-----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, Icqlr9PwLEWSTeKY58N3ylNl0EZ8tUpK6NIONrUYAmfpMoIrUptSSTkjcR20Smuj cDy2/AFahqaycDa5mULK+Q== 0000934747-04-000014.txt : 20040312 0000934747-04-000014.hdr.sgml : 20040312 20040312085002 ACCESSION NUMBER: 0000934747-04-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH INDUSTRIES INC/DE/ CENTRAL INDEX KEY: 0000934747 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 133245741 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25642 FILM NUMBER: 04664205 BUSINESS ADDRESS: STREET 1: 500 WEST JEFFERSON STREET STREET 2: PNC PLAZA - 19TH FLOOR CITY: LOUISVILLE STATE: KY ZIP: 40202-2823 BUSINESS PHONE: 502-589-8100 MAIL ADDRESS: STREET 1: 500 WEST JEFFERSON STREET STREET 2: PNC PLAZA - 19TH FLOOR CITY: LOUISVILLE STATE: KY ZIP: 40202-2823 FORMER COMPANY: FORMER CONFORMED NAME: COMMONWEALTH ALUMINUM CORP DATE OF NAME CHANGE: 19941228 10-K 1 jb10k03.txt 2003 FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ____ to ____ ------------------- Commission File Number: 0-25642 COMMONWEALTH INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-3245741 (State of incorporation) (I.R.S. Employer Identification No.) 500 West Jefferson Street PNC Plaza - 19th Floor Louisville, Kentucky 40202-2823 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (502) 589-8100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock; Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_| The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2003 was $73,059,000. The number of shares outstanding of the registrant's common stock as of March 5, 2004 was 16,020,397. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual report to stockholders of Commonwealth Industries, Inc. for the year ended December 31, 2003 are incorporated by reference into Parts I and II and portions of the definitive Proxy Statement dated March 26, 2004 for the 2004 Annual Meeting of Stockholders to be held April 23, 2004 are incorporated by reference into Parts II and III. =============================================================================== COMMONWEALTH INDUSTRIES, INC. FORM 10-K For the Year Ended December 31, 2003 INDEX PART I Page ---- Item 1. Business.........................................................3 Item 2. Properties.......................................................9 Item 3. Legal Proceedings................................................9 Item 4. Submission of Matters to a Vote of Security Holders..............9 Item E.O. Executive Officers of the Registrant............................10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................................................11 Item 6. Selected Financial Data.........................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......11 Item 8. Financial Statements and Supplementary Data.....................11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................11 Item 9A. Controls and Procedures.........................................12 PART III Item 10. Directors and Executive Officers of the Registrant..............13 Item 11. Executive Compensation..........................................13 Item 12. Security Ownership of Certain Beneficial Owners and Management..13 Item 13 Certain Relationships and Related Transactions..................13 Item 14 Principal Accounting Fees and Services..........................13 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K..14 Signatures.................................................................19 PART I Item 1. Business. Commonwealth Industries, Inc. (the "Company") is one of North America's leading manufacturers of aluminum sheet and, through its Alflex Corporation subsidiary ("Alflex"), of electrical flexible conduit and prewired armored cable. The Company's aluminum sheet products are produced using the conventional, direct -chill rolling ingot casting process at the Company's multi-purpose aluminum rolling mill at Lewisport, Kentucky, one of the largest in North America, and by the continuous casting process at its facilities located in Uhrichsville, Ohio, and Carson, California. The Company operates coating lines at the Lewisport mill and at Company facilities in Bedford, Ohio, and Torrance, California. It also operates a tube mill and fabrication facility Kings Mountain, North Carolina. The electrical flexible conduit and prewired armored cable products are manufactured at Alflex facilities in Long Beach, California and Rocky Mount, North Carolina. In addition, Alflex has begun outsourcing a portion of its pre-fabrication assembly processes to a location in Tecate, Mexico. The aluminum sheet products manufactured by the Company are generally referred to as common alloy products. They are produced in a number of aluminum common alloys with thicknesses (gauge) of 0.008 to 0.250 inches, widths of up to 72 inches, and a variety of physical properties and packaging, in each case to meet customer specifications. These products are sold to distributors and end-users, principally for use in building and construction products such as roofing, siding, windows and gutters; transportation equipment such as truck trailers and bodies and automotive parts; and consumer durables such as cookware, appliances and lawn furniture. The Company also fabricates aluminum sheet into welded tube products for various markets. Other than for depot sales, which are for standard size products, substantially all of the Company's aluminum sheet products are produced in response to specific customer orders. Production of aluminum sheet products in 2003 was 773 million pounds or about 72% of capacity compared to 925 million pounds or about 86% of capacity in 2002. In 2003, the North American market for aluminum sheet products, excluding rigid container sheet, foil and exports, was approximately 3.6 billion pounds versus 3.9 billion pounds in 2002. Alflex manufactures metallic (aluminum and steel) and non-metallic (plastic) electrical flexible conduit and prewired armored cable, utilizing aluminum sheet manufactured by the Company. These products provide mechanical protection for electrical wiring installed in buildings in accordance with local building code requirements. Armored cable differs from electrical conduit in that it is pre-wired by Alflex, whereas end-users must pull wire through electrical conduit when conduit is installed. These products are used primarily by electrical contractors in the construction, renovation and remodeling of commercial and industrial facilities and multi-family dwellings. They also are used in the heating, ventilating and air-conditioning ("HVAC"), original equipment manufacturers ("OEM") and Do-It-Yourself ("DIY") markets. The products include preassembled and prepackaged products for commercial and DIY markets and commercial pre-fabricated wiring systems which provide significant savings in labor and installation costs for end-users. Historically, electrical wires were housed in rigid pipes in the walls of buildings. Rigid pipe remains the most widely used means of protecting wiring in commercial and other non-residential construction. Electrical flexible conduit made from steel was introduced in the 1920s. Flexible conduit is significantly easier to install than rigid pipe, resulting in cost savings to the installer. Aluminum flexible conduit, introduced to the market by Alflex, has in recent years become a significant factor due to its ease of installation, lighter weight and ease of cutting compared to steel flexible conduit or rigid pipe. In wet, harsh or corrosive environments, non-metallic or plastic jacketed steel flexible conduit may be used. Armored cable (conduit with pre-installed wire) made of steel or aluminum has captured an increasing share of the market from rigid pipe due to its pre-assembly, ease of installation and overall cost effectiveness. The Company estimates that at December 31, 2003 it had a backlog of firm orders for which product specifications have been defined of 133.7 million pounds of aluminum sheet products with an aggregate sales price of $143.6 million, compared to an estimate of 124.2 million pounds with an aggregate sales price of $122.9 million at December 31, 2002. Backlog is not a significant factor for the Company's electrical products. The Company operates in two reportable segments: aluminum and electrical products. The aluminum segment manufactures aluminum sheet for distributors and the transportation, construction, and consumer durables end-use markets. The electrical products segment manufactures flexible electrical wiring products for the commercial construction and do-it-yourself markets. Summarized financial information for the Company's segments is included in note 18 to the consolidated financial statements. Aluminum Sheet Products Net sales revenue in the Company's aluminum segment accounted for 89%, 88% and 87% of the Company's total net sales revenue in 2003, 2002 and 2001, respectively. Manufacturing The Company's aluminum sheet manufacturing facilities are comprised of the rolling mills at Lewisport, Kentucky, Uhrichsville, Ohio, and Carson, California, coating facilities at Lewisport, Bedford, Ohio, and Torrance, California and a tube mill and fabrication facility at Kings Mountain, North Carolina. The Lewisport mill uses the conventional, vertical direct-chill, rolling ingot casting process. This process permits the production of traditional aluminum sheet with strength, hardness, formability, finishing and other characteristics preferred for many applications. The flexibility permitted by this multi-purpose rolling mill enables the Company to target higher margin products, manufacture a variety of products with consistent high quality and respond quickly to shifts in market demand. In 2003, the Lewisport mill produced 405 million pounds of aluminum sheet products compared to 495 million pounds in 2002. At full capacity utilization, unit costs of converting metal to aluminum sheet products at Lewisport are believed to be among the lowest in the industry for plants using the conventional process. The Uhrichsville and Carson mills use low-cost, scrap-based twin-belt mini-mill continuous casting production technology. This process permits the efficient production of aluminum sheet alloys used in building and construction and other applications not requiring the more complex alloys or the physical characteristics better provided by the conventional casting method. The process eliminates several steps associated with conventional casting, thereby reducing manufacturing costs. Capital costs also are significantly lower than for mills using the conventional casting process. In 2003, the Uhrichsville and Carson mills together produced 368 million pounds of aluminum sheet products compared to 430 million pounds in 2002. Aluminum Supply Most of the aluminum metal used by the Company's rolling mills is purchased, principally from or through aluminum scrap dealers or brokers, in the form of aluminum scrap. The Company believes it is one of the largest users of aluminum scrap other than beverage can scrap in the United States and that the volume of its purchases assists it in obtaining scrap at competitive prices. The Company's remaining requirements are met with purchased primary metal, including metal produced in Russia to specifications that differ from the industry standard for primary aluminum but that is appropriate for the Company's needs. The Company has seven years remaining on a 10-year supply agreement with Glencore Ltd. ("Glencore"), a leading diversified trading and industrial company, for the purchase of primary aluminum. Under the agreement, the Company committed to purchase a minimum of 120 million pounds of P1020/99.7% aluminum at current market prices from Glencore each year over the 10-year term, which began in January 2001. The Company has met or exceeded the minimum purchase quantity for each year of the contract. Casting and Rolling At Lewisport, scrap, in some cases after processing in the Company's recycling facilities, and primary aluminum are melted in reverbatory furnaces. Small amounts of copper, magnesium, manganese and other metals are added to produce alloys with the desired hardness, formability and other physical characteristics. The molten aluminum is then poured through a mold surrounded by circulating water which cools and solidifies into an ingot about 24 inches thick and weighing as much as 30,000 pounds. The cooled ingot is conveyed to the rolling mill area for further processing. The rolling ingots are heated to a malleable state in soaking pits or tunnel furnaces. Then, in the next two stages--hot and cold rolling--the ingot is passed between rolls under pressure, causing it to become thinner and longer. The first rolling stage takes place in a "reversing" mill, so named because the ingot is passed back and forth between the work rolls, reversing itself after each pass. After it passes through the reversing mill the aluminum sheet moves through a continuous multi-stand hot mill, and then is cooled and cold rolled to its final thickness. The Uhrichsville and Carson rolling mills employ a continuous casting process in which molten aluminum is fed into a caster which produces a continuous thin slab that is immediately hot rolled into semi-finished aluminum sheet in a single manufacturing process. The aluminum sheet is then cooled and cold rolled to its final thickness as in the conventional process. The Uhrichsville and Carson mills use twin-belt thin-slab continuous casting, which the Company believes is the most efficient and most productive form of continuous casting. The Company and IMCO Recycling, Inc ("IMCO") are parties to a supply agreement under which IMCO serves as the major supplier of molten recycled aluminum for the Company's Uhrichsville mill. Under the IMCO supply agreement, the Company purchases aluminum scrap and delivers it to IMCO who then processes and converts it into molten metal at its recycling and processing facility located adjacent to the Company's mill. The Company is responsible for the treatment and disposal of the waste generated as a result of IMCO's processing services on behalf of the Company. The IMCO supply agreement expires March 31, 2009. The Company has an option to purchase the IMCO facility at the end of the supply agreement for an amount equal to five times the average earnings before interest, taxes, depreciation and amortization of the facility as defined in the supply agreement. The Company also has a right of first refusal if IMCO wishes to sell the facility. The Carson rolling mill processes its own scrap to produce molten metal, utilizing current delacquering and melting technology. The Company has paid a one-time license fee for certain technology used in its continuous casting process. The license agreement allows the Company the use of certain inventions, technical discoveries and apparatus of the licensor in the manufacturing process. Finishing and Coating After hot and cold rolling is complete, the aluminum sheet is leveled to ensure required flatness and may be slit into narrower widths, embossed or painted to customers' specifications. The Company is an industry leader in the development and production of superior quality coated aluminum products and operates at Lewisport the largest coating line integrated with a United States rolling mill. Coating lines at the Company's Bedford and Torrance facilities serve the Uhrichsville and Carson rolling mills. In the coating process, aluminum sheet is chemically cleaned, painted and then cured to produce a durable coated surface. Packaging and Shipping Finished products are shipped to customers by truck or rail in coils of various size and weighing up to 30,000 pounds. Electrical Products Net sales revenue in the Company's electrical products segment accounted for 11%, 12% and 13% of the Company's total net sales revenue in 2003, 2002 and 2001, respectively. Alflex fabricates its flexible conduit and armored cable at its Long Beach, California and Rocky Mount, North Carolina facilities in addition to outsourcing a portion of its pre-fabrication assembly processes to a location in Tecate, Mexico. Alflex purchases its aluminum sheet from the Company. Alflex also uses significant amounts of insulated copper wire and steel in its production process. Alflex fabricates its electrical products by slitting aluminum or steel sheet on specialized narrow-width slitting equipment, after which the sheet is coiled. The coils are then fed through proprietary forming machines to produce the flexible conduit. Until 1998, Alflex followed a process that draws copper rod into wire, coats the wire with plastic insulation and, for certain products, wraps the coated wire with paper or plastic. The protective armoring is then wrapped around the cabled wire. During 1998, the Company executed a strategic alliance with BICCGeneral whereby beginning in the second half of 1999, Alflex ceased drawing wire and coating the wire with plastic insulation, and instead purchased all of its copper wire requirements from BICCGeneral. During the fourth quarter of 2001, BICCGeneral sold its assets to Southwire Company and Southwire Company is now executing the supply contract. Alflex uses a specialized co-extrusion process involving both rigid and flexible plastics (PVC) to produce its non-metallic conduit. After production, the conduit and cable products are cut to length and packaged. Alflex designs and builds much of the equipment used to manufacture its products. In 2003, Alflex produced 458 million feet of electrical products compared to 483 million feet in 2002. Customers and Markets The Company's aluminum sheet products are sold to distributors as well as end-users, principally in the building and construction, transportation and consumer durables markets. The following table sets forth for 2003 and 2002 the percentage of aluminum sheet net shipments contributed by each of these classes of customers and the Company's estimate of its share of these markets in North America. % of Net Shipments % Market Share ------------------ -------------- 2003 2002 2003 2002 ---- ---- ---- ---- Building and construction 43 42 30 35 Distribution 29 32 23 24 Transportation 10 8 9 11 Consumer durables and other 18 18 15 12 --- --- 100 100 === === The building and construction sector is the largest end-use market other than the packaging market for common alloy aluminum sheet products. The Company believes it is one of the largest suppliers of common alloy aluminum sheet to distributors. Distributors, in some cases after slitting, punching, leveling or other processing, resell the Company's products into end-use markets, including the building and construction, transportation and consumer durables markets. The Company is one of the largest suppliers of aluminum sheet products to North American manufacturers of transportation equipment, including truck trailers and bodies, recreational vehicles and automobile parts. This market has been severely impacted by the weak economic conditions of the last couple of years. The 2003 commercial transportation market was off 19% from its 2000 consumption rate. The largest volume in the category of consumer durables and other markets for the Company is reroll stock sold for further processing and conversion for a variety of markets. Other major end-uses of this product category are cookware, consumer durables, pleasure boats, personal watercrafts, appliances and irrigation pipe. Packaging is the largest single end-use of aluminum sheet, accounting for about one-half of the estimated world-wide market. Much of this product is produced by large, single-purpose rolling mills. The Company does not participate in the packaging market. Market share estimates exclude heat-treated aluminum plate and sheet, which the Company does not produce. The Company estimates that heat-treated products constitute an immaterial portion of the end-use markets served by the Company. Company sales are made to customers located primarily throughout North America. Sales outside North America have not been significant. During 2003, 2002 and 2001, sales to one major customer amounted to approximately 9.7%, 11.1% and 12.2%, respectively, of the Company's net sales. No other single customer accounted for more than 10% of the Company's net sales in 2003, 2002 or 2001. Sales of aluminum sheet products are made through the Company's own sales force which is strategically located to provide North American coverage. An integrated computer system provides the Company's employees with on-line access to inventory status, production schedules, shipping information and pricing data to facilitate immediate response to customer inquiries. Many of the Company's aluminum sheet markets are seasonal. Demand in the building and construction and transportation markets is generally stronger in the spring and summer seasons than in the fall and winter seasons. Such factors typically result in higher operating income in the spring and summer months. Alflex electrical products are sold primarily through independent manufacturer's representatives to electrical distributors. Distributors represented approximately 95% of Alflex net sales in 2003. The remaining sales are made to the do-it-yourself ("DIY"), original equipment manufacturer ("OEM") and heating ventilation and air conditioning ("HVAC") markets. The independent manufacturer's representatives do not market Alflex's products exclusively, but also sell complementary products that are used in conjunction with products manufactured and sold by Alflex. Alflex serves approximately 2,500 customers. Alflex maintains registered trademarks on certain of its flexible conduit and armored cable systems, including Ultratite, Galflex, the Alflex name and its design, Electrician's Choice, Computer Blue, Duraclad, Armorlite and PowerSnap. While Alflex considers these trademarks to be important to its business, it does not believe it is dependent upon the trademarks for the continuation of its business. Competition The Company competes in the production and sale of common alloy aluminum sheet products with some 9 other aluminum rolling mills in North America and with imported products. Aluminum Company of America ("Alcoa") and Alcan Aluminium Ltd. ("Alcan") have a significantly larger share of the total United States market for aluminum sheet products, including packaging and aluminum foil. However, in the market for common alloy aluminum sheet products other than can sheet and aluminum foil, the market share leaders are Alcoa, Alcan and the Company. The Company competes with other rolled products suppliers on the basis of quality, price, timeliness of delivery and customer service. Aluminum also competes with other materials such as steel, plastic and glass for various applications. Alflex competes with national and regional competitors and imported products in the electrical flexible conduit and prewired armored cable industry. Competition is principally on the basis of product features, availability, price and customer service. Research and Development The Company conducts research and development activities at its rolling mills as part of its ongoing operations to satisfy emerging customer requirements, improve product quality and reduce manufacturing costs. Outside consultants also are utilized. Alflex focuses its research and development activities on the development of new products and the improvement of its conduit and cable manufacturing processes through the development of proprietary manufacturing equipment and the reduction of waste. The estimated amounts spent during 2003, 2002 and 2001 on Company-sponsored research and development activities were $1.3 million, $1.3 million and $1.4 million, respectively. Environmental Matters The Company's operations are subject to increasingly stringent environmental laws and regulations governing air emissions, wastewater discharges, the handling, disposal and remediation of hazardous substances and wastes and employee health and safety. These laws can impose joint and several liability for releases or threatened releases of hazardous substances upon statutorily defined parties, including the Company, regardless of fault or the lawfulness of the original activity or disposal. The Company believes it is currently in material compliance with applicable environmental laws and regulations. Federal and state regulations continue to impose stricter emission requirements on the aluminum industry. While the Company believes that current pollution control measures at the emission sources at its facilities meet current requirements, additional equipment or process changes at some of the Company's facilities may be required to meet future requirements. The Company has been named as a potentially responsible party at seven federal superfund sites and is in operations and maintenance at two of the sites for past waste disposal activity associated with closed recycling facilities. The ultimate goal is to delist these two sites under superfund. At the five other federal superfund sites, the Company is a minor contributor and has satisfied its obligations at four of the sites and expects to resolve its liability at the remaining site for a nominal amount. The Company is also under orders by agencies in two states for environmental remediation at three sites, one of which is currently operating and two of which have been closed. The Company acquired its Lewisport rolling mill and an aluminum smelter at Goldendale, Washington ("Goldendale"), from Lockheed Martin in 1985. In connection with the transaction, Lockheed Martin indemnified the Company against expenses relating to environmental matters arising during the period of Lockheed Martin's ownership of those facilities. The aluminum smelter at Goldendale was operated by Lockheed Martin until 1985 and by the Company from 1985 to 1987 when it was sold to Columbia Aluminum Corporation which has since been renamed Goldendale Aluminum Company ("Goldendale Aluminum"). Past aluminum smelting activities at Goldendale have resulted in environmental contamination and regulatory involvement. A 1993 Settlement Agreement among the Company, Lockheed Martin and Goldendale Aluminum allocated responsibility for future remediation at 11 sites at the Goldendale smelter. If remediation is required, estimates by outside consultants of the probable aggregate cost to the Company for these sites range from $1.3 million to $7.2 million. The Company had an accrual for such liabilities of $1.3 million at December 31, 2003 and 2002. In December 2003, Goldendale Aluminum filed for bankruptcy protection. The Company cannot presently quantify any additional liability that may be incurred as a result of Goldendale Aluminum's bankruptcy filing. The apportionment of responsibility for other sites at Goldendale is left to alternative dispute resolution procedures if and when these locations become the subject of remedial requirements. Environmental sampling at Lewisport has disclosed the presence of contaminants, including polychlorinated biphenyls (PCBs). Management believes a portion of the contamination is covered by the Lockheed Martin indemnification, which Lockheed Martin disputes. The Company has been named as a potentially responsible party at three third-party disposal sites relating to Lockheed Martin operations, for which Lockheed Martin has assumed responsibility. The Company's aggregate loss contingency accrual for environmental matters was $6.7 million and $7.4 million at December 31, 2003 and 2002, respectively, which covers all environmental loss contingencies that the Company has determined to be probable and reasonably estimable. The Company estimates that total cost to remediate these environmental matters could be as much as $16 million should all matters be ultimately concluded in a manner least favorable to the Company. It is not possible, however, to predict the amount or timing of cost for future environmental matters which may subsequently be determined. Although the outcome of any such matters, to the extent they exceed any applicable accrual, could have a material adverse effect on the Company's consolidated results of operations or cash flows for the applicable period, the Company believes that such outcome will not have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. The Company has incurred and will continue to incur capital and operating expenditures for matters relating to environmental control and monitoring. Capital expenditures of the Company for environmental control and monitoring for 2003, 2002 and 2001 were $0.5 million, $0.9 million and $0.2 million, respectively. All other environmental expenditures of the Company, including remediation expenditures, for 2003, 2002 and 2001 were $1.6 million, $1.7 million, and $1.9 million, respectively. The Company has planned environmental capital expenditures for 2004 of $0.8 million. Employees At December 31, 2003, the Company employed 1,793 persons, of whom 1,259 were full-time non-salaried employees including 625 at Lewisport represented by the United Steel Workers of America ("USW") and 219 at the Uhrichsville and Bedford facilities represented by the Glass, Molders, Pottery, Plastic & Allied Workers International, AFL-CIO, CLC union ("GMP"). Current collective bargaining agreements with the USW and the GMP expire in July 2008 and December 2006, respectively. The Company believes its relationships with its employees are good. The Company provides gain sharing plans for certain of its non-salaried employees. Contributions to the plans are generally based upon a formula which compares actual performance results to targets agreed upon by management and in some cases the bargaining units. In addition, the Company provides defined contribution 401(k) plans for certain non-salaried and salaried employees. Website Access to Company Reports The Company makes available free of charge through the Company's website at www.ciionline.com the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, any current reports on Form 8-K, and amendments to those reports filed or furnished with the United States Securities and Exchange Commission (the "Commission") pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The reports are available as soon as reasonably practicable after the Company electronically files such material with the Commission and can be found under the Company website headings of Investor Relations/ SEC Filings. Item 2. Properties. The following table sets forth certain information with respect to the Company's principal operating properties used in the Company's two reportable segments: aluminum and electrical products. All of the owned properties collateralize borrowings under the Company's senior secured bank credit facility. Location Nature Segment Square Feet Status -------- ------ ------- ----------- ------ Louisville, Kentucky Administrative offices Both 26,000 Leased Lewisport, Kentucky Rolling mill and Aluminum 1,700,000 Owned coating facility Uhrichsville, Ohio Rolling mill Aluminum 285,000 Owned Carson, California Rolling mill Aluminum 103,000 Owned Bedford, Ohio Coating facility Aluminum 121,000 Leased Torrance, California Coating facility Aluminum 60,000 Leased Kings Mountain, Tube mill and Aluminum 100,000 Leased North Carolina fabrication facility Long Beach, Alflex administrative Electrical 154,000 Leased California offices and Products manufacturing facility Rocky Mount, Alflex manufacturing Electrical 105,000 Owned North Carolina facility and Products distribution center Item 3. Legal Proceedings. The Company is a party to non-environmental legal proceedings and administrative actions all of which are of an ordinary routine nature incidental to the business. In the opinion of management such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2003. Item E.O. Executive Officers of the Registrant. The executive officers of the Company as of March 5, 2004 were: Name Age Position with the Company ---- --- ------------------------- Mark V. Kaminski 48 President, Chief Executive Officer and Director Patrick D. King 42 Executive Vice President and Chief Commercial Officer Donald L. Marsh, Jr. 57 Executive Vice President and Chief Financial Officer John J. Wasz 43 Executive Vice President and President Alflex Henry Del Castillo 64 Vice President Finance Gregory P. Givan 51 Vice President and Treasurer Lenna Ruth Macdonald 41 Vice President, General Counsel and Secretary William G. Toler 47 Vice President Supply Chain William R. Witherspoon 58 Vice President Aluminum Operations John F. Barron 52 Controller and Assistant Secretary Mr. Kaminski joined the Company in 1987 as Marketing Manager. In 1989 he was promoted to Vice President of Operations and in 1991 he became President and Chief Executive Officer. He is a director of Secat, Inc. Mr. King joined the Company in June 2002. From 1998 to 2002 he was Vice President Worldwide Product Marketing and Strategy for Lexmark International. Prior to 1998 he held executive sales and marketing positions with Bausch and Lomb and Micron Communications, Inc. Mr. Marsh joined the Company in March 1996. From March 1996 to April 2002 he also held the position of Secretary of the Company. Prior to March 1996 he was Senior Vice President of Castle Energy Corporation. Mr. Wasz joined the Company in 1985. From 1988 to 1991 he was Regional Manager and from 1991 to 1993 he served as Distribution Marketing Manager. He was promoted to Vice President, Marketing and Sales in December 1993. In March 1997, he moved to the position of Vice President, Materials and in November 1999 he held the position of Vice President Operations, Alflex. In June 2000, he became Chief Operating Officer, Alflex and was promoted to his current position in February 2002. Mr. Del Castillo joined the Company in October 1997 as Alflex Business Unit Controller and was elected to his present position in November 1999. From 1995 to 1997 he was Chief Financial Officer of Wherehouse Entertainment Inc., a retail music and video chain undergoing financial restructuring. From 1981 to 1995 he served in a number of financial management positions, including Chief Financial Officer, at Powerine Oil Company, an independent oil refiner. Mr. Givan joined the Company in July 1997. From 1987 until 1997 he was Second Vice President, Corporate Finance and Director, Corporate Finance and Risk Management and Assistant Treasurer of Providian Corp., a financial services company. Ms. Macdonald joined the Company in August 1999 as Principal Legal Counsel and Assistant Secretary and was elected Vice President, General Counsel and Assistant Secretary in May 2000. In April 2002 she also was elected Secretary of the Company. From December 1998 to 1999 she served as Real Estate Counsel for Vencor, Inc. From 1993 to 1998 she held in-house counsel positions with Bank One Corporation, including with its subsidiary Banc One New Hampshire Asset Management Corporation as Assistant General Counsel and Litigation Group Leader. Mr. Toler rejoined the Company in August 2002. From 2000 to 2002 he was Vice President with Smelter Service Corporation. He had been with the Company from 1980 through 2000 holding various management and executive positions, including Vice President Materials and Corporate Development from November 1999 to June 2000 and prior to that as Vice President Finance and Administration. Mr. Witherspoon joined the Company in 1998 as Vice President Continuous Cast and has served in his current position since January 2001. In 1997 he was Plant Manager for Alcan's Louisville operation. From 1979 until 1997 he held various management positions with Logan Aluminum, including Hot Mill Business Unit Manager. Prior to 1979 he held various management positions with Anaconda Company. Mr. Barron joined the Company in February 1997. From 1986 to 1996 he held the position of Senior Vice President and Assistant Comptroller of Bank One Kentucky, N.A. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the Nasdaq National Market under the symbol CMIN. On March 5, 2004, there were 163 holders of record of the Company's Common Stock. The Company estimates that there were a total of 4,000 stockholders on that date, including beneficial owners. Prior to suspending the Company's quarterly cash dividend during the third quarter of 2003, the Company had paid quarterly cash dividends on its Common Stock of $0.05 per share since becoming publicly owned in March 1995. The following table sets out the high and low sales prices for the Common Stock for each quarterly period indicated, as quoted in the Nasdaq National Market: 2003 High Low ---- ---- --- First Quarter $7.00 $4.41 Second Quarter 6.02 4.25 Third Quarter 5.37 4.33 Fourth Quarter 10.09 4.58 2002 High Low ---- ---- --- First Quarter $7.48 $4.48 Second Quarter 8.11 5.89 Third Quarter 7.28 4.20 Fourth Quarter 7.04 4.41 The information required by Item 201(d) of Regulation S-K may be found under the caption Executive Compensation--Equity Compensation Plan Information in the Company's Proxy Statement dated March 26, 2004 for the Annual Meeting of Stockholders to be held on April 23, 2004 (the "Proxy Statement") and is incorporated herein by reference. Item 6. Selected Financial Data. The information captioned "Consolidated Selected Financial Data" included on page 22 of the Company's annual report to stockholders for the year ended December 31, 2003 is incorporated herein by reference. This information sets forth selected consolidated statement of operations, operating and balance sheet data for the years indicated. The financial information is derived from the audited consolidated financial statements of the Company for such years. This information should be read in conjunction with, and is qualified by reference to, the consolidated financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" also incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" included on pages 10 through 21 of the Company's annual report to stockholders for the year ended December 31, 2003 is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information under the subcaption "Risk Management" included in the information captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" included on pages 10 through 21 of the Company's annual report to stockholders for the year ended December 31, 2003 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements of the Company and report of independent auditors included on pages 23 through 62 of the Company's annual report to stockholders for the year ended December 31, 2003 are incorporated herein by reference. Consolidated Balance Sheet Consolidated Statement of Operations Consolidated Statement of Comprehensive Income (Loss) Consolidated Statement of Changes in Stockholders' Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the year ended December 31, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Changes in Internal Control over Financial Reporting During the fourth quarter of 2003, the Company implemented a new information systems platform for its aluminum business. Incomplete system functionality, combined with training and systems integration deficiencies, resulted in information gaps that inhibited effective internal controls over financial reporting. Recognizing these deficiencies, during the fourth quarter of 2003, the Company put in place a number of work-around procedures and controls to counteract the effects of observed information gaps. During the completion of the annual audit by the Company's independent auditors, PricewaterhouseCoopers LLP, in February 2004, it became evident that certain material items relating to fourth quarter 2003 transactions had not been reported accurately in the Company's preliminary financial statements. The previously implemented work-around procedures and controls established to counteract the effect of observed information gaps associated with the new systems implementation failed to adequately and timely detect all information necessary to ensure the reliability of financial reporting within the new information systems platform. The Company believes that the detected failures to adequately and timely detect all information necessary to ensure the reliability of financial reporting noted herein are temporary, and has implemented greater systems functionality, improved user training and more comprehensive controls over work-around processes in order to address and correct these deficiencies. Except as set forth above, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by Item 401 (other than paragraphs (b) and (h) thereof), Item 405 and Item 406 of Regulation S-K may be found under the caption Governance of the Company in the Proxy Statement and is incorporated herein by reference. The information required by Item 401(h) of Regulation S-K may be found under the caption Audit Committee Report in the Proxy Statement and is incorporated herein by reference. The information required by Item 401(b) of Regulation S-K may be found under Item E.O. above. Item 11. Executive Compensation. The information required by Item 402 of Regulation S-K may be found under the caption Executive Compensation in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Items 201(d) and 403 of Regulation S-K may be found under the captions Executive Compensation --Equity Compensation Plan Information and Beneficial Ownership of Common Stock in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by Item 404 of Regulation S-K may be found under the caption Governance of the Company --Compensation and Other Transactions with Directors and under the caption Executive Compensation - --Management Development and Compensation Committee Interlocks and Insider Participation in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by Item 9(e) of Schedule 14A may be found under the caption Relationship with Independent Public Accountants in the Proxy Statement and is incorporated herein by reference. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) List of Financial Statements filed The following consolidated financial statements of the Company and report of independent auditors included in the Company's annual report to stockholders for the year ended December 31, 2003 were incorporated by reference in Part II, item 8 of this report: Consolidated Balance Sheet Consolidated Statement of Operations Consolidated Statement of Comprehensive Income (Loss) Consolidated Statement of Changes in Stockholders' Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors (a) (2) List of Financial Statement Schedules filed The following report of independent auditors and financial statement schedule should be read in conjunction with the Company's consolidated financial statements. Supplemental Schedule II - Valuation and Qualifying Accounts is filed on page 18 of this report. Report of Independent Auditors on the Company's financial statement schedule filed as a part hereof for the years ended December 31, 2003, 2002 and 2001 is filed on page 17 of this report. Financial statement schedules other than listed above have been omitted since they are either not required or not applicable or the information is otherwise included. (b) Reports on Form 8-K. The following reports on Form 8-K were filed with the Securities and Exchange Commission during the fourth quarter ended December 31, 2003: A Form 8-K dated October 21, 2003 reporting the Company's results of operations for the Third Quarter of 2003. A Form 8-K dated December 22, 2003 reporting that the Company's Ohio facilities had signed a new three-year labor contract. (c) Exhibits 3.1 Restated Certificate of Incorporation, effective April 18, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 3.2 By-laws, dated April 17, 1997 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31,1999). 3.3 Stockholder Protection Rights Agreement, dated as of March 6, 1996, including forms of Rights Certificate, Election to Exercise and Certificate of Designation and Terms of Participating Preferred Stock of the Company (incorporated by reference to Exhibits (1), (2) and (3) to the Company's Registration Statement No. 0-25642 on Form 8-A). 10.1 Executive Incentive Compensation Plan, as amended December 4, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 Long-term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement No. 33-87924 on Form S-1). 10.3 Cash Balance Plan (defined benefit pension plan covering all non-bargaining unit employees of the Company) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.4 401(k) Plan (defined contribution plan covering all non-bargaining unit employees of the Company) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.5 1995 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.6 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.6.1 Amendment, dated December 18, 2000, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.7.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.6.2 Amendment, dated May 5, 2003, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). 10.7 Form of Severance Agreements between the Company and Mark V. Kaminski, Donald L. Marsh, Jr. and John J. Wasz (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.7.1 Form of Severance Agreements between the Company and Henry Del Castillo, Gregory P. Givan, Patrick D. King, Lenna Ruth Macdonald, William G. Toler and William R. Witherspoon (incorporated by reference to Exhibit 10.7.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.8 Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.8.1 First Amendment, dated October 14, 2003, to Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). 10.8.2 Second Amendment, dated February 2, 2004, effective as of December 30, 2003, to Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002. 10.9 Second Amended and Restated Pledge and Security Agreement entered into by the Company and its subsidiaries, collectively, in favor of PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.10 Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.11 First Amendment, dated May 12, 1998, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.11.1 Second Amendment, dated September 25, 2000, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.11.2 Third Amendment, dated September 24, 2001, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 10.11.3 Fourth Amendment, dated as of April 12, 2002, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.11.4 Fifth Amendment, dated as of October 29, 2002, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). 10.11.5 Sixth Amendment, dated as of June 3, 2003, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.11.6 Seventh Amendment, dated as of October 30, 2003, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.11.7 Eighth Amendment, dated as of February 20, 2004, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.12 Supply Agreement by and among Commonwealth Aluminum Corporation, IMCO Recycling of Ohio Inc. and IMCO Recycling Inc., effective as of April 1, 1999 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.13 Indenture dated as of September 20, 1996 between the Company, the Subsidiary Guarantors named therein and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement No. 333-13661 on Form S-4). 10.13.1 First Supplemental Indenture, dated as of November 12, 1996, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.13.2 Second Supplemental Indenture, dated as of October 16, 1998, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.13.3 Third Supplemental Indenture, dated as of December 31, 1999, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.15.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.13.4 Fourth Supplemental Indenture, dated as of December 31, 2000, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.15.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 13 Portions of the annual report to stockholders for the year ended December 31, 2003 which are expressly incorporated by reference in this filing. 14 Code of Ethics. 21 Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP. 31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302 Certifications"). 32 Section 1350 Certifications ("Section 906 Certifications"). Report of Independent Auditors on Financial Statement Schedule Board of Directors Commonwealth Industries, Inc. Our audits of the consolidated financial statements referred to in our report dated March 10, 2004 appearing in the 2003 Annual Report to Stockholders of Commonwealth Industries, Inc. and subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the consolidated financial statement schedule listed in Item 15 (a) (2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky March 10, 2004 Supplemental Schedule II Commonwealth Industries, Inc. Valuation and Qualifying Accounts December 31, 2003, 2002 and 2001 (in thousands)
Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period ----------- --------- -------- -------- ---------- --------- Allowance for uncollectible accounts December 31, 2003 $1,103 $ 115 $ 545 $ 373 $1,390 December 31, 2002 $1,240 $ 721 $ 222 $1,080 $1,103 December 31, 2001 $2,930 $ 4,263 $ - $5,953 $1,240 Allowance for obsolete stores inventory December 31, 2003 $1,490 $ 104 $ - $ - $1,594 December 31, 2002 $1,223 $ 267 $ - $ - $1,490 December 31, 2001 $1,203 $ 20 $ - $ - $1,223
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 10, 2004. COMMONWEALTH INDUSTRIES, INC. By /s/ Mark V. Kaminski --------------------------------------- Mark V. Kaminski, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Paul E. Lego - ------------------------------ Paul E. Lego Chairman of the Board March 10, 2004 /s/ Mark V. Kaminski - ------------------------------ Mark V. Kaminski President, Chief Executive Officer and March 10, 2004 Director (Principal Executive Officer) /s/ Catherine G. Burke - ------------------------------ Catherine G. Burke Director March 10, 2004 /s/ Steven J. Demetriou - ------------------------------ Steven J. Demetriou Director March 10, 2004 /s/ C. Frederick Fetterolf - ------------------------------ C. Frederick Fetterolf Director March 10, 2004 /s/ Larry E. Kittelberger - ------------------------------ Larry E. Kittelberger Director March 10, 2004 /s/ John E. Merow - ------------------------------ John E. Merow Director March 10, 2004 /s/ Donald L. Marsh, Jr. - ------------------------------ Donald L. Marsh, Jr. Executive Vice President and Chief Financial March 10, 2004 Officer (Principal Financial Officer) /s/ Henry Del Castillo - ------------------------------ Henry Del Castillo Vice President Finance March 10, 2004 (Principal Accounting Officer) /s/ John F. Barron - ------------------------------ John F. Barron Controller and Assistant Secretary March 10, 2004
Exhibit Index ------------- Exhibit Number Description ------- ----------- 3.1 Restated Certificate of Incorporation, effective April 18, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 3.2 By-laws, dated April 17, 1997 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 3.3 Stockholder Protection Rights Agreement, dated as of March 6, 1996, including forms of Rights Certificate, Election to Exercise and Certificate of Designation and Terms of Participating Preferred Stock of the Company (incorporated by reference to Exhibits (1), (2) and (3) to the Company's Registration Statement No. 0-25642 on Form 8-A). 10.1 Executive Incentive Compensation Plan, as amended December 4, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 Long-term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement No. 33-87924 on Form S-1). 10.3 Cash Balance Plan (defined benefit pension plan covering all non-bargaining unit employees of the Company) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.4 401(k) Plan (defined contribution plan covering all non-bargaining unit employees of the Company) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.5 1995 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.6 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.6.1 Amendment, dated December 18, 2000, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.7.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.6.2 Amendment, dated May 5, 2003, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). 10.7 Form of Severance Agreements between the Company and Mark V. Kaminski, Donald L. Marsh, Jr. and John J. Wasz (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.7.1 Form of Severance Agreements between the Company and Henry Del Castillo, Gregory P. Givan, Patrick D. King, Lenna Ruth Macdonald, William G. Toler and William R. Witherspoon (incorporated by reference to Exhibit 10.7.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.8 Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.8.1 First Amendment, dated October 14, 2003, to Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders form time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). 10.8.2 Second Amendment, dated February 2, 2004, effective as of December 30, 2003, to Third Amended and Restated Credit Agreement among the Company, subsidiaries of the Company, the several lenders form time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of March 21, 2002. 10.9 Second Amended and Restated Pledge and Security Agreement entered into by the Company and its subsidiaries, collectively, in favor of PNC Bank, National Association, as administrative agent, dated as of March 21, 2002 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.10 Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.11 First Amendment, dated May 12, 1998, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.11.1 Second Amendment, dated September 25, 2000, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.11.2 Third Amendment, dated September 24, 2001, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 10.11.3 Fourth Amendment, dated April 12, 2002, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.11.4 Fifth Amendment, dated as of October 29,2002, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). 10.11.5 Sixth Amendment, dated as of June 3, 2003, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.11.6 Seventh Amendment, dated as of October 30, 2003, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.11.7 Eighth Amendment, dated as of February 20, 2004, to Receivables Purchase Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporation and PNC Bank, National Association, dated as of September 29, 1997. 10.12 Supply Agreement by and among Commonwealth Aluminum Corporation, IMCO Recycling of Ohio Inc. and IMCO Recycling Inc., effective as of April 1, 1999 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.13 Indenture dated as of September 20, 1996 between the Company, the Subsidiary Guarantors named therein and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement No. 333-13661 on Form S-4). 10.13.1 First Supplemental Indenture, dated as of November 12, 1996, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.13.2 Second Supplemental Indenture, dated as of October 16, 1998, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.13.3 Third Supplemental Indenture, dated as of December 31, 1999, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.15.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.13.4 Fourth Supplemental Indenture, dated as of December 31, 2000, to Indenture dated as of September 20, 1996 (incorporated by reference to Exhibit 10.15.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 13 Portions of the annual report to stockholders for the year ended December 31, 2003 which are expressly incorporated by reference in this filing. 14 Code of Ethics. 21 Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP. 31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302 Certifications"). 32 Section 1350 Certifications ("Section 906 Certifications"). EX-10 3 jb200310kex1082.txt EXHIBIT 10.8.2 FOR 2003 10-K Exhibit 10.8.2 -------------- SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the "Amendment") is dated as of February 2, 2004, effective as of December 30, 2003, and made by and among: (1) COMMONWEALTH INDUSTRIES, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Parent") and the successor by merger to CI Holdings, Inc.; (2) CI HOLDINGS, LLC, a limited liability company duly organized and validly existing under the laws of the State of Delaware ("CI Holdings") and formerly known as CI Holdings, Inc. and as Alflex Corporation; (3) COMMONWEALTH ALUMINUM, LLC, a limited liability company duly organized and validly existing under the laws of the State of Delaware ("CAC") and formerly known as Commonwealth Aluminum Corporation; (4) ALFLEX CORPORATION, a corporation duly organized and validly existing under the laws of the State of Delaware ("New Alflex"); (5) CA LEWISPORT, LLC, a limited liability company duly organized and validly existing under the laws of the State of Delaware ("Old Lewisport") and formerly known as CA Lewisport, Inc. and as Commonwealth Aluminum Lewisport, Inc. and as Commonwealth Aluminum Corporation; (6) COMMONWEALTH ALUMINUM LEWISPORT, LLC, a limited liability company duly formed and validly existing under the laws of the state of Delaware ("New Lewisport"); (7) COMMONWEALTH ALUMINUM METALS, LLC, a limited liability company duly formed and validly existing under the laws of the State of Delaware ("Metals"); (8) COMMONWEALTH ALUMINUM CONCAST, INC. (formerly named Barmet Aluminum Corporation) a corporation duly organized and validly existing under the laws of the State of Ohio ("CACI" and, together with CAC, CI Holdings, Old Lewisport, New Lewisport, Metals and New Alflex, each a "Revolving Credit Borrower" and, collectively, the "Revolving Credit Borrowers"); (9) each of the Subsidiaries of the Parent identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages hereto (each, a "Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors"); (10) each of the lenders that is a signatory hereto (individually, a "Lender" and, collectively, the "Lenders"); and (11) PNC BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent"). This Amendment amends that certain Third Amended and Restated Credit Agreement, dated as of March 21, 2002, as amended by a First Amendment thereto dated as of October 14, 2003 (collectively, the "Credit Agreement"). WITNESSETH: WHEREAS, Parent, Revolving Credit Borrowers and Subsidiary Guarantors have requested Lenders, subject to the terms and conditions herein, to amend the Credit Agreement to modify certain financial covenant as measured at the fiscal quarter ended December 31, 2003. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements herein contained and intending to be legally bound hereby, covenant and agree as follows: 1. Recitals. The foregoing recitals are true and correct and incorporated herein by reference. 2. Definitions. Capitalized terms not otherwise defined in this Amendment have the meanings given to them in the Credit Agreement. 3. Amendment of Credit Agreement. A. The following definition set forth in Section 1.01 of the Credit Agreement is hereby amended and restated as follows: "EBITDA" shall mean the sum, for the Parent and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) net income for such period, plus (b) the amount of Total Interest Expense for such period, plus (c) income tax expense during such period, plus (d) depreciation and amortization for such period, plus (e) extraordinary losses for such period, plus (f) for any period that includes the calendar quarter ended December 31, 2001, nonrecurring losses recognized during the fiscal quarter ended December 31, 2001, related to asset impairment, goodwill reduction, termination of the Parent's executive incentive plan, and provision for uncollectable accounts (all as previously disclosed to the Administrative Agent), but not in excess of $179,000,000 in the aggregate, plus (g) in the case of any period during calendar year 2002, an amount equal to the amount deducted, on account of impairment of goodwill, in calculating net income for such period in accordance with GAAP, plus (h) in the case of any period from and after October 1, 2003, an amount equal to the non-cash charge taken with respect to reduction of goodwill for New Alflex, minus (i) extraordinary gains for such period. B. Section 9.10 of the Credit Agreement is hereby amended and restated as follows: "9.10 Certain Financial Covenants. (a) Total Leverage Ratio. The Parent will not permit the Total Leverage Ratio to exceed the following respective ratios at any time during the following respective periods: -------------------------------------------------------- -------------- Period Ratio -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including the Restatement Effective Date to 4.50 to 1.00 and including March 31, 2002 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including April 1, 2002 to and including 4.25 to 1.00 September 30, 2002 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including October 1, 2002 to and including 4.00 to 1.00 December 31, 2002 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including January 1, 2003 to and including 3.75 to 1.00 June 30, 2003 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including July 1, 2003 to and including 4.25 to 1.00 September 30, 2003 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including October 1, 2003 to and including 5.25 to 1.00 December 31, 2003 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From January 1, 2004 and at all times thereafter 3.25 to 1.00 -------------------------------------------------------- -------------- (b) Total Interest Coverage Ratio. The Parent will not permit the Total Interest Coverage Ratio to be less than the following respective ratios at any time during the following respective periods: -------------------------------------------------------- -------------- Period Ratio -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From the Restatement Effective Date to and including 1.50 to 1.00 December 31, 2002 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From January 1, 2003 to and including September 30, 2.00 to 1.00 2003 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From and including October 1, 2003 to and including 1.50 to 1.00 December 31, 2003 -------------------------------------------------------- -------------- -------------------------------------------------------- -------------- From January 1, 2004 and at all times thereafter 2.50 to 1.00 -------------------------------------------------------- -------------- (c) Fixed Charges Ratio. The Parent will not permit the Fixed Charges Ratio to be less than the following respective ratios at any time during the following respective periods: -------------------------------------------------------- ------------- Period Ratio -------------------------------------------------------- ------------- -------------------------------------------------------- ------------- From the Restatement Effective Date to and including 1.00 to 1.00 March 31, 2003 -------------------------------------------------------- ------------- -------------------------------------------------------- ------------- From April 1, 2003 to and including September 30, 2003 1.10 to 1.00 -------------------------------------------------------- ------------- -------------------------------------------------------- ------------- From October 1, 2003 to and including December 31, 2003 1.00 to 1.00 -------------------------------------------------------- ------------- -------------------------------------------------------- ------------- January 1, 2004 and at all time thereafter 1.10 to 1.00 -------------------------------------------------------- ------------- 4. Consent. The parties hereto hereby consent to the conversion of the following Revolving Credit Borrowers from Delaware corporations to Delaware limited liability companies: CI Holdings, Inc. to CI Holdings, LLC, Commonwealth Aluminum Corporation to Commonwealth Aluminum, LLC, and CA Lewisport, Inc. to CA Lewisport, LLC. 5. Amendment Fee. The Borrowers shall pay to the Administrative Agent, for the benefit of the Lenders which execute and deliver this Amendment to the Administrative Agent on or before February 2, 2004, an amendment fee in the amount of 10 basis points of the Revolving Credit Commitments of such Lenders. 6. Conditions Precedent. The Parent, the Revolving Credit Borrowers, the Subsidiary Guarantors and the Lenders acknowledge that this Amendment shall not be effective until each of the following conditions precedent has been satisfied (such date is referred to herein as the "Effective Date"): (a) The Parent, the Revolving Credit Borrowers, the Subsidiary Guarantors, the Required Banks, and the Administrative Agent shall have executed this Amendment; (b) The Borrowers shall have paid to the Administrative Agent, for the benefit of the applicable Lenders, the amendment fee set forth in Section 5 of this Amendment. (c) The Parent shall have delivered to the Administrative Agent a closing certificate certifying to the accuracy of representations and warranties, compliance with covenants and conditions and absence of any Default or Event of Default under the Credit Agreement; (d) No Material Adverse Effect shall have occurred with respect to the Parent, the Revolving Credit Borrowers or the Subsidiary Guarantors; (e) The Parent, the Revolving Credit Borrower and the Subsidiary Guarantors shall have obtained all approvals and consents necessary to consummate the transactions contemplated by this Amendment; (f) All legal details and proceedings in connection with the transactions contemplated by this Amendment and all other Credit Documents shall be in form and substance satisfactory to the Administrative Agent. 7. Incorporation into Credit Agreement. This Amendment shall be incorporated into the Credit Agreement by this reference. 8. Full Force and Effect. Except as expressly modified by this Amendment, all of the terms, conditions, representations, warranties and covenants of the Credit Agreement and the other Credit Documents are true and correct and shall continue in full force and effect without modification. 9. Reimbursement of Expenses. The Borrowers unconditionally agrees to pay and reimburse the Administrative Agent and save the Administrative Agent harmless against liability for the payment of reasonable out-of-pocket costs, expenses and disbursements, including without limitation, fees and expenses of counsel incurred by the Administrative Agent in connection with the development, preparation, execution, administration, interpretation or performance of this Amendment and all other documents or instruments to be delivered in connection herewith. 