ITEM 1. BUSINESS
(a) General Development of Business. ------------------------------- Cold Metal Products, Inc. (which, together with its wholly-owned Canadian subsidiary, is referred to herein as the "Company") is a corporation organized in 1980 under the laws of the State of New York. The Company is a leading intermediate processor of flat-rolled steel engineered to meet the critical requirements of precision parts manufacturers. As an intermediate processor of flat-rolled steel, the Company purchases coils of rolled steel from primary producers and processes the steel, using techniques such as cold-rolling, annealing, normalizing, edge-conditioning and oscillate-winding, as well as more basic services of slitting and cutting to length. The Company's products include strip steel for speciality and conventional applications and processed sheet steel. "Specialty" strip is highly engineered to meet customer needs in precision parts manufacturing, and "conventional" strip is supplied to high-volume manufacturers whose purchasing criteria emphasize quality, price and service rather than unique specifications.
(b) Financial Information about Industry Segments --------------------------------------------- Production of specialty strip steel, conventional strip steel and processed sheet steel comprises a single segment of the intermediate steel processing industry, involving inter-related equipment, technology and raw materials. Accordingly, the business of the Company cannot be separated into industry segments.
(c) Narrative Description of Business ---------------------------------
Products and Services --------------------- An intermediate processor of flat-rolled steel, the Company purchases coils of rolled steel from primary producers and processes the steel, using techniques such as cold-rolling, annealing, normalizing, edge-conditioning and oscillate-winding, as well as the more basic services of slitting and cutting-to-length. The Company processes and markets over 50 grades of steel, including ultra-low carbon, low carbon, medium and high carbon, very high carbon, alloy, high strength-low alloy and both 300 and 400 series stainless. The following table sets forth management's estimates of the percentages of net sales for the three years ended March 31, 1997, 1996 and 1995 attributable to the Company's strip steel products, which include both specialty and conventional applications, and processed sheet products, respectively:
The increase in the precent of net sales of processed sheet in fiscal 1997 is primarily attributable to the expansion of service center business through the acquisition of Direct Steel, Inc., which became a wholly-owned subsidiary of the Company in June 1996 and Cold Metal Processing, which was acquired in November 1996.
The Company believes that it is one of the few flat-rolled steel processors with a significant position in both the specialty strip steel and conventional strip steel markets, and is an industry leader in at least two key areas of specialty strip technology: (i) continuous annealing and normalizing of steel to produce special metallurgical properties and (ii) multi-head oscillate-winding to produce long lengths of narrow strip steel.
Strip Steel Products. Specialty strip products are highly engineered and customized, processed from flat-rolled coils of steel meeting exacting specifications in multiple rolling, annealing and finishing operations. Specialty strip is used in the manufacture of a variety of products, including bearings, cutting tools and chain saw blades, tape measures, computer discs, high-tolerance springs and pen clips. Conventional strip products are generally used in high-volume manufacturing applications. Quality requirements for conventional strip products are typically stringent, and customer purchasing decisions are usually based on prices offered by processors which can meet those requirements. Conventional strip products are used in the manufacture of such products as seat belt parts, transmission parts, industrial chains, door hinges, drawer slides, golf club shafts and other products.
Processed Sheet. At its steel service centers, the Company produces processed sheet consisting primarily of hot-rolled, cold-rolled and galvanized steel. The Company's processed sheet steel is typically used in applications that do not require precision tolerances, such as for heating ducts, wall studs and unexposed automobile parts. The Company's steel service centers purchase steel from primary steel producers and add value by slitting, cutting to length and providing warehousing services.
The principal processing techniques and the related equipment of the Company -- rolling, annealing, slitting, oscillate-winding and finishing -- are described below:
- Cold-rolling is the process of rolling steel to a specified thickness, temper and finish. Most strip-rolling is performed on reversing mills of three major types: 4-High, 6-High and cluster mills (or "Z-mills"). The Company utilizes all three types.
- Annealing is a thermal process which changes the hardness and certain metallurgical characteristics of steel. The most common means of softening strip steel for further processing or customer use is by annealing (heating and cooling) stacks of wound coils of strip steel in batch furnaces. All of the Company's strip mills are equipped for batch annealing.
- Slitting is the cutting of steel to specified widths and is performed at all of the Company's facilities. Coils of fully-processed strip or wide sheet coil are unwound, passed through rotary slitting knives and rewound in narrow-width coils as required by customer specifications.
