<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000. COMMISSION FILE NUMBER 1-12870.
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COLD METAL PRODUCTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 16-1144965
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 GEORGETOWN DRIVE, SUITE 301, SEWICKLEY, PENNSYLVANIA 15143
--------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (724) 933-3445
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Shares American Stock Exchange
Par Value $.01 Per Share
Securities registered pursuant to Section 12(g) of the Act:
NONE
----------------
(Title of Class)
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. [ ]
The aggregate market value of the voting common shares, $.01 par value, held by
non-affiliates of the registrant as computed by reference to the closing price
on the American Stock Exchange on June 9, 2000 was $10,143,750.
The number of shares of Registrant's Common Stock, par value $.01 per share,
outstanding as of June 9, 2000 was 6,367,500.
DOCUMENTS INCORPORATED BY REFERENCE
Select portions of the 2000 Proxy Statement of Cold Metal Products, Inc. are
incorporated by reference into Part III of this Form 10-K to the extent provided
herein.
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COLD METAL PRODUCTS, INC.
FORM 10-K - FISCAL YEAR ENDED MARCH 31, 2000
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
DESCRIPTION PAGE
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<S> <C>
PART I Item 1 Business..................................................................3
2 Properties................................................................8
3 Legal Proceedings.........................................................8
4 Submission of Matters to a Vote of Security Holders.......................8
4A Executive Officers of the Registrant......................................9
PART II Item 5 Market and Dividend Information..........................................10
6 Selected Consolidated Financial Data.....................................11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations............................12
7A Quantitative and Qualitative Disclosures About
Market Risk..............................................................16
8 Financial Statements and Supplementary Data..............................17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures..................................36
PART III Item 10 Directors and Executive Officers of the Registrant.......................36
11 Executive Compensation...................................................36
12 Security Ownership of Certain Beneficial
Owners and Management....................................................36
13 Certain Relationships and Related Transactions...........................36
PART IV Item 14 Exhibits, Financial Statement, Schedules
and Reports on Form 8-K..................................................36
Signatures...............................................................40
</TABLE>
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PART I
ITEM 1. BUSINESS
General
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Cold Metal Products, Inc. together with its wholly owned subsidiaries
(collectively referred to herein as the "Company") is a corporation organized in
1980 under the laws of the State of New York. The Company is a leading
intermediate processor of flat-rolled steel engineered to meet the critical
requirements of precision parts manufacturers. As an intermediate processor of
flat-rolled steel, the Company purchases coils of rolled steel from primary
producers and in some cases from other intermediate steel processors, for
further processing using techniques such as cold-rolling, annealing,
normalizing, edge-conditioning and oscillate-winding, as well as more basic
services of slitting and cutting to length. The Company's products include strip
steel for specialty and conventional applications, and to a lesser extent,
processed sheet steel. "Specialty" strip is highly engineered to meet customer
needs in precision parts manufacturing while "conventional" strip is supplied to
high-volume manufacturers whose purchasing criteria emphasize quality, price and
service rather than unique specifications.
Production and distribution of specialty, conventional strip steel and
processed sheet steel comprises a single segment of the intermediate steel
processing industry, involving inter-related equipment, technology and raw
materials. Accordingly, the Company operates in one industry segment.
Products and Services
---------------------
An intermediate processor of flat-rolled steel, the Company purchases
coils of rolled steel from primary producers and processes the steel using
techniques such as cold-rolling, annealing and normalizing to alter the gauge
thickness and physical properties of the material to permit its use in other
manufacturing activities. The Company also performs other highly specialized
operations to strip steel, including edge-conditioning and oscillate-winding, as
well as the more basic services of slitting and cutting to length. The Company
processes and markets over 50 grades of steel, including grades that are
custom-designed to meet special customer and application requirements. Product
grades include specialty, ultra-low, high and very high carbon steel, alloy,
high strength-low alloy and both 300 and 400 series stainless, as well as low
and medium carbon commodity grades of steel.
The Company believes that it is one of the few flat-rolled steel
processors with a significant position in both the specialty and conventional
strip steel markets, and is an industry leader in at least two key areas of
specialty strip technology: (i) continuous annealing and normalizing of steel to
produce special metallurgical properties and (ii) multi-head oscillate-winding
to produce long lengths of narrow strip steel.
Specialty strip products are highly engineered and customized,
processed from flat-rolled coils of steel meeting exacting specifications in
multiple rolling, annealing and finishing operations. Specialty strip is used in
the manufacture of a variety of products, including bearings, cutting tools and
chain saw blades, tape measures, high-tolerance springs and pen clips. Specialty
strip production takes place principally at the Company's Indianapolis, Indiana,
New Britain, Connecticut, and Youngstown, Ohio, plants. Conventional strip
products are generally used in high-volume manufacturing applications that
typically have stringent quality requirements. Customer purchasing decisions are
usually based on prices offered by processors who can meet those requirements.
Conventional strip product applications are used in the manufacture of such
products as seat belt parts, transmission parts, industrial chains, door hinges,
drawer slides, golf club shafts and other products. Conventional strip
production takes place principally at the
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Company's Ottawa, Ohio and Hamilton, Ontario plants. The Company's newly
acquired subsidiary, Alkar Steel Corporation ("Alkar"), located in Roseville,
Michigan, distributes principally to the automotive industry both specialty and
conventional strip products produced at the Company's facilities or purchased
from others.
At its steel service center in Pointe Claire, Quebec, the Company
produces and distributes processed sheet steel consisting primarily of
hot-rolled, cold-rolled and galvanized steel. The steel service center purchases
sheet steel from primary steel producers and adds value by slitting, cutting to
length and providing warehousing services. This processed sheet steel is
typically used in applications that do not require precision tolerances, such as
for heating ducts and wall studs principally used in the construction industry.
The principal processing techniques and the related equipment of the
Company -- rolling, annealing, slitting, oscillate-winding and finishing -- are
described below:
- Cold-rolling is the process of rolling steel to a specified thickness,
temper and finish. Most strip-rolling is performed on reversing mills
of three major types: 4-High, 6-High and cluster mills (or "Z-mills").
The Company utilizes all three types.
- Annealing is a thermal process, which changes the hardness and certain
metallurgical characteristics of steel. The most common means of
softening strip steel for further processing or customer use is by
annealing (heating and cooling) stacks of wound coils of strip steel in
batch furnaces. All of the Company's strip mills are equipped for batch
annealing. The Company is one of only two domestic strip producers to
operate continuous annealing lines, which soften the strip steel by
uncoiling the strip and passing it through a long
temperature-controlled furnace to produce more uniform and
grain-normalized properties in the strip. The Company believes it is
the only North American producer to perform continuous annealing of
high carbon and alloy steel grades.
- Slitting is the cutting of steel to specified widths and is performed
at all of the Company's facilities. Coils of fully-processed strip or
wide sheet coil are unwound, passed through rotary slitting knives and
rewound in narrow-width coils as required by customer specifications.
- Oscillate-winding is a means of producing exceptionally long lengths of
narrow strip steel by winding consecutive coils, much like thread is
wound on a spool. This operation can be performed after slitting or, at
a lower cost, on a multiple head-slitting and oscillate-winding line.
- Several finishing operations are performed by the Company, including
coating and edge-conditioning. Coating is performed internally on an
electro-galvanizing line at the Youngstown facility and by outside
vendors for other platings or paints as needed to meet a given
customer's needs. Edge-conditioning is the conditioning of edges of
processed steel into square, full-round or partially-round shapes by
rolling and skiving and is done at several of the Company's plants.
Recent Developments
-------------------
On March 31, 2000, the Company acquired all of the outstanding common
stock of Alkar in a business combination accounted for as a purchase
transaction. Alkar's business activities consist of a steel service center
operating in the Detroit, Michigan area. Prior to its acquisition by the Company
it had been a significant customer for the Company's specialty and conventional
strip steel products. Alkar employs approximately 65 people.
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Effective March 30, 1999, the company disposed of its steel service
centers in Hamilton and Concord, Ontario, Canada, which prior to their
disposition employed approximately 100 people and engaged in slitting of steel,
primarily for the automotive and industrial goods markets. After the disposition
of the two service centers in Hamilton and Concord, the Company's only remaining
Canadian steel service center is in Montreal, Quebec, Canada.
In the fourth quarter of the fiscal year ended March 31, 1999,
management of the Company's business operations was restructured through the
establishment of geographic business units, with significant autonomy delegated
to each business unit. Although the Company's operations continue to comprise a
single segment of the intermediate steel processing industry, involving
inter-related equipment, technology and raw materials, the new structure
emphasizes accountability and initiative within each geographic region of the
Company's operations. The restructuring has resulted in the streamlining of
corporate management, including the elimination of some positions. Corporate
management now concentrates on overall business strategy, decisions regarding
executive personnel, major capital projects and financial evaluation of
performance of the business units.
Raw Materials
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The primary raw materials used in the Company's operations are
hot-rolled and cold-rolled steel coils. Currently, the Company obtains steel for
processing from a number of primary steel producers, and to a lesser extent,
from other intermediate steel processors. The Company has developed cooperative
relationships with its principal suppliers, primarily domestic integrated steel
producers, that the Company believes will enable it to assure itself of the
availability of steel. The Company has also developed supply relationships with
several primary steel producers outside of the U.S. and Canada. Over the
Company's last three fiscal years, approximately 13% of its steel requirements
were purchased from foreign suppliers. The Company's ability to acquire steel
from sources outside the U.S. and Canada affords it access to certain grades
required for its specialty strip production and, the Company believes, can
afford substantial protection in the event of limited steel supply in North
America.
The Company's largest component of cost of sales is raw material costs.
These costs can vary over time due to changes in steel pricing which the Company
attempts to pass on as market conditions or contractual pricing agreements
permit. In periods of changing steel prices, however, reductions in the
Company's raw material costs may lag behind pressure on the Company's prices or
increases in raw material costs may precede increases in the Company's prices,
temporarily compressing the Company's profit margins.
