-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfVkoCAW+WgFfd29qGModdf+locu+JxZETEBbALXgzVLjKEFmc783Ul/DbTakTQI Wym1X73Y98NRt+I5tYGYVQ== 0000083604-99-000046.txt : 19991021 0000083604-99-000046.hdr.sgml : 19991021 ACCESSION NUMBER: 0000083604-99-000046 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS METALS CO CENTRAL INDEX KEY: 0000083604 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 540355135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-01430 FILM NUMBER: 99730916 BUSINESS ADDRESS: STREET 1: 6601 W BROAD ST STREET 2: PO BOX 27003 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8042812000 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 to FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 001-01430 REYNOLDS METALS COMPANY A Delaware Corporation (IRS Employer Identification No. 54-0355135) 6601 West Broad Street, P. O. Box 27003, Richmond, Virginia 23261-7003 Telephone: (804) 281-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------- ----------------------- Common Stock, no par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ As of March 22, 1999: (a) the aggregate market value of the voting stock known by the Registrant to be held by nonaffiliates of the Registrant was approximately $2.4 billion*. (b) the Registrant had 64,457,809 shares of Common Stock outstanding and entitled to vote. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 1999 - Part III * For this purpose, "nonaffiliates" are deemed to be persons other than directors, officers and persons owning beneficially more than five percent of the voting stock as reported to the Securities and Exchange Commission. 1 PART I Item 1. BUSINESS Reynolds Metals Company (the "Registrant") was incorporated in 1928 under the laws of the State of Delaware. In this report, "Reynolds" and "Company" and personal pronouns, such as "we," "our" and "us," mean the Registrant and its consolidated subsidiaries unless otherwise indicated. GENERAL Nature of Operations - -------------------- Reynolds is the world's third-largest aluminum producer and the world's leading producer of aluminum foil. We serve customers in growing world markets including the aluminum fabricating, packaging and consumer, commercial construction, distribution, and automotive markets, with a wide variety of aluminum, plastic and other products. At December 31, 1998, Reynolds employed approximately 20,000 people. We have operations or interests in operations at more than 100 locations in 24 countries. Our world headquarters is in Richmond, Virginia. Reynolds' operations are organized into four market-based, global business units: Base Materials; Packaging and Consumer; Construction and Distribution; and Transportation. For a description of these units, see the discussion below under the heading "Global Business Units." For information about certain operations that are not considered part of a global business unit, see the discussion below under the heading "Other Operations." Portfolio Review - ---------------- In late 1996, we began a portfolio review of our operations and businesses. Below is a summary of the portfolio review transactions that we have completed since the beginning of 1998, as well as those that are currently pending: In February 1998, we sold our Canadian aluminum extrusion plants, located in Richmond Hill, Ontario and Ste. Therese, Quebec, to the William L. Bonnell subsidiary of Tredegar Industries, Inc. The plants manufacture products used primarily in the construction, transportation, electrical, machinery and equipment, consumer durables and climbing equipment markets. In March 1998, we sold our U.S. recycling operations to Wise Recycling, LLC, an affiliate of Wise Metals Co., Inc. In a related transaction, TOMRA Pacific, Inc., an affiliate of TOMRA Systems, ASA, acquired the western region of our U.S. recycling operations. In May 1998, we sold our European rolling mill businesses to VAW aluminium AG. Included in the sale were the aluminum rolling operations of Reynolds Aluminium Deutschland, Inc. in Hamburg, Germany (known as RADI); Reynolds Italy Slim, S.p.A. in Cisterna di Latina, Italy (known as SLIM); and Industria Navarra del Aluminio, S. A. in Irurzun, Spain (known as INASA). In June 1998, we sold our McCook, Illinois sheet and plate plant to McCook Metals L.L.C. The plant produces aluminum products for the aircraft and aerospace, transportation and distribution markets. In August 1998, we sold our North American beverage can business to Ball Corporation. In December 1998, we signed a definitive agreement to sell our Alloys can stock complex located in Alabama to Wise Alloys LLC, an affiliate of Wise Metals Co., Inc. Included in the complex are the Alloys rolling mill, two reclamation plants, and a coil coating facility. Wise Alloys took title to the inventory and spare parts associated with the Alloys complex in December 1998, and until the final closing, we are operating the facility on behalf of Wise Alloys for a management fee. The final closing is expected to occur by the end of the first quarter of 1999 and is subject to customary closing conditions. 1 2 In December 1998, we signed a definitive agreement to sell our aluminum extrusion plant in Irurzun, Spain, as well as our distribution operations for architectural systems located in Spain, to an affiliate of Alcoa Inc. The transaction is subject to customary closing conditions and is expected to close by the end of the first quarter of 1999. Financial Information Regarding Global Business Units and Operations by Geographic Location - --------------------------------------------------------- Financial information for operations and assets attributable to our global business units and information regarding our operations by geographic location are included in Note 11 to the consolidated financial statements in Item 8 of this report. GLOBAL BUSINESS UNITS Base Materials - -------------- Our base materials global business unit produces metallurgical alumina, alumina chemicals and primary aluminum. It also produces carbon products, principally for use in primary aluminum reduction plants. Aluminum is one of the most plentiful metals in the earth's crust. It is found chemically combined with other elements. Aluminum silicates are in almost every handful of clay, but aluminum is produced primarily from bauxite, an ore containing aluminum in the form of aluminum oxide, commonly referred to as alumina. Aluminum is made by extracting alumina from bauxite and then removing oxygen from the alumina through an electrolytic process known as "reduction." The result is molten primary aluminum, which is cast into various forms for shipment to fabricating plants. It takes about four tons of bauxite to make two tons of alumina, which in turn yield about a ton of primary aluminum. We refine bauxite into alumina at our Sherwin alumina plant near Corpus Christi, Texas. We also are entitled to a share of the production from two joint ventures in which we have interests, one located in Western Australia, known as the Worsley Joint Venture ("Worsley"), and the other located in Stade, Germany, known as Aluminium Oxid Stade ("Stade"). See Table 1 under this Item. In addition, we have a contract with a third party to purchase 120,000 metric tons of alumina annually in 1999 and 2000. Worsley currently has the capacity to produce 1.7 million metric tons of alumina per year. Reynolds is entitled to 56% of the alumina produced by the joint venture. The Worsley refinery is currently being expanded to increase its annual capacity to 3.1 million metric tons. In addition to increasing capacity, the expansion project will further reduce operating costs and improve product quality. Construction is scheduled to be completed in the second quarter of 2000. Worsley has proven bauxite reserves sufficient to operate the plant at capacity for at least the next 35 years, even after taking into account the ongoing expansion of the refinery's annual capacity. Bauxite requirements for our Sherwin alumina plant and our share of the Stade joint venture are obtained from the following sources: AUSTRALIA We have a long-term purchase arrangement under which we may buy from a third party an aggregate of approximately 18,800,000 dry metric tons of Australian bauxite through 2021. 2 3 BRAZIL We own a 5% interest in Mineracao Rio Do Norte S.A. (known as MRN), which owns the Trombetas bauxite mining project in Brazil. We will buy at least 322,000 dry metric tons of Brazilian bauxite from the project in 1999. We also maintain an interest in other, undeveloped bauxite deposits in Brazil. GUINEA We own a 6% interest in Halco (Mining), Inc. Halco owns 51% and the Guinean government owns 49% of Compagnie des Bauxites de Guinee ("CBG"), which has the exclusive right through 2038 to develop and mine bauxite in a 10,000 square- mile area in northwestern Guinea. We have a bauxite purchase contract with CBG that will provide us with a minimum of approximately 6,550,000 dry metric tons of Guinean bauxite for the period 1999 through 2011. GUYANA We are a 50% partner with the Guyanese government in a bauxite mining project in the Berbice region of Guyana. During 1999, we will buy between 1,500,000 and 1,800,000 dry metric tons of bauxite from the project. JAMAICA We have a purchase arrangement under which we will buy from a third party an aggregate of up to 5,400,000 dry metric tons of Jamaican bauxite for the period 1999 through 2001. OTHER We have an arrangement with the U.S. government under which we will buy at a negotiated price during 1999 approximately 529,000 long dry tons of Jamaican bauxite stored next to our Sherwin alumina plant. Our present sources of bauxite and alumina are more than adequate to meet the forecasted requirements of our primary aluminum production operations for the foreseeable future. We produce primary aluminum at three plants in the United States and one at Baie Comeau, Quebec, Canada. We also are entitled to a share of the primary aluminum produced at three joint ventures in which we participate: one in Quebec known as the Becancour joint venture ("Becancour"); one in Hamburg, Germany, known as Hamburger Aluminium-Werk GmbH ("Hamburg"); and the third in Ghana, known as Volta Aluminium Company Limited ("Ghana"). See Table 2 under this Item. Our primary aluminum products include unalloyed aluminum ingot; billet, which is used by extrusion plants; sheet ingot, which is supplied to rolling facilities; foundry ingot, which is the base material for cast products such as automotive wheels; and electrical redraw rod, which is used by the electrical cable industry. During 1998, approximately 65% of our primary aluminum products was sold externally to third parties; the remainder was purchased by other Reynolds business units. Our internal demands for primary aluminum have declined as a result of actions taken in connection with our portfolio review. Consequently, we expect that a larger percentage of our future primary aluminum sales will be to external customers. Production at our primary aluminum plants can vary due to a number of factors, including changes in worldwide supply and demand. Reynolds currently has the annual capacity to produce 1,094,000 metric tons of primary aluminum, of which 47,000 metric tons are temporarily idled. During 1998, we restarted 162,000 metric tons of previously idled production capacity. We will monitor market conditions and our internal needs before proceeding with further restarts. 3 4 In addition to the primary aluminum plants listed in Table 2, Reynolds has a 10% equity interest in the Aluminum Smelter Company of Nigeria ("ALSCON"), which is currently under construction. When ALSCON is operating at capacity, we expect to buy at market-related prices approximately 153,000 metric tons of primary aluminum annually from the 193,000 metric ton smelter. Startup of one line began in late 1997. That line was operating at the end of 1998 at 41% of its rated capacity of 96,500 metric tons. We also have an 8% equity interest in C.V.G. Aluminio del Caroni, S.A. (known as ALCASA), which produces primary aluminum in Venezuela. Reynolds owns and operates two carbon products manufacturing facilities located in Lake Charles and Baton Rouge, Louisiana. These facilities produce 855,000 metric tons of calcined petroleum coke and 136,000 metric tons of carbon anodes annually. The anodes are produced principally for consumption at our primary aluminum plant in Baie Comeau, Quebec. The calcined petroleum coke is used by our wholly owned primary aluminum plants. We also sell it worldwide to the aluminum and titanium dioxide industries. In addition to producing aluminum and carbon products, our base materials business operates a commercial hazardous waste treatment facility in Gum Springs, Arkansas for the treatment of spent potliner resulting from Reynolds' and other producers' North American aluminum reduction operations. Regulations issued by the U.S. Environmental Protection Agency (the "EPA") require the treatment of spent potliner to prescribed standards prior to disposal. Our facility has the capacity to treat 120,000 short tons of spent potliner annually and is currently operating at approximately 50% of capacity. In July 1998, the U. S. Court of Appeals for the District of Columbia struck down the treatment standards included in the then current EPA regulations. The EPA subsequently adopted temporary standards, which are expected to continue in effect until final standards are adopted. Our Gum Springs facility is the only commercial facility in the U.S. capable of treating spent potliner to the temporary standards, as well as to the standards previously in effect. In addition, we have submitted permit applications to state and federal environmental authorities to allow us to operate the Gum Springs facility's landfill as a hazardous waste landfill. The applications were submitted as a result of EPA's 1997 decision to classify treated spent potliner as a hazardous waste. Energy - ------ Reynolds consumes substantial amounts of energy in the aluminum production process. Refining alumina from bauxite requires high temperatures. The facilities where we refine alumina achieve these temperatures by burning natural gas or coal to produce direct heat or steam. Natural gas and coal for these facilities are purchased under long- and short-term contracts. See Table 1 under this Item. The electrolytic process for reducing alumina to primary aluminum requires large amounts of electricity. We generally expect to meet the energy requirements for our primary aluminum production for the foreseeable future under long-term contracts. Under these contracts, however, we may experience shortages of interruptible power from time to time at our Massena, New York plant and at the plant in Ghana in which we hold a joint-venture interest. The portion of power supplied to the Massena plant that is interruptible (approximately 15%) can be offset with purchased power. Production at Ghana is dependent on hydroelectric power. The Ghana plant is currently operating at reduced capacity due to drought conditions that have existed since 1994. See Table 2 under this Item. Rates for electricity charged by the Bonneville Power Administration, which serves the Company's Troutdale, Oregon and Longview, Washington primary aluminum plants, are established under a five-year contract that runs through September 2001. We are now evaluating the sources of electricity that may be available to us after the current contract expires. 4 5
Table 1 Alumina Plants and Energy Supply Rated Capacity(a) at Principal December 31, 1998 Energy Energy Contract Plant Metric Tons Purchased(b) Expiration Date - ----- ----------- ------------ --------------- Corpus Christi, Texas 1,600,000 Natural Gas (c),(d) Worsley, Australia 969,000(e) Coal 2002(d) Stade, Germany 375,000(e) Natural Gas 2008
TABLE 2 Primary Aluminum Production Plants and Energy Supply Rated Capacity(a) at Principal December 31, 1998 Energy Energy Contract Plant Metric Tons Purchased(b) Expiration Date - ----- ----------- ------------ --------------- Baie Comeau, Quebec 400,000 Electricity 2011 and 2014 Longview, Washington 204,000(f) Electricity 2001 Massena, New York 123,000(f) Electricity 2013(g) Troutdale, Oregon 121,000(f) Electricity 2001 Becancour, Quebec 186,000(h) Electricity 2014 Hamburg, Germany 40,000(h) Electricity 2005 Ghana 20,000(h) Electricity 2017
TABLE 3 Alumina and Primary Aluminum Capacity and Production (Metric Tons) Alumina(e),(i) Primary Aluminum(h),(j) --------------------------- --------------------------- Rated Rated Year Capacity(a) Production(k) Capacity(a) Production(f) - ---- ----------- ------------- ----------- ------------- 1996 2,927,000 2,674,000 1,094,000 893,500 1997 2,944,000 2,724,000 1,094,000 893,200 1998 2,944,000 2,868,000 1,094,000 982,900
NOTES TO TABLES 1, 2, and 3. (a) Ratings are estimates at the end of the period based on designed capacity and normal operating efficiencies and do not necessarily represent maximum possible production. (b) See "Energy" above. (c) The Sherwin plant purchases approximately 50% of the natural gas required to operate the plant under a three-year contract that is scheduled to expire in October 1999. The remainder is purchased under short-term contracts. After the base term of the existing three-year contract expires in 1999, it will continue on a month-to-month basis until one of the parties terminates the contract. 5 6 (d) We have a long-term agreement to purchase all of Sherwin's steam and a portion of its electricity from a third-party cogeneration facility beginning in mid-year 2000. Worsley has a similar contract to purchase a portion of its steam and electricity beginning in early 2000. (e) We are entitled to 56% of the production of Worsley and 50% of the production of Stade. Capacity and production figures reflect our share. (f) We curtailed 121,000 metric tons of production capacity at our Troutdale primary aluminum plant in the second half of 1991 and restarted 74,000 metric tons of that capacity in 1998. We also curtailed an aggregate of 88,000 metric tons of primary aluminum production capacity at our Massena (41,000 metric tons) and Longview (47,000 metric tons) plants effective in the fourth quarter of 1993. We restarted all of the idled capacity at Massena and Longview during 1998. (g) The power contract terminates in 2013, subject to earlier termination by the supplier in 2003 if its federal license for its hydroelectric project is not renewed. (h) We are entitled to 50% of the production of Becancour, 33- 1/3% of the production of Hamburg, and 10% of the production of Ghana. Capacity and production figures reflect our share. Production at Ghana has been curtailed since September 1994 by drought. At December 31, 1997, Ghana was operating at 77% of capacity and was further reduced to 20% of capacity in the first half of 1998. In December 1998, Ghana began to restart a portion of its curtailed capacity. The plant is currently operating at approximately 60% of capacity. (i) Production is from the alumina production operations listed in Table 1. (j) Production is from the primary aluminum production operations listed in Table 2. (k) We reduced production at our Sherwin alumina plant near Corpus Christi, Texas during the third quarter of 1996. We restarted the idle alumina capacity at the Sherwin plant late in 1997. 6 7 Packaging and Consumer - ---------------------- Reynolds' packaging and consumer global business unit provides a variety of foil, plastic and other products and related services to the packaging and consumer products markets. We are the world's leading producer of aluminum foil and a major converter of plastic resins. Reynolds markets a diverse range of flexible packaging products including inner and outer wraps, pouches, specialty cartons, child-resistant blister backing, and plastic containers. Our customers include global marketers of food, confection, healthcare and tobacco products. We also serve the foodservice market (restaurants, delis, supermarket take-out, and fast-food and catering establishments) with over 1,000 foil, plastic and paper products including aluminum and plastic film, plastic containers and lids, foodservice bags, catering trays, sandwich bags and wraps, baking cups and trays. We also produce industrial plastic film (including Reynolon shrink film) and labels for shrink wrapping and tamper-evident packaging. We manufacture our packaging products at wholly owned facilities in the U.S., Canada and Spain. See Table 4 under the heading "Packaging and Consumer." We also have interests in foil operations in Colombia and Venezuela. The capacity of these manufacturing facilities depends on the variety and types of products manufactured. Reynolds' packaging and consumer global business unit also manufactures and markets an extensive line of foil, plastic and paper consumer products under the Reynolds name. Products include the well-known Reynolds Wrap Aluminum Foil, Reynolds Plastic Wrap, Reynolds Oven Bags, Reynolds Freezer Paper, Reynolds Cut-Rite Wax Paper and Reynolds Baker's Choice Bake Cups. In 1998, we introduced two new products - Reynolds Hot Bags Foil Bags and Reynolds Wrappers Foil Sandwich Sheets. Our consumer products are distributed throughout the U.S., which is our largest market for these products, and in more than 65 other countries. Through our Presto Products Company subsidiary, we are a supplier of private label consumer products. Presto produces a variety of plastic food wraps and bags (including trash bags and reclosable snack, sandwich, storage and freezer bags) that are sold under private labels. Our subsidiary, Southern Graphic Systems, Inc., produces rotogravure printing cylinders, color separations and flexographic plates used in our packaging printing operations and for the consumer and industrial packaging industry. Southern Graphic's major customers, in addition to Reynolds, are other consumer products companies and converters, with a trend toward consumer products companies. Southern Graphic also provides graphics management services and manufactures printing accessories (bases and anilox rolls). In February 1999, we acquired London Graphics Inc. London Graphics is based in Toronto, Ontario and produces flexographic separations and plates for the packaging industry in Canada. It is being integrated with Southern Graphic's Canadian operations. Construction and Distribution - ----------------------------- The Company's construction and distribution global business unit distributes aluminum, stainless steel and other specialty metal products under the name Reynolds Aluminum Supply Company ("RASCO"). This business unit also produces and sells architectural products and systems. RASCO provides supply chain management services to North American metal fabricating customers requiring high-quality aluminum, stainless steel and other specialty metal products. During 1998, RASCO's sales were 56% in aluminum products and 44% in stainless steel products. RASCO processes and distributes plate, sheet, extrusions, rod and bar products through 28 facilities across North America. RASCO provides metal processing services such as cutting to length, slitting, shearing, sawing and plasma burning. The customized metal processing 7 8 services offered by RASCO allow it to provide just-in-time delivery to customers. Its customers include fabricators and manufacturers in transportation, equipment, machinery and other markets. Through our construction operations we produce Reynobond and other architectural cladding products in the U.S. that are sold globally. In 1998, we began a $25 million expansion of our plant in Merxheim, France. The expansion will allow us to produce Reynobond and other composite architectural products in Europe. Our construction and distribution business unit also produces Reynolux painted aluminum sheet and profiled products; designs and markets architectural systems consisting of curtainwall and window and door units for residential and commercial applications in Europe; sells polymer-coated magnet wire for electrical transformers; and designs and markets highway sound barrier systems in Europe. Transportation - -------------- Reynolds' transportation global business unit operates nine plants supplying a wide range of fabricated aluminum products to the transportation industry and has interests in two additional plants located in Canada and Venezuela. See Table 4 below under the heading "Transportation." Our principal products are wheels, heat exchanger tubing and automotive structures. We market these products primarily in North America to the "Big Three" automobile manufacturers, with customers also in Europe and Venezuela. We produce forged and cast aluminum wheels in a variety of sizes, styles and finishes. In February 1999, we completed the start-up of a $32 million expansion of our forged aluminum wheel manufacturing facility in Lebanon, Virginia. The expansion doubled the plant's production capacity to 1.4 million wheels per year. Heat exchanger tubing products include extruded and drawn round tube, micro multivoid tube and oval tube made of aluminum and long-life alloys. These products are used in applications such as automotive air conditioning systems and radiators. Automotive structures include bumpers, car and truck door frames, convertible roof brackets, sunroof frames, antilock brake system housings, steering shafts and steering column brackets, among other items, for use in automobiles and truck and trailer systems. In addition, we are currently testing a new engine cradle program that should be in production in mid-1999. OTHER OPERATIONS Reynolds has certain operations that are not within a global business unit. These include, principally, our headquarters operations, as well as the following: EMERGING MARKETS GROUP - The purpose of the Emerging Markets Group is to identify and develop new business opportunities in strategic emerging world markets. The group oversees our interests in an aluminum foil and extrusion plant in China. It also provides technical services to rolling operations owned by third parties in Russia and India. EUROPEAN EXTRUSION OPERATIONS - Our plants in Nachrodt, Germany and Harderwijk, Netherlands produce extruded aluminum products that are used internally by our construction and distribution and our transportation global business units. In addition, the plants manufacture products that are sold directly to third parties. The portion of these extrusion operations related to products sold directly to third parties is not included within our global business units. REYCAN L.P./REYCAN S.E.C. - We own a 50% partnership interest in this Canadian aluminum rolling operation. LATAS DE ALUMINIO. S.A. ("Latasa") - We own a 34.9% interest in this South American aluminum can operation. Previously, we disclosed an intent to sell this interest; however, we now expect to maintain our interest in Latasa. 