Consolidated Financial Statements
Exhibit 99.3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Wolverine Tube, Inc.
We have audited the accompanying consolidated balance sheets of Wolverine
Tube, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, redeemable preferred stock and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wolverine Tube,
Inc. and Subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the financial statements, in 1999 the Company
changed its method of accounting for start-up activities. Also as discussed in
Note 3, in 2001 the Company changed its inventory costing method.
The accompanying consolidated financial statements have been prepared
assuming that Wolverine Tube, Inc. and subsidiaries will continue as a going
concern. As more fully described in Note 1, the Company has material debt
maturities coming due in 2002 and has not secured replacement financing or an
extension of those maturities. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans to
address these matters are described in Note 1. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
March 11, 2002
Birmingham, Alabama
F-1
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
-------- ---------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net sales................................................... $583,114 $621,464 $586,202
Cost of goods sold.......................................... 520,874 536,351 522,589
-------- -------- --------
Gross profit................................................ 62,240 85,113 63,613
Selling, general and administrative expenses................ 32,254 31,961 30,314
Restructuring and other charges............................. 1,546 -- 19,938
-------- -------- --------
Operating income from continuing operations................. 28,440 53,152 13,361
Other (income) expenses:
Interest expense, net..................................... 13,100 12,168 12,237
Amortization and other, net............................... (447) 417 1,705
-------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... 15,787 40,567 (581)
Income tax provision (benefit).............................. 4,345 14,660 (988)
-------- -------- --------
Income from continuing operations........................... 11,442 25,907 407
Income (loss) from discontinued operations, net of income
tax provision (benefit) of $(4.5) million, $0.5 million
and $0.7 million for 2001, 2000, 1999, respectively....... (7,375) 782 1,362
Loss on disposal of discontinued operations, net of income
tax benefit of $7.6 million............................... (23,865) -- --
-------- -------- --------
Income (loss) before effect of a change in accounting
principle................................................. (19,798) 26,689 1,769
Cumulative effect of accounting change, net of income tax
benefit of $2.2 million................................... -- -- (5,754)
-------- -------- --------
Net income (loss)........................................... (19,798) 26,689 (3,985)
Less preferred stock dividends.............................. (280) (280) (280)
-------- -------- --------
Net income (loss) applicable to common shares............... $(20,078) $ 26,409 $ (4,265)
======== ======== ========
Earnings per common share -- basic:
Income from continuing operations........................... $ 0.92 $ 2.11 $ 0.01
Income (loss) from discontinued operations.................. (2.58) 0.06 0.10
Cumulative effect of accounting change...................... -- -- (0.44)
-------- -------- --------
Net income (loss) per common share -- basic................. $ (1.66) $ 2.17 $ (0.33)
======== ======== ========
Basic weighted average number of common shares.............. 12,077 12,153 13,106
======== ======== ========
Earnings per common share -- diluted:
Income from continuing operations........................... $ 0.91 $ 2.08 $ 0.01
Income (loss) from discontinued operations.................. (2.54) 0.06 0.10
Cumulative effect of accounting change...................... -- -- (0.43)
-------- -------- --------
Net income (loss) per common share -- diluted............... $ (1.63) $ 2.14 $ (0.32)
======== ======== ========
Diluted weighted average number of common and common
equivalent shares......................................... 12,307 12,344 13,243
======== ======== ========
</Table>
See accompanying notes.
F-2
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
-------- ----------
(RESTATED)
(IN THOUSANDS EXCEPT
SHARE AND PER
SHARE AMOUNTS)
ASSETS
Current assets
Cash and equivalents........................................ $ 22,739 $ 23,458
Accounts receivable, net.................................. 67,164 105,025
Inventories............................................... 103,360 101,935
Refundable income taxes................................... 2,410 10,769
Prepaid expenses and other................................ 7,230 3,402
-------- --------
Total current assets........................................ 202,903 244,589
Property, plant and equipment, net.......................... 218,476 207,325
Deferred charges and intangible assets, net................. 102,995 111,723
Assets held for sale........................................ 9,072 13,547
Prepaid pensions............................................ 5,981 7,753
-------- --------
Total assets................................................ $539,427 $584,937
======== ========
LIABILITIES, MINORITY INTEREST, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 34,137 $ 51,904
Accrued liabilities....................................... 25,689 18,229
Short-term borrowings..................................... 99,590 10,057
-------- --------
Total current liabilities................................... 159,416 80,190
Deferred income taxes....................................... 9,225 21,190
Long-term debt.............................................. 149,792 231,163
Postretirement benefit obligation........................... 15,720 17,272
Accrued environmental remediation........................... 1,862 2,165
-------- --------
Total liabilities........................................... 336,015 351,980
Commitments and contingencies
Minority interest........................................... -- 2,508
Redeemable preferred stock, par value $1 per share; 500,000
shares authorized; 20,000 shares issued and outstanding... 2,000 2,000
Stockholders' equity
Common stock, par value $0.01 per share; 40,000,000 shares
authorized, 14,276,831 and 14,214,318 shares issued as
of December 31, 2001 and 2000, respectively............ 143 142
Additional paid-in capital................................ 103,759 103,589
Retained earnings......................................... 159,045 179,123
Unearned compensation..................................... (165) (613)
Accumulated other comprehensive loss...................... (21,898) (14,320)
Treasury stock, at cost (2,179,900 shares as of December
31, 2001 and 2000)..................................... (39,472) (39,472)
-------- --------
Total stockholders' equity.................................. 201,412 228,449
-------- --------
Total liabilities, minority interest, redeemable preferred
stock and stockholders' equity............................ $539,427 $584,937
======== ========
</Table>
See accompanying notes.
F-3
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
--------------- ------------------- PAID-IN RETAINED COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SATION
------ ------ ---------- ------ ---------- -------- --------
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
Balance at December 31, 1998,
as previously reported..... 20,000 $2,000 14,147,060 $141 $101,514 $164,118 $ --
Adjustment to reflect the
change in method of
accounting for inventories
(Note 3)................... -- -- -- -- -- (7,139) --
------ ------ ---------- ---- -------- -------- -----
Balance at December 31, 1998,
as adjusted................ 20,000 2,000 14,147,060 141 101,514 156,979 --
Comprehensive income:
Net loss................... -- -- -- -- -- (3,985) --
Translation adjustments.... -- -- -- -- -- -- --
Comprehensive income.......
Common stock issued.......... -- -- 49,229 1 283 -- --
Tax benefit from stock
options exercised.......... -- -- -- -- 308 -- --
Preferred stock dividends.... -- -- -- -- -- (280) --
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- -- -- 549 -- (309)
Purchase of treasury stock... -- -- -- -- -- -- --
------ ------ ---------- ---- -------- -------- -----
Balance at December 31,
1999....................... 20,000 2,000 14,196,289 142 102,654 152,714 (309)
Comprehensive income:
Net income................. -- -- -- -- -- 26,689 --
Translation adjustments.... -- -- -- -- -- -- --
Comprehensive income....... -- -- -- -- -- -- --
Common stock issued.......... -- -- 18,029 -- 58 -- --
Tax benefit from stock
options exercised.......... -- -- -- -- 3 -- --
Preferred stock dividends.... -- -- -- -- -- (280) --
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- -- -- 874 -- (304)
Purchase of treasury stock... -- -- -- -- -- -- --
------ ------ ---------- ---- -------- -------- -----
Balance at December 31,
2000....................... 20,000 2,000 14,214,318 142 103,589 179,123 (613)
Comprehensive loss:
Net loss................... -- -- -- -- -- (19,798) --
Translation adjustments.... -- -- -- -- -- -- --
Change in fair value of
derivatives, net of tax
benefit of $1,021........ -- -- -- -- -- -- --
Comprehensive loss......... -- -- -- -- -- -- --
Common stock issued.......... -- -- 62,513 1 70 -- --
Tax benefit from stock
options exercised.......... -- -- -- -- 78 -- --
Preferred stock dividends.... -- -- -- -- -- (280) --
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- -- -- 22 -- 448
------ ------ ---------- ---- -------- -------- -----
Balance at December 31,
2001....................... 20,000 $2,000 14,276,831 $143 $103,759 $159,045 $(165)
====== ====== ========== ==== ======== ======== =====
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL STOCK-
INCOME TREASURY HOLDERS'
(LOSS) STOCK EQUITY
------------- -------- -------------
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
Balance at December 31, 1998,
as previously reported..... $(15,494) $(16,628) $233,651
Adjustment to reflect the
change in method of
accounting for inventories
(Note 3)................... -- -- (7,139)
-------- -------- --------
Balance at December 31, 1998,
as adjusted................ (15,494) (16,628) 226,512
Comprehensive income:
Net loss................... -- -- (3,985)
Translation adjustments.... 4,806 -- 4,806
--------
Comprehensive income....... 821
--------
Common stock issued.......... -- -- 284
Tax benefit from stock
options exercised.......... -- -- 308
Preferred stock dividends.... -- -- (280)
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- 240
Purchase of treasury stock... -- (15,386) (15,386)
-------- -------- --------
Balance at December 31,
1999....................... (10,688) (32,014) 212,499
Comprehensive income:
Net income................. -- -- 26,689
Translation adjustments.... (3,632) -- (3,632)
--------
Comprehensive income....... -- -- 23,057
--------
Common stock issued.......... -- -- 58
Tax benefit from stock
options exercised.......... -- -- 3
Preferred stock dividends.... -- -- (280)
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- 570
Purchase of treasury stock... -- (7,458) (7,458)
-------- -------- --------
Balance at December 31,
2000....................... (14,320) (39,472) 228,449
Comprehensive loss:
Net loss................... -- -- (19,798)
Translation adjustments.... (5,681) -- (5,681)
Change in fair value of
derivatives, net of tax
benefit of $1,021........ (1,897) -- (1,897)
--------
Comprehensive loss......... -- -- (27,376)
--------
Common stock issued.......... -- -- 71
Tax benefit from stock
options exercised.......... -- -- 78
Preferred stock dividends.... -- -- (280)
Issuance of restricted stock
award and amortization of
unearned compensation...... -- -- 470
-------- -------- --------
Balance at December 31,
2001....................... $(21,898) $(39,472) $201,412
======== ======== ========
</Table>
See accompanying notes.
