SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _________________
Commission file number 0-22206
NIAGARA CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3182820
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
667 MADISON AVENUE, NEW YORK, NEW YORK 10021
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 317-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, $.001 PAR VALUE
UNITS, CONSISTING OF COMMON STOCK AND WARRANTS
WARRANTS TO PURCHASE COMMON STOCK
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
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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.
YES X NO
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AS OF MARCH 27, 1997, THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY
$14,280,031 (ASSUMES OFFICERS, DIRECTORS AND ALL STOCKHOLDERS HOLDING 5%
OF THE OUTSTANDING SHARES ARE AFFILIATES).
THERE WERE 3,668,750 SHARES OF THE REGISTRANT'S COMMON STOCK
OUTSTANDING AS OF MARCH 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE
REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON MAY 29, 1997 ARE INCORPORATED BY REFERENCE INTO PART III (ITEMS
10, 11, 12 AND 13) HEREOF.
EXPLANATORY NOTE
This Amendment on Form 10-K/A to the Annual Report on Form
10-K of Niagara Corporation ("Niagara") for the fiscal year ended
December 31, 1996 (the "Form 10-K") amends and restates in their entirety
Items 7 and 8 of Part II thereof. Capitalized terms used and not defined
herein shall have the meanings ascribed thereto in the Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Niagara was organized on April 27, 1993 with the objective of
acquiring an operating business in the metals processing and distribution
industry or metals-related manufacturing industry. On June 1, 1995,
Niagara entered into a stock purchase agreement with the stockholders of
Niagara Cold Drawn providing for the purchase by Niagara of all
outstanding shares of common and preferred stock of Niagara Cold Drawn
for $10,744,045 in cash. This acquisition was consummated on August 16,
1995.
On January 31, 1996, Niagara Cold drawn entered into a stock
purchase agreement with the stockholders of Southwest pursuant to which,
and simultaneously therewith, Niagara Cold Drawn purchased all
outstanding capital stock of Southwest for $1,920,000 in cash and
$1,156,773 principal amount of Niagara Cold Drawn promissory notes
guaranteed by Niagara. In connection with this acquisition, Niagara Cold
Drawn discharged $8,518,691 of Southwest indebtedness and Niagara
guaranteed $898,000 of Southwest indebtedness. On November 1, 1996,
Southwest was merged into Niagara Cold Drawn.
On May 22, 1996, Niagara issued 168,750 shares of Common Stock
in exchange for unit purchase options (the "Purchase Options") issued to
the underwriters of its 1993 initial public offering. The Purchase
Options were exercisable until August 13, 1998 for an aggregate of
250,000 units at $9.00 per unit (subject, in each case, to certain
antidilution adjustments), with each unit consisting of one share of
Common Stock and two warrants, with each warrant exercisable for one
share of Common Stock at $6.60.
On January 23, 1997, Niagara entered into a letter of intent to
purchase all of the issued and outstanding shares of LaSalle Steel
Company, a wholly owned subsidiary of Quanex Corporation. Consummation of
the proposed transaction is subject to the satisfaction of certain
conditions including, among others, the satisfactory completion of the
Company's due diligence review and the negotiation and execution of a
mutually acceptable stock purchase agreement.
Niagara is engaged in substantive commercial activity only
through its wholly owned subsidiary, Niagara Cold Drawn, and the
following comparison of results of operations relates solely to Niagara
Cold Drawn's operations. Such results include the results of operations
of Southwest since February 1, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995
Net sales for the twelve months ended December 31, 1996 were
$76,827,165, an increase of $25,087,414 or 48.5% over the same period in
1995. This increase was primarily due to sales attributable to Southwest.
Cost of sales for the twelve months ended December 31, 1996 was
$65,824,190, an increase of $21,794,557 or 49.5% over the same period in
1995. This increase was attributable to increased volume following the
acquisition of Southwest. Gross margins for the twelve months ended
December 31, 1996 decreased by 0.6% over the same period in 1995 due to
pricing pressures.
Selling (absent freight), general and administrative expenses
(absent management charges and bonuses) increased $2,029,753 to
$5,036,332 or 6.6% of sales in the twelve months ended December 31, 1996
compared to 5.8% for the same period in 1995. This increase was caused by
increased costs associated with the increased volume, increased Canadian
goods and services taxes and duties resulting from increased Canadian
sales and increased depreciation and amortization associated with the
step-up in basis of Niagara Cold Drawn's fixed assets.
Interest expense increased $765,445 to $1,536,717 primarily due
to higher levels of borrowing incurred in financing the acquisition of
Southwest.
Net income for the twelve months ended December 31, 1996 was
$1,314,218, an increase of $788,841 or 150.2% from the same period in
1995. This increase was due primarily to the inclusion of Niagara Cold
Drawn's results for a full year.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994
Net sales for the twelve months ended December 31, 1995 were
$51,739,751, an increase of $5,116,114 or 11.0% over the same period in
1994. Of the 11.0% increase, 7.1% was attributable to increased volume
with the balance attributable to improved pricing.
Cost of sales for the twelve months ended December 31, 1995 was
$43,967,359, an increase of $3,421,425 or 8.4% over the same period in
1994. This increase was attributable to increased volume. Gross margins
increased approximately 2.0%, primarily as a result of improved pricing,
a more favorable product mix and reduced last-in first-out ("LIFO")
impact.
Selling (absent freight), general and administrative expenses
(absent management fees and administrative bonuses) increased
approximately $131,000 to $2,923,000 or 5.7% of sales in the twelve
months ended December 31, 1995 compared to 6.0% for the same period in
1994. This increase was caused by increased commission expenses,
increased salaries and increased Canadian goods and services taxes and
duties resulting from increased Canadian sales.
Interest expense increased $59,854 to $771,272 due to higher
levels of borrowing.
Net income for the twelve months ended December 31, 1995 was
$525,377, a decrease of $296,222 or approximately 36.1% from the same
period in 1994. Income before taxes was adversely affected by $1,666,327
in expenses related to management exercise of stock options, $235,000
primarily as a result of depreciation and amortization related to the
pushdown of the fair value of acquired assets and $130,000 in increased
management fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term liquidity requirement or day-to-day
operating expenses has been and is expected to continue to be funded by
cash provided by operations and borrowings under its revolving credit
agreement. The Company's principal long-term liquidity requirement has
been and is expected to continue to be the funding of capital
expenditures to modernize, improve and expand the facilities, machinery
and equipment of Niagara Cold Drawn. Net capital expenditures for the
year ending December 31, 1996 (after proceeds from the sale of
Southwest's Tulsa facilities) were $3,867,944 compared to $807,768 for
the same period in 1995. The increase in expenditures was largely due to
the construction of the facility in Midlothian, Texas, which became
operational in late 1996. The Company anticipates spending approximately
$4,000,000 for capital expenditures during 1997, which amount includes
the cost of a new production line at the Company's Midlothian facility.
Cash flows of the Company provided by operations were $4,831,940
for the year ended December 31, 1996, which included cash flows of
Niagara Cold Drawn for the entire year and cash flows of Southwest from
February 1, 1996. Cash flows of the Company used in operations were
$2,371,124 for the year ended December 31, 1995, which included the cash
flows of Niagara Cold Drawn from August 17, 1995. This $7,203,064
increase from the prior year is primarily attributable to an increase of
$719,442 in net income, an increase of $1,373,395 in depreciation and
amortization, a decrease of $1,215,505 in accounts receivable, a decrease
of $2,876,491 in inventories and an increase of $660,836 in accounts
payable. The Company's cash flows provided by operations during 1996,
together with proceeds of $551,000 from the sale of Southwest's Tulsa
facility and $915,856 of financing proceeds, were used to acquire
Southwest and complete the construction of the Midlothian facility.
Working capital of the Company at December 31, 1996 and 1995 was
$12,087,913 and $11,885,476, respectively. At December 31, 1996, Niagara
Cold Drawn had a $5,146,579 balance under its revolving credit agreement
with Manufacturers and Traders Trust Company ("M&T") and $8,853,421 in
available credit thereunder.