- Oscillate-winding is a means of producing exceptionally long lengths of narrow strip steel by winding consecutive coils, much like thread is wound on a spool. This operation can be performed after slitting or, at a lower cost, on a multiple head-slitting and oscillate-winding line.
- Several auxiliary operations are performed by the Company, including coating and edge-conditioning. Coating is performed internally on an electro-galvanizing line at the Youngstown facility and by outside vendors for other platings or paints as needed to meet a given customer's needs. Edge-conditioning is the conditioning of edges of processed steel into square, full-round or partially-round shapes by rolling and skiving and is done at several of the Company's plants.
Raw Materials. -------------- The primary raw materials used in the Company's operations are hot-rolled and cold-rolled steel coils. Currently, the Company obtains steel for processing from a number of primary steel producers, and has developed cooperative relationships with its principal suppliers which, the Company believes, enable it to assure itself of the availability of steel. Pursuant to an agreement between the Company and one of its principal suppliers, the Company has agreed to purchase, and the supplier has agreed to supply, certain specified volumes of various grades and specifications of steel on competitive terms. This arrangement, which extends through the year 2001, has been, and is expected to be, significant to the Company during periods when demand for steel is high and primary steel suppliers are likely to allocate grades and quantities of steel. During the fiscal year ended March 31, 1997, the Company purchased approximately 7% of its requirements for hot-rolled and cold-rolled steel under this arrangement.
The Company has developed supply relationships with several primary steel producers outside of the U.S. and Canada. Over the Company's last three fiscal years, approximately 16% of its steel requirements was purchased from these suppliers. The Company's ability to acquire steel from sources outside the U.S. and Canada affords it access to certain grades required for its specialty strip production and, the Company believes, can afford substantial protection in the event of limited steel supply in North America.
The Company's largest component of cost of sales is raw material costs. These costs can vary over time due to changes in steel pricing which the Company typically passes on to customers. In periods of changing steel prices, however, reductions in the Company's raw material costs may lag behind pressure on the Company's prices or increases in raw material costs may preceed increases in the Company's prices, temporarily compressing the Company's profit margins.
Patents and Trademarks ---------------------- The Company has no patents material to its business. With respect to trademarks, the Company has developed a proprietary LaserMatte(TM) finish to enhance drawability in certain difficult forming operations, which the Company applies utilizing laser texturing technology acquired by the Company in March of 1995. The Company also has developed and produces the UniForm(TM) series of specialty strip products that help customers solve problems in their manufacturing processes. These include:
Product Application ------- -----------
UniForm(TM)100 Magnetic shielding and relay applications UniForm(TM)200 Extra-deep drawn parts UniForm(TM)300 Cup-shaped parts UniForm(TM)500 Applications involving severe bending or stretch forming UniForm(TM)700 Pre-hardened flat parts UniForm(TM)800 High-strength parts requiring high ductility
Seasonality ----------- The Company experiences lower levels of net sales in the months of July, November and December due, primarily, to holiday periods and customer plant shutdowns.
Working Capital Requirements ---------------------------- The Company generally maintains its inventory of raw materials at levels that it believes are sufficient to satisfy the anticipated needs of its customers based on historic buying practices and market conditions. The Company believes that its practices are comparable to other companies in the intermediate steel processing industry. The Company believes that cash generated from operations and
from borrowing under its committed credit facility provide adequate cash for the Company's working capital requirements.
Customers --------- The Company sells its products primarily in the automotive, construction, cutting tools, consumer goods and industrial markets and to specialty steel distributors. During the fiscal year ended March 31, 1997, 41% of the Company's net sales were to the automotive market. Net sales are primarily to manufacturers who produce component parts for sale to automotive manufacturers and after-market parts suppliers. The balance of the Company's net sales are almost equally divided among the other markets served. The markets served by the Company's steel service centers are primarily the automotive industry in Ontario and the construction industry in Quebec. During the fiscal year ended March 31, 1997, the Company sold products to approximately 1300 customers with the largest single customer accounting for approximately 7% of the Company's net sales. The Company's ten largest customers accounted for 31% percent of its net sales during that period. During the fiscal year ended March 31, 1997, approximately 29% of the Company's net sales were made pursuant to arrangements with customers which contemplate deliveries over a period of 12 months or more.
For the fiscal year ended March 31, 1997, approximately 55% of the Company's net sales were to customers in the U.S. and 44% were to customers in Canada. Less than 1% of the Company's net sales, in each of its last three fiscal years, were derived from sales to customers outside the U.S. and Canada. See Note 1 to Consolidated Financial Statements included herein at Item 8.
