
the Company believes is the most efficient and most productive form of
continuous casting.
The Company and IMCO, the world's largest aluminum recycler, are parties to
a Supply Agreement under which IMCO serves as the exclusive source of recycled
aluminum for the Company's Uhrichsville mill. Under the Supply Agreement, the
Company purchases aluminum scrap and delivers it to IMCO which then processes
and converts it into molten metal at its recycling and processing facility
located adjacent to the Company's mill. The Company is responsible for the
treatment and disposal of the waste generated as a result of IMCO's processing
services on behalf of the Company. The Supply Agreement expires March 31, 2003,
subject to the Company's option to renew the agreement for an additional 10-year
term. The Company has an option to purchase up to a 49% interest in the IMCO
facility and a right of first refusal if IMCO wishes to sell the facility.
The Carson rolling mill processes its own scrap to produce molten metal,
utilizing current delacquering and melting technology.
The Company has paid a one-time license fee for technology used in its
continuous casting process. The license agreement allows the Company to use
inventions, technical discoveries and apparatus of the licensor in the
manufacturing process.
FINISHING AND COATING
After hot and cold rolling is complete, the aluminum sheet is leveled to
ensure required flatness and may be slit into narrower widths, embossed or
painted to customers' specifications.
The Company is an industry leader in the development and production of
superior quality coated aluminum products and operates at Lewisport the largest
coating line integrated with a U.S. rolling mill. Coating lines at the Company's
Bedford and Torrance facilities serve the Uhrichsville and Carson rolling mills.
In the coating process, aluminum sheet is chemically cleaned, painted and then
cured to produce a durable coated surface.
PACKAGING AND SHIPPING
Finished products are shipped to customers by truck or rail in the form of
coils of various size and weighing up to 30,000 pounds.
ELECTRICAL PRODUCTS
Alflex fabricates its flexible conduit and armored cable products at its
Long Beach, California, facility. Alflex purchases its aluminum sheet
exclusively from the Company's nearby Carson rolling mill, making Alflex the
only backward integrated manufacturer of electric flexible conduit and cable.
Alflex also uses significant amounts of copper and steel as raw materials.
Alflex designs and builds much of the equipment used to manufacture its
products. The Company believes that the ability of Alflex to design and build
its own equipment has significantly reduced its manufacturing costs by lowering
its cost of capital, increasing output and reducing set-up times and waste.
Alflex fabricates its electrical products by slitting aluminum or steel
sheet on specialized narrow-width slitting equipment, after which the sheet is
coiled. The coils are then fed through proprietary forming machines to produce
the flexible conduit. For its cable products, Alflex draws copper into wire,
coats the wire with plastic insulation and, for certain products, wraps the
coated wire with paper or plastic. The
28
<PAGE>
protective armoring is then wrapped around the cabled wire. To produce its
non-metallic conduit, Alflex uses a specialized co-extrusion process involving
both rigid and flexible plastics (PVC). After production, the conduit and cable
products are cut to length and packaged.
CUSTOMERS AND MARKETS
The Company's aluminum sheet products are sold to distributors and
end-users, principally in the building and construction, transportation,
beverage cans and consumer durables markets.
The following table sets forth the percentage of 1996 aluminum sheet
revenues contributed by each of these classes of customers and the Company's
estimate of its share of these markets in North America.
<TABLE>
<CAPTION>
% OF % MARKET
SALES SHARE
----- ---------------
<S> <C> <C>
Distributors............................................................... 39 22
Building and construction.................................................. 24 23
Transportation............................................................. 12 17
Beverage cans.............................................................. 10 --
Consumer durables and other................................................ 15 2
</TABLE>
The Company believes that it is the largest supplier of common alloy
aluminum sheet to distributors. Distributors, in some cases after slitting,
punching, leveling or other processing, resell the Company's products into
end-use markets, including the building and construction, transportation and
consumer durables markets.
The building and construction sector is the largest end-use market other
than beverage cans for common alloy sheet products.
The Company is one of the largest suppliers of aluminum sheet products to
North American manufacturers of transportation equipment, including truck
trailers and bodies, recreational vehicles and automobile parts.
The Company also produces aluminum sheet for the manufacture of beverage
cans. Can sheet is the largest single end-use of aluminum sheet, accounting for
about one-half of the estimated world-wide market. Much of this product is
produced by large, single-purpose rolling mills. The Company participates in
this market in recognition of the size of the market and the strategic
importance of maintaining a position in that business. In addition, many of the
advances in aluminum rolling mill technology are developed for the production of
can sheet and participation in this market supports the Company's effort to
maintain its technological proficiency for all of its products.
The largest volume in the category of consumer durables and other markets
for the Company is reroll stock sold for further processing into aluminum foil.
The other major end-uses of this product category are cookware, appliances and
heat exchanger fin stock.
Market share estimates exclude heat-treated aluminum plate and sheet, which
the Company does not produce. The Company estimates that heat-treated products
constitute an immaterial portion of the end-use markets served by the Company.
The inclusion of the former CasTech operations for a full year is expected
to result in a further increase in the Company's share of the market for
aluminum sheet products, particularly the distributor, building and construction
and consumer durables markets, viewed on an annual basis. Also, it is expected
to result in a further increase in the proportion of the Company's annual
business accounted for by the building and construction and consumer durables
markets.
Company sales are made to customers located throughout North America. Sales
outside North America have not been significant.
29
<PAGE>
In 1996, subsidiaries of Reynolds Metals Co. accounted for approximately
11%, and the Company's top 10 customers represented about 52%, of the Company's
revenues. No other single customer accounted for more than 10% of 1996 revenues.
Sales of aluminum sheet products are made through the Company's own sales
force which is strategically located to provide national coverage. An integrated
computer system provides the Company's employees with on-line access to
inventory status, production schedules, shipping information and pricing data to
facilitate immediate response to customer inquiries.
Many of the Company's aluminum sheet markets are seasonal. Demand in the
building and construction and transportation markets is generally lower in the
fall and winter seasons than in the spring and summer. Warmer temperatures in
the spring and summer boost sales of can sheet as a result of increased beverage
consumption. Such factors typically result in higher operating income in the
spring and summer months.
Alflex electrical products are sold primarily through independent sales
representatives to electrical wholesalers. Wholesalers represented more than 83%
of Alflex sales in 1996. The remaining sales are made to the DIY, OEM and HVAC
markets. The independent sales representatives do not market Alflex's products
exclusively, but they may not sell products that are in direct competition with
products manufactured and sold by Alflex. Alflex serves about 5,100 customers.
Alflex maintains registered trademarks on certain of its flexible conduit
and armored cable systems, including Ultratite, Galflex, the Alflex name and its
design, Electrician's Choice, Computer Blue, Duraclad, Armorlite and PowerSnap.
While Alflex considers these trademarks to be important to its business, it does
not believe it is dependent upon the trademarks for the continuation of its
business.
COMPETITION
The Company competes in the production and sale of common alloy aluminum
sheet products with some 27 other aluminum rolling mills in North America,
including large, single-purpose can sheet mills, and with imported products.
Aluminum Company of America ("Alcoa"), Alcan Aluminum Ltd. ("Alcan") and
Reynolds Metals Co. have a significantly larger share of the U.S. market for
aluminum sheet products, including can sheet and aluminum foil. However, in the
market for common alloy aluminum sheet products other than can sheet and
aluminum foil, the market leaders are Alcoa, Alcan, Alumax Inc., Noranda Inc.
and the Company.
The Company competes with other rolled product suppliers on the basis of
quality, price, timeliness of delivery and customer service.
Aluminum also competes with other materials such as steel, plastic and glass
for various applications.
Alflex competes with national and regional competitors and imported
products, both in the electrical flexible conduit and prewired armored cable
industry and in the pipe and wire industry. Competition is principally on the
basis of product availability and features, price and customer service.
RESEARCH AND DEVELOPMENT
The Company conducts research and development activities at its rolling
mills as part of its ongoing operations to improve product quality and reduce
manufacturing costs. Outside consultants also are used.
Alflex focuses its research and development activities on the development of
new products and the improvement of its conduit and cable manufacturing
processes through the development of proprietary manufacturing equipment and the
reduction of scrap.
The estimated amounts spent during 1994, 1995 and 1996 on Company and
CasTech sponsored research and development activities aggregated $1.6 million,
$1.6 million and $1.4 million, respectively.
30
<PAGE>
ENVIRONMENTAL MATTERS
The Company's operations are subject to increasingly stringent environmental
laws and regulations governing air emissions, wastewater discharges, the
handling, disposal and remediation of hazardous substances and wastes and
employee health and safety. These laws can impose joint and several liability
for releases or threatened releases of hazardous substances upon statutorily
defined parties, including the Company, regardless of fault or the lawfulness of
the original activity or disposal. The Company believes it is currently in
material compliance with applicable environmental laws and regulations.
Future regulations, under the Clean Air Act and otherwise, are expected to
impose stricter emission requirements on the aluminum industry. While the
Company believes that current pollution control measures at most of the emission
sources at its facilities will meet these anticipated future requirements,
additional measures at some of the Company's facilities, including Lewisport as
discussed above under "Aluminum Sheet Products--Casting and Rolling," may be
required.
The Company has been named as a potentially responsible party at four
federal superfund sites which were acquired in the CasTech acquisition and is
conducting remedial investigations at two of the sites for past waste disposal
activity associated with closed recycling facilities. A trust fund exists to
fund the activity at one of the sites undergoing remediation and was established
though contributions from two other parties in exchange for indemnification from
further liability. The Company is reimbursed from the fund as approved
remediation expenditures are incurred at the site. The balance remaining in the
trust fund at December 31, 1996 was $4.3 million. In determining the adequacy of
the Company's aggregate environmental contingency accrual, the assets of the
trust fund and the future trust earnings were taken into account. At the two
other federal superfund sites, the Company is a minor contributor and expects to
resolve its liability for a nominal amount. The Company is under orders by
agencies in three states for environmental remediation at sites, one of which is
currently operating and two of which have been closed. Based upon currently
available information, the Company estimates the range of possible losses with
respect to the above matters is between $12 million and $16 million.