8 9 UNITED ARAB CAN MANUFACTURING COMPANY, LTD. - We own a 27.5% interest in this aluminum can operation located in Saudi Arabia. CAN MACHINERY - We operate a can machinery plant that manufactures can production machinery used by aluminum can manufacturers around the world. ALLOYS COMPLEX - Our Alloys can stock complex in Alabama consists of a rolling mill, two reclamation plants that provide input metal to the mill, and a coil coating facility. The principal product of the rolling mill is aluminum sheet used to produce beverage can bodies, ends and tabs. We have signed a definitive agreement with Wise Alloys LLC for the sale of the complex and have transferred title to certain of the assets of the complex. We are currently operating the facility on behalf of Wise Alloys. See "General - Portfolio Review" for additional information. CERTAIN SPANISH OPERATIONS - We operate an aluminum extrusion plant in Irurzun, Spain. We also have warehouses in several cities in Spain that are part of our distribution operation for architectural systems. We have signed an agreement with Alcoa Inc. for the sale of these assets. See "General - Portfolio Review" for additional information. COMPETITION Competition in our industry is based on price, quality and service. In the sale of our products, we compete primarily with (i) producers of alumina and primary aluminum and processors of reclaimed aluminum, (ii) producers of plastic products, (iii) producers of aluminum and non-aluminum packaging materials, (iv) metals service center companies engaged in the distribution of aluminum and other products and (v) fabricators of aluminum and non-aluminum automotive products. Reynolds' principal competitors in the manufacture of primary aluminum products in North America and other global markets are ten U.S. companies, a Canadian company and other foreign producers. In Europe, our principal competitors are seven major multinational producers of extruded aluminum products and a number of smaller European producers of aluminum semifabricated products. Our consumer products operations compete primarily with three U.S. companies. North America is our largest market for our flexible packaging products. We have a large number of competitors in this area, ranging from small, local businesses to large, national companies. Aluminum and related products compete with various products, including those made of iron, steel, copper, zinc, tin, titanium, lead, glass, wood, plastic, magnesium and paper. Plastic products compete with products made of glass, aluminum, steel, paper, wood and ceramics, among others. 9 10 ENVIRONMENTAL COMPLIANCE Reynolds has spent and will spend substantial capital and operating amounts relating to ongoing compliance with environmental laws. The area of environmental management, including environmental controls, continues to be in a state of scientific, technological and regulatory evolution. Consequently, it is not possible for us to predict accurately the total expenditures necessary to meet all future environmental requirements. We expect, however, to add or modify environmental control facilities at a number of our worldwide locations to meet existing and certain anticipated regulatory requirements, including regulations to be implemented under the Clean Air Act Amendments of 1990 (the "Clean Air Act"). Based on information currently available, we estimate that compliance with the Clean Air Act's hazardous air pollutant standards would require in excess of $250 million of capital expenditures (including a portion of the expenditures at the Massena plant referred to below), primarily at our U.S. primary aluminum production plants. The ultimate effect of the Clean Air Act on such plants and on our other operations (and the actual amount of any such capital expenditures) will depend on how the Clean Air Act is interpreted and implemented pursuant to regulations that are currently being developed and on such additional factors as the evolution of environmental control technologies and the economic viability of such operations at the time. Based on an August 1995 memorandum of understanding with the State of New York to resolve environmental issues at our Massena, New York primary aluminum production plant, we have undertaken a five-year capital spending program (planned for completion in 2001) of an estimated $200 million to modernize the Massena plant and significantly reduce air emissions from the plant. Pursuant to the memorandum of understanding, we are accelerating certain expenditures believed necessary to achieve compliance with the Clean Air Act's Maximum Achievable Control Technology standards. Our capital expenditures for equipment designed for environmental control purposes were approximately $24 million in 1996, $43 million in 1997 and $80 million in 1998. The portion of such amounts expended in the United States was $16 million in 1996, $41 million in 1997 and $74 million in 1998. We estimate that annual capital expenditures for environmental control facilities will be approximately $55 million in 1999, $17 million in 2000, and $40 million in 2001. The majority of these estimated expenditures are associated with the capital spending program referred to above at the Massena plant. Future capital expenditures for environmental control facilities cannot be predicted with accuracy for the reasons cited above; however, it is reasonable to expect that environmental control standards will become increasingly stringent and that the expenditures necessary to comply with them could increase substantially. Reynolds has been identified as a potentially responsible party ("PRP") and is involved in remedial investigations and remedial actions under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and similar state laws regarding the past disposal of wastes at approximately 40 sites in the United States. Such statutes may impose joint and several liability for the costs of such remedial investigations and actions on the entities that arranged for disposal of the wastes, the waste transporters that selected the disposal sites, and the owners and operators of such sites. Responsible parties (or any one of them) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. In addition, we are investigating possible environmental contamination, which may also require remedial action, at certain of our present and former United States manufacturing facilities. The following discussion provides information about the current status of two individually significant sites. MASSENA, NEW YORK SITE. In 1988, Reynolds discovered that soils in the area of the heat transfer medium system at Reynolds' primary aluminum production plant in Massena, New York were contaminated with polychlorinated biphenyls ("PCBs") and other contaminants. At December 31, 1998, remediation. of the contaminated soils and other contaminated areas of the plant is substantially complete. Portions of the St. Lawrence River system adjacent to the plant are also contaminated with PCBs. Since 1989, Reynolds has been conducting investigations and studies of the river system under order from the EPA issued under Superfund. Reynolds is in the process of working with the EPA to better define the scope of the dredging program which is planned for 2000. Reynolds is also aware of a natural resource damage claim arising out 10 11 of the discharge of PCBs and other contaminants into the river system that may be asserted by potential claimants, including federal, state and tribal natural resource trustees. TROUTDALE, OREGON SITE. In 1994, the EPA added our Troutdale, Oregon primary aluminum production plant to the National Priorities List of Superfund sites. Reynolds is cooperating with the EPA and, under a September 1995 consent order, is working with the EPA in investigating potential environmental contamination at the Troutdale site and promoting more efficient cleanup at the site. At most of the Superfund sites referred to above where Reynolds has been identified as a PRP, we are one of many PRPs, and our share of the anticipated cleanup costs is expected to be small. With respect to certain other sites (not included in the foregoing number) where Reynolds has been identified as a PRP, we have either fully or substantially settled or resolved actions related to such sites at minimal cost or believe that we have no responsibility with regard to them. We have been notified that Reynolds may be a PRP at certain sites in addition to those already referred to in this paragraph. Reynolds' policy is to accrue remediation costs when it is probable that remedial efforts will be required and the related costs can be reasonably estimated. On a quarterly basis, we evaluate the status of all sites, develop or revise estimates of costs to satisfy known remediation requirements and adjust our accruals accordingly. At December 31, 1998, the accrual for known remediation requirements was $172 million. This amount reflects management's best estimate of our ultimate liability for such costs. Potential insurance recoveries are uncertain and therefore have not been considered. As a result of factors such as the developing nature of administrative standards promulgated under Superfund and other environmental laws; the unavailability of information regarding the condition of potential sites; the lack of standards and information for use in the apportionment of remedial responsibilities; the numerous choices and costs associated with diverse technologies that may be used in remedial actions at such sites; the availability of insurance coverage; the ability to recover indemnification or contribution from third parties; and the time periods over which eventual remediation may occur, estimated costs for future environmental compliance and remediation are necessarily imprecise. It is not possible to predict the amount or timing of future costs of environmental remediation that may subsequently be determined. Based on information currently available, it is management's opinion that such future costs are not likely to have a material adverse effect on Reynolds' competitive or financial position. However, such costs could be material to future quarterly or annual results of operations. See the discussion under "Environmental" in Item 7, and under Note 12 to the consolidated financial statements in Item 8 of this report regarding the Company's anticipated costs of environmental compliance. RESEARCH AND DEVELOPMENT Reynolds engages in a continuous program of basic and applied research and development to support its global business units. This program deals with new and improved materials, products, processes and related environmental compliance technologies. It includes development and expansion of products and markets that benefit from aluminum's light weight, strength, resistance to corrosion, ease of fabrication, high heat and electrical conductivity, recyclability and other properties. Materials and core competencies involving aluminum, ceramics, composites and various polymers and their processing, fabrication and applications are also included in the scope of our research and development activities. Expenditures for Reynolds-sponsored research and development activities were approximately $31 million in 1998, $41 million in 1997, and $49 million in 1996. We own numerous patents relating to our products and processes based predominantly on our in-house research and development activities. The patents owned by Reynolds, or under which we are licensed, generally concern particular products or manufacturing techniques. Our business is not, however, materially dependent on patents. 11 12 EMPLOYEES At December 31, 1998, Reynolds had approximately 20,000 employees. After the completion of the sale of our Alloys can stock complex, Reynolds will have approximately 18,400 employees. In 1996, we entered into new six-year labor contracts with the United Steelworkers of America and the Aluminum, Brick and Glass Workers International Union. The contracts involve approximately 4,000 active employees. At the end of the fifth year, the economic provisions of the contracts will be reopened. If agreement cannot be reached, the economic provisions applicable to the sixth year will be submitted to arbitration. Item 3. LEGAL PROCEEDINGS A private antitrust lawsuit styled Hammons v. Alcan Aluminum Corp. et al. was filed in the Superior Court of California for the County of Los Angeles on March 5, 1996 against the Registrant and other aluminum producers. The lawsuit alleged a conspiracy to reduce worldwide and U.S. aluminum production. Estimated damages of approximately $26 billion were sought in the lawsuit, which claimed class action status. Defendants removed the case to the U.S. District Court for the Central District of California (the "District Court"). The District Court granted summary judgment for defendants. On December 11, 1997, the U.S. Court of Appeals for the Ninth Circuit sustained the District Court's dismissal of the case. The plaintiff filed a motion seeking review of the decision by all the judges of the Ninth Circuit. The motion was denied on May 14, 1998. On August 12, 1998, the plaintiff filed a petition for a writ of certiorari in the U.S. Supreme Court. On October 19, 1998, the Supreme Court denied the petition and declined to review the case. On November 10, 1998, the plaintiff requested a rehearing but the Supreme Court denied that request on December 7, 1998. Various other suits, claims and actions are pending against Reynolds. In the opinion of Reynolds' management, after consultation with legal counsel, disposition of these proceedings, either individually or in the aggregate, will not have a material adverse effect on our competitive or financial position. No assurance can be given, however, that the disposition of one or more of such suits, claims or actions in a particular reporting period will not be material in relation to the reported results for such period. 12 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements, related notes and other sections of this report. In the tables, dollars are in millions, except per share and per pound amounts, and shipments are in thousands of metric tons. A metric ton is equivalent to 2,205 pounds. Management's Discussion and Analysis contains forecasts, projections, estimates, statements of management's plans, objectives and strategies for the Company and other forward- looking statements. Please refer to the "Risk Factors" section beginning on page 27, where we have summarized factors that could cause actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. RESULTS OF OPERATIONS - --------------------- Lower aluminum prices negatively impacted 1998 profits by $134 million, primarily affecting our Base Materials Global Business Unit. We were able to completely overcome this impact with improved sales volumes from our ongoing operations of $82 million, significant reductions in conversion costs of $21 million and lower selling, general and administrative expenses and interest expenses of $67 million. Over the past two years, through our Portfolio Review process, we have improved our focus and lowered our threshold for profitability at decreased pricing levels. We increased earnings from operations in 1998 while experiencing a 12% reduction in realized primary aluminum prices. Comparing 1998 results to our pre-restructuring base year of 1996, we almost doubled earnings from operations despite 5% lower realized primary aluminum prices. As we enter 1999, we have made significant progress on cost reduction, debt reduction, share repurchases and effective management of inventory and capital spending.
1998 1997 1996 ------------------------ RESULTS Income before extraordinary loss and cumulative effect of accounting change $ 152 $ 136 $ 104 Extraordinary loss (see Note 3) (63) - - Cumulative effects of accounting changes (see Note 1) (23) - (15) ------------------------- Net income $ 66 $ 136 $ 89 ========================= EARNINGS PER SHARE - BASIC Income before extraordinary loss and cumulative effect of accounting change $2.18 $1.86 $1.06 Extraordinary loss (0.91) - - Cumulative effects of accounting changes (0.33) - (0.24) ------------------------- Net income $0.94 $1.86 $0.82 =========================
Income before extraordinary loss and cumulative effect of accounting change includes after tax charges for operational restructuring of $90 million in 1998, $78 million in 1997 and $23 million in 1996. For additional information concerning these charges, see Note 2 to the consolidated financial statements. 13 14 RESULTS OF OPERATIONS - continued - --------------------- GLOBAL BUSINESS UNITS The Company is organized into four market-based, global business units. The four global business units and their principal products are as follows: . Base Materials - alumina, carbon products, primary aluminum ingot and billet, and electrical rod . Packaging and Consumer - aluminum and plastic packaging and consumer products; printing products . Construction and Distribution - architectural construction products and the distribution of a wide variety of aluminum and stainless steel products . Transportation - aluminum wheels, heat exchangers and automotive structures
BASE MATERIALS 1998 1997 1996 ---------------------------- Aluminum shipments: Customer 668 513 458 Internal 354 684 577 ---------------------------- Total 1,022 1,197 1,035 ============================ Revenues: Customer - aluminum $1,058 $ 923 $ 763 - nonaluminum 402 405 373 Internal - aluminum 572 1,187 944 ---------------------------- Total $2,032 $2,515 $2,080 ============================ Operating income $ 290 $ 312 $ 242 ============================
The Base Materials global business unit consists principally of the following: Aluminum - -------- . Primary aluminum - Three plants in the U.S., one in Canada and partial interests in plants in Canada (50% owned), Germany (33-1/3% owned) and Ghana (10% owned). Our rated annual production capacity including our share of partial interests is 1,094,000 metric tons, of which 47,000 metric tons is temporarily idled (see below). . Electrical rod - One plant in Canada. Nonaluminum - ----------- . Alumina - One plant in the U.S. and partial interests in plants in Australia (56% owned) and Germany (50% owned). Our rated annual production capacity including our share of partial interests is 2,944,000 metric tons. Depending on operating rates of primary aluminum and alumina facilities, approximately 71% of alumina production is consumed within the Base Materials global business unit. . Carbon products - Two U.S. plants that produce calcined petroleum coke (one of which also produces carbon anodes) principally for use in primary aluminum facilities. Depending on operating rates of primary aluminum and carbon products facilities, approximately 45% of carbon products production is consumed within the Base Materials global business unit. The increase in customer aluminum shipments in 1998 and 1997 reflects strong demand for our value-added products (foundry and sheet ingot, billet and rod). Our available supply to meet customer needs has increased because we no longer need to supply downstream fabricating operations that have been sold. Our available supply also increased because of restarting idled capacity in 1998 (as discussed below). 14 15 RESULTS OF OPERATIONS - continued - --------------------- GLOBAL BUSINESS UNITS - continued BASE MATERIALS - continued In addition to reflecting the changes in shipping volume, aluminum revenues were significantly affected by primary aluminum prices. Average realized prices for customer shipments were: Per Pound --------- 1998 $.72 1997 .82 1996 .76 Alumina shipments were higher in both 1998 and 1997 because of significant improvements in production efficiencies and capacity utilization at our U.S. alumina plant. Nonaluminum revenues were flat in 1998 as lower prices for alumina and carbon products offset the effect of higher alumina shipments. The most significant factor affecting operating profit in 1998 was lower prices for primary aluminum and alumina. Also contributing to the decline were non-recurring restart costs at our primary aluminum plants and lower technical services income. We were able to offset most of the decline with improved capacity utilization, significant cost reductions, lower costs for certain raw materials and higher customer shipments of aluminum and alumina. In addition to higher prices, 1997 operating income improved due to increased operating efficiencies and capacity utilization. Somewhat offsetting these improvements were non-recurring maintenance costs in our alumina operations and higher costs for raw materials in carbon products operations. Results in all three years were negatively impacted by temporarily curtailed capacity at our U.S. primary aluminum plants. During 1998, we restarted 162,000 metric tons of previously idled capacity. We plan to monitor our internal needs and market conditions before finalizing the schedule to restart the remaining 47,000 metric tons at our Troutdale, Ore., plant. In 1999, we expect to continue to benefit from performance improvements. We also expect approximately 70% of our primary aluminum shipments to be in the form of value-added products, enabling us to earn a premium over primary aluminum market prices.
