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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
For the Fiscal Year Ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission File Number 0-25032
------------------------------
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, par value $.001 per share
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 ((S)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 27, 2000, based on the closing price of $7.0625 per share
on that date, was $21,262,094. 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 27, 2000, there were 6,072,516 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, 1999, and definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 23, 2000, are incorporated by reference
into Parts II, III and IV of this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 7
Item 3. Legal Proceedings....................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................... 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.......................................................... 10
Item 6. Selected Financial Data................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risks............. 11
Item 8. Financial Statements and Supplementary Data............................. 11
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 11
PART III
Item 10. Directors and Executive Officers of the Company......................... 12
Item 11. Executive Compensation.................................................. 12
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 12
Item 13. Certain Relationships and Related Transactions.......................... 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 13
</TABLE>
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PART I
ITEM 1. BUSINESS
General
Universal Stainless & Alloy Products, Inc. (the "Company"), which was
incorporated in 1994, manufactures and markets semi-finished and finished
specialty steel 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 customers
further process its products for use primarily in the heavy equipment
manufacturing, power generation and aerospace industries. The Company also
performs 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.
The Company's products are manufactured in a wide variety of grades, widths and
gauges in response to customer specifications. At the Bridgeville facility, the
Company produces its specialty steel products in the form of long products
(ingots, blooms, billets and bars) and flat rolled products (slabs and plates).
The semi-finished long products are primarily used by customers to produce
finished bar, rod and wire products, and the semi-finished flat rolled products
are used by customers to produce fine-gauge plate, sheet and strip products.
The finished bar products manufactured by the Company are primarily used by
service center customers for distribution to a variety of customers. The
Company also produces customized shapes primarily for original equipment
manufacturers that are cold rolled from purchased coiled strip, flat bar or
extruded bar at its Precision Rolled Products department ("PRP"), located at the
Titusville facility.
Industry Overview
The specialty steel industry is a relatively small but distinct segment of the
overall steel industry. Specialty steels include stainless steels, high speed
and tool steels, electrical steels, high temperature alloys, magnetic alloys 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 its products within the following specialty
steel product lines:
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, and 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.
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.
Heating and cooling at precise rates in the heat treating process bring out
these hardness characteristics. Tool steels are utilized in the manufacturing
of metals, plastics, pharmaceuticals, electronics, optics and paper and aluminum
extrusions.
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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.
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 nickel, chrome and molybdenum in such steels
typically exceed the alloy element of carbon steels but not that of high
temperature alloy steel.
Net sales by principal product line were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
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<S> <C> <C> <C>
Stainless steel $55,255 $53,661 $60,700
Tool steel 6,055 7,548 10,467
High-temperature alloy steel 2,124 4,387 2,636
Conversion service 1,807 3,690 4,834
Other 1,422 3,309 2,664
------- ------- -------
$66,663 $72,595 $81,301
------- ------- -------
</TABLE>
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 three principal domestic suppliers. The long-term demand for scrap metal
and its importance to the domestic specialty steel industry is expected to
increase as demand for specialty steel products increases. In addition, the
importance of scrap metal will be further enhanced as steel makers continue to
expand scrap metal-based electric furnace capacity. The high quality of the
Company's products requires use of premium grades of scrap metal, the supply of
which is 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.
Alloys
The Company purchases various materials for use as alloy additions, some of
which come from Canada (principally nickel) and other foreign countries. South
African manufacturers supply certain alloys (principally chrome). Any political
disruptions in that country could interfere with the delivery of those
materials.
PRP Starting Materials
PRP's principal starting materials consist of metallic flat bar, extruded "near
shaped" bar and coiled strip, which the Company cold rolls to customer
specifications 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 PRP will continue to be available in sufficient quantities
for the foreseeable future.
The cost of raw material is approximately 40% of the Company's total cost of
products sold. 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. Therefore, the Company does
not maintain any long-term written agreements with any of its raw material
suppliers. The Company has established arrangements with certain raw material
suppliers that permit the Company to purchase certain
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raw materials at set prices for 30 days. These arrangements 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. In addition, the Company may also be protected by
an alloy surcharge mechanism covering nickel, chrome and molybdenum.
Customers
The Company's principal customers are rerollers, forgers, service centers and
original equipment manufacturers, which primarily include the power generation
and aerospace industries. The Company has a supply agreement with its primary
customer, Talley Metals Technology, Inc., a subsidiary of Carpenter Technology
Corporation to provide an average of 1,750 tons of stainless steel reroll billet
products per month. In December 1999, the agreement was extended through June
2001. For the year ended December 31, 1999, Talley Metals and its affiliates
accounted for 48% of the Company's net sales. No other customer accounted for
more than 10% of the Company's net sales for the year ended December 31, 1999.
The Company's five largest customers in the aggregate accounted for
approximately 66% of net sales. 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. The Company's customer base
increased from 200 at December 31, 1998 to 235 at December 31, 1999.
The Company's products are marketed directly to its customers by Company
personnel, including the Company's President and Chief Executive Officer, its
PRP General Manager, five full-time sales persons and two independent sales
representatives. In view of the relatively small number of prospective
customers, the strong business relationships maintained with its existing
customers and the thorough product knowledge possessed by those management and
marketing persons, the Company believes its sales force is adequate for its
current and immediately foreseeable needs.
Backlog
The Company primarily manufactures products to meet specific customer orders,
generally fulfilling orders in eight weeks or less for its semi-finished
products and in sixteen weeks or less for its finished products. The Company's
backlog of orders on hand as of December 31, 1999, was approximately $14.5
million as compared to $10.8 million at the same time in 1998. The increase in
backlog of orders on hand as of December 31, 1999 as compared to December 31,
1998 primarily resulted from declining import levels during 1999 and higher
demand for products required by the power generation industry. Customer orders
are generally subject to cancellation with the payment of a penalty charge prior
to delivery. The Company's backlog may not be indicative of actual sales and
therefore should not be used as a measure of future revenue.
Competition
The Company believes itself to be one of approximately 20 domestic manufacturers
that produce specialty steel and one of approximately five domestic specialty
steel manufacturers that produce special shapes. Of that number of firms that
produce specialty steel, the Company believes five companies currently compete
within the Company's selected markets, although other specialty steel mills have
the capability of producing, and hence competing with, some of or all the
Company's specialty steel products.
Major competitors of the Company in the specialty steel market include fully
integrated specialty steel producers such as Allegheny Technologies, Inc.;
Carpenter Technology Corporation; Empire Specialty Steel Inc. (formerly AL Tech
Specialty Steel Corporation); Slater Steels Corporation; and The Timken 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 major competitors of the Company in the special shapes
market served by
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PRP include Rathbone Precision Metals, Inc., a subsidiary of Carpenter
Technology Corporation; Precision Shapes, Inc.; and J.T. Slocomb Company.
Competition in the Company's markets is based upon product quality, delivery
capability, customer 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 is currently, and is expected to remain,
important in the specialty steel market. The Company believes its universal
rolling mill provides it with a competitive advantage as the only domestic mill
that can produce both long product and flat rolled product. The Company
believes it has the ability to fill customers' orders in a shorter lead time for
delivery 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 specialty steel industry is frequently affected by general economic
conditions. Further, the Company also faces competition from producers of
certain materials, particularly aluminum, composites and plastics. 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 factors that
adversely affects the market for finished products manufactured by the Company's
customers could indirectly adversely affect the demand for the Company's
specialty steel products.
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 profit-
sharing plans for certain salaried employees and all of its United Steel Workers
of America (USWA) employees and has equity ownership programs for all of its
eligible employees, in an effort to forge an alliance between its employee's
interests and those of the Company's stockholders. At December 31, 1999, the
Company had 229 employees at its Bridgeville facility and 48 employees at its
Titusville facility, of whom 183 and 41 were USWA members, respectively.
In August 1997, the Company and the USWA completed negotiation of a new five-
year comprehensive collective bargaining agreement (the "Bridgeville CBA") 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 basic structure of the Bridgeville CBA is similar to the
original four-year agreement, which contained certain wage, benefit, and work
rule terms, which permitted the Company to be competitive in the domestic
specialty steel industry.
In February 2000, the Company and the USWA completed negotiation of a new sixty-
seven (67) month comprehensive collective bargaining agreement (the "Titusville
CBA"). The Titusville CBA is similar to the original five-year agreement.
The Company has profit-sharing plans that cover certain salaried employees and
all hourly employees. The profit-sharing plans provide for the sharing of pre-
tax profits in excess of specified amounts. The Company maintains separate
401(k) retirement plans for its hourly and salary employees. Pursuant to each
plan, 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"). Company matching contributions are not permitted under the
plans. In addition, the Company is required to make periodic contributions to
the plans based on service. The Company also provides life insurance and health
coverage for its hourly and salary employees.
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Armco Agreement
Armco, which merged with and into AK Steel in 1999, the former owner of certain
assets of the Company ("Armco"), 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.
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.