F-4
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
-------- ---------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
OPERATING ACTIVITIES
Income from continuing operations........................... $ 11,442 $ 25,907 $ 407
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation.............................................. 15,022 14,109 12,998
Amortization.............................................. 3,657 2,931 2,775
Deferred income taxes..................................... (1,635) 5,353 (8,536)
Non-cash portion of restructuring and other charges....... 1,531 -- 14,920
Other non-cash items...................................... 140 570 1,264
Changes in operating assets and liabilities:
Accounts receivable, net................................ 15,873 (6,072) (3,540)
Inventories............................................. (9,956) (11,453) 13,459
Refundable income taxes................................. 8,530 (1,415) (6,797)
Prepaid expenses and other.............................. (368) 1,155 1,343
Accounts payable........................................ (16,291) 15,750 (12,540)
Accrued liabilities, including pension, postretirement
benefit and environmental.............................. (1,298) (193) 227
-------- -------- --------
Net cash provided by operating activities................... 26,647 46,642 15,980
INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (27,612) (31,676) (23,092)
Acquisition of business assets.............................. -- (43,948) --
Other....................................................... (1,601) 16 (452)
-------- -------- --------
Net cash used for investing activities...................... (29,213) (75,608) (23,544)
FINANCING ACTIVITIES
Net decrease in note payable................................ (320) -- --
Net borrowing (repayment) from revolving credit
facilities................................................ 16,724 48,671 (33,507)
Principal payments on long-term debt........................ -- (338) (335)
Issuance of common stock.................................... 130 58 284
Purchase of treasury stock.................................. -- (7,458) (15,386)
Dividends paid on preferred stock........................... (280) (280) (280)
-------- -------- --------
Net cash provided by (used for) financing activities........ 16,254 40,653 (49,224)
Effect of exchange rate on cash and equivalents............. (1,139) (709) 1,061
-------- -------- --------
Net cash provided by (used for) continuing operations....... 12,549 10,978 (55,727)
Net cash provided by (used for) discontinued operations..... (13,268) (14,414) 3,722
-------- -------- --------
Net decrease in cash and equivalents........................ (719) (3,436) (52,005)
Cash and equivalents at beginning of year................... 23,458 26,894 78,899
-------- -------- --------
Cash and equivalents at end of year......................... $ 22,739 $ 23,458 $ 26,894
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Interest paid............................................... $ 15,500 $ 15,163 $ 16,119
Income taxes paid (refund).................................. $ (2,331) $ 10,767 $ 14,484
</Table>
See accompanying notes.
F-5
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The accompanying consolidated financial statements include the accounts of
Wolverine Tube, Inc. (the "Company") and its majority-owned subsidiaries after
elimination of significant intercompany accounts and transactions. References to
the "Company", "we" or "us" refer to Wolverine Tube, Inc. and its consolidated
subsidiaries, unless the context otherwise requires.
We are engaged in the manufacturing and distribution of copper and copper
alloy tubular products, fabricated and metal joining products, as well as rod
and bar products. Our focus is developing and manufacturing high value added
products used in engineered applications that require tubular products having
superior heat transfer capability. Our major customers are primarily located in
North America and include commercial and residential air conditioning and
refrigeration equipment manufacturers, appliance manufacturers, automotive
manufacturers, industrial equipment manufacturers, utilities and other power
generating companies, refining and chemical processing companies and plumbing
wholesalers.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Basis of Presentation
We have prepared our financial statements assuming that Wolverine Tube,
Inc. will continue as a going concern. As discussed in Note 8, our existing
revolving credit facility is set to mature on April 30, 2002 and the outstanding
balance due thereunder must be repaid. We have not secured adequate replacement
financing or an extension of our existing revolving credit facility.
The report of Ernst & Young LLP, our independent auditors, on our
consolidated financial statements for the year ended December 31, 2001 includes
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern because we have material debt service obligations
due in April 2002 and we have not secured replacement financing or an extension
of our facility. Our financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.
We are currently in the process of obtaining financing to replace our
existing revolving credit facility, which matures April 30, 2002. With this
financing in place and with anticipated cash flow from our continuing
operations, we believe that we will be able to satisfy our existing working
capital needs, interest obligations, and capital expenditure requirements. There
can be no assurance, however, that we will successfully complete the financial
transactions we are pursuing. If we are unable to complete the financial
transactions we are pursuing of if we are unable to meet our debt service
obligations or fund our other liquidity needs, we could attempt to restructure
or refinance our indebtedness or seek additional equity capital or we may be
required to sell assets. Upon completion of the anticipated financing, we
believe the conditions that gave rise to Ernst & Young's substantial doubt about
our ability to continue as a going concern will no longer exist.
F-6
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition Policy
We record sales when products are shipped to customers. Title passes to the
customer upon shipment. Sales are made under normal terms and generally do not
require collateral.
Start-Up Costs
Prior to adoption on January 1, 1999 of Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-Up Activities, as issued by the American
Institute of Certified Public Accountants, we capitalized pre-operating costs
associated with the start-up of new operations to the extent that such costs i)
could be separately identified and segregated from ordinary period costs; ii)
provided a quantifiable benefit to a future period; and, iii) were directly
attributable to the quantifiable benefit within a relatively short period of
time after the costs were incurred. Pre-operating costs were comprised of
certain expenditures such as payroll, travel and other costs incurred during the
pre-operating period. The pre-operating period was defined as the period prior
to the commencement of production of products manufactured for sale to
customers. These capitalized costs were generally amortized on a straight-line
basis over a five-year period. Upon adoption of SOP 98-5, we recognize start-up
costs as expense when incurred.
In accordance with the Statement, we recognized a charge for the cumulative
effect of a change in accounting principle of $8.0 million pre-tax ($5.8 million
after-tax) in 1999.
Cash and Equivalents
We consider all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Inventories
During the year ended December 31, 2001, we changed our method of
accounting for a portion of our raw materials, work-in-process and finished
products inventories from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method (see Note 3). These inventories are carried at the lower
of FIFO cost or market. We determine market value based upon assumptions about
future demand and market conditions. The remaining inventories, which primarily
include supplies, are valued using the average cost method. We write down our
inventories for estimated obsolescence and unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the following periods:
<Table>
Furniture and fixtures...................................... 2-9 years
Software.................................................... 3-5 years
Tooling..................................................... 3-10 years
Building and improvements................................... 3-39 years
Machinery and equipment..................................... 5-25 years
</Table>
Impairment of Long-Lived Assets
We recognize impairment losses on long-lived assets under the provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-lived Assets to Be Disposed Of. When facts and
F-7
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
circumstances indicate that long-lived assets used in operations may be impaired
and the undiscounted cash flows estimated to be generated from those assets are
less than their carrying values, we record an impairment loss equal to the
excess of the carrying value over fair value. Long-lived assets held for
disposal are valued at the lower of the carrying amount or fair value less cost
to sell. Beginning in 2002, we will adopt new rules for recognizing impairment
(see "Recent Accounting Pronouncements").
Income Taxes
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of our assets and liabilities.
Property, plant and equipment, inventories, prepaid pension, postretirement
benefit obligations, and certain other accrued liabilities are the primary
sources of these temporary differences. Deferred income tax also includes
operating loss and tax credit carryforwards.
Deferred Charges and Intangible Assets
Debt issuance costs are deferred and amortized over the terms of the debt
to which they relate using the interest method. Intangible assets consist of
patents and goodwill. Patents are amortized on the straight-line method over
their estimated lives. Excess cost over the fair value of net assets acquired
(or enterprise level goodwill) generally has been amortized on a straight-line
basis over 40 years. Beginning in 2002, goodwill will no longer be amortized
(see "Recent Accounting Pronouncements"). The carrying value of enterprise level
goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. Negative operating results, negative cash flows from operations, among
other factors, could be indicative of the impairment of enterprise level
goodwill. We assess the recoverability of enterprise level goodwill by
determining whether the unamortized goodwill balance can be recovered through
undiscounted future cash flows from operations. The amount of enterprise level
goodwill impairment, if any, is measured based on projected discounted future
cash flows using a discount rate reflecting our average cost of funds. To date,
we have made no adjustments to the carrying value of our enterprise level
goodwill, except for $7.4 million of goodwill attributable to discontinued
operations (see Note 2).