On January 31, 1996, Niagara Cold Drawn acquired all the
outstanding capital stock of Southwest. This acquisition was financed
pursuant to credit agreements (the "Credit Agreements") entered into with
M&T on January 31, 1996 by Niagara Cold Drawn (and guaranteed by
Niagara). Among these were: (i) a $12,000,000 Term Loan Agreement (the
"Term Loan Agreement") and (ii) a $14,000,000 Amended and Restated
Revolving Credit Agreement (the "Revolving Credit Agreement"). In
connection with the execution of the Credit Agreements, Niagara Cold
Drawn terminated its existing term loan facility with M&T, and Southwest
terminated its existing bank credit agreements.
The Credit Agreements are guaranteed by Niagara and secured by
substantially all of the assets of Niagara Cold Drawn. These agreements
carry restrictions on, among other things, capital expenditures,
dividends and changes in control and management of Niagara Cold Drawn and
require minimum levels of net worth through maturity. Niagara Cold Drawn
is currently in compliance with these provisions.
The Term Loan Agreement provides for the payment of (i) interest
in monthly installments from March 1, 1996 through February 1, 1997 and
(ii) principal and interest in monthly installments from March 1, 1997
through February 1, 2003. The interest rate is fixed at 7.49% for the
first two years, and thereafter will be periodically adjusted to 2.5%
above the average yield on certain United States Treasury obligations.
Loans made pursuant to the Revolving Credit Agreement are based on a
percentage of eligible accounts and inventory and will mature on January
31, 1999. The interest rate on each loan is 2.25% above the applicable
LIBOR rate. Monthly interest payments commenced on March 1, 1996.
Loan proceeds pursuant to the Credit Agreements were used to
consummate the acquisition of Southwest, to repay and discharge certain
indebtedness of Southwest and Niagara Cold Drawn, for certain acquisition
expenses, to finance the completion of Niagara Cold Drawn's Midlothian,
Texas facility and for general corporate purposes.
RECENT ACCOUNTING CHANGES
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") which provides a different method of calculating earnings
per share than is currently used in accordance with APB 15. SFAS 128
provides for the calculation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding
for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. Early implementation of SFAS
128 would have had no effect on the 1996 net income per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
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NIAGARA CORPORATION
AND SUBSIDIARY:
Report of Independent Certified Public Accountants. . . . 6
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 7
Statements of Operations. . . . . . . . . . . . . . . . . 8
Statements of Stockholders' Equity. . . . . . . . . . . . 9
Statements of Cash Flows. . . . . . . . . . . . . . . . . 10
Notes to Financial Statements . . . . . . . . . . . . . . 11
NIAGARA COLD DRAWN CORP. IS CONSIDERED A PREDECESSOR
COMPANY AND THE INFORMATION DISCLOSED HEREIN IS AS OF
AND PRIOR TO THE DATE OF ACQUISITION BY NIAGARA, ON
AUGUST 16, 1995:
Report of Independent Certified Public Accountants . . . 30
Statements of Operations . . . . . . . . . . . . . . . . 31
Statements of Cash Flows . . . . . . . . . . . . . . . . 32
Notes to Financial Statements. . . . . . . . . . . . . . 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Niagara Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of Niagara
Corporation (formerly International Metals Acquisition Corporation) and
subsidiary (the "Company") as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Niagara Corporation and subsidiary as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 27, 1997
Niagara Corporation and Subsidiary
Balance Sheets
December 31, 1995 1996
- ---------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 2,186,897 $ 1,587,927
Trade accounts receivable, net of
allowance for doubtful accounts
of $184,000 and $233,000
(Notes 7 and 15) 4,239,369 5,952,896
Inventories (Notes 5 and 7) 14,743,541 14,446,473
Other current assets 165,874 253,078
- ---------------------------------------------------------------------------
Total current assets 21,335,681 22,240,374
Property, plant and equipment, net
(Notes 4, 6 and 7) 12,745,144 21,649,219
Goodwill, net of accumulated amortization
of $76,030 (Note 1) -- 2,543,294
Other assets, net (Notes 1, 4 and 20) 512,587 914,928
- ---------------------------------------------------------------------------
$ 34,593,412 $ 47,347,815
===========================================================================
Liabilities and Stockholders' Equity
Current:
Trade accounts payable $ 4,786,769 $ 4,109,731
Accrued expenses 3,211,643 3,689,584
Accrued workmen's compensation 516,745 480,107
Current maturities of long-term debt
(Note 7) 733,048 1,662,039
Deferred income taxes (Note 13) 202,000 211,000
- ---------------------------------------------------------------------------
Total current liabilities 9,450,205 10,152,461
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Long-term debt, less current maturities
(Note 7) 6,968,860 18,075,147
- ---------------------------------------------------------------------------
Deferred income taxes (Note 13) 3,712,000 3,594,000
- ---------------------------------------------------------------------------
Commitments and contingencies (Notes 10,
11, 14 and 16)
Stockholders' equity (Notes 2, 8 and 9):
Preferred stock, $.001 par value - shares
authorized 500,000; none outstanding -- --
Common stock, $.001 par value - shares
authorized 15,000,000; outstanding
3,500,000 and 3,668,750 3,500 3,669
Additional paid-in capital 15,560,296 15,560,127
Deficit (1,101,449) (37,589)
- ---------------------------------------------------------------------------
Total stockholders' equity 14,462,347 15,526,207
- ---------------------------------------------------------------------------
$ 34,593,412 $ 47,347,815
===========================================================================
See accompanying notes to financial statements.
Niagara Corporation and Subsidiary
Statements of Operations
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1994 1995(a) 1996(b)
- -------------------------------------------------------------------------------------
Net sales (Note 15) $ -- $ 17,454,688 $ 76,827,165
Cost of products sold -- 15,421,064 65,824,190
- -------------------------------------------------------------------------------------
Gross profit -- 2,033,624 11,002,975
Operating expenses:
Selling, general and administrative
(Note 17) 1,821,665 1,805,269 8,013,589
- -------------------------------------------------------------------------------------
Income (loss) from operations (1,821,665) 228,355 2,989,386
Other income (expense):
Interest income 600,880 628,375 100,244
Interest expense -- (272,312) (1,536,717)
Other, net - primarily gain on
sale of property -- -- 126,147
- -------------------------------------------------------------------------------------
Income (loss) before taxes
on income (recovery) (1,220,785) 584,418 1,679,060
Taxes on income (recovery) (Note 13) (6,000) 240,000 615,200
- -------------------------------------------------------------------------------------
Net income (loss) $ (1,214,785) $ 344,418 $ 1,063,860
=====================================================================================
Net income (loss) per share $ (.35) $ .10 $ .30
=====================================================================================
Weighted average common shares
outstanding 3,500,000 3,500,000 3,602,818
=====================================================================================
</TABLE>
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(a) Includes the results of Niagara Cold Drawn for the period from
August 17, 1995 to December 31, 1995.
(b) Includes the results of Niagara Cold Drawn for the entire year, and
the results of Southwest from February 1, 1996.
See accompanying notes to financial statements.
