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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(Amendment No. 1)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 21, 2004
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-25642 13-3245741
(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
500 West Jefferson Street
PNC Plaza - 19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Section 8 - Other Events.
Item 8.01 Other Events.
Explanatory Note
This Amendment No. 1 to Commonwealth Industries, Inc.'s (the "Company") Form
8-K originally filed on August 19, 2004 is being filed solely to revise note
13 to the Company's Consolidated Financial Statements for the year ended
December 31, 2003 included in Item 8 "Financial Statements and Supplementary
Data" of the Company's Annual Report on Form 10-K for the year ended December
31, 2003 as filed on March 12, 2004 (the "Form 10-K") and amended by the
Company's Form 8-K filed on August 19, 2004. This revision is to delete the
reference to outside consultants from the fifth paragraph of note 13.
For a description of other material events occurring since March 12, 2004,
please read the Company's reports filed with the Securities and Exchange
Commission, including the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004.
Revised Item 8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
COMMONWEALTH INDUSTRIES, INC.
Consolidated Balance Sheet
(in thousands except share data)
December 31,
-------------------------------------
2003 2002
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ - $ 13,199
Accounts receivable, net 307 77
Inventories 116,150 110,620
Net residual interest in receivables sold 44,889 61,755
Prepayments and other current assets 13,964 6,681
Current assets of discontinued operations 35,704 34,875
------------- -------------
Total current assets 211,014 227,207
Property, plant and equipment, net 127,610 131,038
Other noncurrent assets 7,802 6,111
Noncurrent assets of discontinued operations 33,690 64,802
------------- -------------
Total assets $ 380,116 $ 429,158
============= =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ 947 $ -
Accounts payable 44,176 55,869
Accrued liabilities 21,259 26,169
Current liabilities of discontinued operations 9,458 6,337
------------- -------------
Total current liabilities 75,840 88,375
Long-term debt 125,000 125,000
Other long-term liabilities 3,845 5,183
Accrued pension benefits 29,017 25,353
Accrued postretirement benefits 67,146 76,670
Noncurrent liabilities of discontinued operations 1,130 1,390
------------- -------------
Total liabilities 301,978 321,971
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
16,010,971 and 15,997,651 shares outstanding at
December 31, 2003 and 2002, respectively 160 160
Additional paid-in capital 405,703 405,613
Accumulated deficit (308,477) (277,942)
Accumulated other comprehensive income:
Unrealized gain on security 34 -
Minimum pension liability adjustment (21,276) (21,391)
Effects of cash flow hedges 1,994 747
------------- -------------
Total stockholders' equity 78,138 107,187
------------- -------------
Total liabilities and stockholders' equity $ 380,116 $ 429,158
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Operations
(in thousands except per share data)
Year ended December 31,
---------------------------------------------
2003 2002 2001
----------- ------------ -----------
Net sales $ 817,711 $ 853,849 $ 801,786
Cost of goods sold 769,402 804,637 774,895
----------- ------------ -----------
Gross profit 48,309 49,212 26,891
Selling, general and administrative expenses 34,317 34,428 41,187
Amortization of goodwill - - 2,248
Asset impairment charges - - 167,267
----------- ------------ -----------
Operating income (loss) 13,992 14,784 (183,811)
Other income (expense), net 1,771 1,636 907
Interest expense, net (15,506) (15,854) (16,635)
----------- ------------ -----------
Income (loss) from continuing operations before
income taxes and cumulative
effect of change in accounting principle 257 566 (199,539)
Income tax expense (benefit) 115 (2,357) 135
----------- ------------ -----------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle 142 2,923 (199,674)
Discontinued operations:
Income (loss) from operations before income taxes (29,007) 6,258 6,187
Income tax expense 69 65 65
----------- ------------ -----------
Income (loss) from discontinued operations (29,076) 6,193 6,122
----------- ------------ -----------
Income (loss) before cumulative effect of change
in accounting principle (28,934) 9,116 (193,552)
Cumulative effect of change in accounting principle - (25,327) -
----------- ------------ -----------
Net income (loss) $ (28,934) $ (16,211) $(193,552)
=========== ============ ===========
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ 0.18 $ (12.15)
Income (loss) from discontinued operations (1.82) 0.39 0.37
Cumulative effect of change in accounting principle - (1.58) -
Net income (loss) (1.81) (1.01) (11.78)
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ 0.18 $ (12.15)
Income (loss) from discontinued operations (1.81) 0.38 0.37
Cumulative effect of change in accounting principle - (1.57) -
Net income (loss) (1.80) (1.01) (11.78)
Weighted average shares outstanding
Basic 16,011 15,994 16,428
Diluted 16,075 16,097 16,428
The accompanying notes are an integral part of the consolidated financial
statements.
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Comprehensive Income (Loss)
(in thousands)
Year ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ---------
Net income (loss) $ (28,934) $ (16,211) $(193,552)
Other comprehensive income, net of tax:
Unrealized gain on security 34 - -
Minimum pension liability adjustment 115 (21,391) -
Net change related to cash flow hedges:
Cumulative effect of accounting change - - 6,619
Increase (decrease) in fair value of cash flow hedges 9,615 1,867 (31,451)
Reclassification adjustment for (gains) losses included in net income (8,368) 10,224 13,488
---------- ---------- ---------
Net change related to cash flow hedges 1,247 12,091 (11,344)
---------- ---------- ---------
Comprehensive income (loss) $ (27,538) $ (25,511) $(204,896)
========== ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands except share and per share data)
Accumulated
Other
Comprehensive
Income:
Notes ------------------------------
Common Stock Receivable Unrealized Minimum Effects of
---------------- Additional from Sale Gain Pension Cash Total
Number of Paid-in Accumulated Unearned of Common on Liability Flow Stockholders'
Shares Amount Capital Deficit Compensation Stock Security Adjustment Hedges Equity
---------- ----- ------- --------- -------- ---------- ------- -------- --------- --------
Balance December 31, 2000 16,528,051 $ 165 $ 408,505 $ (61,688) $ (7) $ (8,582) $ - $ - $ - $ 338,393
Net income (loss) - - - (193,552) - - - - - (193,552)
Cash dividends, $0.20
per share - - - (3,292) - - - - - (3,292)
Effects of cash flow hedges - - - - - - - - (11,344) (11,344)
Amortization of unearned
compensation - - - - 7 - - - - 7
Issuance of stock in connection
with stock awards 24,975 - 106 - - - - - - 106
Repayments of notes receivable
and retirement of common
stock (583,996) (5) (3,168) - - 7,021 - - - 3,848
---------- ----- ------- --------- -------- ---------- ------- -------- --------- --------
Balance December 31, 2001 15,969,030 160 405,443 (258,532) - (1,561) - - (11,344) 134,166
Net income (loss) - - - (16,211) - - - - - (16,211)
Cash dividends, $0.20
per share - - - (3,199) - - - - - (3,199)
Minimum pension liability
adjustment - - - - - - - (21,391) - (21,391)
Effects of cash flow hedges - - - - - - - - 12,091 12,091
Issuance of stock in connection
with stock awards 28,621 - 170 - - - - - - 170
Repayments of notes receivable
and retirement of common
stock - - - - - 1,561 - - - 1,561
---------- ----- ------- --------- -------- ---------- ------- -------- --------- --------
Balance December 31, 2002 15,997,651 160 405,613 (277,942) - - - (21,391) 747 107,187
Net income (loss) - - - (28,934) - - - - - (28,934)
Cash dividends, $0.10
per share - - - (1,601) - - - - - (1,601)
Unrealized gain on security - - - - - - 34 - - 34
Minimum pension liability
adjustment - - - - - - - 115 - 115
Effects of cash flow hedges - - - - - - - - 1,247 1,247
Issuance of stock in connection
with stock awards 13,320 - 90 - - - - - - 90
---------- ----- ------- -------- -------- ---------- ------- -------- --------- --------
Balance December 31, 2003 16,010,971 $ 160 $405,703 $(308,477) $ - $ - $ 34 $ (21,276) $1,994 $ 78,138
========== ===== ======= ======== ======== ========== ======= ========= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
COMMONWEALTH INDUSTRIES, INC.