The Company acquired its Lewisport rolling mill and an aluminum smelter at
Goldendale, Washington ("Goldendale"), from Lockheed Martin in 1985. In
connection with the transaction, Lockheed Martin indemnified the Company against
expenses relating to environmental matters arising during the period of Lockheed
Martin's ownership of those facilities.
Environmental sampling at Lewisport has disclosed the presence of
contaminants, including polychlorinated biphenyls (PCBs), in a closed Company
landfill. The Company has not yet determined the extent of the contamination or
the nature and extent of remedial measures that may be required. Accordingly,
the Company cannot at present estimate the cost of any remediation that may be
necessary. Management believes the contamination is covered by the Lockheed
Martin indemnification, which Lockheed Martin disputes.
The aluminum smelter at Goldendale was operated by Lockheed Martin until
1985 and by the Company from 1985 to 1987 when it was sold to Columbia Aluminum
Corporation ("Columbia"). Past aluminum smelting activities at Goldendale
resulted in environmental contamination and regulatory involvement. A 1993
Settlement Agreement among the Company, Lockheed Martin and Columbia allocated
responsibility for future remediation at 11 sites at the Goldendale smelter. If
remediation is required, estimates by outside consultants of the probable
aggregate cost to the Company for these sites range from $1.3 million to $7.2
million. The apportionment of responsibility for other sites at Goldendale is
left to alternative dispute resolution procedures if and when these locations
become the subject of remedial requirements.
The Company has been named a potentially responsible party at three
third-party disposal sites relating to Lockheed Martin operations for which
Lockheed Martin has assumed responsibility.
31
<PAGE>
The Company's aggregate loss contingency accrual for environmental matters
was $15.2 million at December 31, 1996, which covers all environmental loss
contingencies that the Company has determined to be probable and reasonably
estimable. It is not possible, however, to predict the amount or timing of costs
for future environmental matters which may subsequently be determined. Although
the outcome of any such matters, to the extent they exceed any applicable
accrual, could have a material adverse effect on the Company's consolidated
results of operations for the applicable period, the Company believes that such
outcome will not have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
The Company has incurred and will continue to incur capital and operating
expenditures for matters relating to environmental control and monitoring.
Capital expenditures of the Company for environmental control and monitoring for
1995 and 1996 were $0.6 million and $2.3 million, respectively. All other
environmental expenditures of the Company, including remediation costs, for
1994, 1995 and 1996 were $2.0 million, $1.9 million and $1.5 million,
respectively.
The Company has planned environmental capital expenditures for 1997 and 1998
of $4.2 million and $4.8 million, respectively, in addition to any amounts which
may be spent to meet future clean air requirements at Lewisport as discussed
above under "Aluminum Sheet Products--Casting and Rolling."
EMPLOYEES
At December 31, 1996, the Company employed 1,997 persons, of whom 1,403 were
full-time hourly employees, including 760 at Lewisport represented by the United
Steel Workers of America (USW) and 188 at the Uhrichsville and Bedford, Ohio,
facilities represented by the Glass, Molders, Pottery, Plastic & Allied Workers
International, AFL-CIO, CLC union (GMP). Three-year collective bargaining
agreements with the USW and the GMP expire in July 1998 and December 1997,
respectively. The Company believes its relationships with its employees are
good.
The Company provides a gain sharing plan for its employees at Lewisport.
Contributions to the plan are based upon a formula which compares actual
performance results to targets agreed upon by the management and the USW.
A profit-sharing plan is provided for all non-union employees at the
Company's Uhrichsville, Bedford, Carson and Torrance plants, and Alflex provides
a non-qualified defined contribution plan for eligible workers. Contributions to
both plans are at the discretion of the Company's Board of Directors.
PROPERTIES
The following table sets forth certain information with respect to the
Company's principal operating properties. Substantially all of these properties
collateralize borrowings under the Company's senior secured bank credit
facility.
<TABLE>
<CAPTION>
LOCATION NATURE SQUARE FEET STATUS
- -------------------------------------------- -------------------------------------------- ----------- ---------
<S> <C> <C> <C>
Louisville, Kentucky........................ Administrative offices 22,000 Leased
Lewisport, Kentucky......................... Rolling mill 1,700,000 Owned
Uhrichsville, Ohio.......................... Rolling mill 220,000 Owned
Carson, California.......................... Rolling mill and tube mill 103,000 Owned
Bedford, Ohio............................... Coating facility and tube mill 103,000 Leased
Torrance, California........................ Coating facility 60,000 Leased
Long Beach, California...................... Alflex administrative offices, manufacturing 210,000 Leased
facility and distribution center
</TABLE>
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark V. Kaminski..................................... 42 President and Chief Executive Officer and Director
Robert D. Lloyd...................................... 63 Executive Vice President, Alflex
Roderick Macdonald................................... 49 Executive Vice President Corporate Systems
Donald L. Marsh, Jr.................................. 51 Executive Vice President, Chief Financial Officer and
Secretary
Fred N. Mudge........................................ 64 Executive Vice President, Commonwealth Aluminum
John F. Barron....................................... 45 Controller and Assistant Secretary
Gregory Givan........................................ 45 Vice President and Treasurer
Daniel L. Smith...................................... 51 Vice President Information Technology
William G. Toler..................................... 40 Vice President Finance and Administration
Paul E. Lego......................................... 67 Chairman of the Board
Catherine G. Burke................................... 58 Director
C. Frederick Fetterolf............................... 69 Director
John E. Merow........................................ 67 Director
Victor Torasso....................................... 68 Director
</TABLE>
Mr. Kaminski joined the Company in 1987 as Marketing Manager. In 1989 he was
promoted to Vice President of Operations and in 1991 he became President and
Chief Executive Officer. He is a director of the Aluminum Association,
Washington, D.C. He is also a director of the Louisville YMCA.
Mr. Lloyd joined the Company in September 1996. From 1991 to 1996 he served
as President and Chief Executive Officer of Alflex and as a member of the Board
of Directors of CasTech. From 1984 to 1991 he held the position of Vice
President Western Operations of Triangle Wire and Cable.
Mr. Macdonald was employed by the Company in January 1994. From 1966 until
1993, Mr. Macdonald was an Officer in the British Army (Royal Engineers). He
retired from the British Army as a Brigadier General.
Mr. Marsh joined the Company in March 1996. Prior to that time he was Senior
Vice President of Castle Energy Corporation.
Mr. Mudge was elected to his present position in September 1996. From 1995
until that time he was Secretary of the Commonwealth of Kentucky Transportation
Cabinet, and for the preceding 10 years was President and Chief Executive
Officer of Logan Aluminum Inc.
Mr. Barron joined the Company in February 1997. From 1986 to 1996 he held
the position of Senior Vice President and Assistant Comptroller of Bank One
Kentucky, N.A.
Mr. Givan joined the Company in July 1997. From 1987 to 1997 he was Second
Vice President, Corporate Finance and most recently Assistant Treasurer of
Providian Corp., an insurance company.
Mr. Smith joined the Company in July 1995. From 1987 until 1995, Mr. Smith
headed the consulting firm, Organization Research Group, which provided
organizational design and staff development services.
Mr. Toler has been with the Company since 1980 and was elected to his
present position in April 1997. His most recent previous position was Vice
President Materials.
33
<PAGE>
From 1990 until his retirement in 1993, Mr. Lego was Chairman of the Board
and Chief Executive Officer of Westinghouse Electric Corporation. He is a
director of PNC Bank Realty Holding Company, USX Corp., Lincoln Electric Company
and Consolidated Natural Gas Company. Mr. Lego is a trustee of the University of
Pittsburgh and a member of the Business Council and of the Board of Overseers of
the New Jersey Institute of Technology.
Dr. Burke has been a member of the faculty of the School of Public
Administration at the University of Southern California since 1973. She has been
a panelist and consultant to the Office of Technology Assessment of the U.S.
Congress and a member of the Los Angeles County Economy and Efficiency
Commission. Dr. Burke has provided management consultations to public and
private sector organizations in the United States, Canada, Australia, England
and Denmark.
Mr. Fetterolf was President and Chief Operating Officer of Aluminum Company
of America (Alcoa) from 1985 to 1991, and served as President of Alcoa from 1983
to 1985. He is a director of Allegheny Teledyne Corporation, Mellon National
Bank, Union Carbide Corporation, Quaker State Corporation, Praxair, Inc. and
Dentsply International.
Mr. Merow was a partner in the law firm of Sullivan & Cromwell from 1965
through 1996 and Chairman and Senior Partner during the period 1987-1994. He is
a director of each of the investment companies (18) in the Seligman Group of
Investment Companies. He also serves as a governor of New York Hospital,
chairman of the American Australian Association, a director of the United
States-New Zealand Council, a governor of the Foreign Policy Association, a
trustee of the U.S. Council for International Business and a director of the
Municipal Art Society of New York.
Mr. Torasso was President of Wheeltek, Inc., an automotive aluminum wheel
manufacturing plant in Freemont, Indiana, from 1986 to 1989. From 1958 until
1985, Mr. Torasso was employed by Anaconda and ARCO Aluminum during which time
he was Vice President and General Manager of the Mill Products Group. Mr.
Torasso supervised the design and start-up of a new $600 million single purpose
aluminum rolling mill in Logan County, Kentucky, was the works manager of an
aluminum smelter in Sebree, Kentucky, and was plant manager of an aluminum
rolling mill in Terre Haute, Indiana.
