ITEM 1. BUSINESS.
CORPORATE HISTORY
Niagara Corporation (formerly International Metals Acquisition Corporation), a Delaware corporation ("Niagara"), was organized on April 27, 1993 with the objective of acquiring an operating business engaged in the metals processing and distribution industry or metals-related manufacturing industry.
On August 16, 1995, Niagara purchased all outstanding shares of capital stock of Niagara LaSalle Corporation, formerly Niagara Cold Drawn Corp. ("Niagara LaSalle"), a leading manufacturer of cold drawn steel bars in the northeast and southeast regions of the United States, for $10,744,045 in cash.
On January 31, 1996, Niagara LaSalle purchased all outstanding shares of capital stock of Southwest Steel Company, Inc. ("Southwest"), a manufacturer of cold drawn steel bars servicing the southwest region of the United States. As consideration for such shares, Niagara LaSalle paid $1,920,000 in cash and $1,156,773 principal amount of Niagara LaSalle promissory notes guaranteed by Niagara. In connection with this acquisition, Niagara LaSalle discharged $8,518,691 of Southwest indebtedness and Niagara guaranteed $898,000 of Southwest indebtedness. On November 24, 1997, Niagara LaSalle settled certain claims against the former Southwest stockholders by paying $525,000 in full satisfaction of all amounts owing under the $1,156,773 principal amount of promissory notes issued in connection with the acquisition.
During 1996, southwest moved its operations from Tulsa, Oklahoma to a new facility in Midlothian, Texas. On November 1, 1996, Southwest was merged into Niagara LaSalle.
On April 18, 1997, Niagara LaSalle purchased from Quanex Corporation ("Quanex") all outstanding shares of capital stock of LaSalle Steel Company ("LaSalle," and, collectively with Niagara and Niagara LaSalle, the "Company"), one of the largest domestic producers of cold drawn steel. In consideration for the sale of such shares (i) Niagara LaSalle paid Quanex $65,500,000 in cash at the closing and (ii) Quanex or Niagara LaSalle, as the case may be, agreed to pay the other an amount based on changes in LaSalle's stockholder's equity between October 31, 1996 and March 31, 1997, as reflected on LaSalle's balance sheets as of such dates. On July 2, 1997, Niagara and Niagara LaSalle submitted to Quanex a statement disputing certain amounts reflected on the balance sheet of LaSalle as of March 31, 1997 submitted by Quanex. This balance sheet indicated that, based on changes in LaSalle's stockholder's equity between October 31, 1996 and March 31, 1997, Niagara LaSalle owed Quanex $2,154,000. In accordance with the LaSalle stock purchase agreement, the parties submitted their respective claims to an independent accounting firm for binding arbitration. Pursuant to the decision in such arbitration, Niagara LaSalle's payment to Quanex was reduced to $1,371,000, which amount was paid on January 26, 1998. The LaSalle stock purchase agreement also provided that Quanex or Niagara LaSalle, as the case may be, pay the other an amount based on cash activity in the intercompany account between Quanex and LaSalle from April 1, 1997 through April 18, 1997.
The acquisition of LaSalle and the refinancing of existing Niagara LaSalle indebtedness was financed pursuant to (i) a revolving credit and term loan agreement with Niagara LaSalle and LaSalle (guaranteed by Niagara), providing for a $50,000,000 three-year revolving credit facility and a $40,000,000 eight-year term loan and (ii) the issuance and sale of $20,000,000 aggregate principal amount of 12.5% senior subordinated notes of Niagara LaSalle due April 18, 2005 (the "Subordinated Notes"). In connection with this financing, the purchasers of the Subordinated Notes were issued 285,715 shares of Niagara Common Stock.
On October 31, 1997, Niagara exercised its right to redeem on December 9, 1997 (which date was extended to December 11, 1997) all of its then outstanding and unexercised Redeemable Common Stock Purchase Warrants ("Warrants") at $.01 per Warrant. As a result of this call for redemption, the Warrants could not be exercised after the redemption date. Each outstanding Warrant entitled the holder to purchase from Niagara, prior to the exercise deadline, one share of Niagara Common Stock at an exercise price of $5.50. Of the 6,050,000 Warrants outstanding prior to the call for redemption, 6,042,990 were exercised resulting in $33,236,445 in gross proceeds to Niagara and the issuance of 6,042,990 shares of Niagara Common Stock. The Company used approximately $21.8 million of such proceeds to prepay, at 107% plus accrued interest, the Subordinated Notes.
PRODUCTS
Following the acquisition of LaSalle, Niagara, through its wholly-owned subsidiaries, became the largest independent producer of cold drawn steel bars in the United States. The manufacture of these bars involves several steps. Hot-rolled steel bars are cleaned of mill scale by a process that involves shotblasting the surface of the bars with hardened steel shot. After shotblasting, the bars are mechanically drawn, or pulled, through a tungsten carbide die containing an orifice one-sixteenth of an inch smaller in cross-section than the size of the hot-rolled bar. Drawing the hot-rolled steel bar in this manner elongates the bar and creates a quality micro-finished surface. The bars are then cut to length and straightened. As an additional step, bars may be turned and/or ground to very close tolerance levels. This process produces steel bars with (i) a smooth and shiny surface, (ii) uniform shape, with close size tolerance, (iii) enhanced strength characteristics and (iv) improved machinability. These characteristics are essential for many industrial applications.
Niagara LaSalle manufactures round bars, ranging from one-quarter inch to six inches in diameter, and rectangular, square and hexagonal bars in a variety of sizes, the majority of which are drawn in sizes one-quarter inch to 6 inches thick and up to 15 inches wide. The bars are produced in lengths from 10 to 20 feet, with most being 10 to 12 feet in length. Niagara LaSalle's products include (i) cold drawn bars which are used in machining applications, automotive and appliance shafts, screw machine parts and machinery guides, (ii) turned, ground and polished bars which are used in precision shafting and (iii) drawn, ground and polished bars which are used in chrome-plated hydraulic cylinder shafts.
LaSalle is a technological leader in the development of specialized cold drawn steel products, having obtained numerous foreign and domestic patents throughout its history. LaSalle pioneered the large drawbenches commonly used in cold finishing today and developed the principle of stress-relieving cold finished steel bars. LaSalle employs a number of advanced processing techniques in the manufacture of value-added steel bars including thermal treatment and chrome plating. In addition to cold drawn bars, LaSalle's products include (i) custom cut bars shipped on a "just-in-time" basis which are used in steering columns and shock absorbers, (ii) stress relieved bars which are used in high strength shafting, gears and drive mechanisms, (iii) quench and tempered bars which are used in high strength bolting and high impact rod cylinders and (iv) chrome plated bars which are used in hydraulic and pneumatic cylinders.
CUSTOMERS
The Company sells its products primarily to steel service centers, which accounted for approximately 77% of sales during 1997, with the balance of sales to original equipment manufacturers ("OEMs") and the screw machine industry. Steel service centers purchase and warehouse large quantities of standardized steel products which are then sold directly to OEMs. OEMs use cold drawn steel bars in a wide range of products. The Company concentrates its sales efforts on steel service centers, which purchase relatively standardized products on a regular basis. By focusing on this market, the Company attempts to minimize the risk of holding obsolete inventory.
The Company has approximately 650 active customers in the United States and Canada and is not dependent upon any one geographical market. For 1997, the Company's 10 largest customers (by tons shipped) represented approximately 63% of sales, and its 3 largest customers, Alro Steel Corporation, A.M. Castle & Co. and Earle M. Jorgensen Co., represented approximately 41% of sales. The loss of any of the three largest customers would have a material adverse effect on sales.
MARKETING
The Company markets its products through salaried in-house sales personnel and sales representatives compensated on a commission-only basis. Such in-house personnel and sales representatives cover all of the United States and certain regions of Canada.
STRATEGY
The Company's business strategy focuses on improving product quality and customer service and on maintaining strict cost controls. With the acquisition of LaSalle, the Company offers a full product line on a national level.
The Company seeks to obtain a competitive advantage through its ability to supply customers on a timely basis with an extensive range of sizes and shapes of high quality cold drawn steel bars. In this regard, the Company maintains finished goods inventories of the most commonly ordered sizes and shapes.
In order to improve profitability, the Company has chosen to specialize on higher margin and value-added products. In addition, the Company is implementing a system of inventory management to supply more efficiently multiple locations of steel service center companies.
RAW MATERIALS
The Company purchases raw materials, which consists of hot-rolled steel bars, from integrated steel mills and mini-mills. The cost of hot-rolled steel bars purchased from mini-mills is primarily dependent on the price of scrap steel. Since the price of scrap steel is subject to substantial price fluctuations, the price of hot-rolled steel bars is subject to similar fluctuations. The Company obtains raw material from both domestic and foreign suppliers and is generally able to pass along to customers increases in the price of hot-rolled steel bars.
COMPETITION
The cold drawn steel bar market is highly competitive, based on price, product quality and customer service. The Company's strategy is to seek to remain competitive on price and surpass its competitors in product quality and customer service. Its principal competitors are domestic companies, including both integrated and independent cold drawn steel bar producers.
The Company believes that the ability to offer a full line of cold finished bar products and the proximity of facilities to major steel service center markets are key competitive factors in the industry. Close geographic proximity to customers results in reduced freight costs and faster delivery of customer orders. The cold drawn steel industry allocates freight costs among suppliers and customers based on an "equalizing" system whereby the customer pays freight cost equal to that of the nearest supplier. The Company's five manufacturing facilities (located in Buffalo, New York; Chattanooga, Tennessee; Midlothian, Texas; and Hammond and Griffith, Indiana) provide close proximity to many customers.
The Company competes in a narrow segment of the steel industry, but its business is affected by conditions within the broader steel industry and in particular the automotive and machine tool industries. Consequently, a significant downturn in the broader steel industry (which generally results from a downturn in the U.S. economy as a whole) or the automotive or machine tool industries may result in a similar downturn in the cold drawn steel bar market and have an adverse effect on the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 645 persons. It believes that its relationship with its employees is good. All of LaSalle's 275 hourly employees at its Hammond, Indiana facility as of such date were covered by a collective bargaining agreement with The Progressive Steelworker's of Hammond, Inc. which expires on May 17, 1998. All of LaSalle's 25 hourly employees at its Griffith, Indiana facility as of such date were covered by a collective bargaining agreement with the United Steel Workers of America and its local affiliate which expires on February 19, 2000.
