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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
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Commission File Number: 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock; Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the common stock held by non-affiliates of
the registrant as of February 26, 1999 was $168,079,000.
The number of shares outstanding of the registrant's common stock as of
February 26, 1999 was 15,949,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to stockholders of Commonwealth Industries,
Inc. for the year ended December 31, 1998 are incorporated by reference into
Parts I and II and portions of the definitive Proxy Statement dated March 17,
1999 for the 1999 Annual Meeting of Stockholders to be held April 23, 1999 are
incorporated by reference into Part III.
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<PAGE>
COMMONWEALTH INDUSTRIES, INC.
FORM 10-K
For the Year Ended December 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I Page
----
<S> <C>
Item 1. Business.............................................................3
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................11
Item E.O. Executive Officers of the Registrant................................11
PART II
Item 5. Market for Registrant's Common Stock and Related Matters............12
Item 6. Selected Financial Data.............................................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........13
Item 8. Financial Statements and Supplementary Data.........................13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.......................................13
PART III
Item 10. Directors and Executive Officers of the Registrant..................14
Item 11. Executive Compensation..............................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management......14
Item 13 Certain Relationships and Related Transactions......................14
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......14
Signatures..........................................................20
</TABLE>
<PAGE>
PART I
Item 1. Business.
Commonwealth Industries, Inc. (the "Company") is one of North
America's leading manufacturers of aluminum sheet and, through its Alflex
Corporation subsidiary ("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
located in 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 in Long Beach, California.
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 0.008 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. Production of aluminum sheet products in
1998 was 894 million pounds or about 89% of capacity. In 1998, the North
American market for aluminum sheet products, excluding sheet used to produce
aluminum beverage 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 pre-wired by Alflex, whereas end-users must pull wire 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 products
include preassembled and prepackaged products for commercial and DIY markets and
commercial pre-fabricated wiring systems which provide significant savings in
labor and installation costs for end-users.
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 in recent years become a significant factor due to its ease of installation,
lighter weight and ease of cutting 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
from rigid pipe due to its pre-assembly, ease of installation and overall cost
effectiveness.
The Company estimates that at December 31, 1998 it had a backlog of
firm orders for which product specifications have been defined of 305.9 million
pounds of aluminum sheet products with an aggregate sales price of $292.2
million, compared to an estimate of 306.7 million pounds with an aggregate sales
price of $327.7 million at December 31, 1997. Backlog is not a significant
factor for the Company's electrical products.
Aluminum Sheet Products
Manufacturing
The Company's aluminum sheet manufacturing facilities are comprised of
the rolling mills at Lewisport, Kentucky, 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
traditional aluminum sheet with strength, hardness, formability, finishing and
other characteristics preferred for many applications. The flexibility permitted
by this multi-purpose rolling mill enables 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 1998, the Lewisport mill produced
537 million pounds of aluminum sheet products. At full capacity utilization,
unit costs of converting metal to aluminum sheet products at Lewisport are
believed to be among the lowest in the industry for plants using the
conventional process.
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 in 1998. 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 in
Uhrichsville has the lowest conversion costs per pound in the world. A current
capital spending program is expected to bring the annual capacity of the
continuous cast mills to 422 million pounds by midyear 1999.
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.
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 into an ingot
about 24 inches thick and weighing as much as 40,000 pounds. The cooled ingot is
conveyed to the rolling mill area for further processing. The Company is
planning to spend an estimated $1.1 million during the 1999-2001 period to bring
the south casting facilities at Lewisport into compliance with more stringent
clean air regulatory regulations expected to come into effect in 2002. In
addition, during 1999 the Company is planning to spend $5.3 million in the north
casting facilities at Lewisport to increase the Company's ability to utilize
lower cost aluminum scrap units.
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 multi-stand hot mill, and then is cooled and cold rolled to
its final thickness.
The Uhrichsville and Carson rolling mills employ a 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 Recycling, Inc ("IMCO") are parties to a Supply
Agreement under which IMCO serves as the major supplier of recycled aluminum for
the Company's Uhrichsville mill. Under the Supply Agreement, the Company
purchases aluminum scrap and delivers it to IMCO who 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 Company and
IMCO are currently discussing an extension to the current contract which could
increase the amount of scrap delivered to IMCO for processing and conversion
into molten metal. This contract extension could extend the Supply Agreement to
an expiration date of March 31, 2008, subject to the Company's option to renew
the agreement for an additional 10-year term.
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 certain technology used
in its continuous casting process. The license agreement allows the Company the
use of certain 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 United States 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 coils of
various size and weighing up to 30,000 pounds.
Electrical Products
Alflex fabricates its flexible conduit and armored cable at its Long
Beach, California, facility. Alflex purchases its aluminum sheet from the
Company's nearby Carson, California, 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 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.
During 1998, the Company executed a strategic alliance with General
Cable Corporation whereby beginning in the second half of 1999, Alflex will
cease drawing wire and coating the wire with plastic insulation, and will
instead purchase all of its copper wire requirements from General Cable.
Alflex has designed its manufacturing processes to allow it to produce
a wide range of electrical flexible conduit and prewired armored cable products.
The Company believes this manufacturing flexibility has contributed
significantly to the growth in this business. Also, since the acquisition of the
Alflex business, the Company has increased Alflex's electrical conduit and cable
manufacturing capacity. Production volume increased from 519 million feet in
1997 to 527 million feet in 1998.
Alflex net sales in 1998 were $121 million, or 12.5% of the Company's
total net sales compared to $127 million, or 11.6% of the Company's net sales in
1997. Sales for 1998 were adversely affected due to substantial employee
turnover in late 1997 and the time involved in employee skills training.
During 1998, Alflex announced plans to build a manufacturing facility
in Rocky Mount, North Carolina. This facility will increase Alflex's capacity
for cable products by 50%. Production from this facility is expected to begin
during the second quarter of 1999 with full production capacity expected to come
on line by the fourth quarter 1999.
Customers and Markets
The Company's aluminum sheet products are sold to distributors as well
as end-users, principally in the building and construction, transportation,
beverage can and consumer durables markets.
The following table sets forth for 1998 and 1997 the percentage of
aluminum sheet net shipments contributed by each of these classes of customers
and the Company's estimate of its share of these markets in North America.
% of Net Shipments % Market Share
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Building and construction 39 37 32 36
Distribution 30 30 21 23
Transportation 12 11 17 19
Consumer durables and other 11 14 11 18
Beverage cans 8 8 2 2
--- ---
100 100
=== ===
The building and construction sector is the largest end-use market
other than beverage cans for common alloy aluminum sheet products.
The Company believes 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 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 largest volume in the category of consumer durables and other
markets for the Company is reroll stock sold for further processing and
conversion for a variety of markets. Other major end-uses of this product
category are cookware, appliances and irrigation pipe.
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.
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.
Company sales are made to customers located primarily throughout North
America. Sales outside North America have not been significant. No single
customer accounted for more than 10% of 1998 net sales.
Sales of aluminum sheet products are made through the Company's own
sales force which is strategically located to provide North American 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 distributors. Distributors represented
approximately 81% of Alflex net sales in 1998. 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
approximately 5,800 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 35 other aluminum rolling mills in North
America, including large, single-purpose can sheet mills, and with imported
products.
Aluminum Company of America ("Alcoa"), Alcan Aluminium Ltd. ("Alcan")
and Reynolds Metals Company have a significantly larger share of the United
States 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 share leaders are Alcoa, Alcan and the
Company.
The Company competes with other rolled products 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 1998, 1997 and 1996 on
Company-sponsored research and development activities were $0.9 million, $0.8
million and $1.4 million, respectively.
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
six federal superfund sites and is conducting closure activities 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 closure 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 closure expenditures are incurred at the
site. The balance remaining in the trust fund at December 31, 1998 was
approximately $0.8 million. In determining the adequacy of the Company's
aggregate environmental contingency accrual, the assets of the trust fund were
taken into account. At the four 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, two of which are currently operating and two of which have
been closed. Based on currently available information, the Company estimates the
range of possible remaining expenditures with respect to the above matters is
between $9 million and $13 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 have 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 as a potentially responsible party at three
third-party disposal sites relating to Lockheed Martin operations, for which
Lockheed Martin has assumed responsibilitiy.
The Company's aggregate loss contingency accrual for environmental
matters was $9.9 million at December 31, 1998, 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 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 or cash flows 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 1998 and 1997 were $2.1 million and $2.3 million, respectively.
All other environmental expenditures of the Company, including remediation
expenditures, for 1998, 1997 and 1996 were $1.0 million, $3.1 million, and $1.5
million, respectively.
The Company has planned environmental capital expenditures for 1999 and
2000 of $3.6 million and $2.4 million, respectively, which includes the 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, 1998, the Company employed 2,173 persons, of whom 1,551
were full-time non-salaried employees including 758 at Lewisport represented by
the United Steel Workers of America ("USW") and 231 at the Uhrichsville and
Bedford facilities represented by the Glass, Molders, Pottery, Plastic & Allied
Workers International, AFL-CIO, CLC union ("GMP"). Current collective bargaining
agreements with the USW and the GMP expire in July 2003 and December 2000,
respectively. The Company believes its relationships with its employees are
good.
The Company provides gain sharing plans for certain of its non-salaried
employees. Contributions to the plans are generally based upon a formula which
compares actual performance results to targets agreed upon by management and in
some cases the bargaining units. In addition, the Company provides defined
contribution 401(k) plans for certain non-salaried and salaried employees.
<PAGE>
Item 2. 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.
Location Nature Square Feet Status
-------- ------ ----------- ------
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 admininistrative 210,000 Leased
offices, manufacturing
facility and distribution center
Item 3. Legal Proceedings.
The Company is a party to non-environmental legal proceedings and
administrative actions all of which are of an ordinary routine nature incidental
to the business. In the opinion of management such proceedings and actions
should not, individually or in the aggregate, have a material adverse effect on
the Company's consolidated financial condition, results of operations or cash
flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1998.
Item E.O. Executive Officers of the Registrant.
The executive officers of the Company as of March 19, 1999 were:
Name Age Position with the Company
---- --- -------------------------
Mark V. Kaminski 43 President, Chief Executive Officer and Director
Roderick Macdonald 51 Executive Vice President Alflex
Donald L. Marsh, Jr. 52 Executive Vice President, Chief Financial Officer
and Secretary
Robert R. Beal 47 Vice President Communications and Computing Services
Gregory P. Givan 46 Vice President and Treasurer
Katherine R. Gould 35 Vice President Corporate Systems
William G. Toler 42 Vice President Finance and Administration
John F. Barron 47 Controller and Assistant Secretary
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., ARM Financial Group, Inc., and the Indiana University
Athletics Board.
Mr. Macdonald was employed by the Company in January 1994. From 1968
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. Beal has been with the Company since 1987 and was elected to his
present position in January 1998. His most recent previous position was Manager
of Process Engineering.
Mr. Givan joined the Company in July 1997. From 1987 until 1997 he was
Second Vice President, Corporate Finance and most recently Director, Corporate
Finance and Risk Management and Assistant Treasurer of Providian Corp., a
financial services company.
Ms. Gould joined the Company in July 1998. From 1996 through 1998 she
was Human Resource Manager of Gordonstone Coal Management, a joint venture
between ARCO Coal Australia and Mitsui. Prior to 1996 she held operations and
human resource management positions with Comalco Limited, an Australia-based
aluminum company.
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.
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.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol CMIN. On February 26, 1999, there were 173 holders of record of
the Company's Common Stock. The Company estimates that there were a total of
4,800 stockholders on that date, including beneficial owners. Since becoming
publicly owned in March 1995, the Company has paid quarterly cash dividends on
its Common Stock of $0.05 per share.