Earnings Per Common Share
Basic income from continuing operations and basic net income per share is
based on the weighted average number of common shares outstanding and income
reduced by preferred dividends. Diluted income from continuing operations and
diluted net income per share is based on the weighted average number of common
shares outstanding plus the effect of dilutive stock options and income reduced
by preferred dividends.
Derivatives and Hedging Activities
We utilize derivative financial instruments to manage risk exposure to
movements in commodity and foreign exchange rates. We do not hold or issue
derivative financial instruments for trading or speculative purposes. In June
1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities, which was amended in June 2000 by SFAS Nos. 137 and 138.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments and hedging activities. Initially, upon adoption of the
new derivative accounting requirements, and prospectively, on the date we enter
into a derivative contract, we designate derivatives as either a hedge of a
recognized asset or liability or an unrecognized firm commitment (fair value
hedge) or a hedge of a forecasted transaction (cash flow hedge). For fair value
hedges, both the effective and ineffective portion of the changes in the fair
value of the derivative, along with the gain or loss on the hedged item that is
attributable to the hedged risk, are recorded in earnings. The effective portion
of changes in fair value of a derivative that is designated as a cash flow hedge
is recorded in accumulated other comprehensive income or loss. When the hedged
item is
F-8
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realized, the gain or loss included in accumulated other comprehensive income or
loss is relieved. Any ineffective portion of the changes in the fair values of
derivatives used as cash flow hedges are reported in the consolidated statements
of operations. We document hedge relationships, including identification of the
hedging instruments and the hedged item, as well as our risk management
objectives and strategies for undertaking the hedge transactions at the
inception of each hedge transaction. Derivatives are recorded in the
consolidated balance sheet at fair value. We formally assess, at inception and
at least quarterly thereafter, whether the derivatives that are used in hedging
transactions are highly effective in offsetting change in either the fair values
or cash flows of the hedged item.
Fair Values of Financial Instruments
The following methods are used by us in estimating fair value disclosures for
financial instruments:
Cash and equivalents, accounts receivable and accounts payable: The
carrying amount reported in the consolidated balance sheets for these assets
approximates their fair value.
Revolving credit facility, long-term debt and redeemable cumulative
preferred stock: The carrying amount of our borrowings under our revolving
credit facilities approximates fair value. The fair value of our 7 3/8% Senior
Notes and any derivative financial instruments are based upon quoted market
prices. The fair value of our redeemable cumulative preferred stock is based
upon its dividend rate and call provisions.
Derivatives: The fair value of our foreign currency and commodity
derivative instruments are determined by reference to quoted market prices.
The following table summarizes fair value information for our financial
instruments:
<Table>
<Caption>
2001 2001 2000 2000
ASSETS (LIABILITIES) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- -------------------- -------------- ---------- -------------- ----------
(IN THOUSANDS)
Revolving credit facilities......... $ (97,906) $ (97,906) $ (81,403) $ (81,403)
Senior notes........................ (149,792) (127,500) (149,760) (130,398)
Other debt.......................... (1,684) (1,684) (10,057) (10,057)
Redeemable cumulative preferred
stock............................. (2,000) (2,019) (2,000) (2,091)
Foreign currency exchange
contracts......................... (9) (9) -- (17)
Commodity futures contracts......... (2,918) (2,918) -- (689)
</Table>
Environmental Expenditures
Environmental expenditures that pertain to our current operations and
relate to future revenues are expensed or capitalized consistent with our
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations, which do not contribute to future
revenues, are expensed. Liabilities, which are undiscounted, are recognized for
remedial activities when the cleanup is probable and the cost can be reasonably
estimated.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does
not require companies to record compensation costs for stock-based employee
compensation plans at fair value. We have chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. We grant stock options for a fixed
number of shares to employees and directors with an exercise price equal to the
fair value of the shares at the date of grant. Accordingly, we recognize no
compensation expense for stock option grants.
F-9
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Translation to U.S. Dollars
Our assets and liabilities denominated in foreign currency are translated
to U.S. dollars at rates of exchange at the balance sheet date. Income statement
items are translated at average exchange rates during the period. Translation
adjustments arising from changes in exchange rates are included in the
accumulated other comprehensive income or loss component of stockholders'
equity. Realized exchange gains and losses are included in "Amortization and
other, net" in the consolidated statements of operations. Net exchange (gains)
losses totaled ($0.5) million in 2001, ($0.1) million in 2000 and $1.0 million
in 1999.
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. The amounts charged to expense were $3.7 million in 2001,
$3.7 million in 2000 and $3.0 million in 1999.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses financial accounting and reporting for acquired
goodwill and intangible assets. SFAS No. 142 eliminates amortization of goodwill
and requires an impairment-only model for recording the value of goodwill. SFAS
No. 142 requires that impairment be tested at least annually at the reporting
unit level, using a two-step impairment test. The first step determines if
goodwill is impaired by comparing the fair value of the reporting unit as a
whole to the book value. If a deficiency exists, the second step measures the
amount of the impairment loss as the difference between the implied fair value
of goodwill and its carrying amount. Purchased intangibles with indefinite
economic lives will be tested for impairment annually using a lower of cost or
market approach. Other intangible assets will still be amortized over their
useful lives and reviewed for impairment when the facts and circumstances
suggest that they may be impaired.
We have not completed our transitional impairment test under SFAS No. 142;
thus, we do not know the amount, if any, of impairment that will be recorded
upon adoption. However, any impairment charge resulting from the transitional
impairment test would be recognized as a cumulative effect of a change in
accounting principle. We have $103.0 million of net deferred charges and
intangible assets at December 31, 2001, of which $99.8 million is goodwill.
Adoption of SFAS No. 142 is expected to increase income from continuing
operations by approximately $2.1 million net of tax in 2002 due to the
elimination of amortization of goodwill.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets that supersedes SFAS No. 121 and provides a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of SFAS
No. 121, the new rules significantly change the criteria that would have to be
met to classify an asset as held-for-sale. The new rules also supersede the
provision of Accounting Principle Board (APB) Opinion No. 30 with regard to
reporting the effects of a disposal of a segment of a business and require
expected future operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are incurred
(rather than as of the measurement date as presently required by APB No. 30). In
addition, more dispositions will qualify for discontinued operation treatment in
the income statement. We plan to adopt SFAS No. 144 in the first quarter 2002.
We do not anticipate the provisions of this statement to have a significant
impact on our financial condition and results of operations.
F-10
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. DISCONTINUED OPERATIONS
On December 6, 2001, the Executive Committee of the Board of Directors
authorized management to discontinue the operations of Wolverine Ratcliffs, Inc.
("WRI"), which is a 74.5% owned strip business that was jointly formed in 1999
with Ratcliffs-Severn, Ltd. WRI, which was previously included in the rod, bar,
strip and other reportable segment, produces both heavy-gauge and light-gauge
copper and copper alloy strip used primarily by automotive, hardware and
electrical equipment manufacturers. WRI has been negatively impacted by
fundamental changes in the marketplace including aggressive foreign competition
for heavy-gauge strip and increasing preference by customers for extremely
light-gauge strip which WRI is unable to produce efficiently without further
capital investment. Our decision to discontinue the WRI operations was
attributable to these changes in market conditions that made it unlikely for us
to produce an acceptable return on investment that would enhance shareholder
value. Immediately after the Executive Committee's authorization, we formalized
our plan of disposal. We have engaged a financial advisor to pursue
opportunities to dispose of the strip business and would expect to be completely
out of the strip business by the second quarter of 2002.
Accordingly, as required by Accounting Principles Board Opinion, ("APB")
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, the operating results of WRI for 2001 and all prior
periods presented herein have been restated and reported in discontinued
operations in the consolidated financial statements. In addition, we recorded a
$31.5 million ($23.9 million after tax) estimated loss on the disposal of the
WRI operations, which included a $2.5 million ($1.6 million after tax) provision
for estimated losses during the expected phase-out period. The expected loss on
disposal of the WRI operations and the expected operating losses during the
phase-out period are based on our best estimates of the most likely outcome,
considering, among other things, our knowledge of valuations of strip production
assets. However, the actual amounts ultimately realized on disposal and losses
incurred during the expected phase-out period could differ materially from the
amounts assumed in arriving at the loss on disposal. To the extent actual
results differ from our estimate, the difference will be reported in
discontinued operations in future periods.
Operating results of the discontinued WRI operations were as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Net sales............................................... $48,886 $79,875 $60,202
Net income (loss)....................................... (7,375) 782 1,362
</Table>
Assets and liabilities of the discontinued WRI operations have been
reflected in the consolidated balance sheets as current or non-current based on
the original classification of these accounts, net of any necessary valuation
allowances, except that property, plant and equipment of the WRI operations to
be disposed has been included in "assets held for sale" net of a necessary
valuation allowance. An accrual for the estimated losses to be incurred during
the expected phase-out period of $2.5 million (pre-tax) is presented in "accrued
liabilities" in the consolidated balance sheets.
There are no material contingent liabilities related to discontinued
operations, such as product or environmental liabilities or litigation, that are
expected to remain with us after the disposal of the WRI operations.