PACKAGING AND CONSUMER 1998 1997 1996 -------------------------------- Customer aluminum shipments 141 142 136 Revenues: Customer - aluminum $ 787 $ 797 $ 768 - nonaluminum 605 602 585 -------------------------------- Total $1,392 $1,399 $1,353 ================================ Operating income $ 156 $ 141 $ 149 ================================
The Packaging and Consumer global business unit consists principally of 17 packaging and consumer products plants in the U.S., one each in Canada and Spain, and 21 graphics facilities located in the U.S. and Canada that produce graphics, printing cylinders and plates. Shipments and revenues for packaging and consumer products were essentially flat in 1998. Sales of consumer products increased because of strong demand for Reynolds Wrap aluminum foil and the introduction of new products. Sales of packaging products decreased because of aluminum foil capacity constraints and the elimination of certain low-margin products. 15 16 RESULTS OF OPERATIONS - continued - --------------------- GLOBAL BUSINESS UNITS - continued PACKAGING AND CONSUMER - continued Operating income increased in 1998 due to higher sales of consumer products, lower raw material costs and cost reduction programs. Higher product development and marketing costs for new consumer products introduced in 1998 partially offset these benefits. Shipments and revenues increased for most products in 1997. Growth was particularly strong for tobacco, pharmaceutical and lidstock packaging products, consumer foil products and plastic wraps and bags. Operating income declined in 1997 due to higher costs for aluminum and other raw materials. These costs were mostly offset by higher shipping volume, improved capacity utilization, lower advertising costs, cost reduction programs and some price increases.
CONSTRUCTION AND DISTRIBUTION 1998 1997 1996 ----------------------------- Customer aluminum shipments 184 166 151 Revenues: Customer - aluminum $681 $614 $600 - nonaluminum 314 328 332 ----------------------------- Total $995 $942 $932 ============================= Operating income $ 39 $ 41 $ 45 =============================
The Construction and Distribution global business unit consists principally of 37 distribution centers in the U.S., Europe and China and four manufacturing plants, two in the U.S. and two in Europe. The increase in aluminum shipments and revenues in 1998 and 1997 resulted from strong demand for most products. All of our major distribution products (plate, sheet and extrusions) benefited from market share growth in our major domestic markets. Construction products benefited from our global expansion efforts. Composite sheet shipments for architectural applications were strong in several global markets. Average realized prices were relatively flat in 1998 after being lower in 1997 due to product mix. The decline in nonaluminum revenues in 1998 and 1997 resulted from lower prices for stainless steel distribution products. Prices for these products continue to be under pressure due to increased imports and strong competition. Our shipments were up approximately 8% in 1998 reflecting strong demand for all of our products. Operating income in 1998 and 1997 benefited from the higher shipping volume. This was offset by higher marketing costs to expand global sales of construction products and to improve market penetration in existing markets. In addition, operating income for 1998 decreased because of lower capacity utilization in construction products plants and poor business conditions for the construction industry in Asian markets. Operating income in 1997 was also adversely affected by higher aluminum raw material costs. Our outlook for 1999 is for growth in shipments in our highly competitive global markets. The shipment growth is expected to result from 1998 geographic expansion and product development initiatives. 16 17 RESULTS OF OPERATIONS - continued - --------------------- GLOBAL BUSINESS UNITS - continued
TRANSPORTATION 1998 1997 1996 ----------------------------- Customer aluminum shipments 63 66 58 Customer revenues $337 $353 $326 Operating income (loss) (19) 10 17 =============================
The Transportation global business unit consists principally of the following: . Aluminum wheels - Two plants in the U.S., one in Italy, and partial interests in plants in Canada (75% owned) and Venezuela (41% owned). . Automotive extrusions - Two plants in the U.S. and one each in The Netherlands, Germany, Ireland and Venezuela. Shipments and revenues in 1998 were negatively impacted by volume declines in bumpers and cast aluminum wheels. The decline in bumper shipments resulted from the completion of a contract in 1997 at our Indiana automotive structures plant. Cast aluminum wheel shipments were lower because of decreased demand related to a substantial number of mid-year wheel program conversions and a strike at a customer earlier in the year. The lower shipments of cast aluminum wheels were somewhat offset by higher shipments of forged aluminum wheels from our Virginia plant. Shipments of aluminum wheels were strong in 1997 as we were able to increase market share with new business at cast wheel facilities, and our new forged wheel plant in Virginia started production. Shipments of automotive extrusions were also higher due to growth in European business. Revenues in 1998 and 1997 also declined due to lower prices for wheels because of competition for new business. The principal reasons for the declines in operating income in 1998 and 1997 were as follows: 1998 . lower shipping volume and its adverse effect on capacity utilization . lower average realized prices . operational difficulties at our Wisconsin cast aluminum wheel plant 1997 . lower average realized prices . higher metal costs . higher selling, general and administrative expenses because of growth in operations Both periods were also affected by non-recurring start-up costs relating to the new Virginia forged aluminum wheel plant and an engine cradle program at our Indiana automotive structures plant. The wheel plant expansion was completed in February 1999. The start-up phase of the engine cradle program should be completed in mid-1999. We have been working hard to address the issues affecting this business. In cast aluminum wheels, facilities in Canada, Italy and Venezuela are operating reasonably well. Our newer plant in Wisconsin has experienced a variety of operational difficulties since it began operation. In 1998, we substantially completed pre-production certification programs for 16 new wheel models at the plant - a major cost hurdle. This new production volume should help the plant improve. During the second half of 1998, the plant showed improvement. 17 18 RESULTS OF OPERATIONS - continued - --------------------- GLOBAL BUSINESS UNITS - continued TRANSPORTATION - continued Our automotive structures plant in Indiana has been operating below capacity for the reasons previously discussed. We are currently testing a new engine cradle program that should be in production in mid-1999 and should help improve performance. In addition, we have entered into a new bumper contract that is scheduled to begin production in 1999. Aside from plant-specific initiatives, we are also evaluating options for our transportation business as a whole, including strategic alliances. RESTRUCTURING This category consists of those operations that are not part of the Company's long-term business focus. In addition to the Alabama can stock complex that we expect to finalize the sale of in early 1999, the Restructuring category includes the following, which have been sold: . U.S. recycling operations . aluminum extrusion facilities in Canada . European rolling mill operations . Illinois sheet and plate plant . North American aluminum beverage can operations . U.S. residential construction products business . aluminum reclamation plant in Virginia . aluminum extrusion plants in Virginia and Texas . coal properties in Kentucky . one-half of the Company's wholly owned interest in a rolling mill and related assets in Canada . aluminum powder and paste plant in Kentucky Financial information for 1998, 1997 and 1996 relating to operations divested and the Alabama can stock complex is reflected in the Restructuring category in Note 11. Customer revenues generated by these entities were $1.4 billion in 1998, $2.7 billion in 1997 and $3.1 billion in 1996. The decline in shipments and net sales in 1998 and 1997 was due to the sale of these operations. In 1998, the absence of operating income from sold operations was offset by the effect ($65 million) of ceasing depreciation on assets held for sale. Operating income in 1997 improved because of higher shipping volume and capacity utilization in can operations. After finalizing the sale of the Alabama can stock complex, the Company's restructuring activities will be essentially complete. As of the end of 1998, the only assets remaining in the Restructuring category relate to the Company's Alabama can stock complex. In accordance with the terms of the definitive agreement to sell this complex, the Company is operating the facility on behalf of the purchasers for a management fee until the final closing. As a result, the Company expects no revenues or operating results to be reflected in the Restructuring category in 1999. OTHER This category consists principally of the corporate headquarters (and related selling, general and administrative expenses), operations in emerging markets, European extrusion operations and investments in Canada, Latin America and Saudi Arabia and real estate. The increased operating loss in 1998 was due to higher corporate amounts and lower equity income in our Latin American can operations. In 1997, lower corporate amounts offset lower equity income in our Latin American can operations. For additional information concerning the Company's restructuring activities, see "Portfolio Review" on page 25 and Notes 2 and 11 to the consolidated financial statements. 18 19 RESULTS OF OPERATIONS - continued - --------------------- GEOGRAPHIC AREA ANALYSIS The Company has worldwide operations in the U.S., Canada and other foreign areas including Europe and Australia. Certain of these consist of equity interests in entities, the revenues of which are not included in our consolidated revenues. In Australia, we participate in an unincorporated joint venture that mines bauxite and produces alumina. Revenues were negatively impacted in all geographic areas as a result of the Company's restructuring activities in 1998 and 1997. Despite the restructuring activities, revenues in Canada improved in 1997 because of higher average realized primary aluminum prices. Other foreign revenues also increased in 1997 due to strong demand for our construction and transportation products. INTEREST EXPENSE Interest expense decreased in 1998 and 1997 because we reduced the amount of debt outstanding. TAXES ON INCOME The Company pays U.S. federal, state and foreign taxes based on the laws of the various jurisdictions in which it operates. The effective tax rates (see reconciliation in Note 10 to the consolidated financial statements) reflected in the income statement differ from the U.S. federal statutory rate principally because of the following: . foreign taxes at different rates . the effects of percentage depletion allowances . additionally in 1997, the adverse effect of permanent basis differences on asset dispositions . additionally in 1998, credits and other tax benefits We have worldwide operations in many tax jurisdictions that generate deferred tax assets and/or liabilities. Deferred tax assets and liabilities have been netted by jurisdiction. This results in both a deferred tax asset and a deferred tax liability on the balance sheet. At December 31, 1998, we had $844 million of deferred tax assets that relate primarily to U.S. tax positions. The most significant portions of these assets relate to tax carryforward benefits and accrued costs for employee health care, environmental and restructuring costs. We expect to realize a major portion of these assets in the future through the reversal of temporary differences, principally depreciation. To the extent that these assets are not covered by reversals of depreciation, we expect the remainder to be realized through U.S. income earned in future periods. The Company has a strong history of sustainable earnings. However, even without considering projections of income, certain tax planning strategies (such as changing the method of valuing inventories from LIFO to FIFO and/or entering into sale-leaseback transactions) would generate sufficient taxable income to realize the portion of the deferred tax asset relating to U.S. operations. In addition, the majority of our U.S. tax carryforward benefits may be carried forward indefinitely. Based on our evaluation of these matters, we expect to realize these deferred tax assets. We are not aware of any events or uncertainties that could significantly affect our conclusions regarding realization. We reassess the realization of deferred tax assets quarterly and, if necessary, adjust the valuation allowance accordingly. 19 20 RESULTS OF OPERATIONS - continued - --------------------- ENVIRONMENTAL The Company is involved in remedial investigations and actions at various locations, including Environmental Protection Agency- designated Superfund sites where we and, in most cases, others have been designated as potentially responsible parties (PRPs). We accrue remediation costs when it becomes probable that such efforts will be required and the costs can be reasonably estimated. We evaluate the status of all significant existing or potential environmental issues quarterly, develop or revise cost estimates to satisfy known remediation requirements, and adjust the accrual accordingly. At December 31, 1998, the accrual was $172 million. The accrual reflects our best estimate of the ultimate liability for known remediation costs. Amounts accrued for two sites - our Massena, New York and Troutdale, Oregon primary aluminum plants - represent individually material portions of the accrual at December 31, 1998. For information about the current status of these two sites, see the discussion in Item 1 under "Environmental Compliance." At most of the other Superfund sites referred to above where the Company has been identified as a PRP, the Company is one of many PRPs, and our share of the anticipated cleanup costs is expected to be small. In estimating anticipated costs, we consider the extent of our involvement at each site, joint and several liability provisions under applicable law, and the likelihood of obtaining contributions from other PRPs. Potential insurance recoveries are uncertain and therefore have not been considered. Based on information currently available, we expect to make remediation expenditures relating to costs currently accrued over the next 15 to 20 years with the majority spent by the year 2002. We expect cash provided by operating activities to provide the funds for environmental capital, operating and remediation expenditures. Annual capital expenditures for equipment designed for environmental control purposes averaged approximately $49 million over the past three years. Ongoing environmental operating costs for the same period averaged approximately $81 million per year. The Company expects operating expenditures for 1999 through 2001 to be approximately $70 million per year. We estimate annual capital expenditures for environmental control facilities will be approximately $55 million in 1999, $17 million in 2000 and $40 million in 2001. The majority of these expenditures are for the capital spending program referred to below at our primary aluminum plant in Massena, New York. Our spending on environmental compliance will be influenced by future environmental regulations, including those issued and to be issued under the Clean Air Act Amendments of 1990. We are spending an estimated $200 million at our primary aluminum plant in Massena, New York for new air emissions controls and a phased modernization of the plant's production lines. We expect to complete this project in the year 2000. We are accelerating certain expenditures believed necessary to achieve compliance with the Clean Air Act's proposed Maximum Achievable Control Technology standards. Based on current information, we estimate that compliance with the Clean Air Act's hazardous air pollutant standards will require in excess of $250 million of capital expenditures (including a portion of the expenditures at the New York plant previously discussed), principally at our U.S. primary aluminum plants. For additional information concerning environmental expenditures, see Note 12 to the consolidated financial statements. 20 21 RESULTS OF OPERATIONS - continued - --------------------- YEAR 2000 READINESS DISCLOSURE ISSUE The Year 2000 issue results from computer programs and systems that rely on two digits rather than four to define the applicable year. Such systems may recognize a date using "00" as the year 1900 rather than the year 2000. As a result, computer systems could fail to operate or make miscalculations, causing disruptions of business operations. Left unrepaired, many of the Company's systems, including information and computer systems and automated equipment, could be affected by the Year 2000 issue. Failure to adequately address the issue could result in, among other things, the temporary inability to manufacture products, process transactions, send invoices, and/or engage in normal business activities. We do not believe the products we sell require remediation to address the Year 2000 issue since they contain no embedded micro-chips or similar electronic components that are date-sensitive. GOAL The Company has a formal program to address and resolve potential exposure associated with information and non-information technology systems arising from the Year 2000 issue. Our goal is that none of the Company's critical business operations or computer processes we share with our suppliers and customers will be substantially impaired by the advent of the year 2000. YEAR 2000 REMEDIATION PROJECT We are preparing our critical, date-sensitive systems, processes and interfacing software for the year 2000. Our remediation project is focusing on the following three areas: . Information Systems - Computer hardware and software systems, business application software, end-user computing and communications infrastructure . Non-Information Systems - Manufacturing equipment and the mechanical systems in our buildings (e.g., HVAC, security and safety systems) . Third Parties - Suppliers and customers In the first two areas, Information Systems and Non-Information Systems, the project consists of the following five phases: . Inventory - identifying our critical, date-sensitive systems that are not ready for the year 2000 . Planning - deciding how to correct those systems . Conversion - repairing or replacing computer hardware and software to make them ready for the year 2000 . Pre-Installation Testing - testing those aspects of systems that have been repaired or replaced to ensure that year entries after 1999 are interpreted properly, date-based calculations are computed correctly, and date-based control systems function accurately . Installation - bringing corrected systems on-line We measure progress in each phase as a percentage of actual staff hours expended to staff hours projected for completion of each phase. Our progress will change as various aspects of the project are completed and as new issues are encountered, either as a result of discovering unanticipated problems in our existing systems or new computer systems or equipment. We also are monitoring our computer and software vendors' readiness statements to assure that readiness changes in their products do not negatively affect our systems. 21 22 RESULTS OF OPERATIONS - continued - --------------------- YEAR 2000 READINESS DISCLOSURE - continued YEAR 2000 REMEDIATION PROJECT - continued As of January 31, 1999, our estimated progress with respect to the five phases of our Year 2000 Remediation Project for Information and Non-Information Systems was approximately as follows:
Information Non-Information Systems Systems ------------------------------- Inventory 100% 97% Planning 99% 96% Conversion 97% 91% Pre-Installation Testing 90% 89% Installation 91% 84% Overall 98% 92%
With respect to Information Systems, the Company is substantially complete, with a small amount of work remaining in the testing and installation phases. This work is expected to be finished by the end of the first quarter of 1999. For Non-Information Systems, we expect to substantially complete each of the phases by the end of the second quarter of 1999. The third area of our remediation project, Third Parties, focuses on assessment of the business impact on the Company resulting from the possible failure of our suppliers to provide needed products and services. We are assessing the Year 2000 readiness of all our suppliers who are deemed to be critical to each of our operating locations, even though the products or services they provide may not be material to the Company's business as a whole. We have surveyed over 2,000 suppliers and rated them low, medium or high risk in their progress toward being ready for the year 2000. Critical suppliers rated as high risk are receiving our immediate attention for contingency planning or other measures. In addition, we are responding to customer inquiries regarding our Year 2000 program and our progress in addressing the issue. We expect to evaluate the Year 2000 readiness of certain of our largest customers as part of our future contingency planning. As of January 31, 1999, we were on schedule for the Third Party portion of our remediation project, having completed approximately 39% of the projected total effort that we currently estimate will be needed. Early in the fourth quarter of 1999, we plan to have either ranked our critical suppliers as low risk, or to have identified additional sources of supply or to have developed other contingency plans with respect to those critical suppliers who are not ranked as low risk. We will continue monitoring these suppliers into the year 2000. The Company and certain of its customers and suppliers use Electronic Data Interchange (EDI) to perform business communications. The Company's EDI system software has been upgraded to support transactions recorded using a four-digit year. Migration of EDI transactions to the four-digit year format will occur as existing EDI transaction formats are modified by the Company and its trading partners on a case-by- case basis. Some of the Company's customers have indicated they will not modify EDI transaction sets but will rely on other techniques such as date interpretation to achieve Year 2000 capability. We are also addressing the Year 2000 readiness of our unconsolidated affiliates. As of January 31, 1999, we had completed approximately 95% of the total effort that we currently estimate will be required for our Year 2000 Remediation Project. This does not include the quality assurance or contingency planning activities that we expect to conduct in 1999 with respect to our Information and Non- Information Systems. 22 23 RESULTS OF OPERATIONS - continued - --------------------- YEAR 2000 READINESS DISCLOSURE - continued 1999 ACTIVITIES Quality Assurance - ----------------- In addition to completing the five phases of our Year 2000 Remediation Project described above, we expect to validate our remediation efforts with additional post-installation testing of certain critical computer systems. We also expect to respond to and initiate requests to test with certain of our suppliers and customers and some government agencies after they ready their systems. Contingency Planning - -------------------- Currently, our contingency planning efforts are focused primarily on working to identify additional sources of supply for critical materials. We anticipate that 1999 will be a year of further contingency planning and monitoring to determine realistic Year 2000 issues beyond those already addressed. While it is still too early to identify a reasonably likely worst case scenario, our operations, particularly in the Base Materials business, require significant quantities of energy. Curtailments or disruptions of energy supplies would result in full or partial shutdowns of these operations until energy availability could be restored. In addition, an unanticipated loss of energy supply could result in damage to production equipment. During 1999, we will be assessing these and other business disruption risks and developing contingency plans to mitigate them. We have not determined the potential costs of business disruptions from supplier or customer non-performance. COSTS The total cost of our Year 2000 Remediation Project is currently expected to be approximately $22 million. As of January 31, 1999, we had incurred approximately $16 million, which includes labor, equipment and license costs. Our cost projections include approximate costs for post-installation testing and contingency planning expected to occur in 1999. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their former sovereign currencies and a common currency, the euro. The euro trades on currency exchanges and is available for non-cash transactions. Between January 1, 1999 and July 1, 2002, entities in the participating countries must convert all of their transactions denominated in the legacy currencies to the new euro currency. We expect to have our systems ready in time to process euro denominated transactions. We do not expect any material adverse effects from the euro conversion on our competitive or financial position or our ongoing results of operations.
LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- WORKING CAPITAL December 31 ---------------- 1998 1997 ---------------- Working capital $361 $711 Ratio of current assets to current liabilities 1.3/1 1.6/1
Working capital was lower in 1998 principally because of reduced receivables and inventories resulting from dispositions of assets as part of our restructuring activities. OPERATING ACTIVITIES
1998 1997 1996 -------------------------- Net cash provided by operating activities $339 $363 $520
23 24 LIQUIDITY AND CAPITAL RESOURCES - continued - ------------------------------- OPERATING ACTIVITIES - continued We used the net cash provided by operating activities for the past three years primarily to fund capital investments. The decline in net cash provided by operating activities in 1997 resulted principally from increases in receivables and inventories of ongoing operations. INVESTING ACTIVITIES The following table shows capital expenditures in the following categories: operational (replacement equipment, environmental control projects, etc.) and strategic (performance improvement, acquisitions and investments).
1998 1997 1996 ------------------------ Operational $155 $152 $195 Strategic 186 120 237 ------------------------ Total capital investments $341 $272 $432 ========================
Major strategic projects that have been completed or that are under way include: BASE MATERIALS In 1997, we began the expansion of the joint-venture Worsley Alumina Refinery in Australia in which we hold a 56% interest. The expansion will increase the annual capacity of the facility by 65% to 3.1 million metric tons. Completion is expected in the year 2000. PACKAGING AND CONSUMER . the expansion of a U.S. plastic film plant (completed in 1997) . the modernization of U.S. foil plants (to be completed in 2000) . the acquisition in early 1999 of a producer of flexographic separations and plates for the packaging industry in Canada CONSTRUCTION AND DISTRIBUTION . the $25-million expansion of a plant in Europe that will produce composite architectural products (to be completed in 1999) . the construction of a new, larger distribution center in Seattle to replace the current leased facility (to be completed in 1999) TRANSPORTATION . the modification and equipping of a purchased facility in Wisconsin to produce aluminum wheels (completed in 1996) . the construction (completed in 1997) and expansion of a forged wheel plant in Virginia (completed in early 1999) . the expansion and modification of a plant in Indiana that produces bumpers, engine cradles and other automotive components (to be completed in early to mid-1999) OTHER INVESTING ACTIVITIES In addition to these major projects, capacity expansions, equipment upgrades, improvement programs and other capital expenditures have been completed or are currently under way at a number of other facilities. PROJECTED 1999 Capital investments planned for 1999 (approximately $450 million) are primarily for those strategic projects now under way and continuing operating requirements. We expect to fund these capital investments primarily with cash provided by operating activities. While the projected 1999 capital investments do not include amounts for acquisitions, we will evaluate opportunities that arise. 24 25 LIQUIDITY AND CAPITAL RESOURCES - continued - ------------------------------- FINANCING ACTIVITIES We believe our available financial resources, together with internally generated funds, are sufficient to meet our present and future business needs. We continue to exceed the financial ratio requirements contained in our financing arrangements and expect to do so in the future. At December 31, 1998, $113 million of our $1.65-billion shelf registration remained available for the issuance of debt securities. We also have committed credit facilities of $650 million, of which $335 million was available at December 31, 1998. A summary of significant financing activities over the past three years follows: 1996 . called for redemption all outstanding shares of PRIDESSM (see Note 8 to the consolidated financial statements), which reduced annual dividend requirements by approximately $24 million . substantially met our goal to fully fund our pension plans . amended our $500-million credit facility to extend the term and lower the cost 1997 . reduced debt by approximately $400 million with the proceeds from sales of assets 1998 . reduced debt by approximately $900 million with part of the proceeds from sales of assets (including repayment of $100 million borrowed from credit facilities during 1998) . repurchased common stock with part of the proceeds from sales of assets (see the Consolidated Statement of Changes in Stockholders' Equity) . borrowed $415 million from credit facilities . terminated a $100-million interest rate swap agreement (see Note 7 to the consolidated financial statements) PORTFOLIO REVIEW - ---------------- We have reviewed all of our operations with the goals of improving focus and profitability, strengthening our financial position, and thereby increasing shareholder value. As a result of this review, we have taken the following actions: . sold operations for $1.7 billion that we determined would not meet our strategic focus or would not earn satisfactory return over the business cycle . reorganized globally and implemented a global business unit structure . reduced debt by $900 million as of the third quarter of 1998 from the balance at the end of 1996 and lowered interest expense by $80 million annually (since then, we made additional borrowings to manage current business conditions) . repurchased 9.6 million shares of common stock and lowered dividends by $13 million annually . eliminated 600 corporate positions at a savings of $40 million annually We expect all of the benefits of the Portfolio Review to be realized in 1999 and to improve earnings in the years ahead throughout the business cycle. Through December 31, 1998, proceeds from operations divested totaled approximately $1.5 billion, which has been used primarily to reduce debt and repurchase common stock. Our goal to complete a debt reduction of $900 million from the balance at the end of 1996 was accomplished in the third quarter of 1998. Since then, we made additional borrowings to manage current business conditions. We also repurchased 9.6 million shares of stock in 1998. 25 26 PORTFOLIO REVIEW - continued - ---------------- We recognized operational restructuring charges of $144 million in 1998 and $75 million in 1997 relating to divestitures and related activities associated with our Portfolio Review (see Note 2 to the consolidated financial statements). Included in these amounts are offsetting favorable impacts of $184 million in 1998 and $58 million in 1997 for the liquidation of certain LIFO inventory layers relating to divestitures. Upon finalizing the sale of the Alabama can stock complex, which is expected in early 1999, our restructuring activities will be essentially complete. We had liabilities of $48 million at December 31, 1998 resulting from our restructuring activities. We expect to satisfy these liabilities in 1999 ($32 million) and 2000 ($16 million) with cash provided by operating activities. Additional liabilities for contractual postretirement obligations resulting from restructuring activities will be satisfied over numerous future years in conjunction with the Company's funding of its pension and other postretirement benefit obligations. We expect to maintain our interest in Latasa, a Latin American aluminum beverage can manufacturer. Fundamentally, the business is in good shape. However, we are cautious about the impact of the current economic situation in Brazil (see "Outlook"). We are proceeding with key internal growth projects, such as the Worsley alumina expansion, new consumer and packaging products, geographic expansion of our construction products business in Europe and Asia, and small acquisitions of packaging operations. OUTLOOK Assuming more favorable pricing for the balance of the year, our outlook for the full year 1999 remains in the range of 1998 operating results. However, for the first quarter, which is historically our weakest, extremely low primary aluminum prices will adversely affect results. While we expect to offset part of the effect of low prices with improved costs, lower interest expense and higher value-added primary aluminum sales, operating earnings for the first quarter of 1999 will be about breakeven. In addition, our 35%-owned can manufacturing operations in Brazil have been adversely affected by the devaluation of Brazil's currency. While it is too early to forecast the final impact on first-quarter operating results, we believe it could be about $10 million (after taxes). 26 27 RISK FACTORS - ------------ This section should be read in conjunction with Items 1 and 3 of this report and the preceding portions of this Item. This report contains (and oral communications made by or on behalf of the Company may contain) forecasts, projections, estimates, statements of management's plans, objectives and strategies for the Company and other forward-looking statements. The Company's expectations for the future and related forward- looking statements are based on a number of assumptions and forecasts as to world economic growth and other economic indicators (including rates of inflation, industrial production, housing starts and light vehicle sales), trends in the Company's key markets, global aluminum supply and demand conditions, and aluminum ingot prices, among other items. By their nature, forward-looking statements involve risk and uncertainty, and various factors could cause the Company's actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. The Company is cautious about the outlook for the aluminum industry, at least through the first half of 1999. Demand for primary aluminum products in Asia was 12% lower in 1998 than in 1997, due largely to the economic recession there. The Company is forecasting an increase in global primary aluminum consumption for 1999 of only 1% - 2%. This growth rate is approximately equal to the expected growth rate for the global economy for 1999. If favorable economic conditions resume in Asia, Brazil and other emerging markets, the Company's long-term outlook for growth in aluminum consumption is 2.5% - 4% per year. Economic and/or market conditions other than those forecasted by the Company in the preceding paragraph could cause the Company's actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. The Company's outlook for 1999 and beyond could be jeopardized by a further delay of economic recovery in Asia and Brazil, as well as in other emerging markets. The following factors also could affect the Company's results: . Primary aluminum is an internationally traded commodity. The price of primary aluminum is subject to worldwide market forces of supply and demand and other influences. Prices can be volatile. Because a significant portion of the Company's shipments are primary aluminum, changes in aluminum pricing have a rapid effect on the Company's operating results. The Company's use of contractual arrangements, including fixed-price sales contracts, fixed-price supply contracts, and forward, futures and option contracts, reduces its exposure to price volatility but does not eliminate it. . The markets for most aluminum products are highly competitive. Certain of the Company's competitors are larger than the Company in terms of total assets and operations and have greater financial resources. Certain foreign governments are involved in the operation and/or ownership of certain competitors and may be motivated by political as well as economic considerations. In addition, aluminum competes with other materials, such as steel, plastics and glass, among others, for various applications in the Company's key markets. Plastic products compete with products made of glass, aluminum, steel, paper, wood and ceramics, among others. Unanticipated actions or developments by or affecting the Company's competitors and/or the willingness of customers to accept substitutions for the products sold by the Company could affect results. [FN] ________________________ Forward-looking statements can be identified generally as those containing words such as "should," "will," "will likely result," "hope," "forecast," "outlook," "project," "estimate," "expect," "anticipate," or "plan" and words of similar effect. [FN] 27 28 RISK FACTORS - continued - ------------ . The Company spends substantial capital and operating amounts relating to ongoing compliance with environmental laws. In addition, the Company is involved in remedial investigations and actions in connection with past disposal of wastes. Estimating future environmental compliance and remediation costs is imprecise due to the continuing evolution of environmental laws and regulatory requirements and uncertainties about their application to the Company's operations, the availability and application of technology, the identification of currently unknown remediation sites, and the allocation of costs among potentially responsible parties. . Unanticipated material legal proceedings or investigations, or the disposition of those currently pending against the Company other than as anticipated by management and counsel, could affect the Company's results. . Changes in the costs of power, resins, caustic soda, green coke and other raw materials can affect results. . A number of the Company's operations are cyclical and can be influenced by economic conditions. . A failure to complete the Company's major capital projects, such as expansion of the Worsley Alumina Refinery, as scheduled and within budget could affect the Company's results. . The Company's results may be adversely affected if it fails to timely meet its Year 2000 readiness goals. The Company's assessments of the effort required to meet its Year 2000 readiness goal and the total cost of its Year 2000 Remediation Project are based on the Company's best estimates. These were derived using numerous assumptions of future events, including the continued availability of certain resources and other factors. However, we cannot guarantee these estimates are accurate and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Also, there can be no guarantee that other companies with which the Company does business will be converted on a timely basis or their failure to be Year 2000 compliant will not have an adverse effect on the Company. . A strike at a customer facility or a significant downturn in the business of a key customer supplied by the Company could affect the Company's results. . Since late 1996, the Company has been conducting a Portfolio Review of all its operations. The Company has signed a definitive agreement for the sale of its can stock complex in Alabama, which consists of a rolling mill, two reclamation plants and a coil coating facility. Title to certain of the assets was transferred to the buyer in December 1998. The final closing for the remainder of the assets is scheduled to occur by the end of the first quarter of 1999 and is subject to customary closing conditions. The Company has also entered into a definitive agreement for the sale of its aluminum extrusion operations in Spain, as well as our distribution operations for architectural systems located in Spain. This transaction is subject to customary closing conditions and is expected to close by the end of the first quarter of 1999. In addition to the factors referred to above, the Company is exposed to general financial, political, economic and business risks in connection with its worldwide operations. The Company continues to evaluate and manage its operations in a manner to mitigate the effects from exposure to such risks. In general, the Company's expectations for the future are based on the assumption that conditions relating to costs, currency values, competition and the legal, regulatory, financial, political and business environments in the worldwide economies and markets in which the Company operates will not change significantly overall. 28 29 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF INCOME (millions, except per share amounts) ============================================================================ - ---------------------------------------------------------------------------- Years ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------- REVENUES $5,859 $6,900 $7,016 COSTS AND EXPENSES Cost of products sold 4,774 5,658 5,856 Selling, general and administrative expenses 378 406 445 Depreciation and amortization 252 368 365 Interest 114 153 160 Operational restructuring effects - net 144 75 37 - ---------------------------------------------------------------------------- 5,662 6,660 6,863 - ---------------------------------------------------------------------------- EARNINGS Income before income taxes, extraordinary loss and cumulative effects of accounting changes 197 240 153 Taxes on income 45 104 49 - ---------------------------------------------------------------------------- Income before extraordinary loss and cumulative effects of accounting changes 152 136 104 Extraordinary loss (63) - - Cumulative effects of accounting changes (23) - (15) - ---------------------------------------------------------------------------- NET INCOME 66 136 89 Preferred stock dividends - - 36 - ---------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 66 $ 136 $ 53 ============================================================================ EARNINGS PER SHARE Basic: Average shares outstanding 69,709,000 73,412,000 63,730,000 Income before extraordinary loss and cumulative effects of accounting changes $2.18 $1.86 $ 1.06 Extraordinary loss (0.91) - - Cumulative effects of accounting changes (0.33) - (0.24) - ---------------------------------------------------------------------------- Net income $0.94 $1.86 $ 0.82 ============================================================================ Diluted: Average shares outstanding 69,937,000 74,004,000 63,947,000 Income before extraordinary loss and cumulative effects of accounting changes $2.18 $1.84 $1.06 Extraordinary loss (0.91) - - Cumulative effects of accounting changes (0.33) - (0.24) - ---------------------------------------------------------------------------- Net income $0.94 $1.84 $0.82 ============================================================================ CASH DIVIDENDS PER COMMON SHARE $1.40 $1.40 $1.40 ============================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
29 30
CONSOLIDATED BALANCE SHEET ============================================================================ December 31 (millions) 1998 1997 - ---------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 94 $ 70 Receivables: Customers, less allowances of $14 (1997 - $16) 710 841 Other 184 174 - ---------------------------------------------------------------------------- Total receivables 894 1,015 Inventories 500 744 Prepaid expenses and other 114 165 - ---------------------------------------------------------------------------- Total current assets 1,602 1,994 Unincorporated joint ventures and associated companies 1,478 1,381 Property, plant and equipment - net 2,024 2,954 Deferred taxes 363 249 Other assets 667 648 - ---------------------------------------------------------------------------- Total assets $6,134 $7,226 ============================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade payables $ 401 $ 512 Accrued compensation and related amounts 183 202 Payables to unincorporated joint ventures and associated companies 75 81 Commercial paper 82 - Notes payable to banks 34 67 Long-term debt 196 142 Other liabilities 270 279 - ---------------------------------------------------------------------------- Total current liabilities 1,241 1,283 Long-term debt 1,035 1,501 Postretirement benefits 1,029 1,043 Environmental 161 158 Deferred taxes 272 269 Other liabilities 202 233 Stockholders' equity: Common stock 1,533 1,521 Retained earnings 1,222 1,253 Treasury stock, at cost (526) - Accumulated other comprehensive income (35) (35) - ---------------------------------------------------------------------------- Total stockholders' equity 2,194 2,739 Contingent liabilities and commitments (Note 12) - ---------------------------------------------------------------------------- Total liabilities and stockholders' equity $6,134 $7,226 ============================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
30 31
CONSOLIDATED STATEMENT OF CASH FLOWS ============================================================================ Years ended December 31 (millions) 1998 1997 1996 - ---------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 66 $ 136 $ 89 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 252 368 365 Operational restructuring effects 144 75 37 Extraordinary loss 63 - - Cumulative effects of accounting changes 23 - 15 Other (3) 28 26 Changes in operating assets and liabilities net of effects from acquisitions and dispositions: Accounts payable, accrued and other liabilities (106) 105 (64) Receivables (53) (194) 67 Inventories 78 (108) 93 Environmental and restructuring liabilities (52) (48) (46) Other (73) 1 (62) - ---------------------------------------------------------------------------- Net cash provided by operating activities 339 363 520 INVESTING ACTIVITIES Capital investments: Operational (155) (152) (195) Strategic (186) (120) (237) Sales of assets - operational restructuring 1,147 367 - Other (38) (3) (5) - ---------------------------------------------------------------------------- Net cash provided by (used in) investing activities 768 92 (437) FINANCING ACTIVITIES Proceeds from long-term debt 415 - 40 Reduction of long-term debt and other financing liabilities (929) (245) (105) Increase (decrease) in short-term borrowings 47 (138) 111 Cash dividends paid (100) (99) (135) Repurchase of common stock (526) - - Stock options exercised 10 59 5 - ---------------------------------------------------------------------------- Net cash used in financing activities (1,083) (423) ( 84) CASH AND CASH EQUIVALENTS Net increase (decrease) 24 32 ( 1) At beginning of year 70 38 39 - ---------------------------------------------------------------------------- At end of year $ 94 $ 70 $ 38 ============================================================================ Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 134 $ 164 $ 176 Income taxes 117 21 2 ============================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
31 32