The following table sets out the high and low sales prices for the
Common Stock for each quarterly period indicated, as quoted in the Nasdaq
National Market:
1998 High Low
---- ---- ---
First Quarter $17.44 $13.75
Second Quarter 17.75 9.00
Third Quarter 10.75 5.50
Fourth Quarter 10.13 6.38
1997
----
First Quarter $20.25 $15.38
Second Quarter 21.00 16.00
Third Quarter 22.50 15.63
Fourth Quarter 19.50 13.50
Item 6. Selected Financial Data.
The information captioned "Consolidated Selected Financial Data"
included on page 10 of the Company's annual report to stockholders for the year
ended December 31, 1998 is incorporated herein by reference. This information
sets forth selected consolidated statement of operations, operating and balance
sheet data for the years indicated. The financial information is derived from
the audited consolidated financial statements of the Company for such years.
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" also incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included on pages 11 through 16
of the Company's annual report to stockholders for the year ended December 31,
1998 is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information under the subcaption "Risk Management" included in the
information captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included on pages 11 through 16 of the
Company's annual report to stockholders for the year ended December 31, 1998 is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of the Company and
report of independent auditors included on pages 17 through 35 of the Company's
annual report to stockholders for the year ended December 31, 1998 are
incorporated herein by reference.
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 401 (other than paragraph (b) thereof)
and Item 405 of Regulation S-K may be found under the caption Election of
Directors of the Company's Proxy Statement dated March 17, 1999 for the Annual
Meeting of Stockholders to be held on April 23, 1999 (the "Proxy Statement") and
is incorporated herein by reference. The information required by Item 401(b) of
Regulation S-K may be found under Item E.O. above.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K may be found
under the caption Executive Compensation in the Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 403 of Regulation S-K may be found
under the caption Beneficial Ownership of Common Stock in the Proxy Statement
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K may be found
under the caption Election of Directors--Compensation and Other Transactions
with Directors; Management Development and Compensation Committee Interlocks and
Insider Participation in the Proxy Statement and is incorporated herein by
reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) List of Financial Statements filed
The following consolidated financial statements of the Company and
report of independent auditors included in the Company's annual report to
stockholders for the year ended December 31, 1998 were incorporated by reference
in Part II, item 8 of this report:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a) (2) List of Financial Statement Schedules filed
The following report of independent accountants and financial statement
schedule should be read in conjunction with the Company's consolidated financial
statements.
Supplemental Schedule II - Valuation and Qualifying Accounts is filed
on page 19 of this report.
Report of Independent Accountants on the Company's financial statement
schedule filed as a part hereof for the years ended December 31, 1998, 1997 and
1996 is filed on page 18 of this report.
Financial statement schedules other than listed above have been omitted
since they are either not required or not applicable or the information is
otherwise included.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter
ended December 31, 1998.
(c) Exhibits
3.1 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).
3.2 By-laws (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement No. 33-87294 on
Form S-1).
3.3 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).
10.1 Executive Incentive Compensation Plan, as amended
December 4, 1995 (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.2 Long-term Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 33-87294 on Form
S-1).
10.3 Salaried Employees Pension Plan (incorporated by
reference to Exhibit 10.4 to the Company's
Registration Statement No. 33-87294 on Form S-1).
10.4 Salaried Employees Performance Sharing Plan
(incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement No. 33-87294 on Form
S-1).
10.5 1995 Stock Incentive Plan as amended and restated
April 17, 1997 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
10.6 1997 Stock Incentive Plan (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997).
10.6.1 Amendment No. 1 to 1997 Stock Incentive Plan,
effective July 1, 1998.
10.7 Form of Severance Agreements between the Company and
Mark V. Kaminski, Scott T. Davis, Roderick Macdonald,
Donald L. Marsh, Jr., James K. O'Donnell, William G.
Toler and John J. Wasz (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.8 Deferred Compensation Plan (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.9 Second Amended and Restated Credit Agreement among
the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and
National Westminster Bank PLC, as agent, dated as of
December 19, 1997 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.9.1 Amendment No. 1, dated as of December 22, 1998, to
Second Amended and Restated Credit Agreement among
the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and
National Westminster Bank PLC, as agent, dated as of
December 19, 1997.
10.10 Amended and Restated Pledge and Security Agreement
entered into by the Company and its subsidiaries,
collectively, in favor of National Westminster Bank
PLC, as agent, dated November 29, 1996 (incorporated
by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.11 Amendment No. 1, dated as of December 19, 1997, to
the Amended and Restated Pledge and Security
Agreement entered into by the Company and its
subsidiaries, collectively, in favor of National
Westminster Bank PLC, as agent, dated November 29,
1996 (incorporated by reference to Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.12 Receivables Purchase Agreement among Commonwealth
Financing Corp., the Company, Market Street Funding
Corporation and PNC Bank, National Association, dated
as of September 29, 1997 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
10.13 Non-exclusive License Agreement between Hazelett
Strip-Casting Corporation and Barmet of Kentucky,
Inc. dated as of June 2, 1982 (incorporated by
reference to Exhibit 10.07 to the CasTech Aluminum
Group Inc.
Registration Statement No. 33-77116 on Form S-1).
10.14 Agreement between Hazelett Strip-Casting Corporation,
Barmet of Kentucky, Inc. and Barmet Aluminum
Corporation, dated as of November 29, 1984
(incorporated by reference to Exhibit 10.08 to the
CasTech Aluminum Group Inc. Registration Statement
No. 33-77116 on Form S-1).
10.15 Supply agreement between Barmet Aluminum Corporation
and IMCO, dated as of March 2, 1992 (incorporated by
reference to Exhibit 10.09 to the CasTech Aluminum
Group Inc. Registration Statement No. 33-77116 on
Form S-1).
10.16 Lease of 2630 El Presidio Street, Long Beach,
California by Alflex Corporation from Brian L.
Harvey, expiring October 31, 2004 (incorporated by
reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.17 Industrial Real Estate Lease of 2303 Jefferson
Street, Torrance, California, by Barmet Aluminum
Corporation from Cypress Land Company, expiring April
30, 1999 (incorporated by reference to Exhibit 10.16
to the CasTech Aluminum Group Inc. Registration
Statement No. 33-77116 on Form S-1).
10.18 Indenture dated as of September 20, 1996 between the
Company, the Subsidiary Guarantors named therein and
Harris Trust and Savings Bank, Trustee (incorporated
by reference to Exhibit 4.2 to the Company's
Registration Statement No. 333-13661 on Form S-4).
10.19 First Supplemental Indenture, dated as of November
12, 1996, to Indenture dated as of September 20, 1996
(incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.20 Second Supplemental Indenture, dated as of
October 16, 1998, to Indenture dated as of
September 20, 1996.
13 Portions of the annual report to stockholders for the
year ended December 31, 1998 which are expressly
incorporated by reference in this filing.
21 Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
<PAGE>
Report of Independent Accountants
Board of Directors
Commonwealth Industries, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 22, 1999 appearing on page 35 of the 1998 Annual Report to
Stockholders of Commonwealth Industries, Inc. and subsidiaries (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the consolidated financial
statement schedule listed in Item 14 (a) (2) of this Form 10-K. In our opinion,
this consolidated financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
January 22, 1999
<PAGE>
Supplemental Schedule II
Commonwealth Industries, Inc.
Valuation and Qualifying Accounts
December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions of Period
----------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts
December 31,1998 $2,348 $1,131 $ - $ 995 $2,484
December 31,1997 2,235 242 - 129 2,348
December 31,1996 1,009 111 1,490 (a) 375 2,235
Allowance for obsolete stores inventory
December 31,1998 $1,100 $ - $ - $ - $1,100
December 31,1997 1,000 100 - - 1,100
December 31,1996 1,000 - - - 1,000
Note (a) - relates to the acquisition of CasTech.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on March xx, 1999.
COMMONWEALTH INDUSTRIES, INC.
By /s/ Mark V. Kaminski
-----------------------
Mark V. Kaminski, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul E.Lego
- --------------------------
Paul E. Lego Chairman of the Board March 26, 1999
/s/ Mark V. Kaminski
- --------------------------
Mark V. Kaminski President, Chief Executive Officer and Director March 26, 1999
(Principal Executive Officer)
/s/ Catherine G. Burke
- --------------------------
Catherine G. Burke Director March 26, 1999
/s/ C. Frederick Fetterolf
- --------------------------
C. Frederick Fetterolf Director March 26, 1999
/s/ John E. Merow
- --------------------------
John E. Merow Director March 26, 1999
/s/ Victor Torasso
- --------------------------
Victor Torasso Director March 26, 1999
/s/ Donald L. Marsh, Jr.
- --------------------------
Donald L. Marsh, Jr. Executive Vice President, Chief Financial March 26, 1999
Officer and Secretary (Principal Financial
Officer)
/s/ William G. Toler
- --------------------------
William G. Toler Vice President - Finance and Administration March 26, 1999
(Principal Accounting Officer)
/s/ John F. Barron
- --------------------------
John F. Barron Controller and Assistant Secretary March 26, 1999
</TABLE>
<PAGE>
Exhibit Index
-------------
Exhibit
Number Description
------ -----------
3.1 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).
3.2 By-laws (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement No. 33-87294 on
Form S-1).
3.3 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).
10.1 Executive Incentive Compensation Plan, as amended
December 4, 1995 (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.2 Long-term Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 33-87294 on Form
S-1).
10.3 Salaried Employees Pension Plan (incorporated by
reference to Exhibit 10.4 to the Company's
Registration Statement No. 33-87294 on Form S-1).
10.4 Salaried Employees Performance Sharing Plan
(incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement No. 33-87294 on Form
S-1).
10.5 1995 Stock Incentive Plan as amended and restated
April 17, 1997 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
10.6 1997 Stock Incentive Plan (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997).
10.6.1 Amendment No. 1 to 1997 Stock Incentive Plan,
effective July 1, 1998.
10.7 Form of Severance Agreements between the Company and
Mark V. Kaminski, Scott T. Davis, Roderick Macdonald,
Donald L. Marsh, Jr., James K. O'Donnell, William G.
Toler and John J. Wasz (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.8 Deferred Compensation Plan (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.9 Second Amended and Restated Credit Agreement among
the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and
National Westminster Bank PLC, as agent, dated as of
December 19, 1997 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.9.1 Amendment No. 1, dated as of December 22, 1998, to
Second Amended and Restated Credit Agreement among
the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and
National Westminster Bank PLC, as agent, dated as of
December 19, 1997.
10.10 Amended and Restated Pledge and Security Agreement
entered into by the Company and its subsidiaries,
collectively, in favor of National Westminster Bank
PLC, as agent, dated November 29, 1996 (incorporated
by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.11 Amendment No.1, dated as of December 19, 1997, to the
Amended and Restated Pledge and Security Agreement
entered into by the Company and its subsidiaries,
collectively, in favor of National Westminster Bank
PLC, as agent, dated November 29, 1996 (incorporated
by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
10.12 Receivables Purchase Agreement among Commonwealth
Financing Corp., the Company, Market Street Funding
Corporation and PNC Bank, National Association, dated
as of September 29, 1997 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
10.13 Non-exclusive License Agreement between Hazelett
Strip-Casting Corporation and Barmet of Kentucky,
Inc. dated as of June 2, 1982 (incorporated by
reference to Exhibit 10.07 to the CasTech Aluminum
Group Inc. Registration Statement No. 33-77116 on
Form S-1).