F-11
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories are as follows at December 31:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Finished products........................................... $ 22,565 $ 22,708
Work-in-process............................................. 20,850 24,328
Raw materials and supplies.................................. 59,945 54,899
-------- --------
Totals...................................................... $103,360 $101,935
======== ========
</Table>
During the year ended December 31, 2001, we changed our method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method for portions of our finished products,
work-in-process and raw materials inventories. We believe the change is
preferable because copper prices have steadily declined since the mid 1990s and
the FIFO method will result in a better matching of the costs of inventories
with revenues. We believe that the FIFO method also provides a more meaningful
presentation of financial position because it reflects more recent costs in our
balance sheet. Moreover, the change also conforms all of our raw materials,
work-in-process and finished goods inventories to a single costing method.
We applied this change in method of inventory costing retroactively by
restating the prior years' financial statements. The effect of the change in
method on previously reported operating results for the quarters ended April 1,
July 1 and September 30, 2001 was to increase (decrease) net income by ($0.2)
million ($0.02 loss per diluted share); ($4.0) million ($0.33 loss per diluted
share); and $1.3 million ($0.11 per diluted share), respectively. The effect on
the balance sheet as of December 31, 1998 was to decrease inventory and retained
earnings by $11.3 million and $7.1 million, respectively. The impact on the
consolidated statements of operations for the years ended December 31, 2000 and
2001 was to increase (decrease) net income by $3.2 million ($0.26 per diluted
share); and ($0.7) million ($0.05 loss per diluted share), respectively. The
impact on the consolidated statements of operations for the year ended December
31, 1999 was not material.
4. DERIVATIVES
We adopted Statement of Financial Accounting Standard (SFAS) No. 133
(subsequently amended by SFAS Nos. 137 and 138), Accounting for Derivative
Instruments and Hedging Activities, on January 1, 2001. The adoption of SFAS No.
133 resulted in an insignificant impact on reported earnings and accumulated
other comprehensive loss. At December 31, 2001, we reported an unrealized loss
of $2.9 million ($1.9 million, net of tax), in accumulated other comprehensive
loss for our outstanding commodity hedge contracts.
We have entered into commodity forward contracts through December 31, 2003
to hedge against the risk of copper price increases with respect to firm price
sales commitments. The notional amount of these forward contracts, which were
designated as fair value hedging instruments, was $17.3 million at December 31,
2001. For the twelve months ended December 31, 2001, an insignificant impact to
cost of goods sold was recorded for the ineffective portion of these derivative
instruments.
Also, we have entered into commodity forward contracts through December 31,
2003 to reduce our risk of future copper price increases on anticipated sales.
The notional amount of these forward contracts, which were designated as cash
flow hedging instruments, was $28.8 million at December 31, 2001. At December
31, 2001, we recorded the fair value of these forward contracts of $2.7 million
($1.7 million, net of tax) in accrued liabilities and in accumulated other
comprehensive loss. We expect that $2.5 million
F-12
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($1.6 million, net of tax) of the unrealized loss on our outstanding forward
contracts will be reclassified to earnings during the next twelve months when
the anticipated transactions occur.
At December 31, 2001, we had commodity futures to purchase natural gas for
the period of February 2002 through October 2002 with a notional value of $1.4
million. These futures contracts were designated as cash flow hedging
instruments and there was no ineffective portion of the change in fair value of
these futures contracts for the period ended December 31, 2001. At December 31,
2001, we recorded the fair value of these instruments of $0.2 million ($0.2
million, net of tax) in accrued liabilities and accumulated other comprehensive
loss.
At December 31, 2001, we had forward exchange contracts outstanding to
purchase foreign currency with a notional value of $1.4 million and to sell
foreign currency with a notional value of $1.0 million. These forward contracts
and the underlying hedged receivables and payables are carried at their fair
values with any associated gains and losses recognized in current period
earnings. The impact on reported earnings of recording the fair value of these
hedging instruments and the underlying hedged receivables and payables for the
period ended December 31, 2001 was not significant.
5. ASSETS HELD FOR SALE
Assets held for sale at December 31, 2001 and 2000, include the net assets
of the unoccupied Greenville, Mississippi and Roxboro, North Carolina
facilities, which have been written down to fair value less cost to sell ($5.4
million) based on their appraised value. Assets held for sale also include $3.7
million and $8.1 million in 2001 and 2000, respectively, for net property, plant
and equipment of WRI, which we discontinued in 2001.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows at December 31:
<Table>
<Caption>
2001 2000
--------- ---------
(IN THOUSANDS)
Land and improvements....................................... $ 11,537 $ 11,558
Building and improvements................................... 48,820 48,105
Machinery and equipment..................................... 268,587 224,614
Construction-in-progress.................................... 6,430 26,995
--------- ---------
335,374 311,272
Less accumulated depreciation............................... (116,898) (103,947)
--------- ---------
Totals...................................................... $ 218,476 $ 207,325
========= =========
</Table>
F-13
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEFERRED CHARGES AND INTANGIBLE ASSETS
Deferred charges and intangible assets are as follows at December 31:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Deferred debt issuance costs................................ $ 2,130 $ 2,650
Goodwill.................................................... 118,455 123,557
Patents and other........................................... 3,685 4,213
-------- --------
124,270 130,420
Less accumulated amortization............................... (21,275) (18,697)
-------- --------
Totals...................................................... $102,995 $111,723
======== ========
</Table>
In September 2000, we acquired the metal joining products business of
Engelhard Corporation. The metal joining products business is located in
Warwick, Rhode Island, and is a leading manufacturer of brazing alloys and
fluxes, as well as a supplier of lead-free solder. The transaction was
structured as an all-cash acquisition for approximately $41.8 million, which we
financed through our credit facility. The transaction was accounted for using
the purchase method of accounting, resulting in $24.0 million of goodwill, that
is being amortized on a straight-line basis over its estimated useful life of 40
years. The accounts and results of operations of the metal joining products
business have been combined with ours since the date of the acquisition. If this
acquisition had been consummated at the beginning of 2000, the effect on our
consolidated results of operations would not have been significant.
8. FINANCING ARRANGEMENTS AND DEBT
Long-term debt consists of the following at December 31:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Revolving Credit Facility, interest tied to banks' base rate
or alternative rates, averaged 5.5% in 2001, due April
2002...................................................... $ 97,906 $ 81,403
Senior Notes, 7 3/8%, due August 2008....................... 150,000 150,000
Discount on Senior Notes, original issue discount amortized
over 10 years............................................. (208) (240)
Netherlands facility, 5.11%, due on demand.................. 1,671 --
Other foreign facilities.................................... 13 10,057
-------- --------
249,382 241,220
Less short-term borrowings.................................. (99,590) (10,057)
-------- --------
Totals...................................................... $149,792 $231,163
======== ========
</Table>
Aggregate maturities of long-term debt are as follows:
<Table>
<Caption>
(IN THOUSANDS)
2002........................................................ $ 99,590
2007 through 2008........................................... 149,792
--------
Totals...................................................... $249,382
========
</Table>
As of December 31, 2001, we had a Revolving Credit Facility ("the
Facility"), set to mature on April 30, 2002. The Facility originally provided
for a $200.0 million line of credit and a floating base
F-14
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate that at our election was LIBOR plus a specified margin of 0.25% to
1.00%. On August 8, 2001, we and our lenders executed the Fifth Amendment and
Limited Waiver to Credit Amendment regarding certain debt covenants and certain
financial covenants of the Facility. The terms of this agreement included a
provision for the last six months of 2001 that increased the floating base
interest rate to LIBOR plus 0.75% to 2.00%. On February 4, 2002, we and our
lenders executed a Limited Waiver, the Sixth Amendment to Credit Agreement and a
Security Agreement. Under the terms of the Limited Waiver, the lenders waived
compliance with the financial covenants contained in the Facility from December
31, 2001 through April 16, 2002 and we agreed to limit borrowings under the
Facility to an aggregate amount of $130.0 million, grant a security interest in
all our U.S. accounts receivable and inventory to secure all new borrowings
under the Facility after the date of the execution of the Limited Waiver, adjust
the floating base interest rate on the Facility to LIBOR plus 3.00% and limit
certain of our non-operating activities. The Sixth Amendment to Credit Agreement
and the Security Agreement document the agreed upon terms in the Limited Waiver.
As of December 31, 2001, we had approximately $103.0 million in outstanding
borrowings and off-balance sheet obligations under the Facility and
approximately $27.0 million in additional borrowing availability under the terms
of the Limited Waiver executed on February 4, 2002. The weighted average
interest rate under the Facility was 5.5% for 2001 versus 7.0% for 2000.
We are currently in the process of obtaining financing to replace our
existing revolving credit facility, which matures April 30, 2002. With this
financing in place and with anticipated cash flow from our continuing
operations, we believe that we will be able to satisfy our existing working
capital needs, interest obligations, and capital expenditure requirements. There
can be no assurance, however, that we will successfully complete the financial
transactions we are pursuing. If we are unable to complete the financial
transactions we are pursuing or if we are unable to meet our debt service
obligations or fund our other liquidity needs, we could attempt to restructure
or refinance our indebtedness or seek additional equity capital or we may be
required to sell assets. Upon completion of the anticipated financing, we
believe the conditions that gave rise to Ernst & Young's substantial doubt about
our ability to continue as a going concern will no longer exist.
