UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from ______ to ______
Commission File Number 0-25032
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 25-1724540
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
600 Mayer Street
Bridgeville, PA 15017
(Address of principal executive offices, including zip code)
(412) 257-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to Section 12(g)
of the Act:
Title of Class
Common Stock, $0.001 par value
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 (ss.229.405 of this chapter) 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 stock held by non-affiliates of the
registrant on March 25, 1997, based on the closing price of these shares of $9
7/8 on that date, was $54,149,602. For the purposes of this disclosure only, the
registrant has assumed that its directors, executive officers, and beneficial
owners of 5% or more of the registrant's Common Stock are the affiliates of the
registrant.
As of March 25, 1997, there were 6,283,734 shares of the Registrant's Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1996, and definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 21, 1997, are incorporated by reference
into Parts II and III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
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Item 1. Business..................................................................................... 1
Item 2. Properties.................................................................................. 10
Item 3. Legal Proceedings............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders..........................................13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.....................14
Item 6. Selected Financial Data......................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.........................................................................16
Item 8. Financial Statements and Supplementary Data..................................................16
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................................16
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................17
Item 11. Executive Compensation.......................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................18
Item 13. Certain Relationships and Related Transactions...............................................18
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................18
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PART I
ITEM 1. BUSINESS
General
Universal Stainless & Alloy Products, Inc. (the "Company"), manufactures and
markets semi-finished and precision cold-rolled products, including stainless
steel, tool steel and certain other alloyed steels. The Company's products are
sold to rerollers, forgers, service centers and original equipment
manufacturers. The Company's products are then finished by its customers and
marketed for use primarily in the heavy equipment manufacturing, power
generation and aerospace industries. The Company also provides conversion
services on materials supplied by customers that lack certain of the Company's
production facilities or that are subject to their own capacity constraints.
While the Company operates in a manner characteristic of a mini-mill,
emphasizing a low operating cost structure, efficient use of production and
management personnel and flexible production capabilities, the Company's
extensive range of manufacturing equipment allows it to achieve product breadth
and quality similar to that of a large, integrated specialty steel producer. The
Company's products are manufactured in a wide variety of grades, widths and
gauges in response to customer specifications. The Company is capable of
fabricating semi-finished specialty steel products that include both long
products (ingots, blooms, billets and bars), which are used by customers to
produce bar, rod and wire, and flat rolled products (slabs and plates), which
are used by customers to produce fine-gauge plate, sheet and strip products. The
Company also produces customized shapes that are cold rolled from purchased
coiled strip, flat bar or extruded bar.
The Company was incorporated in Delaware on June 27, 1994. On July 29, 1994, the
Company completed a stock-for-stock merger with a corporation of the same name
organized in Pennsylvania in January 1994 (the "Pennsylvania Corporation"), for
the principal purpose of acquiring from Armco, Inc. (Armco), and operating
substantially all of the equipment and related assets (the "Assets") of Armco's
Stainless and Alloy Products Division ("ASAP"), formerly owned by Cyclops
Industries, Inc. ("Cyclops"), that are located at Bridgeville, Pennsylvania (the
"Bridgeville Facility"). Prior to the Merger, the Pennsylvania Corporation had
no operating history and no material assets. Through August 15, 1994, the date
the acquisition was consummated, the Company was solely involved in
organizational and financing activities.
On June 2, 1995, the Company acquired its precision rolled products business
from the Cytemp division of Armco (the "PRP Business"). Simultaneously, the
Company acquired from the Cytemp division five vacuum-arc remelting furnaces and
certain ancillary equipment that was not operationally related to the PRP
Business and had been idled since January 1994.
Industry Overview
The specialty steel industry is a relatively small but distinct segment of the
overall steel industry. According to the Specialty Steel Institute of North
America (the "SSNA"), specialty steels are among the highest-valued steel
products produced.
Specialty steels include stainless steels, high speed and tool steels,
electrical steels, high temperature alloys and magnetic and electronic alloys.
Specialty steels are made with a high alloy content, which enables their use in
environments that demand exceptional hardness, toughness, strength and
resistance to heat, corrosion or abrasion, or combinations thereof. Specialty
steels generally must conform to more demanding customer specifications for
consistency, straightness and surface finish than carbon steels.
The Company primarily manufactures stainless steel, tool steel, and certain
other alloyed steels:
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Stainless Steel. Stainless steel, which represents the largest part of the
specialty steel market, contains elements such as nickel, chrome and molybdenum
that give it unique qualities of resistance to rust, corrosion and heat, high
strength, good wear characteristics, natural attractiveness, and ease of
maintenance. Stainless steel is used, among other applications, in the
automotive, aircraft and aerospace industries and in the manufacture of food
handling, chemical processing, pollution control and medical and health
equipment. The large number of applications for stainless steel has resulted in
the development of a greater variety of stainless steel metallurgical grades
than carbon steel.
Stainless steel was created in response to a need for materials that would
provide better resistance to corrosion than carbon steel. Adding chrome to
carbon steel makes it more rust and stain resistant and adding nickel to chrome
stainless steel enhances the mechanical properties and fabrication
characteristics of the steel. Stainless steel's resistance to many corrosive
conditions, such as exposure to water, air, food and alkalis, is provided by a
thin, transparent protective chrome oxide film that forms on its exterior. When
this film is scratched, nicked or otherwise penetrated, a fresh film immediately
forms to preserve the corrosion resistance.
Stainless steel is manufactured in different types, or grades, but each type
contains at least 10% chrome, along with other elements that are added to
develop specific properties. Depending on the quantity of the various elements
present in a stainless steel alloy, it will have a metallurgical structure
characteristic of one of three basic stainless steel groups-austenitic,
martensitic or ferritic. The Company makes products in each of those groups, but
most of the Company's products are in the austenitic category.
Austenitic stainless steels, unlike the other two groups of stainless steel
alloys, contain 4-35% nickel. Austenitic stainless steels, which are
non-magnetic, have outstanding ductility and can be cold worked so that the
final condition attained has the most advantageous combination of strength and
toughness. In addition, certain austenitic stainless steels may be used at
temperatures from -200~C to 1,100~C and still maintain their formability and
strength. These physical properties make austenitic stainless steels the most
popular grades.
Martensitic stainless steels contain 10-18% chrome for corrosion resistance, can
be hardened by heat treating to a wide variety of mechanical properties and are
magnetic under all conditions. These steels are generally used where abrasion
resistance and high strength are important requirements.
Ferritic stainless steels generally contain a similar amount of chrome as
martensitic stainless steels but have a lower carbon content. However, chrome
content in this stainless steel group can range as high as 27% for maximum
oxidation resistance at high temperatures. As with the martensitic group, the
addition of other elements to the basic alloy brings about special properties
for particular end uses. Ferritic steels are also magnetic under all conditions.
Ferritic stainless steels are less susceptible to stress corrosion cracking
problems and are generally cheaper to produce than austenitic stainless steels
because they do not contain nickel. However, because they do not contain nickel,
ferritic stainless steels are less malleable than austenitic grades and have
fewer applications.
Tool Steel. Tool steels contain elements of manganese, silicon, chrome and
molybdenum to produce specific hardness characteristics that enable them to
form, cut, shape and shear other materials in the manufacturing process. These
hardness characteristics are brought out by heating and cooling at precise rates
in the annealing process. Tool steels are utilized in the manufacture of metals,
plastics, pharmaceuticals, electronics, optics and paper and aluminum
extrusions.
High Strength Low Alloy Steel. High strength low alloy steel is a relative term
that refers to those steels that maintain alloying elements that range in
versatility. The alloy element of such steels as nickel, chrome and molybdenum
typically exceed the alloy element of carbon steel but not that of high
temperature alloy steel.
High Temperature Alloy Steel. These steels are designed to meet critical
requirements of heat resistance and structural integrity. They generally have a
very high nickel content relative to other types of specialty steels. High
temperature alloy steels are manufactured for use generally in the aerospace
industry.
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Net sales by principal product line were as follows:
1996 1995 1994
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Stainless steel $46,903,000 $38,292,000 $4,192,000
Tool steel 8,019,000 4,080,000 1,212,000
Conversion services 3,804,000 3,272,000 188,000
Other 1,532,000 1,348,000 151,000
--------------------------- ---------------------------- ---------------------------
$60,258,000 $46,992,000 $5,743,000
--------------------------- ---------------------------- ---------------------------
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Raw Materials
Scrap Metal
The Company's major raw material is ferrous scrap metal, which is generated
principally from industrial, automotive, demolition and railroad sources and is
purchased in the open market through a number of scrap brokers and dealers or by
direct purchase. The Company purchases approximately 80% of its scrap metal from
six principal domestic suppliers. The long-term demand for scrap metal and its
importance to the domestic specialty steel industry may be expected to increase
as steelmakers continue to expand scrap metal-based electric furnace capacity
with additions to or replacements of existing integrated specialty steel
manufacturing facilities that use iron ore, coke and limestone as their raw
materials. The high quality of the Company's products requires use of premium
grades of scrap metal, the supply of which is more limited. The Company has not
experienced difficulty to date in purchasing adequate scrap metal for its
production processes. The Company believes that adequate supplies of scrap metal
will continue to be available in sufficient quantities for the foreseeable
future. Raw material prices vary based on numerous factors, including quality,
and are subject to frequent market fluctuations and future prices cannot be
predicted with any degree of certainty.
Alloys
The Company purchases various materials for use as alloy additions, some of
which come from Canada (principally nickel) and other foreign countries. Certain
of those alloys (principally chrome) are supplied by South African manufacturers
and any political disruptions in that country could interfere with the delivery
of those materials.
The cost of scrap metal together with alloy additives is more than 50% of the
Company's total cost of products sold. The Company has established arrangements
with certain raw material suppliers that permit the Company to purchase certain
raw materials at set prices for up to 30 to 90 days, which may protect the
Company against short-term price increases in raw materials after it has agreed
to manufacture products for its customers at specified prices, which reflect
those set raw material prices.
PRP Business
The PRP Business' principal starting materials consist of metallic flat bar,
extruded "near shaped" bar and coiled strip, which the Company cold rolls to
customer specification to produce special shapes. The Company generally
purchases those starting materials from steel strip coil suppliers, extruders,
flat rolled producers and service centers. The Company believes that adequate
supplies of starting material for the PRP Business will continue to be available
in sufficient quantities for the foreseeable future.
The Company does not maintain any long-term written agreements with any of its
raw material suppliers.
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Energy Agreements
The production of steel requires the ready availability of substantial amounts
of energy. Electricity is the major energy source consumed in the Company's
operations. The Company believes that its energy arrangements allow it to
compete effectively within its industry. The Company also uses natural gas in
certain of its furnaces, and certain industrial and refining gases, including
oxygen, nitrogen and argon, in connection with its AOD operations. A curtailment
or interruption in energy supplies could adversely affect the performance of the
Company, as could an increase in energy-related costs.
At the Bridgeville Facility, the Company purchases electricity from Duquesne
Light Company ("DLC") pursuant to a five-year supply agreement entered into in
July 1994, with one-year renewal options. Under that agreement, the Company has
been granted significant reductions in DLC's posted base demand rates,
particularly if, as the Company plans, it conducts its principal melting
operations in off-peak hours, which for purposes of the DLC agreement are
between 6 p.m. and 10 a.m. (16 hours) daily and up to 24 hours a day on
weekends. The Company purchases natural gas from Columbia Energy Services
Corporation on a month-to-month basis.
At the Titusville Facility, the Company purchases electricity from Pennsylvania
Electric Company pursuant to a one-year supply agreement entered into in June
1995, with one-year renewal options. QSE&P, Inc., a wholly owned subsidiary of
Quaker State Corporation, supplies all the Company's natural gas requirements at
that location pursuant to a one-year supply agreement entered into in May 1995,
which is eligible for renewal thereafter.
Air Products and Chemicals, Inc. supplies all the Company's liquid gas for
industrial requirements for its AOD operations pursuant to a five-year agreement
entered into in July 1994, which contains one-year renewal options.
Customers
As of March 24, 1997, the Company has approximately 140 active customers. The
Company's principal customers are rerollers, forgers, service centers and
original equipment manufacturers, which primarily include the power generation
and aerospace industries. A principal element of the Company's business strategy
is to seek new customers so that over time it will reduce its dependence on one
or a small number of customers. For the year ended December 31, 1996, Talley
Metals Technology, Inc., a subsidiary of Talley Industries, Inc., accounted for
44% of the Company's total net sales.
The Company's products are marketed directly to its customers by Company
personnel, including the Company's President and Chief Executive Officer, its
PRP Division General Manager, five full-time sales persons and two independent
sales representatives. Many of the Company's current customers had pre-existing
business relationships with the Company's management prior to the formation of
the Company. In view of the relatively small number of prospective customers for
the Company's customized products, the strong business relationships with its
customers and the thorough product knowledge and substantial experience with
actual and prospective customers of those management and marketing persons, the
Company believes its sales force is adequate for its current and immediately
foreseeable needs. The Company does not have any long-term written agreements
with any of its customers.
Backlog
The Company manufactures products to meet specific customer orders, generally
fulfilling orders in eight weeks or less, and consequently does not manufacture
for inventory purposes. The Company's backlog of orders on hand as of March 24,
1997, was approximately $18.5 million as compared to approximately $11.0 million
at the same time in 1996. Customer orders are generally subject to cancellation
with the payment of a penalty charge prior to shipment. The Company's backlog
may not be indicative of actual sales and therefore should not be used as a
measure of future revenue.
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Seasonality of Business
The Company's sales and earnings are influenced by seasonal factors. Results in
each third fiscal quarter (three months ending September 30) are expected to be
adversely affected by the Company's annual week-long plant vacation closing
during the July 4 holiday period as well as vacation closings of many of its
customers during that period. Results in each fourth fiscal quarter (three
months ending December 31) are adversely affected by the Company's vacation
closings during the Christmas holiday periods, as well as by the vacation
closings of many of its customers during this period, and by order slowdowns as
customers fulfill their annually budgeted inventory requirements.