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ============================================================================ - ---------------------------------------------------------------------------- Years ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------- SHARES (thousands) Common stock Balance at January 1 73,909 72,719 63,598 Shares issued under employee benefit plans 196 1,190 101 Shares issued on conversion/redemption of preferred stock - - 9,020 - ---------------------------------------------------------------------------- Balance at December 31 74,105 73,909 72,719 - ---------------------------------------------------------------------------- Treasury stock Balance at January 1 - - - Purchased and held as treasury stock (9,648) - - - ---------------------------------------------------------------------------- Balance at December 31 (9,648) - - - ---------------------------------------------------------------------------- Net common shares outstanding 64,457 73,909 72,719 ============================================================================ DOLLARS (millions) Common stock Balance at January 1 $1,521 $1,451 941 Shares issued under employee benefit plans 12 70 5 Shares issued on conversion/redemption of preferred stock - - 505 - ---------------------------------------------------------------------------- Balance at December 31 $1,533 $1,521 $1,451 - ---------------------------------------------------------------------------- Retained earnings Balance at January 1 $1,253 $1,220 $1,256 Net income 66 136 89 Cash dividends declared: Preferred stock (PRIDES) - - (36) Common stock (97) (103) (89) - ---------------------------------------------------------------------------- Balance at December 31 $1,222 $1,253 $1,220 - ---------------------------------------------------------------------------- Treasury stock Balance at January 1 $ - $ - $ - Purchased and held as treasury stock (526) - - - ---------------------------------------------------------------------------- Balance at December 31 $ (526) $ - $ - - ---------------------------------------------------------------------------- Accumulated other comprehensive income (loss) Balance at January 1 $ (35) $ (37) $ (85) Foreign currency translation adjustments 5 - (16) Income taxes (5) 2 1 Pension liability adjustment - - 97 Income taxes - - (34) ------------------------------ Other comprehensive income - 2 48 - ---------------------------------------------------------------------------- Balance at December 31 $ (35) $ (35) $ (37) - ---------------------------------------------------------------------------- Total stockholders' equity $2,194 $2,739 $2,634 ============================================================================ COMPREHENSIVE INCOME (millions) Net income $ 66 $ 136 $ 89 Other comprehensive income - 2 48 - ---------------------------------------------------------------------------- Comprehensive income $ 66 $ 138 $ 137 ============================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In the tables, dollars are in millions, except per share amounts. Certain amounts have been reclassified to conform to the 1998 presentation.) - ---------------------------------------------------------------- 1. ACCOUNTING POLICIES GENERAL The consolidated financial statements are prepared in conformity with generally accepted accounting principles. As a result, management makes estimates and assumptions that affect the following: . reported amounts of revenues and expenses during the reporting period . reported amounts of assets and liabilities at the date of the financial statements . disclosure of contingent liabilities at the date of the financial statements Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after eliminating inter-company transactions, profits and losses. The Company accounts for investments in unincorporated joint ventures on an investment cost basis adjusted for the Company's share of the non- cash production charges of the operation. Unincorporated joint ventures are production facilities without marketing or sales activities. Products produced are distributed in kind and cash production costs are allocated to the joint venturers based upon their respective percentage interests in the facilities. Our operating results include our share of cash production costs and non-cash production charges (principally depreciation) as well as revenues from the ultimate sale by us of our share of the products. Investments in associated companies (20% - 50% owned) are carried at cost adjusted for the Company's equity in undistributed net income. REVENUE RECOGNITION Revenues are recognized when products are shipped and ownership risk and title pass to the customer. INVENTORIES Inventories are stated at the lower of cost or market. Inventory costs were determined by the last-in, first-out (LIFO); first-in, first-out (FIFO); and average-cost methods. LIFO method inventories were $178 million at the end of 1998 (1997 - $270 million). FIFO and average-cost method inventories were $322 million at the end of 1998 (1997 - $474 million). Inventories would increase by $221 million at the end of 1998 (1997 - $425 million) if the FIFO method were applied to LIFO method inventories. The favorable impact of the liquidation of certain LIFO layers that occurred as a result of the Company's divestitures ($184 million in 1998 and $58 million in 1997) is included in "Operational restructuring effects - net" in the Consolidated Statement of Income. In 1996, the liquidation of certain LIFO layers decreased cost of products sold by $30 million. The inventories in these LIFO layers were acquired at lower costs in prior years. Since inventories are sold at various stages of processing, there is no practical distinction between finished products, in-process products and other materials. Inventories are therefore presented as a single classification. DEPRECIATION AND AMORTIZATION The straight-line method is used to depreciate plant and equipment over their estimated useful lives (buildings and leasehold improvements - 10 to 40 years, machinery and equipment - - 5 to 20 years). Improvements to leased properties are generally amortized over the shorter of the terms of the respective leases or the estimated useful life of the improvement. 33 34 1. ACCOUNTING POLICIES - continued ENVIRONMENTAL EXPENDITURES Remediation costs are accrued when it is probable that such efforts will be required and the related costs can be reasonably estimated. POSTEMPLOYMENT BENEFITS The expected cost of postemployment benefits is accrued when it becomes probable that such benefits will be paid. HEDGING Forward, futures, option and swap contracts are designated to manage market risks resulting from fluctuations in the aluminum, natural gas, foreign currency and debt markets. These instruments, which are not held for trading purposes, are effective in minimizing such risks by creating equal and offsetting exposures. Unrealized gains and losses are deferred and recorded as a component of the underlying hedged transaction when it occurs. Realized gains or losses from matured and terminated hedge contracts are recorded in other assets or liabilities until the underlying hedged transactions are consummated. Realized and unrealized gains or losses on hedge contracts relating to transactions that are subsequently not expected to occur are recognized in results currently. None of these instruments contains multiplier or leverage features. There is exposure to credit risk if the other parties to these instruments do not meet their obligations. Creditworthiness of the other parties is closely monitored, and they are expected to fulfill their obligations. Contracts used to manage risks in these markets are not material. CUMULATIVE EFFECTS OF ACCOUNTING CHANGES In 1998, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires costs of start-up activities and organization costs to be expensed as incurred. The Company adopted the SOP in 1998 and recognized a charge for the cumulative effect of accounting change of $23 million. In 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The cumulative effect of adopting the standard was a loss of $15 million. The loss was for the impairment of certain real estate held for sale at the beginning of 1996, principally undeveloped land. STATEMENT OF CASH FLOWS In preparing the Consolidated Statement of Cash Flows, all highly liquid, short-term investments purchased with an original maturity of three months or less are considered to be cash equivalents. COMPREHENSIVE INCOME In 1998, the Company adopted the Financial Accounting Standards Board's (FASB) Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adopting the Statement had no impact on the Company's net income or stockholders' equity. Statement No. 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Prior-year financial statements have been reclassified to conform to the requirements of Statement No. 130. Comprehensive income is presented in the Consolidated Statement of Changes in Stockholders' Equity. STOCK OPTIONS Stock options are accounted for using the intrinsic value method. Except as discussed below, compensation expense is not recognized because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Compensation expense is recognized for performance-based stock options if it becomes probable that the performance condition will be satisfied. Compensation expense is the difference between the market price of the common stock when the performance condition is satisfied and the exercise price of the stock options. 34 35 1. ACCOUNTING POLICIES - continued ACCOUNTING FOR THE COSTS OF DEVELOPING OR OBTAINING INTERNAL-USE SOFTWARE In 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires qualifying computer software costs incurred in connection with obtaining or developing software for internal use to be capitalized. The Company currently capitalizes the costs of purchased software and expenses the costs of internally developed software. The Company plans to adopt the SOP in 1999 on a prospective basis when it becomes effective. The Company has not yet determined the impact this statement will have on its financial position or results of operations. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards for derivative instruments and hedging activities. The Company must adopt this statement by January 1, 2000. The Company has not determined the impact this statement will have on its financial position or results of operations. 2. OPERATIONAL RESTRUCTURING In 1998, the Company sold the following: . U.S. recycling operations . aluminum extrusion facilities in Canada . European rolling mill operations . Illinois sheet and plate plant . North American aluminum beverage can operations In 1997, the Company sold the following: . U.S. residential construction products business . aluminum reclamation plant in Virginia . aluminum extrusion plants in Virginia and Texas . coal properties in Kentucky . one-half of its wholly owned interest in a rolling mill and related assets in Canada . aluminum powder and paste plant in Kentucky In 1996, operational restructuring costs resulted from the closing of a can plant in Texas. In early 1999, the Company expects to finalize the sale of its Alabama can stock complex. The carrying amount of the related net assets was $216 million at December 31, 1998. Financial information for 1998, 1997 and 1996 relating to operations divested and the Alabama can stock complex is reflected in the Restructuring category in Note 11. Customer revenues generated by these entities were $1.4 billion in 1998, $2.7 billion in 1997 and $3.1 billion in 1996. Depreciation expense in 1998 was reduced $65 million as a result of ceasing depreciation on assets held for sale relating to the divestitures. The favorable impact of the liquidation of certain LIFO layers that occurred as a result of the Company's divestitures ($184 million in 1998 and $58 million in 1997) is included in "Operational restructuring effects - net" in the Consolidated Statement of Income. After finalizing the sale of the Alabama can stock complex, the Company's restructuring activities will be essentially complete. As of the end of 1998, the only assets remaining in the Restructuring category relate to the Alabama can stock complex. In accordance with the terms of the definitive agreement to sell this complex, the Company is operating the facility on behalf of the purchasers for a management fee until the final closing. As a result, the Company expects no revenues or operating results to be reflected in the Restructuring category in 1999. 35 36 2. OPERATIONAL RESTRUCTURING - continued The Company recognized the following operational restructuring charges:
1998 1997 1996 ----------------------- Employee terminations $ 39 $49 $12 Additional postretirement benefits 105 - 19 Asset dispositions: Losses 337 85 5 (Gains) (349) (64) - Other 12 5 1 ----------------------- $144 $75 $37 =======================
The charges for employee terminations recorded in 1998, 1997 and 1996 were principally for severance and related costs for approximately 2,000 salaried and hourly employees. The employees worked principally at domestic plants. Approximately 600 employees worked at corporate headquarters. Employees terminated in each period were 1,385 in 1998, 498 in 1997 and 65 in 1996. An analysis of the accrual for restructuring liabilities follows:
1998 1997 1996 ------------------------------ Balance at January 1 $ 44 $ 12 $ - Accruals 44 54 13 Payments (40) (22) (1) ------------------------------ Balance at December 31 $ 48 $ 44 $ 12 ==============================
Liabilities at December 31, 1998 relating to the Company's restructuring activities are expected to be satisfied in 1999 ($32 million) and 2000 ($16 million) with cash provided by operating activities. Additional liabilities relating to contractual postretirement obligations are reflected in postretirement benefits on the balance sheet and will be settled over numerous future years in conjunction with the Company's funding of its pension and other postretirement benefit obligations. The Company used proceeds from completed divestitures for debt repayments and repurchases of common stock (see Notes 3 and 8). 3. EXTRAORDINARY LOSSES The Company had extraordinary losses from debt extinguishments in 1998 of $63 million (net of income tax benefit of $39 million). The debt extinguished at a loss consisted of $500 million of medium-term notes and $79 million of 9% debentures. 36 37 4. EARNINGS PER SHARE The following reconciles income and average shares for the basic and diluted earnings per share computations for "Income before extraordinary loss and cumulative effects of accounting changes."
1998 1997 1996 --------------------------------------- Income (numerator): Income before extraordinary loss and cumulative effects of accounting changes $152 $136 $104 Less convertible preferred stock (PRIDES) dividend - - 36 --------------------------------------- Basic and diluted income $152 $136 $68 ======================================= Average shares (denominator): Basic 69,709,000 73,412,000 63,730,000 Effect of dilutive securities: Stock options 228,000 592,000 217,000 --------------------------------------- Diluted 69,937,000 74,004,000 63,947,000 ======================================= Per share amounts for income before extraordinary loss and cumulative effects of accounting changes: Basic earnings per share $2.18 $1.86 $1.06 Diluted earnings per share 2.18 1.84 1.06 Antidilutive securities excluded: Convertible preferred stock (PRIDES) - - 8,950,000 Stock options 2,452,000 505,000 2,665,000
5. UNINCORPORATED JOINT VENTURES AND ASSOCIATED COMPANIES Investments in unincorporated joint ventures that produce alumina and primary aluminum consist of the following:
December 31 ------------------- 1998 1997 ------------------- Current assets $ 52 $ 42 Current liabilities (89) (66) Property, plant and equipment and other assets 1,203 1,078 ------------------- Net investment $1,166 $1,054 ===================
Property, plant and equipment and other assets in 1998 includes $150 million of construction in progress for the expansion of the joint-venture Worsley Alumina Refinery. 37 38 5. UNINCORPORATED JOINT VENTURES AND ASSOCIATED COMPANIES - continued Foreign-based associated companies produce bauxite, alumina, primary aluminum, hydroelectric power and fabricated aluminum products. Investments in these companies were $312 million at the end of 1998 (1997 - $327 million), including advances of $59 million (1997 - $50 million). Summarized financial information related to these entities follows:
Years ended December 31 --------------------------- 1998 1997 1996 --------------------------- Net sales $1,195 $999 $950 Cost of products sold 1,115 910 814 Net income (loss) (27) (14) 31 Reynolds' share of net income (loss): Included in revenues (pre-tax) $ (14) $ (5) $ 21 Included in cost of products sold (pre-tax) 12 15 11 Included in tax provision (1) (7) (14) --------------------------- $ (3) $ 3 $ 18
Part of Reynolds' share of the net income (loss) is reflected in cost of products sold (on a pre-tax basis) as an adjustment to the cost of raw materials purchased from certain of these entities.
December 31 ----------------- 1998 1997 ----------------- Current assets $810 $ 891 Noncurrent assets 977 1,015 Current liabilities 690 733 Noncurrent liabilities 456 470 Stockholders' equity 641 703
6. PROPERTY, PLANT AND EQUIPMENT (At Cost)
December 31 ------------------- 1998 1997 ------------------- Land, land improvements and mineral properties $ 244 $ 289 Buildings and leasehold improvements 781 1,045 Machinery and equipment 3,087 5,044 Construction in progress 170 155 ------------------- 4,282 6,533 Less allowances for depreciation and amortization 2,258 3,579 ------------------- Net property, plant and equipment $2,024 $2,954 ===================
38 39 7. FINANCING ARRANGEMENTS
December 31 ------------------- 1998 1997 ------------------- Public debt securities: Medium-term notes $ 329 $ 902 9-3/8% debentures due 1999 100 100 9% debentures due 2003 21 100 6-5/8% amortizing notes 228 285 Industrial and environmental control revenue bonds 227 237 Other arrangements: Credit facilities 315 - Mortgages and other notes payable 11 19 ------------------- 1,231 1,643 Amounts due within one year 196 142 ------------------- Long-term debt $1,035 $1,501 ===================
Long-term debt at December 31, 1998 matures as follows: 1999 $196 2000 153 2001 484 2002 70 2003 58 2004 - 2025 270 The medium-term notes, 9% debentures and 9-3/8% debentures were issued under a $1.65-billion shelf registration. The medium-term notes bear interest at an average fixed rate of 9% and have maturities ranging from 1999 to 2013. At December 31, 1998, $113 million of debt securities remained unissued under the shelf registration. A portion of this fixed-rate debt has been effectively converted to a variable rate through the use of a $100-million interest rate swap that matures in 2001. Under the swap, payments are received based on a fixed rate (6%) and made based on a variable rate (5.7% at December 31, 1998). The variable rate is based on the London Interbank Offer Rate (LIBOR). The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense. The fair value of this agreement and its effect on interest expense was not material. The Company terminated a $100-million interest rate swap in 1998. The small gain realized will be recognized over the remainder of the designated hedge period ending 2001. The 6-5/8% amortizing notes were issued at a discount (99.48%) and have an effective interest rate of 6.7%. The notes require annual principal repayments of $57 million between 1999 and 2002. Industrial and environmental control revenue bonds consist of variable-rate debt with interest rates averaging 4.2% at December 31, 1998. The variable rate is based on market interest rates. These bonds require principal repayments in lump sums periodically between 1999 and 2025. Letters of credit issued by banks support these bonds. The credit facilities have variable interest rates (6.7% at December 31, 1998) and mature in 2001. The variable rate is based on LIBOR. The Company can borrow up to $650 million under these facilities and pays an annual commitment fee of .1% on the unused portion. 39 40 7. FINANCING ARRANGEMENTS - continued Mortgages and other notes payable consist of fixed-rate debt with an average interest rate of 5%. They require principal repayment between 1999 and 2008. Certain financing arrangements contain restrictions that primarily consist of requirements to maintain specified financial ratios. These restrictions do not inhibit operations or the use of fixed assets. At December 31, 1998, the Company exceeded all such requirements. The fair value of long-term debt was approximately $1.2 billion at the end of 1998 (1997 - $1.8 billion). This value was determined by using discounted cash flow analysis. Interest capitalized was $12 million during 1998 (1997 - $8 million, 1996 - $13 million). Interest rates on short-term borrowings are based on market rates. The weighted-average interest rates were:
December 31 -------------------- 1998 1997 -------------------- Notes payable to banks 4.2% 4.5% Commercial paper 5.9 -
8. STOCKHOLDERS' EQUITY PREFERRED STOCK The Company has 21,000,000 shares of preferred stock authorized. Two million shares have been designated Series A Junior Participating Preferred. On December 31, 1996, the Company called for redemption all its outstanding PRIDES. As a result of the call, the Company issued a total of 9,019,990 shares of common stock upon the redemption or conversion of all of the PRIDES. A total of 4,673,800 shares of common stock were issued in redemption of 5,699,756 shares of PRIDES. The redemption rate of .82 of a share of common stock for each share of PRIDES was based on a call price of $48.077 per share and a common stock market price of $58.79 per share (determined as provided in the PRIDES governing documents). In lieu of redemption, holders of 5,300,244 shares of PRIDES elected to convert their shares of PRIDES (on or before the redemption date) into 4,346,190 shares of common stock (at a conversion rate of .82 of a share of common stock for each share of PRIDES). Dividends declared on each share of PRIDES were $3.31 in 1996. COMMON STOCK The Company has 200,000,000 shares of common stock (without par value) authorized. The Company has authorization to repurchase up to 18 million shares of common stock of which approximately 9.6 million shares have been repurchased through December 31, 1998. (See the Consolidated Statement of Changes in Stockholders' Equity for additional share repurchase information.) 40 41 8. STOCKHOLDERS' EQUITY - continued STOCK OPTIONS The Company has a non-qualified stock option plan under which key employees may be granted stock options at a price equal to the fair market value at the date of grant. Other than the performance-based options discussed below, the stock options outstanding at December 31, 1998 vest in one year and are exercisable between one year and ten years from the date of grant. The range of exercise prices for the stock options outstanding at December 31, 1998 was $45 to $64 and their weighted-average remaining contractual life was 6 years. A summary of stock option activity and related information follows (options are in thousands):
1998 1997 1996 ----------------------------- Outstanding at January 1 4,828 5,318 4,680 Granted 633 711 750 Exercised (192) (1,190) (103) Canceled (15) (11) (9) ----------------------------- Outstanding at December 31 5,254 4,828 5,318 Exercisable at December 31 4,621 4,121 4,569 Available for grant 304 923 1,630 Weighted-average prices: Outstanding at January 1 $55 $52 $52 Granted 62 64 55 Exercised 47 50 39 Canceled 62 56 52 Outstanding at December 31 56 55 52 Exercisable at December 31 55 53 52
In 1996, the Company also granted 150,000 performance-based stock options at an exercise price of $53.50 per share. The stock options will not be exercisable unless, on or before September 30, 1999, the closing price of the common stock equals or exceeds $80.25 per share for 30 consecutive days. If this condition is satisfied, the options may be exercised any time before March 31, 2000. Pro forma net income and earnings per share have been prepared based on expensing (after tax) the estimated fair value of stock options granted during 1998, 1997 and 1996. The estimated fair value of the stock options was determined by using a Black- Scholes option-pricing model. The estimated fair values and the weighted-average assumptions used to estimate those values follow:
Performance- Based Stock Options Options ------------------------------- -------- 1998 1997 1996 1996 ------------------------------- -------- Risk-free interest rate 5.5% 6.4% 6.9% 6.5% Dividend yield 2.2% 2.2% 2.6% 2.1% Volatility factor of the expected market price of the Company's common stock .256 .265 .278 .262 Expected life of the option 6 years 6 years 6 years 3 years Estimated fair value of each stock option granted $17.53 $19.53 $16.97 $11.73
41 42 8. STOCKHOLDERS' EQUITY - continued STOCK OPTIONS - continued The Black-Scholes option-pricing model was not developed for use in valuing employee stock options. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the input of highly subjective assumptions including expectations of future dividends and stock price volatility. The assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective input assumptions can materially affect the fair value estimate and because the employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable single measure of the employee stock options. The pro forma information follows:
1998 1997 1996 ----------------------- Pro forma net income $ 59 $ 127 $ 79 Pro forma earnings per share: Basic 0.84 1.73 0.67 Diluted 0.84 1.72 0.67
SHAREHOLDER RIGHTS PLAN In 1997, the Company adopted a new shareholder rights plan that replaced an existing, similar plan that was adopted in 1987 and expired in 1997, in accordance with its terms. Under the new plan, as subsequently amended, each share of common stock has one right attached and the rights trade with the common stock. The rights are exercisable only if a person or group buys 15% or more of the Company's common stock, or announces a tender offer for 15% or more of the outstanding common stock. Each right will entitle a holder to buy one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock at an exercise price of $300. If a person or group acquires 15% or more of the common stock of the Company, each right would permit its holder to buy common stock of the Company having a market value equal to two times the exercise price of the right. In addition, if at any time after the rights become exercisable, the Company is acquired in a merger, or if there is a sale or transfer of 50% or more of its assets or earning power, each right would permit its holder to buy common stock of the acquiring company having a market value equal to two times the exercise price of the right. The rights, which do not have voting privileges, expire in 2007. The Board of Directors may redeem the rights before expiration, under certain circumstances, for $0.01 per right. Until the rights become exercisable, they have no effect on earnings per share. These rights should not interfere with a business combination approved by the Board of Directors. However, they will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on redemption of the rights or acquiring a substantial number of the rights. 42 43 9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS The following information is disclosed in accordance with the requirements of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which the Company adopted in 1998.