Backlog ------- At May 31, 1997, the Company's backlog was approximately $48 million compared with approximately $35 million at May 31, 1996. The increase is backlog is attributable to both the expansion of the service center business through the acquisition of Direct Steel, Inc. and Cold Metal Processing, and increased orders in anticipation of the ramp-up of the expanded Ottawa, Ohio facility. Management estimates that substantially all of the existing backlog will be shipped during the current fiscal year.
Competition ----------- The intermediate steel processing industry is highly competitive. The Company competes on the basis of quality, technical expertise, price and its ability to meet the delivery demands of its customers. Its principal competitors in the specialty strip market consist primarily of small, privately-held concerns, many of which focus on certain grades, finishes or coatings. The Company's competitors in the conventional strip market include Steel Technologies, Inc., Worthington Industries and Gibraltar Steel Corporation, each of which may have greater financial and other resources than the Company. Imported processed steel from Japan and Europe also competes with the Company's strip steel products.
Compliance With Environmental Regulations ----------------------------------------- The Company's steel processing facilities are subject to many federal, state, provincial and local requirements relating to the protection of the environment, and the Company has made, and will continue to make, expenditures to comply with such provisions. The Company believes that its facilities are being operated in material compliance with these laws and regulations and does not believe that future compliance with such existing laws and regulations will have a material adverse effect on its results of operations or financial condition. Capital expenditures and expenses attributable to environmental control compliance were approximately $950,000 in fiscal 1997, and are forecast to be approximately $500,000 in fiscal 1998 and $600,000 in fiscal 1999.
The Company has retained the services of an environmental consultant who continuously reviews the Company's operations to insure compliance with environmental laws and regulations. While the Company's facilities are located on old industrial sites, and although some contamination has
been discovered, based upon studies and reports conducted by the Company's consultants, the Company believes it is unlikely that any of the sites will require the Company to incur material remediation costs.
Employees --------- As of March 31, 1997, the Company employed a total of 863 people, consisting of 307 salaried, 426 union, hourly and 130 non-union, hourly employees. The Company is a party to six collective bargaining agreements at its different facilities. The Company believes its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth the location, square footage and use of each of the Company's principal production facilities.
Changes in product mix result in significant variations in productive capacity of the Company's strip facilities in any measurable period. The Company estimates that its strip facilities operated at an estimated 84% of productive capacity in fiscal 1997, and the Company's slitting equipment at its steel service centers operated at approximately 79% of productive capacity in fiscal 1997.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, none of such claims, suits, or complaints is material, and in the aggregate, they will not have a material adverse effect on the Company's results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the shareholders in the period in the fourth quarter of the fiscal year ended March 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, positions held and ages of all the executive officers of the Company:
Executive officers are elected by the Board of Directors and serve at its discretion.
JAMES R. HARPSTER has served as President and Chief Executive Officer of the Company since 1984, and has served as a Director since 1982. Prior to assuming his current position, he was Vice President of Sales for the Company since its incorporation. He has twenty-eight years' experience in the steel industry, having begun his career in 1969 with Jones & Laughlin Steel Corporation. During his career with Jones & Laughlin, Mr. Harpster held various management positions in the areas of product quality and plant operations. He graduated from Lehigh University in 1969 with a B.S. in Metallurgy and from the University of Akron in 1975 with an MBA. He is a member and past president of the Association of Cold-Rolled Strip Steel Producers and a member of the Department of Commerce's Industry Sector Advisory Committee on Ferrous Ores and Metals for Trade Policy Matters.
R. QUINTUS ANDERSON has served as Chairman of the Board of Directors of the Company since its incorporation in 1980. Mr. Anderson and Aarque Capital Corporation, a corporation controlled by Mr. Anderson, together own approximately 51.3% of the shares of Common Stock of the Company. Aarque Capital Corporation is one of a group of privately-held corporations owned or controlled by Mr. Anderson, known as The Aarque Companies, which are in businesses unrelated to the business of the Company. Mr. Anderson holds a Bachelor of Engineering degree from Princeton University and was granted a post-graduate fellowship at the Sloane School of Industrial Management at the Massachusetts Institute of Technology. Since his discharge as a lieutenant from the U.S. Navy in 1957, Mr. Anderson has managed, operated and acquired businesses related principally to the metal fabrication industry. Mr. Anderson is a trustee of Northwestern Mutual Life Insurance Company and a director of Oneida Ltd.