34
<PAGE>
OWNERSHIP OF COMMON STOCK
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of June 30, 1997, the number of shares of
Common Stock of the Company beneficially owned by each director and certain
executive officers of the Company and all directors and executive officers as a
group. Each person has sole investment and voting power with respect to the
shares set forth below unless otherwise noted.
<TABLE>
<CAPTION>
NO. OF
SHARES PERCENT
NAME OF BENEFICIAL OWNER OWNED(A) OF CLASS
- ----------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Catherine G. Burke....................................................................... 7,000 *
C. Frederick Fetterolf................................................................... 2,000 *
Mark V. Kaminski......................................................................... 112,424 1.1%
Paul E. Lego............................................................................. 7,000 *
John E. Merow............................................................................ 13,000 *
Victor Torasso........................................................................... 3,000 *
Robert D. Lloyd.......................................................................... -- *
Roderick Macdonald....................................................................... 19,322 *
Donald L. Marsh, Jr...................................................................... 16,263 *
Fred N. Mudge............................................................................ 1,958 *
All directors and executive officers as a group (14 persons)............................. 216,244 2.1%
</TABLE>
- ------------------------
* Less than 1%
(a) Includes the following shares of Common Stock which the individual(s) had
the right to acquire within 60 days of June 30, 1997 through the exercise of
options: Dr. Burke--2,000 shares; Mr. Lego--5,000 shares; Mr. Merow--2,000
shares; Mr. Torasso--2,000 shares; and all directors and executive officers
as a group--11,000 shares. Also includes shares held in the Company's
Performance Sharing Plan for Salaried Employees for the accounts of
individuals as follows: Mr. Kaminski--15,520 shares; Mr. Macdonald--459
shares; Mr. Marsh--473 shares; Mr. Mudge--59 shares; and all directors and
executive officers as a group--19,309 shares.
35
<PAGE>
OTHERS
The following table sets forth information with respect to each person
believed by the Company to be the beneficial owner of more than five percent of
the Company's Common Stock on the dates noted.
<TABLE>
<CAPTION>
NO. OF
SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS
- ----------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
904,000(a) 8.9%
John R. Simplot..........................................................................
Self Declaration of Revocable Trust
999 Main Street
Boise, Idaho 83702
860,000(b) 8.4%
Goodman & Goodman LTD....................................................................
40 King Street West
55th Floor
Toronto, Ontario, Canada
719,700(c) 7.1%
Franklin Resources, Inc..................................................................
777 Mariners Island Blvd.
San Mateo, CA 94404
520,000(d) 5.1%
American Express Financial Services......................................................
IDS Tower 10
Minneapolis, MN 55440
</TABLE>
- ------------------------
(a) Based solely on a Schedule 13D dated January 28, 1997 filed with the
Commission by John R. Simplot, Trustee.
(b) Based solely on a Form 13D dated April 3, 1997 filed with the Commission by
Goodman & Goodman LTD.
(c) Based solely on a Schedule 13F dated March 31, 1997 filed with the
Commission by Franklin Resources, Inc.
(d) Based solely on a Schedule 13F dated March 31, 1997 filed with the
Commission by American Express Financial Services.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Delaware law
and to the provisions of the Company's Certificate of Incorporation and By-Laws,
copies of which have been filed with the Commission.
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $.01 per share. As of June 30, 1997, there were 10,207,500 shares of
Common Stock and no shares of Preferred Stock outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, including the election of
directors. Holders of Common Stock do not have cumulative voting rights, and
therefore holders of a majority of the shares voting for the election of
directors can elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, after payment of dividends required to be paid on
outstanding Preferred Stock, if any, and subject to the terms of the agreements
governing the Company's long-term debt. See "Dividend Policy." In the event of
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock then
outstanding, if any.
The Common Stock has no preemptive, conversion or redemption rights and is
not subject to further calls or assessments by the Company. All of the
outstanding shares of Common Stock are, and any issued upon sale of the shares
offered hereby will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Certificate of Incorporation authorizes the issuance of 1,000,000 shares
of Preferred Stock. The Board of Directors of the Company may authorize the
issuance of one or more series of Preferred Stock having such rights, including
voting, conversion and redemption rights, and such preferences, including
dividend and liquidation preferences, as the Board may determine, without
further action by the stockholders of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
Preferred Stock could result in a series of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, enjoy all of the
rights appurtenant to the Common Stock.
STAGGERED BOARD
Pursuant to the Certificate of Incorporation, the Company's Board of
Directors is divided into three classes of directors serving staggered
three-year terms.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Certificate of Incorporation and the By-Laws contain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS. At any annual or special meeting of stockholders, proposals by
stockholders and persons nominated for election as directors by stockholders
will be considered only if advance notice thereof has been timely given as
provided in the By-Laws of the Company. Such notice must be delivered to the
Secretary of the Company at its principal executive office not less than 60 nor
more than 90 days prior to the date of the meeting, provided that if the date of
the meeting is first publicly announced or disclosed less than 70 days prior to
the date of the
37
<PAGE>
meeting, the notice must be given not more than 10 days after the date is so
announced or disclosed. In addition, any stockholder who gives notice of any
such proposal or who desires to nominate a director for election must deliver
with the notice certain specified information. The person presiding at the
meeting shall determine whether the required notice has been given and shall
direct that proposals and nominees not be considered if such notice has not been
given.
DIRECTOR'S LIABILITY. The Certificate of Incorporation provides that to the
fullest extent permitted by the Delaware General Corporation Law ("Delaware
Law"), a director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under current Delaware Law, liability of a director may not be limited (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases and (iv) for any
transaction from which the director derives an improper personal benefit. The
effect of this provision of the Company's Certificate of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or recission in the event of a breach
of a director's duty of care. In addition, the Company's By-Laws provide that
the Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law.
SECTION 203 OF DELAWARE LAW. The Company is a Delaware corporation and is
subject to Section 203 of Delaware Law. In general, Section 203 prevents an
"interested stockholder" (defined as a person who, together with affiliates and
associates, beneficially owns (or within three years, did beneficially own) 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation, and shares held by certain employee stock
ownership plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
"interested stockholder." A "business combination" generally includes mergers,
stock or asset sales and other transactions resulting in a financial benefit to
the "interested stockholders."
STOCKHOLDERS PROTECTION RIGHTS AGREEMENT. The Company has adopted a
Stockholders Protection Rights Agreement, dated as of March 6, 1996 (the "Rights
Plan"). Under the Rights Plan, each share of Common Stock issued pursuant to the
Offering will have attached to it a right (a "Right") to purchase 1/100th of a
share of Participating Preferred Stock, par value $.01 per share, for $65 (the
"Exercise Price"), subject to adjustment, upon the business day following the
earlier of (i) the first date (the "Flip-in Date") of public announcement by the
Company that a person has become the beneficial owner of 15% or more of the
outstanding shares of Common Stock (an "Acquiring Person") and (ii) the 10th
business day after commencement of a tender offer which, if consummated, would
result in a person becoming an Acquiring Person. The Rights will expire on the
earliest of (i) the Exchange Time (as defined below), (ii) March 16, 2006, (iii)
the date on which the Rights are redeemed as described below and (iv) the merger
of the Company into another corporation pursuant to an agreement entered into at
a time when there is no
38
<PAGE>
Acquiring Person. The Board of Directors may, at its option, at any time prior
to the Flip-in Date, redeem all the Rights at a price of $.01 per Right. If a
Flip-in Date occurs, each Right (other than Rights beneficially owned by the
Acquiring Person or its affiliates, associates or transferees, which Rights will
become void), to the extent permitted by applicable law, will constitute the
right to purchase shares of Participating Preferred Stock having an aggregate
market price equal to twice the Exercise Price for an amount in cash equal to
the then-current Exercise Price. In addition, the Board of Directors may, at its
option, at any time after a Flip-in Date and prior to the time that an Acquiring
Person becomes the beneficial owner of more than 50% of the outstanding shares
of Common Stock, elect to exchange the Rights (other than Rights beneficially
owned by the Acquiring Person or its affiliates, associates or transferees) for
shares of Common Stock or Participating Preferred Stock at an exchange ratio of
one share of Common Stock or 1/100th of a share of Participating Preferred Stock
per Right (the "Exchange Ratio"). Immediately upon such action by the Board of
Directors (the "Exchange Time"), the right to exercise the Rights will terminate
and each Right will thereafter represent only the right to receive a number of
shares of Common Stock or Participating Preferred Stock pursuant to the Exchange
Ratio. The Company may not agree to be acquired by an Acquiring Person without
providing that each Right, upon such acquisition, will constitute the right to
purchase common stock of the Acquiring Person having an aggregate market price
equal to twice the Exercise Price for an amount in cash equal to the
then-current Exercise Price. The Rights will not prevent a takeover of the
Company. The Rights, however, may have certain anti-takeover effects. The Rights
may cause substantial dilution to an Acquiring Person unless the Rights are
first redeemed by the Board of Directors.
39
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below, for whom Morgan Stanley & Co. Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated are acting as Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated..........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................
-----------------
Total.................................................................. 5,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain other dealers. After
the initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 750,000 additional shares of
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the Offering. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to the total number of shares of Common Stock offered set forth next to
the names of all of the Underwriters in the preceding table.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing
shares of Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
40
<PAGE>
The Company, its directors and its executive officers have agreed that
during the period ending 90 days after the date of this Prospectus, it or they
will not, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the Underwriters, (i) register with the Commission, offer, issue,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock, or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the shares of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of shares of Common Stock or other such securities, in cash or otherwise, other
than (i) the sale to the Underwriters of any shares of Common Stock pursuant to
the Underwriting Agreement or (ii) any options granted or shares of Common Stock
issued pursuant to existing benefit plans of the Company.