In August 1998, we issued $150.0 million in principal amount of 7 3/8%
Senior Notes due August 1, 2008. The 7 3/8% Senior Notes were issued pursuant to
an Indenture, dated as of August 4, 1998, between us and First Union National
Bank, as Trustee. The 7 3/8% Senior Notes (i) have interest payment dates of
February 1 and August 1 of each year (ii) are redeemable at our option at a
redemption price equal to the greater of (a) 100% of the principal amount of the
Senior Notes to be redeemed, or (b) the sum of the present value of the
remaining scheduled payments of principal and interest thereon from the
redemption date to the maturity date, discounted to the redemption date on a
semiannual basis at a rate based upon the yield of the specified treasury
securities plus 25 basis points, plus, in each case, accrued interest thereon to
the date of redemption; (iii) are senior unsecured obligations and are pari
passu in right of payment with any of our existing and future senior unsecured
indebtedness, including borrowings under the Facility; (iv) are guaranteed by
certain of our subsidiaries; and (v) are subject to the terms of the Indenture,
which contain certain covenants that limit our ability to incur indebtedness
secured by certain liens and to engage in sale/leaseback transactions.
We have a credit facility with a Netherlands bank, payable on demand and
providing for available credit up to 1.8 million euros (approximately U.S. $1.6
million). At December 31, 2001, we had outstanding borrowings of $1.7 million
under this facility.
During 2001, we repaid substantially all of our obligations under other
foreign credit facilities.
F-15
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our financing agreements contain covenants that include requirements to
maintain certain financial ratios and other restrictions and limitations,
including the restrictions on our payment of dividends, limitations on the
issuance of additional debt, limitations on investments and contingent
obligations, the redemption of capital stock and the sale or transfer of assets.
Interest expense is net of interest income and capitalized interest of $0.6
million and $1.1 million in 2001, $1.2 million and $1.3 million in 2000 and $2.9
million and $0.3 million in 1999. Interest expense is also net of interest
allocated to the discontinued operations of WRI of $1.3 million in 2001, $0.5
million in 2000 and $0.2 million in 1999.
9. RETIREMENT AND PENSION PLANS
U.S. PLANS
We have established trusteed, noncontributory defined benefit pension plans
covering the majority of all our U.S. employees fulfilling minimum age and
service requirements. Benefits are based upon years of service and a prescribed
formula based upon the employee's compensation. We contribute annual amounts
that fall within the range determined to be deductible for federal income tax
purposes.
Certain assumptions utilized in accounting for the U.S. defined benefit
plans for the years ended December 31 are as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----------
Discount rate............................................... 7.25% 7.75% 7.75%
Rate of increase in compensation............................ 4.0 4.0 4.0 - 4.25
Expected return on plan assets.............................. 9.5 9.5 9.5
</Table>
A summary of the components of net periodic pension cost for the U.S.
defined benefit plans for the years ended December 31 is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Service cost......................................... $ 3,859 $ 3,324 $ 4,143
Interest cost........................................ 9,045 8,494 7,953
Expected return on plan assets....................... (12,613) (12,817) (11,708)
Amortization of prior service cost................... 134 134 134
Amortization of net actuarial gain................... -- (602) --
Effect of special termination benefits............... -- -- 68
-------- -------- --------
Net periodic pension cost (benefit).................. $ 425 $ (1,467) $ 590
======== ======== ========
</Table>
The following table sets forth a reconciliation of the benefit obligation
for the years ended December 31:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Benefit obligation at the beginning of the year............. $118,177 $111,562
Service costs............................................... 3,859 3,324
Interest costs.............................................. 9,045 8,494
Actuarial loss.............................................. 9,628 869
Benefits paid............................................... (6,322) (6,072)
-------- --------
Benefit obligation at the end of the year................... $134,387 $118,177
======== ========
</Table>
F-16
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the change in our assumed discount rate for the year ended
December 31, 2001 contributed $8.2 million of the $9.6 million actuarial loss.
The following table sets forth a reconciliation of the plan assets for the
years ended December 31:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Fair value of plan assets at the beginning of the year...... $135,700 $137,746
Actual return on plan assets................................ (1,652) 4,026
Benefits paid............................................... (6,322) (6,072)
-------- --------
Fair value of plan assets at the end of the year............ $127,726 $135,700
======== ========
</Table>
The following table sets forth the funded status of the plan and the
amounts recognized in our consolidated balance sheets at December 31:
<Table>
<Caption>
2001 2000
------- --------
(IN THOUSANDS)
(Unfunded) funded status.................................... $(6,661) $ 17,523
Unrecognized net actuarial loss (gain)...................... 11,675 (12,218)
Unrecognized pension service costs.......................... 1,228 1,361
------- --------
Prepaid pensions............................................ $ 6,242 $ 6,666
======= ========
</Table>
We have 401(k) plans covering substantially all of our U.S. employees. We
provide at our discretion a match of employee salaries contributed to the plans.
We recorded expense with respect to these plans of $1.3 million in 2001, $2.0
million in 2000 and $1.9 million in 1999.
The Wolverine Tube, Inc. Supplemental Executive Retirement Plan (the
"Retirement Plan") is a non-funded defined benefit pension plan that provides
benefits to certain of our eligible executives. The benefits provided under the
Retirement Plan are identical to the benefits provided by the defined benefit
pension plan. In addition, we provide a Supplemental Retirement Plan ("SERP")
for the current CEO, which also is non-funded. The benefits provided under this
SERP are based upon years of service and compensation. Benefits become fully
vested upon completion of six years of service from the date of employment or a
change of control for the Company or dismissal without cause. We incurred
expense with respect to all supplemental plans of $0.3 million in 2001, $0.3
million in 2000 and $0.2 million in 1999. At December 31, 2001, the balance of
accrued pension costs related to these plans was $1.4 million.
Canadian Plans
We sponsor a defined contribution profit-sharing retirement plan for our
London, Ontario facility employees who are required to contribute 4% of regular
wages, subject to a maximum contribution limit specified by Canadian income tax
regulations. Employer contributions were $0.5 million in 2001, $0.6 million in
2000 and $0.7 million in 1999.
We have established noncontributory defined benefit pension plans covering
substantially all our employees at the Montreal, Quebec and Fergus, Ontario
facilities. We contribute the actuarially determined amounts annually into the
plans. Benefits for the hourly employees at the Montreal, Quebec and Fergus,
Ontario facilities are based on years of service and a negotiated rate. Benefits
for salaried employees are based on years of service and the employee's highest
annual average compensation over five consecutive years.
F-17
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain assumptions utilized in accounting for the Salaried Employees,
Canadian Operational Employees and Quebec Operational Employees pension plans
for the years ended December 31 are as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Discount rate............................................... 7.0% 7.5% 7.5%
Expected long-term rate of return on plan assets............ 8.5 8.5 8.5
</Table>
The expected rate of increase in compensation used in accounting for the
Salaried Employees' pension plan was 3.0% for the years ended December 31, 2001,
2000 and 1999, and is not applicable in accounting for the Canadian Operational
Employees and Quebec Operational Employees pension plans for the same periods.
A summary of the components of net periodic pension cost for the Salaried
Employees, Canadian Operational Employees and Quebec Operational Employees
pension plans for the years ended December 31 are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Service cost............................................ $ 498 $ 522 $ 525
Interest cost........................................... 1,240 1,317 1,212
Expected return on plan assets.......................... (1,793) (1,748) (1,638)
Amortization of prior service cost...................... 73 77 41
Amortization of net actuarial gain...................... (118) (62) (32)
------- ------- -------
Net periodic pension cost (benefit)..................... $ (100) $ 106 $ 108
======= ======= =======
</Table>
The following table sets forth a reconciliation of the benefit obligation
for the years ended December 31:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Benefit obligation at the beginning of the year............. $17,007 $18,001
Service costs............................................... 497 522
Interest costs.............................................. 1,240 1,317
Actuarial (gain) loss....................................... 1,736 (1,175)
Benefits paid............................................... (921) (978)
Foreign currency exchange rate changes...................... (1,094) (680)
------- -------
Benefit obligation at the end of the year................... $18,465 $17,007
======= =======
</Table>
The following table sets forth a reconciliation of the plans assets for the
years ended December 31:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Fair value of plan assets at the beginning of the year...... $22,123 $21,673
Actual return on plan assets................................ (850) 2,015
Company contribution........................................ 179 249
Benefits paid............................................... (921) (978)
Foreign currency exchange rate changes...................... (1,272) (836)
------- -------
Fair value of plan assets at the end of the year............ $19,259 $22,123
======= =======
</Table>
F-18
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of the plans and the
amounts recognized in our consolidated balance sheets at December 31:
<Table>
<Caption>
2001 2000
------ -------
(IN THOUSANDS)
Funded status............................................... $ 794 $ 5,116
Unrecognized net actuarial loss (gain)...................... 548 (4,053)
Unrecognized pension service costs.......................... 1,035 1,177
------ -------
Prepaid pension obligation.................................. $2,377 $ 2,240
====== =======
</Table>
10. POSTRETIREMENT BENEFIT OBLIGATION
We sponsor a defined benefit health care plan and life insurance plan that
provides postretirement medical benefits and life insurance to substantially all
our full-time employees who have worked ten years after age 50 to 52, and widows
of employees who die while employed after age 55 and have at least five years of
service. This plan is contributory, with retiree contributions being adjusted
annually.
