Item 1. Business.
(a) General Development of Business
Laclede Steel Company is a manufacturer of a wide range of carbon and alloy steel products, including pipe and tubular products, hot rolled products (primarily special quality bars), wire products, and welded chain. The Company converts its semi-finished steel into products through its rolling mills and finishing plants. The Company produces wire products and welded chain utilizing rods purchased on the open market. Each of the Company's finishing facilities is located near its end markets and is specialized by product to optimize efficiency.
The Company is one of three full-line domestic producers of continuous weld pipe in the United States. In addition, the Company believes it is a dominant North American producer of oil tempered wire, which is used for applications such as mechanical springs and overhead garage door springs. Oil tempered wire has metallurgical properties that typically command a price premium over commodity grades of wire, and therefore produces higher profit margins. The Company's manufactured and imported chain products give it a significant position in the truck and automobile tire chain and the hardware and industrial chain markets. The Company's special quality bars are primarily sold to forgers for finishing into a variety of products.
Due to favorable energy costs and modernized facilities, the Company believes it is a low cost producer of semi-finished steel at the Alton, Illinois Plant. With the completion of a Ladle Furnace facility in the second quarter of 1996 the Company now produces all of its steel by the more efficient continuous cast method. Annual steelmaking capacity is estimated at 780,000 net tons. Through 1995, the Alton Plant had supplied nearly all of the semi-finished steel used to finish products at the Company's downstream facilities. The Company began purchasing rods for its two wire mills and the welded chain operations in the second quarter of 1996. Over the last twelve years the Company has acquired or leased five additional finishing facilities, constructed a new finishing facility and relocated much of its labor-intensive work to lower cost labor areas. On February 10, 1997 the Company sold the assets of its electric weld structural tubing operation located in Benwood, West Virginia. Sales of structural tubing accounted for approximately 6% of consolidated net sales in 1996.
At December 31, 1996 Ivaco Inc. of Montreal, Canada owned 2,018,650 shares of the Company's common stock or 49.8% of the total number of shares outstanding. In July 1996 Ivaco purchased $5.5 million Series A Preferred Stock, which is convertible at the option of the holder into 1,719,667 shares of common stock. The Company has been advised that Ivaco would be prepared to dispose of its interest in Laclede Steel Company at some time in the future.
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(b) Financial Information
The following table sets forth certain financial information relating to Registrant's operations:
Year Ended December 31, (Thousands of Dollars) 1996 1995 1994
Net Sales $335,381 $320,350 $341,289
Net Earnings (Loss) $ (9,985) $(10,137) $ 4,462
Identifiable Assets $331,110 $349,778 $343,251
(c) Description of Business
The following table lists the Company's wide range of steel products:
Pipe and Tubular Products: Continuous Weld Pipe - A53 Standard and Extra Heavy - API 5L Line Pipe - Coupling Stock - Fence Pipe - Rigid Conduit Shells
Hot Rolled Products: Carbon and Alloy SBQ Bars Forging Billets Special Shapes Reinforcing Bars
Wire Products: Cold Drawn Wire - High Carbon - Oil Tempered - Low Carbon - Annealed Wire and Rod
Chain: Welded Chain
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The following table presents, for the years indicated, the percentage of the Company's total sales by product class:
Product 1996 1995 1994
Pipe and tube 41.1% 40.8% 40.1%
Hot Rolled 35.1 34.7 32.5
Wire 13.6 16.4 18.5
Chain 10.2 8.1 8.9
Total 100% 100% 100%
Pipe and Tubular Products. The Company's tubular products consist primarily of continuous butt weld ("CBW") pipe which is sold in the U.S. and Canada to distributors and manufacturers. Pipe products are produced and finished at the Company's Alton Plant; Fairless Hills, Pennsylvania and Vandalia, Illinois Facilities. Prior to 1993, the majority of the Company's CBW pipe was finished at the Alton Plant or at the Fairless Facility, as discussed below. While semi-finished pipe continues to be produced at the Alton Plant, in 1993 the Company moved the majority of the Alton Plant's finishing operations to the Company's new, lower cost Vandalia Facility. By the end of 1993, the majority of CBW pipe was no longer finished at the Alton Plant. In February 1997 the Company sold the assets of its electric resistance weld tubing operation located in Benwood, West Virginia. This product accounted for approximately 6% of consolidated net sales in 1996.
The Company is one of only three producers of CBW pipe in the United States, due in part to the Company's long-term lease from former competitor USX Corporation of its pipe manufacturing facilities at the Fairless Facility.
In 1996 the Company completed the final modifications to the Melt Shop at the Alton Plant by installation of a Ladle Furnace Facility that allowed the Company to shift the remaining portion of its steel production used in pipe making from the ingot process to the more efficient continuous cast method.
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Hot Rolled Products. The Company's hot rolled products are produced at the Alton Plant and consist primarily of special quality ("SBQ") bars sold to manufacturers to be cold drawn or forged.
Wire Products. The Company is a major manufacturer of wire products. These products include high and low carbon wire, oil tempered wire, and annealed wire. The Company believes it is a dominant participant in the oil tempered wire market. Wire products are currently manufactured and finished at the Company's Memphis, Tennessee and Fremont, Indiana Facilities. The Fremont Facility is the Company's stand-alone oil tempered wire plant which the Company believes to be a state-of-the-art facility. The Fremont Plant has begun producing oil tempered wire for automobile suspension springs and for brake springs. This is a recently developed new product which is expected to have a positive effect on profitability.
Chain Products. Laclede Chain, one of the Company's wholly owned subsidiaries, produces welded chain and also imports a significant amount of chain for resale. Laclede Chain generated in excess of $34 million in sales in 1996, approximately 54% of which was attributable to sales of anti-skid devices for trucks and automobiles. The balance of the Company's chain products sales is in the hardware and industrial chain business.
At December 31, 1996 the Company had a sales backlog of over $30 million. This backlog does not have significant seasonal variation. Long-term sales commitments do not represent a significant portion of the business. For further information and also for discussion of future capital expenditure plans, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Research and development activities of the Company have not been material.
The Company manufactures steel from steel scrap generated in the course of its steel production and purchased in the open market from numerous scrap suppliers. Since it does not produce its own raw materials, the Company is subject to the fluctuation in prices and availability of scrap.
The Company's business strategy has been to modernize its basic steelmaking facilities at the Alton Plant while growing and modernizing its lower cost, downstream finishing facilities. The Company believes that the major elements of this strategy are currently in place.
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The center of the Company's business is the Alton Plant, which has the advantages of a central location, low utility costs, and good sources for raw materials. In addition, the Alton Plant provides the necessary strategic flexibility to manufacture the grades of steel needed to produce the Company's various products. Each of the Company's downstream facilities is located near its end markets and is specialized by product to optimize efficiency.
The Company began its business expansion with the acquisition of a chain manufacturer in northwestern Missouri in 1984. Since 1984 the Company has acquired four additional facilities and constructed one new facility. Most notable among these new and/or expanded facilities are the Company's lease of the pipe manufacturing facilities at the Fairless Facility, the Company's expanded oil tempered wire operations at the Fremont Facility, and the construction of the Vandalia Facility, a tubular finishing plant.
The Fremont Facility was expanded in order to handle the majority of oil tempered wire volume previously produced at the Alton Plant's wire mill. Relatively minor amounts of oil tempered wire are produced at the Memphis Plant. The Vandalia Facility processes semi-finished pipe produced at the Alton Plant.
In 1996 the Company completed the final phase of its strategic plan with the restructuring of the steelmaking facilities at the Alton Plant. The Company's new Ladle Furnace Facility became operational in the second quarter of 1996 and all steel is now produced using the more efficient continuous cast method. In connection with this restructuring, the Company shut down its Blooming Mill and Rod Mill operations. The shutdown of these facilities, together with the move to 100% continuous cast steel, have resulted in more efficient operations at the Alton Plant. In 1996 the Company began purchasing the rod requirements for its wire operations on the open market resulting in reduced costs and improved quality.
In February 1997, the Company sold the assets of its electric weld structural and mechanical tubing operation, located in Benwood, West Virginia. Cash proceeds from the sale of these assets, which consist primarily of equipment and inventory, totaled approximately $10.0 million. The Company used the funds from the sale to improve its working capital position. Sale of these assets will not affect the Company's primary tubular business, continuous weld pipe.
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Capital Improvements. While the Company has expanded and improved its downstream finishing facilities, it has also completed important capital improvements to the steelmaking operations at the Alton Plant. The primary objective of these improvements was to substantially reduce production costs and also provide access to new markets.