GORDON A. WILBER has served as Vice President since 1984, and Executive Vice President of the Company since 1987. Mr. Wilber was appointed Chief Operating Officer and was elected a Director
in 1994. Prior to 1987, he held the positions of Vice President of Operations, Manager of Operations and Technical Director of the Company. Mr. Wilber began his career as a Research Metallurgist at the Graham Laboratories of Jones & Laughlin in 1968. Following a series of technical positions in the basic and specialty flat-rolled divisions of Jones & Laughlin, he became Manager of Quality Control for Jones & Laughlin's specialty strip plants in 1977. He has a Master's Degree in Metallurgical Engineering from the University of Illinois and a Ph.D. from Rensselaer Polytechnic Institute. He is a member of the Board of Directors and Vice President of the Association of Cold Rolled Strip Steel Producers.
ALLEN R. MORROW serves as Vice President, Chief Administrative Officer and Treasurer of the Company. Prior to his appointment as Chief Administrative Officer in April 1996, he had served as Chief Financial Officer of the Company since its incorporation in 1980. He was elected Vice President and Treasurer in 1994. Prior thereto, he held various management positions with LTV and Jones & Laughlin and, immediately preceding his employment with the Company, was Division Controller, Strip Plants of Jones & Laughlin. He began his career with Coopers & Lybrand and is a Certified Public Accountant. Mr. Morrow graduated from Geneva College in 1971 with a B.S. Bus. Ad. in Accounting and from the University of Pittsburgh in 1978 with an MBA.
JOHN E. SLOE joined the Company on April 1, 1996 as Vice President, Chief Financial Officer. From 1993 to 1996, he served as a turnaround management consultant with Sloe & Associates, whereby he independently assisted manufacturing companies improve productivity, efficiencies and profitability. From 1990 to 1993, he served as President and Chief Executive Officer of Denman Tire Corporation, a $45 million specialty tire manufacturer. He joined Denman Tire as Vice President & Chief Financial Officer in 1987. Mr. Sloe began his career in 1977 with Eaton Corporation as an accountant and rapidly progressed to Division Controller. He is a Certified Public Accountant and graduate of Cleveland State University with a BBA in Accounting in 1977 and in 1983 earned an MBA degree.
ROBERT R. ALBERT has served as Vice President - Commercial of the Company since 1987 and has over 45 years experience in the steel industry. Immediately prior to joining the Company, he served as Vice President-Sales for Sharon Steel Corporation and has held various sales and marketing positions at both the Empire Detroit Division of Cyclops Corporation and Bethlehem Steel Corporation. He is a 1952 graduate of Bucknell University with a B.S. degree in Commerce and Finance.
JACK W. WATSON has served as Vice President, General Manager, Canada since 1991. Prior to 1991 he held positions of Manager Operations, Manager Sales/Marketing and Quality Control at the Company. Mr. Watson began his career at British Steel Corporation as a Research Metallurgist. In 1967 he joined Dofasco Inc. holding various technical positions before joining the Company's predecessor company, Stanley Steel, in 1980. He is a graduate Metallurgist from Tees-Side Polytechnic, England. He is a Professional Engineer and a member of Association of Professional Engineers of Ontario.
HEIDI A. NAULEAU is Secretary of the Company and a Director, having been elected to those positions in 1993. Mrs. Nauleau is Chairman of The Aarque Companies, having been elected to that position in February 1996. Mrs. Nauleau joined The Aarque Companies in 1981 as Assistant to the Chairman and was appointed Vice President/Europe in 1984. From 1987 until 1992, she was manager of a subsidiary of Aarque Steel Corporation. Prior to joining The Aarque Companies in 1981, from 1979 until 1981, Mrs. Nauleau served as a research associate for Berndtsen International Ltd. Mrs. Nauleau is the daughter of R. Quintus Anderson. She is a graduate of the University of Pennsylvania.
PART II -------
ITEM 5.