Pension Benefits Other Benefits ------------------ ---------------- 1998 1997 1998 1997 ------------------ ---------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $2,081 $1,916 $ 899 $ 852 Service cost 36 37 7 7 Interest cost 151 147 62 64 Amendments 9 (5) - 1 Actuarial losses 166 148 60 41 Restructuring 39 (43) 5 (5) Benefits paid (133) (119) (69) (61) ------------------ ---------------- Benefit obligation at end of year $2,349 $2,081 $ 964 $ 899 ------------------ ---------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $2,099 $1,876 $ - $ - Actual return on plan assets 295 315 - - Company contributions 43 80 69 61 Restructuring (27) (53) - - Benefits paid (133) (119) (69) (61) ------------------ ---------------- Fair value of plan assets at end of year $2,277 $2,099 $ - $ - ------------------ ---------------- Funded status of the plans $ (72) $ 18 $ (964) $ (899) Unrecognized net actuarial loss (gain) 101 76 27 (31) Unrecognized prior service cost 66 117 (67) (109) ------------------ ---------------- Prepaid (accrued) benefit cost $ 95 $ 211 $(1,004) $(1,039) ================== ================ AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET Prepaid benefit cost $ 111 $ 217 $ - $ - Accrued benefit liability (68) (12) (1,004) (1,039) Intangible asset 52 6 - - ------------------ ---------------- Net amount recognized $ 95 $ 211 $(1,004) $(1,039) ================== ================ WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 9.25 9.25 - - Rate of compensation increase 4.50 4.50 - -
For measurement purposes, a 5.75% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% in 2002 and remain at that level thereafter. 43 44 9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS - continued
Pension Benefits Other Benefits ------------------ ------------------ 1998 1997 1996 1998 1997 1996 ------------------ ------------------ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 36 $ 37 $ 38 $ 7 $ 7 $ 8 Interest cost 151 147 138 62 64 62 Expected return on plan assets (175) (158) (151) - - - Amortization of prior service cost 14 19 17 (13) (17) (19) Recognized net actuarial loss (gain) 13 11 16 - (1) - ------------------ ------------------ Benefit cost $ 39 $ 56 $ 58 $56 $53 $51 ================== ==================
The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
1% 1% Increase Decrease ---------- ---------- Effect on total of service and interest cost components in 1998 $ 4 $ (3) Effect on postretirement benefit obligation as of December 31, 1998 $51 $(46)
10. TAXES ON INCOME The significant components of the provision for income taxes were:
1998 1997 1996 --------------------------- Current: Federal $ 6 $ 13 $ 3 Foreign 57 71 3 State 1 1 1 --------------------------- Total current 64 85 7 --------------------------- Deferred: Federal (31) (7) 2 Foreign 23 21 28 State (12) (2) (2) --------------------------- Total deferred (20) 12 28 --------------------------- Equity income 1 7 14 --------------------------- Total $ 45 $104 $49 ===========================
The deferred tax provision includes domestic carryforward benefits of $8 million (1997 - $2 million, 1996 - $28 million). 44 45 10. TAXES ON INCOME - continued The effective income tax rate varied from the U.S. statutory rate as follows:
1998 1997 1996 -------------------- U.S. rate 35% 35% 35% Income taxed at other than the U.S. rate (4) 9 2 Percentage depletion (3) (2) (3) Credits and other tax benefits (6) - - State income taxes and other 1 1 (2) -------------------- Effective rate 23% 43% 32% ====================
Income taxed at other than the U.S. rate includes a 10% adverse effect in 1997 from basis differences on asset dispositions. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1998, the Company had $844 million (1997 - $897 million) of deferred tax assets and $694 million (1997 - $827 million) of deferred tax liabilities that have been netted with respect to tax jurisdictions for presentation purposes. The significant components of these amounts were:
1998 1997 --------------------------------------- Asset Liability Asset Liability --------------------------------------- Retiree health benefits $381 $ - $392 $ - Tax carryforward benefits 141 - 170 - Environmental and restructuring costs 116 (2) 109 (2) Other 39 78 63 70 Tax over book depreciation (235) 196 (376) 201 Valuation reserve relating to tax carryforward benefits (20) - (19) - --------------------------------------- Total deferred tax assets and liabilities 422 272 339 269 Amount included as current in balance sheet 59 - 90 - --------------------------------------- Noncurrent deferred tax assets and liabilities $363 $272 $249 $269 =======================================
The tax carryforward benefits can be carried forward indefinitely except for $67 million that will expire primarily between 2003 and 2013. A valuation reserve of $20 million relating to certain of these benefits has been recorded. Alternatives continue to be evaluated that may result in the ultimate realization of a portion of these reserved assets. Income taxes have not been provided on the undistributed earnings ($973 million) of foreign subsidiaries. The Company uses these earnings to finance foreign expansion, reduce foreign debt or support foreign operating requirements. The geographic components of income (loss) before income taxes, extraordinary loss and the cumulative effects of accounting changes were as follows:
1998 1997 1996 ------------------------ Domestic $(86) $ 21 $ 4 Foreign 283 219 149 ------------------------ $197 $240 $153 ========================
45 46 11. COMPANY OPERATIONS The Company is organized into four market-based, global business units. The global business units and their principal products are: . Base Materials - alumina, carbon products, primary aluminum ingot and billet, and electrical rod . Packaging and Consumer - aluminum and plastic packaging and consumer products; printing products . Construction and Distribution - architectural construction products and the distribution of a wide variety of aluminum and stainless steel products . Transportation - aluminum wheels, heat exchangers and automotive structures The Restructuring category includes operations sold and the Company's Alabama can stock complex that we expect to finalize the sale of in early 1999. (See Note 2 for a discussion of the Company's restructuring activities.) The Other category consists principally of the corporate headquarters (and related selling, general and administrative expenses), operations in emerging markets, European extrusion operations, investments in Canada, Latin America and Saudi Arabia and real estate. Part of the real estate, principally undeveloped land, is held for sale and is expected to be sold over the next few years. The carrying amount for these held-for- sale assets was $42 million at December 31, 1998. Expenses relating to holding these assets, principally real estate taxes, were approximately $1 million per year in each of the last three years. The comparative periods of 1997 and 1996 have been restated for the following changes: . the Alabama can stock operation was reclassified from the Other category to the Restructuring category as we expect to finalize the sale in early 1999 . the investment in Latin American can operations was reclassified from the Restructuring category to the Other category as the Company expects to maintain its interest in these operations (no operational restructuring reserves were recorded as a result of our initial classification of this investment in the Restructuring category) ACCOUNTING POLICIES Operating income for each global business unit is calculated as revenues plus equity income less cost of products sold, depreciation and the unit's selling, general and administrative expenses. The sales between units are made at market-related prices. Cost of products sold reflects current costs. Assets for each global business unit include: . receivables (including internal receivables from other units) . inventories (based on the FIFO method) . property, plant and equipment (excluding construction in progress) . investments in unincorporated joint ventures and associated companies . other assets directly associated with the unit's operations Current liabilities for each global business unit include: . trade payables . accrued compensation and related amounts . other current liabilities . internal liabilities from other units For the geographic presentation, revenues are attributed to specific countries based on the location of the operation generating the revenue. Long-lived assets consist of all noncurrent assets such as property, plant and equipment and investments in joint ventures and associated companies. 46 47 11. COMPANY OPERATIONS - continued
Packaging Construction Base and and 1998 Materials Consumer Distribution - --------------------------------------------------------------------------- Customer aluminum shipments 668 141 184 Customer revenues: Aluminum $1,058 $ 787 $681 Nonaluminum 402 605 314 Intersegment revenues - aluminum 572 - - - --------------------------------------------------------------------------- Total revenues $2,032 $1,392 $995 =========================================================================== Operating income (loss) $ 290 $ 156 $ 39 Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ - $ - $ - Depreciation and amortization 138 44 7 Assets $3,000 $ 625 $375 Current liabilities (excluding debt) 305 110 86 - --------------------------------------------------------------------------- Net operating investment $2,695 $ 515 $289 =========================================================================== Unincorporated joint ventures and associated companies $1,299 $ - $ - Capital expenditures 228 38 10 =========================================================================== 1997 - --------------------------------------------------------------------------- Customer aluminum shipments 513 142 166 Customer revenues: Aluminum $ 923 $ 797 $614 Nonaluminum 405 602 328 Intersegment revenues - aluminum 1,187 - - - --------------------------------------------------------------------------- Total revenues $2,515 $1,399 $942 =========================================================================== Operating income (loss) $ 312 $ 141 $ 41 Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ (2) $ - $ - Depreciation and amortization 135 47 5 Assets $3,154 $ 663 $381 Current liabilities (excluding debt) 289 114 102 - --------------------------------------------------------------------------- Net operating investment $2,865 $ 549 $279 =========================================================================== Unincorporated joint ventures and associated companies $1,177 $ - $ - Capital expenditures 105 41 9 ===========================================================================
47 48
1998 Transportation Restructuring Other - --------------------------------------------------------------------------- Customer aluminum shipments 63 391 37 Customer revenues: Aluminum $337 $1,434 $ 127 Nonaluminum - 12 102 Intersegment revenues - aluminum - 12 - - --------------------------------------------------------------------------- Total revenues $337 $1,458 $ 229 =========================================================================== Operating income (loss) $(19) $ 124 $ (140) Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ - $ - $ (14) Depreciation and amortization 25 26 12 Assets $352 $ 282 $1,523 Current liabilities (excluding debt) 53 66 321 - --------------------------------------------------------------------------- Net operating investment $299 $ 216 $1,202 =========================================================================== Unincorporated joint ventures and associated companies $ 7 $ - $ 172 Capital expenditures 50 - 15 =========================================================================== 1997 - --------------------------------------------------------------------------- Customer aluminum shipments 66 737 39 Customer revenues: Aluminum $353 $2,610 $ 129 Nonaluminum - 79 60 Intersegment revenues - aluminum - 33 - - --------------------------------------------------------------------------- Total revenues $353 $2,722 $ 189 =========================================================================== Operating income (loss) $ 10 $ 102 $ (126) Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ 1 $ - $ (4) Depreciation and amortization 26 143 12 Assets $331 $1,921 $1,359 Current liabilities (excluding debt) 46 212 415 - --------------------------------------------------------------------------- Net operating investment $285 $1,709 $ 944 =========================================================================== Unincorporated joint ventures and associated companies $ 8 $ 172 $ 24 Capital expenditures 40 33 44 ===========================================================================
Reconciling 1998 Items Consolidated - --------------------------------------------------------------------------- Customer aluminum shipments - 1,484 Customer revenues: Aluminum $ - $4,424 Nonaluminum - 1,435 Intersegment revenues - aluminum (584) - - --------------------------------------------------------------------------- Total revenues $ (584) $5,859 =========================================================================== Operating income (loss) $ (139) $ 311 Interest expense 114 - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes $ 197 =========================================================================== Equity income (loss) $ - $ (14) Depreciation and amortization - 252 Assets $ (23) $6,134 Current liabilities (excluding debt) (12) 929 - --------------------------------------------------------------------------- Net operating investment $ (11) $5,205 =========================================================================== Unincorporated joint ventures and associated companies $ - $1,478 Capital expenditures - 341 =========================================================================== 1997 - --------------------------------------------------------------------------- Customer aluminum shipments - 1,663 Customer revenues: Aluminum $ - $5,426 Nonaluminum - 1,474 Intersegment revenues - aluminum (1,220) - - --------------------------------------------------------------------------- Total revenues $(1,220) $6,900 =========================================================================== Operating income (loss) $ (87) $ 393 Interest expense 153 - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes $ 240 =========================================================================== Equity income (loss) $ - $ (5) Depreciation and amortization - 368 Assets $ (583) $7,226 Current liabilities (excluding debt) (104) 1,074 - --------------------------------------------------------------------------- Net operating investment $ (479) $6,152 =========================================================================== Unincorporated joint ventures and associated companies $ - $1,381 Capital expenditures - 272 ===========================================================================
48 49 11. COMPANY OPERATIONS - continued
Packaging Construction Base and and 1996 Materials Consumer Distribution - --------------------------------------------------------------------------- Customer aluminum shipments 458 136 151 Customer revenues: Aluminum $ 763 $ 768 $600 Nonaluminum 373 585 332 Intersegment revenues - aluminum 944 - - - --------------------------------------------------------------------------- Total revenues $2,080 $1,353 $932 =========================================================================== Operating income (loss) $ 242 $ 149 $ 45 Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ - $ - $ - Depreciation and amortization 131 46 5 Assets $3,207 $ 635 $365 Current liabilities (excluding debt) 283 124 84 - --------------------------------------------------------------------------- Net operating investment $2,924 $ 511 $281 =========================================================================== Unincorporated joint ventures and associated companies $1,187 $ - $ - Capital expenditures 93 59 6 ===========================================================================
49 50
1996 Transportation Restructuring Other - --------------------------------------------------------------------------- Customer aluminum shipments 58 813 37 Customer revenues: Aluminum $326 $2,802 $ 132 Nonaluminum - 264 71 Intersegment revenues - aluminum - 39 - - --------------------------------------------------------------------------- Total revenues $326 $3,105 $ 203 =========================================================================== Operating income (loss) $ 17 $ (38) $ (128) Interest expense - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes =========================================================================== Equity income (loss) $ 3 $ - $ 18 Depreciation and amortization 23 143 17 Assets $304 $2,149 $1,394 Current liabilities (excluding debt) 38 256 320 - --------------------------------------------------------------------------- Net operating investment $266 $1,893 $1,074 =========================================================================== Unincorporated joint ventures and associated companies $ 8 $ 107 $ 35 Capital expenditures 47 167 60 ===========================================================================
Reconciling 1996 Items Consolidated - --------------------------------------------------------------------------- Customer aluminum shipments - 1,653 Customer revenues: Aluminum $ - $5,391 Nonaluminum - 1,625 Intersegment revenues - aluminum (983) - - --------------------------------------------------------------------------- Total revenues $(983) $7,016 =========================================================================== Operating income (loss) $ 26 $ 313 Interest expense 160 - --------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effects of accounting changes $ 153 =========================================================================== Equity income (loss) $ - $ 21 Depreciation and amortization - 365 Assets $(538) $7,516 Current liabilities (excluding debt) (85) 1,020 - --------------------------------------------------------------------------- Net operating investment $(453) $6,496 =========================================================================== Unincorporated joint ventures and associated companies $ - $1,337 Capital expenditures - 432 ===========================================================================
50 51 11. COMPANY OPERATIONS - continued RECONCILING ITEMS Reconciling items consist of the following:
1998 1997 1996 ----------------------------------- Operating income (loss) Inventory accounting adjustments $ 5 $ (12) $ 63 Operational restructuring effects (144) (75) (37) ----------------------------------- $(139) $ (87) $ 26 =================================== Assets: Inventory accounting adjustments $(248) $(547) $(530) Construction in progress 320 155 207 Internal receivables included in the assets of the global business units (95) (191) (215) ----------------------------------- $ (23) $(583) $(538) =================================== Current liabilities: Internal liabilities included in the current liabilities of the global business units $ (87) $(185) $(182) Payables to unincorporated joint ventures and associated companies 75 81 97 ---------------------------------- $ (12) $(104) $ (85) ==================================
Inventory accounting adjustments include elimination of unrealized profits on sales between global business units and LIFO inventory adjustments, including a LIFO inventory liquidation of $30 million in 1996. Construction in progress in 1998 includes $150 million related to the expansion of the joint- venture Worsley Alumina Refinery in Australia. Research and development expenditures were $31 million in 1998 (1997- $41 million, 1996 - $49 million).