Competition
Price sensitivity in markets for the Company's products is driven by competitive factors and the cost of steel production.
Domestic. The Company faces competition from regional mini-mill companies and fully integrated steel mills, and such competition can be expected to continue. Moreover, the addition of new sheet capacity in the industry has had and will continue to have a favorable impact on production costs of the Company's competitors.
Foreign. The Company also faces competition from foreign steel producers. Foreign competition may increase in the future, due to factors such as changes in currency exchange rates, repeal of duties on foreign-produced steel or the enactment of restrictive or burdensome regulations or taxes that affect domestic but not foreign steel manufacturers. Many foreign steel producers are owned, controlled or subsidized by their governments and their decisions with respect to production and sales may be influenced more by political and economic policy considerations than by prevailing market conditions.
Environmental Matters
In general, the Company is subject to a broad range of federal, state and local environmental regulations, including those governing discharges into the air and water, the handling and disposal of solid and/or hazardous wastes and the remediation of contamination associated with the release of hazardous substances. The domestic steel industry, including the Company, has spent substantial amounts to comply with these requirements. Although the Company believes it is in substantial compliance with the various environmental regulations applicable to its business, there can be no assurance that future changes in environmental regulations will not require the Company to incur significant costs in order to comply with such future regulations.
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Specifically, like all electric arc furnace (EAF) steel producers, the Company generates EAF dust as part of the steelmaking process. For some time, the EPA has classified EAF dust as a designated hazardous waste. Over a period of years, the Company accumulated approximately 145,000 tons of this material on-site at the Alton Plant, pending development of technology for economical treatment.
The Company has received approval of a modified closure plan for disposition of this existing EAF dust with the Illinois EPA which provides for the closure of all piles in place. It appears that the remaining cost of this plan will not exceed the $3.1 million liability reflected on the Company's financial statements at December 31, 1996 for the disposal of the existing EAF dust.
Employees. As of December 31, 1996, the Company employed approximately 1,600 employees, 315 of whom are classified as management, administrative and sales personnel.
The Company's 720 hourly employees at the Alton Plant are covered by a collective bargaining agreement that expires in September of 1997. None of the Company's other employees are covered by a collective bargaining agreement. The Company has never experienced a strike, and it believes that its relations with its employees are good. The compensation for the majority of the Company's employees is based partially on productivity in accordance with various incentive plans.
Item 2.
Item 2. Properties.
The Company's steelmaking facilities are located on a 400-acre site in Alton, Illinois, and consist of two electric furnaces with a combined rated production capacity of over 780,000 net tons per year, a ladle metallurgy facility, a continuous bloom casting facility, a roughing mill and 14-inch bar mill, 8-inch bar mill, 22-inch strip mill and facilities for the manufacture of continuous butt-weld pipe. The Company also has a pipe finishing plant in Vandalia, Illinois, a chain manufacturing plant in Maryville, Missouri, a wire mill in Memphis, Tennessee and a wire oil tempering facility in Fremont, Indiana. The Company operates a pipe mill in Bucks County, Pennsylvania which is leased from USX Corporation. The lease expires September 30, 2001 with an option to renew until September 30, 2006.
The Company's property is well maintained and adequate for production of its existing product line. The majority of the Company's properties are owned in fee. For its executive offices the Company presently leases space in the Metropolitan Square Building in downtown St. Louis under a lease expiring on April 30, 2004.
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Item 3. Legal Proceedings.
There are various claims pending involving the Company and its subsidiaries with respect to environmental, hazardous substance, product liability, personal injury, and other matters arising out of the routine conduct of it business. The Company believes it has meritorious defenses with respect to all claims and litigation and the ultimate disposition of such matters will not materially affect its financial position or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the stockholders was held on October 28, 1996.
Proposals voted upon:
(1) Approving the amendment to the Certificate of Incorporation of the Company to provide for a reduction of the par value per share of the Common Stock from $13.33 per share to $0.01 per share.
For Against Abstention Withheld
3,421,556 101,281 33,381 --
(2) Approving the amendment to the Certificate of Incorporation of the Company to provide for an increase in authorized Common Stock from 5,000,000 shares to 25,000,000 shares.
For Against Abstention Withheld
3,321,982 87,750 35,919 110,567
(3) Approving the recapitalization of the Company's Series A Preferred Stock, no par value per share, such that the Series A Preferred Stock owned by Ivaco Inc. and certain members of management of the company is convertible into Common Stock at the option of the holder of such Series A Preferred Stock; effective upon the amendment of the Company's Certificate of Incorporation provided for in Item 1 and Item 2 and pursuant to Section 12 of the Company's Certificate of Designation for Series A Preferred Stock filed with the Secretary of State of the State of Delaware on July 30, 1996.
For Against Abstention Withheld
2,713,417 97,173 38,721 706,907
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PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
Laclede's common stock is traded on the NASDAQ National Market System and the symbol is LCLD. As of January 1997 there were approximately 580 stockholders of record.
Market Price Range 1996 1995 Quarter High Low High Low
First $ 8 $ 5-1/2 $12-1/2 $10 Second $ 8-1/4 $ 5-3/8 $12 $10-1/2 Third $ 6-3/8 $ 4 $14-1/2 $10-1/4 Fourth $ 4-1/2 $ 2-3/4 $10-3/4 $ 6-1/4
Dividends Per Share Paid on Common Stock 1996 1995 None None
Payment of dividends on common stock is limited by the Company's Loan and Security Agreement. See Note 4 to the Company's Consolidated Financial Statements. In addition, the Certificate of Designation for the Company's outstanding Series A Preferred Stock provides that the Company shall not declare or pay any dividends on the Company's common stock unless full cumulative dividends have been paid or declared on the Series A Preferred Stock. At this date, full cumulative dividends have not been paid or declared on the Series A Preferred Stock.
On July 30, 1996, the Company sold 416,667 shares of Series A Preferred Stock to Ivaco Inc. and the executive officers of the Company for an aggregate sales price of approximately $6,250,000. There were no underwriters and no underwriting discount or commission and the net proceeds to the Company, after expenses, was $6,090,000. The sale of the Series A Preferred Stock to Ivaco Inc. and the executive officers of the Company was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) as a transaction not involving any public offering because of the limited number of offerees, each of whom was a sophisticated investor and fully informed as to the risks involved. On October 28, 1996, at a special meeting of stockholders, the Company's stockholders approved a recapitalization of the Series A Preferred Stock such that each share of the preferred stock became convertible into the Company's Common Stock at the option of the holder at a conversion price of $3.20 into 4.69 shares of common stock.
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operating Results 1994 to 1996
The net loss for 1996 was $10.0 million which included a $1.6 million ($1.0 million after tax) charge for an early retirement incentive in the fourth quarter discussed in Note 5 to the Consolidated Financial Statements.
Net earnings for 1995 were $1.3 million before the effect of restructuring, asset impairment and other charges described in Note 6 to the Consolidated Financial Statements. The net loss for 1995 was $10.1 million after deducting the $11.4 million after tax effect of the special charges.
Net earnings for 1994 were $4.5 million which included a $1.1 million ($.7 million after tax) gain on the sale of equipment.
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The change in net sales for the last three fiscal years is analyzed as follows:
(In Thousands) 1996 Vs. 1995 1995 Vs. 1994 1994 Vs.1993
Increase (Decrease) in net sales $ 15,031 $(20,939) $ 12,523 Comprised of: Increase (Decrease) in volume $ 32,192 $(24,788) $(14,044) Increase (Decrease) in price $(17,161) $ 3,849 $ 26,567
Steel Operations
Net sales increased by $15.0 million in 1996 over 1995 resulting from a 13.5% increase in tons shipped offset by a 5.4% reduction in selling prices.
Cost of products sold increased by $30.3 million reflecting the higher volume of shipments in 1996 and a change in the mix of products sold.
In 1995 net sales decreased by $20.9 million as a result of a 6.4% reduction in steel shipments. While sales prices declined in the second half of 1995, average prices for the year were slightly higher than 1994.
Cost of products sold decreased by 6.4% compared to 1994, reflecting lower volume. As discussed below, production costs in 1995 include the effects of further increases in the cost of the Company's basic raw material, ferrous scrap.
Net sales in 1994 increased by $12.5 million or 3.8% from 1993, reflecting a significant increase in average selling prices partially offset by a lower volume of tons shipped. Cost of products sold increased by $8.7 million or 2.9%, primarily as a result of higher ferrous scrap costs.
The Company experienced a sharp rise in the price of scrap in 1994 and 1995. The average scrap usage cost in 1994 represents an increase over the prior year of approximately 19%. In 1995 scrap prices were 3.4% higher than 1994. In 1996 scrap prices declined slightly.