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 50% of the savings, if any,
of reduced workers' compensation premiums obtained due to reductions in the
state experience modifier issued to the Company.
Executive Officers
The following table sets forth, as of December 31, 1999, 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 (64) 1994 President and Chief Executive Officer
A. Bruce Kennedy (41) 1998 Vice President, Operations
Paul McGrath (48) 1996 Director of Employee Relations,
General Counsel and Secretary
Richard M. Ubinger (40) 1994 Chief Financial Officer and Treasurer
</TABLE>
Clarence M. McAninch, 64, has been President and Chief Executive Officer and a
Director of the Company since July 1994. Mr. McAninch served as Vice President,
Sales and Marketing, of the Stainless and Alloy Products Division of Armco from
1992 to 1994.
A. Bruce Kennedy, 41, has been Vice President, Operations since August 1998.
Mr. Kennedy was employed by Kurtz Steel Company for the previous 17 years, most
recently as President and Chief Executive Officer from January 1991 to May 1998.
Paul A. McGrath, 48, has been General Counsel and Director of Employee Relations
since January 1995 and was appointed Secretary in May 1996. Prior thereto, he
was employed by Westinghouse Electric Corporation for approximately 24 years in
various management positions.
Richard M. Ubinger, 40, has been Chief Financial Officer and Principal
Accounting Officer of the Company since August 1994, and was appointed Assistant
Secretary in November 1995 and Treasurer in May 1996. From 1981 to 1994, Mr.
Ubinger was employed by Price Waterhouse LLP (currently known as
PricewaterhouseCoopers LLP) in its audit department, and he served in the
capacity of Senior Manager for Price Waterhouse LLP from 1990 to 1994. Mr.
Ubinger is a Certified Public Accountant.
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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 including, but not limited to the
factors discussed below, many of which are not within the Company's control.
Significant Customer and Concentrated Customer Base
For the year ended December 31, 1999, the Company's largest customer, Talley
Metals Technology, Inc., a subsidiary of Carpenter Technology Corporation, and
its affiliates accounted for approximately 48% of the Company's net sales. The
Company's five largest customers in the aggregate accounted for approximately
66% of net sales. An adverse change in, or termination of, the Company's
relationship with one or more of its major customers or one or more of its
market segments could have a material adverse effect upon the Company. In
addition, a number of the Company's customers are also competitors of the
Company. See "Business--Customers" and "Business--Competition".
Reliance on Critical Manufacturing Equipment
The Company's manufacturing processes are dependent upon certain critical pieces
of specialty steel making 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 unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed
which may have a negative effect on the Company's financial results. See
"Properties."
Competition
The Company competes with domestic and foreign sources of specialty steel
products. 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 factors 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. 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. Competition in the Company's field is intense and is
expected to continue to be so in the foreseeable future. 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 ("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 acquisition of the Bridgeville facility assets, Armco agreed to retain
responsibility for certain environmental liabilities and agreed to indemnify the
Company for environmental liabilities existing prior to August 15, 1994.
Because the indemnification is the Company's primary 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.
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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 any liability incurred with respect
to violations of Environmental Laws enacted after August 15, 1994, with respect
to the Bridgeville facility, or after June 2, 1995, with respect to the
Titusville facility. There is no assurance that the Company will not incur any
such liability. See "Properties--Environmental Compliance."
Supply of Raw Materials and Cost of Raw Materials
The Company relies on a limited number of suppliers, some of which are foreign
owned, for its raw material needs which currently account for approximately 40%
of the Company's total cost of products sold. Raw material prices are affected
by cyclical, seasonal and other market factors. 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. 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. In addition, 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."
ITEM 2. PROPERTIES
The Company leases its Bridgeville facility from Armco (the "Bridgeville Lease")
and owns the Titusville facility. The Bridgeville Lease is for ten years
commencing on 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. The Bridgeville Lease also provides
for three five-year options to renew on the same terms at the sole discretion of
the Company. In addition, the Bridgeville Lease provides the Company with an
option to purchase substantially all of the leased premises for $1 any time
during the term of the Bridgeville 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 Bridgeville
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 and indemnification obligations under the
asset agreement related to the Bridgeville facility (the "Asset Agreement").
The Bridgeville facility consists of approximately 600,000 square feet of floor
space on approximately 50 acres. The Bridgeville facility contains melting,
electro-slag remelting, conditioning, rolling, annealing and various other
processing equipment. Substantially all products shipped from the Bridgeville
facility are processed through its melt shop and universal rolling mill
operations. In early 1999, the Company successfully completed the round-bar
finishing facility at the Bridgeville location. The facility includes heat-
treating and processing equipment that enables the Company to produce completely
finished 2-inch to 6-inch round bar products.
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The Titusville facility consists of approximately 10 acres and includes seven
separate buildings, including two principal buildings of approximately 265,000
square feet in total area. The Titusville facility contains vacuum-arc
remelting and various rolling and finishing equipment.
Specialty steel production is a capital-intensive industry. The Company
believes that its facilities and equipment are suitable for its present needs.
The Company believes, however, that 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 to enable it to manufacture quality products and provide
delivery and other support service assurances to its customers.
Environmental Compliance
The Company is subject to Environmental Laws, including those governing
discharges of pollutants into the air and water, the generation, handling and
disposal of hazardous and non-hazardous substances. The Company may be liable
for the remediation of contamination associated with generation, handling and
disposal activities. The Company is subject periodically to environmental
compliance reviews by various regulatory offices. 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 has not made to date and does not anticipate making any
significant expenditure for environmental control facilities. Environmental
costs could be incurred 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
significant 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 from any of those matters with respect to the Bridgeville
facility to the extent of $6.0 million in the aggregate until 2004. Armco has
further agreed (subject to the indemnity limits) to pay up to up to $1.0 million
for certain non-recoverable operating costs should the Company's business be
interrupted as a result of Environmental Law violations 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.
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 that 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 acquisition of
the Titusville facility, the Company conducted a Phase I and Phase II
environmental study (the "Study") of the parcel of real estate acquired. 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
noted that as is typical of the Titusville,
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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. To date, no environmental governmental
authority has contacted the Company concerning this matter. The Company believes
it unlikely that it or Armco will be required to provide cleanup at the
Titusville facility for the local hydrocarbon contamination. 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 for the safety of its employees, the Company shall bear such
accelerated or increased cost. Any accelerated or increased cost of an
environmental obligation retained by Armco resulting from the Company seeking
financing or from the sale of less than a controlling interest in the voting
stock of the Company shall be borne equally by Armco and the Company.
The Company's primary 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. 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. There can be no assurance, however, that those
indemnities will fully cover all environmental liabilities incurred by the
Company and there can 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."
ITEM 3. LEGAL PROCEEDINGS
There are no material 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
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
At December 31, 1999, a total of 6,330,416 shares of the Company's Common Stock,
par value $.001 per share, were issued and outstanding, and held by
approximately 216 holders of record. 257,900 shares of the issued and
outstanding Common Stock of the Company were held in treasury at December 31,
1999.
Certain holders of Common Stock and the Company are party to a stockholder
agreement. That agreement maintains in effect certain registration rights
granted to non-management stockholders, which provides to them two demand
registration rights exercisable at any time upon written request for the
registration of Restricted Shares of Common Stock having an aggregate net
offering price of at least $5,000,000 (the "Registrable Securities").
Price Range of Common Stock
The information called for by this item is set forth on page 26 of the Annual
Report to Stockholders for the year ended December 31, 1999, which is
incorporated herein by reference.
Preferred Stock
The Company's Certificate of Incorporation provides that the Company may, by
vote of its Board of Directors, issue the Preferred Stock in one or more series.
The Preferred Stock may have rights, preferences, privileges and restrictions
thereon, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others.
The Company has no outstanding Preferred Stock and has no plans to issue any of
the authorized Preferred Stock.
Dividends
The Company has never paid a cash dividend on its Common Stock and currently has
no plans to pay dividends in the foreseeable future. Restrictions contained in
the Company's Credit Agreement with PNC currently prohibit the payment of cash
dividends on Common Stock.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is set forth on page 27 of the Annual
Report to Stockholders for the year ended December 31, 1999, which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is set forth on pages 10 through 13 of
the Annual Report to Stockholders for the year ended December 31, 1999, which
are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Prices for the Company's raw materials are subject to frequent market
fluctuations. The Company does not maintain long term supply agreements for its
raw material needs. Raw material price increases are normally off-set by
selling price increases and surcharges.
The Company is exposed to market risk from changes in interest rates related to
its long-term debt. At December 31, 1999, the Company's total long-term debt,
including the current portion was $11,841,000. Of that amount, $2,541,000 has
fixed rates and $9,300,000 bears a variable rate. Assuming a 10% increase in
interest rates on the Company's variable rate (an increase from the December 31,
1999 interest rate of 8.0% to an interest rate of 8.8%), annual interest
expense would be approximately $74,000 higher based on the December 31, 1999
balance of variable rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth on pages 14 through 25 of
the Annual Report to Stockholders for the year ended December 31, 1999, which
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 23, 2000,
under the heading "Proposal No. 1--Election of Directors," which information is
incorporated herein 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 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.