ITEM 2.
ITEM 2. PROPERTIES.
NIAGARA
Niagara utilizes approximately 5,000 square feet of headquarters space in New York, New York under a lease expiring in March 2001.
NIAGARA LASALLE
Niagara LaSalle operates manufacturing facilities in Buffalo, New York; Chattanooga, Tennessee; and Midlothian, Texas. Niagara LaSalle owns the 207,000 square foot Buffalo facility, leases the 92,000 square foot Chattanooga facility and owns the 115,000 square foot Midlothian facility. The Chattanooga lease expires in May 1998. Niagara LaSalle has entered into a letter agreement to continue leasing this facility through November 30, 2009. The agreement gives Niagara LaSalle options to renew the lease through November 30, 2019 and also provides that Niagara LaSalle may terminate the lease beginning December 1, 2004.
LASALLE
LaSalle operates manufacturing facilities in Hammond, Indiana and Griffith, Indiana. LaSalle owns the 550,000 square foot Hammond facility and the 45,900 square foot Griffith facility.
Management considers these five manufacturing facilities, which operated at approximately 75% of capacity in 1997, suitable for its current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
ENVIRONMENTAL MATTERS
Under applicable state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), Niagara LaSalle and LaSalle may be responsible for costs required to remove or remediate previously disposed wastes or hazardous substances at locations owned or operated by them or at locations owned or operated by third parties where they, or a company from which they acquired assets, arranged for the disposal of such materials. Claims for such costs have been made against LaSalle with respect to four such third-party sites. Management believes that, in three cases, the volumes of waste allegedly attributable to LaSalle and the share of costs for which it may be liable are de minimis. In the fourth case, LaSalle has received an insurance settlement in an amount that exceeds the financial contribution it has been required to make to date. Because liability under CERCLA and analogous state laws is generally joint and several and because further remediation work may be required at these sites, LaSalle may be required to contribute additional funds. However, based on its volumetric share of wastes disposed and the participation of other potentially liable parties, management does not believe that LaSalle's share of additional costs will have a material adverse effect on the Company's business or financial position.
SOUTHWEST
On May 8, 1996, pursuant to the provisions of the Southwest stock purchase agreement, Niagara LaSalle asserted indemnification claims in the aggregate amount of approximately $1,300,000 against the former Southwest stockholders. On May 22, 1996, Niagara LaSalle brought an action in the Supreme Court of the State of New York, Erie County, captioned Niagara Cold Drawn Corp. v. Handrahan, et al., against such stockholders relating to these claims. On June 28, 1996, this action was removed to the U.S. District Court for the Western District of New York. On November 24, 1997, the parties entered into a settlement agreement, pursuant to which Niagara LaSalle paid $525,000 to the former Southwest stockholders in full satisfaction of all amounts owing under the $1,156,773 principal amount of promissory notes issued in connection with the acquisition, and the action was dismissed with prejudice. Joseph Handrahan, a former Southwest stockholder and a defendant in this action, is a Vice President of Niagara LaSalle.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Niagara's Common Stock is traded on the Nasdaq National Market. The following table sets forth the range of high and low sales prices by quarter for 1996 and 1997.
HIGH LOW
January 1 through March 31......... 7 4 1/4 April 1 through June 30............ 6 5/8 4 1/8 July 1 through September 30........ 61/2 4 1/4 October 1 through December 31...... 5 3/8 3 7/8
January 1 through March 31......... 6 1/4 4 1/8 April 1 through June 30............ 6 3/4 4 5/8 July 1 through September 30........ 10 5 1/4 October 1 through December 31...... 11 1/4 8
As of March 25, 1998, there were 39 registered holders of Niagara Common Stock.
Niagara has not declared or paid any dividends on its Common Stock since its inception. The payment of dividends is conditioned on Niagara's earnings, which are dependent on the earnings of its subsidiaries, capital requirements and general financial condition. Pursuant to its revolving credit and term loan agreement, Niagara LaSalle is subject to restrictions on its ability to declare dividends to Niagara. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31, -------------------------------------- 1995(1) 1996(2) 1997(3) (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Net sales.......................... $ 17,035 $ 74,810 $ 204,962 Cost of products sold.............. 15,541 66,114 180,532 Gross profit....................... 1,493 8,695 24,430 Selling, general and administrative expenses.......... 1,265 5,706 12,450 Interest income.................... 628 100 160 Other income....................... -- 126 187 Interest expense................... 272 1,536 5,874 Income taxes....................... 240 615 2,479 Net income before extraordinary loss............................... 344 1,064 3,974 Extraordinary loss on early extinguishment of debt.......................... -- -- 2,062 Net income after extraordinary loss 344 1,064 1,912 Net income per share (basic) (Before extraordinary loss)..... $ .10 $ .30 $ .94 Net income per share (diluted) (Before extraordinary loss)..... $ .10 $ .30 $ .78 Net income per share (basic)....... $ .10 $ .30 $ .45 Net income per share (diluted)..... $ .10 $ .30 $ .38 Weighted average common shares outstanding (basic)............. 3,500 3,603 4,247 Weighted average common shares outstanding (diluted)........... 3,500 3,603 5,095
AT DECEMBER 31, -------------------------------------- 1995 1996 1997 (in thousands) BALANCE SHEET DATA: Cash and cash equivalents.......... $ 2,187 $ 1,588 $ 13,207 Trade accounts receivable.......... 4,239 5,953 21,660 Inventories........................ 14,744 14,446 35,190 Property, plant and equipment, net. 12,745 21,649 89,163 Goodwill, net...................... -- 2,543 2,177 TOTAL ASSETS....................... 34,593 47,348 166,520 Trade accounts payable............. 4,787 4,110 20,985 Accrued expenses................... 3,212 3,690 8,679 Current maturities of long-term debt............................... 733 1,662 3,498 Long-term debt, less current maturities......................... 6,969 18,075 59,184 Accrued pension and post-retirement benefits outstanding ..................... -- -- 14,537 Deferred income taxes.............. 3,914 3,805 5,726 TOTAL LIABILITIES.................. 20,131 31,821 114,523 STOCKHOLDERS' EQUITY .............. $ 14,462 $ 15,526 51,996 - --------------- (1) Includes the results of Niagara LaSalle for the period from August 17, 1995 to December 31, 1995. (2) Includes the results of Niagara LaSalle for the entire year, and the results of Southwest from February 1, 1996. (3) Includes the results of Niagara LaSalle for the entire year, and the results of LaSalle from April 1, 1997.
NIAGARA LASALLE (PREDECESSOR COMPANY)
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995(1) (in thousands) STATEMENT OF OPERATIONS DATA: Net sales..........................$ 36,681 $ 45,593 $ 50,506 Cost of products sold.............. 32,484 40,873 44,386 Gross profit....................... 4,197 4,720 6,120 Selling, general and administrative expenses......................... 2,636 2,707 2,904 Employment expense-management options............................ -- -- 1,666 Operating income................... 1,561 2,013 1,550 Other Income -- -- 17 Interest expense................... 636 711 771 Income before income taxes and extraordinary loss on early extinguishment of debt............................. 925 1,302 795 Income taxes....................... 361 480 270 Extraordinary loss on early extinguishment of debt............................. -- -- -- Net income.........................$ 564 $ 822 $ 525
AT DECEMBER 31, AT AUGUST 16, -------------------- ------------ 1993 1994 1995(2) (in thousands) BALANCE SHEET DATA: Current assets.....................$ 10,325 $ 13,533 $ 18,257 Current liabilities................ 5,625 8,427 11,118 Working capital.................... 4,700 5,106 7,139 Property plant and equipment, net . 6,838 6,810 6,829 Total assets....................... 17,179 20,355 25,103 Long-term debt and capital lease obligations (excluding current portion)........................... 6,320 6,088 6,266 Total liabilities.................. 12,850 15,365 17,384 Redeemable preferred stock......... 560 453 251 Stockholders' equity...............$ 3,769 $ 4,537 $ 6,268
(1)- Derived from combining results of operations prior to acquisition by Niagara (January 1 to August 16, 1995) with results from after such acquisition (August 17 to December 31, 1995). (2)- Acquisition date by Niagara.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Niagara was organized in April of 1993. With the acquisition of Niagara LaSalle in August 1995, Niagara entered the cold drawn steel bar industry. With plants in Buffalo, New York and Chattanooga, Tennessee, Niagara LaSalle had an established position in the northeast and southeast regions of the United States cold drawn steel bar market.
In January 1996, Niagara LaSalle acquired Southwest. During 1996, Southwest completed construction of a new plant outside of Dallas, Texas and relocated its Tulsa, Oklahoma operations to this new facility. With this acquisition, Niagara gained an established position in the southwest region of the United States because Southwest was the leading cold drawn steel bar producer servicing that area.
In April 1997, Niagara LaSalle acquired LaSalle, which has plants in Hammond and Griffith, Indiana. This acquisition gave Niagara LaSalle a strong market position in the midwest region of the United States and broadened Niagara LaSalle's product range by adding thermal treated and chrome plated bars.
With the acquisition of LaSalle, Niagara became the largest independent producer of cold drawn steel bars in the United States. The geographic position of Niagara's plants creates competitive advantages because of freight savings and the ability to supply efficiently multiple locations of steel service centers.
During the fourth quarter of 1997, nearly all of Niagara's 6,050,000 Warrants were exercised resulting in approximately $33.2 million in gross proceeds to the Company. This significantly strengthened the Company's balance sheet by enabling it to prepay, with approximately $21.8 million of such proceeds, the Subordinated Notes in their entirety and by increasing total stockholders' equity to approximately $52 million.
The hourly employees at LaSalle's Hammond, Indiana facility are covered by a collective bargaining agreement which expires on May 17, 1998. If a new agreement is not reached, a work stoppage could result and have a negative impact on financial results.
RESULTS OF OPERATIONS
The following year-to-year comparisons reflect certain reclassifications, primarily relating to delivery costs, for 1995 and 1996. Net sales for 1995 and 1996 are stated after reduction for delivery costs. Previously, such costs had been included as a component of selling, general and administrative expenses. This reclassification resulted in no change to income from operations for these periods and was made to conform to current year presentation. In addition, comparisons of 1996 to 1995 reflect the results of the Company for 1996 and the predecessor company, Niagara LaSalle, for all of 1995.