In addition to demand for steel, there are other factors affecting the supply of scrap that could be considered structural factors, including the growth in electric furnace production which is almost totally dependent on ferrous scrap as a raw material.
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In 1994 and the first half of 1995, the Company was able to recover the increased scrap costs through higher selling prices for its products. In the second half of 1995 and for the year 1996, declining sales prices had a negative impact on product margins.
In December 1995 a decision was made to initiate the final phase of the Company's strategic plan, leading to a restructuring of the steelmaking facilities at the Alton Plant.
As a result of this decision, accounting charges totaling $9.8 million after taxes were recorded in the fourth quarter of 1995. These charges, which are primarily non-cash in nature, include recognition of impairment loss for equipment, retirement costs for affected employees, and adjustments of rod and wire inventories to market value.
The Company also recognized a charge of $1.6 million, after taxes, related to inventory write-downs in its tubular product operations. This inventory adjustment, which reduced the carrying cost to net realizable value, reflected higher production costs together with significant reductions in selling prices for tubular products. Pressure on sales prices in 1995 was caused by lower prices for sheet steel, the raw material for the Company's competitors in the pipe market.
The Company's new Ladle Furnace Facility became operational in the second quarter of 1996 and all steel is now produced using the more efficient continuous cast method. The Company ceased production of rods, and began purchasing requirements for its wire operations on the open market, at a significant reduction in costs.
In connection with this restructuring, in 1996 the Company also shut down its Blooming Mill and Rod Mill operations. The shutdown of these facilities, together with the move to 100% continuous cast steel, results in more efficient operations at the Alton Plant. These actions, however, resulted in production inefficiencies and higher costs early in the year. These inefficiencies continued after the start-up of the Ladle Furnace until August 1996 when the Company began to experience progress in the form of lower steelmaking costs.
Slight increases in selling, general and administrative expenses in 1994 and 1995 were primarily a result of higher salaried employment costs. The increase in interest expense in 1996 over 1995 reflects an increase in the average borrowings outstanding and a slightly higher average rate of interest. In 1995 the $3.2 million increase in interest expense reflects higher interest rates, as well as an increase in long-term borrowings. In addition, in the second quarter of 1995 the Company began expensing interest costs on the Solid Waste Disposal Revenue Bonds used to finance its High Temperature
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Metals Recovery System at the Alton Plant. These interest costs had previously been capitalized until modification of the facility was complete. See Note 9 to the Consolidated Financial Statements and "Liquidity and Capital Resources" for further discussion.
In 1994 the Company recorded a gain of $1.1 million related to the sale of various items of steel mill equipment. In the second quarter of 1995 the Company completed the sale of approximately 3% of the common stock of its subsidiary, Laclede Mid America, Inc. Accordingly a non-taxable gain of $728,000 representing the excess of the sales price over the net book value of the stock sold, is included in the results for 1995. Higher depreciation expense in 1995 is a result of increased capital expenditure levels. Reduced depreciation in 1996 reflects the shutdown of the Blooming Mill and Rod Mill at the Alton Plant.
General inflation has not had a significant effect on the Company's sales and revenues, which are more related to factors such as domestic steel capacity, currency levels, demand for the Company's products, and the impact of foreign steel imports. Imported steel typically has the greatest impact on the Company's tubular products.
Divisions and Subsidiaries
The Company operates a cold drawn wire mill in Memphis, Tennessee and an oil tempered wire facility in Fremont, Indiana. In 1997 the Fremont Plant expects to produce certain higher grades of oil tempered wire, utilizing technology developed in connection with the project to produce wire for suspension springs.
The Company's wholly-owned subsidiary, Laclede Chain Manufacturing Company, operates a manufacturing plant in Maryville, Missouri and a warehouse and sales operation in Portland, Oregon. The Laclede Chain operation made a significant contribution to consolidated earnings in the fourth quarter of 1996 and 1994. Unusually mild weather in the northwest adversely affected the Chain Company's tire chain business in the fourth quarter of 1995.
Under an agreement with USX Corporation the Company leases the Pipe Mill Operations located at the Fairless Works in Bucks County, Pennsylvania. Shipments of continuous weld pipe from the Fairless Plant represented 36% of tubular products sales in 1996.
The Company also operates a tubular finishing plant in Vandalia, Illinois. The Vandalia facility processes semi-finished pipe produced at the Alton Pipe Mill. Shipments of continuous weld pipe from the Vandalia Plant represented 41% of tubular products sales in 1996. - 14 -
Liquidity and Capital Resources
In the year 1996 operating activities provided $11.8 million in cash. Capital expenditures were $10.7 million, and contributions to Company pension plans totaled $15.0 million. Increases in accounts receivable of $1.5 million were more than offset by decreases in inventory of $17.2 million, while accounts payable and accrued expenses increased by $10.0 million. Proceeds from a sale-leaseback transaction increased cash flow by $4.0 million in the second quarter. Net working capital decreased by $25.8 million and the ratio of current assets to current liabilities was 1.9 to 1.0 at December 31, 1996.
In July 1996, the Company issued a total of $6.25 million in Series A Preferred Stock to its largest stockholder, Ivaco Inc., and to executive officers of the Company. On October 28, 1996, at a special meeting of the stockholders, an amendment was approved to the Company's Certificate of Incorporation which reduced the par value of each share of common stock from $13.33 per share to $0.01 per share and increased the number of authorized common stock shares from 5,000,000 shares to 25,000,000 shares. The stockholders also approved the recapitalization of the Company's Series A 6% preferred stock to convertible preferred stock. At such time each share of the preferred stock became convertible into common stock at the option of the holder at a conversion price of $3.20 into 4.69 shares of common stock. In connection with the sale of Series A Preferred Stock to Ivaco Inc. and to executive officers of the Company, the Company was required to use its best efforts to obtain stockholder approval of the amendment to the Company's Certificate of Incorporation. In addition such approval was necessary in order for the Company to pursue a rights offering to all of the Company's stockholders, entitling all such stockholders to subscribe for Series A Preferred Stock (the "Rights Offering").
The Company, however, has postponed the Rights Offering in order to allow time to improve recent operating results. In this regard the Company has implemented a number of cost reduction and productivity improvement programs that will be effective in 1997. Cost reductions were accomplished in several areas, including compensation and work force related issues and issues concerning employee benefits. The Company does not presently intend to proceed with the Rights Offering until these programs and operating results have reached satisfactory levels. There can be no assurance, however, when or if the Company will proceed with a Rights Offering.
At December 31, 1996, $76.1 million in borrowings were outstanding under the Company's revolving credit facility. Amounts available under this facility were utilized early in the first quarter of 1997 to cover outstanding short-term commitments, primarily trade accounts payable.
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In February 1997 the Company completed the sale of its electric weld structural and mechanical tubing operation, located in Benwood, West Virginia. Cash proceeds from the sale of these assets, which consist primarily of equipment and inventory, were approximately $10.0 million. The Company used the funds from the sale to improve its working capital position.
Under terms of the Company's Loan and Security Agreement, amounts available based on Company inventory levels will be reduced by $10.0 million by September 30, 1997. The Company believes that planned inventory reductions will equal or exceed the reduction in revolving credit availability and, thus, this reduction should not affect current availability. During 1997 the Company anticipates capital expenditures of approximately $3.0 million, and contributions to pension plans of $14.0 million. Taking into account the proceeds from the February 1997 sale of the Benwood facility and assuming that the Company is able to (i) maintain its existing level of sales, (ii) avoid sales price decreases and (iii) capture savings from recently completed productivity improvements, the Company will generate sufficient cash flow to finance its 1997 liquidity requirements including the above referenced expenditures. If the Company is unable to maintain its existing level of sales and current pricing or if the Company's recently completed productivity improvements fail to produce positive financial results, the Company may not generate sufficient cash flow to finance its 1997 liquidity requirements. In such event, the Company would evaluate other methods of generating cash flow such as the sale of significant businesses or assets and refinancing transactions. There can be no assurance, however, that any such alternative could be successfully completed.
The Company has amended its Loan and Security Agreement, obtaining waivers of financial covenants relating to operating losses and net worth for the third quarter of 1996, and modifying such covenants with regard to the other quarters of 1996 and the year 1997. In the event further amendment to financial covenants is necessary because operating losses exceed the limits of the amended covenants, there can be no assurance that the Company will be able to obtain such amendment.