ITEM 5. MARKET AND DIVIDEND INFORMATION
As of June 13, 1997, there were 7,162,250 shares of common stock outstanding that were held by 120 shareholders of record. The Company has declared no dividends in either of the two previous fiscal years. The Company's ability to pay dividends in the future is limited by the terms of its credit facilities so as not to exceed twenty-five percent of after tax income on a cumulative basis exclusive of certain accounting adjustments, commencing as of March 31, 1994, and by the requirement that no dividend shall result in a default under the credit facility. Additional information regarding the principal market for the Company's common stock and market prices for the Company's common stock is set forth below.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information with respect to the results of operations of the Company for fiscal 1997, 1996 and 1995 and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Results of Operations - --------------------- The following table presents the Company's results of operations expressed as a percentage of net sales:
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $58.9 million, or 25.9% to $286.0 million. The increase is mainly attributable to the addition to the Company's consolidated financial statements of sales of $43.5 million at Direct Steel, Inc., which became a wholly owned subsidiary of the Company in June 1996 and sales of $1.3 million attributable to the operation of the New Hamilton Assets at the processing center acquired on November 1, 1996. Excluding the effect of these transactions, the Company's sales increased $14.1 million, or 6.2%. Volume of tons shipped was up 12.9% accounting for a $29.3 million sales increase, offset by an aggregate decrease in sales dollars per ton of $15.2 million due to a decline in average selling price, resulting from a mix shift to lower revenue products.
Gross profit for fiscal 1997 was $23.9 million, or 8.3% of net sales, up $2.5 million or 11.6% over fiscal 1996. As a percent of sales, it was down from 9.4% in the prior year reflecting several factors. Startup costs associated with the new Ottawa facility decreased the margins by approximately $1.6 million for fiscal 1997, approximately $700,000 of which affected the fourth fiscal quarter. Additionally, a fourth quarter charge related to the cessation of brokerage activities reduced gross profit by approximately $880,000 for the year. With the consolidation of Direct Steel, a greater proportion of sales activity was weighted by a lower margin mix of business. The effect of higher raw material costs, particularly in the fourth fiscal quarter, also reduced margins.
Selling, general and administrative (SG&A) expenses of $15.7 million in fiscal 1997 were $2.1 million over the fiscal 1996 level. As a percentage of sales, expenses decreased to 5.4% from 6.0%. Increased expenses were attributable principally to incremental activities associated with Direct Steel and the New Hamilton Asset acquisitions, while the lower percentage level reflected the comparison of the expense level on the higher sales activity level. SG&A expenses net of acquisitions increased $633,000, reflecting higher expenses associated with normal salary increases and the Company's general growth plan.
Income from equity investment at Direct Steel was $28,000 for fiscal 1997. Subsequent to June 18, 1996, the operations were consolidated with the Company's and no longer reported as income from equity investment.
Interest expense was $3.1 million, an increase of $197,000, but 1.1% of net sales in fiscal 1997, down from 1.3% of net sales in fiscal 1996. Lower interest expense through the third quarter of fiscal 1997 reflected lower borrowing levels associated with decreased inventory levels resulting from improved inventory management and lower rates. These favorable effects more than offset the increased interest costs attributable to acquisition activity. The consolidation of Direct Steel increased interest expense by $592,000 from fiscal 1996 levels. In the fourth quarter of fiscal 1997, the capitalization of interest costs associated with the Ottawa expansion project ended and these financing costs began to be reflected as interest expense, impacting the year to year comparison by $499,000.
Income taxes for fiscal 1997 were $1.7 million or .6% of net sales compared to $1.7 million in fiscal 1996 or .7% of net sales. The effective tax rates computed on income exclusive of income (loss) from equity investment were down slightly in the current year at 33.8% versus 34.8% in the prior fiscal year.
As a result of the factors discussed above, net income for fiscal 1997 was $3.4 million or 1.2% of net sales compared to $3.1 million or 1.4% of net sales in fiscal 1996. The Company expects that net income for fiscal 1998 will continue to reflect operation of the expanded Ottawa facility at below break-even levels through the first half of the fiscal year, with a positive contribution to net income by the second half of the fiscal year.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales decreased $8.0 million, or 3.4%, to $227.1 million. This was the result of lower shipment levels as tonnage decreased 4.9% or an $11.4 million decrease in revenue. Sales of almost all the Company's products decreased over the course of the year as customers adjusted their inventory levels to bring them in line with curtailed production schedules reflecting declines in economic activity.
Gross profit decreased by $5.3 million, or 20.0%, to $21.4 million. Gross profit as a percent of sales decreased to 9.4% compared to 11.4% in the prior year. The decline is attributable to two factors. First, lower volume levels required that fixed costs be absorbed over lower revenues, resulting in decreased margins generally. Additionally, downward pressure on steel prices, particularly in the Company's Canadian operations, created lower margins as the market adjusted to lower steel prices in advance of these lower prices being reflected in the Company's inventories. Somewhat countering the pressure from this high-cost inventory was the liquidation of inventories accounted for on the LIFO basis in the United States, which generated approximately $583,000 of pre-tax income over the course of the fiscal year.