Year ended December 31, 1997 compared with December 31, 1996
Net sales for the twelve months ended December 31, 1997 were $204,962,133, an increase of $130,152,613, or 174.0%, over the same period in 1996. This increase was primarily due to sales attributable to LaSalle.
Cost of sales for the twelve months ended December 31, 1997 was $180,532,223, an increase of $114,417,738, or 173.1%, over the same period in 1996. This increase was attributable to increased volume following the acquisition of LaSalle. Gross margins for the twelve months ended December 31, 1997 increased by 0.3% over the same period in 1996 due to greater emphasis on higher margin and value-added products.
Selling, general and administrative expenses increased by $6,743,856 to $12,449,505, or 6.1%, of sales in the twelve months ended December 31, 1997 compared to 7.6% for the same period in 1996. The dollar increase was due to increased sales, and the decline as a percentage of sales was caused by the consolidation of the Niagara LaSalle and LaSalle sales forces and personnel reductions at LaSalle.
Interest expense increased by $4,337,477 to $5,874,194 primarily due to higher levels of borrowing incurred in financing the acquisition of LaSalle.
In 1997, Niagara LaSalle issued the Subordinated Notes. Net proceeds from the sale of the Subordinated Notes, together with borrowings under the revolving credit and term loan agreement, were used to finance the acquisition of LaSalle and refinance existing Niagara LaSalle indebtedness. In connection with the prepayment of the Subordinated Notes, the Company was required to write off unamortized debt issuance costs and incurred a prepayment charge in the aggregate amount of approximately $3,326,000. The resultant one time, after-tax charge amounted to approximately $2,062,000. The Subordinated Notes and prepayment charge were paid from the proceeds of the Warrants exercised during the fourth quarter of 1997.
Income before the extraordinary loss on the early extinguishment of the debt for the twelve months ended December 31, 1997 was $3,974,503, an increase of $2,910,643, or 273.6%, from the same period in 1996. This increase was due primarily to the addition of LaSalle's results from April 1, 1997.
Net income for the twelve months ended December 31, 1997 was $1,912,318, an increase of $848,458, or 79.8%, from the same period in 1996. This increase was due primarily to the addition of LaSalle's results from April 1, 1997.
Year ended December 31, 1996 compared with December 31, 1995
Net sales for the twelve months ended December 31, 1996 were $74,809,520, an increase of $24,304,035, or 48.1%, over the same period in 1995. This increase was primarily due to sales attributable to Southwest.
Cost of sales for the twelve months ended December 31, 1996 was $66,114,485, an increase of $21,729,170, or 49.0%, over the same period in 1995. This increase was attributable to increased volume following the acquisition of Southwest. Gross margins for the twelve months ended December 31, 1996 decreased by 0.5% over the same period in 1995 due to pricing pressures.
Selling, general and administrative expenses increased by $2,801,545 to $5,705,649, or 7.6%, of sales in the twelve months ended December 31, 1996 compared to 5.8% for the same period in 1995. This increase was caused by increased costs associated with the increased volume, increased Canadian goods and services taxes and duties resulting from increased Canadian sales and increased depreciation and amortization associated with the step-up in basis of Niagara LaSalle's fixed assets.
Interest expense increased by $765,445 to $1,536,717 primarily due to higher levels of borrowing incurred in financing the acquisition of Southwest.
Net income for the twelve months ended December 31, 1996 was $1,063,860, an increase of $538,483, or 102.5%, from the same period in 1995. This increase was due primarily to the inclusion of Niagara LaSalle's results for a full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term liquidity requirement or day-to-day operating expenses have been, and is expected to continue to be, funded by cash provided by operations and borrowings under its revolving credit facility. The Company's principal long-term liquidity requirement has been and is expected to continue to be the funding of capital expenditures to modernize, improve and expand the facilities, machinery and equipment of Niagara LaSalle and LaSalle. Capital expenditures for the year ending December 31, 1997 were $5,572,754 compared to $4,418,944 for the same period in 1996. This increase in expenditures was largely due to the installation of a new production line at the Midlothian facility. The Company anticipates spending approximately $3,000,000 for capital expenditures during 1998.
Cash flow of the Company provided by operations was $9,333,468 for the year ended December 31, 1997, which included the cash flow of Niagara LaSalle for the entire year and the cash flow of LaSalle from April 1, 1997. The cash flow of the Company provided by operations was $4,831,940 for the year ended December 31, 1996, which included the cash flow of Niagara LaSalle for the entire year and the cash flow of Southwest from February 1, 1996. This $4,501,528 increase, or 93.1%, from the prior year is largely attributable to an increase of $848,958 in net income and an increase of $3,687,545 in depreciation and amortization. Net proceeds from financing activities of $75,098,436 were used to acquire LaSalle ($67,240,000) and to acquire fixed assets ($5,572,754). Cash and cash equivalents at December 31, 1997 was $13,207,077, an increase of $11,619,150 as compared to December 31, 1996.
On April 18, 1997 and in connection with the acquisition of LaSalle, Niagara LaSalle and LaSalle entered into a revolving credit and term loan agreement (the "Credit Agreement") with Manufacturers and Traders Trust Company ("M&T"), CIBC Inc., National City Bank, National Bank of Canada and the Prudential Insurance Company of America, and Niagara LaSalle terminated its previously existing credit agreements with M&T. The Credit Agreement provides for a $50,000,000 three-year revolving credit facility and a $40,000,000 eight-year term loan. The obligations of Niagara LaSalle and LaSalle under the Credit Agreement are guaranteed by Niagara and secured by substantially all of the assets and a pledge of all outstanding capital stock of Niagara LaSalle and LaSalle.
Principal of the term loan under the Credit Agreement amortizes in monthly installments that commence on November 1, 1997 and end on April 1, 2004. The principal repayment installments on the term loan escalate throughout its term. Interest on the term loan is payable in monthly installments either at the LIBOR rate (for a period specified by Niagara LaSalle from time to time) plus 285 basis points, or M&T's prime rate plus 50 basis points. Revolving credit loans made pursuant to the Credit Agreement are based on a percentage of eligible accounts receivable and inventory and will mature on April 17, 2000. Interest on such loans is payable in monthly installments and is either 250 basis points above the LIBOR rate (for a period specified by Niagara LaSalle from time to time) or M&T's prime rate plus 25 basis points.
The Credit Agreement carries restrictions on, among other things, indebtedness, liens, capital expenditures, dividends, asset dispositions and changes in control of Niagara LaSalle and LaSalle, and requires minimum levels of net worth through maturity. Also included in this agreement are requirements regarding the ratio of consolidated current assets to consolidated current liabilities and the ratio of net income before interest, taxes, depreciation and amortization to cash interest expense. Niagara LaSalle is currently in compliance with all of these requirements.
Note and stock purchase agreements were entered into on April 18, 1997, by and among Niagara, Niagara LaSalle, LaSalle and, respectively, The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States and United States Fidelity and Guaranty Company (collectively, the "Note and Stock Purchase Agreements") providing for, among other things, the issuance and sale of the Subordinated Notes. In connection with this financing, the purchasers of the Subordinated Notes were issued 285,715 shares of Niagara Common Stock.
On October 31, 1997, Niagara exercised its right to redeem all of its then outstanding and unexercised Warrants. Each outstanding Warrant entitled the holder to purchase from Niagara, prior to the exercise deadline, one share of Niagara Common Stock at an exercise price of $5.50. Of the 6,050,000 Warrants outstanding prior to the call for redemption, 6,042,990 were exercised resulting in $33,236,445 in gross proceeds to Niagara and the issuance of 6,042,990 shares of Niagara Common Stock. The Company used approximately $21.8 million of such proceeds to prepay, at 107% plus accrued interest, the Subordinated Notes.
At December 31, 1997, Niagara LaSalle had borrowed $21,800,000 under its revolving credit facility and had approximately $20,000,000 in available credit thereunder. Working capital of the Company at December 31, 1997 and 1996 was $38,746,722 and $12,087,913, respectively.
YEAR 2000 COMPLIANCE
The Company is in the process of modifying and upgrading its computer software applications and systems which the Company expects will accommodate the "Year 2000" dating changes necessary to permit correct recording of year dates for 2000 and later years. The Company does not expect that the cost of this process will be material to its financial condition or results of operations. The Company believes that it will be able to achieve compliance by the end of 1998, and does not currently anticipate any material disruption in its operations as the result of any failure by the Company to be in compliance. The Company does not currently have any information concerning the compliance status of its suppliers and customers.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information which supersedes SFAS No. 14, "Financial Reporting Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to impact the Company's financial statements or disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits. Due to the recent issuance of this standard, management has been unable to fully evaluate the extent of future financial statement disclosures that may be required.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe harbor" for certain forward-looking statements. The factors discussed under "Risk Factors" in Niagara's Post-Effective Amendment No. 3 to its Registration Statement No. 33-64682, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-K, including, without limitation, in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in future filings by Niagara with the Commission, in the Company's press releases and in oral statements made by authorized officers of the Company. When used in this Form 10-K, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and other similar expressions are intended to identify forward-looking statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page NIAGARA CORPORATION AND SUBSIDIARIES: REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..... 14 BALANCE SHEETS......................................... 15 STATEMENTS OF OPERATIONS............................... 16 STATEMENTS OF STOCKHOLDERS' EQUITY..................... 17 STATEMENTS OF CASH FLOWS............................... 18 NOTES TO FINANCIAL STATEMENTS.......................... 19
NIAGARA LASALLE CORPORATION (FORMERLY NIAGARA COLD DRAWN CORP.) IS CONSIDERED A PREDECESSOR COMPANY AND THE INFORMATION DISCLOSED HEREIN IS AS OF AND PRIOR TO THE DATE THE DATE OF ACQUISITION BY NIAGARA CORPORATION (AUGUST 16, 1995): REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS... 40 STATEMENTS OF OPERATIONS............................. 41 STATEMENT OF CASH FLOWS.............................. 42 NOTES TO FINANCIAL STATEMENTS........................ 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Niagara Corporation New York, New York
We have audited the accompanying consolidated balance sheets of Niagara Corporation and Subsidiaries (the "Company") as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Niagara Corporation and Subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 6, 1998
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- ---------
(a) On April 18, 1997, Niagara issued 285,715 shares of Common Stock in connection with the subordinated debt portion of the financing for the acquisition of LaSalle. (b) Proceeds from exercise of Warrants during December 1997 (Note 2). ==============================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Niagara Corporation and Subsidiaries
Statements of Cash Flows (Note 19)
- ------------- (a) Includes the cash flows of Niagara LaSalle for the period from August 17, 1995 to December 31, 1995.