10. Counterparts. This Amendment may be executed by different parties hereto in any number of separate counterparts, each of which, when so executed and delivered shall be an original and all such counterparts shall together constitute one and the same instrument. 11. Entire Agreement. This Amendment sets forth the entire agreement and understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior understandings and agreements, whether written or oral, between the parties hereto relating to the subject matter hereof. No representation, promise, inducement or statement of intention has been made by any party which is not embodied in this Amendment, and no party shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not set forth herein. 12. Governing Law. This Second Amendment shall be deemed to be a contract under the laws of the State of New York and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to its conflict of laws principles. [SIGNATURE PAGES FOLLOW] [SIGNATURE PAGE 1 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. THE PARENT COMMONWEALTH INDUSTRIES, INC. By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- [SIGNATURE PAGE 2 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] THE REVOLVING CREDIT BORROWERS COMMONWEALTH ALUMINUM, LLC By: Commonwealth Aluminum Concast, Inc., its sole member By: ---------------------------------------------------- Name: -------------------------------------------------- Title: ------------------------------------------------- ALFLEX CORPORATION By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- COMMONWEALTH ALUMINUM CONCAST, INC. By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- CA LEWISPORT, LLC By: Commonwealth Industries, Inc., its sole member By: ---------------------------------------------------- Name: -------------------------------------------------- Title: ------------------------------------------------- [SIGNATURE PAGE 3 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] CI HOLDINGS, LLC By: Commonwealth Industries, Inc., its sole member By: ---------------------------------------------------- Name: -------------------------------------------------- Title: ------------------------------------------------- COMMONWEALTH ALUMINUM LEWISPORT, LLC By: CA Lewisport, Inc., its managing member By: ---------------------------------------------------- Name: -------------------------------------------------- Title: ------------------------------------------------- COMMONWEALTH ALUMINUM METALS, LLC By: Commonwealth Aluminum Lewisport, LLC, its sole member By: CA Lewisport, Inc., its managing member By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- [SIGNATURE PAGE 4 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] SUBSIDIARY GUARANTORS COMMONWEALTH ALUMINUM SALES CORPORATION By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- COMMONWEALTH ALUMINUM TUBE ENTERPRISES, LLC By: Commonwealth Aluminum Concast, Inc., its sole member By: ---------------------------------------------------- Name: -------------------------------------------------- Title: ------------------------------------------------- [SIGNATURE PAGE 5 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent and a Lender By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- [SIGNATURE PAGE 6 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] U.S. BANK NATIONAL ASSOCIATION By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- [SIGNATURE PAGE 7 OF 7 TO SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT] NATIONAL CITY BANK OF KENTUCKY By: ----------------------------------------------------------- Name: --------------------------------------------------------- Title: -------------------------------------------------------- EX-10 4 jb200310kex10115.txt EXHIBIT 10.11.5 FOR 2003 10-K Exhibit 10.11.5 --------------- SIXTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT THIS SIXTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT, dated as of June 3, 2003 (this "Amendment"), is entered into among COMMONWEALTH FINANCING CORP., a Delaware corporation (the "Seller"), COMMONWEALTH INDUSTRIES, INC., a Delaware corporation ("Commonwealth"), MARKET STREET FUNDING CORPORATION, a Delaware corporation (the "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, as Administrator (the "Administrator"). RECITALS 1. The Seller, Commonwealth, the Issuer and the Administrator are parties to the Receivables Purchase Agreement, dated as of September 29, 1997 (as amended through the date hereof, the "Agreement"); and 2. The parties hereto desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Certain Defined Terms. Capitalized terms that are used herein without definition and that are defined in Exhibit I to the Agreement shall have the same meanings herein as therein defined. 2. Amendment to Agreement. Schedule II to the Agreement is hereby amended and restated in its entirety as set forth in Annex A attached hereto. 3. Effect of Amendment. All provisions of the Agreement, as expressly amended and modified by this Amendment, shall remain in full force and effect and are hereby ratified and confirmed in all respects. After this Amendment becomes effective, all references in the Agreement (or in any other Transaction Document) to "this Agreement", "hereof", "herein" or words of similar effect referring to the Agreement shall be deemed to be references to the Agreement as amended by this Amendment. This Amendment shall not be deemed, either expressly or impliedly, to waive, amend or supplement any provision of the Agreement other than as set forth herein. 4. Effectiveness. This Amendment shall become effective as of the date hereof upon receipt by the Administrator of counterparts of this Amendment (whether by facsimile or otherwise) executed by each of the other parties hereto, in form and substance satisfactory to the Administrator in its sole discretion. 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of New York (without regard to any otherwise applicable principles of conflicts of law), except to the extent that the validity or perfection of the interests of the Issuer in the Receivables or remedies hereunder in respect thereof are governed by the laws of a jurisdiction other than the State of New York. 7. Section Headings. The various headings of this Amendment are included for convenience only and shall not affect the meaning or interpretation of this Amendment, the Agreement or any provision hereof or thereof. (continued on following page) IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. COMMONWEALTH FINANCING CORP. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ COMMONWEALTH INDUSTRIES, INC. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ MARKET STREET FUNDING CORPORATION, as Issuer By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ PNC BANK, NATIONAL ASSOCIATION, as Administrator By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ ANNEX A SCHEDULE II LOCK-BOX BANKS AND LOCK-BOX ACCOUNTS Lock-Box Bank Lock-Box Accounts Lock-Box Number - ------------- ----------------- --------------- Mellon Bank, N.A. 036-8892 21056 (Los Angeles) 10527 (Chicago) 360293 (Pittsburgh) Mellon Bank, N.A. 036-8905 21118 (Los Angeles) 10526 (Chicago) PNC Bank, National Association 1017291021 643431 (Pittsburgh) EX-10 5 jb200310kex10116.txt EXHIBIT 10.11.6 FOR 2003 10-K Exhibit 10.11.6 --------------- SEVENTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT THIS SEVENTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT, dated as of October 30, 2003 (this "Amendment"), is entered into among COMMONWEALTH FINANCING CORP., a Delaware corporation (the "Seller"), COMMONWEALTH INDUSTRIES, INC., a Delaware corporation ("Commonwealth"), MARKET STREET FUNDING CORPORATION, a Delaware corporation (the "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, as Administrator (the "Administrator"). RECITALS 1. The Seller, Commonwealth, the Issuer and the Administrator are parties to the Receivables Purchase Agreement, dated as of September 29, 1997 (as amended through the date hereof, the "Agreement"); and 2. The parties hereto desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Certain Defined Terms. Capitalized terms that are used herein without definition and that are defined in Exhibit I to the Agreement shall have the same meanings herein as therein defined. 2. Amendment to Agreement. 2.1. The definition of "Purchase Limit" as set forth in Exhibit I of the Agreement is hereby amended by replacing the number "$95,000,000" with the number "$60,000,000". 2.2 Clause (a) of the definition of "Facility Termination Date" as set forth in Exhibit I to the Agreement is hereby amended by replacing the date "September 22, 2004" with the date "March 31, 2004" therein. 3. Effect of Amendment. All provisions of the Agreement, as expressly amended and modified by this Amendment, shall remain in full force and effect and are hereby ratified and confirmed in all respects. After this Amendment becomes effective, all references in the Agreement (or in any other Transaction Document) to "this Agreement", "hereof", "herein" or words of similar effect referring to the Agreement shall be deemed to be references to the Agreement as amended by this Amendment. This Amendment shall not be deemed, either expressly or impliedly, to waive, amend or supplement any provision of the Agreement other than as set forth herein. 4. Effectiveness. This Amendment shall become effective as of the date hereof upon receipt by the Administrator of counterparts of this Amendment (whether by facsimile or otherwise) executed by each of the other parties hereto, in form and substance satisfactory to the Administrator in its sole discretion. 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of New York (without regard to any otherwise applicable principles of conflicts of law), except to the extent that the validity or perfection of the interests of the Issuer in the Receivables or remedies hereunder in respect thereof are governed by the laws of a jurisdiction other than the State of New York. 7. Section Headings. The various headings of this Amendment are included for convenience only and shall not affect the meaning or interpretation of this Amendment, the Agreement or any provision hereof or thereof. (continued on following page) IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. COMMONWEALTH FINANCING CORP. By: _______________________________________________________ Name: Gregory Givan Title: Vice President and Treasurer COMMONWEALTH INDUSTRIES, INC. By: _______________________________________________________ Name: Gregory Givan Title: Vice President and Treasurer MARKET STREET FUNDING CORPORATION, as Issuer By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ PNC BANK, NATIONAL ASSOCIATION, as Administrator By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ EX-10 6 jb200310kex10117.txt EXHIBIT 10.11.7 FOR 2003 10-K Exhibit 10.11.7 --------------- EIGHTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT THIS EIGHTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT, dated as of February 20, 2004 (this "Amendment"), is entered into among COMMONWEALTH FINANCING CORP., a Delaware corporation (the "Seller"), COMMONWEALTH INDUSTRIES, INC., a Delaware corporation ("Commonwealth"), MARKET STREET FUNDING CORPORATION, a Delaware corporation (the "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, as Administrator (the "Administrator"). RECITALS 1. The Seller, Commonwealth, the Issuer and the Administrator are parties to the Receivables Purchase Agreement, dated as of September 29, 1997 (as amended through the date hereof, the "Agreement"); and 2. The parties hereto desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Certain Defined Terms. Capitalized terms that are used herein without definition and that are defined in Exhibit I to the Agreement shall have the same meanings herein as therein defined. 2. Amendment to Agreement. 2.1. The definition of "Purchase Limit" as set forth in Exhibit I of the Agreement is hereby amended by replacing the number "$60,000,000" with the number "$80,000,000". 2.2 Clause (a) of the definition of "Facility Termination Date" as set forth in Exhibit I to the Agreement is hereby amended by replacing the date "March 31, 2004" with the date "March 31, 2005" therein. 3. Effect of Amendment. All provisions of the Agreement, as expressly amended and modified by this Amendment, shall remain in full force and effect and are hereby ratified and confirmed in all respects. After this Amendment becomes effective, all references in the Agreement (or in any other Transaction Document) to "this Agreement", "hereof", "herein" or words of similar effect referring to the Agreement shall be deemed to be references to the Agreement as amended by this Amendment. This Amendment shall not be deemed, either expressly or impliedly, to waive, amend or supplement any provision of the Agreement other than as set forth herein. 4. Effectiveness. This Amendment shall become effective as of the date hereof upon (i) receipt by the Administrator of counterparts of this Amendment (whether by facsimile or otherwise) executed by each of the other parties hereto, in form and substance satisfactory to the Administrator in its sole discretion and (ii) receipt by the Administrator for the account of the Issuer of an amendment fee payable on the date hereof in an amount equal to $80,000. 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of New York (without regard to any otherwise applicable principles of conflicts of law), except to the extent that the validity or perfection of the interests of the Issuer in the Receivables or remedies hereunder in respect thereof are governed by the laws of a jurisdiction other than the State of New York. 7. Section Headings. The various headings of this Amendment are included for convenience only and shall not affect the meaning or interpretation of this Amendment, the Agreement or any provision hereof or thereof. (continued on following page) IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. COMMONWEALTH FINANCING CORP. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ COMMONWEALTH INDUSTRIES, INC. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ MARKET STREET FUNDING CORPORATION, as Issuer By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ PNC BANK, NATIONAL ASSOCIATION, as Administrator By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ EX-13 7 jb200310kex13.txt EXHIBIT 13 FOR 2003 10-K Exhibit 13 ---------- Portions of the annual report to stockholders for the year ended December 31, 2003 which are expressly incorporated by reference in this filing follow. Such items are proceeded by an index which shows the location in this Annual Report on Form 10-K where such items are incorporated by reference and the location of the item in the annual report to stockholders for the year ended December 31, 2003. INDEX Reference Incorporation Page number letter in location in in annual this this report to Exhibit Form 10-K Description of Item stockholders - ------- --------------- -------------------------- ------------ (A) Part II, item 6 Consolidated Selected page 22 Financial Data (B) Part II, item 7 Management's Discussion and pages 10 Analysis of Financial Condition thru 21 and Results of Operations Part II, item 7A Quantitative and Qualitative pages 19 Disclosures About Market Risk thru 21 (C) Part II, item 8 Consolidated Balance Sheet page 23 Part II, item 8 Consolidated Statement of Operations page 24 Part II, item 8 Consolidated Statement of page 25 Comprehensive Income (Loss) Part II, item 8 Consolidated Statement of page 26 Changes in Stockholders' Equity Part II, item 8 Consolidated Statement of page 27 Cash Flows Part II, item 8 Notes to Consolidated pages 28 Financial Statements thru 61 Part II, item 8 Report of Independent Auditors page 62 The items follow: Exhibit 13 item (A) ------------------- COMMONWEALTH INDUSTRIES, INC. Consolidated Selected Financial Data (in thousands except per share data)
Year ended December 31, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 --------- --------- ---------- ---------- ---------- Statement of Operations Data: Net sales $ 918,396 $ 966,238 $ 920,504 $ 1,125,142 $ 1,074,939 Gross profit 60,122 67,311 47,031 82,205 86,865 Operating income (loss) (1) (2) (15,570) 20,334 (178,747) 21,929 28,440 Income (loss) before cumulative effect of change in accounting principle (1) (2) (28,934) 9,116 (193,552) 3,491 11,011 Cumulative effect of change in accounting principle (3) - (25,327) - - - Net income (loss) (1) (2) (3) (28,934) (16,211) (193,552) 3,491 11,011 Net income (loss) per share data: (1) (2) Basic Income (loss) before cumulative effect of change in accounting principle $ (1.81) $ 0.57 $ (11.78) $ 0.21 $ 0.68 Cumulative effect of change in accounting principle (3) - (1.58) - - - --------- --------- ---------- ---------- ---------- Net income (loss) $ (1.81) $ (1.01) $ (11.78) $ 0.21 $ 0.68 ========= ========= ========== ========== ========== Diluted Income (loss) before cumulative effect of change in accounting principle $ (1.81) $ 0.57 $ (11.78) $ 0.21 $ 0.68 Cumulative effect of change in accounting principle (3) - (1.57) - - - --------- --------- ---------- ---------- ---------- Net income (loss) $ (1.81) $ (1.00) $ (11.78) $ 0.21 $ 0.68 ========= ========= ========== ========== ========== Cash dividends paid per share $ 0.10 $ 0.20 $ 0.20 $ 0.20 $ 0.20 Operating Data: Depreciation $ 20,713 $ 21,142 $ 30,053 $ 33,683 $ 30,620 Amortization 895 984 5,276 5,668 5,893 Capital expenditures 16,492 16,321 9,002 18,445 36,715 Aluminum products business: Net sales $ 817,711 $ 853,849 $ 801,786 $ 990,961 $ 944,438 Shipments (pounds) 774,610 905,038 801,274 966,597 1,022,680 Electrical products business: Net sales $ 100,685 $ 112,389 $ 118,718 $ 134,181 $ 130,501 Shipments (feet) 454,828 486,709 509,326 592,863 576,205 Balance Sheet Data: Working capital $ 135,174 $ 138,832 $ 121,483 $ 138,462 $ 123,067 Total assets 379,326 428,904 439,632 655,340 706,322 Total debt 125,000 125,000 125,000 125,000 125,000 Total stockholders' equity 78,138 107,187 134,166 338,393 336,676 (1) 2003 includes non-cash goodwill impairment charges of $29.6 million or $1.85 per basic and diluted share. The goodwill impairment charges had no tax effect. See note 3 to the consolidated financial statements. (2) 2001 includes a non-cash asset impairment charge of $167.3 million or $10.18 per basic and diluted share. The asset impairment charge had no tax effect. See note 2 to the consolidated financial statements for additional information. (3) 2002 includes non-cash goodwill impairment charges of $25.3 million or $1.58 per basic share and $1.57 per diluted share which was recorded as a cumulative change in accounting principle in accordance with Statement of Financial Accounting Standards No. 142. The goodwill impairment charges had no tax effect. See note 3 to the consolidated financial statements for additional information.
Exhibit 13 item (B) ------------------- COMMONWEALTH INDUSTRIES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of the consolidated financial condition and results of operations of Commonwealth Industries, Inc. (the "Company") for each of the years in the three-year period ended December 31, 2003, and certain factors that may affect the Company's prospective financial condition. This section should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2003 and the notes thereto including note 1 which describes the Company's significant accounting policies including its use of estimates. See the caption entitled "Application of Critical Accounting Policies" in this section for further information. The following discussion contains statements which are forward-looking rather than historical fact. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could render them materially different, including, but not limited to, the success of the implementation of the company-wide information system, the effect of global economic conditions, the ability to achieve the level of cost savings or productivity improvements anticipated by management, the effect (including possible increases in the cost of doing business) resulting from war or terrorist activities or political uncertainties, the impact of competitive products and pricing, product development and commercialization, availability and cost of critical raw materials, the ability to effectively hedge the cost of raw materials, capacity and supply constraints or difficulties, the success of the Company in implementing its business strategy, and other risks as detailed in the Company's various Securities and Exchange Commission filings. Overview The Company operates two businesses, an aluminum business and an electrical products business. The aluminum business is the larger of the two, accounting for approximately 89% of net sales in 2003. The aluminum business manufactures non-heat treat coil aluminum sheet products, generally referred to as common alloy products, that are sold through distributors and to end-users, principally in building and construction, transportation, consumer durables and welded tube product markets. Both businesses are highly cyclical in nature and are affected by global economic conditions, market competition, product development and commercialization and other such factors that influence supply and demand for the products produced by the Company. The Company's principal raw materials are aluminum scrap, primary aluminum, copper and steel. Trends in the demand for aluminum sheet products in the United States and in the prices of primary aluminum metal, aluminum scrap and copper commodities affect the business of the Company. The Company's operating results also are affected by factors specific to the Company, such as the margins between selling prices for its products and its cost of raw materials ("material margins") and its unit cost of converting raw materials into its products ("conversion cost"). While changes in aluminum and copper prices can cause the Company's net sales to vary significantly from period to period, net income is more directly impacted by fluctuations in material margins and conversion cost. The price of aluminum metal affects the price of the Company's products and in the longer term can have an effect on the competitive position of aluminum in relation to alternative materials. The price of primary metal is determined largely by worldwide supply and demand conditions and is highly cyclical. The price of primary aluminum in world markets greatly influences the price of aluminum scrap, the Company's principal raw material. Significant movements in the price of primary aluminum can affect the Company's margins, however, aluminum sheet prices do not always move simultaneously nor necessarily to the same degree as the primary markets. The Company seeks to manage its material margins by focusing on higher margin products and by sourcing the scrap and primary metal markets in the most cost-effective manner. An important element in the Company's management of its material margins involves the use of futures contracts to hedge the Company's exposure to the risk of changes in aluminum prices. The use of futures contracts to hedge the Company's exposure to changes in aluminum prices can best be understood by following aluminum metal sales/purchases flows. Aluminum metal sold to customers is typically priced by industry participants, including the Company, at a market-based cents-per-pound differential ("rolling margin") over the prevailing market price of a base-reference primary metal type ("P1020"). The rolling margin differs for each coil type sold, depending on the specifications of the metal, the cost of manufacturing the metal, and by prevailing supply and demand conditions, as reflected by competitors' price offerings and general economic trends. The base-reference primary metal, P1020, is used in the sales pricing formula because of its widespread acceptance as a reference value for the price of primary aluminum. The P1020 price is determined in the market by the market price of primary aluminum sold on the London Metal Exchange ("LME") commodity market, plus a market-based cents-per-pound price differential ("Mid-West Premium") covering the cost of transportation from the smelter to the Midwestern United States. On the raw materials side of the business, the Company purchases the great majority of its scrap aluminum and its primary aluminum at a discount or premium to the prevailing LME price, the particular differential in each case based on the qualities of the type of metal being purchased. (Discounts from LME relating to scrap aluminum purchases are generally referred to as "scrap spreads"). Like its counterpart base-reference P1020 for sales transactions, the LME serves as a base-reference for raw material purchase transactions in the industry because of its widespread acceptance as a value indicator. Since the P1020 market price used to set selling prices is itself directly linked to the market price of LME as described in the preceding paragraph, the LME serves as a common component in pricing both raw material purchases and finished product sales. Common use of the LME as a component in both purchase and sale pricing practices enables the Company to substantially, but not exactly, "lock-in" material margins on its sales without simultaneously buying physical metal to satisfy customers' fixed price sales orders. This is accomplished by the Company's purchase of LME futures contracts, which serve as economic substitutes for physical metal purchases, at the same time that selling prices are fixed. (When the metal to satisfy the fixed price sale commitments is physically purchased and fixed in price the LME futures contracts are sold, resulting in an economically effective cash flow hedge of the metal component of the transactions at issue.) The Company's metal hedging practices have several distinct advantages. The foremost of these advantages is that by executing the hedge strategy described the Company can continue to make fixed price sales for delivery to customers in future periods without assuming the significant metal price risk associated with changes in the LME. If the Company did not hedge its future metal delivery commitments by purchasing futures contracts on the LME, the Company, alternatively, could avoid metal price risk by simultaneously buying physical metal to match its future sales commitments; however, this approach would significantly increase the Company's working capital requirements to accommodate the inventory purchases and create serious logistical storage and transportation problems. If the Company were to assume metal price risk, by neither hedging its fixed price sales commitments with futures contracts nor simultaneously buying physical metal, its exposure to metal price changes could threaten the Company's solvency in periods of metal price fluctuations. Despite the obvious benefit (in an economic and cash flow sense) of employing LME futures contracts to hedge its metal purchases, the Company notes that the accounting treatment accorded hedge gains/losses realized during the second, third and fourth quarters of 2003 required that such gains/losses be marked-to-market as prescribed by Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"). This mark-to-market treatment resulted from a determination that the hedges did not meet certain "effectiveness" requirements that would have enabled such realized gains/losses to be recorded in other comprehensive income for later reclassification into cost of goods sold when the hedged transactions occur. The "effectiveness" standard required to be met for deferral treatment of the hedge gains/losses is predicated on a statistically based high degree of correlation between price changes in the metal purchases being hedged and price changes in the hedge instruments, the LME futures contracts. The requisite correlation was not met during the last three quarters of 2003 due to the fact that the variability in price changes relating to unhedged components of the metal purchases being hedged (principally scrap spreads) did not move in tandem with hedged components to the degree that would statistically demonstrate the requisite correlation. Recognizing in income rather than deferring the hedge gains/losses as required by SFAS No. 133 had the effect of increasing 2003 material margins, pretax income and net income by approximately $7.0 million, that otherwise would have been recorded in other comprehensive income and matched to hedged metal purchases in 2004. Consequently, 2004 material margins when the hedged transactions occur will be adversely affected by the $7.0 million required under SFAS No. 133 to be recognized in 2003 (see the caption entitled "Commodity Price Risk" under the section entitled "Risk Management" for additional information regarding the Company's hedging programs.) The Company estimates that, absent any other effects that arise from 2004 transactions, the $7.0 million adverse impact in 2004 will be distributed approximately $3.3 million in the first quarter, $1.7 million in the second quarter, $1.2 million in the third quarter and $0.8 million in the fourth quarter. During 2003, shipments of the Company's aluminum sheet products decreased by 14% from 2002 due to weak economic conditions, however, fourth quarter 2003 shipments have trended upward to the highest level in 2003 having increased 11% over the third quarter of 2003, 22% over the second quarter of 2003 and 18% over the first quarter of 2003. Contributing to the year over year decline in aluminum shipments were planned equipment downtime for maintenance and capital improvement outages during the first quarter and fourth quarter of 2003. No similar equipment downtime for maintenance and capital improvement outages were taken in 2002. Despite the decreased aluminum shipments, material margins for 2003 were higher than 2002 helping to partially offset the sales volume decline. The improvement in material margins was partially the result of the previously discussed gain of approximately $7.0 million recorded in 2003 relating to certain aluminum hedge transactions. During 2002, net sales of the Company's aluminum sheet products increased 6% from the year 2001 while shipment volume increased 13% from 2001. The positive impact of this increased volume, combined with lower depreciation and amortization charges, more than offset the impact of lower material margins in 2002 versus 2001 and helped to increase profitability of the aluminum business for 2002 compared to 2001. Material margins which were lower for the full year of 2002 versus 2001 did increase in the third and fourth quarter of 2002 compared to the third and fourth quarter of 2001 due to firmer aluminum sales pricing coupled with lower metal costs and better scrap availability. Demand for the Company's electrical products decreased during 2003. Shipments were down 7% compared to 2002 reflecting weakness in key markets in the electrical products sector, particularly commercial construction. Material margins for 2003 decreased 13% from 2002. Lower net selling prices due to the competitive price environment combined with higher material costs per foot resulted in the decrease in material margins for 2003 versus 2002. Manufacturing costs per foot were down 2% for 2003 versus 2002 primarily due to lower overtime labor, group insurance and workers compensation insurance costs. Demand for the Company's electrical products decreased during 2002. Shipments were down 4% compared to 2001 as business conditions remained competitive and commercial construction activity declined. Material margins for 2002 increased 2% from 2001. The reduction in material costs per foot in 2002 compared to 2001 more than offset the lower net selling prices and contributed to the slight material margin improvement in 2002 versus 2001. The Company's electrical products business continued to report operating profits which were slightly increased over 2001 principally due to a decrease in selling, general and administrative expenses and the elimination of goodwill amortization expense in 2002. During the second quarter of 2003, the Company implemented changes to its postretirement medical insurance program applicable to all non-bargaining unit Kentucky employees, limiting eligibility and increasing premiums. Because of these changes, the Company realized a benefit of approximately $6.5 million after tax or $0.40 per share in 2003. The Company recognized the benefit as reductions of approximately $3.3 million in cost of goods sold and $3.2 million in selling, general and administrative expenses. In addition to the effect on 2003, the Company estimates that net income will be increased approximately $8.3 million in 2004 and approximately $1.7 million in 2005. During the second quarter of 2002, the Company completed its transitional test of goodwill upon the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Pursuant to this test, the Company recorded a charge of $25.3 million or $1.57 per basic share and $1.58 per diluted share (before and after tax), as a cumulative effect of a change in accounting principle, to reflect the impairment of goodwill on the balance sheet as of January 