Consolidated Statement of Cash Flows
(in thousands)
Year ended December 31,
--------------------------------------------
2003 2002 2001
---------- ---------- -----------
Cash flows from operating activities:
Net income (loss) $(28,934) $ (16,211) $ (193,552)
Loss (income) from discontinued operations 29,076 (6,193) (6,122)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operations:
Depreciation 18,832 18,891 27,853
Amortization 895 984 3,536
Asset impairment charges - - 167,267
Goodwill impairment charges - 13,470 -
Loss on disposal of property, plant and equipment 554 325 264
Issuance of common stock in connection with stock awards 90 170 106
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (230) 15 (6)
(Increase) decrease in inventories (5,530) (5,991) 12,273
Decrease (increase) in net residual interest in receivables sold 16,900 516 (14,949)
(Increase) decrease in prepayments and other current assets (7,142) (2,120) 8,342
(Increase) in other noncurrent assets (579) (3,602) (322)
(Decrease) increase in accounts payable (11,693) 10,248 (3,209)
(Decrease) in accrued liabilities (3,804) (105) (1,802)
(Decrease) in other liabilities (9,090) (6,019) (16,977)
---------- ---------- -----------
Net cash (used in) provided by continuing operations (655) 4,378 (17,298)
Net cash provided by discontinued operations 4,068 20,119 20,605
---------- ---------- -----------
Net cash provided by operating activities 3,413 24,497 3,307
---------- ---------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (16,116) (15,975) (8,797)
Proceeds from sale of property, plant and equipment 158 23 100
---------- ---------- -----------
Net cash (used in) investing activities (15,958) (15,952) (8,697)
---------- ---------- -----------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits 947 - -
Proceeds from long-term debt 108,970 77,270 57,110
Repayments of long-term debt (108,970) (77,270) (57,110)
Repayments of notes receivable from sale of common stock - 1,561 3,848
Cash dividends paid (1,601) (3,199) (3,292)
---------- ---------- -----------
Net cash (used in) provided by financing activities (654) (1,638) 556
---------- ---------- -----------
Net (decrease) increase in cash and cash equivalents (13,199) 6,907 (4,834)
Cash and cash equivalents at beginning of period 13,199 6,292 11,126
---------- ---------- -----------
Cash and cash equivalents at end of period $ - $ 13,199 $ 6,292
========== ========== ===========
Supplemental disclosures:
Interest paid $ 14,595 $ 14,483 $15,609
Income taxes paid (refunds received) 118 (2,524) 36
Non-cash activities:
Repayment of notes receivable from sale of common stock with
common stock and subsequent retirement of common stock $ - $ - $ 3,173
The accompanying notes are an integral part of the consolidated financial
statements.
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 one segment after having disposed of its other segment, the
electrical products segment, in July 2004. The aluminum segment manufactures
common alloy aluminum sheet for distributors and the transportation,
construction, and consumer durables end-use markets. The electrical products
segment manufactured flexible electrical wiring products for the commercial
construction and do-it-yourself markets.
The Company has restated the consolidated financial statements for the years
ended December 31, 2003, 2002 and 2001 as a result of the Company's disposal of
its Alflex subsidiary, which comprised its electrical products segment. The
assets and liabilities, results of operations and cash flows of the electrical
products segment have been reported separately as discontinued operations in the
Company's consolidated financial statements. Certain other reclassifications
have been made to present the financial statements on a consistent basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
The Company's most significant estimates relate to the valuation of property,
plant and equipment and goodwill, assumptions and methodology for assessing
hedge effectiveness regarding aluminum and natural gas futures contracts,
forward contracts and options, assumptions for computing pension and
postretirement benefits obligations, allowance for uncollectible accounts
receivable, assumptions for computing workers' compensation liabilities and
environmental liabilities.
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. During
2003, 2002 and 2001, sales to one major customer amounted to approximately
10.9%, 12.6% and 14.0%, respectively, of the Company's net sales. No other
single customer accounted for more than 10% of the Company's net sales in 2003,
2002 or 2001. 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 5.
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 prior to 2002 was being amortized on a straight-line basis over
forty years. Accumulated amortization was $13.9 million at December 31, 2001.
Beginning January 1, 2002 goodwill is no longer amortized, but instead is being
evaluated annually for impairment according to the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). See note 3 for additional information.
Prior to January 1, 2002, the Company periodically evaluated the carrying value
of long-lived assets to be held and used, including goodwill and other
intangible assets according to the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.121"). In the
event that facts and circumstances indicated that the carrying amount of an
asset or group of assets may be impaired, an evaluation of recoverability was
performed in accordance with the provisions of SFAS No. 121. In performing the
evaluation, the estimated future undiscounted cash flows associated with the
asset was compared to the assets' carrying amount to determine if a write-down
to fair value or discounted cash flow value was required. The Company recorded
an impairment charge in the fourth quarter of 2001 according to the provisions
of SFAS No.121. See note 2 for additional information.
After January 1, 2002, the Company periodically evaluates the carrying value of
long-lived assets to be held and used according to Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). The Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement superseded SFAS No. 121, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a "segment of a business" (as previously defined in that
Opinion). The adoption of SFAS No. 144 had no impact on the Company's financial
statements in 2002.
Capitalized Software Costs
The Company capitalizes certain computer software acquisition and
implementation costs. Computer software costs of $7.7 million and $5.3 million
were capitalized during the year ended December 31, 2003 and 2002, respectively,
relating to the Company's project to upgrade its information technology systems
which became operational in the fourth quarter of 2003. The Company recorded
$0.4 million of depreciation during the fourth quarter of 2003 relating to the
project.
Capitalized Interest Costs
The Company capitalizes interest costs associated with the financing of major
capital expenditures up to the time the asset is ready for its intended use.
Deferred Financing Costs
The costs related to the issuance of debt are capitalized and amortized over the
lives of the related debt as interest expense.
Financial Instruments
The Company enters into futures contracts, forward contracts and options to
manage exposures to price risk related to aluminum and natural gas purchases.
The Company also occasionally uses interest rate swap agreements to manage
interest rate risk. Gains and losses on these financial instruments which
effectively hedge exposures are deferred, net of taxes if any, in other
comprehensive income and included in income when the underlying transactions
occur. The ineffective portion of the gains and losses are recorded currently in
the consolidated statement of operations. Gains and losses on certain other
financial instruments entered into to mitigate risk which do not qualify for
hedge accounting are recognized currently in the consolidated statement of
operations. See note 7 for additional information.
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.
The Company classifies customer rebates as sales deductions in accordance
with the requirements of Emerging Issues Task Force Issue No. 01-09 and
classifies shipping costs incurred as a component of cost of goods sold in
accordance with the requirements of Emerging Issues Task Force Issue No. 00-10.
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
At December 31, 2003, the Company had stock-based compensation plans which are
described more fully in note 14. 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 under the intrinsic
value based method. Accordingly, no stock-based compensation expense has been
recognized for stock options issued under the plans as all stock options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. 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 loss and basic
and diluted net loss per share would have been increased for 2003, 2002 and 2001
to the pro forma amounts which follow (in thousands except per share data):
2003 2002 2001
---- ---- ----
Net income (loss) as reported $(28,934) $(16,211) $(193,552)
Less total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects 327 372 106
--------- --------- ----------
Pro forma net income (loss) $(29,261) $(16,583) $(193,658)
========= ========= ==========
Basic net income (loss) per share
As reported $(1.81) $(1.01) $(11.78)
Pro forma (1.83) (1.04) (11.79)
Diluted net income (loss) per share
As reported $(1.81) $(1.00) $(11.78)
Pro forma (1.83) (1.03) (11.79)
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. Under the terms of the workers'
compensation programs, the Company is required to maintain pre-determined
amounts of cash security, restricted as to use. At December 31, 2003 and 2002,
$3.2 million and $2.9 million, respectively, of other noncurrent assets on the
consolidated balance sheet were so restricted.
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. Liabilities for remediation costs and post-remediation monitoring are
recorded when they are probable and reasonably estimable. The liability may
include costs such as environmental site evaluations, consultant fees,
feasibility studies, outside contractor and monitoring expenses. The assessment
of this liability is calculated based on existing technology, does not reflect
any offset for possible recoveries from insurance companies and is not
discounted. The Company expenses all legal fees associated with remediation
costs and post-remediation monitoring as the fees are incurred. These fees are
neither estimable nor probable, as it is not possible to predict the amount or
timing of cost for future environmental matters which may subsequently be
determined.
Capital Lease Obligations
The Company leases certain property, plant and equipment used in its
operations, some of which are required to be capitalized in accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("SFAS No. 13"). SFAS No. 13 requires the capitalization of leases meeting
certain criteria, with the related asset being recorded in property, plant and
equipment and an offsetting amount recorded as a liability.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), and issued a
revision in December 2003. This Interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements" requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for the Company in the quarter ending March
31, 2004. Management does not expect the adoption of this Interpretation to have
a material impact on the Company's results of operations or financial position.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (" SFAS No. 149"). The Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. In addition, the provisions of this Statement are generally to be
applied prospectively. The Statement's initial adoption did not have a material
impact on the Company's results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). The Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The provisions of SFAS
No. 150 apply immediately to all financial instruments entered into or modified
after May 31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. The Statement's initial adoption
did not have a material impact on the Company's results of operations or
financial position.
In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The Statement requires
additional disclosures about an employer's pension plans and postretirement
benefits plans such as: the types of plan assets, investment strategy,
measurement date, plan obligations, cash flows, and components of net periodic
benefit cost recognized during interim periods. See notes 10 and 11 to the
consolidated financial statements for the required additional disclosures.
2. Asset Impairment Charges
During the fourth quarter of 2001, the Company recorded a non-cash asset
impairment charge of $167.3 million or $10.18 per basic and diluted share
(before and after tax) related to the impairment of certain property, plant and
equipment and goodwill in its aluminum segment. The asset impairment charges
resulted from the application of the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121") which
required that long-lived assets, certain intangibles and goodwill held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of these assets may not be
recoverable. The Company undertook the impairment review upon concluding, in the
weeks following the tragic events of September 11, that the economic recovery
forecast by the Company to restore its aluminum rolling mill operations to
profitability in the second half of 2001 would not occur, and that a
continuation of poor market conditions would impact the carrying amount of the
assets. The estimated fair value of the assets was based on anticipated cash
flows of the operations in the Company's aluminum business discounted at a rate
commensurate with the risk involved. The $167.3 million impairment charge was
composed of $85.4 million of property, plant and equipment write-downs ($1.8
million of net land and improvements, $15.7 million of net building
improvements, $59.0 million of net machinery and equipment and $8.9 million of
construction in progress) and $81.9 million of goodwill write-downs.
3. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets" and amends Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope
goodwill and intangible assets that are not amortized. SFAS No. 121 was
subsequently superseded by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144").
SFAS No. 142 addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Under SFAS No. 142, goodwill is no longer to be amortized but
reviewed for impairment annually or more frequently if certain indicators arise,
using a two-step approach. SFAS No. 142 was effective January 1, 2002 and the
Company was required to complete step one of a transitional impairment test by
June 30, 2002 and to complete step two of the transitional impairment test, if
step one indicates that the reporting unit's carrying value exceeds its fair
value, by December 31, 2002. Any impairment loss resulting from the transitional
impairment test was required to be recorded as a cumulative effect of a change
in accounting principle in the quarter ended March 31, 2002. Any subsequent
impairment losses will be reflected in operating income in the consolidated
statement of operations. The net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair value
of each reporting unit to its carrying value. Fair value was determined by using
the valuation technique of calculating the present value of estimated expected
future cash flows (using a discount rate commensurate with the risks involved).
Based upon the transitional impairment test performed upon adoption of SFAS No.
142, the Company recorded a goodwill impairment loss of $25.3 million ($13.5
million in its aluminum segment and $11.8 million in its discontinued electrical
products segment). As required by SFAS No. 142 and previously described, the
Company recorded the goodwill write-down as a cumulative effect of a change in
accounting principle as of January 1, 2002 and restated the Company's first
quarter 2002 financial results.
During the fourth quarter of 2003, the Company performed its annual impairment
review of the Company's remaining goodwill balance relating to the discontinued
Alflex electrical products segment and determined that an additional
goodwill impairment write-down of $29.6 million was necessary. The impairment
loss was due to increased competition in the electrical products industry which
lowered the operating profits and cash flows during 2003 over what had been
expected. Based upon this trend, the long-term earnings and cash flow forecasts
were revised.
The following displays the changes in the carrying amount of goodwill in each
of the Company's reportable segments (including the discontinued Alflex
electrical products segment for the years ended December 31, 2003 and 2002 (in
thousands):
Less
Discontinued
Electrical Electrical
Aluminum Products Total Products Total
-------- ---------- --------- ----------- ---------
Balance December 31, 2001 $13,470 $60,729 $74,199 ($60,729) $13,470
Goodwill impairment loss as a result of transitional
Impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327) 11,857 (13,470)
------- ------- ------- ------- --------
Balance December 31, 2002 - 48,872 48,872 (48,872) -
Goodwill impairment loss as a result of annual
Impairment test performed in fourth quarter - (29,607) (29,607) 29,607 -
------- ------- ------- ------- --------
Balance December 31, 2003 $ - $19,265 $19,265 (19,265) $ -
======= ======= ======= ======= ========
The following represents transitional disclosures for the years ending December
31, 2003, 2002 and 2001 relating to goodwill amortization including the goodwill
impairment loss which was recorded as a cumulative effect of a change in
accounting principle as of January 1, 2002, as required by SFAS No. 142 and the
goodwill impairment loss which was recorded in operating income during the
fourth quarter of 2003 (in thousands except per share data):
2003 2002 2001
---- ---- ----
Reported income (loss) from continuing operations before cumulative
effect of change in accounting principle $ 142 $ 2,923 $(199,674)
Reported income (loss) from discontinued operations (29,076) 6,193 6,122
------- ------- --------
Reported income (loss) before cumulative of change in
accounting principle (28,934) 9,116 $(193,552)
Cumulative effect of change in accounting principle - (25,327) -
------- ------- --------
Reported net income (loss) (28,934) (16,211) (193,552)
Add back: goodwill amortization - - 3,988
------- ------- --------
Adjusted net income (loss) $(28,934) $(16,211) $(189,564)
======== ======== ========
Basic net income (loss) per share:
Reported income (loss) from continuing operations before cumulative
effect of change in accounting principle $ 0.01 $ 0.18 $(12.15)
Reported income (loss) from discontinued operations (1.82) 0.39 0.37
Cumulative effect of change in accounting principle - (1.58) -
Reported net income (loss) (1.81) (1.01) (11.78)
Goodwill amortization - - 0.24
Adjusted net income (loss) (1.81) (1.01) (11.54)
Diluted net income (loss) per share:
Reported income (loss) from continuing operations before cumulative
effect of change in accounting principle $ 0.01 $ 0.18 $(12.15)
Reported income (loss) from discontinued operations (1.81) 0.39 0.37
Cumulative effect of change in accounting principle - (1.57) -
Reported net income (loss) (1.80) (1.01) (11.78)
Goodwill amortization - - 0.24
Adjusted net income (loss) (1.80) (1.01) (11.54)
Weighted average shares outstanding
Basic 16,011 15,994 16,428
Diluted 16,075 16,097 16,428
The Company has no other intangible assets other than the goodwill discussed
above.
4. Receivables Purchase Agreement
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 receivables purchase agreement 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. The Company services the receivables for a fee in accordance with the
receivables purchase agreement. In addition, under the agreement, the
receivables are sold with no recourse to the Company and the Company records no
discount on the sale of the receivables. During September 2000, the Company and
the financial institution extended the receivables purchase agreement for an
additional three-year period ending in September 2003, in October 2002, extended
the agreement for an additional year ending in September 2004 and in February
2004, extended the agreement through the end of March 2005. In addition during
September 2001, the Company and the financial institution agreed to reduce the
maximum amount which can be outstanding under the agreement to $95.0 million, in
October 2003, the availability was reduced to $60.0 million and in February
2004, the availability was increased to $80.0 million.
At December 31, 2003 and 2002, the Company had outstanding under the agreement
$60.0 million and $24.0 million, respectively, and had $44.9 million and $61.8
million, respectively, of net residual interest in the receivables sold. The net
residual interest in the receivables sold has been reduced by $19.3 million and
$19.4 million at December 31, 2003 and 2002, respectively, for the portion of
the net residual interest that relates to the Company's discontinued electrical
products segment and that was included in the current assets of discontinued
operations on the consolidated balance sheet. The fair value of the net residual
interest is measured at the time of the sale and is based on the sale of similar
assets. In 2003 and 2002, the Company received gross proceeds of $82.0 million
and $51.0 million, respectively, from the sale of receivables and made gross
payments of $46.0 million and $47.0 million, respectively, under the agreement.
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 $1.0 million and $0.5 million at
December 31, 2003 and 2002, respectively, and is netted against the net residual
interest in the receivables sold in the Company's consolidated financial
statements. The allowance relating to the Company's discontinued electrical
products segment of $0.4 million and $0.6 million at December 31, 2003 and 2002,
respectively, is netted against the current assets of discontinued operations on
the consolidated balance sheet.
Under the terms of the agreement, the Company is required to maintain tangible
net worth of $5 million, and to not exceed certain percentages of credit sales
for uncollectible accounts, delinquent accounts and sales returns and
allowances. Should the Company exceed such limitations, the financial
institution has the right to terminate the agreement.
5. Inventories
Inventories at December 31 consist of the following (in thousands):
2003 2002
---- ----
Raw materials $36,502 $19,529
Work in process 47,871 46,293
Finished goods 25,633 32,624
Expendable parts and supplies 12,915 14,320
-------- --------
122,921 112,766
LIFO reserve (6,771) (2,146)
-------- --------
$116,150 $110,620
======== ========
The Company's raw materials, work in process and finished goods inventories are
valued using the last-in, first-out (LIFO) accounting method. The first-in,
first-out (FIFO) accounting method is used for valuing its expendable parts and
supplies inventory. The inventory has been reduced by $15.2 million and $14.7
million, respectively, at December 31, 2003 and 2002, for the portion of the
inventory that relates to the Company's discontinued electrical products segment
and that was included in the current assets of discontinued operations on the
consolidated balance sheet.
6. Property, Plant and Equipment
Property, plant and equipment and the related accumulated depreciation at
December 31 consist of the following (in thousands):
2003 2002
---- ----
Land and improvements $16,910 $16,910
Buildings and improvements 43,272 43,101
Machinery and equipment 301,003 286,483
Construction in progress 11,275 16,285
-------- --------
372,460 362,779
Less accumulated depreciation 244,850 231,741
-------- --------
Net property, plant and equipment $127,610 $131,038
======== ========
Depreciation expense was $18.8 million, $18.9 million and $27.9 million for the
years ended 2003, 2002 and 2001, respectively. The net property, plant and
equipment has been reduced by $14.4 million and $15.9 million, respectively, at
December 31, 2003 and 2002, for the portion of the net property, plant and
equipment that relates to the Company's discontinued electrical products segment
and that was included in the noncurrent assets of discontinued operations on the
consolidated balance sheet. The net book value of property, plant and equipment
was reduced by $85.4 million in 2001 as a result of the asset impairment charges
described in note 2.