(b) Includes the cash flows of Niagara LaSalle for the entire year, and the cash flows of Southwest from February 1, 1996.
(c) Includes the cash flows of Niagara LaSalle for the entire year and the cash flows of LaSalle from April 1, 1997.
See accompanying notes to financial statements.
NIAGARA CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS ============================================================================= 1. SUMMARY OF Organization and Business Operations ACCOUNTING POLICIES Niagara Corporation ("Niagara") was incorporated in Delaware on April 27, 1993 with the objective of acquiring an operating business in the metals processing and distribution industry or metals-related manufacturing industry.
Niagara consummated an initial public offering on August 20, 1993 and raised net proceeds of $15,295,100 and, as discussed in Note 3, has made acquisitions of cold drawn steel bar producers since that date.
Niagara, through its subsidiaries, Niagara LaSalle Corporation (formerly Niagara Cold Drawn Corp) ("Niagara LaSalle"), and LaSalle Steel Company ("LaSalle," and together with Niagara and Niagara LaSalle, the "Company"), operates from five principal locations: Buffalo (New York); Chattanooga (Tennessee); Midlothian (Texas); and Hammond and Griffith (Indiana). Niagara's subsidiaries produce cold drawn steel bars for steel service centers and original equipment manufacturers throughout North America. The Company competes in a narrow sector of the steel industry and its business is affected by conditions within the broader steel and machine tool industries. It grants trade credit to its customers consistent with industry practice.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share includes all such dilutive effects and, as such, is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash equivalents to consist of all short-term highly liquid debt instruments which are readily convertible into cash at par value (cost). Cash equivalent investments were $1,370,981 and $12,359,973 at December 31, 1996 and 1997, respectively.
Revenue Recognition
Revenue from the sale of products is recorded at the time the goods are shipped. Net delivery costs are classified as a reduction of sales.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined using the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Property, Plant and Equipment Property, plant and equipment is stated at cost.
Additions to property, plant and equipment are stated at cost and include expenditures for new facilities and those which substantially increase the useful lives of existing property, plant and equipment. Maintenance, repairs and minor renewals are expensed as incurred.
The Company provides for depreciation of property, plant and equipment at rates designed to amortize such equipment over their useful lives. Depreciation is computed on the straight-line method using lives of 3 to 15 years on machinery and equipment and furniture and fixtures, and 10 to 20 years on buildings and improvements and leasehold improvements.
OTHER CURRENT ASSETS
Other current assets at December 31, 1997 includes a $600,000 loan due from a related party. This loan bears interest at a rate of 5.68% and is due in December 1998.
Intangible Assets Niagara
LaSalle has a Power Authority of New York Power Replacement Agreement which provides for low cost energy and is included in other assets. The agreement is being amortized on a straight-line basis over 10 years.
Deferred financing costs are being amortized on a straight-line basis over the term of the related debt, which is seven years.
Goodwill represents the excess of the cost of purchased businesses over the fair value of the net assets acquired. Amortization is computed using the straight-line method over 30 years.
Evaluating Recoverability of Long-Lived Assets
The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses recoverability of these assets by estimating future nondiscounted cash flows. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. No impairments have been recorded through December 31, 1997.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities in accordance with SFAS No. 109. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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.
Reclassifications
Certain reclassifications, primarily relating to delivery costs, have been made to prior year amounts to conform to current year presentation. Net sales for 1995 and 1996 are stated after reduction for delivery costs. Previously, such costs had been included as a component of selling, general and administrative expenses. This reclassification resulted in no change to income from operations for these periods.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 encourages entities to adopt the fair value method in place of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees, for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. The Company has not adopted the fair value method encouraged by SFAS No. 123 and will continue to account for such transactions in accordance with APB No. 25.
New Accounting Standards Not Yet Adopted
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to impact the Company's financial statements or disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits. Due to the recent issuance of this standard, management has been unable to fully evaluate the extent of future financial statement disclosures that may be required.
2. PUBLIC OFFERING AND On August 20, 1993, Niagara sold 2,875,000 units SUBSEQUENT COMMON ("Units") in an initial public offering (the STOCK ISSUANCES "Offering"). Each Unit consisted of one share of Niagara Common Stock, par value $.001 per share, and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitled the holder to purchase from Niagara, until the close of business on August 13, 2000, one share of Niagara Common Stock at an exercise price of $5.50, subject to adjustment in certain circumstances. The Warrants were redeemable at a price of $.01 per Warrant upon 30 days' notice in the event that the last sale price of the Common Stock was at least $10.00 per share for 20 consecutive trading days ending on the third day prior to the date on which notice of redemption is given.
In 1993, Niagara issued an aggregate of $150,000 of promissory notes to certain accredited investors. These notes bore interest at the rate of 10% per annum and were repaid on the consummation of the Offering with accrued interest thereon. The investors were issued 300,000 warrants (valued at a nominal amount) which were (following Niagara's acquisition of Niagara LaSalle) identical to the Warrants.
On May 22, 1996, Niagara issued 168,750 shares of its Common Stock in exchange for unit purchase options (the "Purchase Options") issued to the underwriters of the Offering. The Purchase Options were exercisable until August 13, 1998 for an aggregate of 250,000 units at $9.00 per unit (subject, in each case, to certain antidilution adjustments), with each unit consisting of one share of Niagara Common Stock and two warrants, with each warrant exercisable for one share of Niagara Common Stock at $6.60.
On April 18, 1997, Niagara issued 285,715 shares of its Common Stock in connection with the subordinated debt portion of the financing for the acquisition of LaSalle. (See Note 3.)
On October 31, 1997, Niagara exercised its right to redeem on December 9, 1997 (which date was extended to December 11, 1997) all of its then outstanding and unexercised Warrants at $.01 per Warrant. As a result of such action, the Warrants could not be exercised after the redemption date. Of the 6,050,000 Warrants outstanding, 6,042,990 were exercised prior to the exercise deadline, resulting in $33,236,445 in gross proceeds to Niagara and the issuance of 6,042,990 shares of Niagara Common Stock.
3. ACQUISITIONS OF (a) Acquisitions of Niagara LaSalle and Southwest NIAGARA LASALLE, SOUTHWEST AND On August 16, 1995, Niagara acquired all of LASALLE the issued and outstanding common and preferred stock of Niagara LaSalle for $10,744,045 in cash. Concurrent with this acquisition, which was approved by Niagara's stockholders, the shares of Niagara Common Stock subject to redemption totalling $3,036,798 were reclassified as additional paid-in capital since no shares were redeemed. This acquisition was accounted for as a purchase, and the financial statements include the results of Niagara LaSalle from this acquisition date.
The purchase price of Niagara LaSalle, including certain transaction expenses of $1,174,377, was $11,918,422. Niagara LaSalle's stockholder's equity at August 16, 1995 was $6,519,678. After giving effect to this excess and a $3,309,000 deferred tax liability, the purchase price for Niagara LaSalle exceeded the book value of Niagara LaSalle's stockholder's equity by approximately $8,708,000. As a result of this acquisition, Niagara's net operating loss carryforward at August 16, 1995 of approximately $1,150,000 was able to be utilized. The tax benefit of this loss (which was previously fully reserved by a valuation allowance) totaled approximately $460,000. This amount was recorded as a deferred tax asset at the date of the acquisition of Niagara LaSalle. Approximately $1,000,000 of this loss was utilized as of December 31, 1995 and the remainder was utilized in 1996 to reduce current tax liabilities. In accordance with SFAS No. 109, "Accounting for Income Taxes," the tax benefit received from this utilization was reflected as a reduction of the deferred tax asset rather than a reduction in tax expense in the statement of operations.
On January 31, 1996, Niagara LaSalle entered into a stock purchase agreement with the stockholders of Southwest Steel Company, Inc. ("Southwest"), a manufacturer of cold drawn steel bars, pursuant to which, and simultaneously therewith, Niagara LaSalle purchased all of the outstanding capital stock of Southwest for $1,920,000 in cash and $1,156,773 principal amount of promissory notes guaranteed by Niagara. In connection with this acquisition, Niagara LaSalle discharged $8,518,691 of Southwest indebtedness and Niagara guaranteed $898,000 of Southwest indebtedness to a former Southwest stockholder. The acquisition was accounted for as a purchase and financed by a $12,000,000 term loan and the utilization of a portion of Niagara LaSalle's revolving line of credit. The financial statements include the results of Southwest from February 1, 1996.
The Southwest purchase price, including certain transaction expenses of $524,270, together with assumed liabilities of $350,063, totaled $3,951,106. Southwest's stockholders' equity at January 31, 1996 was $1,071,782. The $2,879,324 excess has been allocated to goodwill and is being amortized on a straight-line basis over 30 years. During 1996, Southwest moved its operations from Tulsa, Oklahoma to a new facility in Midlothian, Texas. Southwest was merged into Niagara LaSalle on November 1, 1996 and, since then, has operated as a division of Niagara LaSalle.
On May 8, 1996, pursuant to the provisions of the Southwest stock purchase agreement, Niagara LaSalle asserted indemnification claims in the aggregate amount of approximately $1,300,000 against the former Southwest stockholders. On May 22, 1996, Niagara LaSalle brought an action against such stockholders relating to these claims. On November 24, 1997, the parties entered into a settlement agreement, pursuant to which Niagara LaSalle paid $525,000 to the former Southwest stockholders in full satisfaction of all amounts owing under the $1,156,773 principal amount of promissory notes issued to such individuals in connection with the acquisition. The difference between the principal amount of the promissory notes and the settlement amount, after related expenses, reduced the amount of goodwill recorded relating to the acquisition of Southwest.