10.14 Agreement between Hazelett Strip-Casting Corporation,
Barmet of Kentucky, Inc. and Barmet Aluminum
Corporation, dated as of November 29, 1984
(incorporated by reference to Exhibit 10.08 to the
CasTech Aluminum Group Inc. Registration Statement
No. 33-77116 on Form S-1).
10.15 Supply agreement between Barmet Aluminum Corporation
and IMCO, dated as of March 2, 1992 (incorporated by
reference to Exhibit 10.09 to the CasTech Aluminum
Group Inc. Registration Statement No. 33-77116 on
Form S-1).
10.16 Lease of 2630 El Presidio Street, Long Beach,
California by Alflex Corporation from Brian L.
Harvey, expiring October 31, 2004 (incorporated by
reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.17 Industrial Real Estate Lease of 2303 Jefferson
Street, Torrance, California, by Barmet Aluminum
Corporation from Cypress Land Company, expiring April
30, 1999 (incorporated by reference to Exhibit 10.16
to the CasTech Aluminum Group Inc. Registration
Statement No. 33-77116 on Form S-1).
10.18 Indenture dated as of September 20, 1996 between the
Company, the Subsidiary Guarantors named therein and
Harris Trust and Savings Bank, Trustee (incorporated
by reference to Exhibit 4.2 to the Company's
Registration Statement No. 333-13661 on Form S-4).
10.19 First Supplemental Indenture, dated as of November
12, 1996, to Indenture dated as of September 20, 1996
(incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.20 Second Supplemental Indenture, dated as of October
16, 1998, to Indenture dated as of September 20,
1996.
13 Portions of the annual report to stockholders for the
year ended December 31, 1998 which are expressly
incorporated by reference in this filing.
21 Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
COMMONWEALTH INDUSTRIES, INC.
Amendment No. 1 to
1997 Stock Incentive Plan
The first sentence of Section 7 is amended, effective July 1,
1998, to read in its entirety as follows:
Nonqualified Stock Options to purchase 2,500 shares of Common Stock, the number
of shares being in each case subject to adjustment pursuant to Section 13, shall
be granted automatically to each Non-Employee Director (a) upon the date such
director joins the Board or becomes a Non-Employee Director and (b) on each
succeeding January 1 which is not less than 90 days after the date referred to
in clause (a).
April 24, 1998
/jbex10.6.1.doc
NY3:#7193795v3
Execution Counterpart
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT NO. 1 TO CREDIT AGREEMENT dated as of December 22, 1998 between:
(1) COMMONWEALTH INDUSTRIES, INC., a corporation duly
organized and validly existing under the laws of the State of Delaware
(the "Parent");
(2) CI HOLDINGS, INC., a corporation duly organized and
validly existing under the laws of the State of Delaware ("Holdings");
(3) COMMONWEALTH ALUMINUM CORPORATION, a corporation duly
organized and validly existing under the laws of the State of Delaware
("CAC");
(4) ALFLEX CORPORATION, a corporation duly organized and
validly existing under the laws of the State of Delaware ("Alflex");
(5) COMMONWEALTH ALUMINUM CONCAST, INC., a corporation duly
organized and validly existing under the laws of the State of Ohio
("CACI") and, together with CAC and Alflex, each a "Borrower" and,
collectively, the "Borrowers");
(6) each of the Subsidiaries of the Parent identified under
the caption "SUBSIDIARY GUARANTORS" on the signature pages hereto
(each, a "Subsidiary Guarantor" and, collectively, the "Subsidiary
Guarantors", and together with the Parent, Holdings and the Borrowers,
the "Obligors");
(7) each of the lenders identified under the caption "LENDERS"
on the signature pages hereto (individually, a "Lender" and,
collectively, the "Lenders"); and
(8) NATIONAL WESTMINSTER BANK PLC, as administrative agent for
the Lenders (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
The Parent, Holdings, CAC, Alflex, CACI, the Subsidiary
Guarantors, the Lenders, and the Administrative Agent are parties to a Second
Amended and Restated Credit Agreement dated as of December 19, 1997 (as
heretofore amended, the "Credit Agreement"), providing, subject to the terms and
conditions thereof, for loans to be made by said Lenders to the Company in an
aggregate principal or face amount not exceeding $100,000,000.
The Obligors have requested that the Credit Agreement be amended in certain
respects, and accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this
Amendment No. 1, terms defined in the Credit Agreement are used herein as
defined therein.
Section 2. Amendments. Effective as of the date hereof (subject to
satisfaction of the conditions set forth in Section 4 hereof), the Credit
Agreement shall be amended as follows:
A. The definition of "Applicable Facility Fee Percentage" in
Section 1.01 of the Credit Agreement shall be amended to read in its entirety as
follows:
"Applicable Facility Fee Percentage" shall mean, at any time,
the percentage set forth in the schedule below opposite the Applicable
Pricing Level in effect at such time:
- ------------------------------- =============================================
Applicable Applicable Facility
Pricing Level Fee Percentage
- ------------------------------- =============================================
1 0.425%
- ------------------------------- =============================================
2 0.450%
- ------------------------------- =============================================
3 0.475%
- ------------------------------- =============================================
4 0.500%
- ------------------------------- =============================================
B. The definition of "Applicable Margin" in Section 1.01 of
the Credit Agreement shall be amended to read in its entirety as follows:
"Applicable Margin" shall mean, at any time, for each Type of
Loan set forth below, the percentage set forth below such Type opposite
the Applicable Pricing Level in effect at such time:
====================== --------------------------------- =====================
Applicable
Pricing Level Base Rate Loans Eurodollar Loans
====================== --------------------------------- =====================
1 0.075% 1.325%
====================== --------------------------------- =====================
2 0.175% 1.425%
====================== --------------------------------- =====================
3 0.275% 1.525%
====================== ================================= =====================
4 0.500% 1.750%
====================== ================================= =====================
The Applicable Margin for Swingline Loans at any time shall be the
Applicable Margin in effect for Revolving Credit Loans that are Base
Rate Loans at such time.
C. Section 9.10(b) shall be amended in its entirety to read as
follows:
"(b) Interest Coverage Ratio.
The Parent will not permit the Total Interest Coverage Ratio
to be less than the following respective ratios at any time during the
following respective periods:
Period Ratio
From the Restatement Effective Date
through December 30, 1998 2.00 to 1.00
From December 31, 1998
through September 29, 1999 2.25 to 1.00
From September 30, 1999
through December 30, 1999 2.50 to 1.00
From December 31, 1999
through December 30, 2000 3.00 to 1.00
From December 31, 2000
and at all times thereafter 3.50 to 1.00"
D. Extension of Scottsboro Consent. The Parent, Holdings, CAC,
Alflex, CACI, the Subsidiary Guarantors, the Lenders, and the Administrative
Agent are parties to a Consent dated as of August 26, 1998 (as heretofore
amended, the "Consent"), by which the Lenders, subject to the terms and
conditions thereof, consented to the Scottsboro Acquisition (as defined in the
Consent). The parties hereto hereby agree to extend the period for which the
Scottsboro Acquisition may occur by amending Section 2 of the Consent to replace
the date "November 30, 1998" set forth at the end of the first sentence of said
Section with "March 31, 1999". Furthermore, each Obligor represents and warrants
to the Lenders and the Administrative Agent that the representations and
warranties set forth in Section 4 of the Consent are true and complete in all
material respects on the date hereof. Except as expressly herein provided, the
Consent shall remain unchanged and in full force and effect.
E. General. Each reference in the Credit Agreement to "this
Agreement", "the Credit Agreement" or words of similar import, or in the Notes
or other Credit Documents to "the Credit Agreement" or words of similar import,
shall be deemed to refer to the Credit Agreement as amended hereby.
Section 3. Representations and Warranties. Each of the
Obligors represents and warrants to the Lenders and the Administrative Agent
that (i) no Default has occurred and is continuing on the date hereof both
before and after giving effect to this Amendment No. 1 and (ii) the
representations and warranties set forth in Section 8 of the Credit Agreement
and in the other Credit Documents are true and complete in all material respects
on the date hereof (or, if any such representation and warranty is expressly
stated to have been made as of a specific date, as of such specific date) and as
if each reference therein to the Credit Agreement referred to each of the Credit
Agreement as amended hereby and this Amendment No. 1. The Obligors agree that
the foregoing representation and warranty shall be a representation and warranty
made by an Obligor in a modification to the Credit Agreement for purposes of
Section 10(c) of the Credit Agreement.
Section 4. Conditions Precedent. The amendments and the
extension in Section 2 hereof shall become effective as of the date hereof upon
(i) receipt by the Administrative Agent of one or more counterpart of this
Amendment No. 1 executed by each of the Obligors and the Lenders constituting
the Majority Lenders (or evidence satisfactory to the Administrative Agent of
such execution) and (ii) payment by the Parent of the consent fee the Parent has
agreed to pay to each Lender who has heretofore executed and delivered this
Amendment No. 1.
Section 5. Miscellaneous. Except as expressly herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. The Parent shall
reimburse the Administrative Agent for all reasonable out-of-pocket costs and
expenses (including reasonable legal fees and disbursements) incurred by it in
connection with this Amendment No. 1. This Amendment No. 1 may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same amendatory instrument and any of the parties hereto may execute this
Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be
governed by, and construed in accordance with, the law of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be duly executed and delivered as of the day and year first
above written.
THE PARENT
COMMONWEALTH INDUSTRIES, INC.
By_________________________
Title:
HOLDINGS
CI HOLDINGS, INC.
By_________________________
Title:
THE BORROWERS
COMMONWEALTH ALUMINUM
CORPORATION
By_________________________
Title:
ALFLEX CORPORATION
By_________________________
Title:
COMMONWEALTH ALUMINUM CONCAST,
INC.
By_________________________
Title:
SUBSIDIARY GUARANTOR
COMMONWEALTH ALUMINUM SALES CORPORATION
By_________________________
Title:
<PAGE>
LENDERS
NATIONAL WESTMINSTER BANK PLC
By_________________________
Title:
PNC BANK, NATIONAL ASSOCIATION
By_________________________
Title:
ABN AMRO BANK N.V.
By_________________________
Title:
BANK OF MONTREAL
By_________________________
Title:
CREDIT AGRICOLE INDOSUEZ
By_________________________
Title:
By_________________________
Title:
MELLON BANK, N.A.
By_________________________
Title:
THE INDUSTRIAL BANK
OF JAPAN, LIMITED
By_________________________
Title:
FIFTH THIRD BANK OF KENTUCKY, INC.
By_________________________
Title:
<PAGE>
THE ADMINISTRATIVE AGENT
NATIONAL WESTMINSTER BANK PLC,
as Administrative Agent
By_________________________
Title:
SECOND SUPPLEMENTAL INDENTURE, dated as of October 16, 1998,
to the Indenture, dated as of September 20, 1996, as heretofore amended and
supplemented (the "Indenture"), between Commonwealth Industries, Inc. (formerly
Commonwealth Aluminum Corporation), a Delaware corporation (the "Company"), each
of the Subsidiary Guarantors (as defined therein) and Harris Trust and Savings
Bank, as Trustee (the "Trustee").
RECITALS:
The Indenture has heretofore been amended and supplemented by
a First Supplemental Indenture, dated as of November 12, 1996. Subsequent to the
date of the First Supplemental Indenture and prior to the date hereof, the
former Commonwealth Aluminum Corporation changed its name to Commonwealth
Industries, Inc., the former Commonwealth Industries, Inc. changed its name to
CI Holdings, Inc. and thereafter was merged into Commonwealth Industries, Inc.,
the former Commonwealth Aluminum Lewisport, Inc. changed its name to
Commonwealth Aluminum Corporation and then to Commonwealth Aluminum Lewisport,
Inc., and the former Barmet Aluminum Corporation changed its name to
Commonwealth Aluminum Concast, Inc.