Competition
The Company believes itself to be one of approximately 20 domestic manufacturers
that produce specialty steel and one of approximately six domestic specialty
steel manufacturers that produce special shapes. Of that number of firms that
produce specialty steel, the Company believes six companies currently compete
with the Company in the semi-finished specialty steel sector, although other
specialty steel mills have the capability of producing, and hence competing
with, some of or all the Company's semi-finished specialty steel products.
Major competitors of the Company in the semi-finished specialty steel market
include fully integrated specialty steel producers such as Allegheny-Teledyne,
Inc.; Carpenter Technology Corporation; AL Tech Specialty Steel Corporation;
Republic Engineered Steels, Inc.; Slater Steels Corporation; and The Timken
Company; and with respect to the special shapes market served by the PRP
Business, competitors include Rathbone Precision Metals, Inc.; Precision Shapes,
Inc.; and J.T. Slocomb Company. Although Electralloy, a subsidiary of G.O.
Carlson Inc., and First Mississippi Steels, Inc. generally produce only
stainless steel ingots, they can also compete with the Company by utilizing
outside conversion services. Additionally, there are several smaller electric
arc furnace melt shops that also produce specialty steel.
The principal methods of competition in the Company's markets are product
quality, delivery capability, and service and price. Maintaining high standards
of product quality while keeping production costs at competitive levels is
essential to the Company's ability to compete in its markets. The ability of a
manufacturer to respond quickly to customer orders currently is, and is expected
to remain, important in the Company's semi-finished specialty steel market. The
Company believes its universal rolling mill provides it with a competitive
advantage as the only domestic mini-mill that can produce both long product
(billets and blooms, used by customers to produce bar, rod and wire) and flat
rolled product (slabs and plates, used by customers to produce fine gauge plate,
sheet and strip products). Moreover, because the Company's focus is on the
manufacture and supply of semi-finished specialty steel, the Company, unlike an
integrated specialty steel mill, does not have to interrupt a production
schedule devoted in part to the manufacture of finished products or
non-specialty steel, in order to meet its customers' orders for semi-finished
specialty steel products. The Company believes it has the ability to fill
customers' orders in a shorter lead time for delivery of those products than a
fully-integrated specialty steel mill currently can achieve, which provides it
with another competitive advantage. The short lead time may also enable the
Company to avoid maintaining a high level of inventory of raw materials, thereby
reducing the Company's cost of production.
The domestic semi-finished specialty steel industry is frequently affected
by economic conditions generally. Further, the Company also faces competition
from producers of certain materials, particularly aluminum, composites and
plastics, that compete with steel in many markets. In addition, many of the
finished products sold by the Company's customers are in direct competition with
finished products manufactured by foreign sources, a number of which are
government owned and/or subsidized. Increases in levels of imported products
could adversely affect future market prices and demand levels for the finished
products manufactured by the Company's customers. Any competitive factor that
adversely affects these markets could indirectly adversely affect the demand for
the Company's semi-finished products.
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Employee Relations
The Company considers the maintenance of good relations with its employees to be
important to the successful conduct of its business. The Company has instituted
profit sharing for all of its USWA Employees and has instituted equity ownership
programs for all of its employees, in an effort to forge an alliance between its
employees' interests and those of the Company's stockholders. At December 31,
1996, the Company had 153 employees at the Bridgeville Facility and 55 employees
at the Titusville Facility, of whom 117 and 46 were USWA members located in
Bridgeville and Titusville, respectively.
USWA Agreements
In connection with the Company's acquisition of the Bridgeville Facility from
Armco, the Company and the USWA completed negotiation of a four-year
comprehensive collective bargaining labor agreement that recognizes the USWA as
the exclusive representative for the Company's hourly Bridgeville employees with
respect to the terms and conditions of their employment. The Company believes
that the USWA Agreement at Bridgeville contains certain wage, benefit and work
rule terms more favorable to the Company than those contained in domestic
specialty steel industry collective bargaining labor agreements generally. The
terms include a decrease in the number of job classifications, a combining of
jobs and the lack of a guarantee of a minimum number of work hours under the
USWA Agreement at Bridgeville. The USWA Agreement at Bridgeville requires all
employees to take yearly vacations during weeks when the Company is closed.
Moreover, the Company is not obligated to contribute to any of the USWA
multi-employer retirement and benefit plans. Also, the Company negotiated and
has achieved in the USWA Bridgeville Agreement favorable terms as to overtime,
work rules, seniority and vacations.
In connection with the PRP/VAR Agreement in 1995, the Company entered into a
five-year collective bargaining agreement with the USWA covering employees at
the Titusville Facility. That Agreement contains substantially similar terms to
those included in the USWA Agreement at Bridgeville, but each of the USWA
Agreements is separate and neither USWA Agreement is conditioned on the renewal
of or compliance with the other USWA Agreement.
The Company's USWA Bridgeville employees share in the profit generated at the
Bridgeville Facility in an aggregate amount equal to 8% of the Company's annual
pre-tax profit in excess of $1.0 million generated at that location. The
Company's USWA Titusville employees share in the profit generated at the
Titusville Facility in an aggregate amount equal to 8% of the Company's annual
pre-tax profit in excess of $500,000 generated at that location. Pre-tax annual
profit for this purpose is defined as the Company's income before income taxes
reduced by scheduled debt principal payments. The Company maintains separate
401(k) retirement plans for its union and salaried employees. Pursuant to each
plan, beginning January 1, 1995, participants may elect to make pre-tax
contributions to the plan, subject to certain limitations imposed under the
Internal Revenue Code of 1986, as amended (the "Code"). The Company is required
to make profit-sharing contributions to the plans as follows: $80 per month per
participant in the salaried plan and $0.40 per hour of service worked per
participant in the union plan. Company matching contributions are not permitted
under the plans. The Company also provides health coverage for its union and
salaried employees.
Armco also retained responsibility for any employee benefit obligations existing
prior to August 15, 1994, with respect to persons previously employed at the
Bridgeville Facility. In addition, Armco agreed to indemnify the Company up to
$3.0 million in the aggregate with respect to any such liabilities that may
arise prior to August 15, 2004, and with respect to any other non-environmental
liabilities that may arise under the Agreement between the Company and Armco
prior to August 15, 1997.
On October 6, 1994 and on May 22, 1996, the Company's Board of Directors adopted
employee stock plans for the purpose of issuing 100 shares of Common Stock of
the Company at no cost to eligible employees, which consist of non-executive
employees not eligible for stock options under the 1994 Stock Incentive Plan.
Pursuant to the employee stock plans, the Company issued 6,900 and 11,300 shares
of the Company's Common Stock in 1994 and 1996, respectively. The costs of these
issuances were recorded as compensation expense. These plans were terminated.
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Employee Stock Purchase Plan Under the 1996 Employee Stock Purchase Plan (the
"Plan"), the Company is authorized to issue up to 90,000 shares of Common Stock
to its full-time employees, nearly all of whom are eligible to participate.
Under the terms of the Plan, employees can choose as of January 1 and July 1 of
each year to have up to 10% of their total earnings withheld to purchase up to
100 shares of the Company's Common Stock each six-month period. The purchase
price of the stock is 85% of the lower of its beginning-of-the period or
end-of-the-period market prices. At December 31, 1996, the end of the initial
purchase period under the Plan, the Company issued 2,434 shares of Common Stock
to 33 employees at $7.44 per share.
Safety
The Company has established and seeks to maintain appropriate safety standards
and policies for its employees. To encourage plant safety, the USWA Agreements
provide that employees will be entitled to receive ratably 50% of the savings,
if any, of reduced workers' compensation premiums obtained by the Company.
Patents and Trademarks
The Company does not consider its business to be materially dependent on patent
or trademark protection, and believes it owns or maintains effective licenses
covering all the intellectual property used in its business. The Company seeks
to protect its proprietary information by use of confidentiality and
non-competition agreements with certain employees.
Risk Factors
The Company's business and results of operations are subject to a wide range of
substantial business and economic factors discussed below, many of which are not
within the Company's control.
Limited Operating History
The Company has only a limited operating history from which an evaluation of the
Company's prospects may be made. Those prospects must be considered in light of
the numerous risks, expenses, problems and difficulties frequently encountered
in connection with the establishment of a business and the competitive
environment in which the Company operates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
"Financial Statements."
Significant Customer and Concentrated Customer Base
For the year ended December 31, 1996, the Company's largest customer, Talley
Metals Technology, Inc., a subsidiary of Talley Industries, Inc., accounted for
approximately 44% of the Company's net sales. The Company's five largest
customers in the aggregate accounted for approximately 63% of net sales. An
adverse change in, or termination of, the Company's relationship with one or
more of its major customers could have a material adverse effect upon the
Company. While the Company has approximately 140 active customers, the Company
does not have long term written contracts with any of its customers, and
customer orders are generally subject to cancellation with the payment of a
penalty charge prior to delivery. In addition, there can be no assurance that
the Company's current customers will continue to purchase product or services
from the Company at current levels or that they will continue to maintain
relationships with the Company. See "Business--Customers."
Reliance on Critical Manufacturing Equipment
The Company's manufacturing processes are dependent upon certain critical pieces
of specialty steelmaking equipment, such as the Company's melt shop and
universal rolling mill. In the event a critical piece of equipment should become
inoperative as a result of unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed. In
that respect, in July and August 1995 the Company experienced an electrical
component breakdown in a drive motor that resulted in an approximately six-week
production halt of the universal rolling mill at the Bridgeville Facility.
Unexpected interruptions in the Company's production capabilities could create
fluctuations in the Company's sales and income. The average age of the Company's
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equipment is more than ten years. There can be no assurance that a shutdown of
the Company's facilities will not occur in the future or that a shutdown would
not have a material adverse effect on the Company. See "Properties--Capital
Expenditures and Facilities Maintenance Programs."
Competition
The Company competes with domestic mills that produce semi-finished specialty
steel products and, with respect to certain parts of their product line, with
domestic fully integrated specialty steel mills. The Company also experiences
competition from foreign sources of semi-finished specialty steels. In addition,
many of the finished products sold by the Company's customers are in direct
competition with finished products manufactured by foreign sources, which may
affect the demand for those customers' products. Any competitive factor that
adversely affects the market for finished products manufactured by the Company's
customers could indirectly adversely affect the demand for the Company's
semi-finished products. Many of the Company's competitors are larger and have
significantly greater resources than the Company, and a number have recently
undergone restructurings and modernization programs designed to enhance their
competitive positions. Additionally, the Company's products compete with
products fashioned from alternative materials such as aluminum, composites and
plastics, the production of which includes domestic and foreign enterprises with
long operating histories and significant financial and other resources.
Competition in the Company's field is intense and is expected to continue to be
so in the foreseeable future. Also, a number of the Company's competitors are
also customers for certain of the Company's products and services. There can be
no assurance that the Company will be able to compete successfully in the
future. See "Business--Competition."
Environmental Issues
The Company is subject to demanding federal, state and local environmental laws
and regulations (the "Environmental Laws") governing, among other things, air
emissions, waste water discharge and solid and hazardous waste disposal. The
Company leases or owns certain real property and operates equipment previously
owned and used in the manufacture of steel products by Armco. In connection with
the Company's August 15, 1994 agreement with Armco to purchase substantially all
the assets and related equipment of the Armco Stainless and Alloy Products
Division located at the Bridgeville Facility and to lease the Bridgeville
Facility, Armco agreed to retain responsibility for liabilities asserted against
Armco under the Environmental Laws arising out of conditions existing prior to
August 15, 1994, and to indemnify the Company up to $6.0 million in the
aggregate over ten years from August 1994 with respect to any claims in
connection with, or costs incurred by, the Company related to such liabilities.
In connection with the Company's June 2, 1995 agreement with Armco to purchase
the PRP Business, the VAR Assets and a parcel of real property located at
Titusville, Pennsylvania, Armco agreed to indemnify the Company up to $3.0
million in the aggregate for liabilities under the Environmental Laws arising
out of conditions on or under the Titusville property existing prior to June 2,
1995. Armco's obligation to indemnify the Company for any liabilities arising
out of environmental conditions existing offsite as of June 2, 1995, is not
subject to the $3.0 million limitation. The Titusville Facility is located in an
industrial area where contamination by petroleum hydrocarbons is widespread.
Because the indemnification is the Company's exclusive remedy against Armco for
a given environmental liability, the Company will be materially dependent upon
that indemnity should any environmental liability arise. There can be no
assurance that the indemnities from Armco will fully cover any or all
environmental liabilities, and there can be no assurance that the Company will
have the financial resources to discharge the liabilities if legally compelled
to do so. Certain environmental conditions have been identified at the
Bridgeville Facility that Armco in accordance with its agreement with the
Company and pursuant to a consent decree between Armco and the Pennsylvania
Department of Environmental Resources, is addressing at Armco's sole expense.
There can be no assurance that Armco will satisfactorily complete the work
required under the consent decree. There may be other environmental conditions
at the Bridgeville Facility or at the Titusville Facility that have not been
previously identified by regulatory authorities but that may later be determined
to require remediation. The Company is not currently a party to any lawsuit or
proceeding involving alleged violations of any Environmental Laws and believes
that its business, operations and facilities are being operated in compliance in
all material respects with applicable Environmental Laws. However, environmental
laws and regulations have changed rapidly in recent years, and the Company may
be subject to increasingly stringent environmental standards in the future. The
Armco indemnities do not cover liability with respect to violations of the
Environmental Laws or the existence of environmental conditions stemming from
any changes, modifications or amendments to the Environmental Laws effective
after
8
<PAGE>
August 15, 1994, with respect to the Bridgeville Facility, or effective
after June 2, 1999, with respect to the Titusville Facility, and there is no
assurance that the Company will not incur any such liability. The Company
anticipates that, from time to time, it will make capital expenditures in
connection with environmental matters. It is impossible, however, currently to
predict the amount of future expenditures that may be required in connection
with environmental compliance. There can also be no assurance that additional
future developments, administrative actions or liabilities relating to
environmental matters will not have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Environmental
Compliance."
