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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, 1997
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 24, 1998, based on the closing price of these shares of $14
on that date, was $47,387,354. 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 24, 1998, there were 6,304,156 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, 1997, and definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 20, 1998, are incorporated by reference
into Parts II and III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 8
Item 3. Legal Proceedings......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................... 11
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.. 11
Item 6. Selected Financial Data................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risks............... 12
Item 8. Financial Statements and Supplementary Data............................... 12
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................... 12
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 12
Item 11. Executive Compensation.................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 13
Item 13. Certain Relationships and Related Transactions............................ 13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 14
PART I
ITEM 1. BUSINESS
General
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 products are
sold to rerollers, forgers, service centers and original equipment
manufacturers. The Company's products are further processed by its customers
for use primarily in the heavy equipment manufacturing, power generation and
aerospace industries. The Company also provides conversion services on
materials supplied by customers that lack certain of the Company's production
facilities or that are subject to their own capacity constraints.
The Company's products are manufactured in a wide variety of grades, widths and
gauges in response to customer specifications. The Company is capable of
producing specialty steel products that include both long products (ingots,
blooms, billets and bars), which are primarily used by customers to produce bar,
rod and wire, and flat rolled products (slabs and plates), which are used by
customers to produce fine-gauge plate, sheet and strip products. The Company
also produces customized shapes that are cold rolled from purchased coiled
strip, flat bar or extruded bar.
The Company was incorporated in 1994 for the principal purpose of acquiring
substantially all of the idled equipment and related assets (the "Assets")
located at the Bridgeville, Pennsylvania production facility (the "Bridgeville
Facility") of Armco, Inc. ("Armco"). In June 1995, the Company acquired the
precision rolled products business (the "PRP Business") and five vacuum-arc
remelting furnaces and certain ancillary equipment (the "VAR Assets") from the
Cytemp division of Armco, located in Titusville, Pennsylvania (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 stainless steel, tool steel and certain other
alloyed steels:
Stainless Steel. Stainless steel, which represents the largest part of the
specialty steel market, contains elements such as nickel, chrome and molybdenum
that give it unique qualities of resistance to rust, corrosion and heat, high
strength, good wear characteristics, natural attractiveness and ease of
maintenance. Stainless steel is used, among other applications, in the
automotive, aircraft and aerospace industries and in the manufacture of food
handling, chemical processing, pollution control and medical and health
equipment. The large number of applications for stainless steel has resulted in
the development of a greater variety of stainless steel metallurgical grades
than carbon steel.
Tool Steel. Tool steels contain elements of manganese, silicon, chrome and
molybdenum to produce specific hardness characteristics that enable them to
form, cut, shape and shear other materials in the manufacturing process. These
hardness characteristics are brought out by heating and cooling at precise rates
in the annealing process. Tool steels are utilized in the manufacture of
metals, plastics, pharmaceuticals, electronics, optics and paper and aluminum
extrusions.
1
High Strength Low Alloy Steel. High strength low alloy steel is a relative term
that refers to those steels that maintain alloying elements that range in
versatility. The alloy element of such steels as nickel, chrome and molybdenum
typically exceed the alloy element of carbon steel but not that of high
temperature alloy steel.
High Temperature Alloy Steel. These steels are designed to meet critical
requirements of heat resistance and structural integrity. They generally have a
very high nickel content relative to other types of specialty steels. High
temperature alloy steels are manufactured for use generally in the aerospace
industry.
Net sales by principal product line were as follows:
Year ended December 31, 1997 1996 1995
---- ---- ----
Stainless steel $60,700,000 $46,903,000 $38,292,000
Tool steel 10,467,000 8,019,000 4,080,000
Conversion services 4,834,000 3,804,000 3,272,000
Other 5,300,000 1,532,000 1,348,000
----------- ----------- -----------
$81,301,000 $60,258,000 $46,922,000
----------- ----------- -----------
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 may be expected to
increase as steelmakers continue to expand scrap metal-based electric furnace
capacity with additions to or replacements of existing integrated specialty
steel manufacturing facilities that use iron ore, coke and limestone as their
raw materials. The high quality of the Company's products requires use of
premium grades of scrap metal, the supply of which is more limited. The Company
has not experienced difficulty to date in purchasing adequate scrap metal for
its production processes. The Company believes that adequate supplies of scrap
metal will continue to be available in sufficient quantities for the foreseeable
future.