Net periodic postretirement benefit cost for the years ended December 31
includes the following components:
<Table>
<Caption>
2001 2000 1999
------ ----- -----
(IN THOUSANDS)
Service cost................................................ $ 431 $ 384 $ 331
Interest cost............................................... 685 687 443
Amortization of prior service cost.......................... 126 85 --
Amortization of deferred gain............................... (411) (284) (640)
Effect of special termination benefits...................... 199 55 717
------ ----- -----
Net periodic postretirement benefit cost.................... $1,030 $ 927 $ 851
====== ===== =====
</Table>
The change in benefit obligation for the years ended December 31 includes
the following components:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Benefit obligation at the beginning of the year............. $14,486 $13,191
Service cost................................................ 431 384
Interest cost............................................... 685 687
Participants' contributions................................. 227 49
Amendments.................................................. 37 --
Actuarial loss.............................................. 1,670 441
Acquisition................................................. -- 336
Benefits paid............................................... (2,703) (657)
Special termination benefits................................ 199 55
------- -------
Benefit obligation at the end of the year................... $15,032 $14,486
======= =======
</Table>
F-19
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the status of the plan and the amounts
recognized in our consolidated balance sheets at December 31:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Benefit obligation at end of year........................... $15,032 $14,486
Unrecognized net actuarial gain............................. 1,371 3,559
Unrecognized prior service cost............................. (683) (773)
------- -------
Net postretirement benefit obligation....................... $15,720 $17,272
======= =======
</Table>
The weighted average discount rate used in determining the postretirement
benefit obligation was 7.25% at December 31, 2001 and 7.75% at December 31,
2000.
For purposes of determining the cost and obligation for postretirement
medical benefits, a 5% annual rate of increase in the per capita cost of covered
benefits (i.e. health care trend rate) was assumed, and is expected to remain at
that level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans. A one percentage point
change in the assumed health care cost trend rate would have had the following
effects:
<Table>
<Caption>
1% INCREASE 1% DECREASE
----------- -----------
(IN THOUSANDS)
Effect on total of service and interest cost components..... $ 11 $ (10)
Effect on postretirement benefit obligation................. $162 $(144)
==== =====
</Table>
11. ENVIRONMENTAL REMEDIATION
We are subject to extensive U.S. and Canadian federal, state, provincial
and local environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment. We have
received various communications from regulatory authorities concerning certain
environmental matters and are a potentially responsible party at one waste
disposal site.
We have accrued estimated environmental remediation costs of $1.9 million
at December 31, 2001, consisting of $0.8 million for the Decatur facility, $0.1
million for the Greenville facility, $0.6 million for the Ardmore facility and
$0.4 million for the Shawnee facility (with respect to the Double Eagle Refinery
site). Based on information currently available, we believe that the costs of
these matters are not reasonably likely to have a material effect on our
business, financial condition or results of operations. However, actual costs
related to environmental matters could differ materially from the amounts we
estimated and accrued at December 31, 2001 and could amount to an aggregate
exposure of $3.2 million if these environmental matters are not resolved as
anticipated.
12. INCOME TAXES
The components of income from continuing operations before income taxes for
the years ended December 31 are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- --------
(IN THOUSANDS)
U.S. .................................................. $ (170) $17,103 $(15,689)
Foreign................................................ 15,957 23,464 15,108
------- ------- --------
Total.................................................. $15,787 $40,567 $ (581)
======= ======= ========
</Table>
F-20
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes on income before the cumulative effect of
accounting change for the years ended December 31 consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Continuing operations
Current (benefit) expense:
U.S. Federal......................................... $ 2,675 $ 1,696 $ 191
Foreign.............................................. 4,387 7,354 5,262
State................................................ (732) 95 (493)
-------- ------- -------
Total current.......................................... 6,330 9,145 4,960
-------- ------- -------
Deferred (benefit) expense:
U.S. ................................................ (1,741) 5,745 (5,246)
Foreign.............................................. (244) (230) (702)
-------- ------- -------
Total deferred....................................... (1,985) 5,515 (5,948)
-------- ------- -------
Income tax expense (benefit) -- continuing
operations........................................... 4,345 14,660 (988)
Income tax expense (benefit) -- discontinued
operations........................................... (12,100) 506 699
-------- ------- -------
Total income tax expense (benefit)..................... $ (7,755) $15,166 $ (289)
======== ======= =======
</Table>
Deferred income taxes included in our balance sheets reflect the net tax
effects of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the carrying amount for income
tax return purposes. Significant components of our deferred tax assets and
liabilities are as follows:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Basis of property, plant and equipment.................... $30,012 $27,368
Inventory valuation....................................... -- 353
Prepaid pension........................................... 2,746 2,930
Other..................................................... 833 257
------- -------
Total deferred tax liabilities.............................. 33,591 30,908
------- -------
Deferred tax assets:
Environmental remediation................................. 704 826
Net operating loss carryforward........................... 15,127 --
Restructuring reserves.................................... 1,935 --
Inventory valuations...................................... 270 --
Pension obligation........................................ 6,269 421
Postretirement benefits obligation........................ -- 6,363
Other..................................................... 2,992 2,919
------- -------
Total deferred tax assets................................... 27,297 10,529
------- -------
Net deferred tax liability.................................. $ 6,294 $20,379
======= =======
</Table>
F-21
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of differences between the statutory U.S. federal income tax
rate and our effective tax rate follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -----
(IN THOUSANDS)
Income tax expense at federal statutory rate.............. $ 5,525 $14,198 $(203)
Increase (decrease) in taxes resulting from:
State and local taxes, net of federal benefit........... 185 369 (731)
Effect of difference in U.S. and foreign rates.......... (1,363) (894) (525)
Permanent differences................................... 12 523 643
Other................................................... (14) 464 (172)
------- ------- -----
Income tax expense (benefit) -- continuing operations..... $ 4,345 $14,660 $(988)
======= ======= =====
</Table>
At December 31, 2001, we have federal, state and foreign net operating loss
carryforwards of $1.5 million, $1.3 million and $12.3 million, respectively.
These net operating loss carryforwards expire at various times beginning in 2016
through 2022.
13. REDEEMABLE PREFERRED STOCK
We have 500,000 shares authorized for issuance of $1 par value cumulative
preferred stock. Of these shares, there are 20,000 shares of cumulative
preferred stock issued and outstanding as of December 31, 2001 that we were
required to redeem by March 1, 2002. The cumulative preferred stock provides for
annual dividends at the rate of $14 per share. The dividends accrue quarterly
whether declared or not, and compound quarterly at 14% per annum to the extent
unpaid. At December 31, 2001 and December 31, 2000, all dividends had been paid.
The cumulative preferred stock is entitled to a preference, in liquidation,
in the amount of $100 per share, plus any accrued and unpaid dividends and any
related interest.
14. COMMON STOCK
All holders of Common Stock are entitled to receive dividends when and if
declared by our Board of Directors (the "Board"), provided that all dividend
requirements of the cumulative preferred stock have been paid. Additionally, the
payment of dividends on our Common Stock is restricted under the terms of our
various financing agreements. To date, no dividends have been paid to the
holders of the Common Stock and there are no immediate plans to institute a
dividend.
The Board has adopted a Stockholder Rights Plan designed to protect the
Company and its stockholders from coercive, unfair or inadequate takeover bids.
Pursuant to the Stockholder Rights Plan, a dividend of one Preferred Share
Purchase Right (a "Right") was declared for each share of Common Stock
outstanding at the close of business on February 23, 1996. The Rights are
generally not exercisable until ten days after a person or group acquires, or
commences a tender offer that could result in the party acquiring, 15% of the
outstanding shares of Common Stock. Each Right, should it become exercisable,
will enable the owner to buy one one-thousandth of a share of newly created
Series A Junior Participating Preferred Stock at an exercise price of $175, and,
in certain circumstances, to purchase shares of Common Stock at a substantially
reduced price. The Board is generally entitled to redeem the Rights at $0.01 per
Right at any time prior to the date they become exercisable. The Rights will
expire on February 23, 2006.
Beginning in September 1998, the Board of Directors authorized management
to purchase shares of our outstanding common stock in the open market under
common stock repurchase programs. These common stock repurchase programs
conclude March 31, 2002. Under the common stock repurchase
F-22
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
programs, we purchased 537,600 shares, 858,100 shares and 784,200 shares of our
common stock for $7.5 million, $15.4 million and $16.6 million for the years
ended December 31, 2000, 1999 and 1998, respectively. We did not purchase any
shares of our common stock in the year ended December 31, 2001.