Pro forma results of operations for 1995, as if both acquisitions had occurred January 1, 1995, are unaudited and are detailed below. Pro forma adjustments primarily include additional depreciation and amortization on the excess purchase price allocated to property, plant and equipment and intangible assets (Niagara LaSalle) and goodwill (Southwest), elimination of interest income on the portion of Niagara's investment in U.S. government securities deposited in a trust fund and liquidated upon consummation of the acquisition of Niagara LaSalle, elimination of the Niagara LaSalle employment expense (exercise of management options), additional accrual of salaries for Niagara management, elimination of merger costs on terminated transactions prior to the acquisition of Niagara LaSalle, elimination of other nonrecurring items and provision for income taxes. This pro forma financial data does not purport to be indicative of the results which actually could have been obtained had such transactions been completed as of the assumed date. Information has not been presented for 1996 since the pro forma results reflecting Southwest were not materially different from the accompanying financial statements.
Year ended December 31, 1995 --------------------------------------------------- Net sales $84,654,000 Net income 882,000 Net income per share (basic and .25 diluted) ===================================================
(b) Acquisition of LaSalle
On April 18, 1997, Niagara and Niagara LaSalle entered into a stock purchase agreement with Quanex Corporation ("Quanex"), pursuant to which, and at a closing occurring simultaneously therewith, Niagara LaSalle purchased from Quanex all of the outstanding shares of capital stock of LaSalle Steel Company ("LaSalle"). Pursuant to the LaSalle stock purchase agreement and in consideration for the sale of the LaSalle shares (i) Niagara LaSalle paid Quanex $65,500,000 in cash at the closing and (ii) Quanex or Niagara LaSalle, as the case may be, agreed to pay the other an amount based on changes in LaSalle's stockholder's equity between October 31, 1996 and March 31, 1997 as reflected on LaSalle's balance sheets as of such dates. The LaSalle stock purchase agreement also provided that Quanex or Niagara LaSalle, as the case may be, pay the other an amount based on cash activity in the intercompany account between Quanex and LaSalle from April 1, 1997 through April 18, 1997.
On July 2, 1997, Niagara and Niagara LaSalle submitted to Quanex a statement disputing certain amounts reflected on the March 31, 1997 balance sheet of LaSalle submitted by Quanex. This balance sheet indicated that, based on changes in LaSalle's stockholder's equity between October 31, 1996 and March 31, 1997, Niagara LaSalle owed Quanex $2,154,000. In accordance with the LaSalle stock purchase agreement, the parties submitted their respective claims to an independent accounting firm for binding arbitration. Pursuant to the decision in such arbitration, Niagara LaSalle's payment to Quanex was reduced to $1,371,000. This amount was paid in January 1998.
The acquisition of LaSalle was accounted for as a purchase, and the financial statements include the results of LaSalle from April 1, 1997. The purchase price, including acquisition costs and other estimated liabilities as of the acquisition date, was approximately $68,000,000. The purchase price exceeded LaSalle's stockholder's equity by approximately $56,000,000 and, based on an appraisal, the excess was primarily allocated to property, plant and equipment. The fair value of assets acquired was approximately $110,000,000 and was allocated primarily to property, plant and equipment ($67,000,000), inventories ($24,000,000) and accounts receivable ($19,000,000).
The acquisition of LaSalle and the refinancing of existing Niagara LaSalle indebtedness was financed pursuant to (i) a revolving credit and term loan agreement with Niagara LaSalle and LaSalle (guaranteed by Niagara), providing for a $50,000,000 three-year revolving credit facility and a $40,000,000 eight-year term loan and (ii) the issuance and sale of $20,000,000 aggregate principal amount of 12.5% senior subordinated notes of Niagara LaSalle due April 18, 2005 (the "Subordinated Notes"). In connection with the subordinated debt portion of this financing, the purchasers of these notes were issued 285,715 shares of Niagara Common Stock. (See Note 2.) The fair value of these shares ($1,321,000) was charged to deferred debt issuance costs.
Pro forma results of operations, assuming the acquisition had occurred on January 1, 1996, are unaudited and detailed below. Pro forma adjustments primarily include additional depreciation and amortization on excess purchase price allocated to property, plant, equipment and additional interest expense related to debt incurred for the acquisition.
This pro forma data does not purport to be indicative of the results which actually would have been obtained had such transactions been completed as of the assumed dates or of the results which may be obtained in the future.
Year ended December 31, 1996 1997 ----------------------------------------------- Net sales 233,560,000 $249,211,000 Income before extra- ordinary loss 304,000 3,759,000 Net income 304,000 1,697,000 Income per share - before extraordinary loss (basic) .08 .89 Income per share - before extraordinary loss (diluted) .08 .74 Net income per share (basic) .08 .40 Net income per share (diluted) .08 .33 ===============================================
4. INVENTORIES Inventories consisted of the following:
December 31, 1996 1997 ---------------------------------------------------- Raw materials $6,302,827 $13,179,052 Work-in-process 1,252,278 5,984,649 Finished goods 6,891,368 16,025,867 ---------------------------------------------------- $ 14,446,473 $35,189,568 ====================================================
5. PROPERTY, PLANT AND Property, plant and equipment consisted of the EQUIPMENT following:
December 31, 1996 1997 ---------------------------------------------------- Land, buildings and improvements $ 7,447,214 $24,354,077 Leasehold improvements 717,095 748,877 Machinery and equipment 15,026,487 69,596,920 Furniture and fixtures 571,924 1,567,601 ---------------------------------------------------- Total 23,762,720 96,267,475 Less: Accumulated depreciation and amortization 2,113,501 7,104,699 ---------------------------------------------------- $21,649,219 $89,162,776 ====================================================
6. LONG-TERM DEBT The long-term debt consisted of the following:
December 31, 1996 1997 Term note payable - bank, maturing in monthly installments of interest only through October 1997, followed by monthly installments of principal plus interest from November 1997 through March 2004. Beginning November 1, 1997 through April 1, 1998, the monthly installments of principal are $166,666. The monthly principal payment is adjusted annually each subsequent May 1, with the final installment due and payable on April 1, 2004. Interest is calcu lated at either the LIBOR rate plus 285 basis points or the bank's prime rate plus 50 basis points (effec tive rate of 8.7875% at December 31, 1977) $ - $39,666,668
Secured bank revolving line of credit up to $50,000,000 due April 17, 2000, limited to a portion of the value of eligible accounts receivable and inventories. Interest is payable in monthly install ments at either the LIBOR rate plus 250 basis points or the bank's prime rate plus 25 basis points (effec tive rate of 8.75% on $11,800,000 and 8.4805% on $10,000,000 at December 31, 1997) - 21,800,000
Note payable - former Southwest stockholder, maturing $64,143 annually on January 31, through 2010, plus interest at 8.5%, guaranteed by Niagara (Note 3) 898,000 833,857
Note payable - former Southwest stockholder, maturing $33,333 annually on April 17, through 2005, plus interest at 10% 300,000 266,667
Term note payable - bank, paid in full in 1997 12,000,000 -
Secured bank revolving line of credit up to $14,000,000, paid in full in 1997 5,146,579 -
Notes payable - former Southwest shareholders, settled in 1997 (Note 3) 1,156,773 -
Other notes payable 235,834 115,265 ---------------------------------------------------- 19,737,186 62,682,457 Less: Current maturities of long-term debt 1,662,039 3,498,069 ---------------------------------------------------- $18,075,147 $59,184,388 ====================================================
The revolving line of credit and term loan agreement is collateralized by substantially all of the assets of Niagara LaSalle and LaSalle and guaranteed by Niagara. This agreement contains, among other things, certain financial covenants relating to current ratio, tangible net worth, and interest coverage ratio, and restrictions on capital expenditures, new indebtedness, operating leases and dividends.
Approximate maturities of long-term debt over the next five years are as follows:
Year ended December 31, ---------------------------------------------------- 1998 $ 3,498,000 1999 4,794,000 2000 27,564,000 2001 6,764,000 2002 7,764,000 ====================================================
7. PENSION PLANS AND LaSalle sponsors two contributory defined benefit RETIREMENT BENEFITS pension plans, which cover substantially all employees of LaSalle. The hourly employees' plan pays benefits to employees at retirement using formulas based upon years of service and job classification. The salaried employees' pension plan pays benefits to employees at retirement using formulas based upon compensation and credited service. Effective April 18, 1997, the salaried plan was amended to discontinue all benefit accruals following October 31, 1997. Since the original intent at the time of the acquisition of LaSalle was to discontinue benefit accruals under this plan, no curtailment accounting was required under SFAS No. 88; rather, the adjustment to the plan was recorded as an acquisition adjustment.
The plans' funded status as of December 31, 1997 was approximately as follows:
Salaried Hourly Plan Plan Total --------------------------------------------------- Assets available for benefits $ 8,420,000 $ 9,681,000 $18,101,000 ---------------------------------------------------- Projected benefit obligation: Vested (7,867,000) (9,313,000)(17,180,000) Nonvested (398,000) (1,956,000) (2,354,000) ----------------------------------------------------- Accumulated benefit obligation (8,265,000)(11,269,000)(19,534,000) Effect of future salary in- creases (163,000) (102,000) (265,000) ------------------------------------------------------ Total projected benefit obliga- tion (8,428,000)(11,371,000)(19,799,000) ------------------------------------------------------ Assets less than projected benefit obligation (8,000) (1,690,000) (1,698,000) Unrecognized accumulated (gain) loss (192,900) 45,000 (147,900) ----------------------------------------------------- Accrued pension cost $ (200,900)$(1,645,000)$ (1,845,900) ======================================================
The projected unit credit method was used to determine the actuarial present value of the accumulated benefit obligation and the projected benefit obligation. For the initial period ended December 31, 1997, the discount rate was 7.5% and the expected long-term rate of return on assets was 10%. The assumed rate of increase in future compensation levels was 3% for the hourly plan. The plan invests primarily in marketable equity and debt securities.
Net pension costs for the above-defined benefit plans were as follows:
Period April 1, 1997 to December 31, 1997 ----------------------------------------------------- Benefits earned during the year $ 696,000 Interest cost on projected benefit obligation (1,037,000) Actual return on plan assets (1,396,000) Deferred gain on assets 148,000 ----------------------------------------------------- Total $ 485,000 =====================================================
The Company maintains a contributory salary deferral retirement plan (401(k)) for all employees other than those subject to a collective bargaining agreement. Under the terms of this plan, participants may elect to defer up to 15% of their earnings. During 1997, this plan was amended to change the matching portion for employee elective deferrals to a 100% match for the first 3% of employee contributions and a 50% match for the next 2% of employee contributions, and to provide for an additional employer contribution equal to 2% of earnings. During 1996, Niagara LaSalle matched 25% of the participant's contributions to this plan, up to a maximum of 4% of the participant's earnings.