7. Financial Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", including Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" ("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 consolidated statement of operations, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Under SFAS No. 133, gains and losses that
represent the effective portion of cash flow hedge transactions are recorded in
other comprehensive income. Gains and losses on these instruments that are
deferred in other comprehensive income are reclassified into net income as cost
of goods sold in the periods when the hedged transactions occur.
The Company enters into futures contracts, forward contracts and options to
manage exposures to price risk related to aluminum and natural gas purchases.
The Company has designated the futures contracts and forward contracts as cash
flow hedges of anticipated aluminum raw material and natural gas requirements,
respectively. For the last three quarters of the year ending December 31, 2003,
the Company's aluminum futures contracts did not meet certain "effectiveness"
requirements set forth in SFAS No. 133. Accordingly, as prescribed by the
provisions of SFAS No. 133, the derivative instruments used as hedges were
marked-to-market and the gains and losses during the last three quarters of 2003
were recorded currently in the consolidated statement of operations instead of
being deferred in other comprehensive income and included in income when the
underlying hedged transactions occur. The Company's natural gas futures continue
to be deemed "effective" per SFAS No. 133 and accordingly the gains and losses
on these financial instruments are deferred in other comprehensive income and
included in income when the underlying hedged transactions occur.
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. Assessments of credit risks with trading
partners (brokers) are completed through a review of the broker's ratings with
credit rating agencies. 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 Commodity Futures Trading Commission,
which requires the brokers to be fully insured against unrealized losses owed to
clients. Brokers of natural gas forward contracts are not regulated. At December
31, 2003, credit lines totaling $27.8 million were available at various
brokerages used by the Company.
The Company recorded a cumulative-effect-type net gain transition adjustment of
$6.6 million in accumulated other comprehensive income to recognize at fair
value all derivatives that were designated as cash-flow hedging instruments upon
adoption of SFAS No. 133 on January 1, 2001. All of this amount was reclassified
from accumulated other comprehensive income into cost of goods sold during 2001.
As of December 31, 2003, approximately $1.8 million of the $2.0 million of
deferred net gains are expected to be reclassified from other comprehensive
income into net income as cost of goods sold over the next twelve months. As of
December 31, 2003, the Company held open aluminum and natural gas futures
contracts, forward contracts and options having maturity dates extending through
December 2005. A net gain of $7.1 million for the year ended December 31, 2003
and a net loss of $0.1 million for both the year ended December 31, 2002 and
2001, was recognized in cost of goods sold representing the amount of the
hedges' ineffectiveness.
At December 31, 2003, the Company held firm-priced aluminum purchase and sales
commitments through May 2005 totaling $5 million and $144 million, respectively.
At December 31, 2002, the Company held firm-priced aluminum purchase and sales
commitments through December 2004 totaling $7 million and $123 million,
respectively.
8. Long-term Debt and Revolving Credit Facility
Long-term debt of the Company at December 31 consisted of the following (in
thousands):
2003 2002
---- ----
Senior subordinated notes $125,000 $125,000
Revolving credit facility - -
-------- --------
125,000 125,000
Less current maturities - -
-------- --------
$125,000 $125,000
======== ========
The Company's $125 million of 10.75% senior subordinated notes are due in 2006.
Interest is payable semi-annually on April 1 and October 1 of each year.
The Company has a credit agreement with a syndicate of banks which is led by PNC
Bank. During March 2002, the credit agreement was amended ("amended credit
agreement") and PNC Bank replaced Bank One Corporation as the administrative
agent and several of the banks in the syndicate were replaced with other banks.
Prior to March 2002, the credit agreement included a $100 million revolving
credit facility, under which the Company had agreed to limit borrowings to $65
million during 2001. The borrowing limitation is currently $30 million under the
amended credit agreement. 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 $20 million of the revolving credit facility is
available for standby and commercial letters of credit. The amended credit
agreement extended the revolving credit facility commitment from September 2,
2002 to March 31, 2005.
Borrowings under the credit agreement, as revised in 2002, bear interest at a
variable base rate per annum plus up to an additional 2.00% 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
facility fee of 0.750%. The Company must pay a fee ranging from 1.500% to 2.000%
per annum on the carrying amount of each outstanding letter of credit. At
December 31, 2003 and 2002, standby letters of credit totaling $3.1 million and
$2.8 million, respectively, 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.
Based on estimated market values at December 31, 2003 and 2002, the fair value
of the senior subordinated notes was approximately $126 million and $125
million, respectively.
Future aggregate maturities of long-term debt at December 31, 2003 are as
follows (in thousands):
2004 $ -
2005 -
2006 125,000
2007 -
2008 -
--------
Total $125,000
========
9. Stockholders' Equity
In July 1999, the Company adopted an Executive Stock Purchase Incentive Program
(the "Program") which had been authorized by the Company's stockholders at the
Company's annual meeting of stockholders held in April 1999. Under the Program,
the Company extended credit to certain key executives to purchase the Company's
common stock at fair market value. The loans were collateralized by the shares
acquired and were repayable with full-recourse to the executives. The Program
provided for the key executives to earn repayment of the notes including
interest, based on achieving annual and cumulative performance objectives as set
forth by the Management Development and Compensation Committee (the "Committee")
of the Board of Directors. During December 2001, the Committee terminated the
Program and the Board of Directors, at the recommendation of the Committee,
authorized all loans to be repaid with a combination of proceeds from forfeiture
by the executives of the collateralized shares and proceeds from application of
Program termination payments made by the Company to the executives to cover the
deficiency between the loans and the value of the collateralized shares on the
date of termination of the Program. In addition, the Program termination
payments covered income tax obligations incurred by the executives as a result
of the Program termination. For certain of the executives, the Program
termination payments used to repay the loans were divided between payments made
in December 2001 and payments made in April 2002. A total of 677,000 shares were
issued during August 1999 of which no shares were outstanding as of December 31,
2001. The outstanding principal balance of the notes at December 31, 2001 of
$1.6 million was classified as a reduction of stockholders' equity and as
previously mentioned that remaining outstanding amount was repaid in full in
April 2002. The expense relating to the Program was $7.2 million for the year
ended 2001.
10. 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. During 2003, the non-salaried
plan's benefit formula was increased. This plan amendment increased the
accumulated pension benefit obligation by $2.5 million in 2003 and is being
amortized over the average remaining service lives of the plan's active
employees, which has the effect of increasing net periodic pension costs.
The financial status of the plans at December 31 is as follows (in thousands):
2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $100,768 $88,424
Service cost 2,907 2,625
Interest cost 6,834 6,473
Plan amendment 2,461 -
Actuarial (gain) loss 9,770 10,939
Benefits paid (7,415) (7,693)
-------- -------
Benefit obligation at end of year 115,325 100,768
-------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 72,391 82,300
Actual return on plan assets 13,037 (4,980)
Employer contribution 4,086 2,764
Benefits paid (7,415) (7,693)
------- -------
Fair value of plan assets at end of year 82,099 72,391
------- -------
Funded status (33,226) (28,377)
Unrecognized net actuarial (gain) loss 28,530 27,563
Unrecognized net prior service cost (benefit) (918) (3,289)
Unrecognized net transition obligation (asset) - -
------- -------
Net amount recognized $(5,614) $(4,103)
======= =======
Amounts recognized in the consolidated balance sheet consist of:
(Accrued) pension cost $(30,147) $(26,743)
Intangible asset 3,257 1,249
Accumulated other comprehensive income 21,276 21,391
------- -------
Net amount recognized $(5,614) $(4,103)
======= =======
The accumulated benefit obligation for the plans was $112.2 million and $99.1
million at December 31, 2003 and 2002, respectively. Reflected at December 31,
2003 and 2002 in the Company's consolidated balance sheet is an additional
minimum liability relative to its plans which were underfunded in the amount of
$24.5 million and $22.6 million at December 31, 2003 and 2002, respectively. A
corresponding amount is recorded at December 31, 2003 and 2002, respectively, as
an intangible asset to the extent it did not exceed unrecognized prior service
cost, while the excess was charged to stockholders' equity.
The components of net pension expense for the years ended December 31 are as
follows (in thousands):
2003 2002 2001
---- ---- ----
Components of net pension expense:
Service cost $2,907 $2,625 $2,548
Interest cost 6,834 6,473 6,451
Expected return on plan assets (5,871) (6,926) (7,346)
Net amortization and deferral 1,728 118 (245)
------ ------ ------
Net pension expense $5,598 $2,290 $1,408
====== ====== ======
Included in the net pension expense above is $0.5 million, $0.4 million and
$0.5 million for the years ended 2003, 2002 and 2001, respectively, relating to
the Company's discontinued electrical products segment. The accrued pension
benefits relating to the discontinued electrical products segment were not
assumed by the purchaser of the segment.