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Patents and Trademarks
----------------------
The Company has no patents material to its business. With respect to
trademarks, the Company has developed and produces the UniForm(R) series of
specialty strip products that help customers solve problems in their
manufacturing processes. The Company also has developed a proprietary
LaserMatte(R) finish to enhance drawability in certain difficult forming
operations, which the Company applies utilizing laser texturing technology
acquired by the Company in 1995. These products include:
Product Application
------- -----------
UniForm(R) 100 Magnetic shielding and relay applications
UniForm(R) 200 Extra-deep drawn parts
UniForm(R) 300 Cut-shaped parts
UniForm(R) 500 Severely bent or stretched formed parts
UniForm(R) 700 Pre-hardened flat parts
UniForm(R) 800 High-strength parts requiring high ductility
Lasermatte(R) Laser-generated surface finish for deep drawing,
friction and enhanced bonding applications
Seasonality
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The Company experiences lower levels of net sales in the months of
July, November and December, due primarily to holiday periods and customer plant
shutdowns.
Working Capital Requirements
----------------------------
The Company generally maintains its inventory of raw materials at
levels that it believes are sufficient to satisfy the anticipated needs of its
customers based on historic buying practices and market conditions. The Company
believes that its practices are comparable to other companies in the
intermediate steel processing industry. The Company believes that cash generated
from operations and from borrowing under its committed revolving line of credit
facility provide adequate cash for the Company's working capital requirements.
Customers
---------
The Company sells its products primarily in the automotive,
construction, cutting tools, consumer goods and industrial markets and to
specialty steel distributors. During the fiscal year ended March 31, 2000, 38%
of the Company's net sales were to the automotive market. These sales are
primarily to manufacturers who produce component parts for sale to automotive
manufacturers and after-market parts suppliers. The balance of the Company's net
sales is almost equally divided among the other markets served.
During the fiscal year ended March 31, 2000, the Company sold products
to approximately 1000 customers with the largest single customer, Borg Warner
Automotive, Inc. together with its subsidiaries, accounting for approximately
14% of the Company's net sales. During the fiscal year ended March 31, 2000,
approximately 43% of the Company's net sales were made pursuant to arrangements
with customers that contemplate deliveries over a period of 12 months or more.
For the fiscal year ended March 31, 2000, approximately 70% of the
Company's net sales were to customers in the U.S. and 30% were to customers in
Canada. Less than 1% of the Company's net sales, in each of its last three
fiscal years, were derived from sales to customers outside the U.S. and Canada.
See Note 1 to Consolidated Financial Statements included herein at Item 8.
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Backlog
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At May 30, 2000, the Company's backlog was approximately $44 million
compared with approximately $30 million at May 31, 1999. The increase in backlog
as of May 2000 reflects the recent acquisition of Alkar and strong demand from
the automotive industry. Management estimates that substantially all of the
existing backlog will be shipped during the current fiscal year.
Competition
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The intermediate steel processing industry is highly competitive. The
Company competes on the basis of quality, technical expertise, price and its
ability to meet the delivery demands of its customers. Its principal competitors
in the specialty strip market consist primarily of small, privately held
concerns, many of which focus on certain grades, finishes or coatings. The
Company's competitors in the conventional strip market include Steel
Technologies, Inc., Worthington Industries and Gibraltar Steel Corporation.
Imported processed steel from Japan and Europe also competes with the Company's
strip steel products.
Compliance With Environmental Regulations
-----------------------------------------
The Company's steel processing facilities are subject to many federal,
state, provincial and local requirements relating to the protection of the
environment, and the Company has made, and will continue to make, expenditures
to comply with such provisions. The Company believes that its facilities are
being operated in material compliance with these laws and regulations and does
not believe that future compliance with such existing laws and regulations will
have a material adverse effect on its results of operations or financial
condition. Capital expenditures and expenses attributable to environmental
control compliance were approximately $300,000 in fiscal 2000, and are forecast
to be approximately $350,000 in fiscal 2001 and $400,000 in fiscal 2002.
The Company has retained the services of an environmental consultant
who continuously reviews the Company's operations to insure compliance with
environmental laws and regulations. While the Company's facilities are located
on old industrial sites, and although some contamination has been discovered,
based upon studies and reports conducted by the Company's consultants, the
Company believes it is unlikely that any of the sites will require the Company
to incur material remediation costs.
Employees
---------
As of May 31, 2000, the Company employed a total of 652 people,
consisting of 224 salaried, 341 union hourly, and 87 non-union hourly employees.
The total employee count is up from 568 as of May 31, 1999 principally as a
result of the acquisition of Alkar and employment by the Company of sufficient
personnel to meet the increased demand for the Company's products. The Company
is a party to five collective bargaining agreements at four of its different
manufacturing facilities and its Quebec service center. During the year ended
March 31, 2000 the Company negotiated a contract extension through December 2004
at its Hamilton, Ontario facility, and in May 2000 entered into a five year
contract with the employees of its Point Claire, Quebec service center. The
Company believes its employee relations are good.
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ITEM 2. PROPERTIES
The following table sets forth the location, square footage and use of
each of the Company's principal production facilities as of March 31, 2000.
<TABLE>
<CAPTION>
Square Owned or
Location Footage Type of Facility Leased (1)
-------- ------- ---------------- ----------
<S> <C> <S> <C>
Indianapolis, Indiana 140,000 Specialty and Conventional Strip production Owned
Hamilton, Ontario 314,000 Conventional Strip production Owned
New Britain, Connecticut 290,000 Specialty Strip production Owned
Ottawa, Ohio 145,000 Conventional Strip production Owned
Pointe Claire, Quebec 45,000 Steel service center Owned
Roseville, Michigan 58,000 Steel service center Leased (2)
Youngstown, Ohio 430,000 Specialty Strip production Owned
</TABLE>
(1) Each of the facilities owned by the Company is subject to the liens of
financial institutions providing revolving and term loan credit facilities.
(2) Leased under agreement for $300,000 per year payable to John M. Fayad,
Executive Vice-President of the Company. Lease term expires March 31, 2003,
subject to one three-year renewal option. Mr. Fayad owned the premises
occupied by Alkar at the time of its acquisition by the Company and the
terms of the lease were negotiated as a part of the acquisition
transaction. The Company believes that the rental rate of approximately
$5.18 per square foot basis net of taxes and utilities is consistent with
fair market lease values for similar facilities in the Detroit metropolitan
area.
Changes in product mix result in significant variations in productive
capacity of the Company's facilities in any measurable period. The Company
estimates that its facilities operated at an estimated 80% of productive
capacity in fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2000, no material legal proceedings were pending
against the Company. Certain claims, suits and complaints arising in the
ordinary course of the Company's business have been filed or are pending against
the Company. In the opinion of management, none of such claims, suits or
complaints is material and in the aggregate, they will not have a material
adverse effect on the Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the shareholders in
the fourth quarter of the fiscal year ended March 31, 2000.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, positions held and ages of all the
executive officers of the Company:
Name Age Position with Company
---- --- ---------------------
Heidi A. Nauleau 43 Chairman of the Board of Directors
Raymond P. Torok 53 President and Chief Executive Officer
Joseph C. Horvath 45 Vice-President and Chief Financial Officer
John M. Fayad 52 Executive Vice-President - U.S. Service Centers
David A. Berry 36 Vice President - Management Information Systems
Corinn S. Grossetti 44 Secretary
Executive officers are elected by the Board of Directors and serve at its
discretion.
HEIDI A. NAULEAU is Chairman of the Company and a Director, having been elected
to those positions in 1998 and 1993, respectively. Aarque Capital Corporation, a
corporation controlled indirectly by Mrs. Nauleau and her parents, R. Quintus
Anderson and Sondra R. Anderson, owns approximately 57.7% of the shares of
Common Stock of the Company. Mrs. Nauleau is Chairman of The Aarque Companies, a
group of corporations which are in businesses unrelated to the business of the
Company and which are controlled by Aarque L. P., a limited partnership
established by the Anderson family, including Mrs. Nauleau. She was elected to
that position in February 1996. Mrs. Nauleau joined The Aarque Companies in 1981
as Assistant to the Chairman and was appointed Vice President/Europe in 1984.
From 1987 until 1992, she was manager of a subsidiary of Aarque Steel
Corporation. Mrs. Nauleau is the daughter of R. Quintus Anderson.
RAYMOND P. TOROK is President and Chief Executive Officer of Cold Metal
Products, Inc. since October 1998. He is also a Director of the Company, having
been elected by the Board of Directors in October 1998 to fill the vacancy
created by the resignation of James R. Harpster. Prior to joining the Company,
he served as President and Chief Executive Officer of Philadelphia Gear
Corporation from 1994 to 1998. From 1968 to 1994, Mr. Torok was employed by
Aluminum Company of America ("Alcoa").
JOSEPH C. HORVATH is Vice-President and Chief Financial Officer of Cold Metal
Products, Inc. since July 1999. Prior to joining the Company, he served since
1991 as a Principal of Ernst & Young, LLP.
JOHN M. FAYAD is Executive Vice-President - U. S. Service Centers of Cold Metal
Products, Inc. since April 2000. For the last eight years prior to joining the
Company, he served as President of Alkar Steel Corporation and continues to
serve in that capacity now that Alkar Steel Corporation is a subsidiary of the
Company.
DAVID A. BERRY is Vice President - Management Information Systems of Cold Metal
Products, Inc. since July 1999. He has over fifteen years of experience with the
Company, having served in various financial positions.
CORINN S. GROSSETTI is Secretary of the Corporation since April 1999. She has
held various financial positions with the Company since 1981.