Supply of Raw Materials and Cost of Raw Materials
The Company relies on a limited number of suppliers for its raw material needs.
The Company does not maintain long-term supply agreements with any of its
independent suppliers. If its supply of raw materials were interrupted, the
Company might not be able to obtain sufficient quantities of raw materials, or
obtain sufficient quantities of such materials at satisfactory prices, which, in
either case, could adversely affect the Company's results of operations.
Significant increases in the price of the Company's principal raw materials
could adversely affect the Company's financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Raw Materials."
Scrap metal is the principal raw material used in the Company's products. Scrap
metal together with alloy additives, principally nickel, chrome and molybdenum,
currently account for more than 50% of the Company's total cost of products
sold. Scrap metal prices are affected by cyclical, seasonal and other market
factors, and therefore future prices cannot be predicted with any degree of
certainty. Consequently, scrap metal prices frequently fluctuate as a result of
factors affecting the supply of scrap metal as well as the demand for steel. In
addition, the supply of premium grades of scrap metal used by the Company is
more limited than the supply of lower grades of scrap metal. Further, nickel and
chrome, key ingredients in certain alloys produced by the Company and
significant cost components, are available substantially only from foreign
sources, some of which are located in countries that may be subject to unstable
political and economic conditions. Those conditions might disrupt supplies or
affect the prices of the raw materials used by the Company. There can be no
assurance that the price of the Company's raw materials will remain at current
levels. Furthermore, an increase in the price that the Company pays for its raw
materials could have a material adverse effect on the results of operations of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Raw Materials."
9
<PAGE>
ITEM 2. PROPERTIES
The Company leases its Bridgeville Facility and owns the Titusville Facility.
The Bridgeville Facility is leased pursuant to a long-term net lease from Armco
for ten years from August 15, 1994, which includes the payment by the Company of
real and personal property taxes, water and sewage charges, special assessment
and insurance premiums associated therewith, with three five-year options to
renew on the same terms at the sole discretion of the Company. The Armco Lease
provides the Company with an option to purchase substantially all of the leased
premises for $1 any time during the term of the Armco Lease prior to August 15,
2015. The building that houses the electro-slag remelting equipment, which is
nearby, but not contiguously located, to the other facilities, is included in
the ten-year initial lease term only. The Company anticipates relocating the
equipment it owns in that facility in close proximity to the melt shop complex
in an existing building prior to the expiration of that initial ten-year term.
The Armco Lease is assignable with the written consent of Armco, which consent
cannot be unreasonably withheld. The Company is responsible for compliance with
all environmental laws related to the property subsequent to August 15, 1994,
subject to liabilities Armco retained under the Asset Agreement and Armco's
indemnification obligations.
The Bridgeville Facility consists of approximately 600,000 square feet of floor
space on approximately 50 acres. The Titusville Facility consists of more than
approximately 10 acres and includes seven separate buildings, including two
principal buildings of approximately 265,000 square feet in total area. The
following table sets forth information concerning the principal production and
process components of the Company's business. Certain of the components contain
more than one structure.
Capital Expenditures and Facilities Maintenance Programs
Steel production is generally considered to be a capital intensive industry. The
Company believes it will continue to require capital from time to time to add
new equipment and to repair or replace existing equipment to remain competitive
and, in conjunction with a continuing rigorous maintenance program, to enable it
to manufacture quality products and provide delivery and other support service
assurances to its customers.
In January 1997, the Company completed a capital expenditures program at an
aggregate cost to the Company of approximately $15.0 million. The funds for the
capital expenditures program were expended primarily at the Bridgeville
Facility, to a lesser extent at the Titusville Facility and in part to relocate
certain equipment from Titusville to Bridgeville, primarily as set forth in the
following table:
<TABLE>
<CAPTION>
Location Principal Additions and Improvements Anticipated Results
BRIDGEVILLE
<S> <C> <C>
Melt Shop Upgrade 50 ton electric arc furnace, AOD and Reduce melt time.
overhead crane system.
Universal Modification to add high lift rolling Permit production of rolled slab, large bloom
rolling mill capability; add plate descaler. and heavier plate products; improve yield and
complex quality of rolled slab and plate products.
Upgrade drive equipment, reheat furnaces and Improve production efficiency; reduce natural
controls. gas usage.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Location Principal Additions and Improvements Anticipated Results
<S> <C> <C>
Electro-slag Upgrade electrical and mechanical systems and Improve efficiency in the production of high
remelting controls. temperature alloys for the power generation
complex and aerospace industries.
Overall plant Add roller leveler and flattening press. Flatten certain plate products, replacing
previously outsourced operations.
Add cutting equipment. Permit large ingots to be cropped.
Upgrade various systems and controls. Improve real-time operating control and
information flow.
TITUSVILLE
PRP Area Upgrade various equipment. Improve efficiency; lower production costs.
Relocation and utilization of certain Improve production flow and reduce costs.
equipment.
</TABLE>
The Company believes the capital expenditures program will improve its ability
to retain its existing customers and attract new customers by enabling it to
provide a wider range of high quality products, ensure timely delivery of its
products and increase production flexibility.
Environmental Compliance
The Company is subject to demanding federal, state and local environmental laws
and regulations (the "Environmental Laws"), including those governing discharges
of pollutants into the air and water, the generation, handling and disposal of
solid and hazardous substances and the remediation of contamination associated
with generation, handling and disposal activities. The Company is subject
periodically to environmental compliance reviews by various regulatory offices.
Additionally, the Company monitors its compliance with Environmental Laws
applicable to it and, accordingly, believes that it is currently in compliance
with all laws and regulations in all material respects. The Company did not make
during fiscal year 1996, and does not expect to make during fiscal year 1997,
any expenditures for environmental control facilities, but could incur costs,
which may be significant, related to environmental compliance at any time or
from time to time in the future.
Bridgeville Facility
The Company has not incurred to date and does not anticipate incurring any
remediation costs from environmental conditions at the Bridgeville Facility. The
Company does not expect that any remediation that may be required at the
Bridgeville Facility will have a material adverse effect on the Company's
results of operations, liquidity or financial condition. The Company operates
production and processing equipment, which it owns, on real property that is
leased from Armco. Armco remains contractually obligated for environmental
matters, including compliance with laws governing the removal of hazardous
materials and the elimination of hazardous conditions, which stem from any
operations or activities at the leased Bridgeville Facility prior to August 15,
1994. In addition, Armco has agreed to indemnify the Company against any
liability arising as a result of any of those matters with respect to the
Bridgeville Facility to the extent of $6.0 million in the aggregate until 2004
and has further agreed (subject to the indemnity limits) to pay up to $250,000
for each 30-day period and up to $1.0 million in reimbursement for certain
non-recoverable operating costs should the Company's business be interrupted by
reason of matters arising under Environmental Laws that stem from occurrences
prior to August 15, 1994. Except as required by law or for the protection of
public health or the safety of its employees, the Company is contractually
prohibited from taking voluntary or discretionary action to accelerate or delay
the timing, or increase the cost of, Armco's environmental obligations with
respect to the Bridgeville Facility. Prior to entering into the Asset Agreement,
Armco and the Company identified certain environmental conditions existing at
the Bridgeville Facility, including asbestos in various structures, oils and
electrical devices containing PCBs, that Armco or the Company has remediated at
Armco's expense. Armco also remains responsible, without cost to the Company,
for complying with a 1993
11
<PAGE>
consent decree with the Pennsylvania Department of Environmental Resources
pursuant to which it is remediating certain contamination at the universal
rolling mill complex. That contamination stemmed from the release of oils
affecting soil and water conditions due to inadequate wastewater treatment. The
Company believes that Armco is in compliance with that consent decree and such
remediation is not expected to adversely impact the Company's use of the
facility. Pending the completion of the remediation by Armco, the Company is
operating, and thereafter intends to operate, the universal rolling mill in a
manner designed to avoid contamination. The Company's Bridgeville Facility
includes an overhead and rooftop system (the "bag house") to remove waste gases
generated by its melting operations. The bag house facility associated with that
system collects oxides and non-metallic residue for reclaiming purposes. An
independent reclaiming contractor purchases the oxides and non-metallic residue,
removes the residue and converts it into metallic form for sale back to the
Company as scrap metal. This reclaiming process enables the Company to dispose
of the unwanted residue, while at the same time recovering some raw materials
for the manufacture of semi-finished specialty steel.
Titusville Facility
The Company operates its production and processing equipment that was acquired
from Armco on real property the Company owns. Armco has agreed to indemnify the
Company to the extent of $3.0 million in the aggregate against liability for
environmental matters, including compliance with laws governing the removal of
hazardous materials and the elimination of hazardous conditions, which pertain
to environmental conditions existing on or under the Titusville Facility prior
to June 2, 1995. In addition, Armco has agreed to indemnify the Company for any
liabilities arising out of environmental conditions existing offsite as of June
2, 1995, and that indemnification is not subject to the $3.0 million limitation.
In connection with the PRP/VAR Agreement, the Company conducted a Phase I and
Phase II environmental study (the "Study") of the parcel of real estate acquired
by the Company, and the Company believes the amount and terms of Armco's
indemnity are sufficient to protect the Company against environmental
liabilities arising at the Titusville Facility from environmental conditions
existing as of June 2, 1995. The Study revealed asbestos in certain areas
adjacent to the Titusville Facility, which Armco has remediated at its expense,
and some electrical equipment containing PCBs that the Company is remediating at
its expense, which is not material. Additionally, the Study noted that as is
typical of the Titusville, Pennsylvania area generally, there is regional soil
and groundwater hydrocarbon contamination present at above applicable cleanup
standards, reflecting the fact that this area contains natural petroleum
deposits and that petroleum refining operations had been conducted nearby. Any
contamination of this type on the Company's property flows from outside its
boundaries, to the extent it is not indigenous to the underlying ground. The
Company believes it unlikely that it or Armco will be required to provide
cleanup at the Titusville Facility for the local hydrocarbon contamination or,
if it were, the Company believes this action would be part of a large program
addressing the entire area. To date, the Company has not been contacted by any
environmental governmental authority concerning this matter. Notwithstanding
Armco's indemnification obligations, with respect to the Titusville Facility, if
the Company accelerates the timing or increases the cost of any environmental
obligation retained by Armco except as required by law or for the protection of
public health or the safety of its employees, the Company shall bear such
accelerated or increased cost. If the Company accelerates the timing or
increases the cost of any environmental obligation retained by Armco with
respect to the Titusville Facility as a result of seeking financing or the sale
of less than a controlling interest in the voting stock of the Company, such
accelerated or increased cost shall be borne equally by Armco and the Company.
Armco has agreed to allow the Company to operate the business and the assets at
the Titusville Facility under Armco's National Pollution Discharge Elimination
System permit pending issuance of a modified permit to the Company.
Additionally, certain other processes that were employed by Armco, and certain
facilities used by Armco that may have involved or been the site of activities
that could have caused environmental pollution at the Titusville Facility, are
not employed or used by the Company. There may be other environmental conditions
that have not been identified by regulatory authorities but which may later be
determined to require remediation.
The Company's exclusive remedies for reimbursement from Armco for losses
stemming from pre-closing environmental conditions at each of the Bridgeville
Facility and the Titusville Facility are the indemnities agreed to with respect
to each of the facilities. There can be no assurance that those indemnities will
fully cover all environmental liabilities, especially if the relevant regulatory
authorities or others were to proceed solely against the Company with respect to
those liabilities at the Bridgeville Facility that arise out of conditions
existing prior to the commencement of the Armco Lease on August 15, 1994 (an
event the Company believes is unlikely), and there can
12
<PAGE>
be no assurance that the Company will have the financial resources to discharge
those liabilities if legally compelled to do so. See "Risk Factors--
Environmental Issues."
Based on the foregoing and the experience of its senior executives with respect
to both Armco's and the Company's facilities and the equipment and processes
employed at the Bridgeville Facility, and the results of the Phase I and Phase
II environmental study of the Titusville Facility, the Company believes the
amount and terms of the Armco indemnities are sufficient to protect the Company
against environmental liabilities arising from environmental conditions prior to
August 15, 1994, with respect to the Bridgeville Facility, and prior to June 2,
1995, with respect to the Titusville Facility.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the Company's best knowledge,
threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1996.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The Common Stock was accepted for trading on the NASDAQ National Market
beginning on August 24, 1995, and from December 14, 1994, the Common Stock had
traded on the NASDAQ Small Cap Market. The Common Stock has always traded under
the symbol "USAP". The following table sets forth the range of high and low sale
prices per share of Common Stock, as reported by the NASDAQ Small Cap Market and
the NASDAQ National Market, as the case may be, for the periods indicated below:
<TABLE>
<CAPTION>
High Low
- -------------------------------------------------------------------------------------------------------------------
Year 1996
<S> <C> <C>
First quarter $13-3/8 $ 9-1/4
Second quarter $12-1/4 $ 8-1/2
Third quarter $10-5/8 $ 8-3/4
Fourth quarter $ 9-1/4 $ 8
- -------------------------------------------------------------------------------------------------------------------
Year 1995
First quarter $10-1/2 $ 8
Second quarter $12-7/8 $ 9
Third quarter $16 $11-1/4
Fourth quarter $13 $ 9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 25, 1997, the last sale price of the Company's Common Stock as reported
by the NASDAQ National Market was $10 per share. At that date, there were
approximately 237 record holders of the Company's Common Stock.