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
None.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 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
PricewaterhouseCoopers LLP, appearing on pages 14 through 25 of the
accompanying Annual Report, 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:
<TABLE>
<CAPTION>
EXHIBIT
- -------
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- -------
<S> <C> <C>
2.1 Certificate of Merger, dated July 29, 1994, between Universal Stainless & Alloy Products, Inc., a Pennsylvania
corporation, and the Company (incorporated herein by reference to Exhibit 2.1 to Registration No. 33-85310).
2.2 Agreement and Plan of Merger, dated July 28, 1994, among Universal Stainless & Alloy Products, Inc., a
Pennsylvania corporation, and the Company (incorporated herein by reference to Exhibit 2.2 to Registration No.
33-85310).
2.3 Asset and Real Property Purchase Agreement, dated as of June 2, 1995, by and between Armco Inc. and the Company
(incorporated herein by reference to Exhibit 2.3 to Registration No. 33-97896).
3.1 Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to
Registration No. 33-85310).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to Registration No. 33-85310).
4.1 Specimen Copy of Stock Certificate for shares of Common Stock (incorporated herein by reference to Exhibit 4.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1998).
4.2 Form of Representative's Warrant Agreement (including Form of Representative's Warrant Certificate) (incorporated
herein by reference to Exhibit 4.2 to Registration No. 33-85310).
10.1 Stockholders Agreement, dated as of August 1, 1994, by and among the Company and its existing stockholders
(incorporated herein by reference to Exhibit 10.8 to Registration No. 33-85310).
10.2 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. (incorporated herein by reference to
Exhibit 10.12 to Registration No. 33-85310).
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -------
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- -------
<S> <C> <C>
10.3 Lease Agreement, dated August 15, 1994, by and between Armco Inc. and the Company (incorporated herein by
reference to Exhibit 10.9 to Registration No. 33-85310).
10.4 Security Agreement, dated August 15, 1994, by and between the Company and Armco Inc (incorporated herein by
reference to Exhibit 10.21 to Registration No. 33-85310).
10.5 Employment Agreement, dated November 20, 1998 by and between the Company and Clarence M. McAninch (incorporated
herein by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31,
1998).
10.6 Employment Agreement, dated August 15, 1998, by and between the Company and Daniel J. DeCola, Sr. (incorporated
herein by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31,
1998).
10.7 Employment Agreement, dated August 1, 1998, by and between the Company and A. Bruce Kennedy (incorporated herein
by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998).
10.8 Employment Agreement dated January 1, 1998 between the Company and Paul McGrath (incorporated herein by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.9 Employment Agreement dated January 1, 1998 between the Company and Richard M. Ubinger (incorporated herein by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.10 1994 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.25 to Registration No. 33-85310).
10.11 Collective Bargaining Agreement, dated May 3, 1995, by and between the Company and United Steelworkers of America
(incorporated herein by reference to Exhibit 10.42 to Registration No. 33-97896).
10.12 Collective Bargaining Agreement, dated September 1, 1997, by and between the Company and United Steelworkers of
America (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.13 Credit Agreement, dated as of January 30, 1998, between the Company and PNC Bank, National Association, with
Exhibits and Schedules (incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.14 Security Agreement and Collateral Assignment, dated as of January 30, 1998, by and between the Company and PNC
Bank, National Association (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.15 Note, dated as of January 30, 1998, by and between the Company and PNC Bank, National Association (incorporated
herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.16 Landlord's Waiver, dated as of January 30, 1998, by Armco Inc (incorporated herein by reference to Exhibit 10.16
to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -------
NUMBER DESCRIPTION PAGE NO.
- ------- ---------- -------
<S> <C> <C>
10.17 Open-End Leasehold Mortgage, Collateral Assignment and Security Agreement dated as of January 30, 1998, by the
Company in favor of PNC Bank, National Association (incorporated herein by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.18 First Amendment to Credit Agreement, dated as of December 31, 1998, between the Company and PNC Bank, National
Association (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for
the year ended Decenber 31, 1998).
10.19 Supply Contract Agreement, dated as of January 1, 1999, between the Company and Talley Metals Technology, Inc. a
subsidiary of Carpenter Technologies Corporation as amended as of December 15, 1999 by and between the Company
and Talley Metals Technology, Inc. (filed herein).
10.20 Loan Agreement, dated October 3, 1995, by and between the Company and Commonwealth of Pennsylvania (incorporated
herein by reference to Exhibit 10.47 to Registration No. 33-97896).
10.21 Note, dated October 3, 1995, for the principal sum of $500,000, by the Company, in favor of the Commonwealth of
Pennsylvania (incorporated herein by reference to Exhibit 10.48 to Registration No. 33-97896).
10.22 Security Agreement, dated October 3, 1995, by and between the Company and the Commonwealth of Pennsylvania
(incorporated herein by reference to Exhibit 10.48 to Registration No. 33-97896).
10.23 Underwriting Agreement, dated December 14, 1994, among the Company and Keane Securities Co., Inc., as representatives of
the several underwriters (incorporated herein by reference to Exhibit 10.52 to Registration No. 33-85310).
10.24 Equipment Purchase Agreement dated as of November 6, 1997 between the Company and Hetran, Inc. for the purchase
of certain bar finishing equipment (incorporated herein by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
13.01 Selected pages of the Company's 1999 Annual Report to Stockholders incorporated by reference in Parts II and
IV of the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
23.01 Consent of PricewaterhouseCoopers LLP.
24.01 Powers of Attorney (included on the signature page hereto).
27.01 Financial Data Schedule
</TABLE>
(b) The following reports on Form 8-K were filed during the fourth quarter of
1999:
None.
15
<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
30, 2000.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
By: /s/ C. 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 Paul A. McGrath, 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/ C. M. McAninch President, Chief Executive Officer March 30, 2000
- ----------------------------- And Director (Principal Executive
Clarence M. McAninch Officer)
/s/ Richard M. Ubinger Chief Financial Officer and Treasurer, March 30, 2000
- ----------------------------- (Principal Financial and Accounting
Richard M. Ubinger Officer)
/s/ Douglas M. Dunn Director March 30, 2000
- -----------------------------
Douglas M. Dunn
/s/ George F. Keane Director March 30, 2000
- -----------------------------
George F. Keane
/s/ Udi Toledano Director March 30, 2000
- -----------------------------
Udi Toledano
/s/ D. Leonard Wise Director March 30, 2000
- -----------------------------
D. Leonard Wise
</TABLE>
16
<PAGE>
EXHIBIT 10.19
AMENDMENT
This Amendment is made as of December 15, 1999, by and between UNIVERSAL
-----------
STAINLESS & ALLOY PRODUCTS, INC., a Delaware corporation (hereinafter
"Universal") and TALLEY METALS TECHNOLOGY, INC., A Carpenter Company (hereafter
"Talley Metals").
WHEREAS, Universal and Talley Metals entered into an Agreement dated
January 1, 1999, for Universal's sale of, and Talley Metals' purchase of,
billets for use in Talley Metals' rolling and finishing operations; and
WHEREAS, said Agreement's initial eighteen (18) months term will expire on
June 30, 2000; and
WHEREAS, the parties wish to extend the initial term of said Agreement for
an additional twelve (12) months.
THEREFORE, In consideration of the mutual covenants contained herein and
intending to be legally bound hereby, the parities agree to amend Section 7
"TERM" of the Agreement in its entirety to read as follows:
----
7. TERM. The term of this Agreement shall commence on the date hereof
----
and continue for a period of thirty (30) months. This Agreement will
automatically renew each month with the placement of each separate
order placed by Talley Metals unless and until notice not to renew is
given in writing by either party.
Notwithstanding the foregoing this Agreement is cancelable at any time
after the expiration of the initial thirty (30) month period upon the
provision of 90 days prior written notice by either party. Either
party may terminate the Agreement at any time in the event that the
other party materially breaches its obligations as stated in this
Agreement.
Either Party may terminate immediately upon the other Party declaring
insolvency or bankruptcy.
All other terms and conditions of the original Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment on the day and year first above written.
UNIVERSAL STAINLESS & TALLEY METALS TECHNOLOGY, INC.
ALLOY PRODUCTS, INC.
By: /s/ C.M. McAninch By: /s/ Bruce P. Bogardus
-------------------------------- --------------------------------
Title: President & CEO Title: Vice President - Materials
----------------------------- -----------------------------
Date: December 3, 1999 Date: December 15, 1999
------------------------------ ------------------------------
<PAGE>
Universal Stainless & Alloy Products Sales Agreement
This AGREEMENT is made and entered into as of the FIRST day of JANUARY 1999, by
and between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a Delaware corporation
(hereinafter "Universal") and TALLEY METALS TECHNOLOGY, a Carpenter Company
(hereinafter "Talley Metals").