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PART II
ITEM 5. MARKET AND DIVIDEND INFORMATION
As of June 9, 2000, there were 6,367,500 shares of common stock
outstanding that were held by 88 holders of record and approximately 680
individual participants in security position listings. The Company declared its
first regular quarterly dividend of $.05 per share on October 19, 1999. Prior to
that date the Company had not declared any dividends. The Company's ability to
pay dividends in the future is limited by the terms of its credit facilities so
as not to exceed twenty-five percent of after tax income on a cumulative basis
exclusive of certain accounting adjustments, commencing as of March 31, 1994,
and by the requirement that no dividend shall result in a default under the
credit facility. Additional information regarding the principal market for the
Company's common stock and market prices for the Company's common stock is set
forth below.
Market Price Ranges
-------------------
Fiscal Year Ending March 31,
----------------------------
2000 1999
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High Low High Low
FIRST QUARTER $3.00 $1.63 $5.06 $4.50
SECOND QUARTER $4.31 $2.50 $5.56 $3.19
THIRD QUARTER $3.94 $2.81 $3.25 $2.00
FOURTH QUARTER $4.00 $3.00 $3.75 $1.63
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998 1997 1996
------------- -------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 205,407 $ 248,536 $ 289,213 $ 286,024 $ 227,128
Cost of sales 180,205 233,811 264,799 262,133 205,727
------------- -------------- -------------- ------------- --------------
Gross profit 25,202 14,725 24,414 23,891 21,401
Selling, general, and administrative expenses
14,374 16,598 16,019 15,711 13,743
Special charges --- 10,028 --- --- ---
Interest expense 3,460 4,418 4,624 3,115 2,918
------------- -------------- -------------- ------------- --------------
Income (loss) before income taxes 7,368 (16,319) 3,771 5,065 4,740
Income tax expense (benefit) 2,831 (3,714) 1,438 1,700 1,685
------------- -------------- -------------- ------------- --------------
Net income (loss) $ 4,537 $ (12,605) $ 2,333 $ 3,365 $ 3,055
============= ============== ============== ============= ==============
Net earnings (loss) per share:
Basic $ .71 $ (1.80) $ 0.33 $ 0.47 $ 0.43
============= ============== ============== ============= ==============
Diluted $ .70 $ (1.80) $ 0.33 $ 0.47 $ 0.43
============= ============== ============== ============= ==============
Weighted average shares outstanding:
Basic 6,408,586 6,985,612 7,142,026 7,162,250 7,172,271
============= ============== ============== ============= ==============
Diluted 6,445,141 6,985,612 7,142,026 7,162,250 7,172,271
============= ============== ============== ============= ==============
BALANCE SHEET DATA:
Total assets $ 137,414 $ 122,515 $ 150,381 $ 153,034 $ 127,785
Working capital 39,480 25,573 56,773 43,419 51,450
Long-term debt 52,621 37,356 60,859 48,330 39,000
Shareholders' equity 26,317 22,016 35,709 35,194 32,368
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
The following discussion and analysis provides information with respect
to the results of operations of the Company for fiscal 2000, 1999 and 1998 and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.7 94.1 91.6
------------- ------------- --------------
Gross profit 12.3 5.9 8.4
Selling, general, and administrative expenses 7.0 6.7 5.5
Special charges -- 4.0 --
Interest expense 1.7 1.8 1.6
------------- ------------- --------------
Income (loss) before income taxes 3.6 (6.6) 1.3
Income tax expense (benefit) 1.4 (1.5) 0.5
------------- ------------- --------------
Net income (loss) 2.2% (5.1)% 0.8%
============= ============= ==============
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales in fiscal 2000 of $205.4 million were $43.1 million or 17.3%
less than the Company's net sales of $248.5 million in fiscal 1999. Lower
revenue primarily reflected the elimination of $55.6 million of revenue
attributable to the Ontario, Canada service centers sold by the Company in March
1999. After adjusting fiscal 1999 to remove the service center activity for
comparison purposes, net sales for fiscal 2000 increased $12.5 million or 6.5%.
This increase is attributable to 13.3% higher volume of tons shipped
representing a $25.7 million sales increase, offset by $13.2 million sales
decrease partly associated with the change in the product mix to lower revenue
products. The Company also experienced downward pricing pressure for its
products as a result of the availability of imported steel at relatively low
costs.
Gross profit in fiscal 2000 was $25.2 million or 12.3% of net sales,
which was an increase of $10.5 million over fiscal 1999. Gross profit in fiscal
1999 reflected a charge of $2.7 million to write-down inventory in Canada to net
realizable value. The increase in margins in fiscal 2000 beyond the effect of
the inventory charge resulted from the elimination of the unprofitable service
center operations, cost savings from the Company's restructuring initiatives,
increased volume at the Company's Ottawa, Ohio facility and improved operating
performance at the Company's continuing Canadian operations. In both fiscal 1999
and 2000, the Company experienced some compression of gross margins as it was
negatively impacted by price increases for raw materials as steel imports began
to ease, while experiencing resistance to corresponding selling price increases
for its products in the marketplace.
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Selling, general and administrative costs of $14.4 million for fiscal
2000 represented 7.0% of net sales; selling and administrative costs for fiscal
1999 were $16.6 million or 6.7% of net sales. Lower selling, general and
administrative expense in fiscal 2000 resulted from the elimination of such
costs associated with the Ontario service centers that were sold in March, 1999.
In addition there was an increase associated with higher compensation accruals
in fiscal 2000 related to the improved profitability of the Company's
operations, that approximated a charge related to the former chief executive
officer's retirement agreement recognized in fiscal 1999.
Interest expense in fiscal 2000 was $3.5 million or 1.7% of net sales
as compared to $4.4 million or 1.8% of net sales in fiscal 1999. Lower interest
expense primarily reflected using $14.6 million proceeds of the service center
sale to decrease debt, somewhat offset by higher effective interest rates.
Income before taxes in fiscal 2000 was $7.4 million or 3.6% of net
sales. In fiscal 1999 loss before taxes was $16.3 million or 6.6% of net sales.
Income tax expense for fiscal 2000 was $2.8 million or 1.4% of net
sales compared to a tax benefit of $3.7 million or 1.5% of net sales for fiscal
1999. The effective tax rate for fiscal 2000 was 38.4% compared to 22.7% for
fiscal 1999, which reflected the effect of a difference for the non-deductible
goodwill impairment charge and foreign currency translation adjustments
associated with the service centers sold in fiscal 1999.
Net income for fiscal 2000 was $4.5 million, or $.71 per share as
compared to net loss of $12.6 million, or $1.80 per share for fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales decreased $40.7 million, or 14.0%, to $248.5 million. This
decrease was primarily due to a volume decrease of 11.9% from fiscal 1998,
leading to a $34.4 million decrease in net sales. The decline in volume reflects
the impact of several external factors including the General Motors work
stoppage, the effect of the Asian financial crisis on customers, and low-priced
imports. The announcement of the decision to reassess the strategic fit of the
Company's Ontario service centers further impacted sales volumes in the fourth
quarter. An aggregate decrease in sales revenue per ton also reduced sales by
$6.3 million, reflecting an increased mix of lower revenue products, a weaker
Canadian dollar, and downward pressure on steel pricing in the marketplace due
to steel imported into North America at relatively low costs that resulted in
lower pricing for the Company's products.
Gross profit for fiscal 1999 was $14.7 million, down $9.7 million, or
39.7%, from fiscal 1998. Gross profit as a percent of sales was 5.9%, down from
8.4% in the prior year. The low volume levels had a severe adverse impact on
gross profit in fiscal 1999. Also affecting gross profit was a third quarter
charge of $2.7 million to write down inventories in Canada to estimated net
realizable value. Also, beginning in the fourth quarter of fiscal 1999 the
Company experienced some compression of gross margins as it was negatively
impacted by price increases
13
<PAGE> 14
for its raw materials as steel imports began to ease, while experiencing
resistance to corresponding selling price increases for its products in the
marketplace.
Selling, general and administrative expenses of $16.6 million were up
$579,000 over fiscal 1998, reflecting costs incurred in connection with the
retirement of the Company's former chief executive officer. As a percent of
sales, selling, general and administrative expenses were 6.7% in fiscal 1999
versus 5.5% in fiscal 1998, the increase being primarily attributable to the
decrease in sales and the non-recurring retirement cost discussed above. In
fiscal 1999 the Company recorded special charges of $10.0 million related to the
impairment of certain assets at the Direct Steel service center, the subsequent
sale of two Ontario service centers, including the Direct Steel facility, and
costs associated with a reduction of the Company's workforce. These charges were
incurred in conjunction with the implementation of a restructuring plan
authorized by the Company's board in January 1999. The restructuring plan
included streamlining central management staff, decentralizing company
operations through the creation of separate business units to enhance
flexibility, responsiveness, and efficiency, and disposing of the two
unprofitable service centers in Ontario. The implementation of the restructuring
plan resulted in a 25% reduction in overall workforce.
Interest expense for the year was $4.4 million, down slightly from $4.6
million in the prior fiscal year. Average effective interest rates were slightly
lower in fiscal 1999, reflecting market effects, somewhat offset by higher
average borrowings.
Income tax benefit for fiscal 1999 totaled $3.7 million, with an
effective tax rate of 22.7%. In fiscal 1998, income tax expense totaled $1.4
million, with an effective tax rate of 38.1%. The low effective tax rate in
fiscal 1999 reflected the effects of a foreign currency translation adjustment
charge and a goodwill impairment charge.
The factors discussed above resulted in a net loss of $12.6 million or
5.1% of sales for fiscal 1999, compared to net earnings of $2.3 million or 0.8%
of sales in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to fund working capital needs,
capital expenditures, including the acquisition, expansion and improvement of
facilities, machinery and equipment, and to acquire complementary steel-related
businesses. The Company met its capital requirements in fiscal 2000 through cash
flow from operations, the proceeds from the sale of service centers located in
Ontario, Canada (sold on March 31, 1999), and from borrowings under credit
facilities.
In fiscal 2000, cash utilized to meet working capital needs for trade
receivables and inventory substantially offset net cash provided by operations
and trade payables.