15. STOCK-BASED COMPENSATION PLANS
We have elected to follow APB 25, Accounting for Stock Options Issued to
Employees and related interpretations in accounting for our employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123 ("Statement 123"), Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, no compensation expense
is recognized because the exercise price of our employee stock options equals
the market price of the underlying stock on the date of the grant.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if we had accounted for
our employee stock options under the fair value method of that statement. The
weighted average fair value of options granted during 2001 estimated on the date
of grant using the Black-Scholes pricing model was $6.97. The fair value for
these options was estimated at the date of grant using the following weighted
average assumptions for 2001, 2000 and 1999, respectively: risk free interest
rates of 4.41%, 6.12% and 5.78%, volatility factors of the expected market price
of our common stock of 0.352, 0.339 and 0.337; and a weighted average expected
life of the option of seven years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying Statement 123 for pro forma disclosure may not be representative of the
effects on reported pro forma net income in future years. Our pro forma
information for the years ended December 31 follows:
<Table>
<Caption>
2001 2000 1999
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) applicable to common shares:
As reported........................................ $(20,078) $26,409 $(4,265)
Pro forma.......................................... (21,604) 24,472 (6,386)
Diluted earnings (loss) per share:
As reported........................................ $ (1.63) $ 2.14 $ (0.32)
Pro forma.......................................... (1.72) 1.97 (0.48)
</Table>
The 1993 Equity Incentive Plan (the "1993 Equity Plan") provides for the
issuance of stock options, restricted shares, stock appreciation rights, phantom
shares and other additional awards to key executives and employees. The maximum
number of additional shares issuable under the 1993 Equity Plan is 2,075,000 at
a price as determined by our Compensation Committee. All options granted to date
have been issued at the market value at the date of the grant. Options granted
prior to 1999 under the 1993 Equity Plan vest 20% on each anniversary thereafter
and terminate on the tenth anniversary of the date of grant. Options granted in
1999 and subsequent years under the 1993 Equity Plan vest 33 1/3% on each
F-23
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anniversary thereafter and terminate on the tenth anniversary of the date of
grant. Options granted under prior plans remain outstanding but are governed by
the provisions of the 1993 Equity Plan.
The 1993 Stock Option Plan for Outside Directors (the "1993 Directors'
Plan") provides for the issuance of stock options to outside directors at the
fair market value on the date of grant. A maximum of 185,000 shares are issuable
under the 1993 Directors' Plan. The initial options granted at the time the
Director joins the Board vest at 33 1/3% per year but must be held one year
before being exercised. All subsequent options granted vest immediately. All
options terminate on the tenth anniversary of the date of grant. The 1993
Directors' Plan terminates in 2003.
On March 22, 2001, the Board of Directors adopted the 2001 Stock Option
Plan for Outside Directors (the "2001 Directors' Plan") providing for the
issuance of options for the purchase of up to 250,000 shares of our common
stock. The 2001 Directors' Plan will allow us to continue to compensate and
reward our directors upon the completion or termination of the 1993 Directors'
Plan. The terms of the 2001 Directors' Plan are substantially the same as the
terms of the 1993 Directors' Plan. No options have been granted under the 2001
Directors' Plan.
In the third quarter of 2001, we made available to our U.S. and Canadian
stock option holders under the 1993 Equity Plan and the 1993 Directors' Plan,
the right to exchange options whose exercise price was $20.00 per share or
greater, for new options to purchase one share for every two shares exchanged.
The new options will be granted on or about April 11, 2002, which is six months
and six business days after the date the options were exchanged. New options
granted under the 1993 Equity Plan will have an exercise price determined by the
market price of our stock on the date the new options are granted. New options
granted under the 1993 Directors' Plan will have an exercise price determined by
the average market price of our stock on the date we grant the new options and
the four preceding trading days. A stock option holder must continue to be
employed by us or provide service to us through April 11, 2002 in order to be
eligible to receive the new options to be granted. As a result of this exchange
of options shares, 836,860 shares with an average option price of $30.48 were
canceled, 38,000 of which were under the 1993 Directors' Plan.
Our stock option plans are summarized as follows:
<Table>
<Caption>
1993 1993 EQUITY WEIGHTED-AVERAGE
DIRECTORS' PLAN INCENTIVE PLAN OPTION PRICE EXERCISE PRICE
--------------- -------------- --------------- ----------------
(NUMBER OF SHARES)
Outstanding at December 31,
1998.......................... 46,000 845,087 $ 4.44 - $40.25 $29.84
Granted......................... 7,000 394,950 $14.01 - $25.25 $22.01
Exercised....................... -- (49,229) $ 4.44 - $20.88 $ 5.81
Forfeited....................... -- (114,450) $20.00 - $39.38 $30.46
------- --------- --------------- ------
Outstanding at December 31,
1999.......................... 53,000 1,076,358 $ 4.44 - $40.25 $28.04
Granted......................... 50,200 343,950 $11.95 - $17.01 $13.90
Exercised....................... -- (4,680) $ 4.44 - $ 7.39 $ 6.24
Forfeited....................... -- (108,386) $12.31 - $38.44 $26.79
------- --------- --------------- ------
Outstanding at December 31,
2000.......................... 103,200 1,307,242 $ 4.44 - $40.25 $24.25
Granted......................... 51,465 394,650 $11.84 - $16.57 $11.93
Exercised....................... -- (24,261) $ 4.44 - $13.69 $ 5.42
Forfeited or canceled........... (38,000) (841,957) $ 7.39 - $40.25 $30.20
------- --------- --------------- ------
Outstanding at December 31,
2001.......................... 116,665 835,674 $ 5.28 - $37.68 $13.46
======= ========= =============== ======
Exercisable at:
December 31, 1999............. 43,000 388,273 $ 4.44 - $40.25 $26.42
December 31, 2000............. 99,866 574,600 $ 4.44 - $40.25 $26.12
December 31, 2001............. 116,665 223,961 $ 5.28 - $37.68 $14.78
</Table>
F-24
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The number of options outstanding, weighted average exercise price,
weighted average remaining contractual life, vested options and the weighted
average exercise price of vested options outstanding at December 31, 2001, which
were issued prior to August 1993, were 59,508, $6.74, 0.9 years, 59,508 and
$6.74, respectively. The number of options outstanding, weighted average
exercise price, weighted average remaining contractual life, vested options and
the weighted average exercise price of vested options outstanding at December
31, 2001, which were issued after August 1993, were 892,831, $13.91, 8.1 years,
281,118 and $16.49, respectively. The weighted average remaining life for all
options outstanding at December 31, 2001 is 7.7 years.
The range of exercise prices of the outstanding options and exercisable
options at December 31, 2001 are as follows:
<Table>
<Caption>
WEIGHTED AVERAGE NUMBER OF NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE EXERCISABLE SHARES OUTSTANDING SHARES REMAINING LIFE
- ---------------- ------------------ ------------------ ----------------
$ 4.44 - $14.99 260,715 843,789 8.0
$15.00 - $24.99 51,261 79,900 6.6
$25.00 - $40.25 28,650 28,650 1.2
------- -------
Totals 340,626 952,339 7.7
======= =======
</Table>
In 2001, we awarded 3,297 shares of restricted stock under the 1993 Equity
Plan, with a fair value at the date of grant of $13.13 per share. These
restricted shares vest 50% annually at the anniversary date of the grant. We
recorded compensation expense with respect to restricted stock awards of
approximately $0.5 million in 2001 which is recognized on a straight-line basis
over the two year vesting period of the restricted stock grants. In addition,
selected senior executives as designated by the CEO and approved by the
Compensation Committee are eligible for restricted stock awards under the
Long-Term Incentive Plan ("LTIP") based on our return on total capital measured
over a three-year period. Performance objectives under the LTIP are based upon
an incremental scale depending on achieving the specified target return rate. No
compensation expense was recorded in 2001 with respect to these awards.
16. COMMITMENTS
Minimum future rental commitments under operating leases having
non-cancelable lease terms in excess of one year totaled approximately $9.5
million as of December 31, 2001 and are payable as follows: $2.2 million in
2002, $1.9 million in 2003, $1.4 million in 2004, $1.3 million in 2005, $0.7
million in 2006 and $2.0 million thereafter. Rental expense for operating leases
was $2.9 million in 2001, $3.3 million in 2000 and $2.9 million in 1999.
At December 31, 2001, we had commitments of $2.1 million for capital
expenditures.
17. INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
Our reportable segments are based on our three product lines: commercial
products, wholesale products and rod, bar and other products. Commercial
products consist primarily of high value-added products sold directly to
original equipment manufacturers. Wholesale products are commodity-type plumbing
tube products, which are sold to a variety of customers. Rod, bar and other
products also are sold to a variety of customers.
The accounting policies for each of the reportable segments are the same as
those described in Note 1. We evaluate the performance of our operating segments
based on sales and gross profit; however, we do not allocate asset amounts and
items of income and expense below gross profit or depreciation and amortization.
F-25
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning our reportable segments is
shown in the following table:
<Table>
<Caption>
ROD, BAR
COMMERCIAL WHOLESALE & OTHER CONSOLIDATED
---------- --------- -------- ------------
(IN THOUSANDS)
Year ended December 31, 2001
Sales................................... $444,209 $ 97,570 $41,335 $583,114
Gross profit............................ 50,140 9,326 2,774 62,240
Year ended December 31, 2000:
Sales................................... $487,416 $ 96,993 $37,055 $621,464
Gross profit............................ 69,987 12,639 2,487 85,113
Year ended December 31, 1999:
Sales................................... $436,737 $118,810 $30,655 $586,202
Gross profit............................ 50,443 12,247 923 63,613
</Table>
Our manufacturing operations are primarily conducted in the U.S. and
Canada. In 2001, 2000 and 1999, no customer accounted for as much as 10% of our
net sales.