WITNESSETH:
----------
WHEREAS, Talley Metals desires to insure a supply of billets for use in its
rolling and finishing operations; and
WHEREAS, Universal desires to sell billets and allocate a portion of its monthly
capacity to manufacture billets on a continuing basis;
NOW, THEREFORE, Universal and Talley Metals the ("Parties" or separately
"Party"), intending to be legally bound, in consideration of the premises and
the mutual covenants and agreements contained herein, agree as follows:
1. BILLET QUANTITIES During the term of this Agreement, Universal shall
-----------------
sell to Talley Metals and Talley Metals shall purchase from Universal,
stainless steel billets (hereinafter the "Billets") in an aggregate
quantity, of no less than three million (3,000,000) pounds and no more
than six million (6,000,000) pounds per month. On an annual basis
Talley Metals purchases from Universal will average three million five
hundred thousand pounds (3,500,000) pounds per month.
2. RESERVED CAPACITY Universal will set aside such capacity as necessary
-----------------
to produce the billet quantities as ordered during the first week in
any month for a shipment in the subsequent month, according to the
terms of this Agreement. Talley Metals will give as much advanced
notice as possible if the order quantity will vary significantly from
month to month. Reserved capacity is based on heat-lot quantities. If
product is rejected by Universal during processing, the order will be
considered complete based on the shipped weight.
3. BILLET SIZES AND SPECIFICATIONS The Billets shall be provided by
-------------------------------
Universal in the sizes and grades requested by Talley Metals' purchase
orders and "Stainless grades" regularly produced by Universal and
requested in accordance with the specifications set forth by Talley
Metals and previously approved by Universal. The Billets shall be
square, with rounded corners, in thickness of four and one-half (4.5")
to eight (8") inches by ten (10") inches, and shall be delivered in
such lengths as Talley Metals shall specify in its monthly purchase
orders, but in no event shorter than twenty-two feet (22') or longer
than forty feet (40').
Universal represents and warrants to Talley Metals that the Billets
delivered by Universal pursuant to this Agreement have been produced
in accordance with good mill practice with respect to dimensions,
weight, straightness,
1
<PAGE>
section, composition and mechanical properties and has been inspected
to assure Billets will meet all applicable standard industry
specifications and all of the specifications set forth in this
Agreement and Talley Metals purchase orders.
4. BILLET PRICES Pricing will be based on Universal's offering to Talley
-------------
metals dated 5/28/98 and 6/1/98. Exhibit "A" of this Agreement.
Monthly adjustments to that offering will be made to address market
changes in key raw material prices per existing formulas.
Any price changes, outside established formulas to adjust for raw
material price fluctuation, must be negotiated in good faith and
agreed to in writing by both parties prior to implementation and be
consistent with market conditions and price changes then common in the
industry.
5. BILLET ORDER; DELIVERY
----------------------
(a) Talley Metals will place orders in heat lot quantities specifying
grade, billet size, and requested delivery on their standard
purchase order form. Orders will be acknowledged by Universal on
their standard acknowledgement form.
(b) The parties acknowledge that this Agreement has been entered into
with the intention that Universal shall retain the capacity
needed to supply Talley Metals with its desired quantity of
Billets. Universal must report all material changes in their
plans, forecast, etc. for manufacturing Billets to Talley Metals
as soon as such plans are known. Talley Metals will advise
Universal of any change to monthly purchases or changes in usage
by grade as soon as such information is available.
(c) The prices and delivery for Billets ordered outside of the first
week of any calendar month shall be as agreed upon by the parties
at the time of order placement.
(d) The Billet prices in all cases shall be exclusive of freight and
insurance, the payment of which shall be solely Talley Metals'
responsibility.
Billets are purchased F.O.B. Bridgeville, PA and Talley Metals
accepts all risk of loss at that time. It is recognized that
Billets are not accepted by Talley Metals until they have arrived
at Talley metals and have been inspected to determine
acceptability under quality standards specified in this
Agreement.
(e) Talley Metals guarantees the minimum order quantity of three
million pounds (3,000,000) of Billet each month during the term
of this Agreement.
(f) Talley Metals purchase orders are placed upon the condition that
Universal shall not assign it or any interest therein, including
any payment due or to become due with respect thereto, and any
assignment or any attempt to assign shall be void without Talley
Metals prior written consent and that Talley Metals shall be
entitled at all times, to setoff any
2
<PAGE>
undisputed amounts owing from Universal to Talley against any
amount due or owing Universal with respect to this order.
6. PAYMENT. Talley Metals will pay to Universal the full invoiced amount
-------
within forty-five (45) days of delivery of material.
7. TERM. The term of this Agreement shall commence on the date hereof and
----
continue for a period of eighteen (18) months. This Agreement will
automatically renew each month with the placement of each separate
order placed by Talley Metals unless and until notice not to renew is
given in writing by either party.
Notwithstanding the foregoing Agreement is cancelable at any time
after the expiration of the initial eighteen-month period upon the
provision of 90 days prior written notice by either party. Either
party may terminate the Agreement at any time in the event that the
other party materially breaches its obligations as stated in this
Agreement.
Either Party may terminate immediately upon the other Party declaring
insolvency or bankruptcy.
8. FORCE MAJEURE. Both parties will make a good faith effort to perform
-------------
hereunder. Neither party, however, shall be liable for delay in
performance or for failure to render any performance under this
Agreement (and without in any way limiting the generality of the
foregoing, any such delay or failure shall be excused) when such delay
or failure is caused by governmental regulations (whether or not
valid, fire, strike, war, flood, accident, epidemic, embargo,
appropriation of plant or product, in whole or in part by Federal or
State authority and any other cause or causes, whether of like or
different nature, beyond the reasonable control of such party;
provided, however that notwithstanding any provisions herein to the
contrary, Talley Metals shall be entitled, in any such event, to
purchase its required amounts in whole or in part from other vendors
and, if necessary, to reduce its obligations hereunder in order to
contract for such other supply requirements at such times that
Universal cannot meet the supply requirements. Once events change
allowing Universal to again supply Talley Metals, Talley Metals must
do so in accordance with the terms and conditions set forth in this
Agreement. Each party shall promptly notify the other of the
occurrence (and the likelihoods of the occurrence) of any such event
or condition and shall keep the other party fully informed of all
relevant information. In the event Talley Metals purchases billets
from another source under circumstances where Universal cannot or does
supply the same, such purchases shall be counted for purposes of the
purchase requirements and restriction set forth in this Agreement.
9. SUCCESSOR AND ASSIGNS. This Agreement shall be binding on and inure to
---------------------
the benefit of the parties hereto and their respective successors and
assigns.
10. GOVERNING LAW. This Agreement and the rights and obligations of the
-------------
parties hereunder shall be governed by and construed in accordance
with the laws of Pennsylvania
3
<PAGE>
11. CONFIDENTIALITY; DISCLOSURE. The parties hereby agree that they will
---------------------------
direct, and will use their best efforts to cause their directors,
officers, employees, advisors and representatives of their advisors
(collectively, the "Permitted Persons") to use the information in this
Agreement solely for the purpose of evaluating and/or affecting the
purchase and sale of Billets and that such information will be kept
confidential by the parties and their Permitted Persons (it being
understood and agreed that the efforts used to keep such request for
information confidential shall not be less than the efforts currently
used to keep non-public information about themselves confidential);
provided, however, that any disclosure of such information may be made
to which both parties consent in writing prior to the disclosure of
such request. Notwithstanding the foregoing, either party hereto will
be permitted to make disclosures required by law.
The parties also hereby agree that all designs, drawings, patterns or
customer chemistries provided by or on behalf of Talley Metals to
Universal or information or material regarding or relating to Talley
Metals' customers shall be deemed "Confidential Information" of Talley
Metals whether or not such information is marked confidential.
12. ENTIRE AGREEMENT; NO ORAL MODIFICATION. This Agreement represents the
--------------------------------------
entire agreement of the parties with respect to the subject matter
hereof, and all prior agreements, whether oral or written, are revoked
and superseded by this Agreement. No representation, warranty,
inducement or oral agreements have been made or relied upon by either
party except as expressly stated herein. This Agreement may not be
changed, modified, altered or amended in any way except in writing
signed by both parties. Any attempt at oral modification shall be void
and of no force or effect.
13. HEADINGS; CONSTRUCTION. The Articles and Section headings contained in
----------------------
this Agreement are for reference purposes only and will not affect in
any way the meaning or interpretation of this Agreement. Unless the
context clearly otherwise requires, the words "hereby", "hereof",
"herein", "hereto", "hereunder", and "hereinafter" and any similar
term used in this Agreement refers to this Agreement as a whole and
not merely the subsection or section in which such terms are used.
14. COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but both of which shall be deemed
one and the same Agreement.