The Company has agreed to indemnify the Underwriters, and the Underwriters
have agreed to indemnify the Company, against certain liabilities, including
liabilities under the Securities Act.
Certain Underwriters from time to time perform various investment banking
services for the Company, for which such Underwriters receive compensation.
VALIDITY OF SHARES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sullivan & Cromwell. Certain legal matters will be
passed upon for the Underwriters by Davis Polk & Wardwell.
EXPERTS
The consolidated balance sheets of Commonwealth Aluminum Corporation and its
subsidiaries as of December 31, 1995 and 1996 and the consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996, included in this Prospectus and in the
Registration Statement, have been included in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The consolidated financial statements of CasTech and its subsidiaries as of
March 31, 1996 and 1995, and for each of the three years in the period ended
March 31, 1996 that are incorporated in this Prospectus and the Registration
Statement by reference have been audited by Ernst & Young LLP, independent
accountants, as set forth in their report incorporated by reference in this
Prospectus and in the Registration Statement, and are so incorporated in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Audited Consolidated Financial Statements:
Balance Sheet as of December 31, 1995 and 1996........................................................... F-3
Statement of Operations for the three years ended December 31, 1996...................................... F-4
Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996................. F-5
Statement of Cash Flows for the three years ended December 31, 1996...................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Unaudited Condensed Consolidated Financial Statements:
Balance Sheet as of June 30, 1997 and December 31, 1996.................................................. F-21
Statement of Operations for the six-month periods ended June 30, 1997 and 1996........................... F-22
Statement of Cash Flows for the six-month periods ended June 30, 1997 and 1996........................... F-23
Notes to Unaudited Condensed Consolidated Financial Statements........................................... F-24
</TABLE>
F-1
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Commonwealth Aluminum Corporation
We have audited the accompanying consolidated balance sheet of Commonwealth
Aluminum Corporation and Subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted accounting
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 presentations.
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 consolidated financial position of Commonwealth
Aluminum Corporation and Subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 11, 1997
F-2
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 2,665 $ 1,944
Accounts receivable, net................................................................ 92,355 146,091
Inventories............................................................................. 125,683 173,911
Prepayments and other current assets.................................................... 6,472 10,056
---------- ----------
Total current assets................................................................ 227,175 332,002
Property, plant and equipment, net........................................................ 189,562 274,095
Goodwill, net............................................................................. -- 175,146
Other noncurrent assets................................................................... 3,947 13,339
---------- ----------
Total assets........................................................................ $ 420,684 $ 794,582
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings................................................................... $ 4,000 $ --
Current portion of long-term debt....................................................... 10,504 6,250
Accounts payable........................................................................ 44,284 82,340
Accrued liabilities..................................................................... 14,655 34,195
Other current liabilities............................................................... 440 2,156
---------- ----------
Total current liabilities........................................................... 73,883 124,941
Long-term debt............................................................................ 33,871 336,000
Other long-term liabilities............................................................... 3,492 14,584
Accrued pension benefits.................................................................. 18,480 10,610
Accrued postretirement benefits........................................................... 77,895 81,224
---------- ----------
Total liabilities................................................................... 207,621 567,359
---------- ----------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized, 10,190,000 and 10,197,500
shares outstanding at December 31, 1995 and 1996, respectively........................ 102 102
Additional paid-in capital.............................................................. 301,114 301,289
Accumulated deficit..................................................................... (83,549) (72,188)
Unearned compensation................................................................... (2,335) (1,980)
Minimum pension adjustment.............................................................. (2,269) --
---------- ----------
Total stockholders' equity.......................................................... 213,063 227,223
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 420,684 $ 794,582
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ----------
Net sales.................................................................... $ 496,529 $ 671,501 $ 739,218
Cost of goods sold........................................................... 455,123 606,751 689,906
---------- ---------- ----------
Gross profit............................................................. 41,406 64,750 49,312
Selling, general and administrative expenses................................. 21,144 22,510 30,050
---------- ---------- ----------
Operating income......................................................... 20,262 42,240 19,262
Halco income................................................................. 2,635 1,636 --
Other income (expense), net.................................................. (44) 2,670 76
Interest expense, net........................................................ (62) (3,473) (9,875)
---------- ---------- ----------
Income before income taxes and extraordinary loss........................ 22,791 43,073 9,463
Provision (benefit) for income taxes......................................... 700 9,286 (5,293)
---------- ---------- ----------
Income before extraordinary loss......................................... 22,091 33,787 14,756
Extraordinary loss on early extinguishment of debt, net of income tax benefit
of $0.1 million............................................................ -- -- (1,355)
---------- ---------- ----------
Net income............................................................... $ 22,091 $ 33,787 $ 13,401
---------- ---------- ----------
---------- ---------- ----------
Per share data:
Income before extraordinary loss......................................... $ 3.32 $ 1.44
Extraordinary loss....................................................... -- (0.13)
---------- ----------
Net income............................................................... $ 3.32 $ 1.31
---------- ----------
---------- ----------
Weighted average shares outstanding.......................................... 10,191 10,197
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL MINIMUM TOTAL
PAID-IN ACCUMULATED UNEARNED PENSION STOCKHOLDERS'
COMMON STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT EQUITY
----------------- ---------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993............ $ -- $ 233,498 $ (137,899) $ -- $ (1,775) $ 93,824
Minimum pension adjustment........... -- -- -- -- 1,775 1,775
Capital contribution................. -- 125,000 -- -- -- 125,000
Net income........................... -- -- 22,091 -- -- 22,091
----- ---------- ------------ ------------- ----------- ------------
Balance December 31, 1994............ -- 358,498 (115,808) -- -- 242,690
Minimum pension adjustment........... -- -- -- -- (2,269) (2,269)
Capital transactions associated with
initial public offering............ 100 (60,116) -- -- -- (60,016)
Issuance of 202,500 shares of
restricted stock................... 2 2,895 -- (2,897) -- --
Forfeiture of 12,500 shares of
restricted stock................... -- (163) -- 163 -- --
Compensation expense................. -- -- -- 399 -- 399
Cash dividends, $0.15 per share...... -- -- (1,528) -- -- (1,528)
Net income........................... -- -- 33,787 -- -- 33,787
----- ---------- ------------ ------------- ----------- ------------
Balance December 31, 1995............ 102 301,114 (83,549) (2,335) (2,269) 213,063
Issuance of 25,000 shares of
restricted stock................... -- 420 -- (420) -- --
Forfeiture of 17,500 shares of
restricted stock................... -- (245) -- 245 -- --
Compensation expense................. -- -- -- 530 -- 530
Cash dividends, $0.20 per share...... -- -- (2,040) -- -- (2,040)
Minimum pension adjustment........... -- -- -- -- 2,269 2,269
Net income........................... -- -- 13,401 -- -- 13,401
----- ---------- ------------ ------------- ----------- ------------
Balance December 31, 1996............ $ 102 $ 301,289 $ (72,188) $ (1,980) $ -- $ 227,223
----- ---------- ------------ ------------- ----------- ------------
----- ---------- ------------ ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 22,091 $ 33,787 $ 13,401
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization................................................. 17,397 18,600 22,452
Extraordinary loss............................................................ -- -- 1,505
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net............................. (38,574) 6,608 12,636
(Increase) in inventories................................................... (21,734) (22,880) (1,563)
(Decrease) increase in prepayments and other current assets................. 247 (1,816) 7,819
(Increase) decrease in other assets......................................... 1,700 (3,642) (1,425)
(Decrease) increase in accounts payable..................................... 24,112 (13,075) (3,248)
(Decrease) increase in accrued liabilities.................................. 3,992 (251) (1,972)
(Decrease) increase in other liabilities.................................... 1,288 2,836 (7,570)
--------- --------- ----------
Net cash provided by operating activities................................... 10,519 20,167 42,035
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business (net of cash of $1,505)................................. -- -- (280,921)
Debt issuance costs............................................................. -- -- (9,921)
Additions to property, plant and equipment...................................... (19,662) (15,153) (14,841)
Disposals of property, plant and equipment...................................... 1,409 304 314
--------- --------- ----------
Net cash used in investing activities....................................... (18,253) (14,849) (305,369)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock.................................................. -- (1,528) (2,040)
Proceeds from short-term borrowings............................................. -- 25,000 21,000
Repayments of short-term borrowings............................................. -- (21,000) (25,000)
Proceeds from long-term debt.................................................... -- 50,000 343,500
Repayments of long-term debt.................................................... -- (5,625) (74,847)
Payment to prior sole shareholder............................................... -- (50,000) --
Miscellaneous receipts from prior sole shareholder.............................. -- 500 --
--------- --------- ----------
Net cash provided by (used in) financing activities......................... -- (2,653) 262,613
--------- --------- ----------
(Decrease) increase in cash and cash equivalents................................ (7,734) 2,665 (721)
Cash and cash equivalents, beginning of year.................................... 7,734 -- 2,665
--------- --------- ----------
Cash and cash equivalents, end of year.......................................... $ -- $ 2,665 $ 1,944
--------- --------- ----------
--------- --------- ----------
Supplemental disclosures:
Interest paid............................................................... $ 61 $ 3,532 $ 3,571
Income taxes paid........................................................... 334 9,955 1,558
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Commonwealth Aluminum Corporation (the "Company") operates principally in
the United States in one business segment. The Company manufactures aluminum
sheet and flexible electrical conduit and cable products made principally from
recycled aluminum scrap and primary aluminum. As further discussed in Note 2, on
September 20, 1996 the Company purchased all of the outstanding stock of CasTech
Aluminum Group Inc. ("CasTech"), a leading manufacturer of continuous-cast
aluminum sheet and electrical flexible conduit and cable.