Net cash used in investing activities for fiscal 2000 totaled $1.6
million. Normal capital spending requirements and the acquisition of Alkar Steel
Corporation ("Alkar") used a total of $16.9 million, offset by $15.3 million
cash provided primarily from the sale of the Ontario service centers.
14
<PAGE> 15
Cash flows from financing activities provided $2.2 million in fiscal
2000. The Company's primary lending arrangement and the proceeds from an
equipment sale and leaseback provided $5.1 million that was used to repay $1.5
million of term debt, pay $.6 million of dividends, and acquire $.8 million of
treasury stock. Two quarterly dividends of $.05 per share, representing the
first such distributions to shareholders, were declared and paid during fiscal
2000.
The Company's primary lending arrangement is a revolving credit and
term loan agreement, which provides up to a maximum of $70 million of borrowing
availability, of which $39.8 million was used as of March 31, 2000. This credit,
which bears interest at LIBOR plus 1.5%, is secured by substantially all of the
assets of the Company, except certain Ottawa, Ohio assets, which secure a
separate term loan.
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates as they relate to its variable rate debt. The
Company does not enter into derivative financial investments for trading or
speculation purposes. As a result, the Company believes that its market risk
exposure is not material to the Company's financial position, liquidity or
results of operations. The Company would be sensitive to a 10% market rate
change in interest under the agreement in the approximate after-tax amount of
$.2 million.
The Company previously entered into a long-term borrowing arrangement
to finance the expansion and improvement of its Ottawa, Ohio cold rolling mill
facility. At March 31, 2000, approximately $17.4 million was outstanding under
the terms of this agreement. As a result of the goodwill associated with the
acquisition of Alkar, the Company violated the tangible net worth covenant of
this loan agreement. The lender has waived non-compliance with this covenant
through April 1, 2001, at which time the Company expects to be in compliance
with the terms of the agreement.
Management expects that cash generated from operating activities and
its borrowing capacity will be sufficient to meet planned capital expenditures
and other cash requirements for the next twelve months.
SEASONALITY
The Company has in the past experienced lower levels of sales in the
months of July, November, and December, due primarily to holiday periods and
customers' temporary plant shutdowns.
INFLATION/IMPACT OF CHANGING PRICES
The Company's largest component of cost of sales is raw material costs.
These costs can vary over time due to changes in steel pricing which the Company
attempts to pass on to customers as market conditions or contractual pricing
agreements permit. The Company does not believe that inflation has had a
significant impact on the results of its operations over the periods presented.
15
<PAGE> 16
ENVIRONMENTAL MATTERS
The Company's facilities are subject to numerous federal, state,
provincial and local regulations related to environmental protection and
compliance with such regulations is a factor in the Company's operations. The
Company has made, and intends to make, expenditures necessary to comply with
such regulations. Under existing laws and regulations, the Company believes that
compliance will not have a material adverse effect on its results of operations
or financial condition.
IMPACT OF YEAR 2000
As of March 31, 2000, the Company has not experienced any significant
Year 2000 related problems, nor to our knowledge, have any of our suppliers. We
will continue to monitor all Year 2000 related issues.
FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "expect," "believe," anticipate," "plan" and similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, general business and economic conditions,
competitive factors such as availability and pricing of steel, changes in
customer demand, work stoppages by customers, potential equipment malfunctions,
Year 2000 problems, or other risks and uncertainties discussed herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is disclosed under the heading
"Liquidity and Capital Resources" in Item 7.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is submitted pursuant to the requirement of Item 8.
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Independent Auditors' Report............................................................................18
Consolidated Balance Sheets as of March 31, 2000 and 1999...............................................19
Consolidated Statements of Operations for the Years Ended
March 31, 2000, 1999 and 1998........................................................................20
Consolidated Statements of Shareholders' Equity
for the Years Ended March 31, 2000, 1999 and 1998....................................................21
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998........................................................................22
Notes to Consolidated Financial Statements..............................................................23
Schedule II - Valuation and Qualifying Accounts and Reserves............................................35
</TABLE>
17
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Cold Metal Products, Inc.
Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Cold
Metal Products, Inc. and subsidiaries (the "Company") as of March 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. Our audits also included the financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Cold Metal Products, Inc.
and subsidiaries as of March 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 12, 2000
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 1999
---------------------------- -------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS:
<S> <C> <C>
Cash $ 1,559 $ 399
Receivables 33,952 36,149
Inventories 42,684 31,481
Prepaid and other current assets 3,897 4,055
---------------------------- -------------------------
Total current assets 82,092 72,084
Property, plant, and equipment - at cost 78,258 74,728
Less accumulated depreciation (37,629) (34,444)
---------------------------- -------------------------
Property, plant and equipment - net 40,629 40,284
Other non-current assets 14,693 10,147
---------------------------- -------------------------
Total assets $ 137,414 $ 122,515
============================ =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings $ 6,556 $ 17,976
Accounts payable 25,597 17,221
Other current liabilities 10,459 11,898
---------------------------- -------------------------
Total current liabilities 42,612 47,095
Long-term debt 52,621 37,356
Postretirement and other benefits 15,864 16,048
Shareholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized, 7,532,250 shares issued 75 75
Additional paid-in capital 25,371 25,360
Retained earnings 9,539 5,640
Accumulated other comprehensive income (loss) (3,024) (3,732)
Less treasury stock, 1,164,750 and 999,750 shares
at cost (5,644) (5,327)
---------------------------- -------------------------
Total shareholders' equity 26,317 22,016
---------------------------- -------------------------
Total liabilities and shareholders' equity $ 137,414 $ 122,515
============================ =========================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales $ 205,407 $ 248,536 $ 289,213
Cost of sales 180,205 233,811 264,799
------------------- ------------------- -------------------
Gross profit 25,202 14,725 24,414
Selling, general, and administrative expenses 14,374 16,598 16,019
Special charges --- 10,028 ---
Interest expense 3,460 4,418 4,624
------------------- ------------------- -------------------
Income (loss) before income taxes 7,368 (16,319) 3,771
Income tax expense (benefit) 2,831 (3,714) 1,438
------------------- ------------------- -------------------
Net income (loss) $ 4,537 $ (12,605) $ 2,333
=================== =================== ===================
Net earnings (loss) per share:
Basic $ 0.71 $ (1.80) $ 0.33
=================== =================== ===================
Diluted $ 0.70 $ (1.80) $ 0.33
=================== =================== ===================
Weighted average shares outstanding:
Basic 6,408,586 6,985,612 7,142,026
=================== =================== ===================
Diluted 6,445,141 6,985,612 7,142,026
=================== =================== ===================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
SHARES CAPITAL STOCK EARNINGS INCOME/(LOSS) TOTAL
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 $ 75 $ 25,330 $ (3,474) $ 15,912 $ (2,649) $35,194
Net income --- --- --- 2,333 --- 2,333
Foreign currency translation adjustment --- --- --- --- (1,385) (1,385)
------------
Comprehensive income 948
Stock compensation --- 20 --- --- --- 20
Acquisition of treasury stock --- --- (453) --- --- (453)
------------------------------------------------------------------------------
Balance, March 31, 1998 75 25,350 (3,927) 18,245 (4,034) 35,709
Net loss --- --- --- (12,605) --- (12,605)
Foreign currency translation adjustment --- --- --- --- 302 302
------------
Comprehensive loss (12,303)
Stock compensation --- 10 --- --- --- 10
Acquisition of treasury stock --- --- (1,400) --- --- (1,400)
------------------------------------------------------------------------------
Balance, March 31, 1999 75 25,360 (5,327) 5,640 (3,732) 22,016
Net income --- --- --- 4,537 --- 4,537
Foreign currency translation adjustment --- --- --- --- 708 708
------------
Comprehensive income 5,245
Cash dividends --- --- --- (638) --- (638)
Stock compensation --- 11 --- --- --- 11
Acquisition of treasury stock --- --- (317) --- --- (317)
------------------------------------------------------------------------------
Balance, March 31, 2000 $ 75 $ 25,371 $ (5,644) $ 9,539 $ (3,024) $26,317
==============================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,537 $ (12,605) $ 2,333
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 3,429 4,459 4,408
Impairment of long-lived assets --- 3,064 ---
(Gain) loss on sales of assets (136) 4,383 ---
Deferred income taxes 1,582 (2,437) 301
Stock compensation 11 10 20
Changes in operating assets and liabilities excluding assets acquired and
sold:
Receivables (7,861) 3,845 4,705
Inventories (3,748) 13,504 (4,417)
Prepaid and other assets (598) 33 (754)
Accounts payable 4,430 (1,927) (2,558)
Accrued expenses and other liabilities (1,034) 1,904 (2,310)
------------- ------------- ------------
Net cash provided by operating activities 612 14,233 1,728
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (3,007) (5,290) (3,391)
Acquisition of Alkar net of cash acquired (13,939) --- ---
Proceeds from sale of assets (principally Ontario service centers) 15,330 --- ---
------------- ------------- ------------
Net cash used in investing activities (1,616) (5,290) (3,391)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of term loans (1,503) (1,378) (1,263)
Payments of other debt (159,618) (158,721) (214,462)
Proceeds from other debt 162,678 151,430 218,124
Proceeds from sale leaseback 2,075 --- ---
Payments of sale leaseback (32) --- ---
Payment of dividends (638) --- ---
Acquisition of treasury stock (755) (962) (453)
------------- ------------- ------------
Net cash provided by (used in) financing activities 2,207 (9,631) 1,946
Net increase (decrease) in cash 1,203 (688) 283
Effect of exchange rate change on cash (43) (53) (41)
Cash at beginning of period 399 1,140 898
------------- ------------- ------------
Cash at end of period $ 1,559 $ 399 $ 1,140
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 3,444 $ 4,349 $ 4,617
============= ============= ============
Income taxes paid $ 156 $ 313 $ 455
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLD METAL PRODUCTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION, BUSINESS DESCRIPTION AND ACCOUNTING POLICIES
Consolidation and Presentation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries, Cold Metal Products,
Limited, a Canadian Company and effective March 31, 2000, Alkar Steel
Corporation ("Alkar"), a Michigan corporation. All significant intercompany
transactions and accounts have been eliminated.