The Company is also required to comply with various covenants regarding limits on liabilities as defined in the Agreements for the Solid Waste Revenue Bonds and Pollution Control Revenue Bonds. At December 31, 1996 the Company was in compliance with these covenants. Furthermore the sale of the Benwood Operations described above in February 1997 improved the Company's financial position with regard to continued compliance. Further operating losses in the future, however, could cause the Company to violate these covenants. In the event amendment of the covenants is required in the future, there can be no assurance that the Company can obtain such amendment.
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As more fully discussed in Note 3 to the Consolidated Financial Statements, at December 31, 1996 the Company has net deferred tax assets of $47,557,000. Management currently believes that its long-term profitability should ultimately be sufficient to enable it to realize full benefit of future tax deductions. Thus no deferred tax valuation allowance is deemed necessary.
The Company will continue to monitor and evaluate its deferred tax assets and the need for a deferred tax valuation allowance. In the event a deferred tax valuation allowance is required in the future, amendment of financial covenants in the Company's Loan and Security Agreement, as well as its Bond Agreements, may be required. There can be no assurance that the Company will be able to obtain such amendments.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis and other portions of this report on Form 10-K, contain various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including the following: statements regarding the overall demand for steel; statements regarding the ability to maintain sales prices; statements regarding productivity improvement programs; statements regarding the Company's long-term profitability; and statements regarding future borrowing capacity. In addition, statements containing expressions such as "believes," "anticipates" or "expects" used in the Company's periodic reports on Forms 10-K and 10-Q filed with the SEC are intended to identify forward-looking statements. The Company cautions that these and similar statements included in this report and in previously filed periodic reports including reports filed on Forms 10-K and 10-Q and further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statement, including, without limitation, the following: decline in sales prices for steel products; increases in the cost of steel scrap; failure to obtain significant benefits from the Company's recently completed cost reduction and productivity improvement programs; and increased domestic or foreign steel competition.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The index to the Financial Statements of the Company and the independent auditors' report of Deloitte & Touche LLP appear on pages 27 and 53.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
NONE
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company.
(a) Certain information with respect to each of the directors of the Company is set forth below, including any positions they hold with the Company and their business experience the past five years:
Name, Age, Other Positions with the Company, Served as Principal Occupation and Directorships of a Director Other Companies Since
Donald F. Gunning, 61 . . . . . . . . . . . . . 1981 (1) Consultant, Steel and Industrial Mineral Industries (1993 to date); President, International Marble and Stone Co. Ltd. (producer of industrial minerals) (1985 to 1993) A. William Hager, 72 . . . . . . . . . . . . . 1991 Chairman of the Board, C. Hager & Sons Hinge Manufacturing Company (manufacturer of hinges and builders' hardware) (1978 to date); Director of Boatmen's Trust Company E. Lawrence Keyes, Jr., 67 . . . . . . . . . . 1988 (1) Partner, Fortune Group Consulting, Inc. (1987 to date); Consultant, Emerson Electric Co. (manufacturer of electrical products) (October 1986 to September 1993); President of Emerson Electric Co. (October 1977 through September 1986); Director of Equitable Resources, Inc. John B. McKinney, 64 . . . . . . . . . . . . . 1981 President and Chief Executive Officer of the Company (January 1983 to date); Director of Boatmen's Trust Company and The Automobile Club of Missouri Robert H. Quenon, 68 . . . . . . . . . . . . . 1992 Mining Consultant (1991 to date); Chairman of the Board, Federal Reserve Bank of St. Louis (1993 to 1995); Chairman (1990 to 1991) and President and Chief Executive Officer (1983 to 1990) of Peabody Holding Company, Inc. (coal mining and sales); Director of Union Electric Company and Newmont Gold Co.
- 18 - Lawrence K. Roos, 79 . . . . . . . . . . . . . 1984 (1) Interim Chancellor, St. Louis Community College (December 1990 to December 1991); President, Federal Reserve Bank of St. Louis (March 1976 through January 1983); Advisory Director of Boatmen's Trust Company; Director of Trans World Airlines, Inc. Edwin J. Spiegel, Jr., 76 . . . . . . . . . . . 1977 Consultant, Jefferson Smurfit Corporation (producer of paperboard packaging) (January 1982 to date) Lester Varn, Jr., 72 . . . . . . . . . . . . . 1984 (1) President, Varn Investment Company and Affiliates (management of securities, real estate, timberland and forest products manufacturing) (1973 to date); Advisory Director of First Union National Bank of Florida, Jacksonville, Florida; and Director of Production Operations Corp., Houston, Texas. George H. Walker III, 65 . . . . . . . . . . . 1990 Chairman of the Board, Stifel Financial Corp. (investment banking firm) and its principal subsidiary, Stifel, Nicolaus & Company, Incorporated (stock brokerage firm) (1979 to date); Director of Laidlaw Corp. and EAC Corporation
(1) Messrs. Gunning, Keyes, Roos and Varn serve on the Board as designees of Ivaco Inc. pursuant to the provisions of an agreement reached in 1991, in which the Company and Ivaco Inc. agreed that the Company would take the necessary action to cause four designees of Ivaco Inc. to be seated on the Company's nine-member Board of Directors.
(b) Information with respect to the executive officers of the Company.
The executive officers of the Company and their ages are as follows:
Name Age Position
John B. McKinney 64 President, Chief Executive Officer and Director
Michael H. Lane 54 Vice President-Finance, Treasurer and Secretary
J. William Hebenstreit 51 Vice President-Operations
Larry J. Schnurbusch 50 Vice President-Administration
H. Bruce Nethington 55 Vice President-Human Resources
- 19 - John B. McKinney was elected President and Chief Executive Officer of the Company in January 1983. Mr. McKinney has been a director of the Company since 1981 and is also a director of Boatmen's Trust Company and The Automobile Club of Missouri.
Michael H. Lane was elected Vice President-Finance, Treasurer and Secretary of the Company in 1983.
J. William Hebenstreit was elected Vice President-Operations of the Company in 1983.
Larry J. Schnurbusch was elected Vice President-Administration in 1993. Prior to 1993, he served as Director of Corporate Administration of the Company.
H. Bruce Nethington was elected Vice President-Human Resources in 1993. Prior to 1993, he served as Director of Industrial Relations of the Company.
Item 11.
Item 11. Executive Compensation.
The following table presents summary information concerning compensation for services rendered to the Company during each of the last three fiscal years by those persons who at December 31, 1996 were the Chief Executive Officer and the other executive officers.
Summary Compensation Table
The Company did not grant any stock appreciation rights or stock options in 1996. The following table presents certain information concerning stock appreciation rights exercised by the Company's executive officers during 1996:
Aggregated SAR Exercises in Last Fiscal Year and Fiscal Year-End SAR Values
- 21 -
Benefit Plans
The Company maintains the Laclede Salaried Employees' Pension Plan (the "Pension Plan"), a defined benefit plan which provides a monthly pension to salaried employees of the Company (excluding employees covered by a collective bargaining agreement) who retire or terminate with vested rights in accordance with the provisions of the Pension Plan. Benefits are based upon years of credited service and covered compensation, offset by the participant's Primary Insurance Amount under the Federal Social Security Act. The Company also maintains the Key Employee Retirement Plan (the "Supplement Plan"), the purpose of which is to provide additional retirement income to certain key employees of the Company, including certain of the executive officers. Under the Supplement Plan, the eligible employees were guaranteed that the total amount received by them each year during retirement from the Pension Plan, Federal Social Security and the Supplement Plan would be equal to 70% of the average of their highest aggregate three consecutive calendar year salary and bonus during their last 10 years of employment with the Company ("Salary Level"), assuming retirement at age 60. In connection with a Company-wide cost reduction program initiated in 1996, in October 1996 the executive officers agreed to a reduction in retirement benefits under the Supplement Plan by a change in the percentage of Salary Level benefits from 70 to 65%. If the employee retires prior to age 60, the applicable percentage of the Salary Level will be reduced 2.5% for each year of retirement age below age 60.
The aggregate annual benefits payable pursuant to the Pension Plan, the Supplement Plan and Federal Social Security at various assumed salary levels and retirement ages are summarized as follows:
- 22 -
Messrs. McKinney, Hebenstreit, Lane, Schnurbusch and Nethington have accumulated 40, 29, 24, 28 and 29 credited years of service, respectively. The current salary level for each of the eligible executive officers in the Supplement Plan is: Mr. McKinney, $547,243; Mr. Hebenstreit $326,193; Mr. Lane, $326,193; Mr. Schnurbusch, $221,627; and Mr. Nethington, $193,919.