The Company has duly organized Commonwealth Aluminum
Corporation, a Delaware corporation, as a Restricted Subsidiary, and it is
proposed that this corporation (the "new subsidiary") become an additional
Subsidiary Guarantor, as permitted by Section 901(7) of the Indenture.
The Company, each of the Subsidiary Guarantors and the new
subsidiary have been authorized by Board Resolutions to enter into this
supplemental indenture.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises it is mutually
agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
ARTICLE ONE
Definitions
For all purposes of this supplemental indenture, unless the
context otherwise requires, the terms used herein shall have the same meanings
as in the Indenture.
-1-
NY12524: 34784.3
<PAGE>
ARTICLE TWO
Subsidiary Guarantors
The new subsidiary is hereby subjected to the provisions
(including the representations and warranties) of the Indenture as a Subsidiary
Guarantor, all as contemplated by Section 1303 of the Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this
supplemental indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first above
written.
COMMONWEALTH INDUSTRIES, INC.
COMMONWEALTH ALUMINUM CORPORATION
COMMONWEALTH ALUMINUM CONCAST,INC.
COMMONWEALTH ALUMINUM LEWISPORT,INC.
COMMONWEALTH ALUMINUM SALES CORPORATION
ALFLEX CORPORATION
By ______________________
Mark V. Kaminski, President
Attest:
- ----------------------
Secretary
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By ___________________________
Attest:
- -------------------
-2-
NY12524: 34784.3
<PAGE>
COMMONWEALTH OF KENTUCKY)
ss.:
COUNTY OF JEFFERSON)
On the __ day of October, 1998, before me personally came Mark
V. Kaminski, to me known, who, being by me duly sworn, did depose and say that
he is President of each of Commonwealth Industries, Inc., Commonwealth Aluminum
Corporation, Commonwealth Aluminum Concast, Inc., Commonwealth Aluminum
Lewisport, Inc., Commonwealth Aluminum Sales Corporation and Alflex Corporation,
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporations; that the seals affixed to said instrument
are such corporate seals; that they were so affixed by authority of the Boards
of Directors of said corporations, and that he signed his name thereto by like
authority.
------------------------
STATE OF ILLINOIS)
ss.:
COUNTY OF COOK )
On the ____ day of __________, 1998, before me personally came
____________, to me known, who, being by me duly sworn, did depose and say that
she is a _____________________ of Harris Trust and Savings Bank, one of the
corporations described in and which executed the foregoing instrument; that she
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that she signed her name thereto by like
authority.
-------------------------
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NY12524: 34784.3
Exhibit 13
----------
Portions of the annual report to stockholders for the year ended December 31,
1998 which are expressly incorporated by reference in this filing follow. Such
items are proceeded by an index which shows the location in this Annual Report
on Form 10-K where such items are incorporated by reference and the location of
the item in the annual report to stockholders for the year ended December 31,
1998.
INDEX
-----
Reference Incorporation Page number
letter in location in in annual
this this report to
Exhibit Form 10-K Description of Item stockholders
- -------- ------------- ---------------------------- ------------
(A) Part II, item 6 Consolidated Selected page 10
Financial Data
(B) Part II, item 7 Management's Discussion and pages 11
Analysis of Financial Condition thru 16
and Results of Operations
Part II, item 7A Quantitative and Qualitative pages 14
Disclosures About Market Risk thru 15
(C) Part II, item 8 Consolidated Balance Sheet page 17
Part II, item 8 Consolidated Statement of Income page 18
Part II, item 8 Consolidated Statement of page 18
Comprehensive Income
Part II, item 8 Consolidated Statement of page 19
Changes in Stockholders'
Equity
Part II, item 8 Consolidated Statement of page 20
Cash Flows
Part II, item 8 Notes to Consolidated pages 21
Financial Statements thru 34
Part II, item 8 Report of Independent Auditors page 35
The items follow:
<PAGE>
Exhibit 13 item (A)
-------------------
COMMONWEALTH INDUSTRIES, INC.
Consolidated Selected Financial Data
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $ 967,949 $ 1,090,777 $ 739,218 $ 671,501 $ 496,529
Gross profi 69,455 88,043 49,312 64,750 41,406
Operating income 21,421 41,593 19,262 42,240 20,262
Income before extraordinary loss 143 9,122 14,756 33,787 22,091
Net income 143 7,941 13,401 33,787 22,091
Net income per share data:
Basic
Income before extraordinary loss $ 0.01 $ 0.78 $ 1.45 $ 3.32
Extraordinary loss - (0.10) (0.13) -
------------ -------------- ------------- -------------
Net income $ 0.01 $ 0.68 $ 1.32 $ 3.32
============ ============== ============= =============
Diluted
Income before extraordinary loss $ 0.01 $ 0.78 $ 1.45 $ 3.31
Extraordinary loss - (0.10) (0.13) -
------------ -------------- ------------- -------------
Net income $ 0.01 $ 0.68 $ 1.32 $ 3.31
============ ============== ============= =============
Cash dividends paid per share $ 0.20 $ 0.20 $ 0.20 $ 0.15
Operating Data:
Depreciation and amortization $ 34,728 $ 34,710 $ 22,452 $ 18,600 $ 17,397
Capital expenditures $ 33,650 $ 21,736 $ 14,841 $ 15,153 $ 19,662
Commonwealth Aluminum business unit:
Net sales $ 846,696 $ 964,012 $ 704,400 $ 671,501 $ 496,529
Shipments (pounds) 884,169 990,207 712,480 587,932 568,970
Alflex business unit:
Net sales $ 121,253 $ 126,765 $ 34,818
Shipments (feet) 517,380 521,711 136,936
Balance Sheet Data:
Working capital $ 115,192 $ 112,924 $ 207,061 $ 153,292 $ 134,026
Total assets 648,399 667,421 794,582 420,684 439,454
Total debt 125,000 125,650 342,250 48,375 -
Total stockholders' equity 326,529 330,473 227,223 213,063 242,690
</TABLE>
<PAGE>
Exhibit 13 item (B)
-------------------
COMMONWEALTH INDUSTRIES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following is a discussion of the consolidated financial condition
and results of operations of the Company for each of the years in the three-year
period ended December 31, 1998, and certain factors that may affect the
Company's prospective financial condition. This section should be read in
conjunction with the consolidated financial statements of the Company for the
year ended December 31, 1998 and the notes thereto. The following discussion
contains statements which are forward-looking rather than historical fact. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties that could render them materially different, including, but not
limited to, the effect of global economic conditions, the impact of competitive
products and pricing, product development and commercialization, availability
and cost of critical raw materials, the rate of technological change, product
demand and market acceptance risks, capacity and supply constraints or
difficulties and other risks as detailed in the Company's various Securities and
Exchange Commission filings.
Overview
The Company manufactures non-heat treat coiled aluminum sheet for
distributors and the transportation, construction and consumer durables end use
markets and electrical flexible conduit and prewired armored cable for the
non-residential construction and renovation markets. The Company's principal raw
materials are aluminum scrap, primary aluminum, copper and steel. Trends in the
demand for aluminum sheet products in the United States and in the prices of
aluminum primary metal, aluminum scrap and copper commodities 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. The price of primary aluminum in world markets greatly 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 always 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 sourcing the scrap
and primary metal markets in the most cost-effective manner, including the use
of futures contracts and options to hedge anticipated raw material requirements
based on firm-priced sales and purchase orders.
During 1998, net sales of the Company's aluminum sheet products
declined by 11% from the year 1997. Lower sales and shipment volume were caused
by production problems and lower productivity in connection with the expiration
of the Company's collective bargaining agreement on July 31 at the Company's
Lewisport, Kentucky aluminum rolling mill, as well as weather-related production
outages at its mill in Uhrichsville, Ohio. Although the Lewisport mill never
actually suffered a strike, mill operations were affected nonetheless as both
labor and management prepared for the possibility. While overall demand for
aluminum sheet products remained strong, material margins had been under
pressure for the past two years until the latter part of 1998. Stronger aluminum
material margins followed after the Company successfully implemented two price
increases, the first beginning in April 1998 and the second in June 1998. Higher
material margins during the latter part of 1998 also reflected the Company's
efforts to enhance product mix and improve the metal blending process. In
addition, although aluminum shipment volume has not completely returned to
historic levels, steadily increasing volume since the completion of the
Company's new, five-year labor agreement in September 1998 has contributed to
improved conversion costs, as have other programs to enhance productivity at
Lewisport and the Company's other mills. One such program which was begun in
February 1998 at the Lewisport rolling mill, was the elimination of all
discretionary overtime hours to reduce the operating cost concurrent with the
reduced sales volume.
Demand for the Company's electrical conduit and cable products
continued to exceed the Company's capacity to supply these products during 1998.
While the Company has been adding additional electrical cable armoring capacity
since the second quarter of 1997, this capacity only reached full production in
the latter part of 1998 due to substantial labor turnover and the time involved
in employee skills training. The strong market for electrical conduit also
allowed the Company to concentrate on higher margin products during 1998, even
though net sales volume was down slightly from the prior year. Value added
products such as MC cable represented a higher ratio of Alflex's 1998 sales
compared to the prior year. In addition, the Company announced in the fourth
quarter of 1998 the decision to open a new plant in Rocky Mount, North Carolina
during the second quarter of 1999. This move will increase production and
enhance the Company's competitive position by placing that capacity closer to
attractive markets along the eastern seaboard.
On September 20, 1996, the Company acquired CasTech Aluminum Group
Inc., ("CasTech") in a transaction that was accounted for under the purchase
method of accounting at a cost of $285 million. Concurrently with the
acquisition, the Company prepaid its existing indebtedness and that of CasTech.
The acquisition and prepayments were financed with a $325 million senior secured
bank credit facility (which has subsequently been reduced - see note 7 to the
consolidated financial statements) and the proceeds from the issue and sale of
$125 million principal amount of 10 3/4% Senior Subordinated Notes Due 2006.
Results of Operations for 1998, 1997 and 1996
Net Sales. Net sales for 1998 decreased 11% to $967.9 million
(including $121.3 million from the Company's Alflex electrical products
subsidiary) from $1.1 billion (including $126.8 million from Alflex) in 1997.
The decrease is due to reduced sales volume at the Lewisport mill which was
partially offset by volume increases at the Company's other facilities. Unit
sales volume of aluminum products decreased 11% to 884.2 million pounds in 1998
from 990.2 million pounds in 1997. Aluminum sales volume for 1998 decreased due
to the reasons outlined in the "overview" section. Additionally 1998 sales
volumes at the Company's continuous cast aluminum sheet operations were only
slightly above last year's level due to tighter inventory management by
customers and unusually wet weather that reduced construction activity in
various parts of the United States in the first half of 1998. Alflex unit sales
volume was 517.4 million feet for 1998 compared to 521.7 million feet for 1997.
In 1997 net sales grew 48% to $1.1 billion (including $126.8 million
from Alflex) from $739.2 million (including $34.8 million from Alflex) in 1996.
The increase is due to the CasTech acquisition along with increased sales volume
at all facilities. Unit sales volume of aluminum products increased 39% to 990.2
million pounds in 1997 from 712.5 million pounds in 1996. Alflex unit sales
volume was 521.7 million feet for 1997 compared to 136.9 million feet for 1996.