Selling, general and administrative (SG&A) expenses decreased $128,000 to $13.6 million, though the percent of sales measure increased to 6.0% from 5.9% due to lower revenue levels. The decrease in spending reflected lower sales commission and lower expenses for compensation plans related to the Company's financial results, somewhat offset by staffing increases and normal salary cost increases.
Income from equity investment was a loss of $98,000 for the year, a decrease of $714,000 from prior year's income of $616,000. This decline in earnings principally reflected the effect of downward pressure on steel prices as discussed above.
Interest expense was $2.9 million, or 1.3% of net sales for fiscal 1996, a decrease of $38,000 from the previous year. Although borrowing levels were higher in the current year, $301,000 of the interest cost on this higher level of borrowing was capitalized as part of the cost of the Ottawa expansion project.
Income taxes decreased $2.0 million primarily as a result of the decrease in income before taxes. The effective tax rates computed on income exclusive of income (loss) from equity investment were down slightly in the current year at 34.8% versus 37.0% in the prior year.
As a result of the factors discussed above, net income for fiscal 1996 was $3.1 million or 1.4% of net sales.
Liquidity and Capital Resources - -------------------------------
The Company requires capital primarily to fund working capital needs, capital projects, including the acquisition, expansion and improvement of facilities, machinery and equipment and to acquire complementary steel-related businesses consistent with the Company's growth strategy to increase its size and profitability. The Company met its capital requirements in fiscal 1997 through cash flow from operations and from borrowings under credit facilities.
During fiscal 1997, the Company generated cash flow from operating activities of $7.4 million. Contributing to cash inflows in the current year were net income, non-cash depreciation and amortization, and a reduction in inventory levels which resulted from improved inventory management. A decrease in accounts payable and a modest increase in receivables offset the inventory reduction.
Cash flows used for investing activities in fiscal 1997 consisted of $14.3 million of capital spending of which $12.4 million was in connection with the Ottawa expansion project. In addition, the acquisition of the New Hamilton Assets for $5.9 million in November 1996, together with the acquisition of the remaining outstanding stock of Direct Steel, Inc. in June 1996 for $2.6 million, accounted for total cash used for acquisitions of $8.5 million.
Cash flows from financing activities provided $13.9 million for fiscal 1997. Proceeds of $21.8 million from a new term loan in December 1996 were used to fund the Ottawa expansion project and reduce bank borrowings under the Company's primary line of credit. Additional term loan proceeds were derived from a refinancing agreement entered into by Direct Steel. The Company was in compliance with covenant requirements under all of its credit facilities as of March 31, 1997.
The Company's various bank lending arrangements provide a maximum borrowing availability of approximately $92.3 million of which $61.5 was outstanding at March 31, 1997. The Company renegotiated its lines of credit to extend their expiration dates and lower interest rates, and entered into a term loan agreement to fund the Ottawa expansion project. Management expects that cash generated from operating activities and its borrowing capacity will be sufficient to meet planned capital expenditures and other cash requirements for the next twelve months. As the Company pursues its growth strategy of expanding through core business acquisitions, capital requirements may change and the Company may from time to time seek additional financing.
Seasonality - -----------
The Company has in the past experienced lower levels of sales in the months of July, November, and December, due primarily to holiday periods and customer plant shutdowns.
Inflation/Impact of Changing Prices - -----------------------------------
The Company's largest component of cost of sales is raw material costs. These costs can vary over time due to changes in steel pricing which the Company typically passes on to customers. The Company does not believe that inflation has had a significant impact on the results of its operations over the periods presented.
Environmental Matters - ---------------------
The Company's facilities are subject to numerous federal, state, provincial and local regulations related to environmental protection and compliance with such regulations is a factor in the Company's operations. The Company has made, and intends to make, expenditures necessary to comply with such regulations. Under existing laws and regulations, the Company believes that compliance will not have a material adverse effect on its results of operations or financial condition.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Cold Metal Products, Inc. Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Cold Metal Products, Inc. and Subsidiary (the "Company") as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cold Metal Products, Inc. and Subsidiary as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP - ------------------------- Cleveland, Ohio May 8, 1997
CONSOLIDATED BALANCE SHEETS COLD METAL PRODUCTS, INC. AND SUBSIDIARY
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS COLD METAL PRODUCTS, INC. AND SUBSIDIARY
See notes to consolidated financial statements
See notes to consolidated financial statements
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COLD METAL PRODUCTS, INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION, BUSINESS DESCRIPTION AND ACCOUNTING POLICIES
Consolidation and Presentation -- The consolidated financial statements include the accounts of the Company and its subsidiary, Cold Metal Products Company, Ltd., a Canadian Company. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications were made to prior years' amounts to conform with the current year presentation.