The Company also maintains the Laclede Steel Company Salaried Employees' Profit Sharing Plan (the "Profit Sharing Plan") for the purposes of encouraging eligible employees to develop initiative and productivity and providing the employees with additional retirement benefits. The Profit Sharing Plan is intended to qualify as a cash deferred compensation arrangement under Section 401(k) of the Internal Revenue Code. Salaried employees of the Company are eligible to participate in the Profit Sharing Plan.
Compensation of Directors
Directors who are not otherwise employed by the Company receive a $1,125 monthly retainer and a per diem fee of $1,125, plus expenses, for Board or committee meetings attended.
Employment Contracts
Messrs. McKinney, Hebenstreit, Lane, Schnurbusch and Nethington each has an employment agreement with the Company (the "Employment Agreements"). Effective July 30, 1996 Mr. McKinney's Employment Agreement provides for a minimum salary of $364,500 for his services as President and Chief Executive Officer, while the Employment Agreements of Messrs. Hebenstreit and Lane provide for a minimum salary of $243,500 for their services, respectively, as Vice President-Operations and Vice President-Finance, Treasurer and Secretary. Also effective July 30, 1996, Mr. Schnurbusch's Employment Agreement provides for a minimum salary of $178,000 for his services as Vice President-Administration and Mr. Nethington's Employment Agreement provides for a minimum salary of $167,500 for his services as Vice President-Human Resources. The Employment Agreements continue through August 2, 1999.
- 23 - Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following information is furnished with respect to each person known by management of the Company to be the beneficial owner of more than 5% of the outstanding Common Stock of the Company, each director of the Company, each executive officer of the Company and all directors and executive officers as a group. The information is furnished as of February 1, 1997.
Item 13.
Item 13. Certain Relationships and Related Transactions.
In July 1996, the Company issued a total of 416,667 shares of Series A 6% Preferred Stock to its largest stockholder, Ivaco Inc., and to named executive officers of the Company, ("Management Purchasers") for approximately $6,250,000 in cash pursuant to a Stock Purchase agreement with Ivaco (the "Ivaco Agreement") and a Management Stock Purchase Agreement with each of the Management Purchasers. On October 28, 1996, at a special meeting of the stockholders, an amendment was approved to the Company's Certificate of Incorporation which reduced the par value of each share of common stock from $13.33 per share to $0.01 per share and increased the number of authorized common stock shares from 5,000,000 shares to 25,000,000 shares. The stockholders also approved the recapitalization of the Company's Series A 6% preferred stock to convertible preferred stock. At such time each share of the preferred stock became convertible into common stock at the option of the holder at a conversion price of $3.20 into 4.69 shares of common stock. For complete terms and conditions of the Series A Preferred Stock, see the Certificate of Designation for such series filed as Exhibit 4(1) to the Annual Report on Form 10-K.
In connection with the sale of Series A Preferred Stock to Ivaco Inc. and to executive officers of the Company, the Company was required to use its best efforts to obtain stockholder approval of the amendment to the Company's Certificate of Incorporation. In addition such approval was necessary in order for the Company to pursue a rights offering to all of the Company's stockholders, entitling all such stockholders to subscribe for Series A Preferred Stock (the "Rights Offering"). The Company, however, has postponed the Rights Offering in order to allow time to improve recent operating results. See Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Pursuant to the Ivaco Agreement, the Company agreed that as long as Ivaco, or Ivaco together with any person with which Ivaco is acting in concert in connection with its investment in the Company, is/are the beneficial owner(s) of 40% of greater of the outstanding shares of Common Stock, on a fully diluted basis (the "Ownership Threshold"), Ivaco has the right to cause the Company to use its best efforts to cause its Board of Directors to
- 25 -
nominate four persons designated by Ivaco to serve on the Company's nine person Board of Directors and to use its best efforts to cause the stockholders of the Company to elect such Directors, and the Company will not change the number of Directors on the Board of Directors to a number higher than nine. This covenant is a confirmation of a letter agreement reached with Ivaco in 1991 (the "1991 Agreement"), and restates Ivaco's existing rights in a more formal contractual form.
Pursuant to the Ivaco Agreement, Ivaco agreed to execute a form of Standby Agreement (the "Standby Agreement") immediately prior to the effectiveness of the Registration Statement with respect to the purchase of up to 83,333 shares of Series A Preferred Stock from the Company for an aggregate purchase price of $1,249,995, or $15.00 per share, under certain conditions. Ivaco's obligations to purchase additional Series A Preferred Stock from the Company under the Standby Agreement are postponed until the Company determines to proceed with the Rights Offering.
The sale of shares of Series A Preferred Stock to Ivaco and the Management Purchasers was not registered with the Securities and Exchange Commission or with any state's securities commission. Accordingly, to provide Ivaco and the Management Purchasers with the ability to sell the Series A Preferred Stock (and any shares of Common Stock issued upon conversion thereof) owned by them absent an exemption from the registration requirements under the Securities Act of 1933, as amended, the Company, Ivaco and the Management Purchasers entered into a Registration Rights Agreement (the "Registration Rights Agreement") pursuant to which the company agreed to provide three demand registration rights to Ivaco for such shares (and any shares of Common Stock issued upon conversion thereof) (collectively, the "Registrable Securities") and incidental registration rights to Ivaco and the Management Purchasers.
In connection with the Registration Rights Agreement, the Company has agreed to indemnify the holders of Registrable Securities against all losses, claims, damages, liabilities or expenses to the extent such losses arise out of, or are based upon, any untrue statement or alleged untrue statement of any material fact contained in any registration statement.
In connection with the purchase of shares of Series A Preferred Stock by Ivaco and the Management Purchasers, as of July 30, 1996, the Company and each of the Management Purchasers entered into amendments to existing Employment Agreements (as in Item 11) to eliminate previously existing provisions regarding payments to be made to the Management Purchasers upon a change of control. The other terms of such Employment Agreements were not changed.
- 26 -
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of This Report
The following is an index of the financial statements and schedules included in this Report.
(1) Financial Statements
LACLEDE STEEL COMPANY AND SUBSIDIARIES
Page Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . 31
Consolidated Balance Sheets, December 31, 1996 and 1995 . . 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 . . . . . . . 34
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . 36
Independent Auditors' Report on Financial Statements . . . . 53
(2) Consolidated Financial Statement Schedules
NONE
- 27 -
(3) Exhibits
The following is an index of the exhibits included in this Report or incorporated herein by reference.
(3)(a) Registrant's Certificate of Incorporation as restated October 28 1996. (Incorporated by reference to Exhibit (3) in Registrant's Quarterly Report on Form 10-Q for September 30, 1996.)
(3)(b) By-laws of Registrant amended May 22, 1987. (Incorporated by reference to Exhibit (3)(b) in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.)
(4)(a) Registrant's Loan and Security Agreement dated as of September 7, 1994. (Incorporated by reference to Exhibit (4)(a) in Registrant's quarterly report on Form 10-Q for September 30, 1994.)
(4)(b) First Amendment dated February 15, 1995 to Registrant's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(b) in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)
(4)(c) Second Amendment dated May 10, 1995 to Registrant's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(c) in Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995.)
(4)(d) Third Amendment dated June 1, 1995 to Registrant's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(c) in Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995.)
(4)(e) Fourth Amendment dated December 7, 1995 to Registrant's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(e) in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.)
(4)(f) Fifth Amendment dated January 26, 1996 to Registrant's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(f) in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.)
- 28 -
(4)(g) Sixth amendment dated June 26, 1996 to the Company's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(g) in Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996.)
(4)(h) Seventh Amendment dated July 30, 1996 to the Company's Loan and Security Agreement. (Incorporated by reference to Exhibit (4)(h) in Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996.)
(4)(i) Eighth Amendment dated November 14, 1996 to Registrant's Loan and Security Agreement.
(4)(j) Ninth Amendment dated February 7, 1997 to Registrant's Loan and Security Agreement.
(4)(k) Tenth Amendment dated February 26, 1997 to Registrant's Loan and Security Agreement.
(4)(l) Certificate of Designation of Series A Preferred Stock dated July 30, 1996. (Incorporated by reference to Exhibit (4)(i) in the Registrant's Quarterly Report on Form 10-Q for June 30, 1996.)
(10)(a) Discretionary incentive compensation plan for Executive Officers of the Registrant. (Incorporated by reference to Exhibit (10)(a) in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.)
(10)(b) 1989 Stock Appreciation Rights Plan for Officers of the Registrant. (Incorporated by reference to Exhibit A of Registrant's Proxy Statement for the 1989 Annual Meeting of the Stockholders).
(10)(c) Stock Purchase Agreement dated July 30, 1996 between Ivaco Inc. and Laclede Steel Company. (Incorporated by reference to Exhibit (10)(a) of Registrant's Quarterly Report on Form 10-Q for June 30, 1996.)