LaSalle maintains a contributory salary deferral retirement plan (401(k)) for its union employees. This plan provides for a 25% match of the first 5% of employee contributions.
All contributions under these plans are subject to the limitations of Section 401 of the Internal Revenue Code and the requirements of the Employee Retirement Income Security Act of 1974. Total expense related to these plans was approximately $288,000 and $25,000 for the years ended December 31, 1997 and 1996, respectively. The funds are invested primarily in annuity contracts.
8. POST-RETIREMENT LaSalle provides certain health care and life BENEFITS insurance benefits for eligible retired employees. OTHER THAN PENSIONS Employees may become eligible for those benefits if they reach the normal retirement age while working for LaSalle. LaSalle continues to fund benefit costs on a pay-as-you-go basis and, for the period from April 1, 1997 to December 31, 1997, LaSalle made benefit payments totalling $682,000.
The following table sets forth the funded status of LaSalle's projected post-retirement benefits other than pensions, reconciled with amounts shown in the balance sheet at:
December 31, 1997 ----------------------------------------------------- Accumulated post-retirement benefit obligation: Retirees $ (7,359,000) Fully eligible active plan parti- cipants (1,522,000) Other active plan participants (3,582,000) ------------------------------------------------------ Accumulated post-retirement benefit obligation in excess of plan assets (12,463,000) Unrecognized net gain from past experience different from that assumed 10,000 Other (238,000) ------------------------------------------------------ Accrued post-retirement welfare benefit liability $(12,691,000) ====================================================== Net periodic post-retirement benefit cost: Service cost-benefits attributed to service during the period $ 152,000 Interest cost on accumulated post- retirement benefit cost 680,000 ------------------------------------------------------ Net periodic post-retirement benefit cost $ 832,000 ======================================================
The assumed health care cost trend rate was 5%. The assumed discount rate used to measure the accumulated post-retirement benefit obligation was 7.5% at December 31, 1997.
The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost recorded. For example, if the health care cost trend rate assumptions were increased by 1%, the accumulated post-retirement benefit obligation as of December 31, 1997 would be increased by 14.1%. The effect of this change on the sum of the service cost and interest cost for the initial period ended December 31, 1997 would be an increase of 16.3%.
9. PREFERRED STOCK Niagara is authorized to issue 500,000 shares of Preferred Stock, par value $.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by its Board of Directors.
10. LEASE COMMITMENTS Niagara leases office space under an operating lease and Niagara LaSalle leases equipment and its Chattanooga, Tennessee facility under operating leases. At December 31, 1997, future minimum payments under noncancellable operating leases are approximately as follows:
Operating lease ---------------------------------------------------- 1998 $ 349,000 1999 275,000 2000 469,000 2001 259,000 2002 190,000 Thereafter 1,364,000 ---------------------------------------------------- Total minimum lease payments $2,906,000 ====================================================
Rent expense under operating leases was approximately $63,000, $449,000 and $458,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
11. STOCK OPTION PLAN The Company has a stock option plan which provides that the Compensation Committee of Niagara's Board of Directors may grant options to the Company's officers, directors, employees and independent contractors for up to 1,500,000 shares of Niagara Common Stock.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for this plan. Under APB Opinion 25, no compensation cost was recognized because the exercise price of Niagara's employee stock options equaled the market price of the underlying stock on the date of grant.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1995, 1996 and 1997: dividend yield of -0- percent; expected volatility of 20 percent for 1995 and 1996 and 37.3% for 1997; risk-free interest rates of 6.6 percent; expected lives of 10 years and a discount due to marketability and dilution of 28, 28 and 22 percent in 1995, 1996 and 1997, respectively.
Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 ----------------------------------------------------- Net income: As reported $344,418 $1,063,860 $1,912,318 Pro forma 250,368 798,133 1,494,881 Net income per share (basic): As reported .10 .30 .45 Pro forma .08 .22 .35 Net income per share (diluted): As reported .10 .30 .38 Pro forma .08 .22 .29 ====================================================
A summary of the status of the Company's stock option plan as of December 31, 1995, 1996 and 1997, and changes during the years ending on those dates, is presented below:
NIAGARA CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at December 31, 1997.
12. INCOME TAXES The provision for Federal and state income tax expense was comprised of the following:
At December 31, deferred tax assets (liabilities) consisted of the following:
Included in the accompanying balance sheets as follows:
At December 31, 1997, Niagara LaSalle had New York State investment tax credit carryforwards of approximately $667,000, which may be available to offset certain future state income taxes. These credits expire through 2005. A valuation allowance has been provided for these tax credits. A reconciliation of the statutory Federal income tax rate and effective rate as a percentage of pre-tax income was as follows:
13. MAJOR CUSTOMERS The Company had three customers in 1997 to which sales were approximately 27%, 8% and 6% of total sales. Accounts receivable from these major customers represented approximately 39% of aggregate accounts receivable at December 31, 1997. Sales to two customers during 1996 were approximately 25% and 18% of total sales. Accounts receivable outstanding from these major customers represented approximately 46% of aggregate accounts receivable at December 31, 1996. Sales to three customers during 1995 were approximately 25%, 22% and 10% of total sales.
14. MAJOR SUPPLIER The Company had one supplier in 1997 which accounted for approximately 37% of the Company's total purchases.
15. COMMITMENTS AND Niagara LaSalle and LaSalle are subject to CONTINGENCIES Federal, state and local environmental laws and regulations concerning, among other matters, water emissions and waste disposal. Management believes that Niagara LaSalle and LaSalle are currently in material compliance with all applicable environmental laws and regulations.
Under applicable state and Federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), LaSalle may be responsible for parts of the costs required to remove or remediate previously disposed wastes or hazardous substances at the locations LaSalle owns or operates or at which it arranged for disposal of such materials. The costs are largely covered by insurance. Management believes any settlement of these matters will not have a material adverse effect on the Company's financial position.
Under the Company's insurance programs, coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. It is the policy of the Company to retain a portion of certain expected losses related primarily to workers' compensation, physical loss to property, business interruption resulting from such loss and comprehensive general, product, vehicle, medical and life benefits and liability. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability, actual and estimated, for claims. Such estimates utilize certain actuarial assumptions followed in the insurance industry and are included in accrued expenses.
Niagara LaSalle and its parent, Niagara, have entered into employment contracts with certain officers of Niagara LaSalle. The contracts, which expire in January 1999 and August 2000, provide minimum salary levels, adjusted annually for cost-of-living changes, as well as incentive bonuses and Niagara stock options. The aggregate contract commitment for future minimum salaries at December 31, 1997 was approximately $1,054,000.
The hourly labor force of LaSalle's Hammond facility, representing approximately 73% of LaSalle's personnel, is covered by a collective bargaining agreement which expires in May 1998.
16. EARNINGS PER SHARE The following table sets forth the calculation of weighted average common shares outstanding for the calculation of basic and diluted earnings per share:
17. EXTRAORDINARY ITEM In 1997, Niagara LaSalle sold the Subordinated Notes. Net proceeds from the sale, together with borrowings under the revolving credit and term loan agreement, were used to finance the acquisition of LaSalle. (See Note 3)
In December 1997, in connection with the prepayment of the Subordinated Notes, the Company was required to write off unamortized debt issuance costs and incur a prepayment charge in the aggregate amount of approximately $3,326,000. The resultant one time, after-tax charge amounted to approximately $2,062,000. The Subordinated Notes and prepayment charge were paid by Niagara from the proceeds of the Warrants exercised during the fourth quarter of 1997. (See Note 2)
18. DISCLOSURE ABOUT The following methods and assumptions were used FAIR VALUE OF to estimate the fair value of each class of FINANCIAL financial instruments for which it is practicable INSTRUMENTS to estimate that value.
The carrying amounts of cash, trade accounts receivable and current liabilities approximate fair value because of the short maturity of these instruments.
The carrying amount of debt approximates fair value because the interest rates on these instruments fluctuate with market interest rates or are based on current rates offered to the Company for debt with similar terms and maturities.
19. SUPPLEMENTAL CASH Interest paid during 1995, 1996 and 1997 was FLOW INFORMATION approximately $243,000, $1,357,000 and $5,637,000, respectively.
Income tax payments made during 1995, 1996 and 1997 totaled approximately $1,000, $86,500 and $512,000, respectively.
As discussed in Note 3(a), Niagara acquired all the capital stock of Niagara LaSalle for $11,918,000 in 1995. In connection with this acquisition, net assets were acquired as follows:
As discussed in Note 3(a), Niagara LaSalle acquired all of the capital stock of Southwest for $3,951,000 in 1996. In connection with this acquisition, net assets were acquired as follows:
As discussed in Note 3(b), Niagara LaSalle acquired all of the capital stock of LaSalle for $68,183,000 in 1997. In connection with this acquisition, net assets were acquired as follows:
Noncash investing and financing activities consist of the following:
Report Of Independent Certified Public Accountants
To The Stockholder And Board Of Directors Niagara LaSalle Corporation Buffalo, New York
We have audited the accompanying statements of operations and cash flows for the period from January 1, 1995 to August 16, 1995 for Niagara LaSalle Corporation (formerly Niagara Cold Drawn Corp.). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of Niagara Lasalle Corporation's operations and its cash flows for the period from January 1, 1995 to August 16, 1995 in conformity with generally accepted accounting principles.
/S/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 8, 1996
NIAGARA LASALLE CORPORATION (FORMERLY NIAGARA COLD DRAWN CORP.)
STATEMENT OF OPERATIONS
- -----------
(a) Acquisition date by Niagara.
(b) This information is unaudited and is provided for informational purposes only to provide for comparisons. The 1995 amounts were derived from combining Niagara LaSalle's results of operations prior to the acquisition by Niagara (January 1 to August 16, 1995) with the results after the acquisition by Niagara (August 17 to December 31, 1995).
(c) Payment due in accordance with purchase agreement.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
NIAGARA LASALLE CORPORATION (FORMERLY NIAGARA COLD DRAWN CORP.)