Business Description -- The Company operates in one business segment,
the intermediate steel processing business, and processes strip and sheet steel
to meet the critical requirements of precision parts manufacturers. Through cold
rolling, annealing, normalizing, slitting, edge-conditioning, oscillate-winding,
and cutting-to-length, the Company provides value-added products to
manufacturers in the automotive, construction, cutting tools, consumer goods,
and industrial goods markets. The Company also supplies specialty steel
distributors. The Company derived revenues from customers in the United States
of approximately $144.8 million, $139.2 million, and $147.5 million in fiscal
2000, 1999 and 1998, respectively. The remainder of the Company's revenues is
related to customers in Canada.
During fiscal 2000, 1999 and 1998, approximately 38%, 38% and 44% of
the Company's sales, respectively, and 45% of accounts receivable at both March
31, 2000 and 1999 were with companies in the automotive industry. The balance of
the Company's net sales was approximately equally divided among the other
markets served. One customer accounted for 14% and 11% of sales in fiscal 2000
and 1999, and 12.0% and 7.5% of accounts receivable at March 31, 2000 and March
31, 1999, respectively. No single customer accounted for 10% or more of sales in
fiscal 1998. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral.
Production facilities are located in Youngstown and Ottawa, Ohio;
Indianapolis, Indiana; New Britain, Connecticut; Detroit, Michigan; Hamilton,
Ontario, Canada; and Pointe Claire, Quebec, Canada. The Company has long-lived
assets located in the United States of $59.2 million and $53.2 million at March
31, 2000 and March 31, 1999, respectively. The remainder of the Company's
long-lived assets is related to operations in Canada.
Financial Instruments -- The Company has various financial instruments
including cash, receivables, short-term and long-term debt, and miscellaneous
other assets. The Company has determined that the estimated fair value of its
financial instruments approximates carrying value.
Inventories -- Inventories are valued at the lower of cost or market.
Cost of domestic inventories is determined under the last-in, first-out (LIFO)
method; cost of inventories of the Canadian subsidiary is determined on the
first-in, first-out (FIFO) method. Domestic inventories represent approximately
75% and 70% of total consolidated inventories at March 31, 2000 and 1999,
respectively. Under the FIFO method of inventory pricing, domestic inventories
would have been approximately $2.3 million and $1.2 million higher at March 31,
2000 and 1999, respectively.
23
<PAGE> 24
Property, Plant, and Equipment -- Property, plant, and equipment are
stated at cost. The Company provides for depreciation over the estimated useful
lives of the assets on the straight-line method for financial statement
reporting and an accelerated method for income tax reporting purposes. Estimated
useful lives range from five to thirty years. Interest is capitalized in
connection with the construction of qualified assets.
Goodwill -- Goodwill is amortized using the straight-line method over a
period of 20 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted cash flows. In
fiscal 1999, goodwill of $2.2 million was written off due to continued operating
losses experienced at one of the Company's Canadian service center locations
that was sold effective March 31, 1999.
Revenue Recognition -- Revenue is recognized when products are shipped
to customers. Sales returns and allowances are treated as a reduction to sales
and are provided for based on historical experience and current estimates.
Stock Based Compensation -- The Company accounts for its stock option
plans using the intrinsic value accounting method, measured as the difference
between the option exercise price and the market value of the stock at the
measurement date. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans in the accompanying financial statements. Pro
forma information regarding net income and earnings per share is calculated and
disclosed in accordance with Statement of Financial Accounting Standard No. 123.
Earnings (Loss) Per Share -- Earnings (loss) per share is computed
based upon the weighted average number of common shares outstanding during the
periods presented after consideration of the dilutive effect of outstanding
stock options.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss) $4,537 $ (12,605) $ 2,333
================== ================== ==================
Weighted average shares outstanding 6,409 6,986 7,142
Net effect of dilutive stock options 36 --- ---
------------------ ------------------ ------------------
Weighted average shares outstanding - assuming dilution 6,445 6,986 7,142
================== ================== ==================
</TABLE>
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial statements
for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from these estimates.
New Accounting Standards -- The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. While the Company is currently evaluating
the statement, it does not believe the standard will have any impact on its
financial position or the results of operations.
24
<PAGE> 25
Reclassifications -- Certain reclassifications have been made to prior
period balances to conform to the fiscal 2000 presentation.
2. ACQUISITION
Effective March 31, 2000, the Company acquired all of the outstanding
stock of Alkar Steel Corporation, a privately-held metal service center located
in Detroit, Michigan for a purchase price of approximately $14.0 million
including debt of $5.5 million which was paid at closing. The purchase price was
funded under the Company's existing credit facilities. The acquisition was
accounted for as a purchase and, accordingly, assets and liabilities were
recorded at estimated fair values. Amounts recorded for this transaction were as
follows:
(IN THOUSANDS)
Current assets $ 12.5
Machinery and equipment 0.6
---------------
Total assets acquired 13.1
Liabilities assumed 5.1
---------------
Net assets acquired 8.0
Goodwill 6.0
---------------
Total purchase price, including acquisition costs $ 14.0
===============
The allocation of the purchase price is preliminary. The final purchase
price adjustment to reflect the fair values of the assets acquired and
liabilities assumed is pending management's evaluation of such assets and
liabilities. The fiscal 2000 operating results do not include any amounts
attributable to the Alkar acquisition. Unaudited pro forma consolidated results
of operations assuming the acquisition had occurred on April 1, 1999 and giving
effect to certain adjustments based on the preliminary allocation of the
purchase price reflect net sales of $ 233.0 million, net income of $4.7 million,
and basic net earnings per share of $.73. The unaudited pro forma information
does not necessarily reflect the actual results that would have occurred nor is
it necessarily indicative of future results of operations of the combined
operations.
3. SPECIAL CHARGES
In December 1998, as a result of continued operating losses experienced
at the Concord, Ontario service center, the Company recognized a special pretax
charge of $3.1 million for impairment of goodwill, machinery and equipment to
adjust the assets to their estimated realizable market value.
In March 1999, the Company completed the sale of both its Concord and
Hamilton, Ontario steel service center operations for $14.6 million in cash
received in April 1999, and a $1.0 million subordinated note, which was
collected in fiscal 2000. The sale resulted in a pre-tax loss of $4.4 million,
which included a $3.4 million charge related to the accumulated foreign currency
translation adjustment on the disposed assets and liabilities of these service
centers.
In the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan to align its operations with current market conditions,
improve the productivity of its operations, and create a more efficient
organizational structure. In conjunction with the plan, the Company recorded a
pretax charge of $2.5 million in the fourth quarter of fiscal 1999 comprised of
severance and other employment related costs resulting from a reduction of
approximately 70 employees. Payments of approximately $2.5 million have been
made in final settlement.
25
<PAGE> 26
4. OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
2000 1999
----------------------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
Receivables:
Customer receivables, less reserves and allowances of
$1,465 and $1,193, respectively $ 33,952 $ 21,507
Proceeds receivable from sale of assets --- 14,642
----------------------- -----------------------
$ 33,952 $ 36,149
======================= =======================
Inventories:
Raw materials $ 21,257 $ 12,554
Work in process 14,527 11,263
Finished goods 6,900 7,664
----------------------- -----------------------
$ 42,684 $ 31,481
======================= =======================
Prepaid and other current assets:
Prepaid expenses $ 769 $ 725
Taxes receivable 1,727 1,910
Deferred income taxes 1,401 1,420
----------------------- -----------------------
$ 3,897 $ 4,055
======================= =======================
Property, plant, and equipment:
Land $ 1,604 $ 1,581
Buildings 14,209 14,093
Machinery and equipment 59,223 56,352
Construction in process 3,222 2,702
----------------------- -----------------------
$ 78,258 $ 74,728
======================= =======================
Other non-current assets:
Deferred income taxes $ 4,340 $ 5,927
Goodwill 5,985 ---
Pension 3,585 3,302
Other 783 918
----------------------- -----------------------
$ 14,693 $ 10,147
======================= =======================
Other current liabilities:
Payroll and related employee benefits $ 6,975 $ 7,451
Income taxes 1,556 327
Receivable collections payable to asset purchaser --- 1,816
Other 1,928 2,304
----------------------- -----------------------
$ 10,459 $ 11,898
======================= =======================
</TABLE>
26
<PAGE> 27
5. DEBT
<TABLE>
<CAPTION>
SHORT-TERM LONG-TERM
---------- ---------
MARCH 31, MARCH 31,
--------- ---------
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Committed facility $ 4,778 $ 16,473 $ 35,000 $ 20,000
Term note 1,640 1,503 15,716 17,356
Lease financing 138 --- 1,905 ---
------------------ ------------------ ------------------ ------------------
Total $ 6,556 $ 17,976 $ 52,621 $ 37,356
================== ================== ================== ==================
</TABLE>
The Company has a committed revolving and term loan credit facility
that provides availability up to a maximum of $70.0 million, based on a
percentage of accounts receivable and inventory. At March 31, 2000, unused
availability was $17.1 million, prior to the effects of including Alkar
availability of approximately $8.0 million. During fiscal 1999, the facility was
amended to provide for borrowing at LIBOR plus 150 basis points, with
performance-based interest rate reductions, to amend certain financial ratio
covenants and to extend the term through October 2002. Under the committed
facility, the Company has determined that $4.8 million would be subject to
repayment with funds generated from operating activities during the coming
fiscal year. As such, these funds are reflected as short-term in nature. The
weighted average interest rate at March 31, 2000 and 1999 was 7.5% and 6.4%,
respectively. The facility is collateralized by accounts receivable, inventory,
common stock of the Canadian subsidiary, and property, plant and equipment. As
of March 31, 2000, the credit line supported letters of credit in the amount of
$315,000.