(10)(d) Management Stock Purchase Agreements dated July 30, 1996 between Laclede Steel Company and John B. McKinney, Michael H. Lane, J. William Hebenstreit, Larry J. Schnurbusch and H. Bruce Nethington. (Incorporated by reference to Exhibit (10)(b) of Registrant's Quarterly Report on Form 10-Q for June 30, 1996.)
- 29 -
(10)(e) Restated Employment Agreements dated as of July 30, 1996 between Laclede Steel Company and John B. McKinney, Michael H. Lane, J. William Hebenstreit, Larry J. Schnurbusch and H. Bruce Nethington. (Incorporated by reference to Exhibit (10)(c) of Registrant's Quarterly Report on Form 10-Q dated June 30, 1996.)
(10)(f) Registration Rights Agreement dated July 30, 1996 between Laclede Steel Company and Ivaco Inc., John B. McKinney, Michael H. Lane, J. William Hebenstreit, Larry J. Schnurbusch and H. Bruce Nethington. (Incorporated by reference to Exhibit (10)(d) of Registrant's Quarterly Report on Form 10-Q dated June 30, 1996.)
(10)(g) Restated Key Employment Retirement Plan dated October 16, 1996.
(10)(h) Asset Purchase Agreement dated January 10, 1997 between Excaliber Tubular Corporation and Laclede Steel Company.
(22) Subsidiaries of Registrant.
Instruments with respect to long-term debt issues have been omitted where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of the Registrant. Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon its request.
NOTE Copies of exhibits will be supplied upon written request and payment of the Registrant's fee of $.25 per page requested.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, no reports on Form 8-K were filed by Registrant.
- 30 -
LACLEDE STEEL COMPANY AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands of Dollars except Per Share Amounts)
- - 31 -
LACLEDE STEEL COMPANY AND SUBSIDIARIES Consolidated Balance Sheets Assets (In Thousands of Dollars)
- - 32 -
Liabilities and Stockholders' Equity
- - 33 -
LACLEDE STEEL COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In Thousands of Dollars)
- - 34 -
LACLEDE STEEL COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands of Dollars) - 35 -
Notes to Consolidated Financial Statements
Note 1 Nature of Operations:
Laclede Steel Company and Subsidiaries (the Company) is a manufacturer of carbon and alloy steel products, including pipe products, hot rolled products, wire products and welded chain. The Company's continuous butt weld pipe and electric weld tubing is sold in the U.S. and Canada to distributors and manufacturers. Hot rolled products consist primarily of special quality bars sold to manufacturers to be cold drawn or forged. Wire products include high and low carbon wire, oil tempered wire used for mechanical springs, overhead door springs and, in the future, automotive suspension and brake springs, and annealed wire and rod. Laclede Chain Manufacturing Company, a wholly-owned subsidiary, produces chain products and also imports a significant amount of chain. Approximately one-half of the chain business is attributable to sales of anti-skid devices for trucks and automobiles and the balance is in sales of hardware and industrial chain.
Note 2 Accounting Policies:
The Company's significant accounting policies are summarized as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Laclede Steel Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of three months or less at date of purchase to be cash equivalents.
Inventories
Inventories of finished and semi-finished products, raw materials and supplies are stated at the lower of cost, predominantly moving average, or market. Market determination is based on the net realizable value of the total of the components of each major category of inventory.
- 36 -
Plant and Equipment
Plant and equipment, consisting primarily of steelmaking and related facilities, are carried at cost. Major renewals and betterments are capitalized, while replacements, rebuilding costs and repairs are charged to operations. The cost of normal retirements is charged to accumulated depreciation and salvage realized, if any, is credited thereto.
Depreciation
The Company follows the policy of providing for depreciation of plant and equipment by charging operations with amounts sufficient to amortize the cost over the following estimated useful lives:
Buildings and improvements 20 to 45 years Machinery and equipment 4 to 25 years Office furniture and equipment 6 to 10 years
Depreciation is computed on the straight-line method for financial reporting purposes. Accelerated depreciation methods are used for tax purposes.
Long-Lived Assets
In 1995 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The general requirements of this statement are applicable to the properties and intangible assets of the Company and require impairment to be considered whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 6 for discussion of asset impairment charges in 1995.
Other Intangible Assets
Other intangible assets include the excess of the purchase price of acquisitions over the fair value of the net assets acquired and these amounts are amortized on a straight-line basis over 25 years.
Management periodically reviews the value of its intangible assets to determine if an impairment has occurred or whether changes have occurred that would require a revision to the remaining useful life. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount. Based on this review, management does not believe that any such impairment has occurred.
- 37 -
Income Taxes
Deferred income taxes are provided for the temporary differences between the tax basis of the Company's assets and liabilities and their financial reporting amounts at each year end, utilizing currently enacted tax rates. See Note 3 for details of significant temporary differences.
Per Share Data and Preferred Stock Dividends
Per share amounts for 1996, 1995 and 1994 have been calculated based on weighted average shares outstanding of 4,056,140. Net loss per share in 1996 was computed by dividing the net loss, after deducting convertible preferred dividend requirements of $156,000, by the weighted average shares outstanding.
Use of Estimates in the Preparation of Financial Statements
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.
Certain Significant Estimates
Amounts reported for pensions and postretirement medical benefits and their related deferred tax assets are subject to significant fluctuation due to changes in interest rates. Estimates of environmental remediation-related obligations are discussed in Note 9.
Current Vulnerability Due to Certain Concentrations
The Company manufactures steel from steel scrap generated in the course of its steel production and purchased in the open market from numerous scrap suppliers. Since it does not produce its own raw materials, the Company is subject to the fluctuation in prices and availability of scrap.
Approximately 57% of the Company's production employees are covered by a collective bargaining agreement, which expires in September 1997.
- 38 -
Note 3 Income Taxes:
The provision for income taxes represents an effective combined federal and state tax rate of 39% for 1996, 38% for 1995 and 40% for 1994. See the reconciliation of these tax rates to the statutory rate below. The provision (credit) for income taxes consists of the following (thousands of dollars):
1996 1995 1994
Current income taxes $ 170 $ (139) $ 1,268 Deferred income taxes (6,424) (6,185) 1,707 $ (6,254) $ (6,324) $ 2,975
Deferred tax assets were decreased in 1996 by $2,929,000, increased in 1995 by $16,151,000 and decreased in 1994 by $3,650,000, as a result of the tax effects of the minimum pension liability adjustment. These amounts are not reflected in the tax provision of these years. See Note 5 for further discussion.
Deferred tax assets and liabilities are comprised of the following at December 31 (thousands of dollars):
1996 1995 Deferred tax liabilities: Depreciation $ (28,549) $ (26,966) Accrued costs of pension plans (2,490) (1,138) Total deferred tax liabilities (31,039) (28,104)
Deferred tax assets: Minimum pension liability adjustment 18,826 21,756 Postretirement medical benefits 31,361 31,921 Active employee benefit liabilities 2,566 2,733 Environmental costs 1,199 1,456 Allowances on receivables 954 871 Net operating loss and alternative minimum tax carryovers 21,832 11,536 Other 1,858 1,893 Total deferred tax assets 78,596 72,166 Net deferred tax assets $ 47,557 $ 44,062
Net operating losses expire over various periods through 2011. Deferred tax assets related to pension liability adjustments and postretirement medical benefits represent amounts accrued for financial reporting purposes but not yet paid or deductible for income tax purposes.
- 39 -
Management currently believes that its long-term profitability should ultimately be sufficient to enable it to realize full benefit of future tax deductions. The Company experienced profitable operations in 1993 and 1994, as well as 1995 if the restructuring, asset impairment and other charges are excluded. Management expects future operations to realize significant benefits from the productivity improvements and cost reductions generated in the fourth quarter of 1996. Consequently, it presently believes that future taxable income will be adequate to utilize both reversing temporary differences and operating loss carryforwards prior to their expiration. Thus, no deferred tax valuation allowance is deemed necessary.
In making this determination the Company is governed by the provisions of FASB Statement No. 109, which requires that consideration be given to information about the Company's current financial position and its results of operations for the current and preceding years. This historical information is supplemented by available information about future years.
The Company does not believe that 1996 should be considered a representative year for purposes of evaluating the likelihood that net deferred tax assets will ultimately be realized. In 1996 the Company completed its restructuring program resulting in a major change in its steelmaking process, through the installation of a ladle furnace facility and movement of the balance of its steel production to the more efficient continuous cast method. In the fourth quarter of 1996 the Company completed a Company-wide cost reduction program, resulting in the identification of significant cost savings, most of which take effect in 1997.