Niagara Corporation and Subsidiary
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Period January 1, 1994 to December 31, 1996
Common stock
---------------------- Additional Retained Total
Number of paid-in earnings stockholders'
shares Amount capital (deficit) equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 2,925,001 $ 2,925 $ 12,524,073 $ (17,917) $ 12,509,081
Net loss for the year -- -- -- (1,214,785) (1,214,785)
Accretion to redemption value of
common stock subject to
possible redemption -- -- -- (111,721) (111,721)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,925,001 2,925 12,524,073 (1,344,423) 11,182,575
Accretion to redemption value of
common stock subject to
possible redemption through
August 16, 1995 -- -- -- (101,444) (101,444)
Reclassification of common stock
subject to possible redemption 574,999 575 3,036,223 -- 3,036,798
Net income for the year -- -- -- 344,418 344,418
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,500,000 3,500 15,560,296 (1,101,449) 14,462,347
Shares issued (Note 2) 168,750 169 (169) -- --
Net income for the year -- -- -- 1,063,860 1,063,860
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,668,750 $ 3,669 $ 15,560,127 $ (37,589) $ 15,526,207
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
Niagara Corporation and Subsidiary
Statements of Cash Flows (Note 19)
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1994 1995(a) 1996(b)
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,214,785) $ 344,418 $ 1,063,860
- ------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,364 472,663 1,846,058
Gain on sale of property -- -- (124,773)
Provision for doubtful accounts -- 36,000 68,991
Deferred income taxes -- 216,000 229,000
Interest on U.S. Government
securities in trust fund (558,880) (507,473) --
Changes in assets and liabilities,
net of effects from purchase of
Niagara Cold Drawn in 1995 and
Southwest in 1996:
(Increase) decrease in accounts
receivable -- (83,599) 1,131,906
(Increase) decrease in inventories -- 640,288 3,516,779
Increase in other assets -- (98,613) (169,909)
Increase (decrease) in trade
accounts payable, accrued expenses
and accrued workmen's compensation 1,386,791 (3,390,808) (2,729,972)
- ------------------------------------------------------------------------------------------------
Total adjustments 833,275 (2,715,542) 3,768,080
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (381,510) (2,371,124) 4,831,940
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of property -- -- 551,000
Acquisition of Niagara Cold Drawn, net of
cash acquired -- (11,862,766) --
Acquisition of Southwest, net of cash acquired -- -- (2,354,289)
Acquisition of fixed assets -- (293,661) (4,418,944)
Financing costs -- -- (124,533)
Deferred acquisition costs -- (115,000) --
Cumulative maturities of U.S. Government
securities deposited in trust fund 72,166,798 89,592,484 --
Cumulative maturities of U.S. Government
securities reinvested in trust fund (72,166,798) (74,400,900) --
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities -- 2,920,157 (6,346,766)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under revolving line of credit -- 998,445 (31,960)
Proceeds from long-term debt -- -- 9,998,963
Repayment of long-term debt -- (297,338) (9,051,147)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing
activities -- 701,107 915,856
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (381,510) 1,250,140 (598,970)
Cash and cash equivalents, beginning of year 1,318,267 936,757 2,186,897
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 936,757 $ 2,186,897 $ 1,587,927
================================================================================================
</TABLE>
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(a) Includes the cash flows of Niagara Cold Drawn for the period from
August 17, 1995 to December 31, 1995.
(b) Includes the cash flows of Niagara Cold Drawn for the entire year,
and the cash flows of Southwest from February 1, 1996.
See accompanying notes to financial statements.
Niagara Corporation and Subsidiary
Notes to Financial Statements
1. Summary of Accounting Organization, Business Operations and
Policies Acquisitions
Niagara Corporation, formerly International
Metals Acquisition Corporation ("Niagara"),
was incorporated in Delaware on April 27,
1993 with the objective of acquiring an
operating business in the metals processing
and distribution industry or metals-related
manufacturing industry.
Niagara consummated an initial public
offering (the "Offering") on August 20, 1993
and raised net proceeds of $15,295,100.
On August 16, 1995, Niagara acquired all of
the issued and outstanding common and
preferred stock of Niagara Cold Drawn Corp.
("Niagara Cold Drawn," and together with
Niagara, the "Company") a manufacturer of
cold drawn steel bars, for $10,744,045 in
cash. Concurrent with this acquisition,
which was approved by Niagara's
stockholders, the shares of common stock
subject to redemption totalling $3,036,798
was reclassified as additional paid-in
capital since no Niagara shares were
redeemed. This acquisition was accounted for
as a purchase, and the financial statements
include the results of Niagara Cold Drawn
from this acquisition date. (see Note 3).
The purchase price of Niagara Cold Drawn
including certain transaction expenses of
$1,174,377, was $11,918,422. Niagara Cold
Drawn's stockholder's equity at August 16,
1995 was $6,519,678. After giving effect to
this excess and a $3,309,000 deferred tax
liability (see Notes 3 and 4), the purchase
price for Niagara Cold Drawn exceeded the
book value of Niagara Cold Drawn's
stockholder's equity by approximately
$8,708,000. As a result of this acquisition,
Niagara's net operating loss carryforward at
August 16, 1995 of approximately $1,150,000
was able to be utilized. The tax benefit of
this loss (that was previously fully
reserved by a valuation allowance) totals
approximately $460,000, which amount was
recorded as a deferred tax asset at the date
of the acquisition of Niagara Cold Drawn.
Approximately $1,000,000 of this loss was
utilized as of December 31, 1995 and the
remainder was utilized in 1996 to reduce
current tax liabilities. In accordance with
SFAS 109, the tax benefit received from this
utilization was reflected as a reduction of
the deferred tax asset rather than a
reduction in tax expense in the statement of
operations.
On January 31, 1996, Niagara Cold Drawn
entered into a stock purchase agreement with
the stockholders of Southwest Steel Company,
Inc. ("Southwest"), a manufacturer of cold
drawn steel bars, pursuant to which, and
simultaneously therewith, Niagara Cold Drawn
purchased all of the outstanding capital
stock of Southwest for $1,920,000 in cash
and $1,156,773 principal amount of
promissory notes guaranteed by Niagara. In
connection with this acquisition, Niagara
Cold Drawn discharged $8,518,691 of
Southwest indebtedness and Niagara
guaranteed $898,000 of Southwest
indebtedness to a former Southwest
stockholder. The acquisition was accounted
for as a purchase and financed by a
$12,000,000 term loan facility and the
utilization of a portion of Niagara Cold
Drawn's revolving line of credit. The
financial statements include the results of
Southwest from February 1, 1996.
The Southwest purchase price, including
certain transaction expenses of $524,270,
together with liabilities of $350,063
assumed in a purchase business combination,
totaled $3,951,106. Southwest's
stockholders' equity at January 31, 1996 was
$1,071,782. The $2,879,324 excess has been
allocated to goodwill and is being amortized
on a straight-line basis over 30 years (see
Note 4). Southwest was merged into Niagara
Cold Drawn on November 1, 1996. Southwest's
Tulsa, Oklahoma operations were closed
during 1996 and its Midlothian, Texas
operations became a division of Niagara Cold
Drawn following the merger.
On May 8, 1996, pursuant to the provisions
of the Southwest stock purchase agreement,
Niagara Cold Drawn asserted indemnification
claims in the aggregate amount of
approximately $1,300,000 against the former
Southwest stockholders. On May 22, 1996,
Niagara Cold Drawn brought an action against
such stockholders relating to these claims.
The defendants have denied liability in
their answer.
Niagara Cold Drawn operates from three
principal locations: Buffalo, New York;
Chattanooga, Tennessee; and Midlothian,
Texas. It produces cold drawn steel bars for
steel service centers and original equipment
manufacturers throughout North America.
Niagara Cold Drawn competes in a narrow
sector of the steel industry, and its
business is affected by conditions within
the broader steel and machine tool
industries. It grants trade credit toits
customers consistent with industry practice.
Net Income (Loss) Per Share
Net income (loss) per common share is
computed on the basis of the weighted
average number of common shares outstanding
during the period, including common stock
equivalents (unless antidilutive) which
would arise from the exercise of stock
warrants and options.
Cash Equivalents
For purposes of the statements of cash
flows, the Company considers cash
equivalents to consist of all short-term
highly liquid debt instruments which are
readily convertible into cash at par value
(cost). Cash equivalent investments were
$2,143,172 and $1,370,981 at December 31,
1995 and 1996, respectively.
Revenue Recognition
Revenue from the sale of products is
recorded at the time the goods are shipped.
Inventories
Inventories are stated at the lower of cost
or market, with cost being determined using
the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment is stated at
cost.
Additions to property, plant and equipment
are stated at cost, and include expenditures
for new facilities and those which
substantially increase the useful lives of
existing property, plant and equipment.