1, 2002. During the fourth quarter of 2003, the Company performed its annual impairment review of the Company's remaining goodwill balance of $48.9 million relating to the Company's Alflex electrical products reporting unit and determined that an additional goodwill impairment write-down of $29.6 million or $1.85 per basic and diluted share (before and after tax) was necessary. The fourth quarter 2003 goodwill impairment charge reflects a more conservative long-term outlook by the Company of a continuing highly competitive, commodity/volume/cost-driven environment for its electrical products business. See the captions entitled "Goodwill Impairment Charges" and "Cumulative Effect of Change in Accounting Principle" in the following section and note 3 to the consolidated financial statements for additional information. During the fourth quarter of 2001, the Company recorded non-cash asset impairment charges totaling $167.3 million or $10.18 per basic and diluted share (before and after tax) to reduce the carrying amount of property, plant and equipment and goodwill in accordance with the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"). See the caption entitled "Asset Impairment Charges" in the following section and note 2 to the consolidated financial statements for additional information. Application of Critical Accounting Policies The Company's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's most critical accounting policies require the use of estimates relating to the valuation of property, plant and equipment and goodwill, assumptions and methodology for assessing hedge effectiveness regarding aluminum and natural gas futures contracts, forward contracts and options, assumptions for computing pension and postretirement benefits obligations, allowance for uncollectible accounts receivable, assumptions for computing workers' compensation liabilities and environmental liabilities. As stated previously, upon adoption of SFAS No. 142, the Company reduced the carrying value of goodwill associated with its Alflex electrical products subsidiary and during the fourth quarter of 2003 the Company performed its annual impairment review of the Company's remaining goodwill balance and determined that an additional goodwill impairment write-down of $29.6 million was necessary. Future assessments of the carrying value of the $19.3 million of goodwill that remains are dependent on management's estimates of the value of Alflex. Because of the competitive and dynamic nature of Alflex's competitive markets, it is reasonably possible that management's estimate of the value of Alflex may change. Any reduction in the estimate of the value of Alflex may also result in a similar reduction in the carrying value of Alflex's long-lived assets. Pension and postretirement benefits obligations accounting is intended to reflect the recognition of future benefit costs over the covered employees' approximate service periods based on the terms of the plans and the investment and funding decisions made by the Company. The Company is required to make assumptions regarding such variables as the expected long-term rate of return on plan assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year. As of December 31, 2003, 2002 and 2001, the Company used expected long-term rates of return on pension plan assets of 8.50%, 8.75% and 8.75%, respectively. The postretirement plan has no assets. The Company analyzed the rates of returns on assets used and determined that these rates are reasonable based upon the plans' historical performance relative to the overall markets and mix of assets. The Company will continue to assess the expected long-term rate of return on plan assets assumptions for each plan based on relevant market conditions and will make adjustments to the assumptions as appropriate. A one percent decrease in the estimated return on plan assets would result in an increase in net pension expense of $0.8 million for 2004. For the years ended December 31, 2003, 2002 and 2001, the Company used discount rates of 6.75%, 7.25% and 7.75%, respectively, for both the pension and postretirement plans to determine net pension and postretirement expense. In addition, at December 31, 2003, 2002 and 2001, the Company used discount rates of 6.25%, 6.75% and 7.50%, respectively, for both the pension and postretirement plans to determine benefit obligations at the end of each year. The decrease in the discount rate used in the current year correlates with a decline in interest rates on noncallable, high quality bonds over the past year. The Company bases its discount rate used on Moody's Aa bond index plus an adjustment upward to the next quarter percentage point. See notes 10 and 11 to the consolidated financial statements for the full list of assumptions for the pension and postretirement plans. The Company has previously recorded accruals totaling $6.7 million relating to various environmental matters, representing the Company's current best estimate of the cost to remediate these matters. The Company estimates that total cost to remediate these matters could be as much as $16 million should all matters be ultimately concluded in a manner least favorable to the Company. Results of Operations for 2003, 2002 and 2001 Net Sales. Net sales for 2003 decreased 5% to $918.4 million (including $100.7 million from Alflex) from $966.2 million (including $112.4 million from Alflex) in 2002. The decrease is due to the combined effect of lower aluminum and electrical product shipments and lower net selling prices of electrical products which more than offset an increase in net selling prices of aluminum products. Unit sales volume of aluminum products decreased 14% to 775 million pounds in 2003 from 905 million pounds in 2002. Alflex unit sales volume was 455 million feet for 2003 compared to 487 million feet for 2002, a 7% decrease. As mentioned previously, the decreased aluminum and electrical product shipments were due to difficult business conditions in both businesses. Net sales for 2002 increased 5% to $966.2 million (including $112.4 million from Alflex) from $920.5 million (including $118.7 million from Alflex) in 2001. The increase was due to increased shipments which more than offset a decrease in net selling prices. The increased shipments resulted from increased demand for aluminum products during 2002 across all of the Company's aluminum products' markets and particularly the strength of a resilient residential construction market. Unit sales volume of aluminum products increased 13% to 905 million pounds in 2002 from 801 million pounds in 2001. Alflex unit sales volume was 487 million feet for 2002 compared to 509 million feet for 2001. The decrease was primarily due to ongoing softness in commercial construction activity. Gross Profit. Gross profit decreased 11% to $60.1 million (6.5% of net sales) in 2003 after a 43% increase to $67.3 million (7.0% of net sales) in 2002 from 2001 gross profit of $47.0 million (5.1% of net sales). Contributing to the 2003 decrease in gross profit were decreases in both the Aluminum business and Alflex. The Aluminum business gross profit declined primarily due to lower shipment volumes due partly to the effects of the planned equipment downtime for maintenance and capital improvement outages previously discussed, partially offset by the combined effects of improved material margins as a result of the mark-to-market hedge adjustments also mentioned previously and by cost of goods sold reductions related to the aforementioned changes to the Company's postretirement medical insurance program. The 2003 gross profit decrease at Alflex reflect the net effects of lower shipment volume and lower material margins which were somewhat offset by slightly lower manufacturing unit costs in 2003. The 2002 increase from 2001 was related entirely to the aluminum business and due primarily to increased volumes and greater manufacturing efficiencies, improving material margins in the last half of 2002, lower outside processing costs, lower natural gas costs plus lower depreciation expense as a result of asset impairment charges recorded in the fourth quarter of 2001. In addition, the gross profit for 2002 benefited from a deferral of the Company's regular December shut-down and maintenance of aluminum production facilities, which permitted increased production and sales in late 2002 and resulted in a deferral to January 2003 of approximately $1.5 million of shut-down expenses, principally relating to labor and purchased parts. All the above factors more than offset the lower material margins experienced during the first half of 2002 which were due to higher scrap acquisition costs for the first six months of 2002 versus the same period in 2001. Scrap acquisition costs declined during the last half of 2002 as scrap availability increased and coupled with lower primary metal costs and firmer pricing for aluminum products translated into higher material margins in the last half of 2002 versus the first half of 2002; however full year 2002 material margins were lower than full year 2001 material margins. Alflex's gross profit for 2002 versus 2001 was down 10% as decreased net sales revenue resulting from decreased shipments and lower selling prices offset the improved material margins. The lower net selling prices reflected the impact of the increasingly competitive price environment in 2002. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 2% in 2003 from 2002. Contributing to the decrease was a $3.2 million reduction in postretirement medical expense relating to the changes made in the postretirement medical program during the second quarter of 2003, lower accruals for employee incentive plans and a lower provision for uncollectible accounts receivable. Limiting the amount of the decrease were increased professional service costs principally associated with the Company's project to upgrade its information technology systems. Selling, general and administrative expenses decreased 14% in 2002 from 2001. Contributing to the decrease were two factors which increased the 2001 selling, general and administrative expenses. The factors were a $3.2 million increase in the provision for uncollectible accounts receivable, principally relating to Chapter 11 bankruptcy filings by certain of the Company's customers, and a $2.5 million additional expense relating to the termination of the Company's 1999 Executive Incentive Plan. Limiting the amount of the decrease were increased professional service costs associated with the Company's information system redesign and accruals for employee incentive plans. Amortization of Goodwill. Goodwill was no longer amortized beginning January 2002 as required by the Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". See note 3 to the consolidated financial statements for additional information. Amortization of goodwill was $4.0 million in 2001. Goodwill Impairment Charges. Non-cash goodwill impairment charges of $29.6 million were recorded in December 2003 in the Company's Alflex electrical products segment as a result of the Company's annual impairment review. See note 3 to the consolidated financial statements for additional information. Asset Impairment Charges. Non-cash asset impairment charges of $167.3 million were recorded in 2001 related to the impairment of certain property, plant and equipment and goodwill in the Company's aluminum business segment. The $167.3 million asset impairment charges were composed of $85.4 million of property, plant and equipment write-downs and $81.9 million of goodwill write-downs. See note 2 to the consolidated financial statements for additional information. Operating Income (Loss). Operating income decreased $35.9 million to an operating loss of $15.6 million in 2003, after having increased $199.1 million in 2002 to operating income of $20.3 million, in 2003 reflecting the effect of the 2003 goodwill impairment charges and in 2002 reflecting the effect of the 2001 asset impairment charges in addition to the other factors mentioned above. Other Income (Expense), Net. Other income (expense), net in 2003 and 2002 increased by $0.9 million and $0.7 million, respectively, compared to 2001 primarily due to increased purchase discounts. Interest Expense, Net. Interest expense in 2003 decreased 1% to $15.0 million from $15.1 million in 2002. The decrease was primarily due to a reduction in interest rates under the Company's receivables purchase agreement which more than offset the combined effect of an increase in amounts outstanding under the agreement and a reduction in investment interest income. Interest expense in 2002 decreased 2% to $15.1 million from $15.5 million in 2001. The decrease was primarily due to lower interest rates under the Company's receivables purchase agreement combined with a reduction in amounts outstanding under the agreement which more than offset a reduction in investment interest income. Income Tax Expense (Benefit). The Company recognized income tax expense of $0.2 million in 2003 compared to an income tax benefit of $2.3 million in 2002 and income tax expense of $0.2 million in 2001. The decrease in income tax expense in 2002 was due to a $2.7 million adjustment recorded in the third quarter of 2002 to reduce prior years' income tax accruals based in part on a change in tax law in 2002. At December 31, 2003, the Company had remaining available net operating loss ("NOL") carryforwards of approximately $74 million. These NOL carryforwards will expire in various amounts from 2005 through 2021. The amount of taxable income that can be offset by NOL carryforwards arising prior to the initial public offering of the Company in March 1995 is subject to an annual limitation of approximately $9.6 million plus certain gains included in taxable income which are attributable to the Company prior to the initial public offering. Approximately $34 million of the $74 million of NOL carryforwards mentioned previously are subject to this annual limitation with the remaining amounts having no such annual limitation. Cumulative Effect of Change in Accounting Principle. A non-cash goodwill impairment charge of $25.3 million was recorded as a cumulative effect of change in accounting principle as of January 1, 2002 under SFAS No.142. See note 3 to the consolidated financial statements for additional information. Net Income (Loss). The Company recorded a net loss for 2003 of $28.9 million, a net loss for 2002 of $16.2 million and a net loss of $193.6 million in 2001, in each case reflecting the factors described above for each year. Off-Balance Sheet Arrangement During 1997, the Company sold all of its trade accounts receivables to a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC entered into a three-year receivables purchase agreement with a financial institution and its affiliate, whereby CFC sells, on a revolving basis, an undivided interest in certain of its receivables and receives up to $150.0 million from an unrelated third party purchaser at a cost of funds linked to commercial paper rates plus a charge for administrative and credit support services. During 2000, the Company and the financial institution extended the receivables purchase agreement for an additional three-year period ending in September 2003, in October 2002, extended the agreement for an additional year ending in September 2004 and in February 2004, extended the agreement through the end of March 2005. In addition, during September 2001 the Company and the financial institution agreed to reduce the size of the facility to $95.0 million, in October 2003, the availability was reduced to $60.0 million and in February 2004, the availability was increased to $80.0 million. At December 31, 2003 and 2002, the Company had outstanding under the agreement $60.0 million and $24.0 million, respectively, and had $64.2 million and $81.2 million, respectively, of net residual interest in receivables sold. The fair value of the net residual interest is measured at the time of the sale and is based on the sale of similar assets. In 2003 and 2002, the Company received gross proceeds of $82.0 million and $51.0 million, respectively, from the sale of receivables and made gross payments of $46.0 million and $47.0 million, respectively, under the agreement. Under the terms of the agreement, the Company is required to maintain tangible net worth of $5 million, and to not exceed certain percentages of credit sales for uncollectible accounts, delinquent accounts and sales returns and allowances. Should the Company exceed such limitations, the financial institution has the right to terminate the agreement. Liquidity and Capital Resources The Company's cash flows from operations in 2003, 2002 and 2001 were $4.0 million, $24.8 million and $3.2 million, respectively. The cash flows from operations decreased in 2003 and 2001 primarily due to reduced income. Working capital decreased to $135.2 million at December 31, 2003 from $138.8 million at December 31, 2002. Working capital was $121.5 million at December 31, 2001. Capital expenditures were $16.5 million, $16.3 million and $9.0 million in 2003, 2002 and 2001, respectively, and are estimated to be $12.6 million in 2004, all generally related to upgrading and expanding the Company's manufacturing and other facilities and meeting environmental requirements. Approximately $7.7 million and $5.3 million of the capital expenditures for 2003 and 2002, respectively, were for acquiring and enhancing software and hardware as part of the Company's new information system platform installed in the fourth quarter of 2003. The Company's sources of liquidity are cash flows from operations, the Company's receivables purchase agreement previously described and borrowings under its $30 million revolving credit facility. The revolving credit facility expires on March 31, 2005. Availability of advances under the $30 million revolving credit facility is dependent on the continued satisfaction of certain financial covenants contained in the revolving credit agreement. While the Company is currently in full compliance with such financial covenants there is no assurance that the Company will be able to continue meeting such covenants, as currently structured, at all times during the next twelve months. In the event the Company does not meet the requisite covenants it may seek to obtain waivers or amendments of applicable covenant provisions from the participating lenders. In any event, the Company believes it has sufficient liquidity available from operating cash flows and amounts available under its receivables purchase agreement to fund its working capital requirements, capital expenditures, debt service, and if necessary, to satisfy any outstanding amounts under its revolving credit facility for at least the next twelve months. The Company's revolving credit facility permits borrowings and letters of credit up to $30.0 million outstanding at any time. As noted in the previous paragraph, availability is subject to satisfaction of certain covenants and other requirements. At December 31, 2003 $26.9 million was available as the only outstanding amounts against the credit facility was $3.1 million of standby letters of credit. The Company announced on July 31, 2003, that its Board of Directors had suspended the Company's quarterly cash dividend payments on its common stock as of the third quarter of 2003 due to the challenging economic conditions and to ensure continued compliance with the Company's debt instruments regarding the payment of dividends. The restrictions that limit the payment of cash dividends are contained in the Indenture relating to the Company's $125 million senior subordinated notes due in 2006. The Company believes that the restrictions are likely to result in suspension of the cash dividend through at least the maturity of the senior subordinated notes in 2006. The following schedules summarize the Company's contractual cash obligations and unused availability of financing sources at December 31, 2003 (in thousands).
Payments Due By Period ------------------------------------------------------------ Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years - ------------------------------------------------------------------------------------------------------------ Long-term debt $125,000 $ - $125,000 $ - $ - Capital and operating leases 10,411 3,355 3,268 1,338 2,450 Standby letters of credit 3,111 3,111 - - - Outstanding obligation under receivables purchase agreement 60,000 60,000 - - - ---------------------------------------------------------------------- Total contractual cash obligations $198,522 $66,466 $128,268 $1,338 $2,450 ====================================================================== Amount of Availability Per Period Unused Availability of Total Amounts ------------------------------------------------------------ Financing Sources Available Less than 1 year 1-3 years 4-5 years After 5 years - ------------------------------------------------------------------------------------------------------------ Unused revolving credit facility $ 26,889 $ - $26,889 $ - $ - Unused availability under receivables purchase agreement -(1) - -(1) - - ----------------------------------------------------------------------- Total available $ 26,889(2) $ - $26,889(2) $ - $ - ======================================================================= (1) The amount would be $20,000 giving effect to the February 2004 amendment to the receivables purchase agreement described previously. (2) The amount would be increased to $46,889 giving effect to the February 2004 amendment to the receivables purchase agreement described previously.
The Company has seven years remaining on a 10-year guaranteed supply agreement with Glencore Ltd. ("Glencore"), a leading diversified trading and industrial company, for the purchase of primary aluminum. Under the agreement, the Company committed to purchase a minimum of 120 million pounds of P1020/99.7% aluminum at current market prices from Glencore each year over the 10-year term. The Company has met or exceeded the minimum purchase quantity for each year of the contract. At December 31, 2003, the Company held firm-priced aluminum purchase and sales commitments through May 2005 totaling $5 million and $144 million, respectively. The Company hedges the impact of changes in prices related to these commitments as explained in the caption entitled "Commodity Price Risk" in the following section. Risk Management Commodity Price Risk. The price of aluminum is subject to fluctuations due to unpredictable factors on the worldwide market. To reduce this market risk, the Company follows a policy of hedging its anticipated raw material purchases based on firm-priced sales and purchase orders by purchasing and selling futures contracts, forward contracts and options on the London Metal Exchange ("LME"). The Company also uses forward contracts and options to reduce its risks associated with its natural gas requirements. As described in note 7 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") effective January 1, 2001 and has designated virtually all of its aluminum and natural gas futures contracts and forward contracts as cash flow hedges. However, for the last three quarters of the year ending December 31, 2003, the Company's aluminum futures contracts did not meet certain "effectiveness" requirements set forth in SFAS No. 133. Accordingly, as prescribed by the provisions of SFAS No. 133, the derivative instruments used as hedges of aluminum prices were marked-to-market and the gains and losses during the last three quarters of 2003 were recorded currently in the consolidated statement of operations instead of being deferred in other comprehensive income and included in income when the underlying hedged transactions occur. The Company's natural gas futures continue to be deemed "effective" per SFAS No. 133 and accordingly the gains and losses on these financial instruments are deferred in other comprehensive income and included in income when the underlying hedged transactions occur. Gains and losses on these instruments that are deferred in other comprehensive income are reclassified into net income as cost of goods sold in the periods when the hedged transactions occur. As of December 31, 2003, approximately $1.8 million of the $2.0 million of deferred net gains are expected to be reclassified from other comprehensive income into net income as cost of goods sold over the next twelve months. A net gain of $7.1 million and a net loss of $0.1 million was recognized in cost of goods sold during the year ended December 31, 2003 and 2002, respectively, representing the amount of the hedges' ineffectiveness. As of December 31, 2003, the Company held open aluminum and natural gas futures and forward contracts having maturity dates extending through December 2005. A sensitivity analysis has been prepared to estimate the Company's exposure to market risk related to its LME position. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in the price of the futures contract. On December 31, 2003 the Company had approximately 57,150 metric tonnes of LME futures contracts. A hypothetical 10% change from the 2003 year-end three-month high grade aluminum price of $1,614 per metric tonne would result in a change in fair value of $9.2 million in these contracts. However it should be noted that any change in the fair value of these contracts would be significantly offset with an inverse change in the cost of metal to be purchased. Additionally, as previously noted, gains and losses on the aluminum derivative instruments used as hedges were recorded currently in the consolidated statement of operations during the last three quarters of 2003 instead of being deferred in other comprehensive income and included in income when the underlying hedged transactions occur. The recording of these transactions in this manner to comply with SFAS No. 133 effects the matching and increases volatility in the consolidated statement of operations. A sensitivity analysis has been prepared to estimate the Company's exposure to market risk related to its New York Mercantile Exchange ("NYMEX") Henry Hub natural gas forward contracts. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in the price of the forward contract. On December 31, 2003 the Company had approximately 6.3 million cubic feet of NYMEX forward contracts. A hypothetical 10% change from the 2003 year-end three-month natural gas price of $5.277 per cubic foot would result in a change in fair value of $3.3 million in these contracts. However it should be noted that any change in the fair value of these contracts that is recognized in income would be significantly offset with an inverse change in the cost of gas purchased during the same reporting period. Credit Risk. Assessments of credit worthiness and credit risk are completed on potential and existing customers through a review of trade references, bank references, financial statements, and independent credit bureau reports. Also as previously discussed, the Company utilizes futures contracts, forward contracts and options to protect against exposures to commodity price risk in the aluminum and natural gas markets. The Company is exposed to losses in the event of non-performance by the counterparties to these agreements; however, the Company does not anticipate non-performance by the counterparties. Assessments of credit risks with trading partners (brokers) are completed through a review of the broker's ratings with credit rating agencies. However, the Company does not require collateral to support broker transactions. In addition, all brokers trading on the LME with U.S. clients are regulated by the Commodity Futures Trading Commission, which requires the brokers to be fully insured against unrealized losses owed to clients. Brokers of natural gas forward contracts are not regulated. At December 31, 2003, credit lines totaling $27.8 million were available at various brokerages used by the Company. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), and issued a revision in December 2003. This Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for the Company in the quarter ending March 31, 2004. Management does not expect the adoption of this Interpretation to have a material impact on the Company's results of operations or financial position. In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, the provisions of this Statement are generally to be applied prospectively. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of SFAS No.150 apply immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". The Statement requires additional disclosures about an employer's pension plans and postretirement benefits plans such as: the types of plan assets, investment strategy, measurement date, plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. See notes 10 and 11 to the consolidated financial statements for the required additional disclosures. Exhibit 13 item (C) ------------------- COMMONWEALTH INDUSTRIES, INC. Consolidated Balance Sheet (in thousands except share data)
December 31, ------------------------------------- 2003 2002 ------------- ------------- Assets Current assets: Cash and cash equivalents $ - $ 13,211 Accounts receivable, net 451 66 Inventories 131,365 125,348 Net residual interest in receivables sold 64,214 81,195 Prepayments and other current assets 14,194 7,133 ------------- ------------- Total current assets 210,224 226,953 Property, plant and equipment, net 142,035 146,968 Goodwill 19,265 48,872 Other noncurrent assets 7,802 6,111 ------------- ------------- Total assets $ 379,326 $ 428,904 ============= ============= Liabilities Current liabilities: Outstanding checks in excess of deposits $ 733 $ - Accounts payable 50,308 59,594 Accrued liabilities 24,009 28,527 ------------- ------------- Total current liabilities 75,050 88,121 Long-term debt 125,000 125,000 Other long-term liabilities 3,845 5,183 Accrued pension benefits 30,147 26,743 Accrued postretirement benefits 67,146 76,670 ------------- ------------- Total liabilities 301,188 321,717 ------------- ------------- Commitments and contingencies - - Stockholders' Equity Common stock, $0.01 par value, 50,000,000 shares authorized, 16,010,971 and 15,997,651 shares outstanding at December 31, 2003 and 2002, respectively 160 160 Additional paid-in capital 405,703 405,613 Accumulated deficit (308,477) (277,942) Accumulated other comprehensive income: Unrealized gain on security 34 - Minimum pension liability adjustment (21,276) (21,391) Effects of cash flow hedges 1,994 747 ------------- ------------- Total stockholders' equity 78,138 107,187 ------------- ------------- Total liabilities and stockholders' equity $ 379,326 $ 428,904 ============= ============= The accompanying notes are an integral part of the consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Consolidated Statement of Operations (in thousands except per share data)
Year ended December 31, --------------------------------------------- 2003 2002 2001 ----------- ------------ ----------- Net sales $ 918,396 $ 966,238 $ 920,504 Cost of goods sold 858,274 898,927 873,473 ----------- ------------ ----------- Gross profit 60,122 67,311 47,031 Selling, general and administrative expenses 46,085 46,977 54,523 Amortization of goodwill - - 3,988 Goodwill impairment charges 29,607 - - Asset impairment charges - - 167,267 ----------- ------------ ----------- Operating income (loss) (15,570) 20,334 (178,747) Other income (expense), net 1,771 1,636 907 Interest expense, net (14,951) (15,146) (15,512) ----------- ------------ ----------- Income (loss) before income taxes and cumulative effect of change in accounting principle (28,750) 6,824 (193,352) Income tax expense (benefit) 184 (2,292) 200 ----------- ------------ ----------- Income (loss) before cumulative effect of change in accounting principle (28,934) 9,116 (193,552) Cumulative effect of change in accounting principle - (25,327) - ----------- ------------ ----------- Net income (loss) $ (28,934) $ (16,211) $(193,552) =========== ============ =========== Basic net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ (1.81) $ 0.57 $ (11.78) Cumulative effect of change in accounting principle - (1.58) - ----------- ------------ ----------- Net income (loss) $ (1.81) $ (1.01) $ (11.78) =========== ============ =========== Diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ (1.81) $ 0.57 $ (11.78) Cumulative effect of change in accounting principle - (1.57) - ----------- ------------ ----------- Net income (loss) $ (1.81) $ (1.00) $ (11.78) =========== ============ =========== Weighted average shares outstanding Basic 16,011 15,994 16,428 Diluted 16,011 16,097 16,428 The accompanying notes are an integral part of the consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Consolidated Statement of Comprehensive Income (Loss) (in thousands)