In December 1996, the Company borrowed $21.8 million under an eight and
one-half year term loan at a fixed rate of 8.8% secured by the fixed assets of
its expanded Ottawa, Ohio facility. The term loan agreement contains certain
financial and other covenants. At March 31, 2000, the Company was in violation
with respect to a tangible net worth covenant. The lender has waived
noncompliance of the covenant through the period ending April 1, 2001, by which
date the Company expects to be in compliance. At March 31, 2000, approximately
$17.4 million of the term loan was outstanding. The scheduled maturities of the
term loan are as follows: 2001 - $1.6 million; 2002 - $1.8 million; 2003 - $2.0
million; 2004 - $2.1 million; 2005 - $2.3 million and $7.6 million thereafter.
In December 1999, the Company completed a sale/leaseback transaction
for a new slitter project at the Company's Indianapolis plant. The $2.1 million
transaction has been accounted for as a financing lease. As of March 31, 2000,
approximately $2.0 million was outstanding. The lease has a seven-year term and
scheduled maturities are as follows: $.1 million in fiscal 2001 and 2002, $.2
million in fiscal 2003 and 2004, $.3 million in fiscal 2005 and 2006, and $.8
million in fiscal 2007.
27
<PAGE> 28
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (ii)
operating loss and tax credit carryforwards. Components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 1999
------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Postretirement and postemployment benefit obligations $ 5,636 $ 5,795
Inventory basis differences 201 62
Reserves not currently deductible 618 961
Tax operating loss carryforwards (expire 2012-2020) 4,933 5,432
Tax credit carryforwards (expire 2002-2005 and unlimited)) 580 538
------------------- --------------------
11,968 12,788
Valuation allowance (383) (383)
------------------- --------------------
11,585 12,405
Deferred tax liabilities:
Property and equipment basis differences (5,057) (4,290)
Pension asset (787) (768)
------------------- --------------------
Net deferred tax asset $ 5,741 $ 7,347
=================== ====================
</TABLE>
The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
-------------------- ------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT TAXES:
U.S. federal $ --- $ --- $ 87
Canadian federal and provincial 1,246 (1,286) 1,019
State and local 3 9 31
-------------------- ------------------- --------------------
1,249 (1,277) 1,137
DEFERRED TAXES:
U.S. 533 (1,693) 95
Canadian 1,049 (744) 206
-------------------- ------------------- --------------------
1,582 (2,437) 301
-------------------- ------------------- --------------------
Total $ 2,831 $ (3,714) $ 1,438
==================== =================== ====================
</TABLE>
28
<PAGE> 29
Reconciliations of the U.S. federal statutory tax rate to the effective tax rate
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
2000 1999 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
U. S. federal statutory tax rate 35.0% 35.0% 35.0%
Effect of graduated rates (1.0) (1.0) (1.0)
Effect of Canadian rates 1.9 1.6 2.6
State taxes 0.7 1.0 0.8
Permanent differences (travel and entertainment) 0.6 (0.6) 1.3
Foreign currency translation adjustment and goodwill charge -- (12.5) --
Change in valuation allowance -- 0.4 --
Other 1.2 (1.2) (0.6)
---------------- ---------------- ---------------
Effective tax rate 38.4% 22.7% 38.1%
================ ================ ===============
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has various pension plans covering substantially all of its
employees. The Company's hourly employees and domestic salaried employees are
covered by noncontributory retirement benefit plans. These plans generally
provide benefits based upon a formula using fiscal average earnings or at a
stated amount for each year of service. The plans' assets are principally
invested by outside asset managers in marketable debt and equity securities. The
Company's funding policy is to make actuarially determined annual contributions
to provide the plans with sufficient assets to meet future benefit payments
consistent with the funding requirements of applicable regulations. The Canadian
subsidiary has a defined contribution pension plan covering its salaried
employees. The Company's contributions to the defined contribution pension plan
include a noncontributory portion, which is a stated percentage of salary, and a
contributory portion, where the Company matches the employee's contribution 100%
up to 5% of their salary. The Company also contributes to a domestic
multi-employer plan under a collective bargaining agreement. The Company's
contribution under this plan is expensed monthly as paid.
Certain health care and life insurance benefits are provided for
eligible retirees through an unfunded defined benefit plan. The extent of
benefits provided is dependent upon the retiree's years of service, age and
retirement date.
Certain curtailment and special termination benefits were recognized in
fiscal 1999 under these employee benefit plans in connection with a reduction in
workforce. In fiscal 1998, special termination benefits were also recognized in
connection with early retirement options.
29
<PAGE> 30
The following tables summarize the change in benefit obligations, plan
assets, funded status, and net periodic benefit costs of the Company's pension
and postretirement benefits plans:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------- -----------------------------
MARCH 31,
--------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C> <C> <C>
Benefits obligation at beginning of year $ 33,097 $ 30,918 $ 13,489 $ 11,908
Service cost 990 1,164 192 186
Interest cost 2,239 2,126 882 845
Amendments 659 272 40 ---
Actuarial (gain) loss (1,324) 542 (187) 1,162
Benefits paid (1,798) (1,442) (960) (941)
Foreign currency exchange rates 123 (319) 18 (22)
Curtailments --- (701) --- 247
Special termination benefits --- 537 --- 104
---------------- ---------------- ---------------- ----------------
Benefit obligation at end of year 33,986 33,097 13,474 13,489
---------------- ---------------- ---------------- ----------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 34,072 32,061 --- ---
Actual return on plan assets 5,739 2,124 --- ---
Employer contribution 1,017 1,684 960 941
Benefits paid (1,798) (1,442) (960) (941)
Foreign currency exchange rates 153 (355) --- ---
---------------- ---------------- ---------------- ----------------
Fair value of plan assets at end of year 39,183 34,072 --- ---
RECONCILIATION OF FUNDED STATUS AT END OF YEAR
Plan assets in excess of (less than) benefit 5,197 975 (13,474) (13,489)
Unrecognized net actuarial (gain) loss (4,665) (337) (172) 28
Unrecognized prior service cost 2,766 2,306 (1,434) (2,035)
Unrecognized initial net obligation 287 358 --- ---
---------------- ---------------- ---------------- ----------------
Prepaid (accrued) benefit cost $ 3,585 $ 3,302 $ (15,080) $ (15,496)
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS AND OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS:
PENSION BENEFITS
Discount rate 7.50% 6.75% 7.00%
Expected return on plan assets 7.00 - 8.50% 7.00 - 8.50% 7.00 - 8.50%
Rate of compensation increase - domestic plans only 5.00% 5.00% 5.00%
POSTRETIREMENT BENEFITS
Discount rate 7.50% 6.75% 7.00%
</TABLE>
30
<PAGE> 31
For measurement purposes, a 9.0% annual rate of increase in the per
capita costs of covered domestic health care benefits for pre-age 65 payments
(7.0% for post-age 65 payments) was assumed for fiscal 2000. The rate was
assumed to decrease gradually to 5.5% in 2007 for pre-age 65 payments and in
2003 for post-age 65 payments and remain at that level thereafter. In Canada, an
8.6% annual rate of increase in the per capita cost of covered health care
benefits for pre-65 payments was assumed for fiscal 2000. The rate was assumed
to decrease gradually to 4.5% by 2005 and remain at that level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------- -----------------------------
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998 2000 1999 1998
------------ ------------ ------------ ------------ ----------- ------------
(IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 990 $ 1,164 $ 964 $ 192 $ 186 $ 142
Interest cost 2,239 2,126 1,926 882 845 825
Expected return on plan assets (2,759) (2,604) (2,015) --- --- ---
Amortization of prior service cost 231 201 191 (561) (564) (564)
Amortization of initial net obligation 74 74 75 --- --- ---
Recognized net actuarial (gain) loss 46 25 (14) 16 --- (156)
Curtailment (gain) loss --- (379) --- --- 286 ---
Cost of special termination benefits --- 537 148 --- 104 ---
------------ ------------ ------------ ------------ ----------- ------------
Net periodic benefit cost-defined
benefit plan 821 1,144 1,275 529 857 247
Net periodic benefit cost -
multi-employer plan 96 55 --- --- --- ---
Net periodic benefit cost - defined
contribution plan 188 268 281 --- --- ---
------------ ------------ ------------ ------------ ----------- ------------
Net periodic benefit cost $ 1,105 $ 1,467 $ 1,556 $ 529 $ 857 $ 247
============ ============ ============ ============ =========== ============
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects on
postretirement benefits:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT INCREASE 1-PERCENTAGE-POINT DECREASE
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------ ------------ ------------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Effect on total of service and interest cost $ 26 $ 26 $ (23) $ (24)
Effect on postretirement benefit obligation $ 282 $ 276 $ (252) $ (263)
</TABLE>
Domestic employees are eligible to participate in savings plans, which
include a 401(k) feature. The Company matches employee contributions 50% to
100%, in ranges of 3% to 6% of basic earnings. Employees vest in matching
contributions after attaining three years of service. Company matching
contributions were $.6 million for each of fiscal 2000, 1999 and 1998.
In fiscal 1999, the Company established a supplemental executive
retirement plan for its former Chairman of the Board, one of the principal
shareholders of the Company. Funding of the plan by the Company resulted in a
pretax charge of $.5 million during fiscal 1999, not reflected in
31
<PAGE> 32
the tables above. The benefit is to be paid over a fifteen year period, but
while the former chairman continues to serve as Chairman of the Executive
Committee of the Company's Board of Directors, he and the Company have agreed to
defer the commencement of the benefit, no portion of which was paid in fiscal
2000.