Maintenance, repairs and minor renewals are
expensed as incurred.
Niagara Cold Drawn provides for depreciation
of property, plant and equipment at rates
designed to amortize such equipment over
their useful lives. Depreciation is computed
on the straight-line method using lives of 3
to 15 years on machinery and equipment and
furniture and fixtures, and 10 to 20 years
on buildings and improvements and leasehold
improvements.
Intangible Assets
Niagara Cold Drawn has a Power Authority of
New York Power Replacement Agreement which
provides for low cost energy and is included
in other assets (see Note 4). The agreement
is being amortized on a straight-line basis
over 10 years.
Income Taxes
Deferred income taxes are recognized for the
tax consequences of temporary differences
between the financial reporting bases and
the tax bases of the Company's assets and
liabilities in accordance with Statement of
Financial Accounting Standards No. 109
("SFAS No. 109"). Valuation allowances are
established when necessary to reduce
deferred tax assets to the amount expected
to be realized. Income tax expense is the
tax payable for the period and the change
during the period in deferred tax assets and
liabilities.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of thefinancial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
Reclassifications
Certain reclassifications have been made to
prior year amounts to conform to current
year presentation.
Recent Accounting Standards
In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of" ("SFAS No. 121"). SFAS No. 121
requires, among other things, impairment
loss of assets to be held and gains or
losses from assets that are expected to be
disposed of be included as a component of
income from continuing operations before
taxes on income. The Company assesses
recoverability of these assets by estimating
future non-discounted cash flows. The
Company adopted SFAS No. 121 in fiscal 1996
and its implementation did not have a
material effect on thefinancial statements.
In October 1995, the FASB issued Statement
of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 encourages
entities to adopt the fair value method in
place of the provisions of Accounting
Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No.
25"), for all arrangements under which
employees receive shares of stock or other
equity instruments of the employer or the
employer incurs liabilities to employees in
amounts based on the price of its stock. The
Company has not adopted the fair value
method encouraged by SFAS No. 123 and will
continue to account for such transactions in
accordance with APB No. 25 (see Note 11).
In March 1997, the FASB issued Statement of
Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") which
provides a different method of calculating
earnings per share than is currently used in
accordance with APB 15. SFAS 128 provides
for the calculation of basic and diluted
earnings per share. Basic earnings per share
is computed by dividing income available to
common shareholders by the weighted average
number of common shares outstanding for the
period. Diluted earnings per share reflects
the potential dilution of securities that
could share in the earnings of an entity,
similar to fully diluted earnings per share.
Early implementation of SFAS 128 would have
had no effect on the 1996 net income per
share.
2. Public Offering On August 20, 1993, Niagara sold 2,875,000
units ("Units") in the Offering. Each Unit
consists of one share of Niagara's common
stock, $.001 par value, and two Redeemable
Common Stock Purchase Warrants ("Warrants").
Each Warrant entitles the holder to purchase
from Niagara, until the close of business on
August 13, 2000, one share of common stock
at an exercise price of $5.50, subject to
adjustment in certain circumstances. The
Warrants will be redeemable at a price of
$.01 per Warrant upon 30 days' notice in the
event that the last sale price of the common
stock has been at least $10.00 per share for
20 consecutive trading days ending on the
third day prior to the date on which notice
of redemption is given.
Niagara issued an aggregate of $150,000 of
promissory notes to certain accredited
investors. These notes bore interest at the
rate of 10% per annum and were repaid on the
consummation of the Offering with accrued
interest thereon. The investors were issued
300,000 warrants (valued at a nominal
amount) which are (following Niagara's
acquisition of Niagara Cold Drawn) identical
to the Warrants.
On May 22, 1996, Niagara issued 168,750
shares of common stock in exchange for unit
purchase options (the "Purchase Options")
issued to the underwriters of the Offering.
The Purchase Options were exercisable until
August 13, 1998 for an aggregate of 250,000
units at $9.00 per unit (subject, in each
case, to certain antidilution adjustments),
with each unit consisting of one share of
common stock and two warrants, with each
warrant exercisable for one share of common
stock at $6.60.
3. Acquisitions of As discussed in Note 1, on August 16, 1995,
Niagara Cold Drawn Niagara acquired all of the issued and
and Southwest outstanding shares of common and preferred
stock of Niagara Cold Drawn and, on January
31, 1996, Niagara Cold Drawn acquired all of
the issued and outstanding capital stock of
Southwest. For financial reporting purposes,
both transactions were accounted for under
the purchase method.
Pro forma results of operations for 1995, as
if both acquisitions had occurred January 1,
1995, are unaudited and are detailed below.
Pro forma adjustments primarily include
additional depreciation and amortization on
the excess purchase price allocated to
property, plant and equipment and intangible
assets (Niagara Cold Drawn) and goodwill
(Southwest), elimination of interest income
on the portion of Niagara's investment in
U.S. government securities deposited in a
trust fund and liquidated upon consummation
of the acquisition ofNiagara Cold Drawn,
elimination of the Niagara Cold Drawn
employment expense (exercise of management
options) discussed in Note 16, additional
accrual of salaries for Niagara management,
elimination of merger costs on terminated
transactions prior to the acquisition of
Niagara Cold Drawn (see Note 17),
elimination of other nonrecurring items and
provision for income taxes. This pro forma
financial data does not purport to be
indicative of the results which actually
could have been obtained had such
transactions been completed as of the
assumed dates or which may be obtained in
the future. Information has not been
presented for 1996 since the pro forma
results reflecting Southwest were not
materially different from the accompanying
financial statements.
Year ended December 31, 1995
--------------------------------------------
Net sales $84,654,000
Net income 882,000
Net income per share .25
=============================================
4. Excess Purchase Price As discussed in Notes 1 and 3 above, on August
of Niagara Cold Drawn 16, 1995, Niagara acquired all of Niagara Cold
and Southwest Assets Drawn's outstanding capital stock. The
and Liabilities financial statements have been adjusted to
reflect the fair value of net assets based
on an appraisal which was obtained as of the
acquisition date and to reflect the deferred
tax asset related to the net operating loss
of Niagara. The carrying amounts of certain
assets and liabilities were increased by
allocation of the following amounts:
----------------------------------------------
Inventories $ 1,839,000
Land, buildings and improvements 2,256,000
Machinery and equipment 3,815,000
Power Authority of New York
Power Replacement Agreement
(included in other assets) 338,000
Deferred tax asset on net
operating loss carryforward 460,000
Less: Deferred tax liability (3,309,000)
-----------------------------------------------
Allocation of excess purchase
price of Niagara $ 5,399,000
================================================
As discussed in Notes 1 and 3 above, on
January 31, 1996, Niagara Cold Drawn
acquired all of Southwest's capital stock.
The book values of assets and liabilities of
Southwest reflected the estimated fair
values at the date of acquisition and the
excess purchase price of $2,879,324 was
allocated to goodwill.
For the period from August 17, 1995 through
December 31, 1995 and for the year ended
December 31, 1996, income before income
taxes was decreased by approximately
$235,000 and $595,000, respectively,
primarily as a result of depreciation and
amortiza tion, related to the adjustment for
the excess purchase price of Niagara Cold
Drawn and Southwest.