Dividend Policy
The Company has never paid a cash dividend on its Common Stock and currently has
no plans to pay dividends in the foreseeable future. The Company presently
intends to retain its earnings, if any, to finance the development of its
business. Any future dividend policy will be determined by the Company's Board
of Directors, and the payment of any dividend in the future will be based upon
conditions then existing, including the Company's earnings, financial condition
and capital requirements, as well as such economic and other factors as the
Board of Directors may deem relevant at the time. The PNC Agreement contains
restrictions on the Company's ability to pay dividends on the Common Stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of operations data:
For the Preoperating
and Operating Period
Year Ended December 31
Ended
1996 1995 December 31, 1994
------------------- -------------------- ----------------------
<S> <C> <C> <C>
Net sales $60,258 $46,992 $5,743
Income (loss) before extraordinary items 4,793 2,723 (1,842)
Extraordinary items (2) -- __ (634)
Net income (loss) 4,793 2,723 (2,476)
=================== ==================== ======================
Net income (loss) per share of Common Stock:
Operations $0.76 $0.57 ($0.84)
Extraordinary items -- -- ($0.22)
------------------- ----------------------
- ---------------------------------------------
Net income (loss) $0.76 $0.57 ($0.84)
6,270,952
=================== ==================== ======================
Weighted average number of shares of
Common Stock outstanding 6,270,952 4,745,384 2,935,646
=================== ==================== ======================
Balance sheet data:
December 31,
1996 1995 1994
---- ---- ----
Working capital $15,981 $19,283 $6,857
Total assets 42,098 32,437 14,757
Long-term debt (2) 2,534 462 762
Total stockholders' equity (3) 30,497 25,591 8,875
</TABLE>
- ---------------------------
1) The Company began operating the Bridgeville Facility on August 15, 1994,
and initial shipments of semi-finished specialty steel were made on
September 19, 1994. Due to significant differences between the operations
conducted by Cyclops and Armco at the Bridgeville Facility and those
conducted by the Company, financial data prior to such time is not
comparable and therefore is not presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Pre-Acquisition
Financial Information".
2) During 1994, the Company recorded an extraordinary loss in the early
extinguishment of debt in connection with the retirement of the Armco Note,
and the 8% Subordinated Note, and the early termination of a bank loan
agreement.
3) In 1994, the Company completed an initial public offering of 1,625,000
shares of its Common Stock for net proceeds of $10,748,000. In 1995, the
Company completed additional offerings, issuing 1,750,600 shares of its
Common Stock for net proceeds of $13,993,000.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The information called for by this item is set forth on Pages 14 through 18 of
the Annual Report to Stockholders for the year ended December 31, 1996, which
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth on Pages 19 through 34 of
the Annual Report to Stockholders for the year ended December 31, 1996, which
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were none.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is set forth in the
Proxy Statement (the "Proxy Statement") to be sent to stockholders in connection
with the Company's Annual Meeting of Stockholders to be held on May 21, 1997,
under the heading "Proposal No. 1--Election of Directors," which information is
incorporated herein by reference.
The following table sets forth, as of December 31, 1996, certain information
with respect to the executive officers of the Company:
<TABLE>
<CAPTION>
NAME (AGE) EXECUTIVE OFFICER SINCE POSITION
<S> <C> <C>
Clarence M. McAninch (61) 1994 President and Chief Executive Officer
Bradford C. Bowman (47) 1996 Chief Operating Officer
Daniel J. DeCola, Sr. (44) 1994 Vice President, Operations
Richard M. Ubinger (37) 1994 Chief Financial Officer, Principal
Accounting Officer and Treasurer
Paul A. McGrath (45) 1997 Secretary and General Counsel
</TABLE>
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission and
the NASDAQ National Market System reports of ownership and changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the Company or
written representations that no other reports are required, the Company believes
that, during the 1996 fiscal year, all filing requirements applicable to its
officers, directors and greater than 10% of beneficial owners were met except
that one report filed by Mr. Ubinger was inadvertently filed late.
With the exception of the information specifically incorporated herein by
reference, the Company's Proxy Statement is not to be deemed filed as part of
this report for the purposes of this Item.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Transactions," which
information is incorporated by reference. With the exception of the information
specifically incorporated herein by reference, the Company's Proxy Statement is
not to be deemed filed as part of this report for the purposes of this Item.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on Form 10-K:
1) Consolidated Financial Statements:
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, appearing on Pages 19 through 34 of the accompanying
Annual Report to Stockholders, are incorporated by reference in this Form
10-K Annual Report.
2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and have therefore been
omitted.
3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
2.1* Certificate of Merger, dated July 29, 1994, between Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.2* Agreement and Plan of Merger, dated July 28, 1994, among Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.3** Asset and Real Property Purchase Agreement, dated as of June 2,
1995, by and between Armco Inc. and the Company.
3.1* Amended and Restated Certificate of Incorporation.
3.2* By-laws of the Company.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.
18
<PAGE>
4.2* Form of Representative's Warrant Agreement (including Form of
Representative's Warrant Certificate).
10.1* Base Contract for Sale of Natural Gas, dated July 1, 1993, by and
between the Company and Columbia Energy Services Corporation.
10.2* Electric Service Contract, dated July 27, 1994, by and between the
Company and Duquesne Light Company, with Schedule of Rates.
10.3* Product Supply Agreement, dated August 16, 1994, by and between Air
Products and Chemicals, Inc., and the Company.
10.4* Management Stock Disposition Agreement, dated July 28, 1994, by
and between the Company and Daniel J. DeCola, Sr.
10.5* Management Stock Disposition Agreement, dated July 28, 1994, by and
between the Company and Clarence M. McAninch.
10.6* Non-Management Stock Disposition Agreement, dated July 28, 1994, by
and between the Company and Samuel P. Gerace, Sr.
10.7* Securities Purchase Agreement, dated July 29, 1994, by and among
the Company and Herbert V. Turk.
10.8* Stockholders Agreement, dated as of August 1, 1994, by and among
the Company and its existing stockholders.
10.9* Lease Agreement, dated August 15, 1994, by and between Armco Inc.
and the Company.
10.10* Employment Agreement, dated August 15, 1994, by and between the
Company and Daniel J. DeCola, Sr.
10.11* Employment Agreement, dated August 15, 1994, by and between the
Company and Clarence M. McAninch.
10.12* Asset Purchase Agreement, dated August 15, 1994, by and between the
Company and Armco Inc., as amended by letter agreement, dated
October 5, 1994, by and between the Company and Armco Inc.
10.13* Loan and Security Agreement, dated August 15, 1994, by and between
the Company and Mellon Bank, N.A., as amended by letter agreement,
dated October 11, 1994.
10.14* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Mellon Bank, N.A.
10.15* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Herbert V. Turk.
10.16* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Herbert V. Turk, the Company and Mellon Bank, N.A.
10.17* Open-End Leasehold Mortgage and Security Agreement, dated August
15, 1994, by the Company, in favor of Mellon Bank, N.A.
10.18* Promissory Note, dated August 15, 1994, for the principal sum of
$1,850,000.00, by the Company, in favor of Armco Inc.
10.19* Subordinated Note, dated August 15, 1994, for the principal sum of
$2,000,000.00, by the Company, in favor of Herbert V. Turk.
10.20* Note, dated August 15, 1994, for the principal sum of
$4,500,000.00, by the Company, in favor of Mellon Bank, N.A.
10.21* Security Agreement, dated August 15, 1994, by and between the
Company and Armco Inc.
19
<PAGE>
10.22* Junior Security Agreement, dated August 15, 1994, by and between
the Company and Herbert V. Turk.
10.23* Surety Agreement, dated August 15, 1994, by Daniel J. DeCola, and
Linda D. DeCola, in favor of Mellon Bank, N.A.
10.24* Surety Agreement, dated August 15, 1994, by Clarence M. McAninch
and Kay L. McAninch, in favor of Mellon Bank, N.A.
10.25* 1994 Stock Incentive Plan.
10.26* Employee Stock Plan.
10.27* Letter Agreement, dated July 15, 1994, by and between the Company
and Tradition (North America), Inc.
10.28* Collective Bargaining Agreement, dated August 24, 1994, by and
between the Company and United Steelworkers of America.
10.29* Subscription Agreement, dated October 14, 1994, by and between
Edelson Technology Partners III, L.P. and the Company.
10.30* Escrow Letter, dated November 22, 1994, between the Company and PNC
Bank, National Association.
10.31* Credit Agreement, dated as of November 18, 1994, between the
Company and PNC Bank, National Association, with Exhibits and
Schedules.
10.32* Security Agreement and Collateral Assignment, dated as of November
18, 1994, by and between the Company and PNC Bank, National
Association.
10.33* Note, dated as of November 18, 1994, by and between the Company and
PNC Bank, National Association.
10.34* Landlord's Waiver, dated as of November 18, 1994, by Armco Inc.
10.35* Open-End Leasehold Mortgage, Collateral Assignment and
Security Agreement dated as of November 18, 1994, by the Company in
favor of PNC Bank, National Association. 10.36* Pledge and Security
Agreement, dated as of November 18, 1994, between the Company and
PNC Bank, National Association. 10.37** First Amendment to Credit
Agreement and Waiver, dated as of March 30, 1995, by and between
the Company and PNC Bank, National Association. 10.38** Second
Amendment to Credit Agreement and Waiver, dated as of May 31, 1995,
by and between the Company and PNC Bank, National Association.
10.39** Third Amendment to Credit Agreement and Waiver, dated as of
August 25, 1995, by and between the Company and PNC Bank, National
Association. 10.40** Fourth Amendment to Credit Agreement and
Waiver, dated as of October 3, 1995, by and between the Company and
PNC Bank, National Association. 10.41** Fifth Amendment to Credit
Agreement and Waiver, dated as of October 9, 1995, by and between
the Company and PNC Bank, National Association. 10.42** Collective
Bargaining Agreement, dated May 3, 1995, by and between the Company
and United Steelworkers of America.
10.43** Promissory note, dated June 2, 1995, by and between the Company and
Armco Inc.
10.44** Security Agreement, dated as of June 2, 1995, by and between the
Company and Armco Inc.
10.45** Mortgage, dated as of June 2, 1995, by and between the Company and
Armco Inc.
20
<PAGE>
10.46** Letter Agreement, dated July 6, 1995, by and between the Company
and Commonwealth of Pennsylvania.
10.47** Loan Agreement, dated October 3, 1995, by and between the Company
and Commonwealth of Pennsylvania.
10.48** Note, dated October 3, 1995, for the principal sum of $500,000, by
the Company, in favor of the Commonwealth of Pennsylvania.
10.49** Security Agreement, dated October 3, 1995, by and between the
Company and the Commonwealth of Pennsylvania.
10.50** Letter Agreement, dated June 30, 1995, by and between the Company
and the Commonwealth of Pennsylvania.
10.51** Letter Agreement, dated September 20, 1995, by and between the
Company and the Commonwealth of Pennsylvania.
10.52* Underwriting Agreement, dated December 14, 1995, among the Company
and Keane Securities Co., Inc., as representatives of the several
underwriters.
10.53** Form of Underwriting Agreement among the Company and Oppenheimer &
Co., Inc., and Furman Selz Incorporated, as representatives of the
several underwriters.
10.54*** First Amendment to Registration Rights Agreement, dated as of July
3, 1995, by and between the Company and Edelson Technology Partners
III, L.P.
10.55 Employment Agreement, dated October 8, 1996, by and between the
Company and Bradford C. Bowman.
13 Selected pages of the Company's 1996 Annual Report to Shareholders
incorporated by reference into Part II of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on the signature page hereto).
27 Financial Data Schedule.
- ---------------------------
* Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-85310).
** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-97896).
*** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-98534).
b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1994.
c) See Item 14(a)(3) above.
d) None.
21
<PAGE>
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 on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 27,
1996.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
By: /s/ Clarence M. McAninch
---------------------------
Clarence M. McAninch
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the officers and directors of Universal Stainless & Alloy Products,
Inc., whose signature appears below in so signing also makes, constitutes and
appoints Clarence M. McAninch and Daniel J. DeCola, Sr., and each of them acting
alone, his true and lawful attorney-in-fact, with full power of substitution,
for him in any and all capacities, to execute and cause to be filed with the
Securities Exchange Commission any and all amendment or amendments to this
Report on Form 10-K, with exhibits thereto and other documents connected
therewith and to perform any acts necessary to be done in order to file such
documents, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Clarence M. McAninch President, Chief Executive Officer March 27, 1997
- ---------------------------------------
Clarence M. McAninch and Director
March 27, 1997
/s/ Bradford C. Bowman Chief Operating Officer
- ---------------------------------------
Bradford C. Bowman and Director
/s/ Daniel J. DeCola, Sr. Vice President, Operations March 27, 1997
- ---------------------------------------
Daniel J. DeCola, Sr. Director
/s/ Richard M. Ubinger Chief Financial Officer, Principal Accounting March 27, 1997
- ---------------------------------------
Richard M. Ubinger Officer and Treasurer
/s/ Udi Toledano Director March 27, 1997
- ---------------------------------------
Udi Toledano
/s/ Orit Gadiesh Director March 27, 1997
- ---------------------------------------
Orit Gadiesh
/s/ George F. Keane Director March 27, 1997
- ---------------------------------------
George F. Keane
/s/ D. Leonard Wise Director March 27, 1997
- ---------------------------------------
D. Leonard Wise
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1* Certificate of Merger, dated July 29, 1994, between Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.2* Agreement and Plan of Merger, dated July 28, 1994, among Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.3** Asset and Real Property Purchase Agreement, dated as of June 2, 1995, by and between Armco Inc. and the
Company.
3.1* Amended and Restated Certificate of Incorporation.
3.2* By-laws of the Company.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.
4.2* Form of Representative's Warrant Agreement (including Form of Representative's Warrant Certificate).
10.1* Base Contract for Sale of Natural Gas, dated July 1, 1993, by and between the Company and Columbia Energy
Services Corporation.
10.2* Electric Service Contract, dated July 27, 1994, by and between the
Company and Duquesne Light Company, with Schedule of Rates.
10.3* Product Supply Agreement, dated August 16, 1994, by and between Air
Products and Chemicals, Inc., and the Company.
10.4* Management Stock Disposition Agreement, dated July 28, 1994, by and between the Company
and Daniel J. DeCola, Sr.
10.5* Management Stock Disposition Agreement, dated July 28, 1994, by and between the Company
and Clarence M. McAninch.