The Company is required to make assumptions regarding such variables as the
expected long-term rate of return on plan assets and the discount rate applied
to determine service cost and interest cost. The Company bases its discount rate
used on Moody's Aa bond index plus an adjustment upward to the next quarter
percentage rate. The rates of returns on assets used is determined based upon an
analysis of the plans' historical performance relative to the overall markets
and mix of assets. The Company assesses the expected long-term rate of return on
plan assets assumptions for each plan based on relevant market conditions and
makes adjustments to the assumptions as appropriate. The weighted average
assumptions used to determine benefit obligations at December 31 and net pension
expense for the years ended December 31 are as follows:
2003 2002 2001
---- ---- ----
Weighted average assumptions used to determine benefit obligations at December
31:
Discount rate 6.25% 6.75% 7.50%
Rate of compensation increase 4.50 4.50 4.50
Weighted average assumptions used to determine net pension expense for the years
ended December 31:
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 8.50 8.75 8.75
Rate of compensation increase 4.50 4.50 4.50
The plans' assets consist primarily of equity securities, guaranteed investment
contracts and fixed income pooled accounts. The Company's plan asset allocation
at December 31, 2003 and 2002, target allocation for 2004, and expected
long-term rate of return by asset category are as follows:
Weighted Average
Percentage of Plan Target Expected Long-term
Assets at December 31 Allocation Rate of Return
Asset Category 2003 2002 2004 2003
---- ---- ---- ----
Equity securities 39% 38% 38% 10.00%
Debt securities 43 45 45 6.00
Real estate - - - -
Other 18 17 17 11.75
---- ---- ---- -----
Total 100% 100% 100% 8.50%
==== ==== ==== =====
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 expects to make $4.7 million of contributions
to the plans in the year ended December 31, 2004.
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 expense relating to the multi-employer pension plan
was approximately $0.2 million in each of the years 2003, 2002 and 2001.
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 expense relating to the plans was approximately $1.7
million, $1.2 million and $1.1 million in 2003, 2002 and 2001, respectively.
11. Postretirement Benefits Other Than Pensions
The Company provides postretirement health care and life insurance benefits to
certain employees hired on or before September 1, 1998. The Company accrues the
cost of postretirement benefits within the covered employees' active service
periods. During 2003 changes were made to the plan for all non-bargaining
Kentucky employees to limit eligibility and increase employee's cost sharing
percentages of the Company's postretirement medical insurance premiums. The
plan changes reduced the accumulated postretirement benefit obligation by $13.7
million in 2003 and is being amortized over the average remaining service lives
of the Company's active employees, which has the effect of reducing net periodic
postretirement benefits costs. The financial status of the plan at December 31
is as follows (in thousands):
2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $59,730 $53,069
Service cost 536 658
Interest cost 3,545 3,972
Plan amendment (13,701) 124
Actuarial loss (gain) 3,993 6,013
Benefits paid (4,267) (4,106)
------- -------
Benefit obligation at end of year 49,836 59,730
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year - -
Actual return on plan assets - -
Employer contribution 4,267 4,106
Benefits paid (4,267) (4,106)
------- -------
Fair value of plan assets at end of year - -
------- -------
Funded status (49,836) (59,730)
Unrecognized net actuarial gain (1,826) (6,117)
Unrecognized net prior service cost (benefit) (15,484) (10,823)
------- -------
Prepaid (accrued) postretirement benefit cost $(67,146) $(76,670)
======= =======
The components of net postretirement benefit expense for the years ended
December 31 are as follows (in thousands):
2003 2002 2001
---- ---- ----
Components of net postretirement benefit expense:
Service cost $536 $658 $682
Interest cost 3,545 3,972 3,852
Amortization of prior service cost (benefit) (6,525) (2,958) (2,973)
Recognized net actuarial gain (297) (319) (576)
Curtailment gain (2,516) - -
------ ------ -----
Net postretirement benefit expense (income) $(5,257) $1,353 $ 985
====== ====== =====
The Company recorded a $2.5 million curtailment gain in 2003 as a result of
certain 2003 plan changes previously mentioned that meet the definition of a
curtailment.
The Company is required to make an assumption regarding the discount rate
applied to determine service cost and interest cost. The Company bases its
discount rate used on Moody's Aa bond index plus an adjustment upward to the
next quarter percentage rate. The weighted average assumptions used to determine
benefit obligations at December 31 and net postretirement benefit expense for
the years ended December 31 are as follows:
2003 2002 2001
---- ---- ----
Weighted average assumption used to determine benefit obligations at December
31:
Discount rate 6.25% 6.75% 7.50%
Weighted average assumption used to determine net postretirement benefit expense
for the years ended December 31:
Discount rate 6.75% 7.25% 7.75%
For measurement purposes, the employer cap on the amount paid for retiree
medical benefits is assumed to increase with general inflation at 3% per year.
At December 31, 2003, the employer cap had not yet been reached. In addition,
the health care cost trend rate assumption is projected to increase in 2004 at
an annual rate of 9% for retirees under age 65 and 11% for retirees 65 years and
older and is assumed to decrease gradually to 5% by 2011 for retirees under age
65 and by 2014 for retirees 65 years and older and remain constant thereafter.
If the health care cost trend rate assumption is increased by 1%, the
postretirement benefit obligation as of December 31, 2003 and the combined
service and interest cost components of postretirement benefit expense for the
year then ended would be increased by approximately $0.2 million and $0.01
million, respectively, and if the health care cost trend rate assumption is
decreased by 1%, the postretirement benefit obligation as of December 31, 2003
and the combined service and interest cost components of postretirement benefit
expense for the year then ended would be decreased by approximately $0.3 million
and $0.02 million, respectively.
The Company's policy for the plan is to make contributions equal to the benefits
paid during the year. The Company expects to make $4.0 million of contributions
to the plan in the year ended December 31, 2004.
12. Income Taxes
The components of income tax expense (benefit) for the years ended December 31
are as follows (in thousands):
2003 2002 2001
---- ---- ----
Current:
Federal $ - $(2,692) $ -
State and Local 184 400 200
----- ------- ----
184 (2,292) 200
Deferred:
Federal - - -
State and Local - - -
----- ------- ----
$184 $(2,292) $200
===== ======= ====
Included in income tax expense (benefit) above is $0.07 million for each of the
years ended 2003, 2002 and 2001, respectively, relating to the Company's
discontinued electrical products segment.
The Company recorded a $2.7 million favorable adjustment to income tax expense
in 2002 to reduce prior years' income tax accruals based in part on a change in
tax law in 2002.
Deferred tax assets and liabilities at December 31 are as follows (in
thousands):
2003 2002
---- ----
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Inventory $ 1,907 $ - $ 768 $ -
Property, plant and equipment - 5,312 - 9,887
Accrued and other liabilities 4,783 - 10,470 -
Accrued pension costs 3,713 - 3,502 -
Accrued postretirement costs 26,953 - 30,667 -
Net operating loss carryforwards 25,888 - 28,686 -
AMT credit carryforwards 6,760 - 6,760 -
Research and development
credit carryforwards 3,458 - 3,142 -
Other 515 - - 37
-------- ------- -------- -------
Totals $ 73,977 $ 5,312 $ 83,995 $ 9,924
-------- ------- -------- -------
Net deferred tax asset 68,665 - 74,071 -
Valuation allowance (68,665) - (74,071) -
-------- ------- -------- -------
Net deferred taxes $ - $ - $ - $ -
======== ======= ======== =======
The Company has determined that at December 31, 2003 and 2002, its ability to
realize future benefits of net deferred tax assets does not meet the "more
likely than not" criteria in Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes".
At December 31, 2003, the Company had net operating loss ("NOL") carryforwards
for federal tax purposes of approximately $74 million, which expire in various
amounts from 2005 through 2021 and approximately $6.8 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 NOL 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. Approximately $34
million of the $74 million of NOL carryforwards mentioned previously are subject
to this annual limitation with the remaining amounts having no such annual
limitation.
A reconciliation of the significant differences between the federal statutory
income tax rate and the effective income tax rate on pre-tax income (loss)
excluding the cumulative effect of the change in accounting principle is as
follows:
2003 2002 2001
---- ---- ----
Federal statutory income tax rate (35.0)% 35.0% (35.0)%
Increase (decrease) in tax rate resulting from:
NOL and AMT credit carryforwards/carrybacks (1.3) (64.8) 4.2
Nondeductible goodwill and other permanent
differences 36.5 5.3 0.5
Adjustment of prior year accrual - (12.9) -
State income taxes, net of federal income tax benefit 0.4 3.8 0.1
Asset impairment charges - - 30.3
---- ----- -----
Effective income tax rate 0.6% (33.6)% 0.1%
==== ===== =====
No income tax benefit was recognized related to the cumulative effect of the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".
13. 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.
Federal and state regulations continue to impose strict emission requirements on
the aluminum industry. While the Company believes that current pollution control
measures at the emission sources at its facilities meet current requirements,
additional measures at some of the Company's facilities may be required to meet
future requirements.
The Company has been named as a potentially responsible party at seven federal
superfund sites and are in operations and maintenance at two of the sites for
past waste disposal activity associated with closed recycling facilities. The
ultimate goal is to delist these two sites under superfund. At the five other
federal superfund sites, the Company is a minor contributor and has satisfied
its obligations at four of the sites and expects to resolve its liability at the
remaining site for a nominal amount. The Company is also under orders by
agencies in two states for environmental remediation at three sites, one of
which is currently operating and two of which have been closed.
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.