5. Inventories Inventories consisted of the following:
December 31, 1995 1996
----------------------------------------------
Raw materials $ 6,978,363 $ 6,302,827
Work-in-process 1,088,153 1,252,278
Finished goods 6,677,025 6,891,368
----------------------------------------------
$ 14,743,541 $14,446,473
==============================================
6. Property, Plant and Property, plant and equipment (after
Equipment accounting for the allocation of excess
purchase price disclosed in Note 4 above)
consisted of the following:
<TABLE>
<S> <C> <C>
December 31, 1995 1996
------------------------------------------------------------
Land, buildings
and improvements $ 3,000,370 $ 7,447,214
Leasehold improvements 717,095 717,095
Machinery and equipment 8,950,643 15,026,487
Furniture and fixtures 369,225 476,659
Equipment under
capital leases 134,375 95,265
------------------------------------------------------------
Total 13,171,708 23,762,720
Less:
Accumulated depreciation (420,942) (2,058,256)
Accumulated depreciation
on equipment under
capital leases (5,622) (55,245)
------------------------------------------------------------
$ 12,745,144 $ 21,649,219
============================================================
</TABLE>
7. Long-term Debt The long-term debt consisted of the following:
<TABLE>
<S> <C> <C>
December 31, 1995 1996
------------------------------------------------------------
Secured bank revolving line of
credit up to $14,000,000, due
January 31, 1999, limited to a
portion of the value of
Niagara Cold Drawn's eligible
accounts receivable and
inventories. Interest is
calculated at the LIBOR rate
plus 2.25% (effective rate of
7.516% at December 31, 1996) $ 5,178,539 $ 5,146,579
Term note payable - bank,
maturing in monthly payments
of interest only at 7.49%
through February 1, 1997,
followed by monthly
installments of principal and
interest from March 1, 1997
through February 1, 2003.
Beginning March 1, 1997
through February 1, 1998, the
monthly installments of
principal and interest are
$207,423. The monthly
principal and interest payment
is adjusted annually each
March 1 to reflect the current
interest rate, which is 2.5%
over the weekly average yield
on United States Treasury
obligations. The note is
collateralized by accounts
receivable and inventories 2,288,253 12,000,000
Notes payable - former
Southwest stockholders,
maturing $82,627 annually on
January 31 through 2010, plus
interest at 8.5%, guaranteed
by Niagara (see Note 1) -- 1,156,773
Note payable - former
Southwest stockholder,
maturing $64,143 annually on
January 31 through 2010, plus
interest at 8.5%, guaranteed
by Niagara (see Note 1) -- 898,000
Note payable - former
Southwest stockholder,
maturing $33,333 annually on
April 17 through 2005, plus
interest at 10% -- 300,000
Obligations under capital
leases maturing in varying
monthly and quarterly
installments through December
1999, including interest
ranging from 7.4% to 9.75%,
collateralized by leased
equipment (see Note 10) -- 109,102
Term note payable - Tennessee
landlord, maturing inmonthly
installments of $2,643 through
June 1998, including interest
at 10%, collateralized by
equipment 69,900 44,008
Subordinated note payable -
development corporation,
maturing in monthly
installments of $1,467
through November 1998,
including interest at 6.5%,
collateralized by accounts
receivable, inventories and
equipment, and personally
guaranteed by certain officers
of Niagara Cold Drawn 45,458 31,653
Subordinated note payable -
development corporation,
maturing in monthly
installments of $1,547
through December 1997,
including interest at 6%,
collateralized by accounts
receivable, inventories and
equipment, and personally
guaranteed by certain officers
of Niagara Cold Drawn 33,524 16,765
Subordinated note payable -
development corporation,
maturing in monthly
installments of $888 through
May 1999, including interest
at 6%, collateralized by
accounts receivable and
inventories, and person ally
guaranteed by certain officers
of Niagara Cold Drawn 32,848 23,920
Other 53,386 10,386
-------------------------------------------------------------
7,701,908 19,737,186
Less: Current maturities of
long-term debt 733,048 1,662,039
-------------------------------------------------------------
$ 6,968,860 $ 18,075,147
=============================================================
</TABLE>
The bank revolving line of credit and term
loan agreements contain certain financial
covenants relating to Niagara Cold Drawn's
working capital, current ratio, tangible net
worth, debt to tangible net worth and
restrictions on capital expenditures,
operating leases and dividends.
Approximate maturities of long-term debt are
as follows:
Year ended December 31,
------------------------------------
1997 $ 1,622,000
1998 2,019,000
1999 7,248,000
2000 2,214,000
2001 2,372,000
====================================
Niagara Cold Drawn has a $200,000 open
letter of credit with a bank that expires in
July 1997, secured by accounts receivable
and inventories. No amounts were outstanding
under the letter of credit at December 31,
1996.
8. Preferred Stock Niagara is authorized to issue 500,000
shares of preferred stock with such
designations, voting and other rights and
preferences as may be determined from time
to time by its Board of Directors.
9. Common Stock At December 31, 1996, 6,050,000 shares of
Niagara common stock were reserved for
issuance upon exercise of redeemable
warrants (see Note 2).
10. Lease Commitments Niagara leases office space under
an operating lease and Niagara Cold Drawn
leases equipment and its Chattanooga,
Tennessee facility under capital and
operating leases. Assets under capital
leases are capitalized using interest rates
appropriate at the inception of the lease.
At December 31, 1996, future minimum
payments under capital and noncancellable
operating leases are approximately as
follows:
Capital Operating
leases lease
------------------------------------------------
1997 $ 47,000 $ 450,000
1998 53,000 338,000
1999 24,000 251,000
2000 -- 276,000
2001 -- 69,000
-----------------------------------------------
Total minimum lease
payments 124,000 $1,384,000
==========
Amount representing
interest (15,000)
-----------------------------------
Present value of net
minimum lease
payments (see Note 7) $109,000
===================================
Rent expense under operating leases was
approximately $63,000 for the period August
17, 1995 to December 31, 1995 and
approximately $449,000 for the year ended
December 31, 1996. The Chattanooga operating
lease expires in May 1998, at which time
Niagara Cold Drawn has the option to
purchase such property for $1,250,000.
11. Compensation Plans Incentive Compensation Plan
Niagara Cold Drawn has an incentive
compensation plan pursuant to which bonuses
are paid to participants as designated by
Niagara Cold Drawn's Board of Directors.
Compensation under the plan is related
solely to Niagara Cold Drawn's earnings
performance. The amount charged to expense
under the plan was approximately $123,000
for the period August 17, 1995 to December
31, 1995 and approximately $307,000 for the
year ended December 31, 1996.
Stock Compensation Plan
Niagara has a stock option plan which is
described below. The Company applies APB
Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in
accounting for the plan. Under APB Opinion
25, because the exercise price of Niagara's
employee stock options equals the market
price of the underlying stock on the date of
grant, no compensation cost is recognized.
Under Niagara's stock option plan, the
Compensation Committee of Niagara's Board of
Directors may grant options to the Company's
officers, directors, employees and
independent contractors for up to 1,500,000
shares of Niagara common stock. The exercise
price of each option is no less than the
market price of Niagara's common stock on
the date of grant.
FASB Statement 123, "Accounting for
Stock-Based Compensation," requires the
Company to provide pro forma information
regarding net income and earnings per share
as if compensation cost for the Company's
stock option plan had been determined in
accordance with the fair value method
prescribed in FASB Statement 123. The
Company estimates the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model with the
following weighted average assumptions used
for grants in 1995 and 1996: dividend yield
of -0- percent; expected volatility of 20
percent; risk-free interest rates of 6.6
percent; expected lives of 10 years and a
discount due to marketability of 28 percent.
Under the accounting provisions of FASB
Statement 123, the Company's net income and
earnings per share would have been reduced
to the pro forma amounts indicated below:
1996 1995
----------------------------------------------
Net income:
As reported $344,418 $1,063,860
Pro forma 270,368 798,133
Primary earnings per
share:
As reported .10 .30
Pro forma .8 .22
===============================================
A summary of the status of the Niagara's
stock option plan as of December 31, 1995
and 1996, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31, 1995 December 31, 1996
--------------------- --------------------
Weighted Weighted
average average
Shares exercise Shares exercise
(000) price (000) price
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding -- $ -- 520,000 $5.75
at begin-
ning of year
Granted 520,000 5.75 295,000 5.50
Exercised -- -- -- --
Forfeited -- -- -- --
-----------------------------------------------------------
Outstanding 520,000 $5.75 815,000 $5.66
at end of
year
===========================================================
Options exercisable
at year-end -- $ -- 254,666 $5.70
===========================================================
Weighted average fair
value of options
granted during the
year $2.14 $1.47
============================================================
</TABLE>
The following table summarizes information
about fixed stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- ------------------------
Weighted
average Weighted Weighted
Range of Number out- remaining average Number average
exercise standing at contractual exercise exercisable exercise
prices 12/31/96 life price at 12/31/96 price
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.50 to 815,000 9 years $5.66 254,666 $5.70
$5.75
============================================================================
</TABLE>
12. Related Party During the period from August 17, 1995 to
Transactions December 31, 1995, Niagara Cold Drawn
incurred approximately $25,000 of freight
and shipping charges to a related party.