The Company's prior sole shareholder completed on March 17, 1995, an initial
public offering of 8,750,000 shares of common stock at an initial offering price
of $14.00 per share and sold its remaining 1,250,000 shares later in 1995 on the
open market. The Company received no proceeds from these transactions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits with banks and highly
liquid investments with original maturities of three months or less. The
carrying amount of cash and cash equivalents approximates fair value.
CONCENTRATIONS OF CREDIT RISK
Futures contracts, options, cash investments and accounts receivable
potentially subject the Company to concentrations of credit risk. The Company
places its cash investments with high credit quality institutions. At times,
such cash investments may be in excess of the Federal Deposit Insurance
Corporation insurance limits. Credit risk with respect to accounts receivable
exists related to concentrations of sales to aluminum distributors, who in turn
resell the Company's aluminum products to end-use markets, including the
consumer durables, building and construction and transportation markets.
Concentration of credit risk with respect to accounts receivable from the sale
of electrical products is limited due to the large customer base, and its
dispersion across many different geographical areas. During 1994, 1995 and 1996,
sales to one major customer amounted to 12.6%, 12.5% and 11.0%, respectively, of
the Company's revenues. The Company performs ongoing credit evaluations of its
customers' financial condition but does not require collateral to support
customer receivables.
F-7
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTS RECEIVABLE
The accounts receivable are net of an allowance for uncollectible accounts
of $0.8 million and $1.8 million at December 31, 1995 and 1996.
INVENTORIES
Inventories are stated at the lower of cost or market. The methods of
accounting for inventories are described in Note 3.
LONG-LIVED ASSETS
Property, plant and equipment are carried at cost and are being depreciated
on a straight-line basis over the estimated useful lives of the assets which
generally range from 15 to 33 years for buildings and improvements and from 5 to
20 years for machinery and equipment. Repair and maintenance costs are charged
against income while renewals and betterments are capitalized. Retirements,
sales and disposals of assets are recorded by removing the cost and accumulated
depreciation from the accounts with any resulting gain or loss reflected in
income.
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over forty years. Accumulated
amortization was $1.2 million at December 31, 1996.
In the event that facts and circumstances indicate that the carrying amount
of an asset or group of assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
FINANCIAL INSTRUMENTS
The Company enters into futures contracts and options to manage price
exposure from committed and certain anticipated sales. Gains, losses and
premiums on these instruments which effectively hedge exposures are deferred and
included in income or expense as a component of the underlying sales
transaction.
The Company also uses futures contracts to manage risks associated with its
natural gas requirements and interest rate swaps to manage interest rate risk.
INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred income taxes reflect the tax effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. In valuing deferred tax assets,
the Company uses judgment in determining if it is more likely than not that some
portion or all of a deferred tax asset will not be realized and the amount of
the required valuation allowance.
REVENUE RECOGNITION
The Company recognizes revenue upon passage of title to the customer, which
in most cases coincides with shipment.
F-8
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET INCOME PER COMMON SHARE
Net income per common share is determined based on net income and the
weighted average number of common and common equivalent shares (stock options)
outstanding during the period. Primary and fully diluted net income per share
are the same. Weighted average shares outstanding were 10,191,000 and 10,197,000
for the years ended December 31, 1995 and 1996. Net income per common share for
1994 has not been presented due to the significant change in the number of
shares outstanding after the initial public offering.
STOCK-BASED COMPENSATION
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." The Company adopted this
standard during 1996, electing to continue accounting for its employee stock
options under the provisions of APB Opinion 25, "Accounting for Stock Issued to
Employees", accompanied by a disclosure, if considered material, of the
pro-forma effects on net income per share had the expense provisions of the new
accounting principle been applied.
SELF INSURANCE
The Company is substantially self-insured for losses related to workers'
compensation and health claims. Losses are accrued based upon the Company's
estimates of the aggregate liability for claims incurred based on Company
experience and certain actuarial assumptions followed in the insurance industry.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to existing conditions caused
by past operations, which do not contribute to current or future revenues, are
expensed. Costs to prepare environmental site evaluations and feasibility
studies are accrued when the Company commits to perform them. Liabilities for
remediation costs and post-remediation monitoring are recorded when they are
probable and reasonably estimable, generally the earlier of completion of
feasibility studies or the Company's commitment to a plan of action. The
assessment of this liability is calculated based on existing technology,
considers funds available in the settlement trust discussed in Note 10, does not
reflect any offset for possible recoveries from insurance companies and is not
discounted.
2. ACQUISITION
On September 20, 1996, the Company acquired all of the outstanding stock of
CasTech for a purchase price of approximately $283 million, including
transaction expenses. The cost of the acquisition was financed with the proceeds
of a new credit agreement and the sale of $125 million of 10.75% senior
subordinated notes due 2006. The Company assumed liabilities of $107 million and
received identifiable tangible assets of $214 million in the transaction. The
excess of the purchase price over the acquired net assets of $176 million has
been recorded as goodwill and is being amortized over 40 years. The acquisition
has been recorded under the purchase method of accounting, with the operating
results of CasTech included in the Company's consolidated financial statements
since the date of the acquisition.
F-9
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION (CONTINUED)
Included in the liabilities assumed in the transaction described above were
environmental remediation liabilities of $14.2 million and severance costs of
$11.7 million. The severance liabilities are related to the involuntary
termination of certain employees of CasTech's corporate office located in Akron,
Ohio which will be closed in March 1997. As of December 31, 1996, $5.1 million
of the severance liabilities had been paid.
The following unaudited pro forma results of operations assume the
acquisition occurred as of January 1, 1995 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Net sales............................................................................. $ 1,071,950 $ 1,033,598
Net income............................................................................ 34,635 249
Net income per share.................................................................. 3.40 0.02
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of January 1, 1995, nor are they necessarily indicative of future operating
results.
3. INVENTORIES
The Company uses the first-in, first-out (FIFO) and the last-in, first-out
(LIFO) methods for valuing its inventories. Inventories at December 31 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Raw materials............................................................................. $ 26,441 $ 32,124
Work in process........................................................................... 55,585 79,539
Finished goods............................................................................ 32,676 46,959
Expendable parts and supplies............................................................. 10,981 15,338
---------- ----------
125,683 173,960
LIFO reserve.............................................................................. -- (49)
---------- ----------
$ 125,683 $ 173,911
---------- ----------
---------- ----------
</TABLE>
Inventories of approximately $38 million, included in the above totals at
December 31, 1996, are accounted for under the LIFO method of accounting.
F-10
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and the related accumulated depreciation at
December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Land and improvements..................................................................... $ 11,634 $ 17,300
Buildings and improvements................................................................ 41,823 63,125
Machinery and equipment................................................................... 261,252 398,789
Construction in progress.................................................................. 11,981 16,219
---------- ----------
326,690 495,433
Less accumulated depreciation............................................................. 137,128 221,338
---------- ----------
Net property, plant and equipment....................................................... $ 189,562 $ 274,095
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was $17.4 million, $17.9 million and $20.0 million for
the years ended 1994, 1995 and 1996, respectively.
5. FINANCIAL INSTRUMENTS
Market and credit risk is managed by the Company through an active risk
management program. This program focuses on inventory, purchase commitments and
committed and anticipated sales. The Company utilizes futures contracts and
options to protect against exposures to price risk in the aluminum market. The
Company is exposed to losses in the event of non-performance by the
counterparties to these agreements; however, the Company does not anticipate
non-performance by the counterparties. Prior to conducting business with a
potential customer, credit checks are performed on the customer to determine
creditworthiness and assess credit risk. In addition, an indirect credit
exposure review is performed on all customers. Trading partners (brokers) are
evaluated for creditworthiness and risk assessment prior to initiating trading
activities with the brokers, however, the Company does not require collateral to
support broker transactions. All brokers trading on the London Metal Exchange
with U.S. clients are regulated by the Commodities Trading and Futures
Commission, which requires the brokers to be fully insured against unrealized
losses owed to clients. At December 31, 1996, credit lines totaling $53 million
were available at various brokerages used by the Company.
Gains, losses and premiums on futures contracts and options which
effectively hedge exposures are deferred and included in income as a component
of the underlying sales transaction. The Company had deferred realized gains of
$0.2 million and $0.4 million as of December 31, 1995 and 1996, respectively on
closed futures contracts and options which are recorded as a reduction of the
carrying value of inventory.
At December 31, 1996, the Company held purchase and sales commitments
through 1997 totaling $52 million and $217 million, respectively. At December
31, 1995 and 1996, the Company's position with respect to aluminum futures
contracts and options was as follows (in millions):
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN
----------- -------------
<S> <C> <C>
December 31, 1995............................................................................ $ 69.5 $ 0.4
December 31, 1996............................................................................ 57.9 2.2
</TABLE>
Unrealized gains and losses are recorded in the consolidated balance sheets
as due from or to broker and deferred gain or loss. The unrealized gain of $2.2
million at December 31, 1996 consists of unrealized
F-11
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
gains due from broker of $4.5 million and unrealized losses due to broker of
$2.3 million. Futures contracts and options are valued at the closing price on
the last business day of the year.
6. FINANCING ARRANGEMENTS
Debt financing of the Company as of December 31 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Senior subordinated notes.................................................................. $ -- $ 125,000
Term loan payable.......................................................................... 44,375 98,750
Revolving credit facility.................................................................. 4,000 118,500
--------- ----------
48,375 342,250
Less current maturities.................................................................... 14,504 6,250
--------- ----------
$ 33,871 $ 336,000
--------- ----------
--------- ----------
</TABLE>
In connection with the acquisition of CasTech, the Company refinanced its
outstanding borrowings of $33 million and entered into a new credit agreement
with a syndicate of banks led by National Westminster Bank. The new agreement
includes a $100 million term loan and a $225 million revolving credit facility.
In addition, the Company issued $125 million of 10.75% senior subordinated notes
due 2006. In connection with the refinancing, the Company incurred an
extraordinary loss on early extinguishment of debt of $1.5 million (or $1.4
million after tax).