10.6* Non-Management Stock Disposition Agreement, dated July 28, 1994, by and between the
Company and Samuel P. Gerace, Sr.
10.7* Securities Purchase Agreement, dated July 29, 1994, by and among the Company and Herbert
V. Turk.
10.8* Stockholders Agreement, dated as of August 1, 1994, by and among the Company and its
existing stockholders.
10.9* Lease Agreement, dated August 15, 1994, by and between Armco Inc. and the Company.
10.10* Employment Agreement, dated August 15, 1994, by and between the Company and
Daniel J. DeCola, Sr.
10.11* Employment Agreement, dated August 15, 1994, by and between the Company and Clarence M.
McAninch.
10.12* Asset Purchase Agreement, dated August 15, 1994, by and between the
Company and Armco Inc., as amended by letter agreement, dated
October 5, 1994, by and between the Company and Armco Inc.
10.13* Loan and Security Agreement, dated August 15, 1994, by and between
the Company and Mellon Bank, N.A., as amended by letter agreement,
dated October 11, 1994.
10.14* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Mellon Bank, N.A.
10.15* Subordination and Intercreditor Agreement, dated August 15, 1994, by and among Armco Inc.,
the Company and Herbert V. Turk.
10.16* Subordination and Intercreditor Agreement, dated August 15, 1994, by and among Herbert V.
Turk, the Company and Mellon Bank, N.A.
10.17* Open-End Leasehold Mortgage and Security Agreement, dated August
15, 1994, by the Company, in favor of Mellon Bank, N.A.
10.18* Promissory Note, dated August 15, 1994, for the principal sum of $1,850,000.00, by the
Company, in favor of Armco Inc.
10.19* Subordinated Note, dated August 15, 1994, for the principal sum of $2,000,000.00, by the
Company, in favor of Herbert V. Turk.
10.20* Note, dated August 15, 1994, for the principal sum of $4,500,000.00, by the Company, in
favor of Mellon Bank, N.A.
10.21* Security Agreement, dated August 15, 1994, by and between the Company and Armco Inc.
10.22* Junior Security Agreement, dated August 15, 1994, by and between the Company and
Herbert V. Turk.
10.23* Surety Agreement, dated August 15, 1994, by Daniel J. DeCola, and Linda D. DeCola, in
favor of Mellon Bank, N.A.
10.24* Surety Agreement, dated August 15, 1994, by Clarence M. McAninch and Kay L. McAninch, in
favor of Mellon Bank, N.A.
10.25* 1994 Stock Incentive Plan.
10.26* Employee Stock Plan.
10.27* Letter Agreement, dated July 15, 1994, by and between the Company
and Tradition (North America), Inc.
10.28* Collective Bargaining Agreement, dated August 24, 1994, by and
between the Company and United Steelworkers of America.
10.29* Subscription Agreement, dated October 14, 1994, by and between Edelson Technology Partners
III, L.P. and the Company.
10.30* Escrow Letter, dated November 22, 1994, between the Company and PNC
Bank, National Association.
10.31* Credit Agreement, dated as of November 18, 1994, between the
Company and PNC Bank, National Association, with Exhibits and
Schedules.
10.32* Security Agreement and Collateral Assignment, dated as of November
18, 1994, by and between the Company and PNC Bank, National
Association.
10.33* Note, dated as of November 18, 1994, by and between the Company and PNC Bank, National
Association.
10.34* Landlord's Waiver, dated as of November 18, 1994, by Armco Inc.
10.35* Open-End Leasehold Mortgage, Collateral Assignment and Security
Agreement dated as of November 18, 1994, by the Company in favor of
PNC Bank, National Association.
10.36* Pledge and Security Agreement, dated as of November 18, 1994,
between the Company and PNC Bank, National Association.
10.37** First Amendment to Credit Agreement and Waiver, dated as of March
30, 1995, by and between the Company and PNC Bank, National
Association.
10.38** Second Amendment to Credit Agreement and Waiver, dated as of May
31, 1995, by and between the Company and PNC Bank, National
Association.
10.39** Third Amendment to Credit Agreement and Waiver, dated as of August
25, 1995, by and between the Company and PNC Bank, National
Association.
10.40** Fourth Amendment to Credit Agreement and Waiver, dated as of
October 3, 1995, by and between the Company and PNC Bank, National
Association.
10.41** Fifth Amendment to Credit Agreement and Waiver, dated as of October
9, 1995, by and between the Company and PNC Bank, National
Association.
10.42** Collective Bargaining Agreement, dated May 3, 1995, by and between the Company and United
Steelworkers of America.
10.43** Promissory note, dated June 2, 1995, by and between the Company and Armco Inc.
10.44** Security Agreement, dated as of June 2, 1995, by and between the Company and Armco Inc.
10.45** Mortgage, dated as of June 2, 1995, by and between the Company and Armco Inc.
10.46** Letter Agreement, dated July 6, 1995, by and between the Company and Commonwealth of
Pennsylvania.
10.47** Loan Agreement, dated October 3, 1995, by and between the Company and Commonwealth of
Pennsylvania.
10.48** Note, dated October 3, 1995, for the principal sum of $500,000, by the Company, in favor
of the Commonwealth of Pennsylvania.
<PAGE>
10.49** Security Agreement, dated October 3, 1995, by and between the Company and the
Commonwealth of Pennsylvania.
10.50** Letter Agreement, dated June 30, 1995, by and between the Company and the Commonwealth of
Pennsylvania.
10.51** Letter Agreement, dated September 20, 1995, by and between the Company and the
Commonwealth of Pennsylvania.
10.52* Underwriting Agreement, dated December 14, 1995, among the Company
and Keane Securities Co., Inc., as representatives of the several
underwriters.
10.53** Form of Underwriting Agreement among the Company and Oppenheimer &
Co., Inc., and Furman Selz Incorporated, as representatives of the
several underwriters.
10.54*** First Amendment to Registration Rights Agreement, dated as of July
3, 1995, by and between the Company and Edelson Technology Partners
III, L.P.
10.55 Employment Agreement, dated October 8, 1996, by and between the Company and Bradford C.
Bowman.
13.1 Selected pages of the Company's 1996 Annual Report to Shareholders
incorporated by reference into Part II of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on the signature page hereto).
27 Financial Data Schedule
</TABLE>
- ---------------------------
* Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-85310).
** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-97896).
*** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-98534).
b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1994.
c) See Item 14(a)(3) above.
d) None.
<PAGE>
Exhibit 10.55
Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, Pennsylvania 15017
October 8, 1996
Bradford Chris Bowman
38 Elora Drive, Unit #1
Hamilton, Ontario L9C7K3
CANADA
SUBJECT: EMPLOYMENT OFFER
Dear Brad:
It is with great pleasure that I am able to notify you that Universal Stainless
& Alloy Products, Inc., is hereby offering you employment in the capacity of
Chief Metallurgical Engineer.
This offer is contingent on your successfully completing a pre-employment
physical, including drug and alcohol screening.
This offer is not an employment contract, is not for any specific period of
time, and any employment resulting from such offer is considered to be
employment at will.
This offer is made with the following provisions.
1) Annual Salary: $175,000.00 (US).
2) Bonus Plan: Same plan as President & CEO for 1997 calendar year
3) Stock Options: 40,000 options at time of employment vesting 1/3 per
year for three years. 20,000 options on first anniversary vesting 1/3
per year for three years.
4) Pension Funding: $40.00 semi-monthly contributed to 401 K plan
5) Life Insurance: Equal to base annual salary
6) Health Insurance: Standard company program
7) Vacation: Two weeks after one year of service
<PAGE>
October 8, 1996
Page 2
8) Holidays: Eight holidays
9) One-time relocation assistance
. A Reimbursement of reasonable costs to relocate personal
household furnishings from your current residence to your new
residence in the Pittsburgh area.
. Reimbursement of temporary living expense for four (4) months
(lodging & meals).
. A Reimbursement for round-trip airfare between Pittsburgh, PA
and Hamilton, Ontario twice a month for up to four (4) months.
. Reimbursement for closing costs associated with the purchase
of primary residence in the Pittsburgh area.
. House hunting: Reimbursement two (2) family trips to
Pittsburgh area to investigate housing market.
10) Involvement with the Board of Directors and membership on the Board
subject to Corporate by-laws and stockholder approval.
11) If employment is terminated during the first year of employment by the
Company without cause, employee is entitled to one year salary plus any
unpaid bonus earned up to time of termination plus standard medical
benefits for one year.
The above mentioned items are substantially the items that are material to the
offer, but are not all-inclusive of the company's benefits and do not contain
all provisions.
We would like your response no later than October 9, 1996, with an anticipated
start date of October 15, 1996.
If you have any questions, please do not hesitate to call me at 412-257-7603.
Sincerely,
/s/ Paul A. McGrath
- -------------------
Paul A. McGrath
Director Employee Relations/General Counsel
hf
I hereby accept this offer of employment by Universal Stainless & Alloy
Products, Inc.
/s/ Bradford C. Bowman
- ----------------------
(Signed)
<PAGE>
Exhibit 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
The Company was incorporated in June 1994 and is the successor by merger to a
company (the "Former Company") of the same name, which was incorporated in
Pennsylvania in January 1994, for the principal purpose of acquiring
substantially all of the idled equipment and related assets (the "Assets")
located at the Bridgeville, Pennsylvania, production facility (the "Bridgeville
Facility") of Armco Inc. ("Armco"). The Assets had been idle since December 23,
1993. Prior to the merger, the Former Company had no operating history and no
material assets.
On August 15, 1994, the Company completed its acquisition of the Assets. On
September 9, 1994, the Company completed its first melt of semi-finished steel
product, and initial shipments from the facility were made on September 19,
1994. On June 2, 1995, the Company acquired the precision rolled products
business ("PRP Business") and five vacuum-arc remelting furnaces and certain
ancillary equipment ("VAR Assets") from the Cytemp division of Armco, located in
Titusville, Pennsylvania. The PRP Business involves primarily the manufacture of
stationary parts for power generation and aerospace uses. The VAR Assets were a
cost center of the Cytemp division with operations unrelated to the PRP
Business.
Results of Operations
An analysis of the Company's operations is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------
Net sales
<S> <C> <C> <C> <C> <C> <C>
Stainless steel $46,903 77.8% $38,292 81.5% $ 4,192 73.0%
Tool steel 8,019 13.3 4,080 8.7 1,212 21.1
Conversion services 3,804 6.3 3,272 7.0 188 3.3
Other 1,532 2.6 1,348 2.8 151 2.6
- ------------------------------------------------------------------------------------------------------------------------------
Total net sales 60,258 100.0 46,992 100.0 5,743 100.0
- ------------------------------------------------------------------------------------------------------------------------------
Cost of products sold
Raw materials 24,208 40.2 23,728 50.5 3,240 56.4
Other 23,986 39.8 16,591 35.3 2,232 38.9
- ------------------------------------------------------------------------------------------------------------------------------
Total cost of
products sold 48,194 80.0 40,319 85.8 5,472 95.3
- ------------------------------------------------------------------------------------------------------------------------------
Plant startup costs - 0.0 - 0.0 273 4.7
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) $12,064 20.0% $ 6,673 14.2% $ (2) 0.0%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Net sales by market segment are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rerollers $29,896 49.6% $27,216 57.9% $3,491 60.8%
Service centers 10,503 17.4 4,493 9.6 1,212 21.1
Original equipment manufacturers 8,168 13.6 4,062 8.6 - -
Forgers 7,797 12.9 7,829 16.7 624 10.9
Conversion 3,804 6.3 3,272 7.0 188 3.3
Miscellaneous 90 0.2 120 0.2 228 3.9
- -----------------------------------------------------------------------------------------------------------------------------------
$60,258 100.0% $46,992 100.0% $5,743 100.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1996 Results as Compared to 1995 The increase in net sales in 1996 reflects the
June 1995 acquisition of the PRP Business and VAR Assets, along with an increase
in shipments of stainless steel to rerollers and original equipment
manufacturers and of tool steel to service centers. The Company shipped
approximately 40,300 tons in 1996, compared to shipments of 32,700 tons in 1995.
The increase in net sales of stainless steels was achieved despite lower pricing
of stainless steel long products due to competition from imports. The net sales
increase to original equipment manufacturers reflects rising demand for the
Company's products from the power generation sector, as well as the PRP Business
acquisition, while the higher service center sales reflect an increase in the
Company's tool steel customer base. The 1995 sales were unfavorably affected by
the approximately six-week production halt of the universal rolling mill at the
Bridgeville Facility in July and August of that year.
Cost of products sold, as a percentage of net sales, decreased in 1996 as
compared to 1995 primarily due to lower acquisition costs for the Company's
primary raw materials, an increase in tool steel shipments and an improved sales
mix within the stainless steel product lines. The 1995 percentage was
unfavorably affected by the universal rolling mill production halt described
above.
Selling and administrative expenses increased from $3.5 million in 1995 to $4.5
million in 1996. The increase primarily relates to insurance costs and the
addition of personnel as a result of the continued growth of the business,
including the acquisition of the PRP Business and VAR Assets.
Interest and other income increased to $211,000 in 1996 in comparison to
$177,000 in 1995, primarily due to cash available for investing purposes during
the respective periods. The increased cash availability in 1996 is directly
related to the sale of 1,700,000 shares of Common Stock in a public offering
completed in November 1995. The public offering proceeds were utilized to fund
the Company's capital expenditure program. In addition, the Company was not
required to borrow funds under its $6.5 million revolving line of credit, which
resulted in a decrease in interest and other financing costs from $416,000 in
1995 to $131,000 in 1996.
The effective income tax rate utilized in 1996 was 37.0% in comparison to 8.1%
in 1995. The lower effective income tax rate in 1995 reflects the recognition of
the benefit from net operating loss carryforwards generated in 1994.
1995 Results as Compared to 1994 The increase in net sales in 1995 is directly
related to the continued growth of the business since the Company's inception.