STATEMENT OF CASH FLOWS (NOTE 8)
Period from January 1, 1995 to August 16, 1995(a) - --------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,569) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 495,185 Increase in allowance for doubtful accounts 8,494 Increase in inventories (4,272,038) Increase in trade accounts receivable (26,892) Increase in trade accounts payable, accrued expenses and accrued compensation 3,137,441 Net change in other current assets and liabilities (63,860) - --------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (732,239) - --------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (514,018) - --------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of debt (631,239) Capital contribution 1,666,327 Proceeds from long-term debt 1,211,692 Net payments under revolving line of credit (323,063) Payments of dividends (313,384) Payments of redeemable preferred stock (212,371) Redemption of redeemable preferred stock (126,442) - --------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,271,520 - --------------------------------------------------------------------- NET INCREASE IN CASH 25,263 CASH, BEGINNING OF PERIOD 30,393 - --------------------------------------------------------------------- CASH, END OF PERIOD $ 55,656
- -------------
(a) Acquisition date by Niagara.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
NIAGARA LASALLE CORPORATION (FORMERLY NIAGARA COLD DRAWN CORP.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF Organization SIGNIFICANT ACCOUNTING POLICIES Niagara LaSalle Corporation (formerly Niagara Cold Drawn Corp.) ("Niagara LaSalle") is a Delaware corporation and, through August 16, 1995, operated from its two principal locations in Buffalo, New York and Chattanooga, Tennessee. Through August 16, 1995, Niagara LaSalle was a wholly owned subsidiary of Adage, Inc. ("Adage"). On August 16, 1995, Niagara Corporation, formerly International Metals Acquisition Corporation ("Niagara"), acquired all of the issued and outstanding common and preferred stock of Niagara LaSalle for $10,744,045 in cash.
Business Activity
Niagara LaSalle produces cold drawn steel bars for steel service centers and original equipment manufacturers throughout North America. Niagara LaSalle competes in a narrow sector of the steel industry and its business is affected by conditions within the broader steel and machine tool industries. Niagara LaSalle grants trade credit to its customers consistent with industry practice.
Revenue Recognition
Revenue from the sale of products is recorded at the time the goods are shipped. Net delivery costs are classified as a reduction of sales.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of Niagara LaSalle's assets and liabilities in accordance with Statement of Financial Accounting Standards No. 109. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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.
Reclassifications
Net sales for 1995 are stated after reduction for delivery costs. Previously, such costs had been included as a component of selling, general and administrative expenses. This reclassification resulted in no change to operating income (loss).
2. EMPLOYMENT EXPENSE - In accordance with the purchase agreement for the MANAGEMENT OPTIONS acquisition of Niagara LaSalle, on August 16, 1995, Niagara LaSalle's former majority stockholder, Adage, paid $1,666,327 to certain senior management of Niagara LaSalle in satisfaction of such individuals' rights under their existing stock option and employment agreements. Niagara LaSalle treated this payment as a contribution of additional paid-in capital and compensation to management which is reflected as employment expense - management options on Niagara LaSalle's financial statements for the period from January 1 to August 16, 1995.
3. RELATED PARTY During the period from January 1 to August 16, TRANSACTIONS 1995, Niagara LaSalle incurred approximately $50,000 of freight and shipping charges to a related party.
During the period from January 1 to August 16, 1995, Niagara LaSalle incurred $62,500 in management fees from its prior parent, Adage.
4. INCOME TAXES Niagara LaSalle had been included in the consolidated Federal income tax return of its parent, Adage. The provision for Federal income taxes is calculated on the separate company basis.
5. RETIREMENT PLANS Niagara LaSalle maintains a contributory salary deferral retirement plan (401(k)) for all of its employees. Under the terms of the plan, participants may elect to defer up to 15% of their earnings. Niagara LaSalle matches 25% of the participant's contribution, up to a maximum of 4% of the participant's earnings. All contributions are subject to the limitations of Section 401 of the Internal Revenue Code and the requirements of the Employee Retiree Income Security Act of 1974. Total expense related to this plan for the period from January 1 to August 16, 1995 was approximately $13,000. The funds are invested in annuity contracts.
6. MAJOR CUSTOMERS Niagara LaSalle had three customers during the period from January 1 to August 16, 1995 to which sales were approximately 25%, 22% and 10% of Niagara LaSalle's total sales.
7. COMMITMENTS AND Niagara LaSalle is subject to Federal,state and CONTINGENCIES local environmental laws and regulations concerning, among other matters, water emissions and waste disposal. Management believes that Niagara LaSalle is in material compliance with all applicable environmental laws and regulations.
Under Niagara LaSalle's insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. It is the policy of Niagara LaSalle to retain a portion of certain expected losses related primarily to workers' compensation, physical loss to property, business interruption resulting from such loss and comprehensive general, product, vehicle, medical and life benefits and liability. Provisions for losses expected under these programs are recorded based upon Niagara LaSalle's estimates of the aggregate liability, actual and estimated, for claims. Such estimates utilize certain actuarial assumptions followed in the insurance industry and are included in accrued expenses.
8. SUPPLEMENTAL CASH Interest paid during the period from January 1 to FLOW INFORMATION August 16, 1995 was approximately $521,000. Income taxes paid during the period from January 1 to August 16, 1995 was approximately $1,000.
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 REGISTRANT
THE INFORMATION REQUIRED BY ITEM 10 IS CONTAINED IN, AND INCORPORATED HEREIN BY REFERENCE FROM, THE SECTION ENTITLED "ELECTION OF DIRECTORS" OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING OF STOCKHOLDERS FILED WITH THE COMMISSION (THE "PROXY STATEMENT"), OR WILL BE FILED BY AMENDMENT TO THIS FORM 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
THE INFORMATION REQUIRED BY ITEM 11 IS CONTAINED IN, AND INCORPORATED HEREIN BY REFERENCE FROM, THE SECTION ENTITLED "EXECUTIVE COMPENSATION" OF THE PROXY STATEMENT, OR WILL BE FILED BY AMENDMENT TO THIS FORM 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
THE INFORMATION REQUIRED BY ITEM 12 IS CONTAINED IN, AND INCORPORATED HEREIN BY REFERENCE FROM, THE SECTION ENTITLED "SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS" OF THE PROXY STATEMENT, OR WILL BE FILED BY AMENDMENT TO THIS FORM 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE INFORMATION REQUIRED BY ITEM 13 IS CONTAINED IN, AND INCORPORATED HEREIN BY REFERENCE FROM, THE SECTION ENTITLED "ELECTION OF DIRECTORS -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" OF THE PROXY STATEMENT, OR WILL BE FILED BY AMENDMENT TO THIS FORM 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) List of Documents filed as a part of this Report:
1. Financial Statements. Financial Statements filed as part of this Report on Form 10-K are listed in Item 8 on Page 13.
2. Financial Statement Schedules Schedule I is filed as part of this Report on Form 10-K Beginning on Page S-1 hereof.
3. Exhibits
(b) Reports on Form 8-K.
1. The Registrant filed Amendment No. 2 on Form 8-K/A, dated October 27, 1997, amending and restating in its entirety Item 7 of Form 8-K, dated May 2, 1997, as amended by Form 8-K/A, dated July 2, 1997, relating to the acquisition of LaSalle.
2. The Registrant filed its Report on Form 8-K, dated November 6, 1997, reporting under Items 5 and 7 the call for redemption of the Warrants.
3. The Registrant filed its Report on Form 8-K, dated December 22, 1997, reporting under Items 5 and 7 the extension of the Warrant redemption date and the results of the Warrant exercise.
(c) EXHIBITS
+3.1 Registrant's Restated Certificate of Incorporation, as amended on May 16, 1996. *3.2 Registrant's By-laws. *4.1 Form of Common Stock Certificate. *4.2 Form of Redeemable Common Stock Purchase Warrant Certificate. **4.3 Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant, dated as of August 13, 1993. ***4.4 Notice of Redemption of Redeemable Common Stock Purchase Warrant +++4.5 Revolving Credit and Term Loan Agreement, dated as of April 18, 1997, by and among Niagara Cold Drawn Corp., LaSalle Steel Company, Manufacturers and Traders Trust Company (individually and as Agent), CIBC Inc. and National City Bank (the "Credit Agreement"). 4.6 First Amendment to the Credit Agreement, dated as of September 4, 1997. 4.7 Second Amendment to the Credit Agreement, effective as of December 31, 1997. +++4.8 Form of Note and Stock Purchase Agreement, dated as of April 18, 1997, by and among the Registrant, Niagara Cold Drawn Corp., LaSalle Steel Company and each of The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States and United States Fidelity and Guaranty Company. +++4.9 Stockholders Agreement, dated as of April 18, 1997, among the Registrant, Niagara Cold Drawn Corp., Michael J. Scharf, The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States and United States Fidelity and Guaranty Company. !10.1 Stock Purchase Agreement by and among Niagara Cold Drawn Corp. and the stockholders of Southwest Steel Company, Inc., dated January 31, 1996. !!10.2 Form of Promissory Note made by Niagara Cold Drawn Corp., dated January 31, 1996. !!10.3 Form of Guaranty made by the Registrant, dated January 31, 1996. !!10.4 Amended and Restated Promissory Note made by Southwest Steel Company, Inc. in favor of the Cohen Family Revocable Trust, u/t/a dated June 15, 1988, in the principal amount of $898,000, dated January 31, 1996. !!10.5 Guaranty, made by the Registrant in favor of the Cohen Family Revocable Trust, u/t/a dated June 15, 1988, dated January 31, 1996. !!!10.6 UPO Exchange Agreement by and among the Registrant and GKN Securities Corp., Roger Gladstone, David M. Nussbaum, Robert Gladstone, Richard Buonocore, Debra L. Schondorf, Andrea B. Goldman, Ira S. Greenspan and Barington Capital Corp., L.P. !!!!10.7 International Metals Acquisition Corporation 1995 Stock Option Plan. ++10.8 First Amendment to the International Metals Acquisition Corporation 1995 Stock Option Plan, dated October 5, 1996. +++10.9 Stock Purchase Agreement, dated April 18, 1997, by and among the Registrant, Niagara Cold Drawn Corp. and Quanex Corporation. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
- --------------------------
+ Incorporated by reference to exhibit 3.1 filed with the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996. * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-64682. ** Incorporated by reference to exhibit 4.4 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. *** Incorporated by reference to exhibit 4.1 filed with the Registrant's Report on Form 8-K, dated November 6, 1997. ! Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K, dated February 13, 1996. !! Incorporated by reference to exhibits filed with the Registrant's Report on Form 10-K for the year ended December 31, 1995. !!! Incorporated by reference to exhibit 10.1 to the Registrant's Report on Form 8-K, dated May 30, 1996. !!!! Incorporated by reference to Annex A to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on May 16, 1996. ++ Incorporated by reference to exhibit 10.10 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996. +++ Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K, dated May 2, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March, 1998.