Year ended December 31, ---------------------------------------- 2003 2002 2001 ---------- ---------- --------- Net income (loss) $ (28,934) $ (16,211) $(193,552) Other comprehensive income, net of tax: Unrealized gain on security 34 - - Minimum pension liability adjustment 115 (21,391) - Net change related to cash flow hedges: Cumulative effect of accounting change - - 6,619 Increase (decrease) in fair value of cash flow hedges 9,615 1,867 (31,451) Reclassification adjustment for (gains) losses included in net income (8,368) 10,224 13,488 ---------- ---------- --------- Net change related to cash flow hedges 1,247 12,091 (11,344) ---------- ---------- --------- Comprehensive income (loss) $ (27,538) $ (25,511) $(204,896) ========== ========== ========= The accompanying notes are an integral part of the consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Consolidated Statement of Changes in Stockholders' Equity (in thousands except share and per share data)
Accumulated Other Comprehensive Income: Notes ------------------------------ Common Stock Receivable Unrealized Minimum Effects of ---------------- Additional from Sale Gain Pension Cash Total Number of Paid-in Accumulated Unearned of Common on Liability Flow Stockholders' Shares Amount Capital Deficit Compensation Stock Security Adjustment Hedges Equity ---------- ----- ------- --------- -------- ---------- ------- -------- --------- -------- Balance December 31, 2000 16,528,051 $ 165 $ 408,505 $ (61,688) $ (7) $ (8,582) $ - $ - $ - $ 338,393 Net income (loss) - - - (193,552) - - - - - (193,552) Cash dividends, $0.20 per share - - - (3,292) - - - - - (3,292) Effects of cash flow hedges - - - - - - - - (11,344) (11,344) Amortization of unearned compensation - - - - 7 - - - - 7 Issuance of stock in connection with stock awards 24,975 - 106 - - - - - - 106 Repayments of notes receivable and retirement of common stock (583,996) (5) (3,168) - - 7,021 - - - 3,848 ---------- ----- ------- --------- -------- ---------- ------- -------- --------- -------- Balance December 31, 2001 15,969,030 160 405,443 (258,532) - (1,561) - - (11,344) 134,166 Net income (loss) - - - (16,211) - - - - - (16,211) Cash dividends, $0.20 per share - - - (3,199) - - - - - (3,199) Minimum pension liability adjustment - - - - - - - (21,391) - (21,391) Effects of cash flow hedges - - - - - - - - 12,091 12,091 Issuance of stock in connection with stock awards 28,621 - 170 - - - - - - 170 Repayments of notes receivable and retirement of common stock - - - - - 1,561 - - - 1,561 ---------- ----- ------- --------- -------- ---------- ------- -------- --------- -------- Balance December 31, 2002 15,997,651 160 405,613 (277,942) - - - (21,391) 747 107,187 Net income (loss) - - - (28,934) - - - - - (28,934) Cash dividends, $0.10 per share - - - (1,601) - - - - - (1,601) Unrealized gain on security - - - - - - 34 - - 34 Minimum pension liability adjustment - - - - - - - 115 - 115 Effects of cash flow hedges - - - - - - - - 1,247 1,247 Issuance of stock in connection with stock awards 13,320 - 90 - - - - - - 90 ---------- ----- ------- -------- -------- ---------- ------- -------- --------- -------- Balance December 31, 2003 16,010,971 $ 160 $405,703 $(308,477) $ - $ - $ 34 $ (21,276) $1,994 $ 78,138 ========== ===== ======= ======== ======== ========== ======= ========= ========= ======== The accompanying notes are an integral part of the consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Consolidated Statement of Cash Flows (in thousands)
Year ended December 31, -------------------------------------------- 2003 2002 2001 ---------- ---------- ----------- Cash flows from operating activities: Net income (loss) $(28,934) $ (16,211) $ (193,552) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation 20,713 21,142 30,053 Amortization 895 984 5,276 Asset impairment charges - - 167,267 Goodwill impairment charges 29,607 25,327 - Loss on disposal of property, plant and equipment 554 325 364 Issuance of common stock in connection with stock awards 90 170 106 Changes in assets and liabilities: (Increase) decrease in accounts receivable, net (385) 15 30 (Increase) decrease in inventories (6,017) (6,310) 18,647 Decrease (increase) in net residual interest in receivables sold 17,015 1,115 (9,943) (Increase) decrease in prepayments and other current assets (6,920) (2,041) 8,133 (Increase) in other noncurrent assets (579) (3,602) (322) (Decrease) increase in accounts payable (9,286) 8,901 (2,829) (Decrease) in accrued liabilities (3,412) (120) (13,524) (Decrease) in other liabilities (9,350) (4,941) (6,472) ---------- ---------- ----------- Net cash provided by operating activities 3,991 24,754 3,234 ---------- ---------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (16,492) (16,321) (9,002) Proceeds from sale of property, plant and equipment 158 23 91 ---------- ---------- ----------- Net cash (used in) investing activities (16,334) (16,298) (8,911) ---------- ---------- ----------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits 733 - - Proceeds from long-term debt 108,970 77,270 57,110 Repayments of long-term debt (108,970) (77,270) (57,110) Repayments of notes receivable from sale of common stock - 1,561 3,848 Cash dividends paid (1,601) (3,199) (3,292) ---------- ---------- ----------- Net cash (used in) provided by financing activities (868) (1,638) 556 ---------- ---------- ----------- Net (decrease) increase in cash and cash equivalents (13,211) 6,818 (5,121) Cash and cash equivalents at beginning of period 13,211 6,393 11,514 ---------- ---------- ----------- Cash and cash equivalents at end of period $ - $ 13,211 $ 6,393 ========== ========== =========== Supplemental disclosures: Interest paid $ 14,595 $ 14,483 $15,609 Income taxes paid (refunds received) 118 (2,524) 36 Non-cash activities: Repayment of notes receivable from sale of common stock with common stock and subsequent retirement of common stock $ - $ - $ 3,173 The accompanying notes are an integral part of the consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Summary of Significant Accounting Policies Commonwealth Industries, Inc. (the "Company") operates principally in the United States in two segments. The aluminum segment manufactures common alloy aluminum sheet for distributors and the transportation, construction, and consumer durables end-use markets. The electrical products segment manufactures flexible electrical wiring products for the commercial construction and do-it-yourself markets. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's most significant estimates relate to the valuation of property, plant and equipment and goodwill, assumptions and methodology for assessing hedge effectiveness regarding aluminum and natural gas futures contracts, forward contracts and options, assumptions for computing pension and postretirement benefits obligations, allowance for uncollectible accounts receivable, assumptions for computing workers' compensation liabilities and environmental liabilities. Cash and Cash Equivalents Cash and cash equivalents include demand deposits with banks and highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates their fair value. Concentrations of Credit Risk Futures contracts, options, cash investments and accounts receivable potentially subject the Company to concentrations of credit risk. The Company places its cash investments with high credit quality institutions. At times, such cash investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Credit risk with respect to accounts receivable exists related to concentrations of sales to aluminum distributors, who in turn resell the Company's aluminum products to end-use markets, including the consumer durables, building and construction and transportation markets. Concentrations of credit risk with respect to accounts receivable from the sale of electrical products are limited due to the large customer base, and their dispersion across many different geographical areas. During 2003, 2002 and 2001, sales to one major customer amounted to approximately 9.7%, 11.1% and 12.2%, respectively, of the Company's net sales. No other single customer accounted for more than 10% of the Company's net sales in 2003, 2002 or 2001. The Company performs ongoing credit evaluations of its customers' financial condition but does not require collateral to support customer receivables. Inventories Inventories are stated at the lower of cost or market. The methods of accounting for inventories are described in note 5. Long-Lived Assets Property, plant and equipment are carried at cost and are being depreciated on a straight-line basis over the estimated useful lives of the assets which generally range from 15 to 33 years for buildings and improvements and from 5 to 20 years for machinery and equipment. Repair and maintenance costs are charged against income while renewals and betterments are capitalized. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the accounts with any resulting gain or loss reflected in income. Goodwill represents the excess of cost over the fair value of net assets acquired and prior to 2002 was being amortized on a straight-line basis over forty years. Accumulated amortization was $23.1 million at December 31, 2001. Beginning January 1, 2002 goodwill is no longer amortized, but instead is being evaluated annually for impairment according to the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). See note 3 for additional information. Prior to January 1, 2002, the Company periodically evaluated the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets according to the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.121"). In the event that facts and circumstances indicated that the carrying amount of an asset or group of assets may be impaired, an evaluation of recoverability was performed in accordance with the provisions of SFAS No. 121. In performing the evaluation, the estimated future undiscounted cash flows associated with the asset was compared to the assets' carrying amount to determine if a write-down to fair value or discounted cash flow value was required. The Company recorded an impairment charge in the fourth quarter of 2001 according to the provisions of SFAS No.121. See note 2 for additional information. After January 1, 2002, the Company periodically evaluates the carrying value of long-lived assets to be held and used according to Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement superseded SFAS No. 121, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a "segment of a business" (as previously defined in that Opinion). The adoption of SFAS No. 144 had no impact on the Company's financial statements in 2002. Capitalized Software Costs The Company capitalizes certain computer software acquisition and implementation costs. Computer software costs of $7.7 million and $5.3 million were capitalized during the year ended December 31, 2003 and 2002, respectively, relating to the Company's project to upgrade its information technology systems which became operational in the fourth quarter of 2003. The Company recorded $0.4 million of depreciation during the fourth quarter of 2003 relating to the project. Capitalized Interest Costs The Company capitalizes interest costs associated with the financing of major capital expenditures up to the time the asset is ready for its intended use. Deferred Financing Costs The costs related to the issuance of debt are capitalized and amortized over the lives of the related debt as interest expense. Financial Instruments The Company enters into futures contracts, forward contracts and options to manage exposures to price risk related to aluminum and natural gas purchases. The Company also occasionally uses interest rate swap agreements to manage interest rate risk. Gains and losses on these financial instruments which effectively hedge exposures are deferred, net of taxes if any, in other comprehensive income and included in income when the underlying transactions occur. The ineffective portion of the gains and losses are recorded currently in the consolidated statement of operations. Gains and losses on certain other financial instruments entered into to mitigate risk which do not qualify for hedge accounting are recognized currently in the consolidated statement of operations. See note 7 for additional information. Income Taxes The Company accounts for income taxes using the liability method, whereby deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In valuing deferred tax assets, the Company uses judgment in determining if it is more likely than not that some portion or all of a deferred tax asset will not be realized and the amount of the required valuation allowance. Revenue Recognition The Company recognizes revenue upon passage of title to the customer. The Company classifies customer rebates as sales deductions in accordance with the requirements of Emerging Issues Task Force Issue No. 01-09 and classifies shipping costs incurred as a component of cost of goods sold in accordance with the requirements of Emerging Issues Task Force Issue No. 00-10. Computation of Net Income Per Common Share Basic net income per common share has been computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share has been computed by dividing net income by the weighted average number of common and common equivalent shares (stock options) outstanding during the period. Stock-Based Compensation At December 31, 2003, the Company had stock-based compensation plans which are described more fully in note 14. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company follows the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock option plans under the intrinsic value based method. Accordingly, no stock-based compensation expense has been recognized for stock options issued under the plans as all stock options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation expense been determined based on the fair value of the stock options at the grant date consistent with the provisions of SFAS No. 123, the Company's net loss and basic and diluted net loss per share would have been increased for 2003, 2002 and 2001 to the pro forma amounts which follow (in thousands except per share data): 2003 2002 2001 ---- ---- ---- Net income (loss) as reported $(28,934) $(16,211) $(193,552) Less total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 327 372 106 --------- --------- ---------- Pro forma net income (loss) $(29,261) $(16,583) $(193,658) ========= ========= ========== Basic net income (loss) per share As reported $(1.81) $(1.01) $(11.78) Pro forma (1.83) (1.04) (11.79) Diluted net income (loss) per share As reported $(1.81) $(1.00) $(11.78) Pro forma (1.83) (1.03) (11.79) Self Insurance The Company is substantially self-insured for losses related to workers' compensation and health claims. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred based on Company experience and certain actuarial assumptions. Under the terms of the workers' compensation programs, the Company is required to maintain pre-determined amounts of cash security, restricted as to use. At December 31, 2003 and 2002, $3.2 million and $2.9 million, respectively, of other noncurrent assets on the consolidated balance sheet were so restricted. Environmental Compliance and Remediation Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs and post-remediation monitoring are recorded when they are probable and reasonably estimable. The liability may include costs such as environmental site evaluations, consultant fees, feasibility studies, outside contractor and monitoring expenses. The assessment of this liability is calculated based on existing technology, does not reflect any offset for possible recoveries from insurance companies and is not discounted. The Company expenses all legal fees associated with remediation costs and post-remediation monitoring as the fees are incurred. These fees are neither estimable nor probable, as it is not possible to predict the amount or timing of cost for future environmental matters which may subsequently be determined. Capital Lease Obligations The Company leases certain property, plant and equipment used in its operations, some of which are required to be capitalized in accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("SFAS No. 13"). SFAS No. 13 requires the capitalization of leases meeting certain criteria, with the related asset being recorded in property, plant and equipment and an offsetting amount recorded as a liability. Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), and issued a revision in December 2003. This Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for the Company in the quarter ending March 31, 2004. Management does not expect the adoption of this Interpretation to have a material impact on the Company's results of operations or financial position. In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (" SFAS No. 149"). The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, the provisions of this Statement are generally to be applied prospectively. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of SFAS No. 150 apply immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". The Statement requires additional disclosures about an employer's pension plans and postretirement benefits plans such as: the types of plan assets, investment strategy, measurement date, plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. See notes 10 and 11 to the consolidated financial statements for the required additional disclosures. 2. Asset Impairment Charges During the fourth quarter of 2001, the Company recorded a non-cash asset impairment charge of $167.3 million or $10.18 per basic and diluted share (before and after tax) related to the impairment of certain property, plant and equipment and goodwill in its aluminum segment. The asset impairment charges resulted from the application of the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121") which required that long-lived assets, certain intangibles and goodwill held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company undertook the impairment review upon concluding, in the weeks following the tragic events of September 11, that the economic recovery forecast by the Company to restore its aluminum rolling mill operations to profitability in the second half of 2001 would not occur, and that a continuation of poor market conditions would impact the carrying amount of the assets. The estimated fair value of the assets was based on anticipated cash flows of the operations in the Company's aluminum business discounted at a rate commensurate with the risk involved. The $167.3 million impairment charge was composed of $85.4 million of property, plant and equipment write-downs ($1.8 million of net land and improvements, $15.7 million of net building improvements, $59.0 million of net machinery and equipment and $8.9 million of construction in progress) and $81.9 million of goodwill write-downs. 3. Goodwill Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" and amends Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope goodwill and intangible assets that are not amortized. SFAS No. 121 was subsequently superseded by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill is no longer to be amortized but reviewed for impairment annually or more frequently if certain indicators arise, using a two-step approach. SFAS No. 142 was effective January 1, 2002 and the Company was required to complete step one of a transitional impairment test by June 30, 2002 and to complete step two of the transitional impairment test, if step one indicates that the reporting unit's carrying value exceeds its fair value, by December 31, 2002. Any impairment loss resulting from the transitional impairment test was required to be recorded as a cumulative effect of a change in accounting principle in the quarter ended March 31, 2002. Any subsequent impairment losses will be reflected in operating income in the consolidated statement of operations. The net goodwill balances attributable to each of the Company's reporting units were tested for impairment by comparing the fair value of each reporting unit to its carrying value. Fair value was determined by using the valuation technique of calculating the present value of estimated expected future cash flows (using a discount rate commensurate with the risks involved). Based upon the transitional impairment test performed upon adoption of SFAS No. 142, the Company recorded a goodwill impairment loss of $25.3 million ($13.5 million in its aluminum segment and $11.8 million in its electrical products segment). As required by SFAS No. 142 and previously described, the Company recorded the goodwill write-down as a cumulative effect of a change in accounting principle as of January 1, 2002 and restated the Company's first quarter 2002 financial results. During the fourth quarter of 2003, the Company performed its annual impairment review of the Company's remaining goodwill balance relating to the Alflex electrical products segment and determined that an additional goodwill impairment write-down of $29.6 million was necessary. The impairment loss was due to increased competition in the electrical products industry which lowered the operating profits and cash flows during 2003 over what had been expected. Based upon this trend, the long-term earnings and cash flow forecasts were revised. The following displays the changes in the carrying amount of goodwill in each of the Company's reportable segments for the years ended December 31, 2003 and 2002 (in thousands):
Electrical Aluminum Products Total -------- ---------- --------- Balance December 31, 2001 $13,470 $60,729 $74,199 Goodwill impairment loss as a result of transitional Impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327) ------- ------- ------- Balance December 31, 2002 - 48,872 48,872 Goodwill impairment loss as a result of annual Impairment test performed in fourth quarter - (29,607) (29,607) ------- ------- ------- Balance December 31, 2003 $ - $19,265 $19,265 ======= ======= =======
The following represents transitional disclosures for the years ending December 31, 2003, 2002 and 2001 relating to goodwill amortization including the goodwill impairment loss which was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002, as required by SFAS No. 142 and the goodwill impairment loss which was recorded in operating income during the fourth quarter of 2003 (in thousands except per share data):
2003 2002 2001 ---- ---- ---- Reported income (loss) before cumulative effect of change in accounting principle $(28,934) $ 9,116 $(193,552) Cumulative effect of change in accounting principle - (25,327) - ------- ------- -------- Reported net income (loss) (28,934) (16,211) (193,552) Add back: goodwill amortization - - 3,988 ------- ------- -------- Adjusted net income (loss) $(28,934) $(16,211) $(189,564) ======== ======== ======== Basic net income (loss) per share: Reported income (loss) before cumulative effect of change in accounting Principle $(1.81) $ 0.57 $(11.78) Cumulative effect of change in accounting principle - (1.58) - ------ ------ ------- Reported net income (loss) (1.81) (1.01) (11.78) Goodwill amortization - - 0.24 ------ ------ ------- Adjusted net income (loss) $(1.81) $ (1.01) $(11.54) ====== ====== ======= Diluted net income (loss) per share: Reported income (loss) before cumulative effect of change in accounting Principle $(1.81) $ 0.57 $(11.78) Cumulative effect of change in accounting principle - (1.57) - ------ ------ ------- Reported net income (loss) (1.81) (1.00) (11.78) Goodwill amortization - - 0.24 ------ ------ ------- Adjusted net income (loss) $(1.81) $(1.00) $(11.54) ====== ====== ======= Weighted average shares outstanding Basic 16,011 15,994 16,428 Diluted 16,011 16,097 16,428
The Company has no other intangible assets other than the goodwill discussed above. 4. Receivables Purchase Agreement On September 26, 1997, the Company sold all of its trade accounts receivables to a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC entered into a three-year receivables purchase agreement with a financial institution and its affiliate whereby CFC can sell, on a revolving basis, an undivided interest in certain of its receivables and receive up to $150.0 million from an unrelated third party purchaser at a cost of funds linked to commercial paper rates plus a charge for administrative and credit support services. The Company services the receivables for a fee in accordance with the receivables purchase agreement. In addition, under the agreement, the receivables are sold with no recourse to the Company and the Company records no discount on the sale of the receivables. During September 2000, the Company and the financial institution extended the receivables purchase agreement for an additional three-year period ending in September 2003, in October 2002, extended the agreement for an additional year ending in September 2004 and in February 2004, extended the agreement through the end of March 2005. In addition during September 2001, the Company and the financial institution agreed to reduce the maximum amount which can be outstanding under the agreement to $95.0 million, in October 2003, the availability was reduced to $60.0 million and in February 2004, the availability was increased to $80.0 million. At December 31, 2003 and 2002, the Company had outstanding under the agreement $60.0 million and $24.0 million, respectively, and had $64.2 million and $81.2 million, respectively, of net residual interest in the receivables sold. The fair value of the net residual interest is measured at the time of the sale and is based on the sale of similar assets. In 2003 and 2002, the Company received gross proceeds of $82.0 million and $51.0 million, respectively, from the sale of receivables and made gross payments of $46.0 million and $47.0 million, respectively, under the agreement. The Company maintains an allowance for uncollectible accounts based upon the expected collectibility of all consolidated trade accounts receivable, including receivables sold by CFC. The allowance was $1.4 million and $1.1 million at December 31, 2003 and 2002, respectively, and is netted against the net residual interest in the receivables sold in the Company's consolidated financial statements. Under the terms of the agreement, the Company is required to maintain tangible net worth of $5 million, and to not exceed certain percentages of credit sales for uncollectible accounts, delinquent accounts and sales returns and allowances. Should the Company exceed such limitations, the financial institution has the right to terminate the agreement. 5. Inventories Inventories at December 31 consist of the following (in thousands): 2003 2002 ---- ---- Raw materials $38,118 $22,718 Work in process 49,052 46,676 Finished goods 38,051 43,780 Expendable parts and supplies 12,915 14,320 -------- -------- 138,136 127,494 LIFO reserve (6,771) (2,146) -------- -------- $131,365 $125,348 ======== ======== The Company's raw materials, work in process and finished goods inventories are valued using the last-in, first-out (LIFO) accounting method in the Company's aluminum segment and the first-in, first-out (FIFO) and average-cost accounting methods in the Company's electrical products segment. The FIFO accounting method is used throughout the entire Company for valuing its expendable parts and supplies inventory. Inventories of approximately $110.0 million and $98.2 million, included in the above totals (before the LIFO reserve) at December 31, 2003 and 2002, respectively, are accounted for under the LIFO method of accounting while the remainder of the inventories are accounted for under the FIFO and average-cost methods. 6. Property, Plant and Equipment Property, plant and equipment and the related accumulated depreciation at December 31 consist of the following (in thousands): 2003 2002 ---- ---- Land and improvements $17,134 $17,134 Buildings and improvements 55,462 55,244 Machinery and equipment 326,764 311,823 Construction in progress 11,275 16,391 -------- -------- 410,635 400,592 Less accumulated depreciation 268,600 253,624 -------- -------- Net property, plant and equipment $142,035 $146,968 ======== ======== Depreciation expense was $20.7 million, $21.1 million and $30.1 million for the years ended 2003, 2002 and 2001, respectively. The net book value of property, plant and equipment was reduced by $85.4 million in 2001 as a result of the asset impairment charges described in note 2. 7. Financial Instruments and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", including Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS No. 133"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in net income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the consolidated statement of operations, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Under SFAS No. 133, gains and losses that represent the effective portion of cash flow hedge transactions are recorded in other comprehensive income. Gains and losses on these instruments that are deferred in other comprehensive income are reclassified into net income as cost of goods sold in the periods when the hedged transactions occur. The Company enters into futures contracts, forward contracts and options to manage exposures to price risk related to aluminum and natural gas purchases. The Company has designated the futures contracts and forward contracts as cash flow hedges of anticipated aluminum raw material and natural gas requirements, respectively. For the last three quarters of the year ending December 31, 2003, the Company's aluminum futures contracts did not meet certain "effectiveness" requirements set forth in SFAS No. 133. Accordingly, as prescribed by the provisions of SFAS No. 133, the derivative instruments used as hedges were marked-to-market and the gains and losses during the last three quarters of 2003 were recorded currently in the consolidated statement of operations instead of being deferred in other comprehensive income and included in income when the underlying hedged transactions occur. The Company's natural gas futures continue to be deemed "effective" per SFAS No. 133 and accordingly the gains and losses on these financial instruments are deferred in other comprehensive income and included in income when the underlying hedged transactions occur. The Company is exposed to losses in the event of non-performance by the counterparties to these agreements; however, the Company does not anticipate non-performance by the counterparties. Assessments of credit risks with trading partners (brokers) are completed through a review of the broker's ratings with credit rating agencies. However, the Company does not require collateral to support broker transactions. All brokers trading on the London Metal Exchange with U.S. clients are regulated by the Commodity Futures Trading Commission, which requires the brokers to be fully insured against unrealized losses owed to clients. Brokers of natural gas forward contracts are not regulated. At December 31, 2003, credit lines totaling $27.8 million were available at various brokerages used by the Company. The Company recorded a cumulative-effect-type net gain transition adjustment of $6.6 million in accumulated other comprehensive income to recognize at fair value all derivatives that were designated as cash-flow hedging instruments upon adoption of SFAS No. 133 on January 1, 2001. All of this amount was reclassified from accumulated other comprehensive income into cost of goods sold during 2001. As of December 31, 2003, approximately $1.8 million of the $2.0 million of deferred net gains are expected to be reclassified from other comprehensive income into net income as cost of goods sold over the next twelve months. As of December 31, 2003, the Company held open aluminum and natural gas futures contracts, forward contracts and options having maturity dates extending through December 2005. A net gain of $7.1 million for the year ended December 31, 2003 and a net loss of $0.1 million for both the year ended December 31, 2002 and 2001, was recognized in cost of goods sold representing the amount of the hedges' ineffectiveness. At December 31, 2003, the Company held firm-priced aluminum purchase and sales commitments through May 2005 totaling $5 million and $144 million, respectively. At December 31, 2002, the Company held firm-priced aluminum purchase and sales commitments through December 2004 totaling $7 million and $123 million, respectively. 