The credit agreement is collateralized by a pledge of all of the outstanding
stock of the Company's subsidiaries and substantially all of the Company's
assets.
The term loan is repayable over five years in quarterly installments. The
Company is required to make prepayments in the event of certain transactions as
defined in the agreement.
The Company's ability to borrow under the revolving credit facility is based
on percentages of its eligible accounts receivable and eligible inventory. Up to
$30 million of the revolving credit facility is available for standby and
commercial letters of credit. The revolving credit facility commitment
terminates on September 1, 2001.
Borrowings under the new credit agreement bear interest at a variable base
rate per annum plus up to an additional 2.25% depending on the results of a
quarterly financial test as defined in the agreement. In addition, the Company
must pay to the lenders under the credit agreement, a quarterly commitment fee
ranging from 0.175% to 0.50% on the unused portion of the revolving credit
facility. The interest rate on the term loan was 6.88% at December 31, 1996. The
blended interest rate on outstanding borrowings under the revolving credit
facility was approximately 6.95% at December 31, 1996.
The Company uses interest rate swaps to effectively convert a portion of its
variable rate debt to fixed rates. At December 31, 1996, the Company had swap
agreements in place covering approximately $100 million of its variable rate
debt. The fixed rates range from 5.8% to 7.0%. The counterparties to interest
rate contracts are major commercial banks and management believes that losses
related to credit risk are remote.
F-12
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCING ARRANGEMENTS (CONTINUED)
The Company must pay a commission of up to 2.25% per annum on the carrying
amount of each outstanding letter of credit. At December 31, 1996, no letters of
credit were outstanding under the revolving credit facility.
The credit agreement includes covenants which, among others, relate to
leverage, earnings, interest coverage and payment of dividends.
At December 31, 1996, the interest rates on all amounts outstanding under
the term loan and revolving credit facility are scheduled to adjust in three
months or less. Accordingly, the carrying value of the term loan and revolving
credit facility approximates fair value at December 31, 1996. Based on estimated
market values at December 31, 1996, the fair value of the senior subordinated
notes was approximately $129 million.
Future aggregate maturities of long-term debt at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................................. $ 6,250
1998.............................................................................. 12,500
1999.............................................................................. 22,500
2000.............................................................................. 31,250
2001.............................................................................. 144,750
Thereafter........................................................................ 125,000
---------
Total........................................................................... $ 342,250
---------
---------
</TABLE>
7. PENSION PLANS
The Company has two defined benefit pension plans covering certain salaried
and hourly employees. The plan benefits are based primarily on years of service
and employees' compensation during the last five years of employment for
salaried employees and stated amounts based on job grade and years of service
prior to retirement for the hourly employees. The plans' assets consist
primarily of equity securities, guaranteed investment contracts and fixed income
pooled accounts.
F-13
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION PLANS (CONTINUED)
The funded status of the plans as of December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................................................... $ 66,453 $ 64,276
Nonvested benefit obligation........................................................ 1,195 4,471
---------- ----------
Accumulated benefit obligation...................................................... $ 67,648 $ 68,747
---------- ----------
---------- ----------
Projected benefit obligation.............................................................. $ 75,578 $ 76,727
Plan assets at fair value................................................................. 51,834 64,083
---------- ----------
Projected benefit obligation in excess of plan assets............................... (23,744) (12,644)
Unrecognized net asset.................................................................... (1,231) (1,000)
Unrecognized prior service cost........................................................... 1,947 3,017
Unrecognized net gain..................................................................... 9,092 3,012
Adjustment required to recognize minimum liability........................................ (4,544) (2,995)
---------- ----------
Accrued pension cost................................................................ $ (18,480) $ (10,610)
---------- ----------
---------- ----------
</TABLE>
Reflected in the Company's consolidated balance sheet is an additional
minimum liability relative to its underfunded plan in the amount of $4.5 million
and $3.0 million at December 31, 1995 and 1996, respectively. A corresponding
amount is recorded as an intangible asset to the extent it does not exceed
unrecognized prior service cost, while the excess in 1995 was charged to
stockholders' equity.
The projected benefit obligation was determined using a weighted average
discount rate of 8.50%, 7.00% and 7.75% for 1994, 1995 and 1996, respectively.
The weighted average rate of future compensation increases was 4.5% for 1994 and
1995 and 3% for 1996. The expected rate of return on plan assets was 8.00% for
1994 and 1995 and 9.25% for 1996.
The components of net pension expense for the years ended December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Benefit cost for service during the year............................................. $ 1,984 $ 1,583 $ 2,378
Interest cost on projected benefit obligation........................................ 4,593 4,787 5,514
Actual return on plan assets......................................................... (1,353) (6,584) (5,699)
Net amortization and deferral........................................................ (2,284) 2,846 1,102
--------- --------- ---------
Net pension expense............................................................ $ 2,940 $ 2,632 $ 3,295
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's policy for these plans is to make contributions equal to or
greater than the requirements prescribed by the Employee Retirement Income
Security Act of 1974.
The Company also contributes to a union sponsored defined benefit
multi-employer pension plan for certain of its hourly employees. The Employee
Retirement Income Security Act of 1974, as amended by the Multi-Employers
Pension Plan Amendment Act of 1980, imposes certain liabilities upon employers
who are contributors to multi-employer plans in the event of the employers'
withdrawal from such a plan or upon a termination of such a plan. Management
does not intend to take any action that would subject the Company to any such
liabilities.
F-14
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION PLANS (CONTINUED)
In addition to the defined benefit plans described above, the Company also
sponsors defined contribution plans covering substantially all employees. In two
of the plans, the Company matches 25% to 50% of a participant's voluntary
contributions (depending on the respective plant's annual earnings performance)
up to a maximum of 6% of a participant's compensation. In the remaining two
plans, contributions are at the discretion of the Board of Directors and cannot
exceed 15% of the participants' annual wages. The Company's expense for the
plans was approximately $0.5 million, $1.5 million and $1.3 million for 1994,
1995 and 1996, respectively.
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance benefits
to certain employees. The Company accrues the cost of postretirement benefits
within the employees' active service periods. Effective January 1, 1994, the
Company limited the extent of its liability for future increases in medical
costs. When the average annual per retiree claim cost exceeds two times the 1993
per retiree claim cost, the employer contribution will be increased each year
only for general inflation, regardless of the actual increase in the cost of
providing medical benefits. Based on current medical trend assumptions, per
retiree medical claims are expected to reach two times the 1993 level in the
year 2000.
The financial status of the plan as of December 31, 1995 and 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 23,457 $ 24,437
Fully eligible, active plan participants.................................................... 3,067 3,051
Other active participants................................................................... 31,791 33,756
--------- ---------
58,315 61,244
Unrecognized prior service cost............................................................. 7,562 6,492
Unrecognized net gain....................................................................... 12,018 13,488
--------- ---------
Accrued postretirement benefits........................................................... $ 77,895 $ 81,224
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost for benefits earned..................................................... $ 1,993 $ 1,708 $ 1,890
Interest cost on accumulated postretirement benefit obligation....................... 3,794 4,184 4,390
Net amortization and deferral........................................................ (1,290) (1,725) (1,451)
--------- --------- ---------
Net periodic postretirement benefit expense........................................ $ 4,497 $ 4,167 $ 4,829
--------- --------- ---------
--------- --------- ---------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation ("APBO") was 8.50% for 1994, 7.00% for 1995 and 7.75% for 1996. The
assumed health care cost trend rate used in measuring the APBO was 9.5%
declining by 1.0% per year to an ultimate rate of 4.5% in 2001. If the health
care cost trend rate assumptions were increased by 1.0%, the APBO as of December
31, 1996 and the combined service and interest cost components of postretirement
benefit expense for the year then ended would be increased by approximately $9.1
million and $1.0 million, respectively.
F-15
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes at December 31 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................................. $ 650 $ 8,845 $ (6,079)
State and local..................................................................... 50 441 786
--------- --------- ---------
700 9,286 (5,293)
Deferred:
Federal............................................................................. -- -- --
State and local..................................................................... -- -- --
--------- --------- ---------
$ 700 $ 9,286 $ (5,293)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred tax assets and liabilities at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---------------------- -----------------------
<S> <C> <C> <C> <C>
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- ---------- -----------
Inventory.......................................................... -- $ 15,024 -- $ 6,890
Property, plant and equipment...................................... -- 35,322 -- 57,208
Accrued and other liabilities...................................... $ 5,723 -- $ 12,308 --
Accrued pension costs.............................................. 5,156 -- 3,046 --
Accrued postretirement costs....................................... 28,821 -- 32,489 --
Net operating loss carryforwards................................... 54,652 -- 50,941 --
AMT credit carryforwards........................................... 1,493 -- 7,494 --
Other.............................................................. 336 -- 1,143 --
--------- ----------- ---------- -----------
Totals........................................................... $ 96,181 $ 50,346 $ 107,421 $ 64,098
--------- ----------- ---------- -----------
Net deferred tax asset............................................. $ 45,835 -- 43,323 --
Valuation allowance................................................ (45,835) -- (43,323) --
--------- ----------- ---------- -----------
Net deferred taxes............................................... $ -- $ -- $ -- $ --
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
</TABLE>
The Company has determined that at December 31, 1995 and 1996, its ability
to realize future benefits of net deferred tax assets does not meet the "more
likely than not" criteria in SFAS No. 109, "Accounting for Income Taxes".
The deferred tax assets and liabilities were computed at a 37% tax rate for
1995 versus a 40% tax rate for 1996. The increase in the tax rates is
attributable to the anticipated increase (as a result of the CasTech
acquisition) in the number of states in which the company will be required to
file tax returns in the future. The change in tax rates had no effect on the
1996 income tax benefits as the net deferred tax asset is fully offset by a
valuation allowance.