Alloys
The Company purchases various materials for use as alloy additions, some of
which come from Canada (principally nickel) and other foreign countries.
Certain of those alloys (principally chrome) are supplied by South African
manufacturers and any political disruptions in that country could interfere with
the delivery of those materials.
PRP Business
The PRP Business' principal starting materials consist of metallic flat bar,
extruded "near shaped" bar and coiled strip, which the Company cold rolls to
customer specification to produce special shapes. The Company generally
purchases those starting materials from steel strip coil suppliers, extruders,
flat rolled producers and service centers. The Company believes that adequate
supplies of starting material for the PRP Business will continue to be available
in sufficient quantities for the foreseeable future.
The cost of raw material is more than 50% 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 up to 30 days, which may protect the Company
against short-term price increases in raw materials after it has agreed to
manufacture products for its customers at specified prices, which reflect those
set raw material prices.
Energy Agreements
The production of steel requires the ready availability of substantial amounts
of energy. Electricity is the major energy source consumed in the Company's
operations. The Company believes that its energy arrangements allow it to
compete effectively within its industry. The Company also uses natural gas in
certain of its furnaces, and certain industrial and refining gases, including
oxygen, nitrogen and argon, in connection with its melting operations. A
curtailment or interruption in energy supplies could adversely affect the
performance of the Company, as could an increase in energy-related costs.
At the Bridgeville Facility, the Company purchases electricity from Duquesne
Light Company ("DLC") pursuant to a five-year supply agreement entered into in
July 1994, with one-year renewal options. Under that agreement, the Company has
been granted significant reductions in DLC's posted base demand rates,
particularly if, as the Company plans, it conducts its principal melting
operations in off-peak hours, which for purposes of the DLC agreement are
between 6 p.m. and 10 a.m. (16 hours) daily and up to 24 hours a day on
weekends. The Company purchases natural gas from Columbia Energy Services
Corporation pursuant to a supply agreement which expires July 1999.
At the Titusville Facility, the Company purchases electricity from Pennsylvania
Electric Company pursuant to a one-year supply agreement entered into in
September 1997, with one-year renewal options. Belden and Blake Corporation
supplies all the Company's natural gas requirements at that location pursuant to
a one-year supply agreement entered into in June 1997, which is eligible for
renewal thereafter.
Air Products and Chemicals, Inc. supplies all the Company's liquid gas for
industrial requirements for its melting operations pursuant to a five-year
agreement entered into in July 1994, which contains one-year renewal options.
Customers
The Company's principal customers are rerollers, forgers, service centers and
original equipment manufacturers, which primarily include the power generation
and aerospace industries. For the year ended December 31, 1997, Talley Metals
Technology, Inc., a subsidiary of Carpenter Technology Corporation, and its
affiliates accounted for 44% of the Company's net sales. 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 136 at December 31, 1996
to 167 at December 31, 1997.
The Company's products are marketed directly to its customers by Company
personnel, including the Company's President and Chief Executive Officer, its
PRP Division General Manager, five full-time sales persons and two independent
sales representatives. In view of the relatively small number of prospective
customers for the Company's customized products, the strong business
relationships with its customers and the thorough product knowledge and
substantial experience with actual and prospective customers of those management
and marketing persons, the Company believes its sales force is adequate for its
current and immediately foreseeable needs.