8. MANAGEMENT INCENTIVE PROGRAMS
The Company has programs that provide for the grant of incentive awards
including stock options or restricted stock to officers, key employees, and
non-employee directors. Effective January 27, 1994, the Company's Board of
Directors approved the officer and key employee stock option program. Under the
program, stock options granted may be either options intended to qualify for
federal income tax purposes as "incentive stock options" or options not
qualifying for favorable tax treatment, "nonqualified stock options." In fiscal
1996, the shareholders approved an increase in the total number shares of common
stock issuable under the program to 715,350 shares. The stock options are
exercisable over a period determined by the Board of Directors, with the
majority of options granted to date vesting at three years. In no case are
options exercisable longer than ten years after the date they are granted.
The Company's Non-Employee Directors' Incentive Plan, which was adopted
on March 3, 1994 and amended by the shareholders on July 20, 1996, provides for
the issuance of shares to Directors (i) on a deferred basis, in lieu of payment
of annual retainer fees and (ii) through options granted at the beginning of a
director's term or, on a discretionary basis, thereafter. The plan reserves for
issuance 60,000 shares for deferral elections and 100,000 shares for the
granting of options. At the beginning of his or her term, each director is
granted an option to purchase 10,000 shares at a price equal to the market price
on the date of the grant, exercisable after three years but no longer than ten
years after grant, or upon certain specified events, such as a sale or merger of
the Company. Options grantable on a discretionary basis under the plan are
exercisable no less than six months from the date of the grant. Deferral
elections under the plan allow eligible directors to defer receipt of director
fees in cash or common stock until a specified period after his or her
resignation or certain other events, such as a sale or merger of the Company.
Amounts deferred under this election were 5,517 shares in fiscal 2000, 2,119
shares in fiscal 1999, and 4,000 shares in fiscal 1998. Total deferred shares
outstanding at March 31, 2000 including effects of dividend reinvestment were
20,547 shares.
A summary of the status of the Company's incentive stock options as of
March 31, 2000, 1999 and 1998 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 635,000 $ 6.39 472,500 $ 8.00 472,500 $ 8.00
Granted 40,000 3.16 200,000 3.00 --- ---
Exercised --- --- --- --- --- ---
Forfeited (32,500) 5.02 (37,500) 8.58 --- ---
------------ ------------ ------------
Outstanding at end of year 642,500 6.25 635,000 6.39 472,500 8.00
============ ============ ============
Options exercisable at year-end 489,167 7.29 412,500 8.03 267,500 9.59
============ ============ ============
Weighted-average fair value of
options granted during the year $ 0.48 $ 0.91 $ ---
</TABLE>
32
<PAGE> 33
The following table summarizes information about incentive stock options
outstanding as of March 31, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 3/31/00 LIFE EXERCISE PRICE 3/31/00 EXERCISE PRICE
--------------- ------- ---- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$2.69 - $ 3.00 220,000 8.6 years $ 2.97 66,667 $ 3.00
$5.75 - $10.00 422,500 4.4 years $ 7.96 422,500 $ 7.96
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000 and 1999, respectively: dividend yield of
6.0 percent for fiscal 2000; expected volatility of 39% and 34%; risk-free
interest rates of 6.75% and 6.0%; and weighted-average expected life of 3 years
for both years.
In fiscal 2000 and 1999, non-qualified stock option grants of 100,000
and 200,000, respectively, were granted at $3.19 and $3.00 per share,
respectively, in connection with the commencement of the employment of certain
executive employees. The exercise price is equal to the fair market value on the
date of the grant and the grant is subject to certain provisions relating to
exercise applicable on changes in control of the Company, termination of
employment, and on other terms and conditions comparable to the terms of the
Company's employee incentive stock option program. As of March 31, 2000,
approximately 117,000 of these options were exercisable at a weighted-average
exercise price of $3.08. The weighted-average fair value of these options
granted in fiscal 2000 and 1999 was $.62 per share and $.91 per share,
respectively. The options granted in fiscal 2000 are subject to shareholder
ratification. The Company's majority shareholder has committed to vote for
ratification of these options at the next annual meeting of the Company.
As permitted by SFAS No. 123, the Company has continued to use the
intrinsic value method of measuring stock based compensation. If compensation
costs had been determined based on the fair value of the awards at the grant
date there would not have been a material impact on the Company's reported
amount of net income or loss or net earnings or loss per share.
9. SHAREHOLDERS' EQUITY
Under a stock repurchase program authorized by the Company's Board of
Directors, the Company purchased 165,000 shares of treasury stock in fiscal 2000
for a total of $.3 million, resulting in an aggregate purchase of treasury
shares of $3.0 million which is the maximum amount permitted by the Company's
current financing agreements. In fiscal 1999, 100,000 shares of treasury stock
were purchased in the open market for a total of $.3 million and in fiscal 1998,
88,000 shares were purchased for a total of $.5 million.
Pursuant to special agreements with former officers, the Company also
purchased an additional 233,700 shares of stock at a price of $.6 million in
fiscal 2000, and 208,050 shares of stock in fiscal 1999 for an aggregate
purchase price of $.9 million. The Company recorded a $.4 million charge in
fiscal 1999 in connection with these special agreements, which was related to
the excess of the purchase price over the fair market value of the stock.
33
<PAGE> 34
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and various equipment under
noncancelable leases expiring through February 2005. The future minimum
obligations under noncancelable operating leases in effect at March 31, 2000
are: $.4 million in fiscal 2001, $.7 million in 2002, and an immaterial amount
thereafter. Total rental expense for operating leases was $.4 million, $.5
million and $.5 million in fiscal 2000, 1999 and 1998, respectively.
Certain claims, suits, and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, none of these claims, suits or complaints is material and in the
aggregate will not have a material adverse effect on the Company's results of
operations or financial condition.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain quarterly financial data.
Quarterly and year to date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year due to rounding and weighting effects.
Third and fourth quarter results in fiscal 1999 included special charges
totaling $10.0 million before taxes, which contributed $8.3 million of loss
after tax.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000
---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
<S> <C> <C> <C> <C> <C>
Net sales $ 51,135 $ 49,761 $ 49,305 $ 55,206 $ 205,407
Gross profit 6,101 6,260 6,002 6,839 25,202
Net income $ 1,061 $ 1,245 $ 802 $ 1,429 $ 4,537
============== =============== =============== ============== =============
Basic earnings per share $ 0.16 $ 0.20 $ 0.13 $ 0.22 $ 0.71
============== =============== =============== ============== =============
Diluted earnings per share $ 0.16 $ 0.20 $ 0.13 $ 0.21 $ 0.70
============== =============== =============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
<S> <C> <C> <C> <C> <C>
Net sales $ 66,856 $ 61,367 $ 58,679 $ 61,634 $ 248,536
Gross profit (loss) 5,436 3,757 (817) 6,349 14,725
Net income (loss) $ 362 $ (1,014) $ (6,390) $ (5,563) $ (12,605)
============== =============== =============== ============== =============
Basic and diluted earnings (loss)
per share $ 0.05 $ (0.14) $ (0.91) $ (0.82) $ (1.80)
============== =============== =============== ============== =============
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
------------------------------------------------------------
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, COSTS AND MARCH 31,
DESCRIPTION 1997 EXPENSES OTHER DEDUCTIONS 1998
----------- ---- -------- ----- ---------- ----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 546 $ 4 --- --- $ 550
Inventory aging reserves (1) $ 1,436 $ 188 --- --- $ 1,624
Customer claims reserve (2) $ 916 --- --- $ (151)(3) $ 765
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, COSTS AND MARCH 31,
DESCRIPTION 1998 EXPENSES OTHER DEDUCTIONS 1999
----------- ---- -------- ----- ---------- ----
Allowance for doubtful accounts $ 550 $ 783 $ (260)(4) $ (593)(3) $ 480
Inventory aging reserves (1) $ 1,624 $ 443 --- --- $ 2,067
Customer claims reserve (2) $ 765 --- --- $ (52)(3) $ 713
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, COSTS AND MARCH 31,
DESCRIPTION 1999 EXPENSES OTHER DEDUCTIONS 2000
----------- ---- -------- ----- ---------- ----
Allowance for doubtful accounts $ 480 --- $ 64 (5) $ (86)(3) $ 458
Inventory aging reserves (1) $ 2,067 --- --- $ (598)(3) $ 1,469
Customer claims reserve (2) $ 713 $ 293 --- --- $ 1,006
</TABLE>
(1) To adjust specific inventory items to lower of cost or market value.
Reserve is reflected in appropriate inventory categories.
(2) To adjust specific customer receivables for allowed claims. Reserve is
reflected against receivables.
(3) Adjustments against the account for purposes provided.
(4) Reserves related to disposed businesses.
(5) Reserves related to acquired businesses.
35
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 as to the Directors of the Registrant
is incorporated by reference to the information set forth under the captions
"Election of Directors" and "Security Ownership of Certain Beneficial Owners and
Management" in the Registrant's definitive proxy statement for its July 28, 2000
Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission no later than June 29, 2000. Information required by this
Item 10 regarding Executive Officers of the Company is incorporated by reference
to Item 4A in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated herein by reference to
the information set forth under the captions "Executive Compensation," "Human
Resources Committee Report on Executive Compensation," and "Performance Graph,"
as well as the information under the caption "Compensation of Directors," in the
Registrant's definitive proxy statement for its July 28, 2000 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission no
later than June 29, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated herein by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management," in the Registrant's definitive proxy
statement for its July 28, 2000 Annual Meeting of Shareholders which will be
filed with the Securities and Exchange Commission no later than June 29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is incorporated by reference to
Note (2) at Item 2 in Part I of this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Form 10-K.
1. CONSOLIDATED FINANCIAL STATEMENTS
Included under Item 8 of this report:
Independent Auditors' Report
Consolidated Balance Sheets, March 31, 2000 and 1999.
Consolidated Statement of Operations for the each of the three years in
the period ended March 31, 2000.
Consolidated Statement of Shareholders' Equity for each of the three
years in the period ended March 31, 1999.
Notes to Consolidated Financial Statement for each of the three years in
the period ended March 31, 1999.
2. SUPPLEMENTAL SCHEDULES
Included under Item 8 of this report:
Financial Statement Schedule II - Valuation and Qualifying Accounts and
Reserves.