From the effective date of the Offering
through the date of the acquisition of
Niagara Cold Drawn, Niagara occupied office
space provided by a company owned by a
stockholder. Niagara paid $5,000 per month
for such office space and certain
administrative and secretarial services.
13. Income Taxes The provision for Federal and state income
tax expense (benefit) was comprised of the
following:
Year ended
December 31, 1994 1995 1996
-----------------------------------------------
Current:
Federal $(4,000) $12,000 $352,200
State (2,000) 12,000 34,000
-----------------------------------------------
(6,000) 24,000 386,200
-----------------------------------------------
Deferred:
Federal -- 208,000 207,000
State -- 8,000 22,000
-----------------------------------------------
-- 216,000 229,000
-----------------------------------------------
Total income
taxes
(recovery) $(6,000) $240,000 $615,200
===============================================
Niagara Cold Drawn is included in the
consolidated Federal income tax return of
its parent, Niagara, from the date of
acquisition.
At December 31, deferred tax assets
(liabilities) consisted of the following:
<TABLE>
<S> <C> <C>
December 31, 1995 1996
-----------------------------------------------------------
New York State investment
tax credits $ 715,000 $ 427,000
Net operating loss
carryforward 78,000 --
Accrued expenses deductible
when paid 231,000 182,000
Inventory capitalization 100,000 159,000
Allowance for doubtful
accounts 71,000 89,000
-----------------------------------------------------------
Gross deferred tax
assets 1,195,000 857,000
Valuation allowance for
deferred tax assets (715,000) (427,000)
-----------------------------------------------------------
Net deferred tax assets 480,000 430,000
-----------------------------------------------------------
Differences in property,
plant, equipment and
intangibles related to
allocation of Niagara
excess purchase price (2,574,000) (2,379,000)
Book versus tax depreciation
of property, plant and
equipment (1,138,000) (1,215,000)
Differences in inventories
related to allocation of
Niagara Cold Drawn excess
purchase price (682,000) (641,000)
-----------------------------------------------------------
Gross deferred tax
liabilities (4,394,000) (4,235,000)
-----------------------------------------------------------
Net deferred tax
liabilities $(3,914,000) $(3,805,000)
===========================================================
</TABLE>
Included in the accompany balance sheets
as follows:
<TABLE>
<S> <C> <C>
1995 1996
-----------------------------------------------------------
Current liability for
deferred income taxes $ (202,000) $ (211,000)
Noncurrent liability for
deferred income taxes (3,712,000) (3,594,000)
-----------------------------------------------------------
Net deferred tax liabilities $(3,914,000) $(3,805,000)
===========================================================
</TABLE>
At December 31, 1996, Niagara Cold Drawn had
New York State investment tax credit
carryforwards of approximately $427,000,
which may be available to offset certain
future state income taxes. These credits
expire through 2005. A valuation allowance
has been provided for these tax credits. The
future utilization of these tax credits, if
any, will be credited to Niagara Cold
Drawn's noncurrent assets.
A reconciliation of the statutory Federal
income tax rate and effective rate as a
percentage of pre-tax income was as follows:
<TABLE>
<CAPTION>
1995 1996
---------------- ---------------
Amount % Amount %
----------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory
rate $199,000 34% $591,000 34%
State income taxes,
net of Federal
income tax benefit 13,000 2 37,000 3
Goodwill amortization -- -- 30,000 3
Other, including
prior year
overaccrual 28,000 5 (42,800) (3)
----------------------------------------------------------
Effective tax rate $240,000 41% $615,200 37%
==========================================================
</TABLE>
14. Retirement Plans Niagara Cold Drawn has a contributory
salary deferral retirement plan (401(k)).
Under the terms of the plan, participants
may elect to defer up to 15% of their
earnings. Niagara Cold Drawn matches one
quarter of the participant's contribution,
up to a maximum of 4% of the participant's
earnings. All contributions are subject to
the limitations of Section 401 of the
Internal Revenue Code of 1986, as amended
and the requirements of the Employee Retiree
Income Security Act of 1974, as amended.
Total expense related to this plan for the
period from August 17, 1995 to December 31,
1995 and for the year ended December 31,
1996 was approximately $25,000 and $8,000,
respectively. The funds are invested in
annuity contracts.
15. Major Customers Niagara Cold Drawn had three customers
during 1995 to which sales were
approximately 25%, 22% and 10% of total
sales, and two customers during 1996 to
which sales were approximately 25% and 18%
of total sales. Accounts receivable
outstanding from these major customers
represented approximately 65% and 52% of
aggregate accounts receivable at December
31, 1995 and 1996, respectively.
16. Commitments and Niagara Cold Drawn is subject to Federal,
Contingencies state and local environmental laws and
regulations concerning, among other matters,
water emissions and waste disposal.
Management believes that Niagara Cold Drawn
currently is in material compliance with all
applicable environmental laws and
regulations.
During 1994, Axia, Inc. ("Axia"), the prior
owner of Niagara Cold Drawn's Buffalo, N.Y.
property, alleged that Niagara Cold Drawn
and certain other parties are responsible
for some or all of the costs that may be
incurred to remediate a site adjoining such
property. Axia requested payment of $200,000
in exchange for Axia's agreeing to assume
full responsibility for the remediation and
to indemnify Niagara Cold Drawn against any
claim arising from this matter. Niagara Cold
Drawn offered to pay $40,000 in exchange for
Axia's agreeing to assume full
responsibility for the remediation, and to
indemnify Niagara Cold Drawn against any
claim arising from this matter. Axia did not
respond to the offer. The financial
statements include an accrued liability of
$40,000 for this contingency.
In accordance with the purchase agreement
for the acquisition of Niagara Cold Drawn,
on August 16, 1995, Niagara Cold Drawn's
former majority stockholder, Adage, Inc.
("Adage"), paid $1,666,327 to certain senior
management of Niagara Cold Drawn in
satisfaction of such individuals' rights
under their existing stock option and
employment agreements. Niagara Cold Drawn
treated this payment as a contribution of
additional paid-in capital and compensation
to management which is reflected as an
employment expense deduction on Niagara Cold
Drawn's financial statements for the period
ended August 16, 1995. Pursuant to the
purchase agreement, Niagara Cold Drawn is
required to pay Adage an amount equal to
Niagara Cold Drawn's Federal income taxes
for the taxable period January 1, 1995
through August 16, 1995, computed as if
Niagara Cold Drawn were not included in a
consolidated Federal income tax return for
such period. In determining such amount,
Niagara Cold Drawn deducted from its income
the payment made to senior management,
thereby reducing the amount payable by
Niagara Cold Drawn to Adage. Adage has
disputed Niagara Cold Drawn's taking of this
$1,666,327 deduction, the tax effect of
which is approximately $567,000. The
settlement of this matter is subject to
binding arbitration by an independent
accounting firm.
On May 8, 1996, pursuant to the provisions
of the Southwest stock purchase agreement,
Niagara Cold Drawn asserted indemnification
claims in the aggregate amount of
approximately $1,300,000 against the former
Southwest stockholders. On May 22, 1996,
Niagara Cold Drawn brought an action against
such stockholders relating to these claims.
The defendants have denied liability in
their answer.
Niagara Cold Drawn and its parent, Niagara,
have entered into employment contracts with
certain officers of Niagara Cold Drawn. The
contracts, which expire in August 2000,
provide minimum salary levels, adjusted
annually for cost-of-living changes, as well
as incentive bonuses and Niagara stock
options. The aggregate contract commitment
for future minimum salaries at December 31,
1996, excluding bonuses and stock options,
was approximately $1,529,000.