3
Backlog
The Company manufactures products to meet specific customer orders, generally
fulfilling orders in eight weeks or less, and consequently does not manufacture
for inventory purposes. The Company's backlog of orders on hand as of December
31, 1997, was approximately $20.9 million as compared to $11.1 million at the
same time in 1996. The Company does not have any long-term written agreements
with any of its customers, and 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 six domestic specialty
steel manufacturers that produce special shapes. Of that number of firms that
produce specialty steel, the Company believes six companies currently compete
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-Teledyne, Inc.; Carpenter
Technology Corporation; AL Tech Specialty Steel Corporation; Republic Engineered
Steels, Inc.; 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 the PRP Business 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 currently is, 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 of those products than a fully-integrated specialty steel mill
currently can achieve, which provides it with another competitive advantage.
The short lead time may also enable the Company to avoid maintaining a high
level of inventory of raw materials, thereby reducing the Company's cost of
production.
The domestic 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, that compete
with steel in many markets. In addition, many of the finished products sold by
the Company's customers are in direct competition with finished products
manufactured by foreign sources, which may affect the demand for those
customers' products. Any competitive factor that adversely affects the market
for finished products manufactured by the Company's customers could indirectly
adversely affect the demand for the Company's 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 instituted
profit sharing for all of its USWA Employees and has, instituted, equity
ownership programs for all of its employees, in an effort to forge an alliance
between its employees' interests and those of the Company's stockholders. At
December 31, 1997, the Company had 211 employees at the Bridgeville Facility and
59 employees at the Titusville Facility, of whom 166 and 50 were USWA members
located in Bridgeville and Titusville, respectively.
4
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 connection with the June 1995 acquisition of the PRP Business and the VAR
Assets (the "PRP/VAR Agreement"), the Company entered into a five-year
collective bargaining agreement with the USWA covering employees at the
Titusville Facility (the "Titusville CBA"). The Titusville CBA contains
substantially similar terms to those included in the Bridgeville CBA, but each
of the agreements is separate and neither agreement is conditioned on the
renewal of or compliance with the other 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 semi-annual contributions
to the plans based on service. The Company also provides life insurance and
health coverage for its hourly and salary employees.
Armco Agreement
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 ratably 50% of the savings,
if any, of reduced workers' compensation premiums obtained due to reductions in
the state experience modifier issued to the Company.
5
Executive Officers
The following table sets forth, as of December 31, 1997, certain information
with respect to the executive officers of the Company:
NAME (AGE) EXECUTIVE OFFICER SINCE POSITION
Clarence M. McAninch (62) 1994 President and Chief Executive Officer
Daniel J. DeCola, Sr. (45) 1994 Vice President, Operations
Paul McGrath (46) 1997 Director of Employee Relations,
General Counsel and Secretary
Richard M. Ubinger (38) 1994 Chief Financial Officer, Principal
Accounting Officer and Treasurer
Clarence M. McAninch, 62, 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 Inc.
from 1992 to 1994.
Daniel J. DeCola, Sr., 45, has been Vice President, Operations, since July 1994
and a Director of the Company from July 1994 to May 1997. Mr. DeCola held
management positions at the Armco Stainless and Alloy Products Division,
including serving as plant superintendent, from 1992 to 1994.
Paul A. McGrath, 46, 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, 38, 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 in its audit department, and he
served in the capacity of Senior Manager for Price Waterhouse LLP since 1990.
Mr. Ubinger is a Certified Public Accountant.
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, 1997, the Company's largest customer, Talley
Metals Technology, Inc., a subsidiary of Carpenter Technology Corporation, and
its affiliates accounted for approximately 44% 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 segment could have a material adverse effect upon the Company. See
"Business--Customers."
6
Reliance on Critical Manufacturing Equipment
The Company's manufacturing processes are dependent upon certain critical pieces
of specialty steelmaking equipment, such as the Company's melt shop and
universal rolling mill. In the event a critical piece of equipment should
become inoperative as a result of unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed
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 factor that adversely affects the market for finished products
manufactured by the Company's customers could indirectly adversely affect the
demand for the Company's semi-finished products. 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. Also, a number of the
Company's competitors are also customers for certain of the Company's products
and services. There can be no assurance that the Company will be able to
compete successfully in the future. See "Business--Competition."