NIAGARA CORPORATION
By: /s/ Michael J. Scharf ----------------------------- Michael J. Scharf Chairman of the Board Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Michael J. Scharf Chairman of the Board, March 27, 1998 - ----------------------- President and Chief Michael J. Scharf Executive Officer
/s/ Raymond Rozanski Vice President, March 27, 1998 - ----------------------- Chief Financial and Raymond Rozanski Principal Accounting Officer
/s/ Gilbert D. Scharf Secretary and Director March 27, 1998 - ------------------------ Gilbert D. Scharf
/s/ Gerald L. Cohn Director March 27, 1998 - ----------------------- Gerald L. Cohn
/s/ Andrew R. Heyer Director March 27, 1998 - ----------------------- Andrew R. Heyer
/s/ Douglas T. Tansill Director March 27, 1998 - ------------------------ Douglas T. Tansill
NIAGARA CORPORATION AND SUBSIDIARIES
INDEX =============================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS S-2
FINANCIAL STATEMENT SCHEDULE I: CONDENSED FINANCIAL INFORMATION OF REGISTRANT: BALANCE SHEETS S-3 STATEMENTS OF INCOME S-4 STATEMENTS OF STOCKHOLDERS' EQUITY S-5 STATEMENTS OF CASH FLOWS S-6 NOTES TO CONDENSED FINANCIAL STATEMENTS S-7
FINANCIAL STATEMENT SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS S-8
ALL OTHER SCHEDULES HAVE BEEN OMITTED BECAUSE THEY ARE INAPPLICABLE OR NOT REQUIRED OR THE INFORMATION IS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR THE NOTES THERETO.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Niagara Corporation New York, New York
The audits referred to in our report dated March 6, 1998 relating to the financial statements of Niagara Corporation and subsidiaries (the "Company"), which is contained in Item 8 of Form 10-K, included the audits of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits.
In our opinion, such financial statement schedules present fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 6, 1998
NIAGARA CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
============================================================================== December 31, 1996 1997 - ------------------------------------------------------------------------------ ASSETS CURRENT: Cash and cash equivalents $ 1,370,981 $ 12,360,083 Other current assets 74,100 1,485,084 - ------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 1,445,081 13,845,167 INVESTMENT IN AND NET ADVANCES TO SUBSIDIARIES 14,448,444 38,712,201 OTHER ASSETS, NET 204,507 675,966 - ------------------------------------------------------------------------------ $ 16,098,032 $ 53,233,334 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable $ - $ 57,246 Accrued expenses 571,825 1,179,686 - ------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 571,825 1,236,932 - ------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (SEE NOTES 10, 11 AND 15 TO THE CONSOLIDATED FINANCIAL STATEMENTS)
STOCKHOLDERS' EQUITY (SEE NOTES 2 AND 9 TO THE CONSOLIDATED FINANCIAL STATEMENTS): Preferred stock, $.001 par value - 500,000 shares authorized, none outstanding - - Common stock, $.001 par value - 15,000,000 shares authorized, 3,668,750 and 9,997,455 outstanding 3,669 9,998 Additional paid-in capital 15,560,127 50,111,675 Retained earnings (deficit) (37,589) 1,874,729 - ------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 15,526,207 51,996,402 - ------------------------------------------------------------------------------ $ 16,098,032 $ 53,233,334 ==============================================================================
See accompanying notes to condensed financial statements.
NIAGARA CORPORATION AND SUBSIDIARIES SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
============================================================================= Year ended December 31, 1995 1996 1997 - ----------------------------------------------------------------------------- REVENUES: Management fees from subsidiaries (Note 2) $ 168,750 $ 450,000 $1,125,000 EXPENSES: Selling, general and administrative expenses 984,833 1,014,496 1,217,817 - ------------------------------------------------------------------------------ (816,083) (564,496) (92,817) OTHER INCOME: Equity in net income of subsidiaries 535,946 1,314,218 1,910,600 Interest income 594,555 74,338 94,535 - ------------------------------------------------------------------------------ INCOME BEFORE INCOME TAX RECOVERIES 314,418 824,060 1,912,318 INCOME TAX RECOVERIES 30,000 239,800 - - ------------------------------------------------------------------------------ NET INCOME $ 344,418 $1,063,860 $1,912,318 ============================================================================== EARNINGS PER SHARE - BASIC: Net income per share - basic $ .10 $ .30 $ .45 ============================================================================== EARNINGS PER SHARE - DILUTED: Net income per share - diluted $ .10 $ .30 $ .38 ============================================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (SEE NOTE 16 TO THE CONSOLIDATED FINANCIAL STATEMENTS): Basic 3,500,000 3,602,818 4,246,925 Diluted 3,500,000 3,602,818 5,095,350 ==============================================================================
See accompanying notes to condensed financial statements.
- ---------
(a) On April 18, 1997, Niagara issued 285,715 shares of Common Stock in connection with the subordinated debt portion of the financing for the acquisition of LaSalle. (b) Proceeds from exercise of Warrants during the fourth quarter of 1997. ==============================================================================
See accompanying notes to condensed financial statements.
See accompanying notes to condensed financial statements.
NIAGARA CORPORATION AND SUBSIDIARIES SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS
1. STATEMENT OF The accompanying condensed financial statements have ACCOUNTING been prepared by Niagara Corporation ("Niagara") pursuant to the rules and regulations of the securities and exchange commission. Certain informa- tion and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. It is, therefore, suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and notes thereto.
2. RESTRICTIONS ON Niagara's subsidiary, Niagara LaSalle Corporation DISTRIBUTIONS ("Niagara LaSalle"), which was acquired on August 16, 1995, has a revolving line of credit and term loan agreement with a bank which contains certain restrictions on the payment of dividends. Niagara is entitled, however, to receive management fees from Niagara LaSalle and, in the years ended December 31, 1995, 1996 and 1997, $168,750, $450,000 and $1,125,000, respectively, of such management fees were included as revenues in the accompanying condensed financial statements, but have been eliminated in the consolidated financial statements.
- ---------
(1) Balance in allowance for doubtful accounts for Niagara LaSalle at date of acquisition (August 16, 1995). (2) Balance in allowance for doubtful accounts for Southwest at date of acquisition (January 31, 1996). (3) Balance in allowance for doubtful accounts for LaSalle at date of acquisition (April 1, 1997). (4) Accounts written off. ==============================================================================
EXHIBIT INDEX
+3.1 Registrant's Restated Certificate of Incorporation, as amended on May 16, 1996. *3.2 Registrant's By-laws. *4.1 Form of Common Stock Certificate. *4.2 Form of Redeemable Common Stock Purchase Warrant Certificate. **4.3 Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant, dated as of August 13, 1993. ***4.4 Notice of Redemption of Redeemable Common Stock Purchase Warrant +++4.5 Revolving Credit and Term Loan Agreement, dated as of April 18, 1997, by and among Niagara Cold Drawn Corp., LaSalle Steel Company, Manufacturers and Traders Trust Company (individually and as Agent), CIBC Inc. and National City Bank (the "Credit Agreement"). 4.6 First Amendment to the Credit Agreement, dated as of September 4, 1997. 4.7 Second Amendment to the Credit Agreement, effective as of December 31, 1997. +++4.8 Form of Note and Stock Purchase Agreement, dated as of April 18, 1997, by and among the Regis trant, Niagara Cold Drawn Corp., LaSalle Steel Company and each of The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States and United States Fidelity and Guaranty Company. +++4.9 Stockholders Agreement, dated as of April 18, 1997, among the Registrant, Niagara Cold Drawn Corp., Michael J. Scharf, The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States and United States Fidelity and Guaranty Company. !10.1 Stock Purchase Agreement by and among Niagara Cold Drawn Corp. and the stockholders of Southwest Steel Company, Inc., dated January 31, 1996. !!10.2 Form of Promissory Note made by Niagara Cold Drawn Corp., dated January 31, 1996. !!10.3 Form of Guaranty made by the Registrant, dated January 31, 1996. !!10.4 Amended and Restated Promissory Note made by Southwest Steel Company, Inc. in favor of the Cohen Family Revocable Trust, u/t/a dated June 15, 1988, in the principal amount of $898,000, dated January 31, 1996. !!10.5 Guaranty, made by the Registrant in favor of the Cohen Family Revocable Trust, u/t/a dated June 15, 1988, dated January 31, 1996. !!!10.6 UPO Exchange Agreement by and among the Registrant and GKN Securities Corp., Roger Gladstone, David M. Nussbaum, Robert Gladstone, Richard Buonocore, Debra L. Schondorf, Andrea B. Goldman, Ira S. Greenspan and Barington Capital Corp., L.P. !!!!10.7 International Metals Acquisition Corporation 1995 Stock Option Plan. ++10.8 First Amendment to the International Metals Acquisition Corporation 1995 Stock Option Plan, dated October 5, 1996. +++10.9 Stock Purchase Agreement, dated April 18, 1997, by and among the Registrant, Niagara Cold Drawn Corp. and Quanex Corporation. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
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+ Incorporated by reference to exhibit 3.1 filed with the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996. * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-64682. ** Incorporated by reference to exhibit 4.4 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. *** Incorporated by reference to exhibit 4.1 filed with the Registrant's Report on Form 8-K, dated November 6, 1997. ! Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K, dated February 13, 1996. !! Incorporated by reference to exhibits filed with the Registrant's Report on Form 10-K for the year ended December 31, 1995. !!! Incorporated by reference to exhibit 10.1 to the Registrant's Report on Form 8-K, dated May 30, 1996. !!!! Incorporated by reference to Annex A to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on May 16, 1996. ++ Incorporated by reference to exhibits to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996. +++ Incorporated by reference to exhibits filed with the Registrant's Report on Form 8-K, dated May 2, 1997.