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 which has since been renamed Goldendale Aluminum Company
("Goldendale Aluminum"). Past aluminum smelting activities at Goldendale have
resulted in environmental contamination and regulatory involvement. A 1993
Settlement Agreement among the Company, Lockheed Martin and Goldendale Aluminum
allocates responsibility for future remediation at 11 sites at the Goldendale
smelter. If remediation is required, the Company estimates the probable
aggregate cost to the Company for these sites of a range from $1.3 million to
$7.2 million. The Company had an accrual for such liabilities of $1.3 million at
December 31, 2003 and 2002. In December 2003, Goldendale Aluminum filed for
bankruptcy protection. The Company cannot presently quantify any additional
liability that may be incurred as a result of Goldendale Aluminum's bankruptcy
filing. 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.
Environmental sampling at Lewisport has disclosed the presence of contaminants,
including polychlorinated biphenyls (PCBs). Management believes a portion of the
contamination is covered by the Lockheed Martin indemnification, which Lockheed
Martin disputes.
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
$6.7 million and $7.4 million at December 31, 2003 and 2002, respectively. Of
the total reserve, $3.3 million and $2.8 million is included in "accrued
liabilities" in the Company's consolidated balance sheets at December 31, 2003
and 2002, respectively, and $3.4 million and $4.6 million is included in "other
long-term liabilities" at December 31, 2003 and 2002, respectively.
The Company estimates that the total cost to remediate these environmental
matters could be as much as $16 million should all matters be ultimately
concluded in a manner least favorable to the Company. 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
2003, 2002 and 2001 were $0.5 million, $0.9 million and $0.2 million,
respectively. All other environmental expenditures of the Company, including
remediation expenditures, for 2003, 2002 and 2001 were $1.6 million,
$1.7 million and $1.9 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.
14. Stock Incentives
The Company has stockholder-approved 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 authorized under the plans is 2,950,000 of which
1,048,033 were available for grants and awards at December 31, 2003.
The following summarizes activity under the plans for the years 2001, 2002 and
2003:
Options Restricted Stock
-------------------------------------------------- ----------------
Range of Weighted Average
Shares Exercise Prices Exercise Price Shares
----------- --------------- ---------------- ---------
Outstanding December 31, 2000 932,500 $7.44 to $20.00 $12.78 12,500
Granted 329,000 $4.22 $4.22 -
Exercised - - - -
Forfeited (192,000) $4.22 to $16.75 $11.91 -
Stock no longer restricted - - - (12,500)
--------- ------
Outstanding December 31, 2001 1,069,500 $4.22 to $20.00 $10.30 -
Granted 349,000 $4.85 to $7.28 $5.16 -
Exercised - - - -
Forfeited (53,000) $4.22 to $16.75 $10.26 -
--------- ------
Outstanding December 31, 2002 1,365,500 $4.22 to $20.00 $8.99 -
Granted 350,500 $4.95 to $6.76 $6.73 -
Exercised - - - -
Forfeited (53,000) $4.22 to $16.75 $8.53 -
--------- ------
Outstanding December 31, 2003 1,663,000 $4.22 to $20.00 $8.53 -
========= ======
(Weighted average contractual
life of 6.6 years)
Exercisable Options:
December 31, 2001 348,500 $7.44 to $20.00 $14.81
December 31, 2002 575,000 $4.22 to $20.00 $11.84
December 31, 2003 820,000 $4.22 to $20.00 $11.61
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Options
Outstanding Exercisable
------------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------- ----------- ----------- -------------- ----------- --------------
$4.22 to $7.44 958,000 8.1 years $5.45 115,000 $4.90
$7.45 to $14.00 458,500 5.2 years $11.17 458,500 $11.17
$14.01 to $20.00 246,500 3.2 years $15.55 246,500 $15.55
--------- -------
$4.22 to $20.00 1,663,000 6.6 years $8.53 820,000 $11.61
========= =======
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, vested five years
from the date of award. The Company has no restricted stock outstanding at
December 31, 2003. The weighted-average fair value of options granted in 2003,
2002 and 2001 was $2.52, $1.90 and $1.48 per share, respectively. Fair value
estimates were determined using the Black-Scholes option pricing model with the
following weighted average asumptions for 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.63% 4.41% 5.13%
Dividend yield 2.98% 3.95% 4.74%
Volatility factor 52% 52% 52%
Expected term of options (in years) 5 5 5
15. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
2003 2002 2001
---- ---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) from continuing operations before cumulative effect of
change in accounting principle $ 142 $ 2,923 $(199,674)
Income (loss) from discontinued operations (29,076) 6,193 6,122
Cumulative effect of change in accounting principle - (25,327) -
-------- -------- ---------
Net income (loss) $(28,934) $(16,211) $(193,552)
======== ======== =========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,011 15,994 16,428
====== ====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,011 15,994 16,428
Plus: dilutive effect of stock options 64 103 -
------ ------ ------
Adjusted weighted average shares 16,075 16,097 16,428
====== ====== ======
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ 0.18 $(12.15)
Income (loss) from discontinued operations (1.82) 0.39 0.37
Cumulative effect of change in accounting principle - (1.58) -
Net income (loss) (1.81) (1.01) (11.78)
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ 0.18 $(12.15)
Income (loss) from discontinued operations (1.81) 0.38 0.37
Cumulative effect of change in accounting principle - (1.57) -
Net income (loss) (1.80) (1.01) (11.78)
Options to purchase 1,089,000; 779,500 and 770,500 common shares for the years
ended December 31, 2003, 2002 and 2001, respectively, were excluded from the
calculations above because the exercise prices on the options were greater than
the average market price for the periods.
16. Lease Commitments
Certain property, plant and equipment are leased under noncancelable capital
and operating leases. A summary of the future minimum lease payments under
capital and operating leases as of December 31, 2003 is as follows (in
thousands):
Capital Leases Operating Leases
-------------- ----------------
2004 $ 49 $2,674
2005 49 2,014
2006 49 1,026
2007 49 791
2008 49 389
2009-2015 12 2,431
Less sublease rental income - (241)
------ -------
Total minimum lease payments 257 $ 9,084
=======
Less interest costs 52
------
Present value of minimum lease payments 205
Less current portion of obligations
under capital leases included in accrued
liabilities 32
------
Long-term portion of obligations under capital
leases included in other long-term liabilities $173
======
Rental expense under cancelable and noncancelable operating leases for 2003,
2002 and 2001 was $3.9 million, $2.8 million and $2.7 million, respectively. The
amount of rental expense for 2003, 2002 and 2001 for operating leases is net of
sublease rental income of $0.09 million, $0.09 million and $0.17 million,
respectively.
17. Selected Quarterly Financial Data (unaudited) All amounts are in thousands
except per share data.
Quarter
---------------------------------------------
1st 2nd 3rd 4th
-------- -------- -------- --------
2003
- ----
Net sales $187,286 $190,099 $221,213 $219,113
Gross profit 7,177 9,188 13,343 18,601
Income (loss) from continuing operations (5,591) (1,961) 2,757 4,937
Income (loss) from discontinued operations (902) 90 151 (28,415)
Net income (loss) (6,493) (1,871) 2,908 (23,478)
Basic net income (loss) per share:
Income (loss) from continuing operations (0.35) (0.12) 0.17 0.31
Income (loss) from discontinued operations (0.06) 0.01 0.01 (1.77)
Net income (loss) (0.41) (0.12) 0.18 (1.47)
Diluted net income (loss) per share:
Income (loss) from continuing operations (0.35) (0.12) 0.17 0.31
Income (loss) from discontinued operations (0.06) 0.01 0.01 (1.76)
Net income (loss) (0.41) (0.12) 0.18 (1.46)
2002
- ----
Net sales $192,958 $223,999 $224,124 $212,768
Gross profit 5,452 10,404 14,892 18,464
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (6,543) (1,037) 4,776 5,727
Income (loss) from discontinued operations 2,120 2,135 1,300 638
Cumulative effect of change in accounting principle (25,327) - - -
Net income (loss) (29,750) 1,098 6,076 6,365
Basic net income (loss) per share:
Income (loss) from continuing operations (0.41) (0.06) 0.30 0.36
Income (loss) from discontinued operations 0.13 0.13 0.08 0.04
Cumulative effect of change in accounting principle (1.58) - - -
Net income (loss) (1.86) 0.07 0.38 0.40
Diluted net income (loss) per share:
Income (loss) from continuing operations (0.41) (0.06) 0.30 0.36
Income (loss) from discontinued operations 0.13 0.13 0.08 0.04
Cumulative effect of change in accounting principle (1.58) - - -
Net income (loss) (1.86) 0.07 0.38 0.40
The net income (loss) for the fourth quarter of 2003 includes $29.6 million or
$1.85 per basic and diluted share non-cash goodwill impairment charges and the
net income (loss) for the first quarter of 2002 includes $25.3 million or $1.58
per basic share and $1.57 per diluted share non-cash goodwill impairment
charges. See note 3 for additional information on the goodwill impairment
charges. In addition, net income for the fourth quarter of 2002 was increased by
$1.4 million due to an adjustment based on the deferral of certain planned
maintenance expenses which had been accrued in previous quarters of 2002.
18. Information Concerning Segments
The Company has determined that it operates in one reportable segment,
aluminum, after having disposed of its other segment, the electrical products
segment, in July 2004. The aluminum segment manufactures common alloy aluminum
sheet for distributors and the transportation, construction, and consumer
durables end-use markets. The electrical products segment manufactured flexible
electrical wiring products for the commercial construction and do-it-yourself
markets.