At December 31, 1996, the Company had net operating loss carryforwards for
federal tax purposes of approximately $127 million, which expire in various
amounts through 2008 and approximately $7.5 million in alternative minimum tax
credit carryforwards which do not expire. As a result of the initial public
offering during 1995, the Company experienced an "ownership change" within the
meaning of Section 382 of the Internal Revenue Code. Consequently, the Company
is subject to an annual limitation on the amount of net operating loss
carryforwards that can be used to offset taxable income. The annual
F-16
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
limitation is $9.6 million plus certain gains included in taxable income which
are attributable to the Company prior to the ownership change.
Reconciliation of the federal statutory rate and the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................................ 35.0% 35.0% 35.0%
Dividends received deduction.......................................................... (0.8) (0.5) --
Non-taxable property distribution..................................................... -- 24.2 --
Utilization of net operating loss carryforwards....................................... (33.5) (38.6) (73.4)
Adjustment of prior year accrual...................................................... -- -- (40.7)
State income taxes.................................................................... -- -- 5.9
Alternative minimum tax............................................................... -- -- 8.0
Other items........................................................................... 2.3 1.5 (0.1)
--------- --------- ---------
Effective income tax rate........................................................... 3.0% 21.6% (65.3)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. CONTINGENCIES
The Company's operations are subject to increasingly stringent environmental
laws and regulations governing air emissions, wastewater discharges, the
handling and remediation of hazardous substances and wastes and employee health
and safety. These laws can impose joint and several liability for releases or
threatened releases of hazardous substances upon statutorily defined parties,
including the Company, regardless of fault or the lawfulness of the original
activity or disposal. The Company believes it is currently in material
compliance with applicable environmental laws and regulations.
Future regulations, under the Clean Air Act and otherwise, are expected to
impose stricter emission requirements on the aluminum industry. While the
Company believes that current pollution control measures at most of the emission
sources at its facilities will meet these anticipated future requirements,
additional measures at some sources at its Lewisport, Kentucky ("Lewisport")
rolling mill will be required.
The Company has been named as a potentially responsible party at four
federal superfund sites which were acquired in the CasTech acquisition and is
conducting remedial investigations at two of the sites for past waste disposal
activity associated with closed recycling facilities. A trust fund exists to
fund the activity at one of the sites undergoing remediation and was established
through contributions from two other parties in exchange for indemnification
from further liability. The Company is reimbursed from the fund as approved
remediation expenditures are incurred at the site. The balance remaining in the
trust fund at December 31, 1996 was approximately $4.3 million. The Company
anticipates that the assets of the trust fund plus the future trust earnings
will not be sufficient to satisfy the required remediation and associated costs.
The estimated trust deficiency has been considered in the Company's aggregate
environmental contingency accrual.
At the two other federal superfund sites, the Company is a minor contributor
and expects to resolve its liability for a nominal amount. The Company is under
orders by agencies in three states for environmental remediation at plants, one
of which is currently operating and two of which have been closed. Based on
currently available information, the Company estimates the range of possible
losses with respect to these matters is between $12 million and $16 million.
F-17
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES (CONTINUED)
The Company acquired Lewisport and an aluminum smelter at Goldendale,
Washington ("Goldendale"), from Lockheed Martin in 1985. In connection with the
transaction, Lockheed Martin indemnified the Company against expenses relating
to environmental matters arising during the period of Lockheed Martin's
ownership of those facilities.
The Company has been named as a potentially responsible party at three
third-party disposal sites relating to Lockheed Martin operations, for which
Lockheed Martin has assumed responsibility.
Environmental sampling at Lewisport has disclosed the presence of various
contaminants, including polychlorinated biphenyls (PCBs), in a closed Company
landfill. The Company has not yet determined the extent of the contamination or
the nature and extent of remedial measures that may be required. Accordingly,
the Company cannot at present estimate the cost of any remediation that may be
necessary. Management believes the contamination occurred at the facility when
it was owned by Lockheed Martin and continues to be covered by the Lockheed
Martin indemnification, which Lockheed Martin disputes.
The aluminum smelter at Goldendale was operated by Lockheed Martin until
1985 and by the Company from 1985 to 1987 when it was sold to Columbia Aluminum
Corporation ("Columbia"). Past aluminum smelting activities at Goldendale have
resulted in environmental contamination and regulatory involvement. A 1993
Settlement Agreement among the Company, Lockheed Martin and Columbia allocates
responsibility for future remediation at 11 sites at the Goldendale smelter. If
remediation is required, estimates by outside consultants of the probable
aggregate cost to the Company for these sites range from $1.3 million to $7.2
million. The apportionment of responsibility for other sites at Goldendale is
left to alternative dispute resolution procedures if and when these locations
become the subject of remedial requirements. The parties have reserved their
rights with respect to all other potential environmental issues at Goldendale,
including the Company's rights under the Lockheed Martin indemnity.
The Company's aggregate loss contingency accrual for environmental matters
was $1.2 million and $15.2 million at December 31, 1995 and 1996, respectively.
Of the total accrual, $1.2 million and $3.6 million is included in "accrued
liabilities" in the Company's consolidated balance sheets at December 31, 1995
and 1996, respectively, and $11.6 million is included in "other long-term
liabilities" at December 31, 1996.
While the Company believes the overall accrual is adequate to cover all
environmental loss contingencies that the Company has determined to be probable
and reasonably estimable, it is not possible to predict the amount or timing of
cost for future environmental matters which may subsequently be determined.
Although the outcome of any such matters, to the extent they exceed any
applicable accrual, could have a material adverse effect on the Company's
consolidated results of operations for the applicable period, the Company
believes that such outcome will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or cash flows.
The Company has incurred and will continue to incur capital and operating
expenditures for matters relating to environmental control and monitoring.
Capital expenditures of the Company for environmental control and monitoring for
1995 and 1996 were $0.6 million and $2.3 million, respectively. All other
environmental expenditures of the Company, including remediation expenditures,
for 1994, 1995 and 1996 were $2.0 million, $1.9 million and $1.5 million,
respectively.
The Company is also a party to various non-environmental legal proceedings
and administrative actions, all arising from the ordinary course of business.
Although it is impossible to predict the outcome of
F-18
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES (CONTINUED)
any legal proceeding, the Company believes that any liability that may finally
be determined with respect to such legal proceedings should not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows, although resolution in any year or quarter could be material to
the consolidated results of operations for that period.
11. STOCK INCENTIVES
The Company has a stock incentive plan covering certain officers, key
employees and directors. The plan provides for the grant of options to purchase
common stock or the award of shares of restricted common stock. The total number
of shares which may be subject to options or issued as restricted stock under
the plan is 600,000.
Plan activity is summarized below:
<TABLE>
<CAPTION>
OPTIONS
------------------------
WEIGHTED RESTRICTED
AVERAGE STOCK
EXERCISE -----------
SHARES PRICE SHARES
--------- ------------- -----------
<S> <C> <C> <C>
Outstanding December 31, 1994............................................... -- -- --
Granted................................................................... 72,500 $ 14.00 202,500
Exercised................................................................. -- -- --
Forfeited................................................................. (3,000) $ 14.00 (12,500)
--------- -----------
Outstanding December 31, 1995............................................... 69,500 $ 14.00 190,000
Granted................................................................... 130,500 $ 16.71 25,000
Exercised................................................................. -- -- --
Forfeited................................................................. (4,000) $ 14.00 (17,500)
--------- -----------
Outstanding December 31, 1996............................................... 196,000 $ 15.80 197,500
--------- -----------
--------- -----------
</TABLE>
The options are issued at the fair value of the underlying stock on the date
of grant and become exercisable three years from the grant date for employees
and one year from the grant date for non-employee directors. The options expire
ten years after the date of grant. The restricted stock, principally issued in
connection with the initial public offering, vests five years from the date of
award. At December 31, 1996, options for 5,500 shares were exercisable. The fair
value of options was $3.44 and $3.95 as of December 31, 1995 and 1996. Fair
value estimates were determined using the Black-Scholes valuation method, an
expected term of ten years, a 6.5% risk-free interest rate, expected turnover of
5% and stock price volatility of 15%.
As permitted by SFAS No. 123, the Company follows the provisions of APB
Opinion 25 and related Interpretations in accounting for its stock option
grants. Compensation cost has not been recognized for options issued under the
plan. If compensation cost had been determined based on the fair value of the
awards at the grant date consistent with the provisions of SFAS No. 123, there
would not have been a material impact on the reported amount of the Company's
net income and net income per share.
F-19
<PAGE>
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands except net income per share.
<TABLE>
<CAPTION>
QUARTER ENDED,
----------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Net sales............................................ $ 173,907 $ 192,229 $ 160,264 $ 145,101 $ 671,501
Gross profit......................................... 17,590 20,724 16,429 10,007 64,750
Net income........................................... 8,662 12,917 7,646 4,562 33,787
Net income per share................................. 0.85 1.27 0.75 0.45 3.32
<CAPTION>
1996
- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 167,544 $ 159,672 $ 170,052 $ 241,950 $ 739,218
Gross profit......................................... 9,811 8,870 10,570 20,061 49,312
Income before extraordinary loss..................... 2,393 2,102 4,634 5,627 14,756
Net income........................................... 2,393 2,102 3,279 5,627 13,401
Income per share before extraordinary loss........... 0.23 0.21 0.45 0.55 1.44
Net income per share................................. 0.23 0.21 0.32 0.55 1.31
</TABLE>
Fourth quarter 1996 net income includes a $1.1 million increase in pre-tax
income as a result of adjustments to certain compensation related expenses. In
addition, the Company recognized an income tax benefit of $5.0 million as a
result of revisions to prior year tax estimates and adjustments to the estimated
utilization of net operating loss carryforwards.