Under Niagara Cold Drawn's insurance
programs, coverage is obtained for
catastrophic exposures as well as those
risks required to be insured by law or
contract. It is the policy of Niagara Cold
Drawn to retain a portion of certain
expected losses related primarily to
workers' compensation, physical loss to
property, business interruption resulting
from suchloss and comprehensive general,
product, vehicle, medical and life benefits
and liability. Provisions for losses
expected under these programs are recorded
based upon Niagara Cold Drawn's estimates of
the aggregate liability, actual and
estimated, for claims. Such estimates
utilize certain actuarial assumptions
followed in the insurance industry and are
included in accrued expenses.
17. Transaction Costs On October 5, 1994, Niagara entered into a
merger agreement with New Jersey Steel
Corporation and a related stock purchase
agreement with its majority stockholder. On
February 1, 1995, the merger agreement and
related stock purchase agreement were
terminated. The costs of $1,580,333 relating
to this transaction were expensed in 1994
and included in selling, general and
administrative expenses.
During 1995, Niagara expensed $321,237 of
costs (included in selling, general and
administrative expenses) with respect to
proposed acquisitions that were later
terminated.
18. Disclosure About Fair The following methods and assumptions were
Value of Financial used to estimate the fair value of each class
Instruments of financial instruments for which it is
practicable to estimate that value.
The carrying amounts of cash, trade accounts
receivable and current liabilities
approximate fair value because of the short
maturity of these instruments.
The carrying amount of debt approximates
fair value because the interest rates on
these instruments fluctuate with market
interest rates or are based on current rates
offered to the Company for debt with similar
terms and maturities.
19. Supplemental Cash Flow Interest paid during 1995 and 1996 was
Information approximately $243,000 and $1,357,000,
respectively.
Income tax payments made during 1995 and
1996 totaled approximately $1,000 and
$86,500, respectively.
As discussed in Note 3 above, Niagara
acquired all the capital stock of Niagara
Cold Drawn for $11,918,000 in 1995. In
connection with this acquisition,
liabilities were assumed as follows:
---------------------------------------------
Fair value of Niagara Cold
Drawn assets acquired $30,502,000
Cash paid for stock, plus
expenses 11,918,000
---------------------------------------------
Liabilities assumed $18,584,000
=============================================
As discussed in Note 3 above, Niagara Cold
Drawn purchased all of the capital stock of
Southwest for $3,951,000 in 1996. In
conjunction with this acquisition, net
assets were acquired as follows:
---------------------------------------------
Fair value of Southwest assets
acquired $13,529,000
Liabilities assumed (12,457,000)
---------------------------------------------
Net assets acquired $1,072,000
=============================================
20. Subsequent Event Subsequent to December 31, 1996, Niagara
entered into a letter of intent to purchase
all of the issued and outstanding shares of
LaSalle Steel Company ("LaSalle"), a wholly
owned subsidiary of Quanex Corporation.
LaSalle is a producer of cold finished and
special purpose steel bar products with
plants in Hammond and Griffith, Indiana.
Costs relating to this proposed acquisition,
primarily professional fees, totalled
$87,000 at December 31,1996, and have been
deferred and included in other assets.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors
Niagara Cold Drawn Corp.
Buffalo, New York
We have audited the accompanying statements of operations and cash flows
for the period from January 1, 1995 to August 16, 1995 for Niagara Cold
Drawn Corp. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of Niagara Cold Drawn Corp.
operations and its cash flows for the period from January 1, 1995 to
August 16, 1995 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 8, 1996
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors
Niagara Cold Drawn Corp.
Buffalo, New York
We have audited the accompanying statements of operations and cash flows
of Niagara Cold Drawn Corp. for the year ended December 31, 1994. These
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of Niagara Cold Drawn Corp.
operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Macdade Abbott LLP
MACDADE ABBOTT LLP
Paoli, Pennsylvania
July 10, 1995
Niagara Cold Drawn Corp.
Statement of Operations
<TABLE>
<CAPTION>
Memorandum
Period from only
January 1, ------------
Year ended 1995 to Year ended
December 31, August 16, December 31,
1994 1995(a) 1995(b)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 7) $ 46,623,637 $ 34,285,063 $ 51,739,751
Cost of products sold 40,545,934 28,608,569 44,029,633
- ---------------------------------------------------------------------------------------------
Gross profit 6,077,703 5,676,494 7,710,118
- ---------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 4,064,686 3,521,776 4,494,052
Employment expense - management
options (Note 2) -- 1,666,327(c) 1,666,327(c)
Interest expense 711,418 498,960 771,272
- ---------------------------------------------------------------------------------------------
Total expenses 4,776,104 5,687,063 6,931,651
- ---------------------------------------------------------------------------------------------
Operating income (loss) 1,301,599 (10,569) 778,467
Other income, net -- -- 16,910
- ---------------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,301,599 (10,569) 795,377
Income taxes (Note 5) 480,000 -- 270,000
- ---------------------------------------------------------------------------------------------
Net income (loss) $ 821,599 $ (10,569) $ 525,377
=============================================================================================
</TABLE>
- ------------
(a) Acquisition date by Niagara.
(b) This information is unaudited and is provided for informational
purposes only to provide for comparisons to priorperiods. The 1995
amounts were derived from combining Niagara Cold Drawn's results of
operations prior to theacquisition by Niagara (January 1 to August
16, 1995) with the results after the acquisition by Niagara (August
17 to December 31, 1995).
(c) Payment due in accordance with purchase agreement.
See accompanying notes to financial statements.
Niagara Cold Drawn Corp.
Statements of Cash Flows (Note 9)
Period from
January 1,
Year ended 1995 to
December 31, August 16,
1994 1995(a)
- ---------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 821,599 $ (10,569)
Adjustment to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 740,133 495,185
(Decrease) increase in allowance
for doubtful accounts 72,000 8,494
Deferred income taxes (56,000) --
Increase in inventories (1,886,251) (4,272,038)
Increase in trade accounts
receivable (1,406,589) (26,892)
Increase in trade accounts payable, 2,631,108 3,137,441
accrued expenses and accrued
compensation
Net change in other current assets
and liabilities (12,169) (63,860)
- --------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 903,831 (732,239)
- --------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (708,575) (514,018)
- --------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in revolving line of credit 424,562 --
Proceeds from term notes -- --
Payment of debt (647,882) (631,239)
Capital contribution -- 1,666,327
Proceeds from long-term debt -- 1,211,692
Net payments under revolving line
of credit -- (323,063)
Payments of dividends -- (313,384)
Payments of redeemable preferred stock -- (212,371)
Redemption of redeemable preferred stock -- (126,442)
- --------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (223,320) 1,271,520
- --------------------------------------------------------------------------
Net increase (decrease) in cash (28,064) 25,263
Cash, beginning of period 58,457 30,393
- --------------------------------------------------------------------------
Cash, end of period $ 30,393 $ 55,656
==========================================================================
- -------------
(a) Acquisition date by Niagara.
See accompanying notes to financial statements.
Niagara Cold Drawn Corp.
Notes to Financial Statements
1. Summary of Significant Organization
Accounting Policies
Niagara Cold Drawn Corp. ("Niagara Cold
Drawn") is a Delaware corporation and
operates from its two principal locations in
Buffalo, New York and Chattanooga,
Tennessee. Through August 16, 1995, Niagara
Cold Drawn was a wholly owned subsidiary of
Adage, Inc. On August 16, 1995, Niagara
Corporation, formerly International Metals
Acquisition Corporation ("Niagara"),
acquired all of the issued and outstanding
common and preferred stock of Niagara Cold
Drawn for $10,744,045 in cash.
Business Activity
Niagara Cold Drawn produces cold drawn steel
bars for steel service centers and original
equipment manufacturers throughout North
America. Niagara Cold Drawn competes in a
narrow sector of the steel industry and its
business is affected by conditions within
the broader steel and machine tool
industries. Niagara Cold Drawn grants trade
credit to its customers consistent with
industry practice.