19. Stockholder Protection Rights Plan
During 1996, the Company's Board of Directors adopted a stockholder protection
rights plan (the "Plan"). Under the Plan, preferred share purchase rights
("Rights") are issued at the rate of one Right for each share of the Company's
common stock. Each Right entitles its holder to purchase one one-hundredth of a
share of Preferred Stock at an exercise price of $65, subject to adjustment.
Until it is announced that a person or group has acquired 15% or more of the
Company's common stock (an "Acquiring Person"), or the tenth business day after
a person or group commences a tender offer that, if completed, would result in
such person or group owning 15% or more of the Company's common stock, the
Rights will be evidenced by the Company's common stock certificates, will
automatically trade with the common stock and will not be exercisable.
Thereafter, separate Rights certificates will be distributed and each Right will
entitle its holder to purchase Participating Preferred Stock having economic and
voting terms similar to those of one share of Common Stock for an exercise price
of $65.
Upon announcement that any person or group has become an Acquiring Person (the
"Flip-in Date"), each Right (other than Rights beneficially owned by any
Acquiring Person or transferees thereof, which Rights become void) will entitle
its holder to purchase, for the exercise price, a number of shares of the
Company's common stock having a market value of twice the exercise price. Also,
if after an Acquiring Person controls the Company's Board of Directors, the
Company is involved in a merger or sells more than 50% of its assets or earning
power (or has entered into an agreement to do any of the foregoing), and, in the
case of a merger, the Acquiring Person will receive different treatment than all
other stockholders, each Right will entitle its holder to purchase, for the
exercise price, a number of shares of common stock of the Acquiring Person
having a market value of twice the exercise price. If any person or group
acquires between 15% and 50% of the Company's common stock, the Company's Board
of Directors may, at its option, exchange one share of the Company's common
stock for each Right. Until the Rights become exercisable, they may be redeemed
by the Company at a price of $0.01 per Right. The Rights expire on March 16,
2006.
20. Guarantor Financial Statements
The $125 million of 10.75% senior subordinated notes due 2006 issued by the
Company, and the $30 million revolving credit facility are guaranteed by the
Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"),
other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as
defined in the Indenture with respect to such debt) and certain subsidiaries of
the Company without substantial assets or operations. Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because management has determined that
they would not be material to investors. The following supplemental financial
information sets forth on a condensed combined basis for the Parent Company
Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a
combining balance sheet as of December 31, 2003 and 2002 and a statement of
operations and statement of cash flows for the years ended December 31, 2003,
2002 and 2001.
Combining Balance Sheet at December 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 269,520 -- (269,213) 307
Inventories -- 116,150 -- -- 116,150
Net residual interest in receivables sold -- -- 44,889 -- 44,889
Prepayments and other current assets 435 13,529 -- -- 13,964
Current assets of discontinued operations -- 35,704 -- -- 35,704
--------- --------- --------- --------- ---------
Total current assets 435 434,903 44,889 (269,213) 211,014
Property, plant and equipment, net 3 127,607 -- -- 127,610
Other noncurrent assets 385,455 7,040 -- (384,693) 7,802
Noncurrent assest of discontinued operations -- 33,690 -- -- 33,690
--------- --------- --------- --------- ---------
Total assets $ 385,893 $ 603,240 $ 44,889 $(653,906) $ 380,116
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ -- $ 947 $ -- $ -- $ 947
Accounts payable 176,832 44,171 92,386 (269,213) 44,176
Accrued liabilities 5,923 15,826 (490) -- 21,259
Current liabilities of discontinued operations -- 9,458 -- -- 9,458
--------- --------- --------- --------- ---------
Total current liabilities 182,755 70,402 91,896 (269,213) 75,840
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 3,845 -- -- 3,845
Accrued pension benefits -- 29,017 -- -- 29,017
Accrued postretirement benefits -- 67,146 -- -- 67,146
Noncurrent liabilities of discontinued operations -- 1,130 -- -- 1,130
--------- --------- --------- --------- ---------
Total liabilities 307,755 171,540 91,896 (269,213) 301,978
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,703 486,727 5,000 (491,727) 405,703
Accumulated deficit (308,477) (35,746) (52,041) 87,787 (308,477)
Accumulated other comprehensive income:
Unrealized gain on security 34 -- 34 (34) 34
Minimum pension liability adjustment (21,276) (21,276) -- 21,276 (21,276)
Effects of cash flow hedges 1,994 1,994 -- (1,994) 1,994
--------- --------- --------- --------- ---------
Total stockholders' equity 78,138 431,700 (47,007) (384,693) 78,138
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 385,893 $ 603,240 $ 44,889 $(653,906) $ 380,116
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 13,199 $ -- $ -- $ 13,199
Accounts receivable, net -- 267,418 -- (267,341) 77
Inventories -- 110,620 -- -- 110,620
Net residual interest in receivables sold -- -- 61,755 -- 61,755
Prepayments and other current assets 435 6,246 -- -- 6,681
Current assets of discontinued operations -- 34,875 -- -- 34,875
--------- --------- --------- --------- ---------
Total current assets 435 432,358 61,755 (267,341) 227,207
Property, plant and equipment, net -- 131,038 -- -- 131,038
Other noncurrent assets 399,269 4,913 -- (398,071) 6,111
Noncurrent assest of discontinued operations -- 64,802 -- -- 64,802
--------- --------- --------- --------- ---------
Total assets $ 399,704 $ 633,111 $ 61,755 $(665,412) $ 429,158
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 161,658 $ 55,869 $ 105,683 $(267,341) $ 55,869
Accrued liabilities 5,859 21,157 (847) -- 26,169
Current liabilities of discontinued operations -- 6,337 -- -- 6,337
--------- --------- --------- --------- ---------
Total current liabilities 167,517 83,363 104,836 (267,341) 88,375
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 5,183 -- -- 5,183
Accrued pension benefits -- 25,353 -- -- 25,353
Accrued postretirement benefits -- 76,670 -- -- 76,670
Noncurrent liabilities of discontinued operations -- 1,390 -- -- 1,390
--------- --------- --------- --------- ---------
Total liabilities 292,517 191,959 104,836 (267,341) 321,971
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613
Accumulated deficit (277,942) (24,932) (48,081) 73,013 (277,942)
Accumulated other comprehensive income:
Minimum pension liability adjustment (21,391) (21,391) -- 21,391 (21,391)
Effects of cash flow hedges 747 747 -- (747) 747
--------- --------- --------- --------- ---------
Total stockholders' equity 107,187 441,152 (43,081) (398,071) 107,187
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 399,704 $ 633,111 $ 61,755 $(665,412) $ 429,158
========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 817,711 $ -- $ -- $ 817,711
Cost of goods sold -- 769,402 -- -- 769,402
--------- --------- --------- --------- ---------
Gross profit -- 48,309 -- -- 48,309
Selling, general and administrative expenses 287 33,712 318 -- 34,317
--------- --------- --------- --------- ---------
Operating income (loss) (287) 14,597 (318) -- 13,992
Other income (expense), net 14,302 1,771 -- (14,302) 1,771
Interest income (expense), net (13,873) 2,008 (3,641) -- (15,506)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes 142 18,376 (3,959) (14,302) 257
Income tax expense -- 114 1 -- 115
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 142 18,262 (3,960) (14,302) 142
Discontinued operations:
Income (loss) from operations before income taxes (29,007) (29,007) -- 29,007 (29,007)
Income tax expense (benefit) 69 69 -- (69) 69
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations (29,076) (29,076) -- 29,076 (29,076)
--------- --------- --------- --------- ---------
Net income (loss) $ (28,934) $ (10,814) $ (3,960) $ 14,774 $ (28,934)
========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 853,849 $ -- $ -- $ 853,849
Cost of goods sold -- 804,637 -- -- 804,637
--------- --------- --------- --------- ---------
Gross profit -- 49,212 -- -- 49,212
Selling, general and administrative expenses 269 34,148 11 -- 34,428
--------- --------- --------- --------- ---------
Operating income (loss) (269) 15,064 (11) -- 14,784
Other income (expense), net 14,652 1,636 -- (14,652) 1,636
Interest income (expense), net (13,833) 2,242 (4,263) -- (15,854)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative
effect of change in accounting principle 550 18,942 (4,274) (14,652) 566
Income tax expense (benefit) (2,373) 16 -- -- (2,357)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 2,923 18,926 (4,274) (14,652) 2,923
Discontinued operations:
Income (loss) from operations before income taxes 6,258 6,258 -- (6,258) 6,258
Income tax expense (benefit) 65 65 -- (65) 65
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations 6,193 6,193 -- (6,193) 6,193
--------- --------- --------- --------- ---------
Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327)
--------- --------- --------- --------- ---------
Net income (loss) $ (16,211) $ (208) $ (4,274) $ 4,482 $ (16,211)
========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 801,786 $ -- $ -- $ 801,786
Cost of goods sold -- 774,895 -- -- 774,895
--------- --------- --------- --------- ---------
Gross profit -- 26,891 -- -- 26,891
Selling, general and administrative expenses 290 40,887 10 -- 41,187
Amortization of goodwill -- 2,248 -- -- 2,248
Asset impairment charges -- 167,267 -- -- 167,267
--------- --------- --------- --------- ---------
Operating income (loss) (290) (183,511) (10) -- (183,811)