Environmental Issues
The Company is subject to demanding federal, state and local environmental laws
and regulations (the "Environmental Laws") governing, among other things, air
emissions, waste water discharge and solid and hazardous waste disposal. The
Company leases or owns certain real property and operates equipment previously
owned and used in the manufacture of steel products by Armco. In connection
with the Company's acquisitions, Armco agreed to retain responsibility for
certain liabilities asserted against Armco under the Environmental Laws.
Because the indemnification is the Company's exclusive remedy against Armco for
a given environmental liability, the Company will be materially dependent upon
that indemnity should any environmental liability arise. There can be no
assurance that the indemnities from Armco will fully cover any or all
environmental liabilities, and there can be no assurance that the Company will
have the financial resources to discharge the liabilities if legally compelled
to do so.
Environmental laws and regulations have changed rapidly in recent years, and the
Company may be subject to increasingly stringent environmental standards in the
future. The Armco indemnities do not cover liability with respect to violations
of the Environmental Laws or the existence of environmental conditions stemming
from any changes, modifications or amendments to the Environmental Laws
effective after August 15, 1994, with respect to the Bridgeville Facility, or
effective after June 2, 1995, with respect to the Titusville Facility, and there
is no assurance that the Company will not incur any such liability. See
"Business--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 more than 50% 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
7
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."
Capital Investment Commitments.
Specialty steel production is a capital intensive industry. The Company has
made, and believes it will continue to make, certain capital investments in
plant and equipment to be competitive on an ongoing basis and to ensure that it
can continue to manufacture quality products to serve new niche-markets. The
Company has initiated an $11 million capital investment program to install a
round-bar finishing facility in Bridgeville, Pennsylvania. The Company
anticipates completion of the scheduled work involved with this program by the
end of 1998. There can be no assurance that the Company will complete this
program in the anticipated time frame or within current cost estimates, or at
all, or, if completed, that the capital investments will deliver the anticipated
benefits to the Company. Failure to complete, or a substantial delay in
completing, any material part of the capital expenditures program, or the
inability of the Company to realize the anticipated benefits therefrom, may have
a material adverse effect on the Company's results of operations and competitive
position. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources" and "Properties."
Year 2000
The Company is engaged in a program to modernize and replace its computerized
production control and management information systems. Although not the primary
purpose of the program, the new systems will be designed to avoid any Year 2000
problems. The Company is also inquiring of its suppliers and others as to their
own Year 2000 compliance. There can be no assurance that the Company will
successfully avoid any Year 2000 problems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resourses."
ITEM 2. PROPERTIES
The Company leases its Bridgeville Facility from Armco (the "Armco Lease") and
owns the Titusville Facility. The Bridgeville Facility is leased pursuant to a
long-term lease from Armco for ten years from August 15, 1994, which includes
the payment by the Company of real and personal property taxes, water and sewage
charges, special assessment and insurance premiums associated therewith, with
three five-year options to renew on the same terms at the sole discretion of the
Company. The Armco Lease provides the Company with an option to purchase
substantially all of the leased premises for $1 any time during the term of the
Armco Lease prior to August 15, 2015. The building that houses the electro-slag
remelting equipment, which is nearby, but not contiguously located, to the other
facilities, is included in the ten-year initial lease term only. The Company
anticipates relocating the equipment it owns in that facility in close proximity
to the melt shop complex in an existing building prior to the expiration of that
initial ten-year term. The Armco Lease is assignable with the written consent
of Armco, which consent cannot be unreasonably withheld. The Company is
responsible for compliance with all environmental laws related to the property
subsequent to August 15, 1994, subject to liabilities Armco retained 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.
The Titusville Facility consists 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.
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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. In
this regard, the Company initiated an $11 million capital investment program to
install a round-bar finishing facility to complement the bar mill commissioned
in 1997. The new facility will include heat treating and processing equipment
that will enable the company to produce completely finished 2-inch to 6-inch
round-bar product.
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 solid and hazardous substances and the remediation of contamination
associated with generation, handling and disposal activities. The Company is
subject periodically to environmental compliance reviews by various regulatory
offices. Additionally, the Company monitors its compliance with Environmental
Laws applicable to it and, accordingly, believes that it is currently in
compliance with all laws and regulations in all material respects. The Company
has not made to date and does not anticipate making any significant expenditures
for environmental control facilities, but could incur costs, which may be
significant, related to environmental compliance at any time or from time to
time in the future.