The Company recorded a $1.9 million increase in inventory and pre-tax income
as a result of the annual physical inventory taken during the fourth quarter of
1995.
F-20
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 1,944 $ --
Accounts receivable, net............................................................. 146,091 194,883
Inventories.......................................................................... 173,911 165,987
Prepayments and other current assets................................................. 10,056 7,761
------------ ----------
Total current assets........................................................... 332,002 368,631
Property, plant and equipment, net................................................... 274,095 268,121
Goodwill, net........................................................................ 175,146 175,800
Other noncurrent assets.............................................................. 13,339 12,182
------------ ----------
Total assets................................................................... $ 794,582 $ 824,734
------------ ----------
------------ ----------
LIABILITIES
Current liabilities:
Current portion of long-term debt.................................................... $ 6,250 $ 8,750
Accounts payable..................................................................... 82,340 112,167
Accrued liabilities.................................................................. 36,351 28,139
------------ ----------
Total current liabilities...................................................... 124,941 149,056
Long-term debt....................................................................... 336,000 332,500
Other long-term liabilities.......................................................... 14,584 15,465
Accrued pension benefits............................................................. 10,610 11,924
Accrued postretirement benefits...................................................... 81,224 82,752
------------ ----------
Total liabilities.............................................................. 567,359 591,697
------------ ----------
Commitments and contingencies.......................................................... -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,207,500 and 10,197,500 shares outstanding
at June 30, 1997 and December 31, 1996, respectively................................. 102 102
Additional paid-in capital........................................................... 301,289 301,467
Accumulated deficit.................................................................. (72,188) (66,877)
Unearned compensation................................................................ (1,980) (1,655)
------------ ----------
Total stockholders' equity..................................................... 227,223 233,037
------------ ----------
Total liabilities and stockholders' equity..................................... $ 794,582 $ 824,734
------------ ----------
------------ ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Net sales............................................................................ $ 327,216 $ 559,431
Cost of goods sold................................................................... 308,535 511,138
---------- ----------
Gross profit....................................................................... 18,681 48,293
Selling, general and administrative expenses......................................... 12,200 21,687
Amortization of goodwill............................................................. -- 2,240
---------- ----------
Operating income................................................................... 6,481 24,366
Other income (expense), net.......................................................... (247) 497
Interest expense, net................................................................ (1,122) (16,421)
---------- ----------
Income before income taxes......................................................... 5,112 8,442
Income tax expense................................................................... 617 2,111
---------- ----------
Net income......................................................................... $ 4,495 $ 6,331
---------- ----------
---------- ----------
Net income per share................................................................. $ 0.44 $ 0.62
---------- ----------
---------- ----------
Weighted average shares outstanding.................................................. 10,196 10,207
---------- ----------
---------- ----------
Dividends per share.................................................................. $ 0.10 $ 0.10
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................. 4,495 $ 6,331
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization............................................................ 8,963 18,293
Issuance of common stock in connection with
stock awards........................................................................... -- 84
Changes in assets and liabilities:.......................................................
(Increase) in accounts receivable, net................................................. (10,055) (48,792)
Decrease in inventories................................................................ 19,616 7,924
(Increase) decrease in prepayments and other current assets............................ (1,769) 2,295
Decrease in other noncurrent assets.................................................... -- 341
(Decrease) increase in accounts payable................................................ (7,876) 29,827
Increase (decrease) in accrued liabilities............................................. 128 (8,212)
Increase in other liabilities.......................................................... 1,474 3,723
---------- ----------
Net cash provided by operating activities............................................ 14,976 11,814
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents (outflow) from
acquisition.............................................................................. -- (2,894)
Additions to property, plant and equipment................................................. (4,822) (8,929)
Disposals of property, plant and equipment................................................. 210 3
---------- ----------
Net cash (used in) investing activities.................................................. (4,612) (11,820)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings........................................................ 9,050 --
Repayments of short-term borrowings........................................................ (13,050) --
Proceeds from long-term debt............................................................... -- 54,050
Repayments of long-term debt............................................................... (7,206) (55,050)
Proceeds from issuance of common stock..................................................... -- 82
Cash dividends paid........................................................................ (1,021) (1,020)
---------- ----------
Net cash (used in) financing activities.................................................. (12,227) (1,938)
---------- ----------
Net (decrease) in cash and cash equivalents................................................ (1,863) (1,944)
Cash and cash equivalents at beginning of period........................................... 2,665 1,944
---------- ----------
Cash and cash equivalents at end of period................................................... $ 802 $ --
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures normally required by generally accepted accounting principles. The
condensed consolidated financial statements have been prepared in accordance
with Commonwealth Industries, Inc.'s (formerly Commonwealth Aluminum
Corporation) (the "Company's") customary accounting practices and have not been
audited. In the opinion of management, all adjustments to fairly present the
results of operations for the reporting interim periods have been made and were
of a normal recurring nature.
2. ACQUISITION
On September 20, 1996, the Company acquired CasTech Aluminum Group Inc.
("CasTech") for a purchase price of $285 million. The excess of the purchase
price over the acquired net assets of $179 million was recorded as goodwill and
is being amortized over 40 years. The acquisition was recorded under the
purchase method of accounting and accordingly, the results of operations of
CasTech prior to the date of acquisition have not been included in the
accompanying consolidated financial statements.
3. INVENTORIES
The Company uses the first-in, first out (FIFO) and the last-in, first-out
(LIFO) methods for valuing its inventories.
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 JUNE 30, 1997
- -------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Raw materials................................................................... $ 29,458 $ 32,376
Work in process................................................................. 82,205 77,919
Finished goods.................................................................. 46,959 44,728
Expendable parts and supplies................................................... 15,338 15,223
-------- -------------
173,960 170,246
LIFO reserve.................................................................... (49) (4,259)
-------- -------------
$ 173,911 $ 165,987
-------- -------------
-------- -------------
</TABLE>
Inventories of approximately $38 million and $41 million, included in the
above totals at December 31, 1996 and June 30, 1997, respectively, are accounted
for under the LIFO method of accounting.
The Company had deferred realized gains of $0.4 million at December 31, 1996
on closed futures contracts which are recorded as a reduction of the carrying
value of inventory. On June 30, 1997, the Company has deferred realized losses
of $1.1 million.
4. PROVISION FOR INCOME TAXES
The effective income tax rate for the six months ended June 30, 1997 is
greater than the rate for the six months ended June 30, 1996 as a result of the
expected increase in the Company's taxable income for the year 1997 compared to
the year 1996.
F-24
<PAGE>
[Company Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following are the estimated expenses of the issuance and distribution of
the securities being registered, all of which will be paid by the Company.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.............................. $ 35,176
NASD filing fee................................... 12,144
Blue sky fees and expenses........................ *
Printing and engraving expenses................... *
Legal fees and expenses........................... *
Accounting fees and expenses...................... *
Miscellaneous..................................... *
---------
Total....................................... $ *
---------
---------
</TABLE>
- ------------------------
* All amounts are estimated except for the SEC registration fee and NASD filing
fee.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation--a "derivative action"), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
rights to which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise. The
Company's By-Laws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Company's Certificate of Incorporation provides for such limitation
of liability.
Reference is also made to Section 7 of the Underwriting Agreement to be
filed as Exhibit 1.1 to the Registration Statement for information concerning
the Underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement.*
4.1 Restated Certificate of Incorporation, effective April 18, 1997 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
4.2 By-Laws (incorporated by reference to Exhibit 3.3 to the Company's Registration
Statement No. 33-87294 on Form S-1).
4.3 Stockholder Protection Rights Agreement, dated as of March 6, 1996, including forms of
Rights Certificate, Election to Exercise and Certificate of Designation and Terms of
Participating Preferred Stock of the Company (incorporated by reference to Exhibits
(1), (2) and (3) to the Company's Registration Statement No. 0-25642 on Form 8-A).
5.1 Opinion and consent of Sullivan & Cromwell.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Sullivan & Cromwell (included in 5.1 above).
24.1 Power of Attorney (included on page II-4 hereof).
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether or not
such indemnification is against public policy as expressed in the Securities Act
of 1933 and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Louisville and State of Kentucky, on the 31st day of
July, 1997.
COMMONWEALTH INDUSTRIES, INC.
BY: /S/ MARK V. KAMINSKI
-----------------------------------------
Mark V. Kaminski
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark V. Kaminski and Donald L. Marsh, Jr. and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 31, 1997.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ PAUL E. LEGO Chairman of the Board
- ------------------------------
Paul E. Lego
President, Chief Executive
/s/ MARK V. KAMINSKI Officer and Director
- ------------------------------ (Principal Executive
Mark V. Kaminski Officer)
Executive Vice President,
/s/ DONALD L. MARSH, JR. Chief Financial Officer
- ------------------------------ and Secretary (Principal
Donald L. Marsh, Jr. Financial and Accounting
Officer)
/s/ CATHERINE G. BURKE Director
- ------------------------------
Catherine G. Burke
/s/ C. FREDERICK FETTEROLF Director
- ------------------------------
C. Frederick Fetterolf
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ JOHN E. MEROW Director
- ------------------------------
John E. Merow
/s/ VICTOR TORASSO Director
- ------------------------------
Victor Torasso
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Commonwealth
Industries, Inc. on Form S-3 of our report dated February 11, 1997, on our
audits of the consolidated financial statements of Commonwealth Aluminum
Corporation. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
July 30, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Commonwealth
Industries, Inc. for the registration of 5,750,000 shares of its common stock
and to the incorporation by reference therein of our report dated May 10, 1996,
with respect to the consolidated financial statements of CasTech Aluminum Group
Inc. included in the Current Report (Form 8-K) of Commonwealth Aluminum
Corporation filed September 26, 1996 with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Akron, Ohio
July 28, 1997