The applicable statutory federal income tax rate of 34% for each of the three years is reconciled to the effective income tax rate as follows (thousands of dollars):
1996 1995 1994 Federal income tax provision (credit) computed at statutory tax rate $ (5,503) $ (5,604) $ 2,529 Non-taxable gain on sale of subsidiary stock -- (277) -- State income taxes, net (819) (542) 388 Other 68 99 58 Provision (credit) for Income taxes $ (6,254) $ (6,324) $ 2,975
- 40 -
Note 4 Debt:
Long-term debt consists of the following at December 31 (thousands of dollars): 1996 1995
Bank Loan and Security Agreement: Revolving Loan $ 76,126 $ 84,541 Term Loan 6,777 8,209
Note Payable Due December 31, 2001 2,000 2,000
Solid Waste Disposal Revenue Bonds:
8.375% Bonds due from 1996 to 2008 6,615 6,930
8.5% Bonds due from 2015 to 2020 9,430 9,430
8% Pollution Control Revenue Bonds due October 1, 2001 (annual sinking fund payments began in 1993) 8,700 9,360
8% Industrial Development Revenue Bonds due October 1, 2001 (annual sinking fund payments began in 1992) 725 780
110,373 121,250
Less amounts payable within one year 2,484 2,459 $107,889 $118,791
The Company has a Loan and Security Agreement with three banks, expiring in September 1999, which has been amended to include a $90,000,000 Revolving Loan. It also includes a $10,000,000 Term Loan, payable monthly through September 1999. Amounts available under the revolving credit facility were utilized early in the first quarter of 1997 to cover outstanding short-term commitments, primarily trade accounts payable.
Interest on the Revolving Loan is payable at either prime plus 1-1/2% or a Eurodollar rate, at the Company's option. Interest on the Term Loan is payable at either prime plus 2% or a Eurodollar rate, also at the Company's option. At December 31, 1996, the interest rates ranged from 9.1% to 10.3%.
- 41 -
Under terms of the Loan and Security Agreement the Company granted security interests in accounts receivable and inventory to the participating banks to support the Revolving Loan. The Term Loan is secured by certain Plant and Equipment.
The Company has amended its Loan and Security Agreement, obtaining waivers of financial covenants relating to operating losses and net worth for the third quarter of 1996, and modifying such covenants with regard to the other quarters of 1996 and the year 1997. As of December 31, 1996 the Company was in compliance with the provisions of its loan agreement.
The most restrictive provisions of the Company's loan agreements, as amended, include the following:
A. The Company shall maintain specified net worth levels as defined in the Loan and Security Agreement. As of December 31, 1996 the Company's consolidated net worth exceeded the minimum required amount by $538,000.
B. The Company will maintain a Consolidated Fixed Charge Coverage Ratio, as defined, determined as of the end of each period listed below. Period Ratio
Three Months Ended March 31, 1997 1.05 to 1.00 Six Months Ended June 30, 1997 1.05 to 1.00 Nine Months Ended September 30, 1997 1.00 to 1.00 Year Ended December 31, 1997 1.05 to 1.00 Three Months Ended March 31, 1998 1.10 to 1.00 Six Months Ended June 30, 1998 1.10 to 1.00 Nine Months Ended September 30, 1998 1.10 to 1.00 Year Ended December 31, 1998 1.10 to 1.00
Commencing on March 31, 1999 and as of the last day of each fiscal quarter in each fiscal year thereafter, for the twelve-month period ending on such date 1.10 to 1.00
C. Payment of cash dividends on common stock is limited to 50% of cumulative net earnings after December 31, 1993. As of December 31, 1996 no funds are available for dividends on common stock.
- 42 -
The Company is also required to comply with various covenants regarding limits on liabilities as defined in the Agreements for the Solid Waste Revenue Bonds and Pollution Control Revenue Bonds. At December 31, 1996 the Company was in compliance with these covenants. Furthermore the sale in February, 1997 of the Benwood Operations described in Note 11 improved the Company's financial position with regard to continued compliance. Further operating losses in the future, however, could cause the Company to violate these covenants. In the event amendment of the covenants is required in the future, there can be no assurance that the Company can obtain such amendment.
The Company has no compensating balance arrangements. Excluding the Revolving Loan, aggregate maturities of long-term borrowings at December 31, 1996 for the next five years are as follows:
1997 2,484,000 1998 2,514,000 1999 5,059,000 2000 1,190,000 2001 8,970,000
The Company estimates that the fair value of its long-term debt in the aggregate approximates the carrying value at December 31, 1996 and 1995.
The Company is party to a Paying Agent Agreement in which the Paying Agent assists the Company in purchasing certain raw material. The terms of this agreement require the Company to pay a commission of 1.5% on all purchases plus a fee on the invoice amount. Amounts purchased under this agreement are included in accounts payable and amounted to $3,270,000 as of December 31, 1996.
Note 5 Employee Benefits: Defined Benefit Pension Plan -
The Company has several non-contributory defined benefit pension plans providing retirement benefits for substantially all employees. Benefits under the plans are primarily based on years of service and employee's compensation prior to retirement. Annual pension plan funding is based on the range of deductible contributions permitted by ERISA regulations, taking into account the Company's current income tax situation.
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The components of pension cost are as follows (thousands of dollars):
1996 1995 1994
Service cost $ 2,111 $ 1,538 $ 2,021 Interest cost on projected benefit obligation 13,868 14,767 13,340 Actual return on plan assets (19,996) (22,502) 4,322 Net amortization and deferral 13,596 14,921 (14,003)
Net periodic pension cost 9,579 8,724 5,680 Curtailment loss recognized 1,559 2,966 --
Total pension cost $ 11,138 $ 11,690 $ 5,680
In the fourth quarter of 1996 the Company presented an early retirement incentive offer to certain hourly employees at the Alton Plant. Approximately 90 employees elected to accept the offer and retired during the quarter. In accordance with applicable accounting standards, the Company recorded a non-cash charge of $1,559,000 representing a pension curtailment loss and the cost of special termination benefits.
In the fourth quarter of 1995 the Company recorded a special restructuring charge which included a $2,966,000 curtailment loss related to planned work force reductions. See Note 6 to the Consolidated Financial Statements for additional discussion.
The projected benefit obligations at December 31, 1996 and 1995 were determined using assumed discount rates of 6.75% and 7.25%, respectively. The assumed discount rate is based on market conditions and reflects annuity purchase rates available to theoretically settle plan obligations. For all plans other than the Alton Plant Hourly Employees' Plan, the assumed rate of increase in compensation levels was 2% for all years. Reflecting the Labor Agreement for Alton hourly employees, a 1% rate of increase in compensation was assumed for all years. The weighted average assumed long-term rate of return on the market-related value of plan assets was 9.8% for 1996, 9.9% for 1995 and 11.7% for 1994 and 1993.
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In accordance with FASB Statement No. 87, the Company has recorded an additional minimum pension liability for underfunded plans of $64,008,000 at December 31, 1996 and $74,660,000 at December 31, 1995, representing the excess of unfunded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to stockholders' equity. The principal cause of the reduction in underfunded pension liability is actual return on plan assets in excess of the assumed rate of return in 1996. As of December 31, 1996, $49,543,000 of the excess minimum pension liability resulted in a charge to equity, net of income taxes, of $30,717,000. As of December 31, 1995, the excess minimum liability was $57,251,000 and the after-tax charge to equity was $35,495,000.
Profit Sharing Plan -
The Company maintains a defined contribution profit sharing thrift plan covering a majority of its salaried employees. In 1996 the Plan was amended to provide for a minimum Company contribution regardless of the level of Company profitability. Company contributions for 1996 amounted to $272,000 and for 1994 amounted to $684,000. There was no profit sharing contribution for 1995.
Postretirement Medical Benefit Plans -
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for active and retired employees. A significant portion of the Company's employees may become eligible for the retiree benefits if they reach retirement age while working for the Company.
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The components of net periodic postretirement medical benefit costs are as follows (thousands of dollars):
1996 1995 1994
Service cost $ 698 $ 638 $ 846 Interest cost 4,522 5,708 5,658 Amortization of unrecognized net gain (1,265) (215) -- Net periodic cost 3,955 6,131 6,504 Curtailment loss recognized -- 1,089 -- Total cost $ 3,955 $ 7,220 $ 6,504
The reduction in cost in 1996 is due to favorable claims experience over the last several years. The actual postretirement medical benefits paid amounted to $5,603,000 in 1996, $4,969,000 in 1995 and $5,439,000 in 1994. See Note 6 for discussion of curtailment loss.