Revenue Recognition
Revenue from the sale of products is
recorded at the time the goods are shipped.
Income Taxes
Deferred income taxes are recognized for the
tax consequences of temporary differences
between the financial reporting bases and
the tax bases of Niagara Cold Drawn's assets
and liabilities in accordance with Statement
of Financial Accounting Standards No. 109.
Valuation allowances are established when
necessary to reduce deferred tax assets to
the amount expected to be realized. Income
tax expense is the tax payable for the
period and the change during the period in
deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of thefinancial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
2. Employment Expense - In accordance with the purchase agreement for
Management Options the acquisition of Niagara Cold Drawn, on
August 16, 1995, Niagara Cold Drawn's former
majority stockholder, Adage, Inc. ("Adage"),
paid $1,666,327 to certain senior management
of Niagara Cold Drawn in satisfaction of
such individuals' rights under their
existing stock option and employment
agreements. Niagara Cold Drawn treated this
payment as a contribution of additional
paid-in capital and compensation to
management which is reflected as employment
expense management options on Niagara Cold
Drawn's financial statements for the period
from January 1 to August 16, 1995. Adage has
disputed the taking of this deduction. The
settlement of this matter is subject to
binding arbitration by an independent
accounting firm (see Note 8).
3. Incentive Compensation Niagara Cold Drawn has an incentive
Plan compensation plan pursuant to which bonuses
are paid to participants as designated by
Niagara Cold Drawn's Board of Directors.
Compensation under the plan is related
solely to Niagara Cold Drawn's earnings
performance. The amount charged to expense
for future distributions under this plan was
approximately $132,000 in 1994 and $200,000
for the period January 1, 1995 to August 16,
1995.
4. Related Party During the period from January 1 to August 16,
Transactions 1995, Niagara Cold Drawn incurred
approximately $50,000 of freight and
shipping charges to a related party. During
the year ended December 31, 1994, these
charges were $174,000.
During the period from January 1 to August
16, 1995, Niagara Cold Drawn incurred
$62,500 in management fees from its prior
parent, Adage, Inc.
During 1994, Niagara Cold Drawn incurred
interest expense of $80,000 to Adage,
related to intercompany balances. During
1994, Niagara Cold Drawn incurred $100,000
of management fees to Adage. At December 31,
1994, $346,000 (included in accrued
expenses) was due to Adage.
5. Income Taxes The provisions for income taxes were
comprised of the following amounts:
1994 1995
----------------------------------------------
Current:
Federal $482,000 $ --
State 54,000 --
----------------------------------------------
536,000 --
----------------------------------------------
Deferred:
Federal (55,000) --
State (1,000) --
----------------------------------------------
(56,000) --
----------------------------------------------
Total tax provisions $480,000 $ --
==============================================
A reconciliation of the statutory Federal
income tax rate and effective rate as a
percentage of pre-tax income is as follows:
1994 1995
----------------------------------------------
Statutory rate 34.00% 34.00%
State income taxes,
net of Federal income
tax benefit 3.64 --
Other (.76) (34.00)
----------------------------------------------
Effective tax rate 36.88% -- %
==============================================
Niagara Cold Drawn had been included in the
consolidated Federal income tax return of
its parent, Adage. The provision for Federal
income taxes is calculated on the separate
company basis.
6. Retirement Plans Niagara Cold Drawn has a contributory salary
deferral retirement plan (401(k)). Under the
terms of the plan, participants may elect to
defer up to 15% of their earnings. Niagara
matches one quarter of the participant's
contribution, up to a maximum of 4% of the
participant's earnings. All contributions
are subject to the limitations of Section
401 of the Internal Revenue Code and the
requirements of the Employee Retiree Income
Security Act of 1974, as amended. Total
expense related to this plan for the period
from January 1 to August 16, 1995 was
approximately $13,000. Total expense related
to this plan for 1994 was $18,114. The funds
are invested in annuity contracts.
7. Major Customers Niagara Cold Drawn had three customers
during the period from January 1 to August
16, 1995, to which sales were approximately
25%, 22% and 10% of Niagara Cold Drawn's
total sales. These same customers
represented approximately 27%, 14% and 10%
of the sales for the year ended December 31,
1994. Accounts receivable outstanding from
the three major customers represented
approximately 65% of Niagara Cold Drawn
accounts receivable at August 16, 1995.
8. Commitments and Niagara Cold Drawn is subject to Federal,
Contingencies state and local environmental laws and
regulations concerning, among other matters,
water emissions and waste disposal.
Management believes that Niagara Cold Drawn
currently is in material compliance with all
applicable environmental laws and
regulations.
During 1994, Axia, Inc. ("Axia"), the prior
owner of Niagara Cold Drawn's Buffalo, N.Y.
property, alleged that Niagara Cold Drawn
and certain other parties are responsible
for some or all of the costs that may be
incurred to remediate a site adjoining such
property. Axia requested payment of $200,000
in exchange for Axia's agreeing to assume
full responsibility for the remediation and
to indemnify Niagara Cold Drawn against any
claim arising from this matter. Niagara Cold
Drawn offered to pay $40,000 in exchange for
Axia's agreeing to assume full
responsibility for the remediation, and to
indemnify Niagara Cold Drawn against any
claim arising from this matter. Axia did not
respond to the offer, but suggested that the
parties continue their settlement
discussions. At August 16, 1995, the
financial statements include an accrued
liability of $40,000 for this contingency.
Pursuant to the August 16, 1995 Niagara Cold
Drawn purchase agreement, Niagara Cold Drawn
is required to pay to Adage an amount equal
to Niagara Cold Drawn's Federal income taxes
for the taxable period January 1, 1995
through August 16, 1995, computed as if
Niagara Cold Drawn were not included in a
consolidated Federal income tax return for
such period. In determining such amount,
Niagara Cold Drawn deducted from its income
the payment made to senior management
thereby reducing the amount payable by
Niagara Cold Drawn to Adage (see Note 2).
Adage has disputed Niagara Cold Drawn's
taking of this $1,666,327 deduction, the tax
effect of which is approximately $567,000.
The settlement of this matter is subject to
binding arbitration by an independent
accounting firm.
Under Niagara Cold Drawn insurance programs,
coverage is obtained for catastrophic
exposures, as well as those risks required
to be insured by law or contract. It is the
policy of Niagara Cold Drawn to retain a
portion of certain expected losses related
primarily to workers' compensation, physical
loss to property, business interruption
resulting from suchloss and comprehensive
general, product, vehicle, medical and life
benefits and liability. Provisions for
losses expected under these programs are
recorded based upon Niagara Cold Drawn's
estimates of the aggregate liability, actual
and estimated, for claims. Such estimates
utilize certain actuarial assumptions
followed in the insurance industry and are
included in accrued expenses.
9. Supplemental Cash Flow Interest paid for the year ended December 31,
Information 1994 was $658,133. Interest paid during the
period from January 1 to August 16, 1995 was
approximately $521,000.
Income taxes paid for the year ended
December 31, 1994 was $256,204. Income taxes
paid during the period from January 1 to
August 16, 1995 was approximately $1,000.
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 the 27th day of October, 1997.
NIAGARA CORPORATION
By /s/ Michael J. Scharf
Michael J. Scharf
Chairman of the Board
Chief Executive Officer and President
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.
/s/ Michael J. Scharf Chairman of the Board, October 27, 1997
- -------------------------- Chief Executive Officer
Michael J. Scharf and President
/s/ Gilbert D. Scharf Vice President, Chief October 27, 1997
- -------------------------- Financial and Principal
Gilbert D. Scharf Accounting Officer,
Treasurer, Secretary
and Director
/s/ Gerald L. Cohn Director October 27, 1997
- -------------------------
Gerald L. Cohn
/s/ Andrew R. Heyer Director October 27, 1997
- -------------------------
Andrew R. Heyer