Bridgeville Facility
The Company has not incurred to date and does not anticipate incurring any
remediation costs from environmental conditions at the Bridgeville Facility.
The Company does not expect that any remediation that may be required at the
Bridgeville Facility will have a material adverse effect on the Company's
results of operations, liquidity or financial condition. The Company operates
production and processing equipment, which it owns, on real property that is
leased from Armco. Armco remains contractually obligated for environmental
matters, including compliance with laws governing the removal of hazardous
materials and the elimination of hazardous conditions, which stem from any
operations or activities at the leased Bridgeville Facility prior to August 15,
1994. In addition, Armco has agreed to indemnify the Company against any
liability arising as a result of any of those matters with respect to the
Bridgeville Facility to the extent of $6.0 million in the aggregate until 2004
and has further agreed (subject to the indemnity limits) to pay up to $250,000
for each 30-day period and up to $1.0 million in reimbursement for certain non-
recoverable operating costs should the Company's business be interrupted by
reason of matters arising under Environmental Laws that stem from occurrences
prior to August 15, 1994. Except as required by law or for the protection of
public health or the safety of its employees, the Company is contractually
prohibited from taking voluntary or discretionary action to accelerate or delay
the timing, or increase the cost of, Armco's environmental obligations with
respect to the Bridgeville Facility. Prior to entering into the Asset
Agreement, Armco and the Company identified certain environmental conditions
existing at the Bridgeville Facility, including asbestos in various structures,
oils and electrical devices containing PCBs, that Armco or the Company has
remediated at Armco's expense. The Company's Bridgeville Facility includes an
overhead and rooftop system (the "bag house") to remove waste gases generated by
its melting operations. The bag house facility associated with that system
collects oxides and non-metallic residue for reclaiming purposes. An
independent reclaiming contractor purchases the oxides and non-metallic residue,
removes the residue and converts it into metallic form for sale back to the
Company as scrap metal. This reclaiming process enables the Company to dispose
of the unwanted residue, while at the same time recovering some raw materials
for the manufacture of specialty steel.
Titusville Facility
The Company operates its production and processing equipment that was acquired
from Armco on real property the Company owns. Armco has agreed to indemnify the
Company to the extent of $3.0 million in the aggregate against liability for
environmental matters, including compliance with laws governing the removal of
hazardous materials and the elimination of hazardous conditions, which pertain
to environmental conditions existing on or under the Titusville Facility prior
to June 2, 1995. In addition,
9
Armco has agreed to indemnify the Company for any liabilities arising out of
environmental conditions existing offsite as of June 2, 1995, and that
indemnification is not subject to the $3.0 million limitation. In connection
with the PRP/VAR Agreement, the Company conducted a Phase I and Phase II
environmental study (the "Study") of the parcel of real estate acquired by the
Company, and the Company believes the amount and terms of Armco's indemnity are
sufficient to protect the Company against environmental liabilities arising at
the Titusville Facility from environmental conditions existing as of June 2,
1995. The Study revealed asbestos in certain areas adjacent to the Titusville
Facility, which Armco has remediated at its expense, and some electrical
equipment containing PCBs that the Company is remediating at its expense, which
is not material. Additionally, the Study noted that as is typical of the
Titusville, Pennsylvania area generally, there is regional soil and groundwater
hydrocarbon contamination present at above applicable cleanup standards,
reflecting the fact that this area contains natural petroleum deposits and that
petroleum refining operations had been conducted nearby. Any contamination of
this type on the Company's property flows from outside its boundaries, to the
extent it is not indigenous to the underlying ground. The Company believes it
unlikely that it or Armco will be required to provide cleanup at the Titusville
Facility for the local hydrocarbon contamination or, if it were, the Company
believes this action would be part of a large program addressing the entire
area. To date, the Company has not been contacted by any environmental
governmental authority concerning this matter. Notwithstanding Armco's
indemnification obligations, with respect to the Titusville Facility, if the
Company accelerates the timing or increases the cost of any environmental
obligation retained by Armco except as required by law or for the protection of
public health or the safety of its employees, the Company shall bear such
accelerated or increased cost. If the Company accelerates the timing or
increases the cost of any environmental obligation retained by Armco with
respect to the Titusville Facility as a result of seeking financing or the sale
of less than a controlling interest in the voting stock of the Company, such
accelerated or increased cost shall be borne equally by Armco and the Company.