The Company shipped approximately 32,700 tons in 1995, compared to shipments of
4,300 tons in 1994. Shipments were favorably affected by the June 2, 1995
acquisition of the PRP Business and the VAR Assets. Shipments were adversely
affected by the approximately six-week
-2-
<PAGE>
production halt, in July and August 1995, of the universal rolling mill at the
Bridgeville Facility. Sales prices per ton improved in 1995 over 1994 primarily
due to an improved sales mix within the stainless steel product line.
Cost of products sold, as a percent of sales, decreased in 1995 as compared to
1994 primarily due to increased volumes, the implementation of price surcharges
to mitigate fluctuations in the market value of the Company's primary raw
materials (basic scrap, nickel, chrome and molybdenum) and the improved sales
mix within the stainless steel product line, complemented by a substantial
increase in conversion services. The 1995 percentage was unfavorably affected by
the universal rolling mill production halt described above.
During its startup phase, the Company purchased raw materials in order to
support the production schedule developed from the order backlog. As a result of
capital constraints placed on the Company due to cash outlays required prior to
the December 1994 initial public offering, the Company did not have sufficient
funds to purchase its raw material needs on its growing book of business that
extended into mid-February 1995. These events occurred at a time when raw
material costs were rapidly rising and were further exacerbated by various
operational delays that occurred and were subsequently corrected during the
plant "shakedown" period. Therefore, the timing of the raw material purchases
caused the Company to produce orders at lower-than-expected margins in this
early period. With a view to further developing its customer relationships,
however, the Company decided to fulfill its order requirements at the originally
established prices. Subsequently, the Company's selling price increases and
surcharges helped offset raw material price increases in 1995. In addition, the
Company completed negotiations with respect to certain raw material suppliers,
resulting in arrangements that permit the Company to purchase certain raw
materials at set prices for up to 30 to 90 days, which may provide short-term
protection from increases in future raw material prices, although there can be
no assurance in that regard.
The increase experienced in selling and administrative expenses between 1994 and
1995 was primarily due to the continued growth of the business, including the
acquisition of the PRP Business and the VAR Assets.
Interest income was earned on the cash received from two public offerings that
was invested in high-grade, short-term investments.
Interest and other financing costs primarily related to the cost of borrowed
funds under the revolving line of credit and other debt instruments and the
amortization of deferred financing costs associated with the negotiation and
execution of loan agreements. The increase in 1995 was primarily due to
increased borrowing activity prior to the Company's November 1995 public
offering.
The effective income tax rate of 8.1% in 1995 was a direct result of the
Company's ability to utilize all of the Company's available net operating loss
carryforwards generated in 1994. Considering the lack of an operating history to
support the realization of the deferred tax assets at December 31, 1994, the
Company provided a valuation allowance of 100% against its net deferred tax
asset balance of $938,000. This valuation allowance was reversed in 1995.
The Company elected to apply a portion of the net proceeds from the December
1994 public offering to prepay its long-term debt, resulting in an extraordinary
gain of $101,000. The Company also elected to terminate a bank loan agreement
that required the write-off of the unamortized deferred financing costs
($523,000) and the payment of a termination fee and other expenses ($212,000).
The net loss from these early extinguishments of debt are reflected in the
statement of operations as extraordinary items.
Liquidity and Capital Resources
In 1996, the Company generated cash flow from operations of $3.6 million despite
continuing increases in accounts receivable and inventory as a result of sales
growth. The preoperating activities and operations of the Company used cash in
the amount of $4.3 million during 1994 and $1.9 million during 1995, which
resulted from the Company's 1994 net loss and the increase in working capital
levels.
-3-
<PAGE>
At December 31, 1996, working capital approximated $16.0 million, as compared to
$19.1 million at December 31, 1995. The ratio of current assets to current
liabilities at December 31, 1996 and 1995, was 3.0:1 and 4.0:1, respectively.
The debt to capitalization ratio was 8% at December 31, 1996, and 2% at December
31, 1995. The decrease in working capital was attributable to capital
expenditures incurred, which were partially offset by cash provided from
operations and financing activities.
Capital Expenditures and Investments The Company's capital expenditures were
approximately $11.4 million and $3.0 million for the years ended December 31,
1996 and 1995, respectively, which primarily related to the Company's 1995-96
capital expenditure program estimated at $15.0 million. Capital expenditures in
1997 are expected to approximate $9.0 million, of which $2.1 million relate to
the completion of projects at the electric arc furnace and universal rolling
mill. These expenditures are expected to be funded substantially from internally
generated funds.
PNC Working Capital Agreement On January 31, 1996, the Company entered into an
amended and restated credit agreement in which PNC Bank agreed to make available
a revolving credit facility through April 1998 ("PNC Line") for working capital
purposes in an amount not to exceed $6.5 million. Interest charged on the unpaid
principal balance under the PNC Line is paid at an annual rate equal to PNC
Bank's prime rate plus 0.25%. The Company must also pay a 0.5% per annum usage
fee on the daily unused portion of the revolving line of credit. The PNC Line is
secured by substantially all the Company's assets and a leasehold mortgage on
the premises leased by the Company from Armco. The PNC working capital agreement
also contains financial covenants and restrictive covenants that place certain
limits on the Company's ability to incur additional indebtedness, issue
guarantees, encumber any of its assets and properties, issue dividends, dispose
of and acquire assets and fund capital expenditures. There were no borrowings
under the PNC Line during 1996.
Government Financing Programs The Company has entered into three separate loan
agreements with the Commonwealth of Pennsylvania's Department of Commerce
aggregating $1.1 million with terms ranging from seven to twenty years. The
Company also entered into a ten-year loan agreement with the Redevelopment
Authority of Allegheny County Economic Development Fund in the amount of $1.5
million. The loans bear interest at rates ranging from 5% to 6% per annum.
Environmental Matters The Company, as well as other steel companies, is subject
to demanding environmental standards imposed by federal, state and local
environmental laws and regulations. In connection with the acquisition of the
Assets at the Bridgeville Facility, Armco agreed to retain responsibility for
liabilities asserted against Armco under environmental laws with respect to
environmental conditions existing at the Bridgeville Facility prior to
commencement of the long-term net lease of that facility with Armco on August
15, 1994, and to indemnify the Company up to $6.0 million in the aggregate over
ten years. Such indemnification expires on August 15, 2004. Certain
environmental conditions, that were identified as having existed as of August
15, 1994, have been or are in the process of being remediated by Armco at its
expense.
In connection with the Company's June 2, 1995 agreement with Armco to purchase
the PRP Business, the VAR Assets and a parcel of real property located at
Titusville, Armco agreed to indemnify the Company up to $3.0 million in the
aggregate for liabilities under environmental laws arising out of conditions on
or under the Titusville property existing prior to June 2, 1995. Armco's
obligation to indemnify the Company for any liabilities arising out of
environmental conditions existing off-site as of June 2, 1995, is not subject to
the $3.0 million limitation.
Management is not aware of any financial difficulties being experienced by Armco
that would prevent its performance under the acquisition agreements. In
addition, management is not aware of any environmental conditions or the
incurrence of other liabilities at the Bridgeville or Titusville facilities, for
which Armco has agreed to indemnify the Company nor of any environmental
condition requiring remediation and affecting the Company other than those
identified in the preceding discussion.
-4-
<PAGE>
Short- and Long-Term Liquidity The Company expects to meet substantially all of
its short-term liquidity requirements with internally generated funds. In
addition, the Company has $6.5 million available under the PNC Line. As the
demand for the Company's products increases, the probability for borrowings
under the PNC Line will likely increase.
The Company's long-term liquidity also depends upon its ability to obtain
additional orders from its customers, attract new customers and control costs
during periods of low demand or pricing in the event of a downturn in general
economic conditions.
General Actual results will be affected by a wide range of factors including
timing, cancellation or delay of customer orders; changes in product mix; the
Company's limited operating history; the concentrated nature of the Company's
customer base to date and the Company's dependence on its significant customers;
the Company's reliance on certain critical manufacturing equipment; the
significant fluctuations that may occur in raw material prices; and the
Company's ongoing requirement for continued compliance with environmental laws.
Any unfavorable change in the foregoing or other factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. Many of these factors are not within the Company's control, and
there can be no assurances regarding the Company's future sales or earnings.
Report of Independent Accountants
To the Board of Directors and Stockholders
of Universal Stainless & Alloy Products, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Universal Stainless & Alloy
Products, Inc., and its subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, and for the preoperating and operating periods ended December
31, 1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As more fully discussed in Note 1, the Company acquired substantially all of the
idled equipment and related assets of Armco Inc.'s Stainless & Alloy Products
Division located at Bridgeville, Pennsylvania, pursuant to an Asset Purchase
Agreement with Armco Inc. The Company had no operating history prior to August
15, 1994.
Price Waterhouse LLP
Pittsburgh, Pennsylvania
January 20, 1997
-5-
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
) For the Preoperating and
For the For the Operating Periods
Year Ended Year Ended Ended December 31,
(Dollars in thousands, except per share information December 31, 1996 December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $60,258 $46,992 $ 5,743
Cost of products sold 48,194 40,319 5,472
Plant startup costs - - 273
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 12,064 6,673 (2)
Selling and administrative expenses 4,533 3,471 1,211
Organizational expenses - - 442
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 7,531 3,202 (1,655)
Interest and other income 211 177 25
Interest and other financing costs 131 416 212
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and extraordinary items 7,611 2,963 (1,842)
Provision for income taxes 2,818 240 -
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items 4,793 2,723 (1,842)
Extraordinary items (Note 4) - - (634)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,793 $ 2,723 $(2,476)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share of Common Stock:
Before extraordinary items $ 0.76 $ 0.57 $(0.62)
Extraordinary items - - (0.22)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.76 $ 0.57 $ (0.84)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares of
Common Stock outstanding 6,270,952 4,745,384 2,935,646
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents $ 4,219 $10,038
Accounts receivable (less allowance for
doubtful accounts of $238 and $178) 9,409 7,832
Inventory (Note 2) 9,784 7,105
Prepaid expenses 629 470
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 24,041 25,445
Property, plant and equipment, net (Note 3) 17,810 6,664
Other assets 247 328
- --------------------------------------------------------------------------------------------------------------------------
Total assets $42,098 $32,437
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Trade accounts payable $ 5,857 $ 5,077
Current portion of long-term debt (Note 4) 260 73
Accrued employment costs (Note 8) 1,403 687
Other current liabilities 540 325
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,060 6,162
Long-term debt (Note 4) 2,534 462
Deferred taxes (Note 6) 1,007 222
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,601 6,846
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments and contingencies (Note 10)
Stockholders' equity (Note 7)
<TABLE>
<CAPTION>
<S> <C> <C>
Senior Preferred Stock, par value $.001 per share; liquidation value $100 per
share; 2,000,000 shares authorized; and 0 shares issued and
outstanding _ _
Common Stock, par value $.001 per share;
10,000,000 shares authorized; 6,283,734 and
6,270,000 shares issued and outstanding 6 6
Additional paid-in capital 25,451 25,338
Retained earnings 5,040 247
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,497 25,591
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $42,098 $32,437
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the Preoperating and
Year Ended Year Ended Operating Periods Ended
(Dollars in thousands) December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from preoperating and operating activities:
<S> <C> <C> <C>
Net income (loss) $ 4,793 $ 2,723 $ (2,476)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 541 304 133
Deferred taxes 728 (205) -
Extraordinary items - - 634
Changes in assets and liabilities:
Accounts receivable, net (1,577) (4,302) (3,530)
Inventory (2,679) (1,385) (4,066)
Accounts payable 780 515 4,562
Accrued employment costs 716 513 174
Other, net 339 (95) 269
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by preoperating
and operating activities 3,641 (1,932) (4,300)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of assets through purchase agreements - (859) (1,850)
Capital expenditures (11,409) (3,039) (132)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (11,409) (3,898) (1,982)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt
to related party - - 2,000
Proceeds from issuance of long-term debt 2,114 500 -
Long-term debt repayment (125) (969) (3,634)
Proceeds from issuance of Common Stock 18 13,993 11,296
Proceeds from issuance of Senior Preferred Stock
to related party - - 2,000
Redemption of Senior Preferred Stock from related
party - - (2,000)
Borrowings under revolving line of credit - 43,429 2,874
Repayments under revolving line of credit - (44,147) (2,156)
Restricted cash - 2,000 (2,000)
Deferred financing costs (58) (61) (975)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,949 14,745 7,405
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (5,819) 8,915 1,123
Cash at beginning of period 10,038 1,123 -
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 4,219 $10,038 $ 1,123
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest $ 72 $ 363 $ 85
Income taxes $ 1,888 $ 340 $ -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-8-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Significant Accounting Policies
Description of the Company Universal Stainless & Alloy Products, Inc. (the
"Company") was incorporated in June 1994 and is the successor by merger (the
"Merger") to a corporation incorporated in January 1994 (the "Former Company")
for the principal purpose of acquiring substantially all of the idled equipment
and related assets (the "Assets") located at the Bridgeville, Pennsylvania,
production facility of Armco Inc. ("Armco"). On August 15, 1994, the Company
entered into an Asset Purchase Agreement (the "Asset Agreement") with Armco to
purchase the Assets. Pursuant to the Asset Agreement, the Company paid Armco
$1,850,000 in cash and issued a subordinated two-year note in the principal
amount of $1,850,000 plus interest commencing on August 15, 1994. The
acquisition of the Assets was accounted for under the purchase method. The fair
value of the Assets estimated at approximately $8,000,000 exceeded the purchase
price. Accordingly, the purchase price, adjusted for the discounted value of the
1994 Armco Note, was allocated as follows (dollars in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Inventory $1,084
Property, plant and equipment 2,460
- --------------------------------------------------------------------------------------------------------------------------
$3,544
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
From January 1994 through August 15, 1994, the assets and activities of both the
Company and the Former Company were devoted to various organizational and
financing activities. Consequently, for financial statement purposes, August 15,
1994, is deemed to be the inception date of the Company. Upon execution of the
Asset Agreement, the Company began to solicit and accept customer orders and on
September 9, 1994, the Company completed its first melt of semi-finished steel
product with initial deliveries shipped on September 19, 1994 (the conclusion of
the preoperating period). In June 1995, the Company acquired the PRP Business
and the VAR Assets, described in Note 11.