8. Long-term Debt and Revolving Credit Facility Long-term debt of the Company at December 31 consisted of the following (in thousands): 2003 2002 ---- ---- Senior subordinated notes $125,000 $125,000 Revolving credit facility - - -------- -------- 125,000 125,000 Less current maturities - - -------- -------- $125,000 $125,000 ======== ======== The Company's $125 million of 10.75% senior subordinated notes are due in 2006. Interest is payable semi-annually on April 1 and October 1 of each year. The Company has a credit agreement with a syndicate of banks which is led by PNC Bank. During March 2002, the credit agreement was amended ("amended credit agreement") and PNC Bank replaced Bank One Corporation as the administrative agent and several of the banks in the syndicate were replaced with other banks. Prior to March 2002, the credit agreement included a $100 million revolving credit facility, under which the Company had agreed to limit borrowings to $65 million during 2001. The borrowing limitation is currently $30 million under the amended credit agreement. The credit agreement is collateralized by a pledge of all of the outstanding stock of the Company's subsidiaries and substantially all of the Company's assets. Up to $20 million of the revolving credit facility is available for standby and commercial letters of credit. The amended credit agreement extended the revolving credit facility commitment from September 2, 2002 to March 31, 2005. Borrowings under the credit agreement, as revised in 2002, bear interest at a variable base rate per annum plus up to an additional 2.00% depending on the results of a quarterly financial test as defined in the agreement. In addition, the Company must pay to the lenders under the credit agreement, a quarterly facility fee of 0.750%. The Company must pay a fee ranging from 1.500% to 2.000% per annum on the carrying amount of each outstanding letter of credit. At December 31, 2003 and 2002, standby letters of credit totaling $3.1 million and $2.8 million, respectively, were outstanding under the revolving credit facility. The credit agreement includes covenants which, among others, relate to leverage, interest coverage, fixed charges, capital expenditures and the payment of dividends. Based on estimated market values at December 31, 2003 and 2002, the fair value of the senior subordinated notes was approximately $126 million and $125 million, respectively. Future aggregate maturities of long-term debt at December 31, 2003 are as follows (in thousands): 2004 $ - 2005 - 2006 125,000 2007 - 2008 - -------- Total $125,000 ======== 9. Stockholders' Equity In July 1999, the Company adopted an Executive Stock Purchase Incentive Program (the "Program") which had been authorized by the Company's stockholders at the Company's annual meeting of stockholders held in April 1999. Under the Program, the Company extended credit to certain key executives to purchase the Company's common stock at fair market value. The loans were collateralized by the shares acquired and were repayable with full-recourse to the executives. The Program provided for the key executives to earn repayment of the notes including interest, based on achieving annual and cumulative performance objectives as set forth by the Management Development and Compensation Committee (the "Committee") of the Board of Directors. During December 2001, the Committee terminated the Program and the Board of Directors, at the recommendation of the Committee, authorized all loans to be repaid with a combination of proceeds from forfeiture by the executives of the collateralized shares and proceeds from application of Program termination payments made by the Company to the executives to cover the deficiency between the loans and the value of the collateralized shares on the date of termination of the Program. In addition, the Program termination payments covered income tax obligations incurred by the executives as a result of the Program termination. For certain of the executives, the Program termination payments used to repay the loans were divided between payments made in December 2001 and payments made in April 2002. A total of 677,000 shares were issued during August 1999 of which no shares were outstanding as of December 31, 2001. The outstanding principal balance of the notes at December 31, 2001 of $1.6 million was classified as a reduction of stockholders' equity and as previously mentioned that remaining outstanding amount was repaid in full in April 2002. The expense relating to the Program was $7.2 million for the year ended 2001. 10. Pension Plans The Company has two defined benefit pension plans covering certain salaried and non-salaried employees. The plan benefits are based primarily on years of service and employees' compensation during employment for all employees not covered under a collective bargaining agreement and; on stated amounts based on job grade and years of service prior to retirement for non-salaried employees covered under a collective bargaining agreement. During 2003, the non-salaried plan's benefit formula was increased. This plan amendment increased the accumulated pension benefit obligation by $2.5 million in 2003 and is being amortized over the average remaining service lives of the plan's active employees, which has the effect of increasing net periodic pension costs. The financial status of the plans at December 31 is as follows (in thousands): 2003 2002 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $100,768 $88,424 Service cost 2,907 2,625 Interest cost 6,834 6,473 Plan amendment 2,461 - Actuarial (gain) loss 9,770 10,939 Benefits paid (7,415) (7,693) -------- ------- Benefit obligation at end of year 115,325 100,768 -------- ------- Change in plan assets: Fair value of plan assets at beginning of year 72,391 82,300 Actual return on plan assets 13,037 (4,980) Employer contribution 4,086 2,764 Benefits paid (7,415) (7,693) ------- ------- Fair value of plan assets at end of year 82,099 72,391 ------- ------- Funded status (33,226) (28,377) Unrecognized net actuarial (gain) loss 28,530 27,563 Unrecognized net prior service cost (benefit) (918) (3,289) Unrecognized net transition obligation (asset) - - ------- ------- Net amount recognized $(5,614) $(4,103) ======= ======= Amounts recognized in the consolidated balance sheet consist of: (Accrued) pension cost $(30,147) $(26,743) Intangible asset 3,257 1,249 Accumulated other comprehensive income 21,276 21,391 ------- ------- Net amount recognized $(5,614) $(4,103) ======= ======= The accumulated benefit obligation for the plans was $112.2 million and $99.1 million at December 31, 2003 and 2002, respectively. Reflected at December 31, 2003 and 2002 in the Company's consolidated balance sheet is an additional minimum liability relative to its plans which were underfunded in the amount of $24.5 million and $22.6 million at December 31, 2003 and 2002, respectively. A corresponding amount is recorded at December 31, 2003 and 2002, respectively, as an intangible asset to the extent it did not exceed unrecognized prior service cost, while the excess was charged to stockholders' equity. The components of net pension expense for the years ended December 31 are as follows (in thousands): 2003 2002 2001 ---- ---- ---- Components of net pension expense: Service cost $2,907 $2,625 $2,548 Interest cost 6,834 6,473 6,451 Expected return on plan assets (5,871) (6,926) (7,346) Net amortization and deferral 1,728 118 (245) ------ ------ ------ Net pension expense $5,598 $2,290 $1,408 ====== ====== ====== The Company is required to make assumptions regarding such variables as the expected long-term rate of return on plan assets and the discount rate applied to determine service cost and interest cost. The Company bases its discount rate used on Moody's Aa bond index plus an adjustment upward to the next quarter percentage rate. The rates of returns on assets used is determined based upon an analysis of the plans' historical performance relative to the overall markets and mix of assets. The Company assesses the expected long-term rate of return on plan assets assumptions for each plan based on relevant market conditions and makes adjustments to the assumptions as appropriate. The weighted average assumptions used to determine benefit obligations at December 31 and net pension expense for the years ended December 31 are as follows: 2003 2002 2001 ---- ---- ---- Weighted average assumptions used to determine benefit obligations at December 31: Discount rate 6.25% 6.75% 7.50% Rate of compensation increase 4.50 4.50 4.50 Weighted average assumptions used to determine net pension expense for the years ended December 31: Discount rate 6.75% 7.25% 7.75% Expected return on plan assets 8.50 8.75 8.75 Rate of compensation increase 4.50 4.50 4.50 The plans' assets consist primarily of equity securities, guaranteed investment contracts and fixed income pooled accounts. The Company's plan asset allocation at December 31, 2003 and 2002, target allocation for 2004, and expected long-term rate of return by asset category are as follows: Weighted Average Percentage of Plan Target Expected Long-term Assets at December 31 Allocation Rate of Return Asset Category 2003 2002 2004 2003 ---- ---- ---- ---- Equity securities 39% 38% 38% 10.00% Debt securities 43 45 45 6.00 Real estate - - - - Other 18 17 17 11.75 ---- ---- ----- Total 100% 100% 8.50% ==== ==== ===== The Company's policy for these plans is to make contributions equal to or greater than the requirements prescribed by the Employee Retirement Income Security Act of 1974. The Company expects to make $4.7 million of contributions to the plans in the year ended December 31, 2004. The Company also contributes to a union sponsored defined benefit multi-employer pension plan for certain of its non-salaried employees. The Employee Retirement Income Security Act of 1974, as amended by the Multi-Employers Pension Plan Amendment Act of 1980, imposes certain liabilities upon employers who are contributors to multi-employer plans in the event of the employers' withdrawal from such a plan or upon a termination of such a plan. Management does not intend to take any action that would subject the Company to any such liabilities. The Company's expense relating to the multi-employer pension plan was approximately $0.2 million in each of the years 2003, 2002 and 2001. In addition to the defined benefit pension plans described above, the Company also sponsors defined contribution plans covering certain employees. In one of the plans, the Company matches 25% to 50% of a participant's voluntary contributions (depending on the respective plant's annual earnings performance) up to a maximum of 6% of a participant's compensation. In the other plan, the Company matches 100% of the first 3% of a participant's voluntary contributions to the plan. The Company's expense relating to the plans was approximately $1.9 million, $1.5 million and $1.3 million in 2003, 2002 and 2001, respectively. 11. Postretirement Benefits Other Than Pensions The Company provides postretirement health care and life insurance benefits to certain employees hired on or before September 1, 1998. The Company accrues the cost of postretirement benefits within the covered employees' active service periods. During 2003 changes were made to the plan for all non-bargaining Kentucky employees to limit eligibility and increase employee's cost sharing percentages of the Company's postretirement medical insurance premiums. The plan changes reduced the accumulated postretirement benefit obligation by $13.7 million in 2003 and is being amortized over the average remaining service lives of the Company's active employees, which has the effect of reducing net periodic postretirement benefits costs. The financial status of the plan at December 31 is as follows (in thousands): 2003 2002 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $59,730 $53,069 Service cost 536 658 Interest cost 3,545 3,972 Plan amendment (13,701) 124 Actuarial loss (gain) 3,993 6,013 Benefits paid (4,267) (4,106) ------- ------- Benefit obligation at end of year 49,836 59,730 ------- ------- Change in plan assets: Fair value of plan assets at beginning of year - - Actual return on plan assets - - Employer contribution 4,267 4,106 Benefits paid (4,267) (4,106) ------- ------- Fair value of plan assets at end of year - - ------- ------- Funded status (49,836) (59,730) Unrecognized net actuarial gain (1,826) (6,117) Unrecognized net prior service cost (benefit) (15,484) (10,823) ------- ------- Prepaid (accrued) postretirement benefit cost $(67,146) $(76,670) ======= ======= The components of net postretirement benefit expense for the years ended December 31 are as follows (in thousands): 2003 2002 2001 ---- ---- ---- Components of net postretirement benefit expense: Service cost $536 $658 $682 Interest cost 3,545 3,972 3,852 Amortization of prior service cost (benefit) (6,525) (2,958) (2,973) Recognized net actuarial gain (297) (319) (576) Curtailment gain (2,516) - - ------ ------ ----- Net postretirement benefit expense (income) $(5,257) $1,353 $ 985 ====== ====== ===== The Company recorded a $2.5 million curtailment gain in 2003 as a result of certain 2003 plan changes previously mentioned that meet the definition of a curtailment. The Company is required to make an assumption regarding the discount rate applied to determine service cost and interest cost. The Company bases its discount rate used on Moody's Aa bond index plus an adjustment upward to the next quarter percentage rate. The weighted average assumptions used to determine benefit obligations at December 31 and net postretirement benefit expense for the years ended December 31 are as follows: 2003 2002 2001 ---- ---- ---- Weighted average assumption used to determine benefit obligations at December 31: Discount rate 6.25% 6.75% 7.50% Weighted average assumption used to determine net postretirement benefit expense for the years ended December 31: Discount rate 6.75% 7.25% 7.75% For measurement purposes, the employer cap on the amount paid for retiree medical benefits is assumed to increase with general inflation at 3% per year. At December 31, 2003, the employer cap had not yet been reached. In addition, the health care cost trend rate assumption is projected to increase in 2004 at an annual rate of 9% for retirees under age 65 and 11% for retirees 65 years and older and is assumed to decrease gradually to 5% by 2011 for retirees under age 65 and by 2014 for retirees 65 years and older and remain constant thereafter. If the health care cost trend rate assumption is increased by 1%, the postretirement benefit obligation as of December 31, 2003 and the combined service and interest cost components of postretirement benefit expense for the year then ended would be increased by approximately $0.2 million and $0.01 million, respectively, and if the health care cost trend rate assumption is decreased by 1%, the postretirement benefit obligation as of December 31, 2003 and the combined service and interest cost components of postretirement benefit expense for the year then ended would be decreased by approximately $0.3 million and $0.02 million, respectively. The Company's policy for the plan is to make contributions equal to the benefits paid during the year. The Company expects to make $4.0 million of contributions to the plan in the year ended December 31, 2004. 12. Income Taxes The components of income tax expense (benefit) for the years ended December 31 are as follows (in thousands): 2003 2002 2001 ---- ---- ---- Current: Federal $ - $(2,692) $ - State and Local 184 400 200 ----- ------- ---- 184 (2,292) 200 Deferred: Federal - - - State and Local - - - ----- ------- ---- $184 $(2,292) $200 ===== ======= ==== The Company recorded a $2.7 million favorable adjustment to income tax expense in 2002 to reduce prior years' income tax accruals based in part on a change in tax law in 2002. Deferred tax assets and liabilities at December 31 are as follows (in thousands):
2003 2002 ---- ---- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Inventory $ 1,907 $ - $ 768 $ - Property, plant and equipment - 5,312 - 9,887 Accrued and other liabilities 4,783 - 10,470 - Accrued pension costs 3,713 - 3,502 - Accrued postretirement costs 26,953 - 30,667 - Net operating loss carryforwards 25,888 - 28,686 - AMT credit carryforwards 6,760 - 6,760 - Research and development credit carryforwards 3,458 - 3,142 - Other 515 - - 37 -------- ------- -------- ------- Totals $ 73,977 $ 5,312 $ 83,995 $ 9,924 -------- ------- -------- ------- Net deferred tax asset 68,665 - 74,071 - Valuation allowance (68,665) - (74,071) - -------- ------- -------- ------- Net deferred taxes $ - $ - $ - $ - ======== ======= ======== =======
The Company has determined that at December 31, 2003 and 2002, its ability to realize future benefits of net deferred tax assets does not meet the "more likely than not" criteria in Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes". At December 31, 2003, the Company had net operating loss ("NOL") carryforwards for federal tax purposes of approximately $74 million, which expire in various amounts from 2005 through 2021 and approximately $6.8 million in alternative minimum tax ("AMT") credit carryforwards which do not expire. As a result of the Company's initial public offering during 1995, the Company experienced an "ownership change" within the meaning of Section 382 of the Internal Revenue Code. Consequently, the Company is subject to an annual limitation on the amount of NOL carryforwards that can be used to offset taxable income. The annual limitation is $9.6 million plus certain gains included in taxable income which are attributable to the Company prior to the ownership change. Approximately $34 million of the $74 million of NOL carryforwards mentioned previously are subject to this annual limitation with the remaining amounts having no such annual limitation. A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income (loss) excluding the cumulative effect of the change in accounting principle is as follows:
2003 2002 2001 ---- ---- ---- Federal statutory income tax rate (35.0)% 35.0% (35.0)% Increase (decrease) in tax rate resulting from: NOL and AMT credit carryforwards/carrybacks (1.3) (64.8) 4.2 Nondeductible goodwill and other permanent differences 36.5 5.3 0.5 Adjustment of prior year accrual - (12.9) - State income taxes, net of federal income tax benefit 0.4 3.8 0.1 Asset impairment charges - - 30.3 ---- ----- ----- Effective income tax rate 0.6% (33.6)% 0.1% ==== ===== =====
No income tax benefit was recognized related to the cumulative effect of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets". 13. Contingencies The Company's operations are subject to increasingly stringent environmental laws and regulations governing air emissions, wastewater discharges, the handling, disposal and remediation of hazardous substances and wastes and employee health and safety. These laws can impose joint and several liability for releases or threatened releases of hazardous substances upon statutorily defined parties, including the Company, regardless of fault or the lawfulness of the original activity or disposal. The Company believes it is currently in material compliance with applicable environmental laws and regulations. Federal and state regulations continue to impose strict emission requirements on the aluminum industry. While the Company believes that current pollution control measures at the emission sources at its facilities meet current requirements, additional measures at some of the Company's facilities may be required to meet future requirements. The Company has been named as a potentially responsible party at seven federal superfund sites and are in operations and maintenance at two of the sites for past waste disposal activity associated with closed recycling facilities. The ultimate goal is to delist these two sites under superfund. At the five other federal superfund sites, the Company is a minor contributor and has satisfied its obligations at four of the sites and expects to resolve its liability at the remaining site for a nominal amount. The Company is also under orders by agencies in two states for environmental remediation at three sites, one of which is currently operating and two of which have been closed. The Company acquired its Lewisport, Kentucky ("Lewisport") rolling mill and an aluminum smelter at Goldendale, Washington ("Goldendale"), from Lockheed Martin in 1985. In connection with the transaction, Lockheed Martin indemnified the Company against expenses relating to environmental matters arising during the period of Lockheed Martin's ownership of those facilities. The aluminum smelter at Goldendale was operated by Lockheed Martin until 1985 and by the Company from 1985 to 1987 when it was sold to Columbia Aluminum Corporation which has since been renamed Goldendale Aluminum Company ("Goldendale Aluminum"). Past aluminum smelting activities at Goldendale have resulted in environmental contamination and regulatory involvement. A 1993 Settlement Agreement among the Company, Lockheed Martin and Goldendale Aluminum allocates responsibility for future remediation at 11 sites at the Goldendale smelter. If remediation is required, estimates by outside consultants of the probable aggregate cost to the Company for these sites range from $1.3 million to $7.2 million. The Company had an accrual for such liabilities of $1.3 million at December 31, 2003 and 2002. In December 2003, Goldendale Aluminum filed for bankruptcy protection. The Company cannot presently quantify any additional liability that may be incurred as a result of Goldendale Aluminum's bankruptcy filing. The apportionment of responsibility for other sites at Goldendale is left to alternative dispute resolution procedures if and when these locations become the subject of remedial requirements. Environmental sampling at Lewisport has disclosed the presence of contaminants, including polychlorinated biphenyls (PCBs). Management believes a portion of the contamination is covered by the Lockheed Martin indemnification, which Lockheed Martin disputes. The Company has been named as a potentially responsible party at three third-party disposal sites relating to Lockheed Martin operations, for which Lockheed Martin has assumed responsibility. The Company's aggregate loss contingency accrual for environmental matters was $6.7 million and $7.4 million at December 31, 2003 and 2002, respectively. Of the total reserve, $3.3 million and $2.8 million is included in "accrued liabilities" in the Company's consolidated balance sheets at December 31, 2003 and 2002, respectively, and $3.4 million and $4.6 million is included in "other long-term liabilities" at December 31, 2003 and 2002, respectively. The Company estimates that the total cost to remediate these environmental matters could be as much as $16 million should all matters be ultimately concluded in a manner least favorable to the Company. While the Company believes the overall accrual is adequate to cover all environmental loss contingencies the Company has determined to be probable and reasonably estimable, it is not possible to predict the amount or timing of cost for future environmental matters which may subsequently be determined. Although the outcome of any such matters, to the extent they exceed any applicable accrual, could have a material adverse effect on the Company's consolidated results of operations or cash flows for the applicable period, the Company believes that such outcome will not have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. The Company has incurred and will continue to incur capital and operating expenditures for matters relating to environmental control and monitoring. Capital expenditures of the Company for environmental control and monitoring for 2003, 2002 and 2001 were $0.5 million, $0.9 million and $0.2 million, respectively. All other environmental expenditures of the Company, including remediation expenditures, for 2003, 2002 and 2001 were $1.6 million, $1.7 million and $1.9 million, respectively. The Company is also a party to various non-environmental legal proceedings and administrative actions, all arising from the ordinary course of business. Although it is impossible to predict the outcome of any legal proceeding, the Company believes any liability that may finally be determined with respect to such legal proceedings should not have a material effect on the Company's consolidated financial position, results of operations or cash flows, although resolution in any year or quarter could be material to the consolidated results of operations for that period. 14. Stock Incentives The Company has stockholder-approved stock incentive plans covering certain officers, key employees and directors. The plans provide for the grant of options to purchase common stock, the award of shares of restricted common stock and in the case of non-employee directors, the award of shares of common stock. The total number of shares authorized under the plans is 2,950,000 of which 1,048,033 were available for grants and awards at December 31, 2003. The following summarizes activity under the plans for the years 2001, 2002 and 2003:
Options Restricted Stock -------------------------------------------------- ---------------- Range of Weighted Average Shares Exercise Prices Exercise Price Shares ----------- --------------- ---------------- --------- Outstanding December 31, 2000 932,500 $7.44 to $20.00 $12.78 12,500 Granted 329,000 $4.22 $4.22 - Exercised - - - - Forfeited (192,000) $4.22 to $16.75 $11.91 - Stock no longer restricted - - - (12,500) --------- ------ Outstanding December 31, 2001 1,069,500 $4.22 to $20.00 $10.30 - Granted 349,000 $4.85 to $7.28 $5.16 - Exercised - - - - Forfeited (53,000) $4.22 to $16.75 $10.26 - --------- ------ Outstanding December 31, 2002 1,365,500 $4.22 to $20.00 $8.99 - Granted 350,500 $4.95 to $6.76 $6.73 - Exercised - - - - Forfeited (53,000) $4.22 to $16.75 $8.53 - --------- ------ Outstanding December 31, 2003 1,663,000 $4.22 to $20.00 $8.53 - ========= ====== (Weighted average contractual life of 6.6 years) Exercisable Options: December 31, 2001 348,500 $7.44 to $20.00 $14.81 December 31, 2002 575,000 $4.22 to $20.00 $11.84 December 31, 2003 820,000 $4.22 to $20.00 $11.61
The following table summarizes information about stock options outstanding at December 31, 2003:
Options Options Outstanding Exercisable ------------------------------------------------- ------------------------------ Weighted Average Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price --------------- ----------- ----------- -------------- ----------- -------------- $4.22 to $7.44 958,000 8.1 years $5.45 115,000 $4.90 $7.45 to $14.00 458,500 5.2 years $11.17 458,500 $11.17 $14.01 to $20.00 246,500 3.2 years $15.55 246,500 $15.55 --------- ------- $4.22 to $20.00 1,663,000 6.6 years $8.53 820,000 $11.61 ========= =======
The options are issued at the fair value of the underlying stock on the date of grant and become exercisable three years from the grant date for employees and one year from the grant date for non-employee directors. The options expire ten years after the date of grant. The restricted stock, principally issued in connection with the Company's initial public offering in 1995, vested five years from the date of award. The Company has no restricted stock outstanding at December 31, 2003. The weighted-average fair value of options granted in 2003, 2002 and 2001 was $2.52, $1.90 and $1.48 per share, respectively. Fair value estimates were determined using the Black-Scholes option pricing model with the following weighted average asumptions for 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Risk-free interest rate 2.63% 4.41% 5.13% Dividend yield 2.98% 3.95% 4.74% Volatility factor 52% 52% 52% Expected term of options (in years) 5 5 5 15. Net Income Per Share Computations The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations (in thousands except per share data):
2003 2002 2001 ---- ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Income (loss) before cumulative effect of change in accounting principle $(28,934) $ 9,116 $(193,552) Cumulative effect of change in accounting principle - (25,327) - -------- -------- --------- Net income (loss) $(28,934) $(16,211) $(193,552) ======== ======== ========= Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 16,011 15,994 16,428 ====== ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 16,011 15,994 16,428 Plus: dilutive effect of stock options - 103 - ------ ------ ------ Adjusted weighted average shares 16,011 16,097 16,428 ====== ====== ====== Basic net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $(1.81) $ 0.57 $(11.78) Cumulative effect of change in accounting principle - (1.58) - ------ ------ ------- Net income (loss) $(1.81) $(1.01) $(11.78) ====== ====== ======= Diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $(1.81) $ 0.57 $(11.78) Cumulative effect of change in accounting principle - (1.57) - ------ ------ ------- Net income (loss) $(1.81) $(1.00) $(11.78) ====== ======= =======
Options to purchase 1,089,000; 779,500 and 770,500 common shares for the years ended December 31, 2003, 2002 and 2001, respectively, were excluded from the calculations above because the exercise prices on the options were greater than the average market price for the periods. 16. Lease Commitments Certain property, plant and equipment are leased under noncancelable capital and operating leases. A summary of the future minimum lease payments under capital and operating leases as of December 31, 2003 is as follows (in thousands): Capital Leases Operating Leases -------------- ---------------- 2004 $ 49 $3,547 2005 49 2,086 2006 49 1,084 2007 49 836 2008 49 404 2009-2015 12 2,438 Less sublease rental income - (241) ------ ------- Total minimum lease payments 257 $10,154 ======= Less interest costs 52 ------ Present value of minimum lease payments 205 Less current portion of obligations under capital leases included in accrued liabilities 32 ------ Long-term portion of obligations under capital leases included in other long-term liabilities $173 ====== Rental expense under cancelable and noncancelable operating leases for 2003, 2002 and 2001 was $4.7 million, $4.2 million and $4.1 million, respectively. The amount of rental expense for 2003, 2002 and 2001 for operating leases is net of sublease rental income of $0.49 million, $0.09 million and $0.17 million, respectively. 17. Selected Quarterly Financial Data (unaudited) All amounts are in thousands except per share data.
Quarter --------------------------------------------- 1st 2nd 3rd 4th -------- -------- -------- -------- 2003 - ---- Net sales $211,968 $215,120 $248,117 $243,191 Gross profit 9,318 12,214 16,357 22,233 Income (loss) before cumulative effect of change in accounting principle (6,493) (1,871) 2,908 (23,478) Net income (loss) (6,493) (1,871) 2,908 (23,478) Basic and diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle (0.41) (0.12) 0.18 (1.47) Net income (loss) (0.41) (0.12) 0.18 (1.47) 2002 - ---- Net sales $221,858 $251,728 $253,933 $238,719 Gross profit 10,540 15,684 19,362 21,725 Income (loss) before cumulative effect of change in accounting principle (4,423) 1,098 6,076 6,365 Net income (loss) (29,750) 1,098 6,076 6,365 Basic and diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle (0.28) 0.07 0.38 0.40 Net income (loss) (1.86) 0.07 0.38 0.40
The net income (loss) for the fourth quarter of 2003 includes $29.6 million or $1.85 per basic and diluted share non-cash goodwill impairment charges and the net income (loss) for the first quarter of 2002 includes $25.3 million or $1.58 per basic share and $1.57 per diluted share non-cash goodwill impairment charges. See note 3 for additional information on the goodwill impairment charges. In addition, net income for the fourth quarter of 2002 was increased by $1.4 million due to an adjustment based on the deferral of certain planned maintenance expenses which had been accrued in previous quarters of 2002. 18. Information Concerning Segments The Company has determined it has two reportable segments: aluminum and electrical products. The aluminum segment manufactures aluminum sheet for distributors and the transportation, construction, and consumer durables end-use markets. The electrical products segment manufactures flexible electrical wiring products for the commercial construction and do-it-yourself markets. The accounting policies of the reportable segments are the same as those described in note 1, "Basis of Presentation and Summary of Significant Accounting Policies". All intersegment sales prices are market based. The Company evaluates the performance of its operating segments based upon operating income. The Company's reportable segments are strategic businesses that offer different products to different customer groups. They are managed separately because each business requires different technology and marketing strategies. Summarized financial information concerning the Company's reportable segments is shown in the following table for the years 2003, 2002 and 2001 (in thousands). The "Other" column includes corporate related items, including elimination of intersegment transactions, and as it relates to segment operating income, income and expense not allocated to reportable segments. The operating income (loss) and total assets for 2001 for the aluminum segment include the $167.3 million non-cash asset impairment charges recorded in the fourth quarter of 2001. Total assets for 2002 include the effects of the 2001 impairment charges and the $25.3 million non-cash goodwill impairment charges ($13.5 million relating to the aluminum segment and $11.8 million relating to the electrical products segment) recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. The operating income (loss) and total assets for 2003 for the electrical products segment include $29.6 million non-cash goodwill impairment charges recorded in the fourth quarter of 2003. See note 2 for additional information on the asset impairment charges and note 3 for additional information on the goodwill impairment charges. Certain expenses and assets relating to information technology which prior to 2003 had been allocated to reportable segments are no longer being allocated. Prior period amounts have been reclassified to conform with current classifications.