Other income (expense), net (185,911) 907 -- 185,911 907
Interest income (expense), net (13,439) 3,581 (6,777) -- (16,635)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes (199,640) (179,023) (6,787) 185,911 (199,539)
Income tax expense 34 89 12 -- 135
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (199,674) (179,112) (6,799) 185,911 (199,674)
Discontinued operations:
Income (loss) from operations before income taxes 6,187 6,187 -- (6,187) 6,187
Income tax expense (benefit) 65 65 -- (65) 65
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations 6,122 6,122 -- (6,122) 6,122
--------- --------- --------- --------- ---------
Net income (loss) $(193,552) $(172,990) $ (6,799) $ 179,789 $(193,552)
========= ========= ========= ========= =========
Combining Statement of Cash Flows for the year ended December 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(28,934) $(10,814) $ (3,960) $ 14,774 $(28,934)
Loss (income) from discontinued operations 29,076 29,076 -- (29,076) 29,076
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation -- 18,832 -- -- 18,832
Amortization -- 895 -- -- 895
Loss on disposal of property, plant and equipment -- 554 -- -- 554
Issuance of common stock in connection with stock awards 90 -- -- -- 90
Equity in undistributed net income of subsidiaries (14,302) -- -- 14,302 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (1,987) -- 1,757 (230)
(Increase) in inventories -- (5,530) -- -- (5,530)
Decrease in net residual interest in receivables sold -- -- 16,900 -- 16,900
(Increase) in prepayments and other current assets -- (7,142) -- -- (7,142)
Decrease (increase) in other noncurrent assets 436 (1,015) -- -- (579)
Increase (decrease) in accounts payable 15,174 (11,813) (13,297) (1,757) (11,693)
Increase (decrease) in accrued liabilities 64 (4,225) 357 -- (3,804)
(Decrease) in other liabilities -- (9,090) -- -- (9,090)
-------- -------- -------- -------- --------
Net cash provided by (used in) continuing operations 1,604 (2,259) -- -- (655)
Net cash provided by discontinued operations -- 4,068 -- -- 4,068
-------- -------- -------- -------- --------
Net cash provided by operating activities 1,604 1,809 -- -- 3,413
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (3) (16,113) -- -- (16,116)
Proceeds from sale of property, plant and equipment -- 158 -- -- 158
-------- -------- -------- -------- --------
Net cash (used in) investing activities (3) (15,955) -- -- (15,958)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 947 -- -- 947
Proceeds from long-term debt -- 108,970 -- -- 108,970
Repayments of long-term debt -- (108,970) -- -- (108,970)
Cash dividends paid (1,601) -- -- -- (1,601)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (1,601) 947 -- -- (654)
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (13,199) -- -- (13,199)
Cash and cash equivalents at beginning of period -- 13,199 -- -- 13,199
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the year ended December 31, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(16,211) $ (208) $ (4,274) $ 4,482 $(16,211)
Loss (income) from discontinued operations (6,193) (6,193) -- 6,193 (6,193)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 18,891 -- -- 18,891
Amortization -- 984 -- -- 984
Goodwill impairment charges 25,327 13,470 -- (25,327) 13,470
Loss on disposal of property, plant and equipment -- 325 -- -- 325
Issuance of common stock in connection with stock awards 170 -- -- -- 170
Equity in undistributed net income of subsidiaries (14,652) -- -- 14,652 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (15,773) -- 15,788 15
(Increase) in inventories -- (5,991) -- -- (5,991)
Decrease in net residual interest in receivables sold -- -- 516 -- 516
(Increase) in prepayments and other current assets -- (2,120) -- -- (2,120)
Decrease (increase) in other noncurrent assets 435 (4,037) -- -- (3,602)
Increase (decrease) in accounts payable 12,687 9,649 3,700 (15,788) 10,248
Increase (decrease) in accrued liabilities 75 (238) 58 -- (105)
(Decrease) in other liabilities -- (6,019) -- -- (6,019)
-------- -------- -------- -------- --------
Net cash provided by continuing operations 1,638 2,740 -- -- 4,378
Net cash provided by discontinued operations -- 20,119 -- -- 20,119
-------- -------- -------- -------- --------
Net cash provided by operating activities 1,638 22,859 -- -- 24,497
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (15,975) -- -- (15,975)
Proceeds from sale of property, plant and equipment -- 23 -- -- 23
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (15,952) -- -- (15,952)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 77,270 -- -- 77,270
Repayments of long-term debt -- (77,270) -- -- (77,270)
Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561
Cash dividends paid (3,199) -- -- -- (3,199)
-------- -------- -------- -------- --------
Net cash (used in) financing activities (1,638) -- -- -- (1,638)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents -- 6,907 -- -- 6,907
Cash and cash equivalents at beginning of period -- 6,292 -- -- 6,292
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 13,199 $ -- $ -- $ 13,199
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the year ended December 31, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(193,552) $(172,990) $ (6,799) $179,789 $(193,552)
Loss (income) from discontinued operations (6,122) (6,122) -- 6,122 (6,122)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operations:
Depreciation -- 27,853 -- -- 27,853
Amortization 7 3,529 -- -- 3,536
Asset impairment charges -- 167,267 -- -- 167,267
Loss on disposal of property, plant and equipment -- 264 -- -- 264
Issuance of common stock in connection with stock awards 106 -- -- -- 106
Equity in undistributed net income of subsidiaries 185,911 -- -- (185,911) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (28,934) -- 28,928 (6)
Decrease in inventories -- 12,273 -- -- 12,273
(Increase) in net residual interest in receivables sold -- -- (14,949) -- (14,949)
Decrease in prepayments and other current assets 362 7,980 -- -- 8,342
Decrease (increase) in other noncurrent assets 435 (757) -- -- (322)
Increase (decrease) in accounts payable 11,587 (8,215) 22,347 (28,928) (3,209)
Increase (decrease) in accrued liabilities 710 (1,913) (599) -- (1,802)
(Decrease) in other liabilities -- (16,977) -- -- (16,977)
-------- -------- -------- -------- --------
Net cash (used in) provided by continuing operations (556) (16,742) -- -- (17,298)
Net cash provided by discontinued operations -- 20,605 -- -- 20,605
-------- -------- -------- -------- --------
Net cash (used in) provided by operating activities (556) 3,863 -- -- 3,307
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (8,797) -- -- (8,797)
Proceeds from sale of property, plant and equipment -- 100 -- -- 100
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (8,697) -- -- (8,697)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 57,110 -- -- 57,110
Repayments of long-term debt -- (57,110) -- -- (57,110)
Repayments of notes receivable from sale of common stock 3,848 -- -- -- 3,848
Cash dividends paid (3,292) -- -- -- (3,292)
-------- -------- -------- -------- --------
Net cash provided by financing activities 556 -- -- -- 556
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (4,834) -- -- (4,834)
Cash and cash equivalents at beginning of period -- 11,126 -- -- 11,126
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 6,292 $ -- $ -- $ 6,292
======== ======== ======== ======== ========
21. Discontinued Electrical Products Segment Operations
On June 4, 2004, the Company entered into a stock purchase agreement to sell
its Alflex subsidiary, which comprised its Electrical Products Segment, to
Southwire Company. The sale was completed on July 30, 2004. The cash
consideration received by the Company was $64.0 million (subject to final
adjustment as set forth in the stock purchase agreement.) Summary operating
results for the discontinued operations for the years ended December 31 follows
(in thousands):
2003 2002 2001
---- ---- ----
Net sales $100,685 $112,389 $118,718
======== ======== ========
Income (loss) from discontinued operations before income taxes $(29,007) $6,258 $6,187
Income tax expense 69 65 65
-------- -------- --------
Income (loss) from discontinued operations, net $(29,076) $6,193 $6,122
======== ======== ========
Summarized balance sheet information for the discontinued operations at
December 31 is as follows (in thousands):
2003 2002
---- ----
Current assets $35,704 $34,875
Property, plant and equipment, net 14,425 15,930
Goodwill 19,265 48,872
Current liabilities (9,458) (6,337)
Accrued pension benefits (1,130) (1,390)
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders
Commonwealth Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income (loss),
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, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 our opinion.
As discussed in note 1 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board (FASB) Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. As discussed in note 3 to the consolidated financial
statements, the Company adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002. As discussed in note 7 to the
consolidated financial statements, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
FASB Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment to FASB Statement No. 133," effective
January 1, 2001.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
March 10, 2004 except for note 21,
as to which the date is
July 30, 2004.
Section 9 - Financial Statements and Exhibits.
Item 9.01 Financial Statements and Exhibits.
(c) Exhibits
23 Consent of PricewaterhouseCoopers LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH INDUSTRIES, INC.
By /s/ Michael D. Friday
---------------------------------------
Michael D. Friday
Executive Vice President and
Chief Financial Officer
Date: October 21, 2004
Exhibit Index
-------------
Exhibit
Number Description
- ------- -----------------------------------------------------
23 Consent of PricewaterhouseCoopers LLP.