A summary of the status of the plans is as follows (thousands of dollars):
December 31, December 31, 1996 1995
Accumulated postretirement benefit obligation (APBO): Retirees $ (37,100) $ (41,911) Fully eligible active employees (9,044) (12,518) Other active employees (7,692) (10,900) Total (53,836) (65,329)
Fair value of plan assets -- --
Funded status (53,836) (65,329)
Unrecognized prior service costs (8,805) -- Unrecognized net gain (17,141) (16,102) Accrued postretirement benefit cost $ (79,782) $ (81,431)
The reduction in APBO as of December 31, 1996 relates to favorable claims experience and the effect of alternative coverages offered by the Company and elected by a portion of retired employees.
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The assumed discount rate used to measure the APBO was 7.25% at December 31, 1996 and 1995. The assumed future health care cost trend rate for the December 31, 1996 calculation is 7.9%, gradually declining to 3.25% after six years and for December 31, 1995 is 8.7% declining to 3.25% after seven years. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of the net periodic postretirement benefit cost by $480,000 for 1996, $603,000 for 1995 and $607,000 for 1994, and would have increased the APBO by $4,302,000 as of December 31, 1996 and $6,958,000 as of December 31, 1995.
Stock Appreciation Rights Plans -
In 1989, the Board of Directors adopted the 1989 Stock Appreciation Rights Plan for Non-Officers and the 1989 Stock Appreciation Rights Plan for Officers. All rights under the plans have been granted and as of December 31, 1996, 19,500 rights had not been exercised. There was no expense for the plans in 1996, 1995 or 1994 as the market price is below grant prices.
Note 6 Restructuring, Asset Impairment and Other Charges:
In the fourth quarter of 1996 the company presented an early retirement incentive offer to certain hourly employees at the Alton Plant. Approximately 90 employees elected to accept the offer and retired during the quarter. In accordance with applicable accounting standards, the Company recorded a non-cash charge of $1,559,000 ($951,000 after taxes), representing a pension curtailment loss and the cost of special termination benefits.
In December 1995, the Company recorded a non-cash charge of $18,422,000 ($11,422,000 after taxes), relating to the restructuring of its operations, asset impairments and inventory write-offs. This charge was primarily the result of a decision to initiate the final phase of the Company's strategic plan, leading to a restructuring of the steelmaking facilities at the Alton Plant.
The new Ladle Furnace Facility became operational in the second quarter of 1996 and all steel is now produced using the more efficient continuous cast method. The Company also ceased production of rods, and began purchasing requirements for its wire operations on the open market, at a significant reduction in costs. In connection with this restructuring, the Company also shut down its Blooming Mill and Rod Mill operations.
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As a result of this decision, non-cash accounting charges totaling $15,780,000 were recorded, which are included in the $18,422,000 charge mentioned above. These charges include $6,190,000 for recognition of impairment loss for equipment and $4,565,000 for employee termination benefits and pension and postretirement benefit curtailment losses. In addition inventories relating to these operations have been written down by $5,025,000 to reduce their carrying cost to their net realizable value.
The Company also recognized a charge of $2,642,000 related to inventory write-downs in its tubular product operations, which are also part of the $18,422,000 charge. This inventory adjustment, which reduces the carrying cost to net realizable value, reflects higher second half production costs together with significant reductions in selling prices for tubular products during 1995.
Note 7 Interest Expense, Net:
Interest expense capitalized in 1996, 1995 and 1994 was $323,000, $484,000 and $2,148,000, respectively. The majority of this interest in 1994 relates to the Solid Waste Disposal Revenue Bond funds used to finance the construction of the HTMR facility.
- 49 - Note 8 Quarterly Results of Operations (Unaudited):
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Note 9 Commitments And Contingencies:
The Company has non-cancelable operating leases for office space and certain equipment through 2006. Future minimum lease commitments required under these leases are as follows:
1997 $4,122,000 1998 3,746,000 1999 3,593,000 2000 3,323,000 2001 2,473,000 Thereafter 4,257,000 TOTAL $21,514,000
Rent expense under all leases in 1996, 1995 and 1994 was $3,528,000, $2,777,000 and $2,578,000, respectively.
On June 26, 1996 the Company entered into a sale and leaseback transaction with a third party for the Ladle Metallurgy Facility at Alton. The third party agreed to purchase the equipment for approximately $4,000,000 cash and a note receivable for approximately $3,600,000. The lease term is for five years starting August 1, 1996 and continuing until June 30, 2001 with an option to purchase the equipment at the expiration date.
There are various claims pending involving the Company and its subsidiaries with respect to environmental, hazardous substance and other matters arising out of the routine conduct of the business. Such claims either have not been reduced to litigation or, if suit has been filed, are in the discovery stage. Therefore the total liability on pending claims at December 31, 1996, if any, cannot be determined.
The Company believes it has meritorious defenses with respect to all claims and litigation and the ultimate disposition of such matters will not materially affect its financial position or results of operations.
In connection with its Melt Shop operations the Company generates electric furnace dust, which the Environmental Protection Agency (EPA) has designated as a hazardous waste.
The Company developed a modified closure plan which has been approved by the IEPA. This plan provides for the closure of existing electric furnace dust piles in place. Based on estimates provided by an independent consultant it appears that the remaining cost of this plan will approximate the $3,051,000 amount included in non-current liabilities at December 31, 1996 for the disposal of the existing EAF dust.
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Note 10 Preferred Stock:
In July 1996 the Company issued 416,667 shares of Series A 6% preferred stock to Ivaco Inc. and the executive officers of the Company for $6,090,000, after expenses. This transaction resulted in an increase in capital in excess of par value of $6,006,667. On October 28, 1996, at a special meeting of the stockholders, an amendment was approved to the Company's Certificate of Incorporation which reduced the par value of each share of common stock from $13.33 per share to $.01 per share and increased the number of authorized common stock shares from 5,000,000 shares to 25,000,000 shares. The stockholders also approved the recapitalization of the Company's Series A 6% preferred stock. At such time each share of the preferred stock became convertible into common stock at the option of the holder at a conversion price of $3.20 into 4.69 shares of common stock. In the event of voluntary or involuntary liquidation of the Company, the holders of shares of Series A Preferred Stock are entitled to receive liquidating distributions in the amount of $15.00 per share plus accrued and unpaid dividends before payment is made to holders of common stock.
Note 11 Benwood Sale:
In February 1997, the Company sold the assets of its electric weld structural and mechanical tubing operation, located in Benwood, West Virginia. Cash proceeds from the sale of these assets, which consist primarily of equipment and inventory, totaled approximately $10,000,000. The Company used the funds from the sale to improve its working capital position. Sale of these assets will not affect the Company's primary tubular business, continuous weld pipe.
Note 12 Related-Party Transactions:
The Company has transactions in the normal course of business with Ivaco Inc. or affiliated companies. As of December 31, 1996 Ivaco Inc. owned 49.77% of the Company's outstanding common stock. In 1996 the Company purchased rods at market prices totaling $3,458,000 from an affiliate of Ivaco.
The Company participates in an insurance purchasing arrangement with Ivaco. Under the terms of this arrangement Ivaco purchases insurance on behalf of the Company and bills the Company for this insurance. Amounts paid by the Company for this insurance amounted to $1,521,000, $1,341,000 and $1,532,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
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INDEPENDENT AUDITORS' REPORT
To The Board Of Directors And Stockholders Of Laclede Steel Company:
We have audited the accompanying consolidated balance sheets of Laclede Steel Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Laclede Steel Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP January 28, 1997 (February 10, 1997 as to Note 11 and February 26, 1997 as to Note 4) St. Louis, Missouri
- 53 - SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.
March 7, 1997 /s/ John B. McKinney Date John B. McKinney President Principal Executive Officer Director
March 20, 1997 /s/ Michael H. Lane Date Michael H. Lane Vice President-Finance Treasurer and Secretary (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
March 13, 1997 /s/ Donald F. Gunning Date Donald F. Gunning Director
March 12, 1997 /s/ A. William Hager Date A. William Hager Director
March 12, 1997 /s/ E. Lawrence Keyes, Jr. Date E. Lawrence Keyes, Jr. Director
March 12, 1997 /s/ Robert H. Quenon Date Robert H. Quenon Director
Date Lawrence K. Roos Director
March 12, 1997 /s/ Edwin J. Spiegel, Jr. Date Edwin J. Spiegel, Jr. Director
March 18, 1997 /s/ Lester Varn, Jr. Date Lester Varn, Jr. Director
March 12, 1997 /s/ George H. Walker III Date George H. Walker III Director