Giving pro forma effect for the 1996 CasTech acquisition, the Company's aluminum
rolling mills generated 5% growth in shipments during 1997 while its Alflex
electrical products subsidiary achieved 8% growth. These gains reflected the
Company's ability to complete the integration of CasTech's operations and
systems successfully, optimizing the product mix between the Company's plants
and achieving the operating synergies envisioned at the time of the CasTech
acquisition.
Gross Profit. Gross profit decreased 21% (to 7.2% of net sales) in 1998
after a 79% increase (to 8.1% of net sales) in 1997. The 1998 decrease was
attributable to decreased sales volume due to the reasons outlined in the
"overview" section. The Company's unit manufacturing costs for 1998 increased
compared to 1997 as a result of the lower volumes which more than offset any
efficiencies due to mill optimization practices. Material margins which were
higher in 1998 than in 1997 partially offset the impact of lower volumes. The
1997 increase was attributable to the CasTech acquisition, increased unit sales
volumes and lower manufacturing unit costs which more than offset lower material
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3.8% in 1998. Contributing to the increase
were increases at Alflex associated with the infrastructure required to support
the growth of this business segment, costs incurred in acquisitions which did
not materialize, expenses incurred at the Lewiport mill in anticipation of a
possible strike and certain expenses relating to the Company's Year 2000
remediation effort. The realization of various operating synergies envisioned at
the time of the CasTech acquisition continued to contribute to holding the 1998
increase down. The 1997 figure was up 45.5% over 1996, primarily due to the
CasTech acquisition. Contributing to the increase was corporate relocation,
severance and other costs related to the integration of the businesses. Giving
pro forma effect for the 1996 CasTech acquisition, selling, general and
administrative expenses declined 3.4% in 1997 compared to 1996.
Amortization of Goodwill. Goodwill, which relates to the CasTech
acquisition, was flat in 1998 versus 1997, after increasing $3.3 million in 1997
compared to 1996 reflecting a full year of amortization in 1997 versus a partial
year in 1996.
Operating Income. Operating income decreased by 48% in 1998 to $21.4
million, compared with a 1997 increase of 115.9% to $41.6 million, in each case
reflecting the factors mentioned above.
Interest Expense, Net. Interest expense in 1998 decreased 27% to $22.2
million from $30.5 million in 1997. The decrease in the Company's interest
expense is due to the reduction in borrowing resulting from the Company's
September 1997 equity offering coupled with reduced interest rates due to the
accounts receivable securitization facility also implemented in September 1997.
Both transactions are described in the "Liquidity and Capital Resources" section
which follows. The increase in interest expense in 1997 over 1996 is due to
borrowings associated with the CasTech acquisition.
Income Tax Expense (Benefit). Income tax expense (benefit) in 1998,
1997 and 1996 reflect the use of the Company's net operating loss ("NOL")
carryforwards to offset taxable income for federal income tax purposes. At
December 31, 1998, the Company had remaining available NOL carryforwards of
approximately $81 million. These NOL carryforwards will expire in various
amounts through 2008. The amount of taxable income that can be offset by NOL
carryforwards 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 an income tax benefit of $0.6 million in 1998
compared to income tax expense of $2.4 million in 1997. The change is due to the
decrease in the Company's taxable income and a $1.5 million favorable adjustment
recorded in the first quarter of 1998 to the prior year's tax expense. The
adjustment resulted from the filing of amended federal income tax returns for
prior years. The Company recognized an income tax benefit in 1996 of $5.3
million as a result of revisions to prior year tax estimates and adjustments to
the estimated utilization of NOLs.
Extraordinary Loss on Early Extinguishment of Debt. The Company
recorded an extraordinary loss on the early extinguishment of debt in both 1997
and 1996 of $1.5 million ($1.2 million and $1.4 million net of income tax
benefit, respectively).
Net Income. Net income for 1998 decreased 98% to $0.1 million, after a
41% decrease in 1997 over 1996, 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, the
Company's accounts receivable securitization facility described below and
borrowings under its $100 million revolving credit facility. The Company
believes these sources will be sufficient to fund its working capital
requirements, capital expenditures, debt service and dividend payments for at
least through 1999.
On September 29, 1997, the Company completed a common stock offering of
5.75 million shares at a public offering price of $18 per share. The net
proceeds from the offering of approximately $97.7 million were used to repay the
entire amount outstanding under the Company's term loan agreement, totaling
$95.0 million, as well as $2.7 million outstanding under the Company's revolving
credit facility.
On September 26, 1997, the Company sold all of its trade accounts
receivables to a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC").
Simultaneously, CFC entered into a three-year accounts receivable securitization
facility with a financial institution and its affiliate, whereby CFC sells, on a
revolving basis, an undivided interest in certain of its receivables and
receives up to $150.0 million from an unrelated third party purchaser at a cost
of funds linked to commercial paper rates plus a charge for administrative and
credit support services. At December 31, 1998, the Company had outstanding
$120.2 million under the agreement and had $15.9 million of net residual
interest in the securitized receivables. The net residual interest in the
securitized receivables is included in other current assets in the Company's
consolidated financial statements.
The Company's cash flows from operations in 1998, 1997 and 1996 were
$46.6 million, $134.7 million and $42.0 million, respectively. The increase in
cash flow from operations in 1997 was due primarily to the accounts receivable
securitization. Working capital increased to $115.2 million at December 31, 1998
from $112.9 million at December 31, 1997. Working capital decreased to $112.9
million at December 31, 1997 from $207.1 million at December 31, 1996, due to
the accounts receivable securitization.
The Company's revolving credit facility permits borrowings and letters
of credit up to $100.0 million outstanding at any time. Availability is subject
to satisfaction of certain covenants and other requirements. At December 31,
1998, $99.3 million was available. The facility expires on September 1, 2002.
Capital expenditures were $33.7 million, $21.7 million and $14.8
million plus the cost of the CasTech acquisition in 1998, 1997 and 1996,
respectively, and are estimated to be $38 million in 1999, all generally related
to upgrading and expanding the Company's manufacturing and other facilities,
including the completion of Alflex's new production and distribution facility in
North Carolina, and meeting environmental requirements.
The indicated annual rate of dividends being paid on the Company's
Common Stock is $0.20 per share, or an annual total of about $3.2 million.
Risk Management
Commodity Price Risk. The price of aluminum is subject to fluctuations
due to unpredictable factors on the worldwide market. To reduce this market
risk, the Company follows the policy of hedging its anticipated raw material
requirements based on firm-priced sales and purchase orders. The Company
purchases and sells futures contracts and options on the London Metal Exchange
("LME") based on its net metal position. The Company's metal position consists
of inventories, purchase commitments, committed and anticipated sales, with the
net hedged using LME futures contracts and options. At December 31, 1998, the
Company held purchase and sales commitments through 1999 totaling $47 million
and $292 million, respectively.
The change in market value of such LME contracts has a high correlation
to the price changes of the hedged commodity (aluminum scrap and ingot). To
obtain a matching of revenues and expenses realized gains or losses arising from
LME contracts are included in inventories as a cost of raw materials and
reflected in the consolidated statement of income when the product is sold. The
Company had deferred realized losses of $2.2 million and $1.5 million as of
December 31, 1998 and 1997, respectively on closed futures contracts and
options. Deferred realized losses are recorded as an increase in the carrying
value of inventory and deferred realized gains are recorded as a reduction in
the carrying value of inventory.
At December 31, 1998 and 1997, the Company's position with respect to
open aluminum futures contracts and options was as follows (in millions):
Fair Net Unrealized
Value (Loss) Gain
----- --------------
December 31, 1998 $100.4 $ (5.6)
December 31, 1997 123.9 0.3
Net unrealized gains and losses on open futures and option contracts
are recorded in the consolidated balance sheet as accrued liabilities and
prepayments and other current assets, respectively. The net unrealized loss of
$5.6 million and net unrealized gain of $0.3 million at December 31, 1998 and
1997, respectively, consists of unrealized gains due from brokers of $4.1
million and $0.6 million, respectively, and unrealized losses due to brokers of
$9.7 million and $0.3 million, respectively. Futures contracts and options are
valued at the closing price on the last business day of the year.
A sensitivity analysis has been prepared to estimate the Company's
exposure to market risk related to its LME position. Market risk is estimated as
the potential loss in fair value resulting from a hypothetical 10% adverse
change in the price of the futures contract. On December 31, 1998 the Company
had approximately 62,175 metric tonnes of LME futures contracts. A hypothetical
10 % change from the 1998 year-end three-month high grade aluminum price of
$1,223 per metric tonne would result in a change in fair value of $7.6 million
in these contracts. However it should be noted that any change in the fair value
of these contracts would be significantly offset with an inverse change in the
cost of purchased metal.
Credit Risk. As discussed previously, the Company utilizes futures
contracts and options to protect against exposures to commodity 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 LME 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, 1998, credit lines totaling $49 million
were available at various brokerages used by the Company.
Interest Rate Risk. The Company manages its ratio of fixed to floating
rate debt with the objective of achieving a mix that management believes is
appropriate. To manage this mix in a cost-effective manner, the Company, from
time to time, enters into interest rate swap agreements. At December 31, 1998
the Company had interest rate swap contracts with a notional amount of
approximately $53 million. With respect to these agreements, the Company pays a
fixed rate of interest and receives a LIBOR-based floating rate. The
counterparties to interest rate contracts are major commercial banks and
management believes that losses related to credit risk are remote. The fair
value of these interest rate swap agreements at December 31, 1998 was a
liability of $1.1 million.
A sensitivity analysis has been prepared to estimate the Company's
exposure to market risk related to its interest rate position. Market risk is
estimated as the potential loss in fair value resulting from a hypothetical 100
basis point change in interest rates relating to the interest rate swap
agreements. A hypothetical 100 basis point change in interest rates would result
in a change in fair value of $0.4 million in these interest rate swap
agreements.
Year 2000 Readiness Disclosure
The Company is entering the final stages of a company-wide program to
make its computer systems year 2000 compliant. The year 2000 issue is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
As of December 31, 1998, approximately 87 percent of the Company's core
business computer systems were Year 2000 compliant, with all computer systems,
which includes mainframe, server, desktop and portable computers, embedded
systems, in addition to the core business applications, expected to be compliant
by the end of the third quarter of 1999 as planned. The total cost of the
program is estimated to be $8.0 million, of which the Company has incurred
approximately $6.4 million through December 31, 1998, and is being funded
through operating cash flows. Maintenance or modification costs are expensed as
incurred, while the cost of systems being replaced is capitalized and amortized
over the new system's useful life. The Company presently believes that, with
these modifications and replacements, the year 2000 issues will not pose
significant operational problems for the Company. However, if such modifications
and replacements in critical operations are not completed timely, the year 2000
issues may have a material impact on the results of operations or financial
condition of the Company.
The Company recognizes the importance of readiness for potential worst
case scenarios relating to the Year 2000 issues. The Company is working to
identify scenarios requiring contingency plans and has begun to assess the year
2000 compliance efforts of external parties. The Company relies on a number of
customers and suppliers, including banks, telecommunication providers,
utilities, and other providers of goods and services. The inability of these
third parties to conduct their business for a significant period of time due to
the Year 2000 issue could have a material adverse impact on the Company's
operations. The Company is currently assessing the Year 2000 readiness of its
most critical customers and suppliers and planning a due diligence study of
those customers and suppliers. There can be no assurance that the systems of
other companies that interact with the Company will be sufficiently Year 2000
compliant. If a major supplier or customer is unable to supply raw materials or
receive the Company's products, the Company's results of operations or financial
condition could be materially impacted.