15. SEVERABILITY. The parties agree that should any part or portion of
------------
this Agreement be found to be unenforceable, that the remainder of
this Agreement be enforced, to the extent that it is legal and
practicable to do so.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Universal Stainless & Alloy Products Talley Metals Technology,
Inc., a Delaware Corporation A Carpenter Company
By: /s/ C.M. McAninch By: /s/ Bruce Bogardus
---------------------------- -------------------------------
Its: President & CEO Its: Vice President - Materials
---------------------------- ------------------------------
Carpenter Technology Corporation
By: /s/ Andrew McElwee
--------------------------------
Its: President Talley Metals
------------------------------
5
<PAGE>
May 28, 1998 EXHIBIT A
TO: Bruce Bogardus
Talley Metals
FROM: Mac McAninch
Stainless billet prices for JULY delivery.
PRICE SELLING
GRADE % NICKEL BASE CURRENT DEDUCT PRICE
- ------- -------- ----- ------- ------ -----
155-00 4.5% 1.159 1.062 0.100 0.962
17-4 4.2% 0.740 0.650 0.050 0.600
203EZ 6.0% 0.778 0.649 0.050 0.599
302 8.5% 0.768 0.585 0.050 0.535
302-02 9.0% 0.796 0.603 0.050 0.553
302-03 9.7% 0.885 0.677 0.050 0.627
302-04 8.5% 0.776 0.593 0.050 0.543
302-05 8.5% 0.787 0.604 0.050 0.554
303 8.5% 0.778 0.595 0.050 0.545
304 8.5% 0.768 0.585 0.050 0.535
304-02 8.5% 0.783 0.600 0.050 0.550
304-03 9.0% 0.798 0.605 0.050 0.555
304-04 9.2% 0.816 0.618 0.050 0.568
304-05 8.7% 0.828 0.641 0.050 0.591
304L 8.5% 0.778 0.595 0.050 0.545
304L3+CAL 8.7% 0.800 0.613 0.050 0.563
305 11.1% 0.970 0.731 0.050 0.681
316 10.5% 0.920 0.694 0.020 0.674
316L 10.5% 0.930 0.704 0.020 0.684
316L3+CAL 10.7% 0.950 0.720 0.020 0.700
321 9.5% 0.979 0.775 0.050 0.725
347 9.5% 1.069 0.865 0.050 0.815
409-00 0.0% 0.415 0.415 0.000 0.415
409-01 0.0% 0.420 0.420 0.000 0.420
409-02 0.0% 0.425 0.425 0.000 0.425
410 0.0% 0.420 0.420 0.000 0.420
416-00 0.0% 0.425 0.425 0.025 0.400
416-01 0.0% 0.450 0.450 0.025 0.425
416-02 0.0% 0.450 0.450 0.025 0.425
416-03 0.0% 0.450 0.450 0.025 0.425
Above prices are based on previous 20 day average Nickel price of $2.316/lb.
<PAGE>
June 1, 1998 EXHIBIT A
TO: Bruce Bogardus
Talley Metals
FROM: Mac McAninch
SUBJECT: Wire rod grade pricing for July delivery
GRADE % NICKEL BASE CURRENT
- ------- -------- ----- ---------
302-01 8.15% 0.735 .577/lb
302-06 8.25% 0.745 0.585
302-07 8.15% 0.719 0.567
302-08 8.50% 0.739 0.565
304-01 9.20% 0.777 0.589
304-06 10.00% 0.795 0.585
304-07 8.50% 0.755 0.581
304L1 9.20% 0.766 0.576
304L2 10.10% 0.810 0.612
316-01 11.00% 0.905 0.671
316L1 12.00% 0.935 0.700
Page 1
<PAGE>
Exhibit 13.01
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
1 9 9 9 financial review
10 Management's Discussion and Analysis of
Financial Condition and Results of Operations
14 Report of Independent Accountants
15 Consolidated Statement of Operations
16 Consolidated Balance Sheet
17 Consolidated Statement of Cash Flows
18 Notes to the Consolidated Financial Statements
26 Price Range of Common Stock
27 Five-Year Summary
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
An analysis of the Company's operations is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------
Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales
Stainless steel $55,255 82.9 $53,661 73.9 $60,700 74.7
Tool steel 6,055 9.1 7,548 10.4 10,467 12.9
High-temperature alloy steel 2,124 3.2 4,387 6.0 2,636 3.2
Conversion services 1,807 2.7 3,690 5.1 4,834 5.9
Other 1,422 2.1 3,309 4.6 2,664 3.3
- ----------------------------------------------------------------------------------------------------
Total net sales 66,663 100.0 72,595 100.0 81,301 100.0
====================================================================================================
Cost of products sold
Raw materials 24,732 37.1 26,839 37.0 32,601 40.1
Other 33,901 50.9 33,256 45.8 32,427 39.9
- ----------------------------------------------------------------------------------------------------
Total cost of products sold 58,633 88.0 60,095 82.8 65,028 80.0
- ----------------------------------------------------------------------------------------------------
Selling and administrative expenses 4,299 6.4 4,934 6.8 4,699 5.8
- ----------------------------------------------------------------------------------------------------
Operating income $ 3,731 5.6 $ 7,566 10.4 $11,574 14.2
====================================================================================================
</TABLE>
Net sales by market segment are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------
Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rerollers $36,522 54.8 $32,990 45.4 $41,196 50.7
Service centers 11,130 16.7 12,809 17.6 11,864 14.6
Forgers 9,185 13.8 17,144 23.6 13,846 17.0
Original equipment manufacturers 7,761 11.6 5,840 8.1 9,200 11.3
Conversion services 1,807 2.7 3,690 5.1 4,834 6.0
Miscellaneous 258 0.4 122 0.2 361 0.4
- ----------------------------------------------------------------------------------------------------
Total net sales $66,663 100.0 $72,595 100.0 $81,301 100.0
====================================================================================================
</TABLE>
10
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
1999 RESULTS AS COMPARED TO 1998 The decrease in net sales in 1999 reflects
lower sales prices on products shipped to all of the Company's market segments
and reduced shipments. The Company shipped approximately 44,800 tons in 1999,
compared to shipments of 45,500 tons in 1998. The increase in net sales of
stainless steel was achieved through increased shipments of long products to the
reroller market, of power generation products to the forging and OEM markets and
of finished round bar to the service center market. Overall, lower shipments to
the forging and service center markets and lower conversion services are a
result of lower demand for the Company's products from the aerospace market and
the lingering effect of increased import levels during the second half of 1998.
Cost of products sold, as a percent of net sales, increased in 1999 as compared
to 1998. This increase was primarily due to increases in the acquisition costs
for the Company's primary raw materials, higher depreciation expenses, costs
associated with the increased activity of the Company's bar products and lower
selling prices in the stainless steel area.
Selling and administrative expenses decreased in 1999 as compared to 1998. This
primarily reflected the Company's actions to lower its costs as a result of
market conditions.
Interest expense and other financing costs increased from $361,000 in 1998 to
$736,000 in 1999 primarily due to a reduction in capitalized interest and higher
interest rates on the PNC Term Loan. Other income (expense), net increased to
income of $30,000 in 1999 from expense of $93,000 in 1998 primarily due to the
costs associated with pursuing an acquisition in 1998.
The 1999 effective income tax rate was 30.5% compared to 36.3% in 1998. The
decrease in the effective income tax rate is primarily attributable to the
effect of the Company's permanent tax deductions against lower income levels
generated in 1999.
1998 RESULTS AS COMPARED TO 1997 The decrease in 1998 net sales reflects reduced
shipments to all of the Company's market segments primarily due to increased
imports. The Company shipped approximately 45,500 tons in 1998, compared to
55,300 tons in 1997. The decrease in net sales of stainless steel also resulted
from lower selling prices due to price competition created by increased import
levels and the lower cost of nickel during 1998. Increased shipments of low-
alloy and high-temperature alloy steels, introduced in 1997, and of bar mill
products partially offset the decline in net sales.
Cost of products sold, as a percent of net sales, increased in 1998 as compared
to 1997 despite lower acquisition costs for the Company's primary raw materials.
Changes in product mix resulting from bar mill shipments as well as increases in
utility, depreciation and maintenance costs more than offset the benefits
received from lower raw material costs.
Selling and administrative expenses increased from $4.7 million in 1997 to $4.9
million in 1998. The increase primarily related to higher selling expenses and
charges relating to certain quality issues which were partially offset by lower
insurance costs.
The 1998 results benefited from the settlement of an insurance claim related to
the 1995 electrical component breakdown in a drive motor at the Company's
Bridgeville facility universal rolling mill. The settlement, net of costs
incurred in connection with the Company's claim, was $750,000.
Interest expense and other financing costs increased $113,000 as a result of
borrowings under a term loan from PNC Bank to finance capital expenditures.
Other income (expense) was impacted negatively by the costs associated with
pursuing the acquisition of AL Tech Specialty Steels, Inc. and the removal of
buildings at the Bridgeville facility. These costs were partially offset by a
government grant received in connection with the expansion of operations at the
Bridgeville facility.
The 1998 effective income tax rate was 36.3% compared to 37.0% in 1997. The
decrease in the effective tax rate is directly attributable to a lower effective
rate for state income taxes.