Sales by customer location and long-lived assets by geographic location of
our facilities is as follows:
<Table>
<Caption>
OTHER FOREIGN
U.S. CANADA OPERATIONS CONSOLIDATED
-------- ------- ------------- ------------
(IN THOUSANDS)
Year ended December 31, 2001:
Sales................................. $434,000 $81,000 $68,000 $583,000
Long-lived assets..................... 294,413 31,820 10,291 336,524
Year ended December 31, 2000:
Sales................................. $478,000 $92,000 $51,000 $621,000
Long-lived assets..................... 294,267 43,649 2,432 340,348
Year ended December 31, 1999:
Sales................................. $455,000 $91,000 $40,000 $586,000
Long-lived assets..................... 247,677 39,506 2,028 289,211
</Table>
F-26
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. RESTRUCTURING AND OTHER CHARGES
1999 Charges
During the third quarter of 1999, we recognized restructuring and other
charges of $19.9 million ($12.5 million net of tax). The restructuring and other
charges include the following components:
<Table>
Impairment of assets due to closing the Roxboro, North
Carolina facility......................................... $ 8.6
Other expenses related to closing the Roxboro, North
Carolina facility......................................... 1.4
Impairment of assets due to relocating equipment from
Roxboro, North Carolina and changes in production......... 3.6
Impairment of assets related to a previously-closed
facility.................................................. 1.8
Other expenses related to a previously-closed facility...... 0.1
Non-manufacturing workforce reduction
program -- approximately 100 employees.................... 2.8
Expenses related to the termination of an interest rate
swap...................................................... 0.8
Expenses related to professional fees and other costs
primarily associated with acquisitions that were not
completed................................................. 0.8
-----
$19.9
=====
</Table>
The primary contributing factors leading to our decision to close our
Roxboro, North Carolina facility were the less-than-anticipated growth in
technical tube, the facility's inability to meet its return on capital
objectives and our plans to potentially expand production in Asian, European and
Latin American markets. The $8.6 million impairment of assets at Roxboro
included the net book value of $4.7 million of machinery and equipment, $1.3
million of cost for parts related to the machinery and equipment and $2.6
million related to the decline in market value of the land and buildings and the
estimated closing costs required to sell the land and buildings. We have
relocated all other Roxboro machinery and equipment and inventory to our other
facilities. As a result of relocating the Roxboro machinery and equipment to our
other facilities and thereby displacing existing equipment and necessitating
changes in production, we recorded a $3.6 million impairment of assets, $2.3
million of which was the net book value of machinery and equipment no longer
employed and $1.3 million of cost for parts related to this machinery and
equipment.
Additionally, we recorded a $1.8 million impairment of assets primarily
related to the closing of our Greenville, Mississippi facility in 1998, $0.8
million of which was the net book value of land and buildings and $1.0 million
of which was the net book value of machinery and equipment.
Our Roxboro, North Carolina and Greenville, Mississippi facilities are not
being utilized for production and are currently held for sale.
To date, we have paid approximately $4.9 million in cash relating to the
restructuring. We believe accrued restructuring costs of $0.1 million at
December 31, 2001 represent our remaining obligations.
Additionally, we recorded in the third quarter of 1999 $5.4 million (as
restated) of unusual charges in cost of goods sold in the consolidated statement
of operations. These charges included $3.7 million related to obsolete
inventory, $0.8 million net book value of idled and obsolete machinery and
equipment and $0.9 million of other charges related to the realignment of our
manufacturing operations
2001 Charges
During the third quarter of 2001, we recognized restructuring and other
charges of $1.5 million ($1.0 million net of tax). We accrued and charged to
expense $1.1 million for severance benefits for approximately 40 salaried and
hourly employees. We offered a voluntary separation program to employees
F-27
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at several of our facilities due to lack of demand for these facilities
products, the criteria for which was dependent on the employee's age, job duties
and years of service. We separated these employees in order to reduce costs for
anticipated continued weakness in sales volumes and mix and anticipated
reductions of capacity utilization. We also accrued and charged to expense a
$0.2 million write-off of impaired assets and $0.2 million related to a
previously closed facility. As of December 31, 2001, we had separated 40
employees and believe accrued restructuring costs of $0.3 million at December
31, 2001 represent our remaining cash obligations.
19. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share for
the years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Income from continuing operations...................... $ 11,442 $25,907 $ 407
Income (loss) from discontinued operations, net of
tax.................................................. (31,240) 782 1,362
Cumulative effect of accounting change, net of tax..... -- -- (5,754)
-------- ------- -------
Net income (loss)...................................... (19,798) 26,689 (3,985)
Dividends on preferred stock........................... (280) (280) (280)
-------- ------- -------
Net income (loss) available to common shares........... $(20,078) $26,409 $(4,265)
======== ======= =======
Basic weighted average common shares................... 12,077 12,153 13,106
Stock options.......................................... 230 191 137
-------- ------- -------
Diluted weighted average common and common equivalent
shares(1)............................................ 12,307 12,344 13,243
======== ======= =======
Earnings per common share -- basic:
Income from continuing operations.................... $ 0.92 $ 2.11 $ 0.01
Income (loss) from discontinued operations........... (2.58) 0.06 0.10
Cumulative effect of accounting change............... -- -- (0.44)
-------- ------- -------
Net income (loss) per common share -- basic............ $ (1.66) $ 2.17 $ (0.33)
======== ======= =======
Earnings per common share -- diluted:
Income from continuing operations.................... $ 0.91 $ 2.08 $ 0.01
Income (loss) from discontinued operations........... (2.54) 0.06 0.10
Cumulative effect of accounting change............... -- -- (0.43)
-------- ------- -------
Net income (loss) per common share -- diluted.......... $ (1.63) $ 2.14 $ (0.32)
======== ======= =======
</Table>
- ---------------
(1) For the year ended December 31, 2001, 2000 and 1999, there were 0.4 million,
1.0 million and 1.1 million anti-dilutive stock options that were excluded
from the calculation of diluted weighted average common and common
equivalent shares.
F-28
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2001 and 2000. All data shown has been restated
to reflect Wolverine Ratcliffs, Inc. as discontinued operations (as described in
Note 3).
<Table>
<Caption>
2001 APRIL 1(1) JULY 1(1) SEPTEMBER 30(1) DECEMBER 31
- ---- ---------- --------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................. $172,437 $161,517 $136,103 $113,057
Gross profit.......................... 21,766 15,792 14,912 9,770
Restructuring and other charges....... -- -- 1,546 --
Income (loss) from continuing
operations.......................... 6,975 3,082 2,137 (752)
Loss from discontinued operations, net
of tax.............................. (848) (3,643) (938) (1,946)
Loss on disposal of discontinued
operations, net of tax.............. -- -- -- (23,865)
Net income (loss)..................... 6,127 (561) 1,199 (26,563)
Basic earnings per common share:
Income (loss) from continuing
operations....................... $ 0.57 $ 0.25 $ 0.17 $ (0.07)
Loss from discontinued operations... (0.07) (0.30) (0.08) (2.13)
-------- -------- -------- --------
Net income (loss)................... $ 0.50 $ (0.05) $ 0.09 $ (2.20)
======== ======== ======== ========
Diluted earnings per common share:
Income (loss) from continuing
operations....................... $ 0.56 $ 0.24 $ 0.17 $ (0.07)
Loss from discontinued operations... (0.07) (0.29) (0.08) (2.13)
-------- -------- -------- --------
Net income (loss)................... $ 0.49 $ (0.05) $ 0.09 $ (2.20)
======== ======== ======== ========
</Table>
<Table>
<Caption>
2000 APRIL 2(1) JULY 2(1) OCTOBER 1(1) DECEMBER 31(1)
- ---- ---------- --------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.............................. $158,843 $160,361 $151,076 $151,184
Gross profit........................... 23,544 22,320 22,978 16,271
Income from continuing operations...... 7,535 6,952 7,846 3,574
Income (loss) from discontinued
operations........................... 401 817 (417) (19)
Net income............................. 7,936 7,769 7,429 3,555
Basic earnings per common share:
Income from continuing operations.... $ 0.60 $ 0.57 $ 0.65 $ 0.29
Income (loss) from discontinued
operations........................ 0.03 0.07 (0.04) --
-------- -------- -------- --------
Net income........................... $ 0.63 $ 0.64 $ 0.61 $ 0.29
======== ======== ======== ========
</Table>
F-29
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2000 APRIL 2(1) JULY 2(1) OCTOBER 1(1) DECEMBER 31(1)
- ---- ---------- --------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diluted earnings per common share:
Income from continuing operations.... $ 0.60 $ 0.56 $ 0.63 $ 0.29
Income (loss) from discontinued
operations........................ 0.03 0.06 (0.03) --
-------- -------- -------- --------
Net income........................... $ 0.63 $ 0.62 $ 0.60 $ 0.29
======== ======== ======== ========
</Table>
- ---------------
(1) Net income for the quarters ended April 1, July 1, and September 30, and for
each of the interim periods in fiscal 2000 has been restated from the
amounts previously reported in our Form 10-Q. The restated amounts reflect
the change in method of accounting for inventories in the fourth quarter of
fiscal 2001, as described in Note 3. The effect of the restatement was to
increase (decrease) gross profit, net income and diluted earnings per common
share as follows:
<Table>
<Caption>
QUARTER ENDED: GROSS PROFIT NET INCOME EPS
- -------------- ------------ ---------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
April 1, 2001................................. $ (292) $ (184) $(0.02)
July 1, 2001.................................. (6,402) (4,034) (0.33)
September 30, 2001............................ 2,092 1,318 0.11
April 2, 2000................................. 1,729 1,089 0.09
July 2, 2000.................................. (379) (239) (0.02)
October 1, 2000............................... 3,863 2,434 0.20
December 31, 2000............................. (111) (70) (0.01)
</Table>
F-30
[WOLVERINE TUBE INC. LOGO]