Electrical Aluminum Products Other Total ---------- ----------- --------- --------- 2003 - ---- Net sales to external customers $817,711 $100,685 $ - $918,396 Intersegment net sales 17,001 - (17,001) - Operating income (loss) 37,493 (29,562) (23,501) (15,570) Depreciation 18,406 1,881 426 20,713 Amortization - - 895 895 Total assets 306,650 58,911 13,765 379,326 Capital expenditures 8,403 379 7,710 16,492 2002 - ---- Net sales to external customers $853,849 $112,389 $ - $966,238 Intersegment net sales 18,160 - (18,160) - Operating income (loss) 35,752 5,550 (20,968) 20,334 Depreciation 18,891 2,251 - 21,142 Amortization - - 984 984 Total assets 331,523 90,467 6,914 428,904 Capital expenditures 10,694 346 5,281 16,321 2001 - ---- Net sales to external customers $801,786 $118,718 $ - $920,504 Intersegment net sales 20,910 - (20,910) - Operating income (loss) (164,153) 5,064 (19,658) (178,747) Depreciation 27,853 2,200 - 30,053 Amortization 2,248 1,740 1,288 5,276 Total assets 336,740 100,824 2,068 439,632 Capital expenditures 8,797 205 - 9,002
19. Stockholder Protection Rights Plan During 1996, the Company's Board of Directors adopted a stockholder protection rights plan (the "Plan"). Under the Plan, preferred share purchase rights ("Rights") are issued at the rate of one Right for each share of the Company's common stock. Each Right entitles its holder to purchase one one-hundredth of a share of Preferred Stock at an exercise price of $65, subject to adjustment. Until it is announced that a person or group has acquired 15% or more of the Company's common stock (an "Acquiring Person"), or the tenth business day after a person or group commences a tender offer that, if completed, would result in such person or group owning 15% or more of the Company's common stock, the Rights will be evidenced by the Company's common stock certificates, will automatically trade with the common stock and will not be exercisable. Thereafter, separate Rights certificates will be distributed and each Right will entitle its holder to purchase Participating Preferred Stock having economic and voting terms similar to those of one share of Common Stock for an exercise price of $65. Upon announcement that any person or group has become an Acquiring Person (the "Flip-in Date"), each Right (other than Rights beneficially owned by any Acquiring Person or transferees thereof, which Rights become void) will entitle its holder to purchase, for the exercise price, a number of shares of the Company's common stock having a market value of twice the exercise price. Also, if after an Acquiring Person controls the Company's Board of Directors, the Company is involved in a merger or sells more than 50% of its assets or earning power (or has entered into an agreement to do any of the foregoing), and, in the case of a merger, the Acquiring Person will receive different treatment than all other stockholders, each Right will entitle its holder to purchase, for the exercise price, a number of shares of common stock of the Acquiring Person having a market value of twice the exercise price. If any person or group acquires between 15% and 50% of the Company's common stock, the Company's Board of Directors may, at its option, exchange one share of the Company's common stock for each Right. Until the Rights become exercisable, they may be redeemed by the Company at a price of $0.01 per Right. The Rights expire on March 16, 2006. 20. Guarantor Financial Statements The $125 million of 10.75% senior subordinated notes due 2006 issued by the Company, and the $30 million revolving credit facility are guaranteed by the Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"), other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as defined in the Indenture with respect to such debt) and certain subsidiaries of the Company without substantial assets or operations. Such guarantees are full, unconditional and joint and several. Separate financial statements of the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. The following supplemental financial information sets forth on a condensed combined basis for the Parent Company Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a combining balance sheet as of December 31, 2003 and 2002 and a statement of operations and statement of cash flows for the years ended December 31, 2003, 2002 and 2001. Combining Balance Sheet at December 31, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ -- $ -- $ -- $ -- Accounts receivable, net -- 288,989 -- (288,538) 451 Inventories -- 131,365 -- -- 131,365 Net residual interest in receivables sold -- -- 64,214 -- 64,214 Prepayments and other current assets 435 13,759 -- -- 14,194 --------- --------- --------- --------- --------- Total current assets 435 434,113 64,214 (288,538) 210,224 Property, plant and equipment, net 3 142,032 -- -- 142,035 Goodwill -- 19,265 -- -- 19,265 Other noncurrent assets 404,703 7,040 -- (403,941) 7,802 --------- --------- --------- --------- --------- Total assets $ 405,141 $ 602,450 $ 64,214 $(692,479) $ 379,326 ========= ========= ========= ========= ========= Liabilities Current liabilities: Outstanding checks in excess of deposits $ -- $ 733 $ -- $ -- $ 733 Accounts payable 176,832 50,303 111,711 (288,538) 50,308 Accrued liabilities 5,923 18,576 (490) -- 24,009 --------- --------- --------- --------- --------- Total current liabilities 182,755 69,612 111,221 (288,538) 75,050 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 3,845 -- -- 3,845 Accrued pension benefits -- 30,147 -- -- 30,147 Accrued postretirement benefits -- 67,146 -- -- 67,146 --------- --------- --------- --------- --------- Total liabilities 307,755 170,750 111,221 (288,538) 301,188 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 160 1 -- (1) 160 Additional paid-in capital 405,703 486,727 5,000 (491,727) 405,703 Accumulated deficit (308,477) (35,746) (52,041) 87,787 (308,477) Accumulated other comprehensive income: Unrealized gain on security -- -- 34 -- 34 Minimum pension liability adjustment -- (21,276) -- -- (21,276) Effects of cash flow hedges -- 1,994 -- -- 1,994 --------- --------- --------- --------- --------- Total stockholders' equity 97,386 431,700 (47,007) (403,941) 78,138 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 405,141 $ 602,450 $ 64,214 $(692,479) $ 379,326 ========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ 13,211 $ -- $ -- $ 13,211 Accounts receivable, net -- 286,847 -- (286,781) 66 Inventories -- 125,348 -- -- 125,348 Net residual interest in receivables sold -- -- 81,195 -- 81,195 Prepayments and other current assets 435 6,698 -- -- 7,133 --------- --------- --------- --------- --------- Total current assets 435 432,104 81,195 (286,781) 226,953 Property, plant and equipment, net -- 146,968 -- -- 146,968 Goodwill -- 48,872 -- -- 48,872 Other noncurrent assets 419,913 4,913 -- (418,715) 6,111 --------- --------- --------- --------- --------- Total assets $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904 ========= ========= ========= ========= ========= Liabilities Current liabilities: Accounts payable $ 161,658 $ 59,594 $ 125,123 $(286,781) $ 59,594 Accrued liabilities 5,859 23,515 (847) -- 28,527 --------- --------- --------- --------- --------- Total current liabilities 167,517 83,109 124,276 (286,781) 88,121 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 5,183 -- -- 5,183 Accrued pension benefits -- 26,743 -- -- 26,743 Accrued postretirement benefits -- 76,670 -- -- 76,670 --------- --------- --------- --------- --------- Total liabilities 292,517 191,705 124,276 (286,781) 321,717 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 160 1 -- (1) 160 Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613 Accumulated deficit (277,942) (24,932) (48,081) 73,013 (277,942) Accumulated other comprehensive income: Minimum pension liability adjustment -- (21,391) -- -- (21,391) Effects of cash flow hedges -- 747 -- -- 747 --------- --------- --------- --------- --------- Total stockholders' equity 127,831 441,152 (43,081) (418,715) 107,187 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904 ========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 918,396 $ -- $ -- $ 918,396 Cost of goods sold -- 858,274 -- -- 858,274 --------- --------- --------- --------- --------- Gross profit -- 60,122 -- -- 60,122 Selling, general and administrative expenses 287 45,480 318 -- 46,085 Goodwill impairment charges -- 29,607 -- -- 29,607 --------- --------- --------- --------- --------- Operating income (loss) (287) (14,965) (318) -- (15,570) Other income (expense), net (14,774) 1,771 -- 14,774 1,771 Interest income (expense), net (13,873) 2,563 (3,641) -- (14,951) --------- --------- --------- --------- --------- Income (loss) before income taxes (28,934) (10,631) (3,959) 14,774 (28,750) Income tax expense -- 183 1 -- 184 --------- --------- --------- --------- --------- Net income (loss) $ (28,934) $ (10,814) $ (3,960) $ 14,774 $ (28,934) ========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 966,238 $ -- $ -- $ 966,238 Cost of goods sold -- 898,927 -- -- 898,927 --------- --------- --------- --------- --------- Gross profit -- 67,311 -- -- 67,311 Selling, general and administrative expenses 269 46,697 11 -- 46,977 Amortization of goodwill -- -- -- -- -- --------- --------- --------- --------- --------- Operating income (loss) (269) 20,614 (11) -- 20,334 Other income (expense), net 20,845 1,636 -- (20,845) 1,636 Interest income (expense), net (13,833) 2,950 (4,263) -- (15,146) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle 6,743 25,200 (4,274) (20,845) 6,824 Income tax expense (benefit) (2,373) 81 -- -- (2,292) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 9,116 25,119 (4,274) (20,845) 9,116 Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327) --------- --------- --------- --------- --------- Net income (loss) $ (16,211) $ (208) $ (4,274) $ 4,482 $ (16,211) ========= ========= ========= ========= =========
Combining Statement of Operations for the year ended December 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 920,504 $ -- $ -- $ 920,504 Cost of goods sold -- 873,473 -- -- 873,473 --------- --------- --------- --------- --------- Gross profit -- 47,031 -- -- 47,031 Selling, general and administrative expenses 290 54,223 10 -- 54,523 Amortization of goodwill -- 3,988 -- -- 3,988 Asset impairment charges -- 167,267 -- -- 167,267 --------- --------- --------- --------- --------- Operating income (loss) (290) (178,447) (10) -- (178,747) Other income (expense), net (179,789) 907 -- 179,789 907 Interest income (expense), net (13,439) 4,704 (6,777) -- (15,512) --------- --------- --------- --------- --------- Income (loss) before income taxes (193,518) (172,836) (6,787) 179,789 (193,352) Income tax expense 34 154 12 -- 200 --------- --------- --------- --------- --------- Net income (loss) $(193,552) $(172,990) $ (6,799) $ 179,789 $(193,552) ========= ========= ========= ========= =========
Combining Statement of Cash Flows for the year ended December 31, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(28,934) $(10,814) $ (3,960) $ 14,774 $(28,934) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation -- 20,713 -- -- 20,713 Amortization -- 895 -- -- 895 Goodwill impairment charges -- 29,607 -- -- 29,607 Loss on disposal of property, plant and equipment -- 554 -- -- 554 Issuance of common stock in connection with stock awards 90 -- -- -- 90 Equity in undistributed net income of subsidiaries 14,774 -- -- (14,774) -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (2,142) -- 1,757 (385) (Increase) in inventories -- (6,017) -- -- (6,017) Decrease in net residual interest in receivables sold -- -- 17,015 -- 17,015 (Increase) in prepayments and other current assets -- (6,920) -- -- (6,920) Decrease (increase) in other noncurrent assets 436 (1,015) -- -- (579) Increase (decrease) in accounts payable 15,174 (9,291) (13,412) (1,757) (9,286) Increase (decrease) in accrued liabilities 64 (3,833) 357 -- (3,412) (Decrease) in other liabilities -- (9,350) -- -- (9,350) -------- -------- -------- -------- -------- Net cash provided by operating activities 1,604 2,387 -- -- 3,991 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment (3) (16,489) -- -- (16,492) Proceeds from sale of property, plant and equipment -- 158 -- -- 158 -------- -------- -------- -------- -------- Net cash (used in) investing activities (3) (16,331) -- -- (16,334) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 733 -- -- 733 Proceeds from long-term debt -- 108,970 -- -- 108,970 Repayments of long-term debt -- (108,970) -- -- (108,970) Cash dividends paid (1,601) -- -- -- (1,601) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (1,601) 733 -- -- (868) -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (13,211) -- -- (13,211) Cash and cash equivalents at beginning of period -- 13,211 -- -- 13,211 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ========
Combining Statement of Cash Flows for the year ended December 31, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(16,211) $ (208) $ (4,274) $ 4,482 $(16,211) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation -- 21,142 -- -- 21,142 Amortization -- 984 -- -- 984 Goodwill impairment charges 25,327 25,327 -- (25,327) 25,327 Loss on disposal of property, plant and equipment -- 325 -- -- 325 Issuance of common stock in connection with stock awards 170 -- -- -- 170 Equity in undistributed net income of subsidiaries (20,845) -- -- 20,845 -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (15,773) -- 15,788 15 (Increase) in inventories -- (6,310) -- -- (6,310) Decrease in net residual interest in receivables sold -- -- 1,115 -- 1,115 (Increase) in prepayments and other current assets -- (2,041) -- -- (2,041) Decrease (increase) in other noncurrent assets 435 (4,037) -- -- (3,602) Increase (decrease) in accounts payable 12,687 8,901 3,101 (15,788) 8,901 Increase (decrease) in accrued liabilities 75 (253) 58 -- (120) (Decrease) in other liabilities -- (4,941) -- -- (4,941) -------- -------- -------- -------- -------- Net cash provided by operating activities 1,638 23,116 -- -- 24,754 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (16,321) -- -- (16,321) Proceeds from sale of property, plant and equipment -- 23 -- -- 23 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (16,298) -- -- (16,298) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt -- 77,270 -- -- 77,270 Repayments of long-term debt -- (77,270) -- -- (77,270) Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561 Cash dividends paid (3,199) -- -- -- (3,199) -------- -------- -------- -------- -------- Net cash (used in) financing activities (1,638) -- -- -- (1,638) -------- -------- -------- -------- -------- Net increase in cash and cash equivalents -- 6,818 -- -- 6,818 Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 13,211 $ -- $ -- $ 13,211 ======== ======== ======== ======== ========
Combining Statement of Cash Flows for the year ended December 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(193,552) $(172,990) $ (6,799) $179,789 $(193,552) Adjustments to reconcile net income (loss) to net cash (used in) provided by operations: Depreciation -- 30,053 -- -- 30,053 Amortization 7 5,269 -- -- 5,276 Asset impairment charges -- 167,267 -- -- 167,267 Loss on disposal of property, plant and equipment -- 364 -- -- 364 Issuance of common stock in connection with stock awards 106 -- -- -- 106 Equity in undistributed net income of subsidiaries -- 179,789 -- (179,789) -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (28,898) -- 28,928 30 Decrease in inventories -- 18,647 -- -- 18,647 (Increase) in net residual interest in receivables sold -- -- (9,943) -- (9,943) Decrease in prepayments and other current assets 362 7,771 -- -- 8,133 Decrease (increase) in other noncurrent assets 180,224 (180,546) -- -- (322) Increase (decrease) in accounts payable 11,587 (2,829) 17,341 (28,928) (2,829) Increase (decrease) in accrued liabilities 710 (13,635) (599) -- (13,524) (Decrease) in other liabilities -- (6,472) -- -- (6,472) -------- -------- -------- -------- -------- Net cash (used in) provided by operating activities (556) 3,790 -- -- 3,234 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (9,002) -- -- (9,002) Proceeds from sale of property, plant and equipment -- 91 -- -- 91 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (8,911) -- -- (8,911) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt -- 57,110 -- -- 57,110 Repayments of long-term debt -- (57,110) -- -- (57,110) Repayments of notes receivable from sale of common stock 3,848 -- -- -- 3,848 Cash dividends paid (3,292) -- -- -- (3,292) -------- -------- -------- -------- -------- Net cash provided by financing activities 556 -- -- -- 556 -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (5,121) -- -- (5,121) Cash and cash equivalents at beginning of period -- 11,514 -- -- 11,514 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 6,393 $ -- $ -- $ 6,393 ======== ======== ======== ======== ========
Commonwealth Industries, Inc. Report of Independent Auditors Board of Directors and Stockholders Commonwealth Industries, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Commonwealth Industries, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 3 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. As discussed in note 7 to the consolidated financial statements, the Company adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment to FASB Statement No. 133," effective January 1, 2001. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky March 10, 2004 EX-14 8 jb200310kex14.txt EXHIBIT 14 FOR 2003 10-K Exhibit 14 ---------- COMMONWEALTH INDUSTRIES, INC. CODE OF CONDUCT I. Introduction The Board of Directors of Commonwealth Industries has approved the following policy statements and directives for the guidance of all officers and employees of Commonwealth Industries and its subsidiaries (the "Company" or "Commonwealth") to be used in conducting the business affairs of the Company. It is the Company's policy to comply with all applicable laws, rules and regulations. It is the personal responsibility of each employee, officer and director to adhere to the standards and restrictions imposed by those laws, rules and regulations. II. Business Ethics and Compliance Commonwealth is committed to operating in obedience to law and in conformity with high standards of business conduct. The Company has earned a reputation for ethical behavior, which is one of its greatest assets. It sustains customer loyalty, vendor relationships, employee satisfaction and shareholder support. The Company requires candor, honesty and cooperation from individuals in the performance of their responsibilities and in communication with our attorneys and auditors. It is essential that the highest standards of conduct be observed in all contacts made by Company employees and each employee should endeavor to deal fairly with the Company's customers, shareholders, service providers, suppliers, competitors, governmental officers, and fellow employees. We do not seek competitive advantages through illegal or unethical business practices. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice. Employees are expected to become familiar with and comply with this Code of Conduct and other codes, policy statements and directives promulgated by the Company. All employees are responsible to ensure that their behavior and activity is consistent with this Code of Conduct as well as Company policies and procedures, and applicable federal, state and local laws and regulations. The Company expects employees to conform to standards of behavior, which will ensure a positive and productive working environment. All employees should also protect the Company's assets and ensure their efficient use. All Company assets should be used for legitimate business purposes only. III. Administration of this Code of Conduct The commitment to ensure compliance with this Code of Conduct extends to all matters, including decisions relating to trade, investment, subcontracting, supplying, business development, and in all other business activities. The Company's approach to implementing this Code of Conduct will be active, open and ethically sound. There are no easy answers to many ethical issues that Company may face in daily business activities. When an employee is faced with a tough ethical decision or whenever they have any doubts as to the right thing to do, or if an employee needs assistance in understanding or interpreting the Code of Conduct, they should talk to someone else such as their supervisor, another manager, or the Legal Division. Failure to abide by this Code of Conduct may lead to disciplinary action and may, in the Company's discretion, result in termination. In the event that an employee is covered by the terms of a collective bargaining agreement, discipline shall be in accordance with the provisions of the collective bargaining agreement. Employees should obtain sufficient knowledge about the laws, regulations and policies that apply to their duties to enable them to recognize when they need to seek help from their manager or others to identify possible violations. Employees should be sure to read the corporate policies outlined in this Code of Conduct and all supporting policies and procedures affecting their role. These policies are available to all employees via the Intranet and also at each facility or site location. Employees must also comply with all other applicable corporate, divisional or site policies, guidelines and procedures that may be adopted from time to time. To encourage employees to report any violations or concerns about misconduct, the Company will not allow retaliation for reports made in good faith. Compliance Program Commonwealth has established and will maintain a Compliance Program to ensure compliance with the law and with these and all other policies, procedures and standards the Company may adopt. The program includes, among other things, (a) this Code of Conduct, (b) other codes, policies, guidelines and procedures as may promulgated by the Company from time to time, (c) training and on-line intranet educational programs, (d) educational programs and processes for the assessment of the effectiveness of internal controls, (e) processes for quarterly and annual and quarterly Chief Executive Officer and Chief Financial Officer certifications, (f) annual certifications of compliance completed by key personnel, (g) an annual audit, and (h) the establishment of a Compliance Program Direct Line. The Company has designated a Compliance Action Team, comprised of management from key corporate departments and operational divisions to oversee the approval process for Company policies, guidelines and procedures. The Company has established a confidential anonymous 24-hour toll-free Compliance Program Direct Line to provide a system of reporting and access when an employee wishes to report a suspected violation, raise concerns about misconduct, or to seek counseling: Direct Line: 866.912.4357 (toll-free) Or Write to: Commonwealth Industries, Inc. Compliance Program Administrator 500 West Jefferson Street PNC Building, 19th Floor Louisville, Kentucky 40202 Or email to: Informationline.compliance@cacky.com Employees are expected to report any observation of actions that are in conflict with the Code of Conduct to their manager, their site human resources representative, the Legal Division, or to the Compliance Program Direct Line. Every report will be investigated and action taken as warranted. The Compliance Program Administrator (part of Legal Division) shall keep a record of all inquiries, complaints or reports received regarding compliance with this Code of Conduct or other Company policies and procedures (including, but not limited to, complaints received regarding accounting, internal accounting controls, or auditing matters), and the resolution thereof. A report on the effectiveness of the Compliance Program and the Direct Line shall be made to the Commonwealth Board of Director's Audit Committee on an annual basis. The Code of Conduct may be accessed on the Company's Intranet site http://ciinet/. Copies of the Code of Conduct may be obtained by sending a request to Compliance Program Administrator at 502.588.3937 or calling the Direct Line. A wallet card with the Compliance Program Direct Line and other program information will be provided to all employees. How to handle a concern, report a suspected violation or to seek counseling FIRST: Define your concern by answering the following questions: o Who or what is the concern? o When did the concern surface? o Where did it happen? NEXT: Raise the concern or report the suspected violation locally and/or to Commonwealth's Corporate Office: Locally, talk about the concern or suspected violation with whomever you feel most comfortable: o Your supervisor or manager, or o The next level of management, or o The site human resources representative, and/or Commonwealth Corporate Office: o Call the confidential anonymous Compliance Program Direct Line at 866.912.4357, or o Call the Commonwealth Corporate Legal Division, or o Write to the Corporate Compliance Office at: 500 West Jefferson Street, PNC Plaza, 19th Floor Louisville, Kentucky 40202 Commonwealth employees at all levels are prohibited from taking retribution against anyone (for example, discharging, demoting, suspending, threatening, or harassing an employee) for reporting or supplying information about an ethical business concern. If you feel this has happened to you tell someone in management, write the Corporate Compliance Program Administrator or call the Corporate Compliance Program Direct Line at 866.912.4357. This call is toll-free and is available 24 hours a day. You may call anonymously and no reprisal will be taken against any reporting person utilizing this confidential service. IV. Accounts, Accounting Controls and Reporting As a public company, the Company is required by law to: o keep books, records and accounts which accurately and fairly reflect the transactions and dispositions of the assets of the Company; and o maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized and recorded, access to assets is permitted only as authorized and recorded assets are compared with existing assets at reasonable intervals. No secret or unrecorded fund or assets may be created or maintained for any purpose, and false, fictitious or misleading entries regarding any transaction or asset is prohibited. The Company is required to disclose, on a timely basis, information required to present fully, fairly and accurately its financial position and results of operation. All such reports must contain understandable disclosure which is fair, complete and accurate. Improper concealment, alteration or withholding of information from authorized auditors or regulatory agencies is prohibited. It is unlawful for any officer or director of the Company, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of the Company for the purpose of rendering such financial statements materially misleading. In this respect, the following guidelines must be followed: o No undisclosed, unrecorded, or "offbook" funds or assets should be established for any purpose. o No false or fictitious invoices should be paid or created. o No false or artificial entries should be made or misleading reports issued. o Assets and liabilities of the company shall be recognized and stated in accordance with the company's standard practices and GAAP. If an employee believes that the company's books and records are not being maintained in accordance with these requirements, the employee should report the matter directly to their supervisor or confidentially to the Compliance Program Direct Line. V. Antitrust Laws and Compliance It is the policy of the Company to comply fully and strictly with the antitrust laws. Compliance is of great importance to the Company and to the individuals concerned. The consequences of non-compliance, which can and often do involve huge fines, jail sentences, treble damages and other very onerous sanctions, can be devastating. Even the costs of a successful defense against claimed violations are enormous. This Policy is intended to be a practical guide to antitrust compliance during the course of the Company's normal business activities. These guidelines are not intended, however, to enable or encourage employees to act as their own lawyers. Rather, they are intended to help them: o recognize issues and situations that might have antitrust implications and as to which they should consult with their manager or the Secretary of the Company; and o avoid actions that might give the appearance of non-compliance with this Policy and the antitrust laws, or the appearance of questionable activity by them or the Company. While corporate officers bear primary responsibility in this area, all employees are responsible for Company and individual compliance. Any person who is aware of a possible violation should notify his or her manager or the Secretary of the Company immediately and directly (without the necessity of following normal reporting channels) and legal counsel will be consulted as each situation warrants. Employees who have any questions regarding the contents of this Policy should contact their manager or the Secretary of the Company. The purpose of the antitrust laws is to ensure free and open competition among market participants. This is regarded as essential to the proper functioning of a market-based economic system. The antitrust laws of principal concern are the U.S. Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts. However, most of the States, the European Union and many foreign nations also have similar antitrust or competition laws. In most cases, the conduct of the Company's current business in compliance with the U.S. antitrust laws will result in compliance with these other laws as well. The U.S. antitrust laws apply not only to domestic business, but also to exports and imports and to acts taken in foreign countries that affect U.S. trade or commerce. Certain business arrangements or agreements with one or more competitors or other third parties are treated under the antitrust laws as illegal per se (a Latin term meaning in or of itself, or intrinsically). Such arrangements are so inherently anti-competitive and so rarely beneficial that a precise analysis of their effects is deemed unnecessary. Restraints of trade that are per se illegal include price fixing, bid rigging, territorial market divisions and customer allocation agreements. Acts and practices that are not per se illegal but that may be subject to challenge as being anti-competitive are unlawful only if they impose unreasonable restraints upon competition. In these cases, courts and regulators examine those acts and practices under the so-called "rule of reason", considering the effects on competition, any non-anti-competitive justification for the act or practice and the availability of less anti-competitive alternatives. Some business conduct that would be lawful if carried out independently nevertheless violates the antitrust laws if carried out jointly by agreement or understanding with others. Examples of such conduct include refusals to deal with suppliers or customers, publication of price lists, entry into or withdrawal from markets and limitations on production. It is irrelevant whether an offending agreement or understanding is formal or informal, written or oral, made directly or through an intermediary or concluded by a nod, wink, silence or other indication of acquiescence. Parallel business behavior, such as uniform raising and lowering of prices, does not alone establish an agreement. However, such behavior can be evidence from which the existence of an agreement is inferred. An example would be institution of a uniform price change closely following an industry trade association meeting. Specific Prohibited or Risky Conduct Relationships with Competitors Price Fixing. Any agreement or understanding between competitors, express or implied, direct or indirect, to raise, reduce or stabilize prices is per se unlawful. The word "price" encompasses all the terms of sale, including credit terms, rebates, allowances or discounts. An illegal agreement or understanding may be inferred from the fact that a common price movement or stabilization followed communication between competitors. Employees should avoid any contact or communication with competitors that would permit an inference that any similarity in price behavior is due to prior agreements or understandings. If a competitor seeks to discuss with an employee prices or any of the other competitively sensitive subjects identified in this Policy, the employee must immediately terminate the conversation, inform the other person that such discussions are against the Company's policy and promptly report the incident to his or her manager. Price lists, prices, pricing or discounting practices or information concerning factors affecting prices must not be exchanged with competitors, either directly or through a third party. The source of price lists and other competitive price information obtained from customers, suppliers, brokers or trade publications should be clearly identified on the face of any document reflecting or reporting competitor pricing information. Bid Rigging. Agreements or understandings with competitors regarding bids for business, including comparison of bids or agreements to refrain from bidding, are illegal per se. Restrictions on Production. It is generally unlawful for competitors to agree upon limitations involving production or supply of goods. Decisions to increase or decrease production levels or to stock inventory must be made independently by the Company consistent with its commercial interest and without consultation with competitors. Production rates, costs, work in progress, inventories, order backlogs or cancellations and future plans should not be exchanged or discussed with competitors. Divisions of Markets or Customers. It is a per se violation of the antitrust laws for competitors or potential competitors to agree upon a division of markets, either by geographical area, by customer or by product. Allocations by mutual withdrawals from business or by prorating market shares are equally unlawful. Employees must not discuss with a competitor or potential competitor any matter relating to whether or to what extent the Company will compete in a particular geographic or product market. Customers should not be discussed with competitors in order to avoid the appearance of an understanding not to compete for their business. Trade Association Meetings. Trade association meetings when properly controlled with a formal agenda and with an attorney present are a legal forum for the discussion of legitimate common business interests. However, such meetings expose each participant to an inference of collusion if several take similar action afterwards, particularly on price or production. Discussion of depressed prices, excess production or inventories, decreased or increased profits or loss, other than in terms of general overall supply, demand, production, consumption and industry-wide economics, should not take place, either formally or informally. "Off-the record" meetings with competitors in hospitality suites and hotel rooms or otherwise outside the formal agenda are particularly dangerous and generally should be avoided. If during the course of any meeting the conversation turns to a prohibited topic, the employee is instructed to announce that participation in this exchange is against corporate policy and that he or she will not be a party to any further discussion. If the discussion continues, the employee is instructed to announce that he or she is leaving and to leave the room, if possible in a manner which makes the withdrawal obvious and likely to be remembered. The employee is instructed to notify the appropriate MRU manager of the possible illegal activity. Relationships with Customers and Suppliers Refusals to Deal. The Company is free to choose its customers or suppliers as it pleases, so long as it acts independently. This includes the right to limit the sale of certain products to certain customers or distribution channels. However, the Company may not agree with any of its competitors or customers to refuse or cease to do business with a third party. As a precaution, decisions to terminate distributors and other customers should be cleared in advance with legal counsel. Exclusive Dealing Agreements. Agreements requiring customers to buy only from the Company are prohibited by the antitrust laws if they foreclose competitive suppliers from a substantial part of a market. Exclusive arrangements with buyers should not be imposed or accepted without advice of legal counsel. Resale and Use Restrictions. The Company may freely establish the price at which it sells products to distributors and other customers, but may only recommend resale prices to distributors or others who purchase Company products for inventory and resale. It is a per se violation of antitrust law to impose resale prices by contract or to otherwise agree on, or to attempt to enforce, such prices. Price Discrimination. The Robinson-Patman Act makes it illegal for a seller to discriminate in prices charged for commodities of like grade and quality to buyers where the effect is to substantially lessen competition between (a) the seller and other suppliers, (b) two buyers who compete with one another or (c) competing customers of the buyers. The Act also prohibits indirect price discrimination, such as better terms of credit