11
<PAGE>
Management's Discussion and Analysis (CONTINUED)
Liquidity and Capital Resources
The Company generated cash flow from operations in 1999 and 1998 of $4.9 million
and $6.9 million, respectively. This decrease is primarily due to the reduction
in net income partially offset by a reduction in working capital.
At December 31, 1999, working capital approximated $20.8 million, as compared to
$21.8 million at December 31, 1998. The ratio of current assets to current
liabilities at December 31, 1999 and 1998, was 3.2:1 and 4.3:1, respectively.
The debt to capitalization ratio was 21% at December 31, 1999, and 23% at
December 31, 1998. The decrease in working capital was primarily attributable to
decreases in cash, inventory and other current assets as well as increases in
accounts payable, and the current portion of long-term debt which were partially
offset by an increase in accounts receivable. The increases in accounts
receivable and accounts payable are primarily due to increased sales activity
during the 1999 fourth quarter.
CAPITAL EXPENDITURES AND INVESTMENTS The Company's capital expenditures were
approximately $3.4 million and $12.1 million in 1999 and 1998, respectively,
which reflect the completion of the round bar finishing facility located at the
Bridgeville facility. Capital expenditures in 2000 are expected to approximate
$4.0 million and will be used primarily to complete projects previously
initiated and for the purchase and installation of a billet grinder. These
expenditures are expected to be funded substantially from internally generated
funds.
PNC CREDIT AGREEMENT On January 30, 1998, the Company entered into the Second
Amended and Restated Credit Agreement, as subsequently amended, with PNC Bank
for a $6.5 million revolving credit facility through April 2001 (the "PNC Line")
and a seven-year term loan (the "PNC Term Loan"), secured by substantially all
of the Company's assets. Borrowings under the PNC Term Loan aggregated $10.0
million and scheduled quarterly principal payments commenced on September 30,
1999. Interest incurred from borrowings under the PNC Line and the PNC Term Loan
is based on short-term market rates, which may be further adjusted based upon
the Company maintaining certain financial ratios. As a condition of the PNC Line
and the PNC Term Loan, the Company is required to maintain certain levels of net
worth, working capital and other financial ratios; to limit the amount of
capital expenditures it may incur without PNC Bank's approval; and to restrict
the payment of dividends. As of December 31, 1999, the Company was in compliance
with all financial ratios and restrictive covenants.
STOCK REPURCHASE PROGRAM On October 19, 1998, the Company initiated a stock
repurchase program to repurchase from time to time up to a total of 315,000
shares of its outstanding common stock in open market transactions at market
prices. During 1999, the Company repurchased 182,900 shares at a cost of
$1,066,000. Cash from operations financed the repurchase of common stock. The
Company is authorized to repurchase an additional 57,100 shares of common stock
as of December 31, 1999.
SUPPLY CONTRACT In November 1998, the Company entered into a supply contract
agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter
Technology Corporation, covering a period of at least 18 months. Under terms of
the agreement, the Company will supply Talley Metals with an average of 1,750
tons of stainless reroll billet products per month. The value of the contract on
a monthly basis will depend on product mix and key raw material prices. In
December 1999, the agreement was extended to cover an additional 12-month period
under the same terms and conditions.
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 1994 acquisition of
the Bridgeville facility assets from Armco, which merged with and into AK Steel
in 1999 ("Armco"), Armco agreed to retain
12
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
responsibility for liabilities asserted against it 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 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.
In connection with the Company's June 2, 1995, agreement with Armco to purchase
certain 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 AK
Steel, as successor to 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 material environmental condition requiring remediation
and affecting the Company.
YEAR 2000 The following statements are provided pursuant to the provisions of
the Year 2000 Information and Readiness Disclosure Act of 1998.
The Company encountered no problems during the rollover to the Year 2000 which
had a material impact on operations. Until all processes and systems are run in
production for the first time after the rollover and through leap year, there is
the potential for date-related problems. The Company plans to continue
monitoring its processes and systems to ensure dates and date-related
information continue to be processed correctly.
SHORT- AND LONG-TERM LIQUIDITY The Company expects to meet substantially all of
its short-term liquidity requirements with internally generated funds and
borrowings under the PNC Credit Agreement. At December 31, 1999, the Company had
$6.5 million available under the PNC Line.
The Company's long-term liquidity 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
receipt, pricing and timing of future customer orders; changes in product mix;
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. For a discussion of these and other matters,
refer to the Company's Annual Report on Form-10K for the year ended December 31,
1999 and other reports on file with the Securities and Exchange Commission.
13
<PAGE>
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 21, 2000
14
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share information)
<S> <C> <C> <C>
Net sales $ 66,663 $ 72,595 $ 81,301
Cost of products sold 58,633 60,095 65,028
Selling and administrative expenses 4,299 4,934 4,699
- ---------------------------------------------------------------------------------------------------
Operating income 3,731 7,566 11,574
Insurance settlement -- 750 --
Interest expense and other financing costs (736) (361) (248)
Other income (expense), net 30 (93) 112
- ---------------------------------------------------------------------------------------------------
Income before taxes 3,025 7,862 11,438
Provision for income taxes 922 2,858 4,232
- ---------------------------------------------------------------------------------------------------
Net income $ 2,103 $ 5,004 $ 7,206
===================================================================================================
EARNINGS PER COMMON SHARE:
Basic $ 0.34 $ 0.79 $ 1.15
Diluted $ 0.34 $ 0.79 $ 1.12
- ---------------------------------------------------------------------------------------------------
Weighted-average number of shares of
Common Stock outstanding 6,110,911 6,304,524 6,285,531
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 868 $ 1,437
Accounts receivable (less allowance for doubtful accounts
of $418 and $358) 12,113 8,843
Inventory 15,730 16,182
Deferred taxes 1,232 592
Other current assets 332 1,388
- -----------------------------------------------------------------------------------------------------------
Total current assets 30,275 28,442
Property, plant and equipment, net 36,989 35,710
Other assets 915 298
- -----------------------------------------------------------------------------------------------------------
Total assets $ 68,179 $64,450
===========================================================================================================
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Trade accounts payable $ 5,477 $ 3,166
Bank overdrafts 1,107 1,145
Current portion of long-term debt 1,836 1,117
Accrued employment costs 727 957
Other current liabilities 328 228
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 9,475 6,613
Long-term debt 10,005 11,841
Deferred taxes 5,046 3,431
- -----------------------------------------------------------------------------------------------------------
Total liabilities 24,526 21,885
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Senior Preferred Stock, par value $.001 per share;
liquidation value $100 per share; 2,000,000 shares authorized;
0 shares issued and outstanding -- --
Common Stock, par value $.001 per share; 10,000,000 shares
authorized; 6,330,416 and 6,320,036 shares issued
and outstanding 6 6
Additional paid-in capital 25,838 25,787
Retained earnings 19,353 17,250
Treasury Stock at cost; 257,900 and 75,000 common shares (1,544) (478)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 43,653 42,565
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 68,179 $64,450
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,103 $ 5,004 $ 7,206
Adjustments to reconcile to net cash and cash
equivalents provided by operating activities:
Depreciation and amortization 2,101 1,516 1,109
Deferred taxes 354 1,566 750
Changes in assets and liabilities:
Accounts receivable, net (3,270) 5,660 (5,094)
Inventory 452 (711) (5,687)
Accounts payable and bank overdraft 2,273 (3,690) 2,144
Accrued employment costs (230) (747) 301
Other, net 1,146 (1,742) 336
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,929 6,856 1,065
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,366) (12,146) (8,145)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,366) (12,146) (8,145)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 10,000 500
Long-term debt repayment (1,117) (382) (300)
Proceeds from issuance of Common Stock 51 244 65
Borrowings under revolving line of credit 22,310 24,855 24,922
Repayments under revolving line of credit (22,310) (27,640) (22,137)
Deferred financing costs -- (49) (12)
Purchase of Treasury Stock (1,066) (478) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,132) 6,550 3,038
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (569) 1,260 (4,042)
Cash and cash equivalents at beginning of period 1,437 177 4,219
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 868 $ 1,437 $ 177
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid (net of amount capitalized) $ 774 $ 298 $ 226
Income taxes paid $ 388 $ 2,698 $ 3,428
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Notes to the Consolidated Financial Statements
Note 1: Significant Accounting Policies
DESCRIPTION OF THE COMPANY Universal Stainless & Alloy Products, Inc. (the
"Company") manufactures and markets semi-finished and finished specialty steel
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 and 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 performs 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.
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 40% 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
18
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
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.
CAPITALIZATION OF SOFTWARE COSTS Direct costs incurred in the development and
implementation of internal-use software is capitalized and amortized on a
straight-line basis over its anticipated useful life, which generally does not
exceed five years.
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.
INCOME TAXES Deferred income taxes are provided for the tax effect of temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements. The Company uses the liability method to
account for income taxes, which requires deferred taxes to be recorded at the
statutory rate expected to be in effect when the taxes are paid. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not that
the asset will not be realized.