Certain processes that were employed by Armco, and certain facilities used by
Armco that may have involved or been the site of activities that could have
caused environmental pollution at the Titusville Facility, are not employed or
used by the Company. There may be other environmental conditions that have not
been identified by regulatory authorities but which may later be determined to
require remediation.
The Company's exclusive remedies for reimbursement from Armco for losses
stemming from pre-closing environmental conditions at each of the Bridgeville
Facility and the Titusville Facility are the indemnities agreed to with respect
to each of the facilities. There can be no assurance that those indemnities
will fully cover all environmental liabilities, especially if the relevant
regulatory authorities or others were to proceed solely against the Company with
respect to those liabilities at the Bridgeville Facility that arise out of
conditions existing prior to the commencement of the Armco Lease on August 15,
1994 (an event the Company believes is unlikely), and there can be no assurance
that the Company will have the financial resources to discharge those
liabilities if legally compelled to do so. See "Risk Factors--Environmental
Issues."
Based on the foregoing and the experience of its senior executives with respect
to both Armco's and the Company's facilities and the equipment and processes
employed at the Bridgeville Facility, and the results of the Phase I and Phase
II environmental study of the Titusville Facility, the Company believes the
amount and terms of the Armco indemnities are sufficient to protect the Company
against environmental liabilities arising from environmental conditions prior to
August 15, 1994, with respect to the Bridgeville Facility, and prior to June 2,
1995, with respect to the Titusville Facility.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the Company's best knowledge,
threatened against the Company.
10
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 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
At December 31, 1997, a total of 6,290,823 shares of the Company's Common Stock,
par value $.001 per share, were issued and outstanding, and held by
approximately 218 holders of record.
Certain holders of Common Stock and the Company are party to a stockholder's
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 35 of the Annual
Report to Stockholders for the year ended December 31, 1997, 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
having the 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.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is set forth on page 36 of the Annual
Report to Stockholders for the year ended December 31, 1997, which is
incorporated herein by reference.
11
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 15 through 19 of
the Annual Report to Stockholders for the year ended December 31, 1997, which
are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth on Pages 20 through 34 of
the Annual Report to Stockholders for the year ended December 31, 1997, which
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were none.
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 20, 1998,
under the heading "Proposal No. -- Election of Directors," which information is
incorporated herein by reference.
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.
12
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 to report.
13
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on Form 10-K:
1) Consolidated Financial Statements:
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, appearing on Pages 20 through 34 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:
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
2.1* Certificate of Merger, dated July 29, 1994, between Universal Stainless & Alloy Products, Inc., a Pennsylvania
corporation, and the Company.
2.2* Agreement and Plan of Merger, dated July 28, 1994, among Universal Stainless & Alloy Products, Inc., a
Pennsylvania corporation, and the Company.
2.3** Asset and Real Property Purchase Agreement, dated as of June 2, 1995, by and between Armco Inc. and the Company.
3.1* Amended and Restated Certificate of Incorporation.
3.2* By-laws of the Company.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.
4.2* Form of Representative's Warrant Agreement (including Form of Representative's Warrant Certificate).
10.1* Base Contract for Sale of Natural Gas, dated July 1, 1993, by and between the Company and Columbia Energy
Services Corporation.
10.2* Electric Service Contract, dated July 27, 1994, by and between the Company and Duquesne Light Company, with
Schedule of Rates.
10.3* Product Supply Agreement, dated August 16, 1994, by and between Air Products and Chemicals, Inc., and the Company.