The Company has notified recipients of previously made Year 2000
statements that these statements, and any other Year 2000 statements released by
the Company, are retroactively identified and labeled in their entirety as Year
2000 Readiness Disclosures pursuant to Section 7(b) of the Year 2000 Information
and Readiness Disclosure Act of 1998. By doing so, these prior statements are
relieved from tort liability.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company will adopt SOP 98-1
effective January 1, 1999 and does not expect the adoption to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in net income unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company will
adopt SFAS No. 133 in the Company's first quarter 2000 reporting as required.
Management is currently evaluating the impact of SFAS No. 133 on the Company's
future financial reporting.
<PAGE>
Exhibit 13 item (C)
-------------------
COMMONWEALTH INDUSTRIES, INC.
Consolidated Balance Sheet
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6 $ -
Accounts receivable, net 228 355
Inventories 174,968 171,633
Prepayments and other current assets 25,367 45,107
------------- -------------
Total current assets 200,569 217,095
Property, plant and equipment, net 269,837 266,292
Goodwill, net 169,086 173,562
Other noncurrent assets 8,907 10,472
------------- -------------
Total assets $ 648,399 $ 667,421
============= =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ - $ 9,122
Accounts payable 54,244 67,881
Accrued liabilities 31,133 27,168
------------- -------------
Total current liabilities 85,377 104,171
Long-term debt 125,000 125,650
Other long-term liabilities 8,859 9,675
Accrued pension benefits 15,930 13,368
Accrued postretirement benefits 86,704 84,084
------------- -------------
Total liabilities 321,870 336,948
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized,
15,944,000 and 15,941,500 shares outstanding at
December 31, 1998 and 1997, respectively 159 159
Additional paid-in capital 398,794 398,757
Accumulated deficit (69,621) (66,575)
Unearned compensation (672) (1,172)
Accumulated other comprehensive income:
Minimum pension liability adjustment (2,131) (696)
------------- -------------
Total stockholders' equity 326,529 330,473
------------- -------------
Total liabilities and stockholders' equity $ 648,399 $ 667,421
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1998 1997 1996
------------- --------------- ------------
<S> <C> <C> <C>
Net sales $ 967,949 $1,090,777 $ 739,218
Cost of goods sold 898,494 1,002,734 689,906
------------- --------------- ------------
Gross profit 69,455 88,043 49,312
Selling, general and administrative expenses 43,558 41,972 28,841
Amortization of goodwill 4,476 4,478 1,209
------------- --------------- ------------
Operating income 21,421 41,593 19,262
Other income (expense), net 365 487 76
Interest expense, net (22,221) (30,536) (9,875)
------------- --------------- ------------
Income (loss) before income taxes and extraordinary loss (435) 11,544 9,463
Income tax expense (benefit) (578) 2,422 (5,293)
------------- --------------- ------------
Income before extraordinary loss 143 9,122 14,756
Extraordinary loss on early extinguishment of debt,
net of income tax benefit - (1,181) (1,355)
------------- --------------- ------------
Net income $ 143 $ 7,941 $ 13,401
============= =============== ============
Basic and diluted per share data:
Income before extraordinary loss $ 0.01 $ 0.78 $ 1.45
Extraordinary loss - (0.10) (0.13)
------------- --------------- ------------
Net income $ 0.01 $ 0.68 $ 1.32
============= =============== ============
Weighted average shares outstanding
Basic 15,944 11,687 10,197
Diluted 15,947 11,723 10,203
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1998 1997 1996
-------------- --------------- ------------
<S> <C> <C> <C>
Net income $ 143 $ 7,941 $ 13,401
Other comprehensive income, net of tax:
Minimum pension liability adjustment (1,435) (696) 2,269
-------------- --------------- ------------
Comprehensive income (loss) $ (1,292) $ 7,245 $ 15,670
============== =============== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income:
Common Stock Minimum
----------------------- Additional Pension Total
Number of Paid-in Accumulated Unearned Liability Stockholders'
Shares Amount Capital Deficit Compensation Adjustment Equity
----------- ---------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 10,190,000 $ 102 $ 301,114 $ (83,549) $(2,335) $(2,269) $ 213,063
Net income - - - 13,401 - - 13,401
Cash dividends, $0.20 per share - - - (2,040) - - (2,040)
Minimum pension liability adjustment - - - - - 2,269 2,269
Issuance of restricted stock 25,000 - 420 - (420) - -
Forfeiture of restricted stock (17,500) - (245) - 245 - -
Amortization of unearned compensation - - - - 530 - 530
----------- ---------- ----------- ---------- ----------- ---------- ---------
Balance December 31, 1996 10,197,500 102 301,289 (72,188) (1,980) - 227,223
Net income - - - 7,941 - - 7,941
Cash dividends, $0.20 per share - - - (2,328) - - (2,328)
Minimum pension liability adjustment - - - - - (696) (696)
Stock offering 5,750,000 57 97,585 - - - 97,642
Issuance of restricted stock 2,500 - 47 - (47) - -
Forfeiture of restricted stock (22,500) - (399) - 399 - -
Amortization of unearned compensation - - - - 456 - 456
Exercise of stock options 9,000 - 151 - - - 151
Stock awards 5,000 - 84 - - - 84
----------- ---------- ----------- --------- ----------- ---------- ---------
Balance December 31, 1997 15,941,500 159 398,757 (66,575) (1,172) (696) 330,473
Net income - - - 143 - - 143
Cash dividends, $0.20 per share - - - (3,189) - - (3,189)
Minimum pension liability adjustment - - - - - (1,435) (1,435)
Forfeiture of restricted stock (2,500) - (35) - 35 - -
Amortization of unearned compensation - - - - 465 - 465
Stock awards 5,000 - 72 - - - 72
----------- ---------- ----------- --------- ----------- ---------- ---------
Balance December 31, 1998 15,944,000 $ 159 $ 398,794 $(69,621) $ (672) $(2,131) $ 326,529
=========== ========== =========== ========= =========== ========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 143 $ 7,941 $13,401
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 34,728 34,710 22,452
Extraordinary loss on early extinguishment of debt - 1,495 1,505
Loss on disposal of property, plant and equipment 1,453 1,271 -
Issuance of common stock in connection with stock awards 72 84 -
Proceeds from the initial sale of accounts receivable - 150,000 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 127 (46,650) 12,636
(Increase) decrease in inventories (3,335) 2,278 (1,563)
Decrease in prepayments and other current assets 19,740 6,970 7,819
Decrease (increase) in other noncurrent assets 398 201 (1,425)
(Decrease) in accounts payable (13,637) (14,459) (3,248)
Increase (decrease) in accrued liabilities 3,965 (9,183) (1,972)
Increase (decrease) in other liabilities 2,931 13 (7,570)
------------ ------------- ------------
Net cash provided by operating activities 46,585 134,671 42,035
------------ ------------- ------------
Cash flows from investing activities:
Net cash and cash equivalents (outflow) from acquisition - (2,894) (280,921)
Debt issuance costs - - (9,921)
Purchases of property, plant and equipment (33,650) (21,736) (14,841)
Proceeds from sale of property, plant and equipment 32 28 314
------------ ------------- ------------
Net cash (used in) investing activities (33,618) (24,602) (305,369)
------------ ------------- ------------
Cash flows from financing activities:
(Decrease) increase in outstanding checks in excess of deposits (9,122) 9,122 -
Proceeds from short-term borrowings - - 21,000
Repayments of short-term borrowings - - (25,000)
Proceeds from long-term debt 45,150 294,950 343,500
Repayments of long-term debt (45,800) (511,550) (74,847)
Proceeds from issuance of common stock - 97,793 -
Cash dividends paid (3,189) (2,328) (2,040)
------------ ------------- -----------
Net cash (used in) provided by financing activities (12,961) (112,013) 262,613
------------ ------------- -----------
Net increase (decrease) in cash and cash equivalents 6 (1,944) (721)
Cash and cash equivalents at beginning of period - 1,944 2,665
------------ ------------- -----------
Cash and cash equivalents at end of period $ 6 $ - $ 1,944
============ ============= ===========
Supplemental disclosures:
Interest paid $ 22,385 $ 27,046 $ 3,571
Income taxes paid (refund received) (10) (1,407) 1,558
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Commonwealth Industries, Inc. (the "Company") operates principally in the United
States in two business segments. The aluminum segment manufactures aluminum
sheet for distributors and the transportation, construction, and consumer
durables end-use markets. The electrical conduit segment manufactures flexible
electrical wiring products for the commercial and do-it-yourself markets.
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. Certain prior year amounts have been reclassified to conform
with current classifications.
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 their 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 limit. 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. Concentrations of credit
risk with respect to accounts receivable from the sale of electrical products
are limited due to the large customer base, and their dispersion across many
different geographical areas. During 1996, sales to one major customer amounted
to 11.0% of the Company's net sales. The Company performs ongoing credit
evaluations of its customers' financial condition but does not require
collateral to support customer receivables.
Inventories
Inventories are stated at the lower of cost or market. The methods of accounting
for inventories are described in Note 4.
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 $10.2 million and $5.7 million at December 31, 1998 and 1997,
respectively.
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
assets' carrying amount to determine if a write-down to fair 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 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.
Computation of Net Income Per Common Share
Basic net income per common share has been computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per share has been computed by dividing net income by the
weighted average number of common and common equivalent shares (stock options)
outstanding during the period.
Stock-Based Compensation
Compensation cost is measured under the intrinsic value based method. Pro forma
disclosures of net income and net income per share are presented, as if the fair
value based method had 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.
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 12, does not
reflect any offset for possible recoveries from insurance companies and is not
discounted.
2. Acquisitions
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. Accounts Receivable Securitization
On September 26, 1997, the Company sold all of its trade accounts receivables to
a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously,
CFC entered into a three-year accounts receivable securitization facility with a
financial institution and its affiliate whereby CFC can sell, on a revolving
basis, an undivided interest in certain of its receivables and receive up to
$150.0 million from an unrelated third party purchaser at a cost of funds linked
to commercial paper rates plus a charge for administrative and credit support
services. At December 31, 1998 and 1997, the Company had outstanding under the
agreement $120.2 million and $150.0 million, respectively, and had $15.9 million
and $39.7 million, respectively, of net residual interest in the securitized
receivables which is included in other current assets in the Company's
consolidated financial statements.
The Company maintains an allowance for uncollectible accounts based upon the
expected collectibility of all consolidated trade accounts receivable, including
receivables sold by CFC. The allowance was $2.5 million and $2.3 million at
December 31, 1998 and 1997, respectively, and is netted against the net residual
interest in the securitized receivables which is included in other current
assets in the Company's consolidated financial statements.
4. 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):
1998 1997
-------- --------
Raw materials $34,908 $30,395
Work in process 74,960 76,286
Finished goods 49,079 53,395
Expendable parts an 14,910 14,884
-------- --------
173,857 174,960
LIFO reserve 3,659 (3,327)
-------- --------
177,516 171,633
Lower of cost or market reserve (2,548) -
-------- --------
$174,968 $171,633
======== ========
Inventories of approximately $33.6 million and $35.4 million, included in the
above totals (before the LIFO and lower of cost or market reserve) at December
31, 1998 and 1997, respectively, are accounted for under the LIFO method of
accounting.
During 1997, LIFO inventory quantities were reduced, resulting in a partial
liquidation of the LIFO bases, the effect of which increased net income by
approximately $0.7 million.