EARNINGS PER COMMON SHARE Basic earnings per common share is computed by
dividing net income by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding plus all
dilutive potential common shares outstanding during the period. Dilutive common
shares are determined using the treasury stock method. Under the treasury stock
method, exercise of options and warrants are assumed at the beginning of the
period when the average stock price during the period exceeds the exercise price
of outstanding options and warrants and, common shares are assumed issued. The
proceeds from exercise are assumed to be used to purchase common stock at the
average market price during the period. The incremental shares to be issued are
considered to be the dilutive potential common shares outstanding.
SEGMENT INFORMATION In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise
and Related Information" utilizing the "management approach." The management
approach is based on the way the chief operating decision maker organizes
segments within the Company for making operating decisions and assessing
performance.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform
with the 1999 presentation.
Note 2: Inventory
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 2,427 $ 2,358
Semi-finished and finished
steel products 10,208 11,152
Operating materials 3,095 2,672
- ---------------------------------------------------------------------------------
Total inventory $15,730 $16,182
=================================================================================
</TABLE>
Note 3: Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 822 $ 822
Buildings 3,337 2,591
Machinery and equipment 37,329 31,903
Construction in progress 835 3,655
- -----------------------------------------------------------------------------------------
42,323 38,971
- -----------------------------------------------------------------------------------------
Accumulated depreciation (5,334) (3,261)
- -----------------------------------------------------------------------------------------
Property, plant and equipment, net $36,989 $35,710
=========================================================================================
</TABLE>
Property, plant and equipment includes a capital lease with Armco, which merged
with and into AK Steel in 1999 ("Armco") for the land and certain buildings and
structures located in Bridgeville (the "Bridgeville Lease"). The Bridgeville
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
19
<PAGE>
Notes to the Consolidated Financial Statements (CONTINUED)
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 Bridgeville Lease prior to August 15, 2015.
In 1998, the Company entered into two new capital leases with unrelated third
parties for machinery and equipment at the Bridgeville facility. Under the terms
of both of the leases, the Company has the option to purchase the leased
machinery and equipment for $1 at the end of the five-year term. The total value
of the leased machinery and equipment is $346,000.
The Company capitalized $104,000 and $421,000 of its interest costs associated
with the PNC Line and the PNC Term Loan in 1999 and 1998, respectively.
Note 4: Long-Term Debt and Other Financing
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
PNC Term Loan $ 9,300 $10,000
Government debt 2,227 2,516
Capital lease obligations 314 442
- -----------------------------------------------------------------------------
11,841 12,958
Less amounts due within one year (1,836) (1,117)
- -----------------------------------------------------------------------------
Total long-term debt $10,005 $11,841
=============================================================================
</TABLE>
On January 30, 1998, the Company entered into the Second Amended and Restated
Credit Agreement, as subsequently amended, with PNC Bank, the "PNC Credit
Agreement", for a $6,500,000 revolving credit facility through April 2001 (the
"PNC Line") and a $15,000,000 seven-year term loan (the "PNC Term Loan"),
secured by substantially all of the Company's assets. Borrowings under the PNC
Term Loan were $10,000,000 through June 30, 1999 and scheduled quarterly
principal payments commenced on September 30, 1999. Interest incurred from
borrowings under the PNC Line and the PNC Term Loan is based on short-term
market rates, which may be further adjusted based upon the Company maintaining
certain financial ratios. The PNC Term Loan currently bears interest at a rate
equal to the Euro-dollar rate plus 175 basis points. As a condition of the PNC
Line and the PNC Term Loan, the Company is required to maintain certain levels
of net worth, working capital and other financial ratios; to limit the amount of
capital expenditures it may incur without PNC Bank's approval; and to restrict
the payment of dividends.
The Company has several separate loan agreements with the Commonwealth of
Pennsylvania's Department of Commerce aggregating $1,600,000 with terms ranging
from seven to twenty years. In 1996 the Company 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 interest at rates
ranging from 5% to 6% per annum.
Scheduled maturities of long-term obligations for the next five years are as
follows (dollars in thousands):
<TABLE>
- ------------------------------------------------------
<S> <C>
2000 1,836
2001 1,808
2002 1,807
2003 1,696
2004 1,633
- ------------------------------------------------------
Thereafter 3,061
======================================================
</TABLE>
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, 1999, 1998
and 1997, was $284,000, $286,000 and $251,000, respectively.
No other post-retirement benefit plans exist.
20
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
Note 6: Income Taxes
Components of the provision for income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 512 $1,245 $3,113
State 56 47 369
- ------------------------------------------------------------------------------
568 1,292 3,482
- ------------------------------------------------------------------------------
Deferred provision
(benefit):
Federal 457 1,416 682
State (103) 150 68
- ------------------------------------------------------------------------------
354 1,566 750
- ------------------------------------------------------------------------------
Provision for income taxes $ 922 $2,858 $4,232
==============================================================================
</TABLE>
A reconciliation of the federal statutory tax rate and the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit (2.2) 2.3 2.7
Other, net (1.3) 0.0 0.3
- ----------------------------------------------------------------------------------
Effective tax rate 30.5% 36.3% 37.0%
==================================================================================
</TABLE>
Deferred taxes result from the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Receivables $ 173 $ 173
Inventory 540 238
Organizational expenses -- 36
Net operating loss carry forwards 1,007 --
Accrued liabilities 132 145
- ----------------------------------------------------------------------
$1,852 $ 592
- ----------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $5,046 $3,431
=======================================================================
</TABLE>
Note 7: Stockholders' Equity
<TABLE>
<CAPTION>
Common Additional
Shares Common Paid-In Retained Treasury Treasury
(Dollars in thousands) Outstanding Stock Capital Earnings Shares Stock
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,283,734 $6 $25,451 $ 5,040 -- $ --
Common Stock Issuance under
Employee Stock Purchase Plan 7,089 65
Net income 7,206
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,290,823 6 25,516 12,246 -- --
Common Stock Issuance under
Employee Stock Purchase Plan 8,880 63
Exercise of Stock Options 20,333 208
Purchase of Treasury stock 75,000 (478)
Net income 5,004
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,320,036 6 25,787 17,250 75,000 (478)
Common Stock Issuance under
Employee Stock Purchase Plan 10,380 51
Purchase of Treasury stock 182,900 (1,066)
Net income 2,103
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,330,416 $6 $25,838 $19,353 257,900 $(1,544)
============================================================================================================================
</TABLE>
21
<PAGE>
Notes to the Consolidated Financial Statements (CONTINUED)
In connection with the 1994 initial public offering, the underwriters received
warrants, which expired 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 October 19, 1998, the Company's Board of Directors implemented a stock
repurchase program. Under the program, the Company may repurchase up to 315,000
shares, or approximately 5%, of the Company's Common Stock in open market
transactions at market prices. At December 31, 1999, the Company is authorized
to repurchase 57,100 shares of the Company's Common Stock.
The Company has 2,000,000 authorized shares of Senior Preferred Stock. At
December 31, 1999 and 1998, there were no shares issued or outstanding.
Note 8: Basic and Diluted Earnings Per Share
The computation of basic and diluted earnings per share for the years ended
December 31, 1999, 1998 and 1997 is performed as follows (dollars in thousands,
except share amounts and per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------
Income Shares Income Shares Income Shares
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income available to common Stockholders $2,103 6,110,911 $5,004 6,304,524 $7,206 6,285,531
Effect of dilutive securities -- 50,707 131,544
Income available to common Stockholders
plus assumed conversion $2,103 6,110,911 $5,004 6,355,231 $7,206 6,417,075
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.34 $ 0.79 $ 1.15
Diluted earnings per share $ 0.34 $ 0.79 $ 1.12
====================================================================================================================
</TABLE>
22
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
Note 9: Stock Compensation Plans
At December 31, 1999, 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 those 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 up 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,
1999, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed options
Outstanding at beginning of year 488,500 $10.10 498,667 $ 9.97 335,500 $ 9.20
Granted 40,000 6.06 70,000 9.94 215,500 11.03
Exercised -- -- (20,333) 8.85 -- --
Forfeited (46,000) 9.90 (59,834) 9.21 (52,333) 9.36
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 482,500 $ 9.79 488,500 $10.10 498,667 $ 9.97
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 364,165 281,232 177,751
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 2.89 $ 6.52 $ 6.62
===================================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$6.06 to $12.25 482,500 7.0 $9.79 364,165 $10.17
============================================================================ =============================
</TABLE>
23
<PAGE>
Notes to the Consolidated Financial Statements (CONTINUED)
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,
1999, the Company has issued 28,783 shares of Common Stock since the plan's
inception.