or delivery, rebates or allowances given to some competing buyers and not others. As a general rule, under the Act, sellers may charge different prices in three circumstances. The party charging the discriminatory price bears the burden of proving that one of these defenses is applicable and satisfied as to each discriminatory price. a) Cost justification. Price discrimination may be justified on the basis of savings to the seller in production costs, handling, order service or delivery from selling to a particular buyer, provided that the seller can prove the amounts saved. Volume discounts, for example, should not be granted unless a determination of cost savings has been made. b) Meeting competition. Price reductions to some buyers are allowed if the seller believes in good faith that a lower competitive price has been offered and must be met to obtain the sale. This defense allows a change in price only to meet competition, not to beat it. While it is important to document the basis for believing a lower price has been offered, which may be a competitor's quotation reported by the customer or other customers, competitors must never be contacted for price verification. It is unlawful for a buyer to induce or receive a discriminatory price reduction from a seller by claiming falsely to have received a lower competitive offer. c) Changed market conditions. Changed conditions affecting the market for a product permit the seller to charge different prices to competing buyers. Price changes may reflect changes in aluminum metal prices, seasonal fluctuations, volatility of market prices, supply and demand and occurrence of unusual events. The Robinson-Patman area is one in which prior consultation with legal counsel can be helpful in avoiding potential risks and in finding ways of accomplishing the sales objective that are consistent with the law. Tying Arrangements. A seller may not lawfully use a strong market position in one product (the tying product) as leverage to force or induce a customer to purchase another product of the seller (the tied product). Reciprocal Arrangements. Reciprocal business arrangements may be unlawful as involving unacceptable restraints of trade. No goods or services should be purchased by the Company on the condition or understanding that the supplier will make purchases from the Company. Similarly, no sales are to be made by the Company on the condition or understanding that the Company will make purchases from the customer. Mergers and Acquisitions Mergers and acquisitions involving the Company are subject to the antitrust laws, including the premerger notification requirements of the U.S. Hart-Scott-Rodino Act. Any such proposed activity should be reviewed with legal counsel. General Antitrust Compliance Because antitrust violations may be and usually are established by inferences and implications from written documents and reports of oral communications, it is important to keep antitrust principles in mind when making business statements and preparing written material. Personal notes, diaries, calendars, e-mail messages and tapes concerning Company business are discoverable in legal proceedings. Every statement, letter, memorandum or report dealing with competitors or competition should be made or prepared on the assumption it will one day be examined with suspicion and hostility by government enforcement authorities or private litigants. Careless language can result in an inference of wrongful motive or conduct, regardless of the true state of the facts. Employees should avoid careless use of terms and phrases that suggest a competitor or the competition will "go along", "follow", be "parallel" or "aligned"; that there is "an industry consensus"; that production or prices should be 'normalized," "rationalized,", "stabilized" or "disciplined"; or that a plan or course of action will result in "domination" or "control" of a market or in the acquisition, maintenance or increase of a large share of any market. Suspicious practices, such as code messages, use of home addresses, fictitious names, instructions to destroy documents and the like are, of course, unnecessary if antitrust laws are complied with, and they are prohibited. The Company is committed to compliance by its employees with the antitrust laws and this Policy and to cooperating appropriately with any governmental antitrust investigations involving the Company. The Company must be notified immediately if any employee is contacted by anyone investigating Company conduct under the antitrust laws, whether on behalf of the government or a private party. Employees must not answer questions or provide documents until after consulting with the Secretary of the Company. Any person making such an inquiry should be referred to the Secretary of the Company. The Company will not tolerate any conduct that is contrary to the antitrust laws or this Policy. Penalties for violations of this Policy include termination of employment, demotion, reduction in pay or other actions the Company deems appropriate. The Company will not accept as an excuse for conduct that violates the antitrust laws or this Policy that the employee thought his or her improper actions were in the best interest of the Company. The willful withholding or concealment of information concerning a violation, or possible violation, of this Policy will result in disciplinary sanctions or dismissal. VI. Confidential and Proprietary Information Confidential Information The Company's technology, business transactions and relationships, financial data, projections and plans, among other things, constitute confidential or proprietary information. Employees, unless authorized to do so, may not disclose any confidential or proprietary information to others within the Company who do not need to know the information to perform their jobs or to anyone outside the Company. They also may not use such information for their personal or private benefit, or for the benefit of anyone else, during or after their employment with the Company. Special Protection for Confidential Documents As an aid to the protection of confidential material, every document or other writing that contains proprietary or other confidential information should be maintained within the area of the Company to which it relates and should be labeled CONFIDENTIAL. The originator of the document or other writing should determine whether it contains proprietary or other confidential information and, if so, cause the document or writing to be labeled CONFIDENTIAL. The relevant manager should see that employees are educated as to the types of documents that should be labeled CONFIDENTIAL. The fact that a document or other writing is not labeled CONFIDENTIAL does not necessarily mean that it is not confidential; employees should treat all Company materials as confidential unless it is clear that they contain no confidential information. All confidential documents should be kept in a secure location within the area of the Company to which they relate. VII. Conflicts of Interest Employees of the Company are expected to conduct their affairs in a manner which will avoid conflicts between their personal interests and those of the Company. Employees should not permit any influence, interest, or relationship to arise or continue that may conflict, or even appears to conflict or interfere, with the interests of the Company or prejudice its reputation for integrity and fair dealing. Conflicts of interest are prohibited as a matter of Company policy, unless they have been approved by the Company. In particular, an employee, officer or director must never use or attempt to use his or her position with the Company to obtain any personal benefit for himself or herself, for his or her family, or for any other person, including loans or guarantees of obligations, form any person or entity, without the authorization of the Company. The Company shall not extend or maintain credit, renew an extension of credit, or to arrange for the extension of credit, either directly or indirectly, in the form of a personal loan to or for any director or officer of the Company. In this connection: Employees and their families are expected to refrain from having any financial interest in, loans from, or other personal business relationships with, suppliers and customers of the Company. An investment in publicly-traded securities of a supplier or customer normally would not be considered to present a conflict of interest unless it represented a material part of the individual's savings or of the capitalization of the supplier or customer. Employees and their families also are expected to refrain from accepting gifts or entertainment from suppliers and customers. This is not intended to prohibit the exchange of social amenities or business courtesies of a reasonable nature, consistent with good taste and mature judgment. Employees who find themselves in a situation where a conflict may arise are expected to report the circumstances to the Secretary of the Company or his or her delegate. All officers and managers, employees responsible for or in a position to influence the Company's dealings with suppliers and customers and other employees designated by the Board of Directors or management, will be required to complete an annual conflicts of interest questionnaire. Any employee, officer or director who is aware of a conflict of interest or is concerned that a conflict might develop, is required to discuss the matter with the General Counsel promptly. VIII. Contracting Authority The authority of officers and other employees to make contractual commitments for the Company is delineated in a Board of Directors delegation of authority to the President and Chief Executive Officer and others in a General Authorization to Execute Contracts and Perform Acts and in similar authorizations adopted by the Board or management and in specific Board resolutions adopted from time to time. Only employees who are specifically authorized may commit the company to others. A "commitment" by Commonwealth includes the execution of any written agreement or any other undertaking that obligates or binds Commonwealth in any respect, whether or not it involves the payment of money. Employees must never execute a document or otherwise commit Commonwealth unless they have clear authority to do so and such document must have Legal Department approval before execution unless it is in a form previously approved by the Legal Department for such purpose or has been exempted by the Board or management from such approval. IX. Corporate Opportunities Employees, officers and directors owe a duty to the Company to advance the Company's best interests when the opportunity to do so arises. Employees, officers and directors are prohibited from taking (or directing a third party) a business opportunity that is discovered through the use of corporate property, information or position, unless the Company has already been offered the opportunity and turned it down. More generally, employees, officers and directors are prohibited from using corporate property, information or position for personal gain or competing with the Company. Sometimes the line between personal and Company benefits is difficult to draw, and sometimes there are both personal and Company benefits in certain activities. The only prudent course of conduct for our employees, officers and directors is to make sure that any use of Company property or services that is not solely for the benefit of the Company is approved beforehand by the General Counsel. X. Environmental, Health and Safety Policy The Company is committed to the concept of sustainable development, which requires balancing the need for economic operations and growth with good stewardship in the protection of human health and the natural environment. The Company will strive to minimize any potentially adverse impacts of its operations and products on its employees, customers, the general public and the natural environment, and will seek to not only meet but, if possible, surpass the standards set by relevant legislation and regulation by diligent application of technically proven and economically feasible environmental protection measures throughout all phases of operations. To implement this policy, the Company will endeavor to: o assess, plan, construct and operate facilities in compliance with all applicable legislation providing for the protection of employees, the general public and the environment; o promote policies to all employees and integrate environmental, health and safety concepts into all applicable aspects of the business; o apply cost-effective best management practices to advance environmental protection and to minimize risks to occupational and public safety and health and the environment; o maintain active monitoring programs to evaluate operational risks to human safety and health and the environment and apply sound risk management principles to ensure compliance with government requirements; and o work with government and the public in the development of equitable, cost-effective and realistic laws and regulations for the enhancement of occupational safety and health and the protection of the environment. Occupational Safety and Health The personal safety and health of each employee of the Company is considered to be of primary importance. It is the policy of the Company to conduct all operations safely to prevent accidents and injuries. All practical steps are to be taken to build and maintain a safe and healthy workplace. The objective is to keep accidents to a minimum, not merely in keeping with, but surpassing, the best experience of other similar operations. The goal is zero accidents. The Company's program includes: o the avoidance of accidents and occupational diseases with their attendant suffering, loss of time and possible impairment of employee earning power; o provision of adequate mechanical and physical safeguards to the equipment; o a continuing program of education and training of personnel in good safety and health practices; o a continuing program of safety and health inspections and reviews to detect and eliminate unsafe practices and conditions; and o the prompt and thorough investigation of all accidents and near accidents to determine the causes and to effect the corrective action necessary to prevent recurrences. The health and safety of our employees and the protection of the environment in the communities in which the Company conducts business is everyone's responsibility. It requires a cooperative and collaborative effort among all our employees in order to be successful. XI. Fair Employment Practice and Policy The Company is committed to fair and equitable treatment in its hiring, promotion, compensation and other personnel practices. It is the policy of the Company to provide equal opportunity to all applicants for employment and to administer its personnel practices, including recruitment, hiring, promotions and other terms and conditions of employment, in a manner that does not discriminate on the basis of race, color, religion, national origin, disability, sex, age, marital status, sexual orientation, liability for service in the Armed Forces of the United States or any other unlawful criterion or circumstance. It is also the Company's policy that the workplace be free of any form of harassment on the basis of any protected characteristic, including race, color, religion, national origin, disability, sex, age, marital status, sexual orientation, liability for service in the Armed Forces of the United States or any other unlawful criterion or circumstance. Behavior prohibited under this policy includes unwelcome sexual advances, request for sexual favors, and other verbal or physical conduct of a sexual nature, where there is an attempt to make submission to such conduct a term or condition of an individual's employment or where the submission to or rejection of such conduct is used as a basis for employment-related decisions or where such conduct has the purpose or effect of substantially interfering with an individual's work performance or creating an intimidating, hostile or offensive working environment. Every employee of the Company should be treated with respect in a workplace that is free of any conduct that is offensive, hostile, intimidating or inconsistent with his or her personal dignity and rights. Any form of harassment in the workplace or behavior inconsistent with the Company's policies and practices will not be tolerated. Any person affiliated in any way with the Company found to have acted in violation of the Company's non-discrimination and non-harassment policies may be subject to appropriate disciplinary action including reprimand, discharge or prosecution, where warranted, under appropriate state and federal laws. Any employee who has reason to believe this policy is being violated is urged to bring the matter to the attention of her or her immediate manager, or, if the employee thinks it appropriate, anyone who is a manager to that person. If for any reason the employee thinks that the matter cannot or should not be raised through those channels, he or she should feel free to communicate with the site human resources representative or contact the Compliance Program Direct Line. Managers who receive employee complaints or inquiries are instructed to discuss, investigate and handle all concerns raised in this manner with the utmost discretion. Retaliation against individuals who report such violations of policy, or against those who provide information in an investigation of such violations, is also a violation of policy. Commonwealth will act promptly and vigorously to take corrective action and appropriate discipline with respect to any harassment or retaliation, up to and including termination of the offending individuals. Except where an employee is under written contract, employment is at the discretion of the employee and the Company and may be ended by either party at any time for any reason. No representations of any kind by any officer or employee and no action by the Company with respect to employee performance evaluations, promotions, compensation increases, granting of benefits or similar actions is intended to modify the at will nature of employment. The Company's policy statements and manuals and the conditions of employment may be changed and revised at the discretion of the Company; nothing contained therein should be considered or interpreted to confer any rights, privileges or entitlements on employees or any obligations on the Company. XII. Insider Trading In the course of their work employees may become aware of information that has not been made public and which, if publicly disclosed, could affect the market price of Commonwealth Common Stock and enable the possessor of the information to realize a profit or avoid a loss by trading in Commonwealth Common Stock or a security whose value is determined by the value of Commonwealth Common Stock (such as puts, calls or other derivative securities). Such information is referred to herein as "Inside Information". It is a violation of law, with potential prison and other sanctions, for any person to purchase or sell Commonwealth Common Stock or related derivative securities, or to tip others who may purchase or sell Commonwealth Common Stock or related derivative securities, on the basis of Inside Information known to that person. Also, it is against Company policy for any individual in our Company, who may have inside or unpublished knowledge about any of our customers or any other company, to purchase or sell the securities of those companies. Any such activity may also result in disciplinary sanctions or dismissal by the Company. Examples of Inside Information are dollar or unit sales volumes, backlogs, orders received, shipments, margins, profits, projections and business plans, but this list is only illustrative of the many kinds of possible Inside Information. To help to avoid the possible misuse of Inside Information, the Company requires its employees to observe the following policies: o An employee may not purchase or sell Commonwealth Common Stock or a related derivative security, and shall cause members of his or her immediate family sharing the same household not to purchase or sell Commonwealth Common Stock or a related derivative security, when that employee has Inside Information, except that an employee may exercise for cash a stock option granted by Commonwealth even though he or she has Inside Information. o An employee may not accept the grant of a Commonwealth stock option if he or she then has Inside Information, and the Board CII Management Development and Compensation Committee may not grant Commonwealth stock options at a time when any member thereof has Inside Information. o An employee may not reveal Inside Information to anyone other than in the regular course and scope of his or her employment and then only on a "need to know" basis. When Inside Information is communicated to another person the employee should ensure that the recipient knows that the information is Inside Information and is aware of the relevant requirements of law and these policies. o Unless an employee has been assigned the task by the President and Chief Executive Officer, an employee shall not answer inquiries concerning Company affairs from analysts or other representatives of the financial community or representatives of news organizations or other media, but shall refer these inquiries to the President and Chief Executive Officer or his delegate. The following additional policies apply to Company officers, managers, and finance division employees: o Officers and managers shall ensure that all employees who report to them are aware of the requirements of law and these policies relating to Inside Information. o An officer or manager may acquire Commonwealth Common Stock for investment but may not trade in Commonwealth Common Stock for short-term profit or purchase or sell derivative securities related to Commonwealth Common Stock. o An officer or manager may not recommend or express any opinion as to the desirability of purchasing, holding or selling Commonwealth Common Stock or a related derivative security. All Company officers, managers and finance division employees must pre-clear any transaction in Commonwealth Company Stock. This means that a document clearing the transaction must be received from the Legal Division prior to the employee initiating the proposed transaction in Commonwealth Company Stock. In order to obtain a pre-clearance, a request should be sent to the Corporate Governance Manager (via email or memorandum) including the type of transaction, proposed date, Common Stock ownership information, broker (if any), and quantity of Common Stock. A written response will be provided for all requests. Information regarding the completed transaction must be communicated by the employee to the Corporate Governance Manager within one (1) business day (including, but not limited to, the transaction date, quantity of the transaction in Common Stock, ownership, and transaction price). Company officers are subject to the special reporting requirements of Section 16 of the Securities and Exchange Act of 1934 and may request assistance through the Corporate Governance Manager with the filing of Section 16 reports with the Securities and Exchange Commission. The Company normally releases an earnings report shortly after the end of each calendar quarter. The period commencing on the third business day after that release has been disseminated to the public and ending three weeks prior to the end of the next fiscal quarter is often a good time for employees to effect transactions in Commonwealth Common Stock because much of what had been Inside Information is disclosed in those releases. Alternatively, the Company has set a regular "blackout" periods during which employees should not effect transactions in Commonwealth Common Stock commencing three weeks prior to the end of any fiscal quarter and ending two business days after the quarterly earnings release. For informational purposes, a "black-out" calendar is posted on the Company's Intranet site. However, even if not within a "black-out" period, Company officers, managers and finance employees must pre-clear all transactions in Company Common Stock. The foregoing policies continue to apply during outside the "black-out" periods for any employee who still has Inside Information. If an employee is uncertain about the legal rules involving the purchase or sale of Commonwealth Common Stock or any securities in companies that you are familiar with by virtue of your work for the Company, you should consult with the Company's General Counsel before making any such purchase or sale. In addition to the foregoing policies of general application, CII directors, officers and 10% stockholders are subject to the special reporting requirements and short-swing trading and short sale provisions of Section 16 of the Securities Exchange Act of 1934. These requirements and provisions are summarized in a memorandum which may be obtained from the Secretary of the Company. XIII. International Business Employees shall comply fully with United States laws and regulations as well as all laws and regulations of the foreign countries in which the Company does business. In particular, under the U.S. Foreign Corrupt Practices Act it is a crime for the Company or an officer, director, employee or agent of the Company to make any payment or promise to any foreign official, political party or official thereof or any candidate for foreign political office for the purpose of: o influencing any act or decision by that official, party, party official or candidate in his or its official capacity, or inducing the foreign official, party, party official or candidate to do or omit to do any act in violation of his or its lawful duty; or o inducing such foreign official, party, party official or candidate to use his or its influence with a foreign government to influence any act or decision of the foreign government for the purpose of obtaining or retaining business for the Company, or directing business to any person. It is also a crime to make any payment or promise to any person while knowing that it will be used to make any such unlawful payment or promise. "Knowing" is defined to mean being aware that the person is engaging in such conduct, or being aware or having a firm belief that such circumstances exist or that such result is substantially certain to occur. Employees are expected to require foreign agents or consultants acting in connection with the affairs of the Company to observe the same requirements that would apply to employees of the Company, whether or not the Company would be responsible for the activities of such foreign agents or consultants under the U.S. Foreign Corrupt Practices Act. The provisions of the U.S. Foreign Corrupt Practices Act do not apply to any facilitating or expediting payment to a foreign official, political party or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party or party official. Examples of routine governmental actions are issuing permits to do business in a country, processing visas or work orders, mail pick-up or delivery, scheduling inspections, providing phone service, loading and unloading goods and the like. Decisions to award new business or to continue business, or as to the terms of any such business, are not considered to be routine governmental actions. XIV. Litigation Authority Authority to bring any litigation, arbitration or other legal proceeding on behalf of the Company may be given only by the President and Chief Executive Officer or his delegate. Authority to retain legal counsel to conduct or defend any proposed, threatened or pending litigation, arbitration or other legal proceeding on behalf of the Company may be given only by the President and Chief Executive Officer, the General Counsel or their delegate. XV. Outside Activities of Employees Officers and other employees are compensated for devoting their primary interests and energies to the accomplishment of their work for the Company. Outside activities, including those discussed below, must not conflict with the proper performance of their duties or involve any other conflicts of interest. The President and Chief Executive Officer or his delegate should be consulted before any officer or other employee undertakes any outside activity that may require the devotion of a substantial amount of time during business hours. Corporate Directorships No officer or manager may serve as a director, trustee or general partner of any business enterprise not affiliated with the Company except with the prior approval of the Board of Directors of the Company. Because of the substantial amount of time and attention normally required to properly perform the duties incident to these positions, acceptance of them is discouraged and such approvals will be given only in special circumstances. In no case will approval be given unless the Board is satisfied that the Company will have no responsibility in respect thereof and that the position will not involve any conflict with the interests of the Company. Political and Governmental Activities Employees, as individuals, are encouraged to take part, on an entirely voluntary basis, in political and governmental affairs. Of course, the political party to which an employee belongs, his or her views on the candidates and issues and the extent of his or her financial support and activities are entirely matters of personal choice. Some employees may wish to run for public office or to hold appointive public office. Because of the federal, state and local laws which may be applicable and other considerations, employees are expected to consult with the Secretary of the Company before undertaking any such activity. Because of legal considerations, no employee may use Company funds, equipment, supplies or facilities for the purpose of supporting any political party or candidate for public office or in connection with his or her own candidacy. Other Public Service Activities In order to avoid any misunderstanding, the Company's letterhead is to be used only for correspondence on corporate business. It is not to be used, for example, for charitable solicitations or personal correspondence. Except as indicated above with respect to political and governmental activities, reasonable use may be made of corporate clerical facilities in connection with an individual officer's or employee's participation in public service and other outside activities. This assistance is provided as a convenience and in the interest of general efficiency, rather than as anything in the nature of contributions in support of, or opposition to, any particular causes, and of course it is assumed that the prior needs of the Company's business will be respected. XVI. Outside Ideas When an unsolicited idea is submitted to the Company by an outsider, care must be taken to ensure that the outsider signs an understanding form (available from the Secretary of the Company) before the idea is disclosed to employees qualified to evaluate or use it. The purpose of this policy is to avoid the risk or allegation of unauthorized use of another's proprietary rights or ideas. Written submissions should be forwarded, without any review or evaluation or making any notations on the document, to the Secretary of the Company. A non-technical employee will return the material to the sender either with a rejection notice or with an understanding form and an appropriate explanation. Outsiders calling in person should be advised that it is the Company's policy to accept no disclosure until the understanding form has been executed and that a copy of the understanding form may be obtained from the Secretary of the Company. XVII. Political Contributions, Positions and Activities No political contributions may be made, directly or indirectly, on behalf of the Company to any federal election or issue campaign, or to any campaign in those States or other jurisdictions where the contributions would be unlawful. Modest Company contributions may be made in appropriate cases where and in the manner permitted by law, but only with the prior approval of the President and Chief Executive Officer. Because of legal considerations, no Company funds, equipment, supplies or facilities may be used for the purpose of supporting any political party or candidate for public office. Entertainment and other acts of hospitality toward government or political officials should never compromise or appear to compromise the integrity or reputation of the official or the Company. When hospitality is extended it should be with the expectation that it will become a matter of public knowledge. An action which presents, or may appear to present, the position of the Company with respect to any political or governmental matter may be taken only with the prior approval of the President and Chief Executive Officer and in conformity with any lobbying or other laws. As a matter of policy, the Company will not voluntarily permit lists of employees or stockholders to be used in connection with political campaigns. XVIII. Records Management The Legal Department has company-wide responsibility for developing, administering and coordinating the record management program, and issuing retention guidelines for specific types of documents. Records should be maintained to comply with applicable statutory, regulatory and contractual requirements, as well as to those pursuant to prudent business practices. Employees can contact Legal Division for specific information on record retention. XIX. Technology Developed During Course of Employment All inventions, discoveries and improvements that an employee conceives or makes during the course of his or her employment relating to the Company's business or arising out of or resulting from such employment become the property of the Company. All exempt salaried employees are required to sign an agreement to this effect. The agreement also confirms the responsibility of employees to keep corporate information confidential. XX. Waiver of the Code From time to time, the Company may waive some provisions of this Code of Conduct. Any employee, officer or director who believes that a waiver may be called for should contact the General Counsel. Any waiver of the Code of Conduct for executive officers or directors of the Company may be made only by the Audit Committee of the Company's Board of Directors, and must promptly be disclosed to shareholders. Adopted: October 29, 2002 EX-21 9 jb200310kex21.txt EXHIBIT 21 FOR 2003 10-K Exhibit 21 ---------- Direct and Indirect Subsidiaries of Commonwealth Industries, Inc. Name Jurisdiction of Incorporation ---- ----------------------------- Commonwealth Financing Corp. (1) Delaware CA Lewisport, LLC (2) Delaware Commonwealth Aluminum Sales Corporation (3) Delaware Commonwealth Aluminum Lewisport, LLC (7) Delaware Commonwealth Aluminum Metals, LLC (6) Delaware CI Holdings, LLC (2) Delaware Commonwealth Aluminum Scottsboro, Inc. (1) Delaware Alflex Corporation (4) Delaware Commonwealth Aluminum Concast, Inc. (4) Ohio Commonwealth Aluminum Tube Enterprises, LLC (5) Delaware Commonwealth Aluminum, LLC (8) Delaware ------------------------------------------------------------------- (1) Subsidiary of Commonwealth Industries, Inc. (2) Limited Liability Company 100% owned by Commonwealth Industries, Inc. (3) Subsidiary of CA Lewisport, LLC. (4) Subsidiary of CI Holdings, LLC. (5) Limited Liability Company 100% owned by Commonwealth Aluminum Concast, Inc. (6) Limited Liability Company 100% owned by Commonwealth Aluminum Lewisport, LLC. (7) Limited Liability Company 73% owned by CA Lewisport, LLC and 27% owned by Commonwealth Aluminum, LLC. (8) Limited Liability Company 100% owned by Commonwealth Aluminum Concast, Inc. EX-23 10 jb200310kex23.txt EXHIBIT 23 FOR 2003 10-K Exhibit 23 ---------- Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File No's. 333-109147, 333-81055, 333-29363, 333-19383, 33-91364 and 33-90292) of Commonwealth Industries, Inc. and subsidiaries of our report dated March 10, 2004 relating to the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 10, 2004 relating to the consolidated financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky March 10, 2004 EX-31 11 jb200310kex31.txt EXHIBIT 31 FOR 2003 10-K Exhibit 31 ---------- CERTIFICATIONS I, Mark V. Kaminski, certify that: 1. I have reviewed this annual report on Form 10-K of Commonwealth Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ Mark V. Kaminski --------------------- Mark V. Kaminski President and Chief Executive Officer CERTIFICATIONS (continued) I, Donald L. Marsh, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Commonwealth Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2004 /s/ Donald L. Marsh, Jr. ------------------------- Donald L. Marsh, Jr. Executive Vice President and Chief Financial Officer EX-32 12 jb200310kex32.txt EXHIBIT 32 FOR 2003 10-K Exhibit 32 ---------- Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350 Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officers of Commonwealth Industries, Inc., a Delaware corporation (the "Company"), hereby certify, to such officer's knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 10, 2004 /s/ Mark V. Kaminski -------------------------------- Name: Mark V. Kaminski Title: President and Chief Executive Officer /s/ Donald L. Marsh, Jr. -------------------------------- Name: Donald L. Marsh, Jr. Title: Executive Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----