36
<PAGE> 37
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. and Description Location
--------------------------- --------
<S> <C>
(2)(a) Stock Purchase Agreement by and Filed herein
among Cold Metal Products, Inc. and
Alkar Steel Corporation and the
Stockholders of Alkar Steel Corporation
dated March 31, 2000
(2)(b) Asset Purchase Agreement between Previously filed as an exhibit to the Company's
Cold Metal Products, Limited and Form 8-K filed April 14, 1999
Maksteel Inc. dated March 30, 1999
(3)(i)(a) Restated Certificate of Incorporation of Previously filed as Exhibit 3.1 to the
Registrant Company's Registration Statement on Form
S-1, which became effective on March 21, 1994 at
4:00 p.m. (Commission File No. 33-74986)
(3)(i)(b) Amendment to the Restated Certificate of Previously filed as Exhibit 3.3 to the Company's
Incorporation of Registrant Registration Statement on Form S-1, which became effective
on March 21, 1994 at 4:00 p.m. (Commission File No.
33-74986)
(3)(ii) Amended By-Laws of Registrant Previously filed as Exhibit E-1 to the Company's 1994
Annual Report on Form 10-K filed on June 29, 1994
(4) Specimen stock certificate for the Common Stock Previously filed as Exhibit E-1 to the Company's 1995
Annual Report on Form 10-K filed on June 29, 1995
(10)(a) Third Amended and Restated Credit Facility and Previously filed as an exhibit to the Company's 1998
Security Agreement between The Bank of New York Annual Report on Form 10-K filed on June 25, 1998
and the Company, dated as of April 1, 1998, which
amended and restated the Second Amended and
Restated Discretionary Credit facility previously
filed and listed as Exhibit 10(a) to the Company's
Annual Report on Form 10K for the fiscal year
ended March 31, 1997
(10)(b) Cold Metal Canadian Subsidiary Guaranty Agreement, Previously filed as Exhibit 3.1 to the Company's
dated as of July 31, 1987, between Registration Statement on Form S-1, which became
Irving Trust Company (predecessor to The Bank of effective March 21, 1994 at 4:00 p.m. (Commission
New York) and on Registrant's Canadian Subsidiary, File No. 33-74986)
Cold Metal Products Company, Ltd.
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C>
(10)(c) Supply Agreement, dated February Previously filed as Exhibit 10.3 to the Company's
1987, as amended June 20, 1989, Registration Statement on Form S-1, which became
December 31, 1992 and December 31, effective on March 21, 1994 at 4:00 p.m. (Commission
1993, subject to request for confidential File No. 33-74986)
treatment
(10)(d) Tax Sharing and Indemnification Agreement, dated Previously filed as Exhibit 10.5 to the Company's
January 31, 1994, among Registrant and its Registration Statement on Form S-1, which became
affiliates effective on March 21, 1994 at 4:00 p.m. (Commission
File No. 33-74986)
(10)(e) Special Incentive Compensation Plan of Previously filed as Exhibit 10.10 to the Company's
Registrant, effective December 1, 1993 Registration Statement on Form S-1, which became
effective on March 21, 1994 at 4:00 p.m. (Commission
File No. 33-74986)
(10)(f) Special Incentive Compensation Plan Previously filed as Exhibit 10.11 to the Company's
Trust Agreement, dated January 28, 1994 Registration Statement on Form S-1, which became
effective on March 21, 1994 at 4:00 p.m. (Commission
File No. 33-74986)
(10)(g) Amended and Restated 1994 Incentive Previously filed as Exhibit A to the Company's
Program 1995 Proxy Statement filed on June 22, 1995
(10)(h) Share Purchase and Loan Agreement, Previously filed as Exhibit 10.13 to the Company's
dated December 30, 1993, among Cold Registration Statement on Form S-1, which became effective
Metal Products Company, Ltd., Lance on March 21, 1994 at 4:00 p.m. (Commission File No.
and Mara Dunlap, 955404 Ontario Inc. 33-74986)
and Direct Steel, Inc.
(10)(i) Share Purchase and Loan Amendment Previously filed as Exhibit E-5 to the Company's 1994
Agreement, dated March 23, 1994 Annual Report on Form 10-K filed on June 29, 1994
among Cold Metal Products Company,
Ltd., Lance and Mara Dunlap, 955404
Ontario Inc. and Direct Steel, Inc.
(10)(j) Shareholders Agreement, dated Previously filed as Exhibit E-6 to the Company's 1994
March 23, 1994, Cold Metal Products Annual Report on Form 10-K filed on June 29, 1994
Company, Ltd., Lance and Mara
Dunlap, 955404 Ontario Inc. and Direct Steel, Inc.
(10)(k) Supply Agreement, dated March 23, Previously filed as Exhibit E-7 to the Company's 1994
1994, between Cold Metal Products Annual Report on Form 10-K filed on June 29, 1994
Company, Ltd. and Direct Steel, Inc.
(10)(l) Agreement between Registrant and The Previously filed as Exhibit 10.20 to the Company's
Stanley Works, dated February 17, 1994 Registration Statement on Form S-1, which became
effective on March 21, 1994 at 4:00 p.m. (Commission
File No. 33-74986)
(10)(m) Amended and Restated Non-Employee Directors' Previously filed as Exhibit B to the Company's 1995 Proxy
Incentive Plan Statement filed on June 22, 1995
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C>
(10)(n) Master Equipment Lease Agreement, Equipment Previously filed as Exhibit E-2 to the Company's 1995
Schedule No. 01 and related addenda between Cold Annual Report on Form 10-K filed on June 29, 1995
Metal Products, Inc. and KeyCorp Leasing Ltd.
(10)(o) Russell Metal, Inc. and Cold Metal Products Previously filed as an exhibit to the Company's Report on
Company, Ltd. Asset Purchase Agreement dated Form 10-Q for the fiscal quarter ended December 31, 1996
October 21, 1996
(10)(p) Loan Agreement between Cold Metal Products, Inc. Previously filed as an exhibit to the Company's Report on
and The CIT Group/Equipment Financing, Inc. Form 10-Q for the fiscal quarter ended December 31, 1996
(10)(q) Amendment No. 1 to Third Amended and Restated Previously filed as an exhibit to the Company's Report on
Credit and Security Agreement Form 10-Q for the fiscal quarter ended September 30, 1998
(10(r) Letter Agreement between James R. Harpster and Previously filed as an exhibit to the Company's Report on
Cold Metal Products, Inc. Form 10-Q for the fiscal quarter ended September 30, 1998
(10)(s) Amendment No. 2 and Waiver Agreement to Third Previously filed as an exhibit to the Company's 1999 Annual
Amended and Restated Credit and Security Agreement Report on Form 10-K filed on June 29, 1999
(10)(t) Letter Agreement between John A. Watson and Cold Previously filed as an exhibit to the Company's 1999 Annual
Metal Products, Inc. Report on Form 10-K filed on June 29, 1999
(10)(u) Letter Agreement between Gordon A. Wilber and Cold Previously filed as an exhibit to the Company's 1999 Annual
Metal Products, Inc. Report on Form 10-K filed on June 29, 1999
(10)(v) Letter Agreement between Allen R. Morrow and Cold Previously filed as an exhibit to the Company's 1999 Annual
Metal Products, Inc. Report on Form 10-K filed on June 29, 1999
(10)(w) Supplemental Executive Retirement Agreement and Previously filed as an exhibit to the Company's 1999 Annual
Cold Metal Products, Inc. Report on Form 10-K filed on June 29, 1999
(10)(x) Letter Agreement between Cold Metal Products, Inc. Previously filed as an exhibit to the Company's 1999 Annual
and The CIT Group Report on Form 10-K filed on June 29, 1999
(10)(y) Letter Agreement between John E. Sloe and Cold Previously filed as an exhibit to the Company's Report on
Metal Products, Inc. Form 10-Q for the fiscal quarter ended June 30, 1999
(10)(z) Master Lease Agreement between National City Previously filed as an exhibit to the Company's Report on
Leasing Corporation and Cold Metal Products, Inc. Form 10-Q for the fiscal quarter ended December 31, 1999
</TABLE>
39
<PAGE> 40
(10)(aa) Letter Agreement between Cold Metal Products, Inc. Filed herein
and the CIT Group
(10)(ab) Lease Agreement between Cold Metal Products, Inc. Filed herein
and John M. Fayad dated March 31, 2000
(21) Subsidiaries of Registrant Filed herein
(23) Independent Auditors' Consent Filed herein
(27) Financial Data Schedule Filed herein
(B) Reports on Form 8-K
On April 14, 1999 the Company filed a Form 8-K to report its
disposition of assets and certain liabilities of its steel service centers
located in Hamilton and Concord, Ontario, Canada.
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.
COLD METAL PRODUCTS, INC.
June 13, 2000 By /s/ Raymond P. Torok
--------------------
Raymond P. Torok
President and Chief Executive Officer
By /s/ Joseph C. Horvath
---------------------
Joseph C. Horvath
Vice President and Chief Financial
Officer
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, as of June 23, 2000, by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Heidi A. Nauleau Chairman of the Board of Directors
--------------------------------------
Heidi A. Nauleau
/s/ Raymond P. Torok President, Chief Executive Officer
-------------------------------------- and Director
Raymond P. Torok (Principal Executive Officer)
/s/ R. Quintus Anderson Chairman of Executive Committee
--------------------------------------
R. Quintus Anderson
/s/ Wilbur J. Berner Director
--------------------------------------
Wilbur J. Berner
/s/ Claude F. Kronk Director
--------------------------------------
Claude F. Kronk
/s/ Robert D. Neary Director
--------------------------------------
Robert D. Neary
/s/ Edwin H. Gott, Jr. Director
--------------------------------------
Edwin H. Gott, Jr.
/s/ Peter B. Sullivan Director
--------------------------------------
Peter B. Sullivan
41