The Company manufactures and markets semi-finished specialty steels and
precision cold-rolled products, including stainless steel, tool steel and
certain other alloyed steels. The Company's manufacturing process involves
melting, remelting, treating and hot and cold rolling of semi-finished specialty
steels. The Company's products are sold to rerollers, forgers, service centers
and original equipment manufacturers, which primarily include the power
generation and aerospace industries. The Company also provides conversion
services on materials supplied by customers that lack certain of the Company's
production facilities or that are subject to their own capacity constraints.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents Cash equivalents are stated at cost plus accrued
interest, which approximates market value. Cash equivalents include only
securities having a maturity of three months or less at the time of purchase.
Concentration of Credit Risk Financial instruments that potentially subject the
Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable. The Company limits its credit risk associated with cash and
cash equivalents by placing its investments in high-grade short-term
instruments. With respect to accounts receivable, the Company limits its credit
risk by performing ongoing credit evaluations and, when deemed necessary,
requiring letters of credit, guarantees or collateral.
Net sales from the Company's largest customer and its affiliate were
approximately 44% and 42% of total 1996 and 1995 sales, respectively. The
accounts receivable balances from the same customer comprised approximately 23%
and 24% of total accounts receivable at December 31, 1996 and December 31, 1995,
respectively. Net sales from the Company's three largest customers, which
individually exceeded 10% of sales, were approximately 38%, 12% and 12%,
respectively, of total 1994 sales.
-9-
<PAGE>
Inventories Inventories are stated at the lower of cost or market with cost
determined by the first-in, first-out (FIFO) method. Such costs include the
acquisition cost for raw materials and supplies, direct labor and applied
manufacturing overhead.
Scrap metal together with alloy additives, principally nickel, chrome and
molybdenum, currently account for more than 50% of the Company's total cost of
products sold. A substantial portion of the alloy additives is available only
from foreign sources, some of which are located in countries that may be subject
to unstable political and economic conditions. Those conditions might disrupt
supplies or affect the prices of the raw materials used by the Company. The
Company has implemented sales price surcharges to help offset the impact of raw
material price fluctuations.
Operating materials consist of production molds and rolls that will normally be
consumed within one year and are accounted for as inventory.
Property, Plant and Equipment Property, plant and equipment is recorded at cost.
Maintenance and repairs are charged to expense as incurred, and costs of
improvements and renewals are capitalized. Costs incurred in connection with the
construction or major rebuild of facilities, including interest directly related
to the project, are capitalized as construction in progress. No depreciation is
recognized on these assets until placed in service.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the related assets. The estimated useful lives
of plant and equipment range from three to twenty years.
The Company's manufacturing processes are dependent upon certain pieces of
specialty steelmaking equipment, such as the Company's electric arc furnace and
universal rolling mill. In the event a critical piece of equipment should become
inoperative as a result of an unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed.
Revenue Recognition Revenue from the sale of products is recognized upon passage
of title to the customer, which in most cases coincides with shipment of the
related products or the performance of conversion services.
Earnings Per Share Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year, plus
common equivalent shares outstanding if the common equivalent shares are
dilutive. Common equivalent shares include dilutive stock options and warrants
as if the options and warrants were exercised and the proceeds used to acquire
common stock. The amount of common equivalent shares was less than 3% of the
weighted average number of common shares outstanding and therefore excluded from
the calculation.
Reclassifications Certain prior year amounts have been reclassified to conform
with the 1996 presentation.
Note 2
Inventories
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $1,715 $1,473
Semi-finished steel products 6,205 4,278
Operating materials 1,864 1,354
- ----------------------------------------------------------------------------------------------------------------------------
Total inventory $9,784 $7,105
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
Note 3
Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 674 $ 327
Buildings 1,248 550
Machinery and equipment 12,746 4,911
Construction in progress 3,898 1,140
- ------------------------------------------------------------------------------------------------
18,546 6,928
Accumulated depreciation (736) (264)
- ------------------------------------------------------------------------------------------------
Property, plant and equipment, net $17,810 $6,664
- ------------------------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment includes a capital lease with Armco for the land
and certain buildings and structures located in Bridgeville. The lease is for a
ten-year term commencing on August 15, 1994, with three five-year options to
renew on the same terms at the Company's discretion at a rental of $1 per year
plus payment of real and personal property taxes and other charges associated
with the property. The Company also has an option under the lease to buy
substantially all of the leased premises for $1 at any time during the term of
the Armco Lease prior to August 15, 2015.
Note 4
Long-Term Debt and Other Financing
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Government debt $2,528 $490
Capital lease obligations 266 45
- ------------------------------------------------------------------------------------------------
2,794 535
Less amounts due within one year (260) (73)
- ------------------------------------------------------------------------------------------------
Total long-term debt $2,534 $462
- ------------------------------------------------------------------------------------------------
</TABLE>
On January 31, 1996, the Company entered into an amended and restated credit
agreement with PNC Bank for a $6,500,000 revolving credit facility through April
1998, secured by substantially all of the Company's assets (PNC Line). Available
borrowings under the PNC Line are based upon a formula related to the Company's
eligible accounts receivable and inventory. Interest on amounts outstanding
under the PNC Line is to be paid at an annual rate of the PNC Bank prime rate
plus 0.25%. The Company must also pay a 0.5% per annum usage fee on the daily
unused portion of the revolving line of credit. The PNC Line also contains
certain financial covenants throughout its term, including covenants that
require the Company to maintain certain levels of net worth, working capital and
other financial ratios. In addition, the PNC Line limits the amount of capital
expenditures the Company may incur and restricts the payment of dividends on its
issued and outstanding Senior Preferred Stock and Common Stock during each year
of the agreement.
The Company has entered into three separate loan agreements with the
Commonwealth of Pennsylvania's Department of Commerce aggregating $1,100,000
with terms ranging from seven to twenty years. The Company also entered into a
ten-year loan agreement with the Redevelopment Authority of Allegheny County
Economic Development Fund in the amount of $1,514,000. The loans bear
-11-
<PAGE>
interest at rates ranging from 5% to 6% per annum. The annual required principal
and interest payments under these loan agreements for each of the next five
years approximate $340,000.
The Company has entered into capital lease obligations for the purchase of
certain equipment. The future minimum lease payments as of December 31, 1996,
approximate $82,000 in each year ending December 31, 1997 and 1998, and $77,000,
$67,000 and $11,000 in the years ending December 31, 1999, 2000 and 2001,
respectively. The interest portion of the future minimum lease payments
approximates $21,000.
The Company elected to apply a portion of the net proceeds from the December
1994 public offering to prepay its long-term debt, resulting in an extraordinary
gain of $101,000. The Company also elected to terminate a bank loan agreement
that required the write-off of the unamortized deferred financing costs
($523,000) and the payment of a termination fee and other expenses ($212,000).
The net loss from these early extinguishments of debt is reflected in the
statement of operations as extraordinary items.
Note 5
Retirement Plans
The Company has defined contribution retirement plans that cover substantially
all employees. The Company's contributions to the hourly employee plan are based
on time worked while contributions to the salaried plan are established as a
fixed amount per month. Company contributions to both plans are funded at
six-month intervals. The total expense for the years ended December 31, 1996 and
1995, and the preoperating and operating periods ended December 31, 1994, was
$192,000, $127,000 and $28,000, respectively.
No other post-retirement benefit plans exist.
Note 6
Income Taxes
Components of the provision for income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------
Current provision:
<S> <C> <C> <C>
Federal $1,869 $385 $---
State 221 60 ---
- ---------------------------------------------------------------------------------------------------------------------
2,090 445 ---
Deferred provision (benefit): ---
Federal 654 (185) ---
State 74 (20) ---
- ---------------------------------------------------------------------------------------------------------------------
728 (205) ---
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $2,818 $240 $---
- ---------------------------------------------------------------------------------------------------------------------
A reconciliation of the federal statutory tax rate and the Company's effective
tax rate is as follows:
December 31, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------------------
Federal statutory tax 34.0% 34.0% (34.0%)
State income taxes, net of federal benefit 2.9 5.5 ---
-12-
<PAGE>
Effect of valuation allowance adjustments --- (31.7) 34.0
Other, net 0.1 0.3 ---
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 37.0% 8.1% 0.0%
- --------------------------------------------------------------------------------------------------------------------
Deferred taxes result from the following (dollars in thousands):
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Receivables $ 100 $ 67
Inventory 109 70
Organizational expenses 145 197
Accrued liabilities 130 93
- --------------------------------------------------------------------------------------------------------------------------
$ 484 $427
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $1,007 $222
- --------------------------------------------------------------------------------------------------------------------------
$1,007 $222
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The ultimate realization of the deferred tax assets depends on the Company's
ability to generate sufficient taxable income in the future. Considering the
lack of an operating history to support the realization of the deferred tax
assets, the Company provided a valuation allowance of 100% against net deferred
tax assets of $938,000, as of December 31, 1994. The entire valuation allowance
was reversed in 1995 based on the generation of taxable income for 1995 and
management's belief that the Company will generate sufficient taxable income in
the future to realize the deferred tax assets.
Note 7
Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Common Additional Retained
Shares Shares Preferred Common Paid-In Earnings
(Dollars in thousands) Outstanding Outstanding Stock Stock Capital (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance --- --- $--- $--- $--- $---
Common Stock issuance 2,750,000 3 11
Senior Preferred Stock issuance 20,000 2,000
Net loss -- (442)
preoperating period
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at August 15, 1994 20,000 2,750,000 --- 3 2,011 (442)
Private placement of 137,500 532
Common Stock
Common Stock issuance under
Employee Stock Plan 6,900 55
-13-
<PAGE>
Initial public offering of
Common Stock 1,625,000 2 10,748
Senior Preferred
Stock redemption (20,000) (2,000)
Net loss -- (273)
preoperating period
Net loss -- (1,761)
operating period
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 --- 4,519,400 --- 5 11,346 (2,476)
Initial public offering of
Common Stock 50,600 353
Second public offering of
Common Stock 1,700,000 1 13,737
Registration of private
placement shares (98)
Net income 2,723
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 --- 6,270,000 $--- $6 $25,338 $ 247
Common Stock issuance under
Employee Stock Plan 11,300 --- 95
Common Stock issuance under
Employee Stock Purchase Plan 2,434 18
Net income 4,793
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 --- 6,283,734 $--- $6 $25,451 $5,040
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In January 1994, the Former Company issued a total of 9,000 shares of Common
Stock and in June 1994, the Company initially issued 1,297,500 shares of Common
Stock to the initial stockholders. In August 1994, the Company issued to Herbert
V. Turk 432,500 shares of Common Stock. In connection with the Merger, the
stockholders of the Former Company received 1,020,000 shares of Common Stock in
exchange for all of the issued and outstanding shares of the Former Company.
The Senior Preferred Stock was issued by the Company to Mr. Turk, an existing
stockholder of the Company, in return for $2,000,000 in cash. The Company
redeemed all outstanding shares of Senior Preferred Stock at $100 per share on
December 22, 1994.
On October 14, 1994, the Company completed a private placement of 137,500 shares
of Common Stock of the Company at a sales price of $4.00 per share. The net
proceeds to the Company from this financing were approximately $532,000. On
December 1, 1995, the Company completed a registration statement at the request
of the stockholder at a cost of $98,000.
On December 22, 1994, the Company completed its initial public offering of
1,625,000 shares of Common Stock of the Company at a sales price of $8.00 per
share.
In connection with the initial public offering, the underwriters received
warrants, which expire on December 14, 1999, to purchase 162,500 shares of the
Company's Common Stock at an exercise price of $10.80 per share. On February 3,
1995, the Company sold an additional 50,600 shares pursuant to the underwriters'
over-allotment option to purchase an additional 243,750 shares of Common Stock.
The net proceeds to the Company from this sale approximated $353,000.
-14-
<PAGE>
On November 22, 1995, the Company completed a second public offering of
1,700,000 shares of Common Stock of the Company at a sale price of $9.00 per
share. In connection with the second public offering, certain original
stockholders sold an additional 600,000 shares of the Company's Common Stock.
On October 6, 1994 and on May 22, 1996, the Company's Board of Directors adopted
employee stock plans for the purpose of issuing 100 shares of Common Stock of
the Company at no cost to the eligible employees. Non-executive employees not
eligible for stock options under the 1994 Stock Incentive Plan, described in
Note 8, were eligible employees under the Plans. The Company issued 6,900 and
11,300 shares of the Company's Common Stock in 1994 and 1996, respectively. The
costs of these issuances were recorded as compensation expense. These plans were
terminated.
Note 8
Stock Compensation Plans
At December 31, 1996, the Company has two stock-based compensation plans that
are described below.
Incentive Compensation Plan
On September 23, 1994, the Company's Board of Directors adopted the Company's
1994 Stock Incentive Plan as amended (the "1994 Plan") for the purpose of
issuing stock options to non-employee directors, other than directors owning
more than 5% of the Company's outstanding Common Stock, officers and other key
employees of the Company who are expected to contribute to the Company's future
growth and success. Under the 1994 Plan, the Company may grant options with
respect to a maximum of 650,000 shares of Common Stock. Options granted to
non-employee directors vest over a three-year period, and options granted to
employees vest over a four-year period. All options under the 1994 Plan will
expire no later than ten years after the grant date.
A summary of the 1994 Plan activity as of and for the years ended December 31,
1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted
Weighted-Average Weighted-Average Average
Number Exercise Price Number Exercise Price Number Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Options
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 208,000 $9.63 60,000 $8.00 --- $---
Granted 130,000 8.54 150,000 10.28 60,000 8.00
Forfeited (2,500) 10.25 (2,000) 9.50 --- ---
Outstanding at end of year 335,500 9.20 208,000 9.63 60,000 8.00
Options exercisable at year-end 108,875 20,000
Weighted-average fair value of
options granted during the year $4.88 $4.97
- ------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1996.