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 of the awards
at the grant dates in accordance with 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 (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $2,103 $5,004 $7,206
Pro forma $1,704 $4,673 $6,874
- ------------------------------------------------------------------------------
Basic earnings per share
As reported $ 0.34 $ 0.79 $ 1.15
Pro forma $ 0.28 $ 0.74 $ 1.09
- ------------------------------------------------------------------------------
</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 1999, 1998 and 1997 respectively; dividend
yield of 0.0% for each year; interest rate of 6.0% for each year; expected
volatility of 45.0%, 75.0% and 65.0%; and expected lives for options of five
years.
CASH-INCENTIVE PLANS The Company has a management cash-incentive plan covering
certain key executives and employees and profit-sharing plans that cover the
remaining employees. The profit-sharing plans provide for the sharing of pre-tax
profits in excess of specified amounts. For the years ended December 31, 1999,
1998 and 1997, the Company expensed $445,000, $1,246,000 and $1,679,000,
respectively, under these plans.
Note 10: Commitments and Contingencies
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 1994 acquisition of the Bridgeville
facility assets from Armco, Armco agreed to retain responsibility for
liabilities asserted against it under environmental laws with respect to
environmental conditions existing at the Bridgeville facility prior to
commencement of the Bridgeville Lease 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.
In connection with the Company's June 2, 1995, agreement with Armco to purchase
certain 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 AK
Steel, as successor to 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 material environmental condition requiring remediation
and affecting the Company.
24
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
The Company maintains insurance for both property damage and business
interruption applicable to its production facilities, including the universal
rolling mill. In 1998, the Company settled its claim under its Boiler and
Machinery policy related to the drive motor at the Bridgeville facility's
universal rolling mill, which caused an approximately six-week production halt
in 1995. After deducting all costs associated with the settlement, the Company
received $750,000.
Note 11: Segment And Related Information
The Company is comprised of two operating locations, the Bridgeville facility
and the Titusville facility, and one corporate headquarters. The nature of the
products and services, production processes, customer type and distribution
methods are generally similar for both operating locations. In addition, the
assessment of performance and allocation of resources is performed by the chief
operating decision maker at the corporate level rather than by operating
location. As such, the Company operates as a single segment.
The following table presents net sales by product line (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Stainless steel $55,255 $53,661 $60,700
Tool steel 6,055 7,548 10,467
High-temperature
alloy steel 2,124 4,387 2,636
Conversion services 1,807 3,690 4,834
Other 1,422 3,309 2,664
- -----------------------------------------------------------------------
Total net sales $66,663 $72,595 $81,301
=======================================================================
</TABLE>
Net sales from the Company's largest customer and its affiliates, which were
generated from the Bridgeville Operations, approximated 48%, 35% and 44% of
total 1999, 1998 and 1997 sales, respectively. The accounts receivable balances
from the same customer comprised approximately 41% and 9% of total accounts
receivable at December 31, 1999 and 1998, respectively.
The Company derives less than 10% of its revenues from markets outside of the
United States and the Company has no assets located outside the United States.
Note 12: Quarterly Financial Data (unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
1999 Data
<S> <C> <C> <C> <C>
Net sales $14,488 $15,485 $16,110 $20,580
Gross profit 1,527 1,545 1,900 3,058
Operating income 513 575 893 1,750
Net income 231 249 455 1,168
Earnings per
common share
Basic $ 0.04 $ 0.04 $ 0.07 $ 0.19
Diluted $ 0.04 $ 0.04 $ 0.07 $ 0.19
==============================================================================
1998 Data
Net sales $22,349 $21,163 $15,977 $13,106
Gross profit 3,882 3,831 2,836 1,951
Operating income 2,742 2,495 1,687 642
Net income 1,811 1,535 982 676
Earnings per
common share
Basic (a) $ 0.29 $ 0.24 $ 0.16 $ 0.11
Diluted $ 0.28 $ 0.24 $ 0.16 $ 0.11
==============================================================================
</TABLE>
(a) Earnings per share for the year is less than the sum of the quarterly
earnings per share due to the change in shares each quarter.
25
<PAGE>
Price Range of Common Stock
The Common Stock is listed on the Nasdaq National Market under the symbol
"USAP." The following table sets forth the range of high and low sale prices per
share of Common Stock, for the periods indicated below:
<TABLE>
<CAPTION>
High Low
- ---------------------------------------------------
<S> <C> <C>
Year 1999
First quarter $ 7 3/8 $ 5 3/4
Second quarter $ 6 1/4 $ 5 3/8
Third quarter $ 6 1/4 $ 4 3/4
Fourth quarter $ 6 3/4 $ 3 1/4
===================================================
Year 1998
First quarter $14 3/8 $11 7/16
Second quarter $14 $ 9
Third quarter $10 1/2 $ 5 3/16
Fourth quarter $ 7 1/2 $ 4 1/4
===================================================
</TABLE>
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 PNC Credit Agreement
contains restrictions on the Company's ability to pay dividends on Common Stock.
26
<PAGE>
Universal Stainless & Alloy Products, Inc. 1 9 9 9 Annual Report
Five-Year Summary
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Summary of Operations
<S> <C> <C> <C> <C> <C>
Net sales $ 66,663 $ 72,595 $ 81,301 $ 60,258 $ 46,992
Operating income 3,731 7,566 11,574 7,531 3,202
Net income 2,103 5,004 7,206 4,793 2,723
===================================================================================================================
Financial Position at Year-End
Working capital $ 20,800 $ 21,829 $ 20,086 $ 15,981 $ 19,283
Total assets 68,179 64,450 56,151 42,098 32,437
Total debt 11,841 12,958 5,779 2,794 535
Stockholders' equity 43,653 42,565 37,768 30,497 25,591
===================================================================================================================
Common Share Data
Net income--basic $ 0.34 $ 0.79 $ 1.15 $ 0.76 $ 0.57
Net income--diluted 0.34 0.79 1.12 0.76 0.57
Stockholders' equity 7.19 6.82 6.00 4.85 4.08
===================================================================================================================
Other Data
EBITDA (a) $ 5,844 $ 8,960 $ 12,741 $ 8,226 $ 3,601
Capital expenditures 3,366 12,146 8,145 11,409 3,039
Depreciation and amortization 2,101 1,516 1,109 541 304
Return on stockholders' equity 4.8% 11.8% 19.1% 15.7% 10.6%
Debt to total capitalization 21.3 23.3 13.3 8.4 2.1
Employees 277 280 270 208 172
Customers 235 200 167 136 77
===================================================================================================================
Average Shares Outstanding (in thousands)
Basic 6,111 6,305 6,286 6,271 4,745
Diluted 6,111 6,355 6,417 6,293 4,780
===================================================================================================================
</TABLE>
(a) Represents earnings before special charges, interest expense, income taxes
and depreciation and amortization.
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, enhanced competitive posture, and Year 2000 compliance, 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.
27
<PAGE>
Directors, Officers and Management
DIRECTORS
Douglas M. Dunn
Dean of Graduate School
of Industrial Administration
Carnegie Mellon University
George F. Keane
Chairman of the Board
Trigen Energy Corporation
Clarence M. McAninch
President and
Chief Executive Officer
Universal Stainless &
Alloy Products, Inc.
Udi Toledano
President
Andromeda Enterprises, Inc.
D. Leonard Wise
Former President and
Chief Executive Officer
Carolina Steel Corporation
OFFICERS
Clarence M. McAninch
President and
Chief Executive Officer
A. Bruce Kennedy
Vice President, Operations
Richard M. Ubinger
Chief Financial Officer and Treasurer
Paul A. McGrath
Director, Employee Relations,
General Counsel and Secretary
MANAGEMENT
Richard A. Dragoo
Director, Purchasing
Keith A. Engleka
Director, Technology
David M. Blanchard
Manager, PRP Division
28
<PAGE>
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 21, 2000, relating to the financial statements, which appears in the
Annual Report to Stockholders, which is incorporated in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 868 1,437
<SECURITIES> 0 0
<RECEIVABLES> 12,531 9,366
<ALLOWANCES> (418) (358)
<INVENTORY> 15,730 16,182
<CURRENT-ASSETS> 30,275 28,442
<PP&E> 42,323 38,971
<DEPRECIATION> (5,334) (3,261)
<TOTAL-ASSETS> 68,179 64,450
<CURRENT-LIABILITIES> 9,475 6,613
<BONDS> 10,005 11,841
0 0
0 0
<COMMON> 6 6
<OTHER-SE> 43,647 42,559
<TOTAL-LIABILITY-AND-EQUITY> 68,179 64,450
<SALES> 66,663 72,595
<TOTAL-REVENUES> 66,633 72,595
<CGS> 58,633 60,095
<TOTAL-COSTS> 58,633 60,095
<OTHER-EXPENSES> 4,239 4,874
<LOSS-PROVISION> 60 60
<INTEREST-EXPENSE> 718 336
<INCOME-PRETAX> 3,025 7,862
<INCOME-TAX> 922 2,858
<INCOME-CONTINUING> 2,103 5,004
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,103 5,004
<EPS-BASIC> 0.34 0.79
<EPS-DILUTED> 0.34 0.79
</TABLE>