5. Property, Plant and Equipment
Property, plant and equipment and the related accumulated depreciation at
December 31 consist of the following (in thousands):
1998 1997
-------- --------
Land and improvements $ 20,704 $ 20,686
Buildings and improvement 67,100 62,764
Machinery and equipment 419,313 408,517
Construction in progress 33,273 19,770
-------- --------
540,390 511,737
Less accumulated depreciation 270,553 245,445
-------- --------
Net property, plant and equipment $269,837 $266,292
======== ========
Depreciation expense was $28.6 million, $28.2 million and $20.0 million for the
years ended 1998, 1997 and 1996, respectively.
6. 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, 1998, credit lines totaling $49 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 losses of $2.2
million and $1.5 million as of December 31, 1998 and 1997, respectively on
closed futures contracts and options. Deferred realized losses are recorded as
an increase in the carrying value of inventory and deferred realized gains are
recorded as a reduction in the carrying value of inventory.
At December 31, 1998, the Company held purchase and sales commitments through
1999 totaling $47 million and $292 million, respectively. At December 31, 1998
and 1997, the Company's position with respect to open aluminum futures contracts
and options was as follows (in millions):
Fair Net Unrealized
Value (Loss) Gain
------ --------------
December 31, 1998 $100.4 $ (5.6)
December 31, 1997 123.9 0.3
Net unrealized gains and losses on open futures and option contracts are
recorded in the consolidated balance sheet as accrued liabilities and
prepayments and other current assets, respectively. The net unrealized loss of
$5.6 million and net unrealized gain of $0.3 million at December 31, 1998 and
1997, respectively, consists of unrealized gains due from brokers of $4.1
million and $0.6 million, respectively, and unrealized losses due to brokers of
$9.7 million and $0.3 million, respectively. Futures contracts and options are
valued at the closing price on the last business day of the year.
7. Long-term Debt
Long-term debt of the Company at December 31 consisted of the following (in
thousands):
1998 1997
-------- --------
Senior subordinated notes $125,000 $125,000
Revolving credit facility -- 650
-------- --------
125,000 125,650
Less current maturities -- --
-------- --------
$125,000 $125,650
======== ========
During 1996, in connection with the acquisition of CasTech, the Company
refinanced its outstanding borrowings and entered into a credit agreement with a
syndicate of banks led by National Westminster Bank. The credit agreement
included 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).
During September 1997, the Company repaid the remaining amount of the term loan
under the credit agreement with the net proceeds of approximately $97.7 million
received from the September 1997 equity offering of the Company. In connection
with the repayment of the term loan, the Company incurred an extraordinary loss
on early extinguishment of debt of $1.5 million (or $1.2 million after tax). In
addition, in December 1997, the Company amended the credit agreement to reduce
the revolving credit facility from $225 million to $100 million.
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.
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, 2002.
Borrowings under the credit agreement bear interest at a variable base rate per
annum plus up to an additional 1.75% 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
0.425% to 0.500%. The blended interest rate on outstanding borrowings under the
revolving credit facility was 8.50% at December 31, 1997.
The Company must pay a fee ranging from 0.325% to 0.750% per annum on the
carrying amount of each outstanding letter of credit. At December 31, 1998 and
1997, letters of credit totaling $0.7 million were outstanding under the
revolving credit facility.
The credit agreement includes covenants which, among others, relate to leverage,
interest coverage, fixed charges, capital expenditures and the payment of
dividends.
The Company uses interest rate swaps to effectively convert a portion of its
variable interest rates relating to the Company's revolving credit facility and
accounts receivable securitization facility to fixed interest rates. At December
31, 1998, the Company had interest rate swap agreements in place covering
approximately $53 million of the Company's exposure to variable interest rates.
The fair value of these interest rate swap agreements at December 31, 1998 was a
liability of $x.x million. The fixed interest rates range from 5.9% to 7.0%. The
counterparties to interest rate contracts are major commercial banks and
management believes that losses related to credit risk is remote.
At December 31, 1997, the interest rates on all amounts outstanding under the
credit agreement were scheduled to adjust in three months or less. Accordingly,
the carrying value of all amounts outstanding under the credit agreement
approximates fair value at December 31, 1997. Based on estimated market values
at December 31, 1998 and 1997, the fair value of the senior subordinated notes
was approximately $123 million and $131 million, respectively.
Future aggregate maturities of long-term debt at December 31, 1998 are as
follows (in thousands):
1999 $ --
2000 --
2001 --
2002 --
2003 --
Thereafter 125,000
--------
Total $125,000
========
8. Stockholders' Equity
On September 29, 1997, the Company completed a common stock offering of 5.75
million shares at a public offering price of $18 per share. The net proceeds
from the offering of approximately $97.7 million were used to repay the entire
amount outstanding under the Company's term loan agreement, totaling $95.0
million, as well as $2.7 million outstanding under the Company's revolving
credit facility.
9. Pension Plans
The Company has two defined benefit pension plans covering certain salaried and
non-salaried employees. The plan benefits are based primarily on years of
service and employees' compensation during employment for all employees not
covered under a collective bargaining agreement and; on stated amounts based on
job grade and years of service prior to retirement for non-salaried employees
covered under a collective bargaining agreement. The plans' assets consist
primarily of equity securities, guaranteed investment contracts and fixed income
pooled accounts.
The financial status of the plans at December 31 is as follows (in thousands):
1998 1997
------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $77,814 $76,727
Service cost 2,508 2,221
Interest cost 5,629 5,719
Actuarial loss (gain) 4,892 (3,358)
Benefits paid (5,722) (3,495)
------- -------
Benefit obligation at end of year 85,121 77,814
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 70,530 64,083
Actual return on plan assets 7,571 9,691
Employer contribution -- 251
Benefits paid (5,722) (3,495)
------- -------
Fair value of plan assets at end of year 72,379 70,530
------- -------
Funded status (12,742) (7,284)
Unrecognized net actuarial loss 6,018 2,290
Unrecognized prior service cost (4,445) (4,703)
------- -------
Net amount recognized $(11,169) $(9,697)
======= =======
Amounts recognized in the consolidated balance sheet consist of:
Prepaid (accrued) pension cost $(15,930) $(13,368)
Intangible asset 2,630 2,975
Accumulated other comprehensive income 2,131 696
------- -------
Net amount recognized $(11,169) $(9,697)
======= =======
The liabilities as of December 31, 1998 and 1997 disclosed above reflect the
change in the defined benefit plan covering the salaried employees to a cash
balance formula effective January 1, 1998. In addition, reflected in the
Company's consolidated balance sheet is an additional minimum liability relative
to its underfunded plan in the amount of $4.8 million and $3.7 million at
December 31, 1998 and 1997, 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 1998 and 1997 was charged to stockholders' equity.
The weighted average assumptions and components of net pension expense for the
years ended December 31 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Weighted average assumptions:
Discount rate 7.00% 7.25% 7.75%
Expected return on plan assets 9.25 9.25 9.25
Rate of compensation increase 4.50 4.50 4.50
Components of net pension expense:
Service cost $2,508 $2,221 $2,378
Interest cost 5,629 5,719 5,514
Actual return on plan assets (7,571) (9,691) (5,699)
Net amortization and deferral 944 4,016 1,102
------ ------ ------
Net pension expense $1,510 $2,265 $3,295
====== ====== ======
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 non-salaried 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. The Company's contributions to the multi-employer pension plan were
approximately $0.2 million for both 1998 and 1997.
In addition to the defined benefit pension plans described above, the Company
also sponsors defined contribution plans covering certain employees. In one 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 other plan, the
Company matches 100% of the first 3% of a participant's voluntary contributions
to the plan. The Company's contributions to the plans were approximately $1.4
million, $1.9 million and $1.3 million for 1998, 1997 and 1996, respectively.
10. 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 will reach two times the 1993 level in the year 2000.
Certain changes were made to the plan as a result of a new labor agreement
completed in September 1998 relating to the Company's Lewisport, Kentucky
rolling mill. The changes require employees who retire to pay a portion of
medical premiums under the plan based upon length of service and also
discontinues medical coverage upon the employees being eligible for Medicare
benefits. The plan changes reduced the accumulated postretirement benefit
obligation by $14.1 million, which will be amortized over the average remaining
service lives of the Company's active employees and has the effect of reducing
net periodic postretirement benefits cost.
The financial status of the plan at December 31, 1998 and 1997 is as follows (in
thousands):
1998 1997
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $69,030 $61,244
Service cost 1,827 1,934
Interest cost 4,439 4,529
Amendments (14,073) --
Actuarial (gain) loss (2,854) 3,341
Benefits paid (1,915) (2,018)
------- -------
Benefit obligation at end of year 56,454 69,030
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Actual return on plan assets -- --
Employer contribution 1,915 2,018
Benefits paid (1,915) (2,018)
------- -------
Fair value of plan assets at end of year -- --
------- -------
Funded status (56,454) (69,030)
Unrecognized net actuarial gain (11,931) (9,490)
Unrecognized prior service cost (18,319) (5,564)
------- -------
Prepaid (accrued) postretirement benefit cost $(86,704) $(84,084)
======= =======
The weighted average assumptions and components of net postretirement benefit
expense for the years ended December 31 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Weighted average assumptions:
Discount rate 7.00% 7.25% 7.75%
Components of net postretirement benefit expense:
Service cost $1,827 $1,934 $1,890
Interest cost 4,439 4,529 4,390
Amortization of prior service cost (1,318) (927) (927)
Recognized net actuarial loss (413) (658) (524)
------ ------ ------
Net postretirement benefit expense $4,535 $4,878 $4,829
====== ====== ======
For measurement purposes, a 7.5% annual health care cost trend rate was assumed
for 1998. The rate was assumed to decrease by 1.0% per year to an ultimate rate
of 4.5% in 2001 and remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plan. If the health care cost trend rate assumptions were increased by 1%,
the postretirement benefit obligation as of December 31, 1998 and the combined
service and interest cost components of postretirement benefit expense for the
year then ended would be increased by approximately $7.1 million and $1.0
million, respectively, and if the health care cost trend rate assumptions were
decreased by 1%, the postretirement benefit obligation as of December 31, 1998
and the combined service and interest cost components of postretirement benefit
expense for the year then ended would be decreased by approximately $5.9 million
and $0.8 million, respectively.
11. Income Taxes
The components of income tax expense (benefit) for the years ended December 31
are as follows (in thousands):
1998 1997 1996
---- ---- ----
Current:
Federal $ (1,093) $ 606 $(6,079)
State and Local 515 1,816 786
------ ------ ------
(578) 2,422 (5,293)
Deferred:
Federal -- -- --
State and Local -- -- --
------ ------ ------
$(578) $2,422 $(5,293)
====== ====== ======
Deferred tax assets and liabilities at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Inventory $ 2,460 $ -- $ 1,429 $ --
Property, plant and equipment -- 55,171 -- 55,835
Accrued and other liabilities 8,217 -- 9,268 --
Accrued pension costs 6,029 -- 5,447 --
Accrued postretirement costs 34,682 -- 33,634 --
Net operating loss carryforwards 32,576 -- 37,341 --
AMT credit carryforwards 5,847 -- 7,494 --
Other 425 -- 803 --
-------- ------- -------- -------
Totals $ 90,236 $55,171 $ 95,416 $55,835
-------- ------- -------- -------
Net deferred tax asset 35,065 -- 39,581 --
Valuation allowance (35,065) -- (39,581) --
-------- ------- -------- -------
Net deferred taxes $ -- $ -- $ -- $ --
======== ======= ======== =======
</TABLE>
The Company has determined that at December 31, 1998 and 1997, 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".