10.4* Stockholders Agreement, dated as of August 1, 1994, by and among the Company and its existing stockholders.
10.5* Lease Agreement, dated August 15, 1994, by and between Armco Inc. and the Company.
10.6* Employment Agreement, dated August 15, 1994, by and between the Company and Daniel J. DeCola, Sr.
10.7* Employment Agreement, dated August 15, 1994, by and between the Company and Clarence M. McAninch.
10.8* Asset Purchase Agreement, dated August 15, 1994, by and between the Company and Armco Inc., as amended by letter
agreement, dated October 5, 1994, by and between the Company and Armco Inc.
10.9* Security Agreement, dated August 15, 1994, by and between the Company and Armco Inc.
14
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
10.11* Letter Agreement, dated July 15, 1994, by and between the Company and Tradition (North America), Inc.
10.12 Amended and Restated Subordination and Standby Agreement, dated as of January 30, 1998, by and between the
Company and PNC Bank, National Assocation.
10.13 Second Amended and Restated Credit Agreement, dated as of January 30, 1998, between the Company and PNC Bank,
National Association, with Exhibits and Schedules.
10.14 Second Amended and Restated Security Agreement and Collateral Assignment, dated as of January 30, 1998, by and
between the Company and PNC Bank, National Association.
10.15 Term Note, dated as of January 30, 1998, by and between the Company and PNC Bank, National Association.
10.16 Landlord's Waiver, dated as of January 30, 1998, by Armco Inc.
10.17 Second Amended and Restated 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.
10.18 Second Amended and Restated Revolving Credit Note, dated as of January 30, 1998, by and between the Company and
PNC Bank, National Association.
10.19** Collective Bargaining Agreement, dated May 3, 1995, by and between the Company and United Steelworkers of America.
10.20** Loan Agreement, dated October 3, 1995, by and between the Company and Commonwealth of Pennsylvania.
10.21** Note, dated October 3, 1995, for the principal sum of $500,000, by the Company, in favor of the Commonwealth of
Pennsylvania.
10.22** Security Agreement, dated October 3, 1995, by and between the Company and the Commonwealth of Pennsylvania.
10.23* Underwriting Agreement, dated December 14, 1994, among the Company and Keane Securities Co., Inc., as
representatives of the several underwriters.
10.24** Form of Underwriting Agreement among the Company and Oppenheimer & Co., Inc., and Furman Selz Incorporated, as
representatives of the several underwriters.
10.25 Employment Agreement dated January 1, 1998 between the Company and Paul McGrath.
10.26 Employment Agreement dated January 1, 1998 between the Company and Richard M. Ubinger.
10.27 Equipment Purchase Agreement dated as of November 6, 1997 between the Company and Hetran, Inc. for the purchase
of certain bar finishing equipment.
10.28 Collective Bargaining Agreement, dated September 1, 1997, by and between the Company and United Steelworkers of
America.
13.01 Selected pages of the Company's 1997 Annual Report to Shareholders incorporated by reference into Parts II and
III of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
23.01 Consent of Price Waterhouse, LLP.
24.01 Powers of Attorney (included on the signature page hereto).
27.01 Financial Data Schedule
* Incorporated herein by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (Registration No. 33-85310).
** Incorporated herein by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (Registration No. 33-97896).
15
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, 1998.
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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ C. M. McAninch
- ------------------------------------ President, Chief Executive Officer March 30, 1998
Clarence M. McAninch and Director
/s/ Richard M. Ubinger
- ------------------------------------ Chief Financial Officer and Treasurer March 30, 1998
Richard M. Ubinger (Principal Accounting Officer)
/s/ Douglas M. Dunn
- ------------------------------------ Director March 26, 1998
Douglas M. Dunn
/s/ George F. Keane
- ------------------------------------ Director March 30, 1998
George F. Keane
/s/ Udi Toledano
- ------------------------------------ Director March 30, 1998
Udi Toledano
/s/ D. Leonard Wise
- ------------------------------------ Director March 30, 1998
D. Leonard Wise
16