Geographic Domestic Canada Other Foreign Consolidated ====================================================================== 1998 Revenues $4,653 $ 452 $ 754 $5,859 Long-lived assets 1,822 1,261 1,086 4,169 ====================================================================== 1997 Revenues $5,306 $ 523 $1,071 $6,900 Long-lived assets 2,582 1,321 1,080 4,983 ====================================================================== 1996 Revenues $5,461 $ 510 $1,045 $7,016 Long-lived assets 2,810 1,402 1,136 5,348 ======================================================================
The majority of the Other Foreign category is comprised of European operations except that long-lived assets include $673 million in 1998 ($569 million in 1997 and $563 million in 1996) related to the joint-venture Worsley Alumina Refinery located in Australia. 51 52 12. CONTINGENT LIABILITIES AND COMMITMENTS LEGAL Various suits, claims and actions are pending against the Company. In the opinion of management, after consultation with legal counsel, disposition of these suits, claims and actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company's competitive or financial position. No assurance can be given, however, that the disposition of one or more of such suits, claims or actions in a particular reporting period will not be material in relation to the reported results for such period. UNCONDITIONAL PURCHASE OBLIGATIONS The Company has committed to pay its proportionate share of annual primary aluminum production charges (including debt service) relating to its interest in an unincorporated joint venture. This arrangement includes a minimum commitment of $37 million in 1999. The present value of this commitment at December 31, 1998 was $36 million, after excluding interest of $1 million. The Company purchased approximately $90 million of primary aluminum in each of the last three years under this arrangement. LEASES Certain items of property, plant and equipment are leased under long-term operating leases. Lease expense was $36 million in 1998 ($45 million in 1997 and $50 million in 1996). Lease commitments at December 31, 1998, were $58 million. Leases covering major items contain renewal and/or purchase options that may be exercised. ENVIRONMENTAL The Company is involved in various worldwide environmental improvement activities resulting from past operations, including designation as a potentially responsible party (PRP), with others, at various Environmental Protection Agency-designated Superfund sites. The Company has recorded estimated amounts (on an undiscounted basis), which are expected to be sufficient to satisfy anticipated costs of known remediation requirements including such costs relating to sold locations. An analysis of the accrual for environmental remediation costs follows:
1998 1997 1996 --------------------------- Balance at January 1 $177 $203 $248 Accruals 7 - - Payments (12) (26) (45) --------------------------- Balance at December 31 $172 $177 $203 ===========================
The balance of the accrual at December 31, 1998 is expected to be spent over the next 15 to 20 years with the majority to be spent by the year 2002. Estimated environmental remediation costs are developed after considering, among other things, the following: . currently available technological solutions . alternative cleanup methods . risk-based assessments of the contamination . estimated proportionate share of remediation costs (if applicable) The Company may also use external consultants and consider, when available, estimates by other PRPs and governmental agencies and information regarding the financial viability of other PRPs. Based on information currently available, the Company believes it is unlikely that it will incur substantial additional costs as a result of failure by other PRPs to satisfy their responsibilities for remediation costs. 52 53 12. CONTINGENT LIABILITIES AND COMMITMENTS - continued Estimated costs for future environmental compliance and remediation are necessarily imprecise because of factors such as: . continuing evolution of environmental laws and regulatory requirements . availability and application of technology . identification of presently unknown remediation requirements . cost allocations among PRPs Furthermore, it is not possible to predict the amount or timing of future costs of environmental remediation that may subsequently be determined. Based on information presently available, such future costs are not expected to have a material adverse effect on the Company's competitive or financial position. However, such costs could be material to results of operations in a future interim or annual reporting period. 53 54 13. CANADIAN REYNOLDS METALS COMPANY, LTD. AND REYNOLDS ALUMINUM COMPANY OF CANADA, LTD. Financial statements for Canadian Reynolds Metals Company, Ltd. and Reynolds Aluminum Company of Canada, Ltd. have been omitted because certain securities registered under the Securities Act of 1933, of which these wholly owned subsidiaries of Reynolds Metals Company (Reynolds) are obligors (thus subjecting them to reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934), are fully and unconditionally guaranteed by Reynolds. Financial information relating to these companies is presented herein in accordance with Staff Accounting Bulletin 53 as an addition to the notes to the consolidated financial statements of Reynolds. Summarized financial information is as follows:
Canadian Reynolds Metals Company, Ltd. Years ended December 31 ---------------------------- 1998 1997 1996 ---------------------------- Net Sales: Customers $356 $237 $202 Parent company 466 680 599 ---------------------------- 822 917 801 Cost of products sold 708 733 677 Net income $ 84 $117 $ 65
December 31 ------------------- 1998 1997 ------------------- Current assets $ 155 $ 179 Noncurrent assets 1,206 1,206 Current liabilities (100) (148) Noncurrent liabilities (379) (415)
Reynolds Aluminum Company of Canada, Ltd. Years ended December 31 --------------------------- 1998 1997 1996 --------------------------- Net Sales: Customers $447 $ 519 $ 509 Parent company 455 648 517 --------------------------- 902 1,167 1,026 Cost of products sold 784 956 884 Net income $ 84 $ 117 $ 59
December 31 ------------------------ 1998 1997 ------------------------ Current assets $ 186 $ 208 Noncurrent assets 1,228 1,276 Current liabilities (103) (111) Noncurrent liabilities (389) (445)
54 55
Quarterly Results of Operations (Unaudited) (millions, except per share amounts) 1998 - ------------------------------------------------------------------------------ Quarter 1st 2nd 3rd 4th - ------------------------------------------------------------------------------ Revenues $1,532 $1,579 $1,368 $1,380 Gross profit 211 238 202 182 Income (loss) before extraordinary loss and cumulative effect of accounting change 58 (123) 262 (45) Extraordinary loss - (3) (60) - Cumulative effect of accounting change (23) - - - - ------------------------------------------------------------------------------ Net income (loss) $ 35 $ (126) $ 202 $ (45) ============================================================================== Earnings Per Share Basic: Average shares outstanding 73 72 69 64 Income (loss) before extraordinary loss and cumulative effect of accounting change $ 0.78 $(1.70) $ 3.80 $(0.71) Extraordinary loss - (0.04) (0.88) - Cumulative effect of accounting change (0.32) - - - - ------------------------------------------------------------------------------ Net income (loss) $ 0.46 $(1.74) $ 2.92 $(0.71) - ------------------------------------------------------------------------------ Diluted: Average shares outstanding 74 72 69 64 Income (loss) before extraordinary loss and cumulative effect of accounting change $ 0.78 $(1.70) $ 3.80 $(0.71) Extraordinary loss - (0.04) (0.88) - Cumulative effect of accounting change (0.32) - - - - ------------------------------------------------------------------------------ Net income (loss) $ 0.46 $(1.74) $ 2.92 $(0.71) ============================================================================== Net income (loss) includes the effect of the following item: Operational restructuring effects - net $ - $ (196) $ 201 $ (95) - ------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------ Quarter 1st 2nd 3rd 4th - ------------------------------------------------------------------------------ Revenues $1,624 $1,786 $1,717 $1,773 Gross profit 171 231 215 257 Net income (loss) $ 43 $ 55 $ 55 $ (17) ============================================================================== Earnings Per Share Basic: Average shares outstanding 73 73 74 74 - ------------------------------------------------------------------------------ Net income (loss) $ 0.59 $ 0.76 $ 0.74 $(0.23) - ------------------------------------------------------------------------------ Diluted: Average shares outstanding 73 74 75 74 - ------------------------------------------------------------------------------ Net income (loss) $ 0.59 $ 0.75 $ 0.73 $(0.23) ============================================================================== Net income (loss) includes the effect of the following item: Operational restructuring effects - net $ 23 $ (4) $ - $ (97) - ------------------------------------------------------------------------------ Gross profit equals revenues minus cost of products sold, and depreciation and amortization Operational restructuring effects are shown net of gains on sales of assets
55 56 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Stockholders and Board of Directors Reynolds Metals Company We have audited the accompanying consolidated balance sheets of Reynolds Metals Company as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement 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 Reynolds Metals Company at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1998 the Company changed its method of accounting for the costs of start-up activities and, in 1996 changed its method of accounting for the impairment of long-lived assets and long-lived assets to be disposed of. ERNST & YOUNG LLP Richmond, Virginia February 19, 1999 56 57 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The consolidated financial statements and exhibits listed below are filed as a part of this report. (1) Consolidated Financial Statements: Page ---- Consolidated statement of income - Years ended December 31, 1998, 1997 and 1996. 29 Consolidated balance sheet - December 31, 1998 and 1997. 30 Consolidated statement of cash flows - Years ended December 31, 1998, 1997 and 1996. 31 Consolidated statement of changes in stockholders' equity - Years ended December 31, 1998, 1997 and 1996. 32 Notes to consolidated financial statements. 33 Report of Ernst & Young LLP, Independent Auditors. 56 (2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts - Years Ended December 31, 1998, 1997 and 1996. 58 This report omits all other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission because they are not required, are inapplicable or the required information has otherwise been given. This report omits individual financial statements of Reynolds Metals Company because the restricted net assets (as defined in Accounting Series Release 302) of all subsidiaries included in the consolidated financial statements filed, in the aggregate, do not exceed 25% of the consolidated net assets shown in the consolidated balance sheet as of December 31, 1998. This report omits financial statements of all associated companies (20% to 50% owned) because no associated company is individually significant. 57 58
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------- Additions ------------------------ Balance at Charged to Charged to Balance at beginning costs and other end of Description of period expenses accounts Deductions period - ------------------------------------------------------------------------------- Allowance for doubtful accounts: 1998 $16 $7 $ - $ (9) (B) $14 1997 18 5 - (7) (B) 16 1996 20 9 - (11) (B) 18 Allowance for deferred income taxes: 1998 19 - 1 (A) - 20 1997 46 - 3 (A) (30) (C) 19 1996 45 - 1 (A) - 46
(A) Allowance for deferred income taxes is charged to provision for taxes on income. (B) Allowance for doubtful accounts deductions consist of the following:
1998 1997 1996 ---------------------------- Receivable write-offs $(6) $(5) $(11) Divestitures (3) (1) - Foreign currency translation effect - (1) - ---------------------------- $(9) $(7) $(11)
(C) Allowance for deferred income taxes was due to divestitures. 58 59 (3) Exhibits * EXHIBIT 2 - Asset Purchase Agreement by and among Ball Corporation, Ball Metal Beverage Container Corp. and Reynolds Metals Company dated as of April 22, 1998. The Registrant agrees to furnish to the Commission upon request a copy of the disclosure schedules supplemental to the Asset Purchase Agreement. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1998, EXHIBIT 2) ** EXHIBIT 3.1 - Restated Certificate of Incorporation, as amended. ** EXHIBIT 3.2 - By-laws, as amended. EXHIBIT 4.1 - Restated Certificate of Incorporation. See EXHIBIT 3.1. EXHIBIT 4.2 - By-laws. See EXHIBIT 3.2. * EXHIBIT 4.3 - Indenture dated as of April 1, 1989 (the "Indenture") between Reynolds Metals Company and The Bank of New York, as Trustee, relating to Debt Securities. (File No. 001-01430, Form 10-Q Report for the Quarter Ended March 31, 1989, EXHIBIT 4(c)) * EXHIBIT 4.4 - Amendment No. 1 dated as of November 1, 1991 to the Indenture. (File No. 001- 01430, 1991 Form 10-K Report, EXHIBIT 4.4) * EXHIBIT 4.5 - Rights Agreement dated as of March 8, 1999 between Reynolds Metals Company and ChaseMellon Shareholder Services, L.L.C. (File No. 001-01430, Form 8-K Report dated March 8, 1999, pertaining to Preferred Stock Purchase Rights, EXHIBIT 4.1) * EXHIBIT 4.6 - Form of 9-3/8% Debenture due June 15, 1999. (File No. 001-01430, Form 8-K Report dated June 6, 1989, EXHIBIT 4) * EXHIBIT 4.7 - Form of Fixed Rate Medium-Term Note. (Registration Statement No. 33-30882 on Form S-3, dated August 31, 1989, EXHIBIT 4.3) * EXHIBIT 4.8 - Form of Floating Rate Medium-Term Note. (Registration Statement No. 33-30882 on Form S-3, dated August 31, 1989, EXHIBIT 4.4) * EXHIBIT 4.9 - Form of Book-Entry Fixed Rate Medium-Term Note. (File No. 001-01430, 1991 Form 10- K Report, EXHIBIT 4.15) * EXHIBIT 4.10 - Form of Book-Entry Floating Rate Medium-Term Note. (File No. 001-01430, 1991 Form 10- K Report, EXHIBIT 4.16) * EXHIBIT 4.11 - Form of 9% Debenture due August 15, 2003. (File No. 001-01430, Form 8-K Report dated August 16, 1991, Exhibit 4(a)) _______________________ * Incorporated by reference. ** Previously filed. 59 60 * EXHIBIT 4.12 - Articles of Continuance of Societe d'Aluminium Reynolds du Canada, Ltee/Reynolds Aluminum Company of Canada, Ltd. (formerly known as Canadian Reynolds Metals Company, Limited -- Societe Canadienne de Metaux Reynolds, Limitee) ("RACC"), as amended. (File No. 001-01430, 1995 Form 10-K Report, EXHIBIT 4.13) * EXHIBIT 4.13 - By-Laws of RACC, as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended March 31, 1997, EXHIBIT 4.14) * EXHIBIT 4.14 - Articles of Incorporation of Societe Canadienne de Metaux Reynolds, Ltee/Canadian Reynolds Metals Company, Ltd. ("CRM"), as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1997, EXHIBIT 4.15) * EXHIBIT 4.15 - By-Laws of CRM, as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1997, EXHIBIT 4.16) * EXHIBIT 4.16 - Indenture dated as of April 1, 1993 among RACC, Reynolds Metals Company and The Bank of New York, as Trustee. (File No. 001-01430, Form 8-K Report dated July 14, 1993, EXHIBIT 4(a)) * EXHIBIT 4.17 - First Supplemental Indenture, dated as of December 18, 1995 among RACC, Reynolds Metals Company, CRM and The Bank of New York, as Trustee. (File No. 001-01430, 1995 Form 10-K Report, EXHIBIT 4.18) * EXHIBIT 4.18 - Form of 6-5/8% Guaranteed Amortizing Note due July 15, 2002. (File No. 001-01430, Form 8-K Report dated July 14, 1993, EXHIBIT 4(d)) EXHIBIT 9 - None. =* EXHIBIT 10.1 - Reynolds Metals Company 1987 Nonqualified Stock Option Plan. (Registration Statement No. 33-13822 on Form S-8, dated April 28, 1987, EXHIBIT 28.1) =* EXHIBIT 10.2 - Reynolds Metals Company 1992 Nonqualified Stock Option Plan. (Registration Statement No. 33-44400 on Form S-8, dated December 9, 1991, EXHIBIT 28.1) =* EXHIBIT 10.3 - Reynolds Metals Company Performance Incentive Plan, as amended and restated effective January 1, 1996. (File No. 001-01430, Form 10-Q Report for the Quarter Ended March 31, 1995, EXHIBIT 10.4) =* EXHIBIT 10.4 - Agreement dated December 9, 1987 between Reynolds Metals Company and Jeremiah J. Sheehan. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.9) =* EXHIBIT 10.5 - Supplemental Death Benefit Plan for Officers. (File No. 001-01430, 1986 Form 10-K Report, EXHIBIT 10.8) _______________________ * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 60 61 =* EXHIBIT 10.6 - Financial Counseling Assistance Plan for Officers. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.11) =* EXHIBIT 10.7 - Management Incentive Deferral Plan. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.12) =* EXHIBIT 10.8 - Deferred Compensation Plan for Outside Directors as Amended and Restated Effective December 1, 1993. (File No. 001-01430, 1993 Form 10-K Report, EXHIBIT 10.12) =** EXHIBIT 10.9 - Form of Indemnification Agreement for Directors and Officers. =* EXHIBIT 10.10 - Form of Executive Severance Agreement as amended between Reynolds Metals Company and key executive personnel, including each of the individuals listed in Item 4A of this report. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.10) =* EXHIBIT 10.11 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective May 20, 1988. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1988, EXHIBIT 19(a)) =* EXHIBIT 10.12 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective October 21, 1988. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1988, EXHIBIT 19(a)) =* EXHIBIT 10.13 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective January 1, 1987. (File No. 001-01430, 1988 Form 10-K Report, EXHIBIT 10.22) =* EXHIBIT 10.14 - Form of Stock Option and Stock Appreciation Right Agreement, as approved February 16, 1990 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, 1989 Form 10-K Report, EXHIBIT 10.24) =* EXHIBIT 10.15 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective January 18, 1991. (File No. 001-01430, 1990 Form 10-K Report, EXHIBIT 10.26) =* EXHIBIT 10.16 - Form of Stock Option Agreement, as approved April 22, 1992 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, Form 10- Q Report for the Quarter Ended March 31, 1992, EXHIBIT 28(a)) =* EXHIBIT 10.17 - Reynolds Metals Company Restricted Stock Plan for Outside Directors. (Registration Statement No. 33-53851 on Form S-8, dated May 27, 1994, EXHIBIT 4.6) _______________________ * Incorporated by reference. ** Previously filed. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 61 62 =* EXHIBIT 10.18 - Reynolds Metals Company New Management Incentive Deferral Plan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.30) =* EXHIBIT 10.19 - Reynolds Metals Company Salary Deferral Plan for Executives. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.31) =* EXHIBIT 10.20 - Reynolds Metals Company Supplemental Long Term Disability Plan for Executives. (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.32) =* EXHIBIT 10.21 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective August 19, 1994. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1994, EXHIBIT 10.34) =* EXHIBIT 10.22 - Amendment to Reynolds Metals Company 1992 Nonqualified Stock Option Plan effective August 19, 1994. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1994, EXHIBIT 10.35) =* EXHIBIT 10.23 - Amendment to Reynolds Metals Company New Management Incentive Deferral Plan effective January 1, 1995. (File No. 001-01430, 1994 Form 10-K Report, EXHIBIT 10.36) =* EXHIBIT 10.24 - Form of Split Dollar Life Insurance Agreement (Trustee Owner, Trustee Pays Premiums). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.34) =* EXHIBIT 10.25 - Form of Split Dollar Life Insurance Agreement (Trustee Owner, Employee Pays Premium). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.35) =* EXHIBIT 10.26 - Form of Split Dollar Life Insurance Agreement (Employee Owner, Employee Pays Premium). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.36) =* EXHIBIT 10.27 - Form of Split Dollar Life Insurance Agreement (Third Party Owner, Third Party Pays Premiums). (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.37) =* EXHIBIT 10.28 - Form of Split Dollar Life Insurance Agreement (Third Party Owner, Employee Pays Premiums). (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.38) =* EXHIBIT 10.29 - Reynolds Metals Company 1996 Nonqualified Stock Option Plan. (Registration Statement No. 333-03947 on Form S-8, dated May 17, 1996, EXHIBIT 4.6) =* EXHIBIT 10.30 - Amendment to Reynolds Metals Company 1992 Nonqualified Stock Option Plan effective January 1, 1993. (Registration Statement No. 333-03947 on Form S-8, dated May 17, 1996, EXHIBIT 99) _______________________ * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 62 63 =* EXHIBIT 10.31 - Form of Stock Option Agreement, as approved May 17, 1996 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1996, EXHIBIT 10.41) =* EXHIBIT 10.32 - Form of Three Party Stock Option Agreement, as approved May 17, 1996 by the Compensation Committee of the Company's Board of Directors. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1996, EXHIBIT 10.42) =* EXHIBIT 10.33 - Stock Option Agreement dated August 30, 1996 between Reynolds Metals Company and Jeremiah J. Sheehan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1996, EXHIBIT 10.43) =* EXHIBIT 10.34 - Amendment to Deferred Compensation Plan for Outside Directors effective August 15, 1996. (File No. 001-01430, Form 10- Q Report for the Quarter Ended September 30, 1996, EXHIBIT 10.44) =* EXHIBIT 10.35 - Amendment to Reynolds Metals Company New Management Incentive Deferral Plan effective January 1, 1996. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.38) =* EXHIBIT 10.36 - Amendment to Reynolds Metals Company Performance Incentive Plan effective January 1, 1996. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.39) =* EXHIBIT 10.37 - Reynolds Metals Company Supplemental Incentive Plan. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.40) =* EXHIBIT 10.38 - Reynolds Metals Company Stock Plan for Outside Directors. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.41) =* EXHIBIT 10.39 - Special Executive Severance Package for Certain Employees who Terminate Employment between January 1, 1997 and June 30, 1999 (or, if earlier, the date of completion of employment related actions related to the Company's portfolio review process, as designated by the Company's Chief Executive Officer), approved by the Compensation Committee of the Company's Board of Directors on January 17, 1997 and extended on May 15, 1998. (File No. 001- 01430, 1996 Form 10-K Report, EXHIBIT 10.42) =* EXHIBIT 10.40 - Special Award Program for Certain Executives or Key Employees, as approved by the Compensation Committee of the Company's Board of Directors on January 17, 1997. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.43) - ----------------- * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 63 64 =* EXHIBIT 10.41 - Amendment to Reynolds Metals Company 1996 Nonqualified Stock Option Plan effective December 1, 1997. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.41) =* EXHIBIT 10.42 - Amendment to Reynolds Metals Company Restricted Stock Plan for Outside Directors effective December 1, 1997. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.42) =* EXHIBIT 10.43 - Reynolds Metals Company Long-Term Performance Share Plan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1998, EXHIBIT 10.43) * EXHIBIT 10.44 - Asset Purchase Agreement by and among Ball Corporation, Ball Metal Beverage Container Corp. and Reynolds Metals Company dated as of April 22, 1998. See EXHIBIT 2. =** EXHIBIT 10.45 - Amendment to Reynolds Metals Company Restricted Stock Plan for Outside Directors effective January 1, 1999 =** EXHIBIT 10.46 - Amendment to Reynolds Metals Company Stock Plan for Outside Directors effective January 1, 1999 EXHIBIT 11 - Omitted; see Item 8 for computation of earnings per share EXHIBIT 12 - Not applicable EXHIBIT 13 - Not applicable EXHIBIT 16 - Not applicable EXHIBIT 18 - None ** EXHIBIT 21 - List of Subsidiaries of Reynolds Metals Company EXHIBIT 22 - None EXHIBIT 23 - Consent of Independent Auditors ** EXHIBIT 24 - Powers of Attorney ** EXHIBIT 27 - Financial Data Schedule Pursuant to Item 601 of Regulation S-K, certain instruments with respect to long-term debt of the Company are omitted because such debt does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any such instrument to the Commission upon request. ______________________ * Incorporated by reference. ** Previously filed. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 64 65 (b) Reports on Form 8-K During the fourth quarter of 1998, the Registrant filed three Current Reports on Form 8-K with the Commission, all of which reported matters under Item 5. The Registrant reported on the Form 8-K dated October 16, 1998 that it had advised local union officials at its Alloys can stock complex in Alabama that the proposed purchaser of the facility had informed the Registrant that it is critical that the purchaser and labor unions representing employees at the complex negotiate new labor agreements with respect to those employees. The report stated additionally that the Registrant had advised the labor leaders at the complex that if (1) the proposed purchaser and the unions are able to agree on new labor contracts and (2) the Registrant and the proposed purchaser are able to successfully conclude negotiations and complete the sale, the Registrant would treat the transaction as a "plant closing" for purposes of benefit payments under its existing labor contracts. The Registrant reported on the Form 8-K dated November 18, 1998 that the Registrant and the other principal shareholders of Latas de Aluminio S. A. - LATASA had finalized a review of strategic alternatives for the South American beverage can manufacturing company. The Registrant announced that it was not considering a disposition of its shares at that time. The Registrant reported on the Form 8-K dated December 30, 1998 that it had signed a definitive agreement to sell its Alloys can stock complex in Alabama to Wise Alloys LLC, an affiliate of Wise Metals Co., Inc. The Registrant has filed two Current Reports on Form 8-K with the Commission during the first quarter of 1999, both of which reported matters under Item 5. The Registrant filed a Form 8-K dated March 3, 1999 concerning its expected earnings for the first quarter of 1999. The Registrant reported on a Form 8-K dated March 8, 1999 that its Board of Directors had approved amendments to the Registrant's shareholder rights plan. 65 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized. REYNOLDS METALS COMPANY By ALLEN M. EAREHART ---------------------------- Allen M. Earehart Senior Vice President and Controller Date: October 20, 1999 66 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K For the fiscal year ended December 31, 1998 Commission File No. 001-01430 REYNOLDS METALS COMPANY Attached herewith is Exhibit 23. INDEX * EXHIBIT 2 - Asset Purchase Agreement by and among Ball Corporation, Ball Metal Beverage Container Corp. and Reynolds Metals Company dated as of April 22, 1998. The Registrant agrees to furnish to the Commission upon request a copy of the disclosure schedules supplemental to the Asset Purchase Agreement. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1998, EXHIBIT 2) ** EXHIBIT 3.1 - Restated Certificate of Incorporation, as amended. ** EXHIBIT 3.2 - By-laws, as amended. EXHIBIT 4.1 - Restated Certificate of Incorporation. See EXHIBIT 3.1. EXHIBIT 4.2 - By-laws. See EXHIBIT 3.2. * EXHIBIT 4.3 - Indenture dated as of April 1, 1989 (the "Indenture") between Reynolds Metals Company and The Bank of New York, as Trustee, relating to Debt Securities. (File No. 001-01430, Form 10-Q Report for the Quarter Ended March 31, 1989, EXHIBIT 4(c)) * EXHIBIT 4.4 - Amendment No. 1 dated as of November 1, 1991 to the Indenture. (File No. 001- 01430, 1991 Form 10-K Report, EXHIBIT 4.4) * EXHIBIT 4.5 - Rights Agreement dated as of March 8, 1999 between Reynolds Metals Company and ChaseMellon Shareholder Services, L.L.C. (File No. 001-01430, Form 8-K Report dated March 8, 1999, pertaining to Preferred Stock Purchase Rights, EXHIBIT 4.1) * EXHIBIT 4.6 - Form of 9-3/8% Debenture due June 15, 1999. (File No. 001-01430, Form 8-K Report dated June 6, 1989, EXHIBIT 4) * EXHIBIT 4.7 - Form of Fixed Rate Medium-Term Note. (Registration Statement No. 33-30882 on Form S-3, dated August 31, 1989, EXHIBIT 4.3) _______________________ * Incorporated by reference. ** Previously filed. 2 * EXHIBIT 4.8 - Form of Floating Rate Medium-Term Note. (Registration Statement No. 33-30882 on Form S-3, dated August 31, 1989, EXHIBIT 4.4) * EXHIBIT 4.9 - Form of Book-Entry Fixed Rate Medium-Term Note. (File No. 001-01430, 1991 Form 10- K Report, EXHIBIT 4.15) * EXHIBIT 4.10 - Form of Book-Entry Floating Rate Medium-Term Note. (File No. 001-01430, 1991 Form 10- K Report, EXHIBIT 4.16) * EXHIBIT 4.11 - Form of 9% Debenture due August 15, 2003. (File No. 001-01430, Form 8-K Report dated August 16, 1991, Exhibit 4(a)) * EXHIBIT 4.12 - Articles of Continuance of Societe d'Aluminium Reynolds du Canada, Ltee/Reynolds Aluminum Company of Canada, Ltd. (formerly known as Canadian Reynolds Metals Company, Limited -- Societe Canadienne de Metaux Reynolds, Limitee) ("RACC"), as amended. (File No. 001-01430, 1995 Form 10-K Report, EXHIBIT 4.13) * EXHIBIT 4.13 - By-Laws of RACC, as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended March 31, 1997, EXHIBIT 4.14) * EXHIBIT 4.14 - Articles of Incorporation of Societe Canadienne de Metaux Reynolds, Ltee/Canadian Reynolds Metals Company, Ltd. ("CRM"), as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1997, EXHIBIT 4.15) * EXHIBIT 4.15 - By-Laws of CRM, as amended. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1997, EXHIBIT 4.16) * EXHIBIT 4.16 - Indenture dated as of April 1, 1993 among RACC, Reynolds Metals Company and The Bank of New York, as Trustee. (File No. 001-01430, Form 8-K Report dated July 14, 1993, EXHIBIT 4(a)) * EXHIBIT 4.17 - First Supplemental Indenture, dated as of December 18, 1995 among RACC, Reynolds Metals Company, CRM and The Bank of New York, as Trustee. (File No. 001-01430, 1995 Form 10-K Report, EXHIBIT 4.18) * EXHIBIT 4.18 - Form of 6-5/8% Guaranteed Amortizing Note due July 15, 2002. (File No. 001-01430, Form 8-K Report dated July 14, 1993, EXHIBIT 4(d)) EXHIBIT 9 - None. =* EXHIBIT 10.1 - Reynolds Metals Company 1987 Nonqualified Stock Option Plan. (Registration Statement No. 33-13822 on Form S-8, dated April 28, 1987, EXHIBIT 28.1) =* EXHIBIT 10.2 - Reynolds Metals Company 1992 Nonqualified Stock Option Plan. (Registration Statement No. 33-44400 on Form S-8, dated December 9, 1991, EXHIBIT 28.1) _______________________ * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 2 3 =* EXHIBIT 10.3 - Reynolds Metals Company Performance Incentive Plan, as amended and restated effective January 1, 1996. (File No. 001-01430, Form 10-Q Report for the Quarter Ended March 31, 1995, EXHIBIT 10.4) =* EXHIBIT 10.4 - Agreement dated December 9, 1987 between Reynolds Metals Company and Jeremiah J. Sheehan. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.9) =* EXHIBIT 10.5 - Supplemental Death Benefit Plan for Officers. (File No. 001-01430, 1986 Form 10-K Report, EXHIBIT 10.8) =* EXHIBIT 10.6 - Financial Counseling Assistance Plan for Officers. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.11) =* EXHIBIT 10.7 - Management Incentive Deferral Plan. (File No. 001-01430, 1987 Form 10-K Report, EXHIBIT 10.12) =* EXHIBIT 10.8 - Deferred Compensation Plan for Outside Directors as Amended and Restated Effective December 1, 1993. (File No. 001-01430, 1993 Form 10-K Report, EXHIBIT 10.12) =** EXHIBIT 10.9 - Form of Indemnification Agreement for Directors and Officers. =* EXHIBIT 10.10 - Form of Executive Severance Agreement as amended between Reynolds Metals Company and key executive personnel, including each of the individuals listed in Item 4A of this report. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.10) =* EXHIBIT 10.11 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective May 20, 1988. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1988, EXHIBIT 19(a)) =* EXHIBIT 10.12 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective October 21, 1988. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1988, EXHIBIT 19(a)) =* EXHIBIT 10.13 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective January 1, 1987. (File No. 001-01430, 1988 Form 10-K Report, EXHIBIT 10.22) =* EXHIBIT 10.14 - Form of Stock Option and Stock Appreciation Right Agreement, as approved February 16, 1990 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, 1989 Form 10-K Report, EXHIBIT 10.24) =* EXHIBIT 10.15 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective January 18, 1991. (File No. 001-01430, 1990 Form 10-K Report, EXHIBIT 10.26) _______________________ * Incorporated by reference. ** Previously filed. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 3 4 =* EXHIBIT 10.16 - Form of Stock Option Agreement, as approved April 22, 1992 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, Form 10- Q Report for the Quarter Ended March 31, 1992, EXHIBIT 28(a)) =* EXHIBIT 10.17 - Reynolds Metals Company Restricted Stock Plan for Outside Directors. (Registration Statement No. 33-53851 on Form S-8, dated May 27, 1994, EXHIBIT 4.6) =* EXHIBIT 10.18 - Reynolds Metals Company New Management Incentive Deferral Plan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.30) =* EXHIBIT 10.19 - Reynolds Metals Company Salary Deferral Plan for Executives. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.31) =* EXHIBIT 10.20 - Reynolds Metals Company Supplemental Long Term Disability Plan for Executives. (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1994, EXHIBIT 10.32) =* EXHIBIT 10.21 - Amendment to Reynolds Metals Company 1987 Nonqualified Stock Option Plan effective August 19, 1994. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1994, EXHIBIT 10.34) =* EXHIBIT 10.22 - Amendment to Reynolds Metals Company 1992 Nonqualified Stock Option Plan effective August 19, 1994. (File No. 001-01430, Form 10-Q Report for the Quarter Ended September 30, 1994, EXHIBIT 10.35) =* EXHIBIT 10.23 - Amendment to Reynolds Metals Company New Management Incentive Deferral Plan effective January 1, 1995. (File No. 001-01430, 1994 Form 10-K Report, EXHIBIT 10.36) =* EXHIBIT 10.24 - Form of Split Dollar Life Insurance Agreement (Trustee Owner, Trustee Pays Premiums). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.34) =* EXHIBIT 10.25 - Form of Split Dollar Life Insurance Agreement (Trustee Owner, Employee Pays Premium). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.35) =* EXHIBIT 10.26 - Form of Split Dollar Life Insurance Agreement (Employee Owner, Employee Pays Premium). (File No. 001-01430, Form 10-Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.36) =* EXHIBIT 10.27 - Form of Split Dollar Life Insurance Agreement (Third Party Owner, Third Party Pays Premiums). (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.37) =* EXHIBIT 10.28 - Form of Split Dollar Life Insurance Agreement (Third Party Owner, Employee Pays Premiums). (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1995, EXHIBIT 10.38) - --------------------- * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 4 5 =* EXHIBIT 10.29 - Reynolds Metals Company 1996 Nonqualified Stock Option Plan. (Registration Statement No. 333-03947 on Form S-8, dated May 17, 1996, EXHIBIT 4.6) =* EXHIBIT 10.30 - Amendment to Reynolds Metals Company 1992 Nonqualified Stock Option Plan effective January 1, 1993. (Registration Statement No. 333-03947 on Form S-8, dated May 17, 1996, EXHIBIT 99) =* EXHIBIT 10.31 - Form of Stock Option Agreement, as approved May 17, 1996 by the Compensation Committee of the Company's Board of Directors. (File No. 001-01430, Form 10- Q Report for the Quarter Ended June 30, 1996, EXHIBIT 10.41) =* EXHIBIT 10.32 - Form of Three Party Stock Option Agreement, as approved May 17, 1996 by the Compensation Committee of the Company's Board of Directors. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1996, EXHIBIT 10.42) =* EXHIBIT 10.33 - Stock Option Agreement dated August 30, 1996 between Reynolds Metals Company and Jeremiah J. Sheehan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended September 30, 1996, EXHIBIT 10.43) =* EXHIBIT 10.34 - Amendment to Deferred Compensation Plan for Outside Directors effective August 15, 1996. (File No. 001-01430, Form 10- Q Report for the Quarter Ended September 30, 1996, EXHIBIT 10.44) =* EXHIBIT 10.35 - Amendment to Reynolds Metals Company New Management Incentive Deferral Plan effective January 1, 1996. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.38) =* EXHIBIT 10.36 - Amendment to Reynolds Metals Company Performance Incentive Plan effective January 1, 1996. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.39) =* EXHIBIT 10.37 - Reynolds Metals Company Supplemental Incentive Plan. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.40) =* EXHIBIT 10.38 - Reynolds Metals Company Stock Plan for Outside Directors. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.41) =* EXHIBIT 10.39 - Special Executive Severance Package for Certain Employees who Terminate Employment between January 1, 1997 and June 30, 1999 (or, if earlier, the date of completion of employment related actions related to the Company's portfolio review process, as designated by the Company's Chief Executive Officer), approved by the Compensation Committee of the Company's Board of Directors on January 17, 1997 and extended on May 15, 1998. (File No. 001- 01430, 1996 Form 10-K Report, EXHIBIT 10.42) - ------------------ * Incorporated by reference. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 5 6 =* EXHIBIT 10.40 - Special Award Program for Certain Executives or Key Employees, as approved by the Compensation Committee of the Company's Board of Directors on January 17, 1997. (File No. 001-01430, 1996 Form 10-K Report, EXHIBIT 10.43) =* EXHIBIT 10.41 - Amendment to Reynolds Metals Company 1996 Nonqualified Stock Option Plan effective December 1, 1997. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.41) =* EXHIBIT 10.42 - Amendment to Reynolds Metals Company Restricted Stock Plan for Outside Directors effective December 1, 1997. (File No. 001-01430, 1997 Form 10-K Report, EXHIBIT 10.42) =* EXHIBIT 10.43 - Reynolds Metals Company Long-Term Performance Share Plan. (File No. 001- 01430, Form 10-Q Report for the Quarter Ended June 30, 1998, EXHIBIT 10.43) * EXHIBIT 10.44 - Asset Purchase Agreement by and among Ball Corporation, Ball Metal Beverage Container Corp. and Reynolds Metals Company dated as of April 22, 1998. See EXHIBIT 2. =** EXHIBIT 10.45 - Amendment to Reynolds Metals Company Restricted Stock Plan for Outside Directors effective January 1, 1999 =** EXHIBIT 10.46 - Amendment to Reynolds Metals Company Stock Plan for Outside Directors effective January 1, 1999 EXHIBIT 11 - Omitted; see Item 8 for computation of earnings per share EXHIBIT 12 - Not applicable EXHIBIT 13 - Not applicable EXHIBIT 16 - Not applicable EXHIBIT 18 - None ** EXHIBIT 21 - List of Subsidiaries of Reynolds Metals Company EXHIBIT 22 - None EXHIBIT 23 - Consent of Independent Auditors ** EXHIBIT 24 - Powers of Attorney ** EXHIBIT 27 - Financial Data Schedule - ---------------- * Incorporated by reference. ** Previously filed. = Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. 6 EX-23 2 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the use of our report dated February 19, 1999, included in the Annual Report on Form 10-K of Reynolds Metals Company for the year ended December 31, 1998, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. Our audits also included the financial statement schedule of Reynolds Metals Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the: . Registration Statement (Form S-8 No. 33-13822) pertaining to the Reynolds Metals Company 1987 Nonqualified Stock Option Plan, . Registration Statement (Form S-8 No. 33-44400) pertaining to the Reynolds Metals Company 1992 Nonqualified Stock Option Plan, . Registration Statement (Form S-8 No. 33-20498) pertaining to the Reynolds Metals Company Savings and Investment Plan for Salaried Employees, . Registration Statement (Form S-3 No. 33-43443) pertaining to the shelf registration of debt securities of Reynolds Metals Company, . Registration Statement (Form S-8 No. 33-66032) pertaining to the Reynolds Metals Company Savings Plan for Hourly Employees, . Registration Statement (Form S-8 No. 33-53847) pertaining to the Employees Savings Plan, . Registration Statement (Form S-8 No. 33-53851) pertaining to the Reynolds Metals Company Restricted Stock Plan for Outside Directors, . Registration Statement (Form S-3 No. 33-59168) pertaining to the registration of debt securities of Reynolds Aluminum Company of Canada, Ltd. (formerly known as Canadian Reynolds Metals Company Limited), . Registration Statement (Form S-8 No. 333-00929) pertaining to the Reynolds Metals Company Performance Incentive Plan, and . Registration Statement (Form S-8 No. 333-03947) pertaining to the Reynolds Metals Company 1996 Nonqualified Stock Option Plan, and in the related prospectuses of our report dated February 19, 1999, and included herein, with respect to the consolidated financial statements and schedule of Reynolds Metals Company included in the Annual Report (Form 10-K, as amended by Amendment No. 1 on Form 10-K/A) for the year ended December 31, 1998. ERNST & YOUNG LLP Richmond, Virginia October 14, 1999 -----END PRIVACY-ENHANCED MESSAGE-----