At December 31, 1998, the Company had net operating loss ("NOL") carryforwards
for federal tax purposes of approximately $81 million, which expire in various
amounts through 2008 and approximately $5.8 million in alternative minimum tax
("AMT") credit carryforwards which do not expire. As a result of the Company's
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 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Utilization of NOL and AMT credit carryforwards 225.8 (40.0) (68.9)
Nondeductible goodwill and other permanent differences (413.5) 15.2 1.0
Adjustment of prior year accrual -- -- (34.8)
State income taxes, net of federal income tax benefit (77.0) 9.9 5.1
Alternative minimum tax -- 5.2 6.8
Foreign sales corporation benefits 21.8 -- --
Refund of income taxes attributed to previously
accrued securities valuation reserves 340.7 (2.3) --
Other items -- (2.0) (0.1)
----- ----- ------
Effective income tax rate 132.8% 21.0% (55.9)%
====== ===== =======
</TABLE>
12. Contingencies
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 may be required.
The Company has been named as a potentially responsible party at six federal
superfund sites and is conducting closure activities 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 closure
and was established through contributions from two other parties in exchange for
indemnification from further liability. The Company is reimbursed from the trust
fund as approved closure expenditures are incurred at the site. The balance
remaining in the trust fund at December 31, 1998 was $0.8 million. In
determining the adequacy of the Company's aggregate environmental contingency
accrual, the assets of the trust fund were taken into account. At the four 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, two of which
are currently operating and two of which have been closed. Based upon currently
available information, the Company estimates the range of possible remaining
expenditures with respect to the above matters is between $9 million and $13
million.
The Company acquired its Lewisport, Kentucky ("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 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 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.
The Company's aggregate loss contingency accrual for environmental matters was
$9.9 million and $10.7 million at December 31, 1998 and 1997, respectively. Of
the total reserve, $2.0 million and $2.5 million is included in "accrued
liabilities" in the Company's consolidated balance sheets at December 31, 1998
and 1997, respectively, and $7.9 million and $8.2 million is included in "other
long-term liabilities" at December 31, 1998 and 1997, respectively.
While the Company believes the overall accrual is adequate to cover all
environmental loss contingencies 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 or cash flows 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
1998 and 1997 were $2.1 million and $2.3 million, respectively. All other
environmental expenditures of the Company, including remediation expenditures,
for 1998, 1997 and 1996 were $1.0 million, $3.1 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 any legal proceeding, the
Company believes 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.
13. Stock Incentives
The Company has stock incentive plans covering certain officers, key employees
and directors. The plans provide for the grant of options to purchase common
stock, the award of shares of restricted common stock and in the case of
non-employee directors, the award of shares of common stock. The total number of
shares available under the plans is 1,200,000.
The following summarizes activity under the plans for the years 1996, 1997 and
1998:
<TABLE>
<CAPTION>
Options Restricted Stock
-------------------------------------------------- -----------------
Range of Weighted Average
Shares Exercise Prices Exercise Price Shares
---------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1995 69,500 $14.00 $14.00 190,000
Granted 130,500 $15.50 to $16.88 $16.71 25,000
Exercised -- -- -- --
Forfeited (4,000) $14.00 $14.00 (17,500)
------- --------
Outstanding December 31, 1996 196,000 $14.00 to $16.88 $15.80 197,500
Granted 203,500 $15.38 to $20.00 $15.55 2,500
Exercised (9,000) $14.00 to $16.75 $15.60 --
Forfeited (45,500) $14.00 to $16.75 $15.60 (22,500)
Stock no longer restricted -- -- -- (7,500)
------- -------
Outstanding December 31, 1997 345,000 $14.00 to $20.00 $15.68 170,000
Granted 231,500 $8.25 to $16.00 $14.40 --
Exercised -- -- -- --
Forfeited (8,500) $14.00 to $16.75 $14.99 (2,500)
------- -------
Outstanding December 31, 1998 568,000 $8.25 to $20.00 $15.17 167,500
======= =======
(Weighted average contractual
life of 8.0 years)
Exercisable Options:
December 31, 1996 5,500 $14.00 $14.00
December 31, 1997 11,000 $14.00 to $15.50 $14.75
December 31, 1998 71,500 $14.00 to $15.50 $14.24
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
-------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------------------- ----------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$8.25 to $14.00 64,500 6.5 years $13.55 59,500 $14.00
$14.01 to $20.00 503,500 8.2 years $15.38 12,000 $15.43
------- ------
$8.25 to $20.00 568,000 8.0 years $15.17 71,500 $14.24
======= ======
</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 Company's initial public offering in 1995, vests five years
from the date of award. The weighted-average fair value of options granted in
1998, 1997 and 1996 was $6.23, $6.11 and $4.24 per share, respectively. Fair
value estimates were determined using the Black-Scholes option pricing model
with the following weighted average asumptions for 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.67% 6.22% 6.50%
Dividend yield 1.40% 1.29% 1.19%
Volatility factor 47% 39% 15%
Expected term of options (in years) 5 5 5
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company follows the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its stock
option plans, and accordingly, no compensation expense has been recognized for
options and stock issued under the plans. Had compensation expense been
determined based on the fair value of the stock options at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income and
basic and diluted net income per share would have been reduced for 1998, 1997
and 1996 to the pro forma amounts which follow:
1998 1997 1996
---- ---- ----
Net income (loss)
As reported $143 $7,941 $13,401
Pro forma $(442) $7,592 $13,276
Basic and diluted net income (loss) per share
As reported $0.01 $0.68 $1.32
Pro forma $(0.03) $0.65 $1.30
14. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before extraordinary loss $ 143 $9,122 $14,756
Extraordinary loss, net of income tax benefit -- (1,181) (1,355)
------ ------- -------
Net income (loss) $ 143 $7,941 $13,401
====== ====== =======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,944 11,687 10,197
====== ====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,944 11,687 10,197
Plus: dilutive effect of stock options 3 36 6
------ ------ ------
Adjusted weighted average shares 15,947 11,723 10,203
====== ====== ======
Basic and diluted per share data:
Income (loss) before extraordinary loss $0.01 $0.78 $1.45
Extraordinary loss -- (0.10) (0.13)
----- ----- -----
Net income (loss) $0.01 $0.68 $1.32
===== ===== =====
</TABLE>
Options to purchase 563,000, 8,000 and 125,000 common shares for the years ended
December 31, 1998, 1997 and 1996, respectively, were excluded from the
calculations above because the exercise prices on the options were greater than
the average market price for the periods.
15. Lease Commitments
Certain property, plant and equipment are leased under noncancelable leases
which provide for minimum rental payments as follows (in thousands):
1999 $2,515
2000 2,389
2001 1,883
2002 1,551
2003 1,511
2004-2006 919
Rental expense under cancelable and noncancelable leases for 1998, 1997 and
1996 was $3.2 million, $3.0 million and $1.2 million, respectively.
16. Selected Quarterly Financial Data (unaudited) All amounts are in thousands
except net income per share.
<TABLE>
<CAPTION>
Quarter
---------------------------------------------
1st 2nd 3rd 4th
-------- -------- -------- ---------
1998
- ----
<S> <C> <C> <C> <C>
Net sales $248,927 $258,346 $231,348 $229,328
Gross profit 18,441 13,786 15,958 21,270
Net income (loss) 2,794 (2,643) (2,139) 2,131
Basic and diluted net income (loss) per share 0.18 (0.17) (0.13) 0.13
1997
- ----
Net sales $272,191 $287,240 $271,142 $260,204
Gross profit 24,046 24,247 21,155 18,595
Income before extraordinary loss 2,168 4,163 1,590 1,201
Net income 2,168 4,163 409 1,201
Basic and diluted per share data:
Income before extraordinary loss 0.21 0.41 0.15 0.08
Net income 0.21 0.41 0.04 0.08
</TABLE>
17. Information Concerning Business Segments
The Company has adopted Statement of Financial Accounting Standards No.131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). Under SFAS No. 131, the Company has determined it has two reportable
segments: aluminum and electrical conduit. The aluminum segment manufactures
aluminum sheet for distributors and the transportation, construction, and
consumer durables end-use markets. The electrical conduit segment manufactures
flexible electrical wiring products for the commercial and do-it-yourself
markets.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Basis of Presentation and Summary of Significant
Accounting Policies". All intersegment sales prices are market based. The
Company evaluates the performance of its operating segments based upon operating
income.
The Company's reportable segments are strategic business units that offer
different products to different customer groups. They are managed separately
because each business requires different technology and marketing strategies.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the years 1998 and 1997. The "Other" column
includes corporate related items, including elimination of intersegment
transactions, and as it relates to segment operating income, income and expense
not allocated to reportable segments. The Company has determined that it is
impracticable to disclose this data for the year 1996.
<TABLE>
<CAPTION>
Electrical
Aluminum Conduit Other Total
---------- ----------- --------- ----------
1998
- ----
<S> <C> <C> <C> <C>
Net sales to external customers $846,696 $121,253 $-- $967,949
Intersegment net sales 26,267 -- (26,267) --
Operating income 16,853 12,885 (8,317) 21,421
Depreciation and amortization 31,151 3,113 464 34,728
Total assets 546,891 101,356 152 648,399
Capital expenditures 27,985 5,665 -- 33,650
1997
- ----
Net sales to external customers $964,012 $126,765 $-- $1,090,777
Intersegment net sales 26,230 -- (26,230) --
Operating income 29,293 19,081 (6,781) 41,593
Depreciation and amortization 31,228 3,026 456 34,710
Total assets 576,677 94,214 (3,470) 667,421
Capital expenditures 19,936 1,800 -- 21,736
</TABLE>
<PAGE>
Commonwealth Industries, Inc.
Report of Independent Auditors
Board of Directors and Stockholders
Commonwealth Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the consolidated financial position of Commonwealth Industries, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
January 22, 1999
Exhibit 21
----------
Direct and Indirect Subsidiaries of Commonwealth Industries, Inc.
Name Jurisdiction of Incorporation
------ -----------------------------
Commonwealth Financing Corp. (1) Delaware
Commonwealth Aluminum Lewisport, Inc. (1) Delaware
Commonwealth Aluminum Sales Corporation (2) Delaware
Commonal Corporation (2) Barbados
Alflex Corporation (1) Delaware
Commonwealth Aluminum Concast, Inc. (3) Ohio
Commonwealth Aluminum Corporation (4) Delaware
--------------------------------------------------------------------------
(1) Subsidiary of Commonwealth Industries, Inc.
(2) Subsidiary of Commonwealth Aluminum Lewisport, Inc.
(3) Subsidiary of Alflex Corporation.
(4) Subsidiary of Commonwealth Aluminum Concast, Inc.
Exhibit 23
----------
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statements of Commonwealth Industries, Inc. and Subsidiaries on Forms S-8 (File
No's. 333-19383, 33-91364 and 33-90292) of our report dated January 22, 1999, on
our audits of the consolidated financial statements and financial statement
schedule of Commonwealth Industries, Inc. and Subsidiaries as of December 31,
1998 and 1997, and for the years ended Decemebr 31, 1998, 1997 and 1996, which
report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 228
<ALLOWANCES> 0
<INVENTORY> 174,968
<CURRENT-ASSETS> 200,569
<PP&E> 540,390
<DEPRECIATION> 270,553
<TOTAL-ASSETS> 648,399
<CURRENT-LIABILITIES> 85,377
<BONDS> 125,000
0
0
<COMMON> 159
<OTHER-SE> 326,370
<TOTAL-LIABILITY-AND-EQUITY> 648,399
<SALES> 967,949
<TOTAL-REVENUES> 967,949
<CGS> 898,494
<TOTAL-COSTS> 898,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,131
<INTEREST-EXPENSE> 22,221
<INCOME-PRETAX> (435)
<INCOME-TAX> (578)
<INCOME-CONTINUING> 143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