Options Outstanding Options Exercisable
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average Number Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price Exercisable Exercise Price
$8.00 to $11.25 335,500 8.9 9.20 108,875 9.02
</TABLE>
-15-
<PAGE>
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue
up to 90,000 shares of Common Stock to its full-time employees, nearly all of
whom are eligible to participate. Under the terms of the Plan, employees can
choose as of January 1 and July 1 of each year to have up to 10% of their total
earnings withheld to purchase shares of the Company's Common Stock. The purchase
price of the stock is 85% of the lower of its beginning-of-the-period or
end-of-the-period market prices. At December 31, 1996, the end of the initial
purchase period under the Plan, the Company issued 2,434 shares of Common Stock
to 33 employees at $7.44 per share.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plan and its stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Financial
Accounting Standards Board Statement 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $4,793 $2,723
Pro forma $4,608 $2,651
Earnings per share As reported $ 0.76 $ 0.57
Pro forma $ 0.73 $ 0.56
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants issued in 1995 and 1996, respectively; dividend
yield of 0.0% for each year; expected volatility of 46.0% and 60.0%; and
expected lives for options of five years.
Cash-Incentive Plans
The Company has two management cash-incentive plans covering certain key
executives and employees and profit-sharing plans that cover the remaining
employees. The management cash-incentive plans provide for payments based on
certain annual performance targets. The profit-sharing plans provide for the
sharing of pre-tax profits in excess of specified amounts. For the years ended
December 31, 1996 and 1995, the Company expensed $1,038,000 and $414,000,
respectively, under these plans.
Note 9
Related Party Transactions
Certain stockholders, one of whom serves as a director of the Company, provided
services in connection with the acquisition and related financing described in
Note 1. These services primarily related to the negotiation and completion of
the Asset Agreement between the Company and Armco, the labor contract with the
United Steelworkers of America and certain utility contracts, and securing the
financing arrangements described in Note 4. Fees and related expenses for these
services are as follows:
Andromeda Enterprises, Inc., a Delaware corporation ("Andromeda"), received
$111,000 from the Company for financial consulting services and out-of-pocket
expenses performed by Andromeda on behalf of the Former Company and on behalf of
the Company. Udi Toledano, a director of the Company and a principal
stockholder, is the President of Andromeda and, together with family members,
beneficially owns all of its outstanding capital stock.
The Company paid the law firm of Jones, Gregg, Creehan & Gerace $315,000 for
legal services and certain other related matters rendered on behalf of the
Company and its predecessor in connection with the Asset Agreement. The Company
and that law firm also entered into certain mutual general releases at that
time. Samuel P. Gerace, Sr., a principal stockholder of the Company, is a
partner in Jones, Gregg, Creehan & Gerace.
-16-
<PAGE>
Note 10
Commitments and Contingencies
The Company, as well as other specialty steel companies, is subject to demanding
environmental standards imposed by federal, state and local environmental laws
and regulations. In connection with the Asset Agreement, Armco agreed to retain
responsibility for liabilities under environmental laws with respect to
environmental conditions existing at the Bridgeville Facility prior to the
commencement of the Armco Lease and to indemnify the Company up to $6,000,000 in
the aggregate over 10 years. Such indemnification expires on August 15, 2004.
Certain environmental conditions, which were identified as having existed as of
August 15, 1994, have been or are in the process of being remediated by Armco at
its expense.
In connection with the PRP/VAR Agreement, Armco agreed to retain responsibility
for liabilities under environmental laws with respect to environmental
conditions existing at the Titusville Facility prior to June 2, 1995, and to
indemnify the Company up to $3,000,000 in the aggregate with respect thereto.
Insofar as the indemnities are the Company's exclusive remedies for
environmental claims, the Company will be materially dependent upon those
indemnities should any such claims arise. The Armco indemnities do not cover
liability for violations of environmental laws stemming from any changes,
modifications or amendments to environmental laws after August 15, 1994, with
respect to the Bridgeville Facility, and June 2, 1995, with respect to the
Titusville Facility. As of December 31, 1996, management was not aware of any
environmental law violations not covered under the Asset Agreement or the
PRP/VAR Agreement.
The Company has entered into certain equipment leases through December 31, 1996.
The operating lease expense incurred was $121,000, $92,000 and $56,000 for the
years ended December 31, 1996 and 1995, and the preoperating and operating
period ended December 31, 1994, respectively. Future minimum lease payments
under non-cancelable operating leases as of December 31, 1996, approximate
$129,000 in 1997, $119,000 in 1998, $116,000 in 1999, $68,000 in 2000 and
$10,000 thereafter.
The Company maintains insurance for both property damage and business
interruption applicable to its production facilities, including the universal
rolling mill. The Company has submitted a claim under these policies related to
an electrical component breakdown in a drive motor at the Bridgeville Facility's
universal rolling mill, which resulted in an approximately six-week production
halt. Management is not able to estimate the probability of the Company
receiving proceeds from its insurance carriers at this time. Therefore, no
amounts have been recorded in the financial statements for insurance recoveries.
Note 11
Acquisition
On June 2, 1995, the Company and Armco entered into an Asset and Real Property
Purchase Agreement (the "Purchase Agreement") pursuant to which the Company
agreed to buy the precision rolled products business (the "PRP Business") of
Armco's Cytemp division located in Titusville. The acquisition was accounted for
under the purchase method. The fair value of the assets acquired, estimated at
approximately $2,300,000, exceeded the purchase price, including related
acquisition costs, of $1,304,000 and was allocated as follows (dollars in
thousands):
- --------------------------------------------------------------------------
Inventory $ 448
Property, plant and equipment 856
- --------------------------------------------------------------------------
$1,304
- --------------------------------------------------------------------------
In addition, the Company also purchased for $505,000 certain equipment and
operating materials (the "VAR Assets"), which were not related to the PRP
Business.
The Company paid to Armco $570,000 in cash at closing and issued Armco a secured
promissory note in the principal amount of $950,000. Included are the amounts
paid for the additional equipment and operating materials. The promissory note
was paid on November 15, 1995.
The following unaudited pro forma combined results of operations for the year
ended December 31, 1995, have been prepared assuming that the acquisition of the
PRP Business occurred as of January 1, 1995, and is not necessarily indicative
of results of
-17-
<PAGE>
operations that would have occurred had the transaction been put into effect at
January 1, 1995, or of future results of the combined business. The financial
information for the PRP Business represents the historical financial results for
the period January 1, 1995, to June 2, 1995.
<TABLE>
<CAPTION>
tsThe PRP Pro Forma
(Dollars in thousands, except per share amoun Company Business Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $46,992 $3,045 $ --- $50,037
Cost of products sold 40,319 2,451 (531)(a) 42,239
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 6,673 594 531 7,798
Selling and administrative expenses 3,471 699 --- 4,170
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 3,202 (105) 531 3,628
Interest and other income 177 --- --- 177
Interest expense (416) --- (45)(b) (461)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 2,963 (105) 486 3,344
Income taxes 240 (44) 75(c) 271
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $2,723 $(61) $411 $3,073
- ------------------------------------------------------------------------------------------------------------------------------
Net income per share of Common Stock $0.57 $0.65
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 4,745,384 4,745,384
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following pro forma adjustments were made:
(a) The decrease in cost of products sold to reflect the terms of the new labor
agreement with PRP Business employees and lower depreciation charges. The new
labor agreement was an integral requirement of the transaction and was effective
upon consummation of the Purchase Agreement. The benefits received from the new
labor agreement include reductions in hourly labor rates ($220,000) and pensions
costs ($258,000) and the elimination of other post retirement employee benefit
costs ($46,000). The lower depreciation charge was $7,000, reflecting the new
basis in property, plant and equipment as a result of the application of
purchase accounting.
(b) The increase in interest expense to reflect the issuance of the 1995 Armco
Note in the principal sum of $950,000 with an assumed annual interest rate of
9.5% to fund the acquisition.
(c) The increase in income taxes to reflect the incremental tax expense to be
provided as a result of the adjustments described above.
Note 12
Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share aFirst)Quarter Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------------------------------------------------------
1996 Data
<S> <C> <C> <C> <C>
Net sales $12,609 $14,565 $16,708 $16,376
Gross profit 1,965 2,878 3,703 3,518
Operating income 962 1,507 2,519 2,543
Net income 647 949 1,552 1,645
Net income per share $ 0.10 $ 0.15 $ 0.25 $ 0.26
-18-
<PAGE>
1995 Data
Net sales $10,605 $13,916 $9,961 $12,510
Gross profit 1,060 2,074 1,242 2,297
Operating income 414 1,210 223 1,355
Net income 275 817 382 1,249
Net income per share $ 0.06 $ 0.18 $ 0.08 $ 0.24
</TABLE>
PRICE RANGE OF COMMON STOCK
The Common Stock was accepted for trading on the NASDAQ National Market
beginning on August 24, 1995, and from December 14, 1994, the Common Stock had
traded on the NASDAQ Small Cap Market. The Common Stock has always traded under
the symbol "USAP." The following table sets forth the range of high and low sale
prices per share of Common Stock, as reported by the NASDAQ Small Cap Market and
the NASDAQ National Market, as the case may be, for the periods indicated below:
High Low
- ----------------------------------------------------------------------------
Year 1996
First Quarter $13-3/8 $ 9-1/4
Second Quarter $12-1/4 $ 8-1/2
Third Quarter $10-5/8 $ 8-3/4
Fourth Quarter $ 9-1/4 $ 8
- ----------------------------------------------------------------------------
Year 1995
First Quarter $10-1/2 $ 8
Second Quarter $12-7/8 $ 9
Third Quarter $16 $11-1/4
Fourth Quarter $13 $ 9
- ----------------------------------------------------------------------------
The Company has never paid a cash dividend on its Common Stock and currently has
no plans to pay dividends in the foreseeable future.
Forward-Looking Information Safe Harbor
This Annual Report contains historical information and forward-looking
statements. Statements looking forward in time, including statements regarding
future growth, cost savings, expanded production capacity, broader product
lines, greater capacity to meet customer quality reliability, price and delivery
needs, and enhanced competitive posture, are included in this Annual Report
pursuant to the "safe harbor" provision of the Private Securities Litigation
Reform Act of 1995. They involve known and unknown risks and uncertainties that
may cause the Company's actual results in future periods to be materially
different from any future performance suggested herein. Further, the Company
operates in an industry sector where securities values may be volatile and may
be influenced by economic and other factors beyond the Company's control. In the
context of the forward-looking information provided in this Annual Report,
please refer to the discussions of risk factors detailed in, as well as the
other information contained in, this Annual Report and the Company's filings
with the Securities and Exchange Commission during the past 12 months.
-19-
<PAGE>
Directors, Officers and Management Officers
Directors Clarence M. McAninch
President and Chief Executive Officer
Bradford C. Bowman
Chief Operating Officer Bradford C. Bowman
Universal Stainless & Chief Operating Officer
Alloy Products, Inc.
Daniel J. DeCola, Sr. Daniel J. DeCola, Sr.
Vice President, Operations Vice President, Operations
Universal Stainless & Paul A. McGrath
Alloy Products, Inc.
Orit Gadiesh Director, Employee Relations, General
Chairman of the Board Counsel and Secretary
Bain & Company
Richard M. Ubinger
George F. Keane Chief Financial Officer and Treasurer
Chairman of the Board
Trigen Energy Corporation Management
Clarence M. McAninch Anthony J. Biondi
President and Chief Executive Officer Director, Purchasing and Production
Universal Stainless & Planning
Alloy Products, Inc.
Udi Toledano Keith A. Engleka
President Director, Technology
Andromeda Enterprises, Inc.
Christopher S. Reynolds
D. Leonard Wise General Manager, PRP Division
President and Chief Executive Officer
Carolina Steel Corporation Sales Organization
Shawna M. Dreyer
Thomas P. Lomasney
Cheryl M. Scott
David W. Shaffer
Charles E. Swartzlander
-20-
<PAGE>
Corporate Information Transfer Agent and Registrar
Executive Offices Continental Stock Transfer
& Trust Company
Universal Stainless & 2 Broadway
Alloy Products, Inc. New York, NY 10004
600 Mayer Street
Bridgeville, PA 15017
412-257-7600 Stock Listing
Annual Meeting NASDAQ Symbol: USAP
The Annual Meeting of Stockholders will be held at 10
a.m. on Wednesday, May 21, 1997, at the Southpointe
Golf Club, Canonsburg, Pa.
Stockholder Information
Universal Stainless & Alloy Products, Inc.'s annual report, Form 10-K and other
reports to the Securities and Exchange Commission can be obtained, without
charge, by writing to the Chief Financial Officer at the Executive Offices.
-21-
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-98534) and
the Registration Statements on Forms S-8 (No. 333-13599, No. 333-13509 and No.
333-13511) of Universal Stainless & Alloy Products, Inc. of our report dated
January 20, 1997 appearing on page 19 of the Annual Report to Stockholders which
is incorporated in this Annual Report on Form 10K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Pittsburgh, Pennsylvania
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,219
<SECURITIES> 0
<RECEIVABLES> 9,647
<ALLOWANCES> (238)
<INVENTORY> 9,784
<CURRENT-ASSETS> 24,041
<PP&E> 18,545
<DEPRECIATION> (735)
<TOTAL-ASSETS> 42,098
<CURRENT-LIABILITIES> 8,060
<BONDS> 2,534
0
0
<COMMON> 6
<OTHER-SE> 30,491
<TOTAL-LIABILITY-AND-EQUITY> 42,098
<SALES> 60,258
<TOTAL-REVENUES> 60,258
<CGS> 48,194
<TOTAL-COSTS> 48,194
<OTHER-EXPENSES> 4,473
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 7,611
<INCOME-TAX> 2,818
<INCOME-CONTINUING> 4,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,793
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