Business Description -- The Company is in the specialty strip steel industry and processes specialty and conventional strip steel, and premium and standard sheet steel, to meet the critical requirements of precision parts manufacturers. Through cold rolling, annealing, normalizing, edge-conditioning, oscillate-winding, slitting, and cutting-to-length, the Company provides value-added products to manufacturers in the automotive, construction, cutting tools, consumer goods, and industrial goods markets. The Company also supplies specialty steel distributors. Its customers are located predominately in the U.S. and Canada.
During the fiscal 1997, 1996, and 1995, approximately 41%, 37%, and 37% of the Company's sales, respectively, and 43%, and 26% of accounts receivable at March 31, 1997 and 1996, respectively, were with companies in the automotive industry. The balance of the Company's net sales are approximately equally divided among the other markets served. During fiscal 1997, 1996, and 1995, the Company's ten largest customers accounted for 31%, 35% and 34% of the Company's net sales. No single customer accounted for 10% or more of sales in any of the years. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral.
Production facilities are located in Youngstown and Ottawa, Ohio; Indianapolis, Indiana; New Britain and Waterbury, Connecticut; Hamilton and Concord Ontario; and Pointe Claire, Quebec, Canada.
Results of Foreign Operations -- Net sales, operating income and net income, respectively, of the Company's Canadian subsidiary were $155.3 million, $5.2 million and $2.5 million in fiscal 1997; $97.6 million, $2.0 million and $634,000 in fiscal 1996; and $95.9 million, $5.4 million and $3.1 million in fiscal 1995. Identifiable assets of the Canadian subsidiary were $71.2 million and $53.7 million at March 31, 1997 and 1996, respectively. The remainder of the Company's consolidated net sales, operating income, net income and assets are related to operations in the United States.
Both United States and Canadian operations sell to customers located predominately in the United States and Canada. Of total net sales, approximately 55% was to customers in the United States, 44% to customers in Canada, and less than 1% to customers in other countries.
Inventories -- Inventories are valued at the lower of cost or market. Cost of domestic inventories is determined under the last-in, first-out (LIFO) method; cost of inventories of the Canadian subsidiary is determined on the first-in, first-out (FIFO) method. Domestic inventories represent approximately 49% and 57% of total consolidated inventories at March 31, 1997 and 1996, respectively. Under the FIFO method of inventory pricing, domestic inventories would have been approximately $2,622,000 and $2,218,000 higher at March 31, 1997 and 1996, respectively.
In fiscal 1997 and 1996, inventory quantities were reduced resulting in a liquidation of certain LIFO inventory layers carried at costs which were different than the cost of current purchases. The effect of the LIFO liquidation in fiscal 1997 and 1996 increased income before taxes by $199,000 and $583,000, respectively, and net income by $128,770 and $376,000, respectively.
Property, Plant, and Equipment -- Property, plant, and equipment are stated at cost. The Company provides for depreciation over the estimated useful lives of the assets on the straight-line method for financial statement
reporting and an accelerated method for income tax reporting purposes. Estimated useful lives range from five to thirty years.
Interest is capitalized in connection with the construction of qualified assets. Under this policy, interest of $722,000 and $301,000 was capitalized in fiscal 1997 and 1996, respectively.
Goodwill -- Goodwill is amortized using the straight-line method over a period of forty years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted operating profits.
Revenue Recognition -- Revenue is recognized when products are shipped to customers. Sales returns and allowances are treated as a reduction to sales and are provided for based on historical experience and current estimates.
Start-up Costs -- Start-up costs are expensed as incurred.
Stock Based Compensation -- The Company accounts for its stock option plans using the intrinsic value accounting method, measured as the difference between the option exercise price and the market value of the stock at the date of the grant. Accordingly, no compensation expense has been recognized for its stock-based compensation plans in the accompanying financial statements as all option exercise prices were equal to market price on the date of grant.
Earnings Per Share -- Primary earnings per common share have been computed based upon the average weighted outstanding shares and have not been adjusted for the effect of stock options as the dilution would be less than 3%. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect SFAS No. 128 to have a material effect on the computation of earnings per share.
Financial Instruments -- The Company has various financial instruments including cash, receivables, short-term and long-term debt, and miscellaneous other assets. The Company has determined that the estimated fair value of its financial instruments approximates carrying value.
Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions pending completion of related events. These estimates and assumptions affect the amounts reported at the date of the financial statements for assets, liabilities, revenues and expenses and the disclosure of contingencies. Actual results could differ from these estimates.
2. OTHER BALANCE SHEET INFORMATION
3. ACQUISITIONS
Effective June 18, 1996, Cold Metal Products, Ltd. acquired the remaining outstanding shares of its 50% equity affiliate, Direct Steel, Inc., ("Direct Steel"), for approximately $2.6 million. Direct Steel operates a steel service center located in Concord, Ontario, Canada. The acquisition has been accounted for as a purchase and, accordingly, assets and liabilities were recorded at estimated fair values. The allocation of purchase price resulted in goodwill of approximately $1.9 million, which is being amortized over 40 years.
On November 1, 1996, the Cold Metal Products, Ltd. acquired real property and steel processing equipment at Hamilton, Ontario (the "New Hamilton Assets") for approximately $5.9 million including acquisition costs. The purchase was completed utilizing the Company's existing banking facilities and short-term seller financing. The transaction was accounted for as a purchase and assets and liabilities were recorded at estimated fair values.
The following unaudited pro forma information has been derived from the Company's income statement for fiscal 1997 and 1996 and adjusts such information to give effect to the acquisitions as if the acquisitions had occurred on April 1, 1995. The pro forma information is presented for informational purposes only and does not purport to be indicative of the results of operations that actually would have been achieved if the acquisitions had occurred on April 1, 1995, or which may be achieved in the future.
4. DEBT
The Company has a committed credit facility which provides availability based on a percentage of accounts receivable, inventory, and an amortizing term loan. In May 1997, the Company amended its credit facility agreement to extend the life of the agreement and provide total borrowing availability of $55 million. The facility provides for borrowing at Libor rates plus one-half percent. The agreement extends through October 2, 2000, and contains certain financial and other covenants, including restrictions on payment of dividends, with which the Company was in compliance at March 31, 1997. Under the committed facility, the Company has determined that balances in excess of $27 million would be subject to repayment with funds generated from operating activities during the business cycle. As such, these funds are reflected as short-term in nature. The weighted average interest rate at both March 31, 1997 and 1996 was 7.4%. The facility is collateralized by accounts receivable, inventory, common stock of the Canadian subsidiary, and property, plant and equipment. As of March 31, 1997, the credit line supported letters of credit in the amount of $507,000.
In November 1996, the discretionary financing agreement between Direct Steel, Inc. and its lender was amended to provide for a revolving line of credit of up to approximately $14.5 million, based on accounts receivable and inventory formulas, with interest at Canadian prime plus 3/4 of 1%, and a term loan of approximately $1.3 million amortized over three years, subject to certain termination rights of the lender, with interest at Canadian prime plus 1%. Indebtedness under the agreement is secured by the accounts receivable, inventory and fixed assets of Direct Steel, Inc. and contains certain financial and other covenants with which Direct Steel, Inc. was in compliance at March 31, 1997. At March 31, 1997, revolving credit permitted under applicable formulas was $11.6 million, of which $10.6 million was outstanding, and the balance of the term note was $1.3 million. Aggregate maturities of the term loan over the next three fiscal years are as follows: 1998 - $193,000; 1999 - $193,000; and 2000 - $900,000. The weighted average interest rate at March 31, 1997 was 5.5%.
In December 1996, the Company borrowed $21.8 million under an eight and one-half year term loan at a fixed rate of 8.8% secured by the fixed assets of its expanded Ottawa, Ohio facility. Proceeds of the loan were used to pay-down debt under the Company's primary lending facility. The term loan agreement contains certain financial and other covenants with which the Company was in compliance at March 31, 1997. At March 31, 1997, approximately $21.5 million of the term loan was outstanding. Aggregate maturities of the term loan for the next five fiscal years are as follows: 1998 - $1.3 million; 1999 - $1.4 million; 2000 - $1.5 million; 2001 - $1.6 million; and 2002 - $1.8 million.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (ii) operating loss and tax credit carryforwards. Components of the Company's deferred tax liabilities and assets are as follows:
The provision for income taxes includes:
Reconciliations of the U.S. federal statutory tax rate to the effective tax rate are as follows:
6. RETIREMENT BENEFIT PLANS
Substantially all of the Company's salaried and hourly employees are covered by noncontributory retirement benefit plans. These plans generally provide benefits based upon a formula using fiscal average earnings or at a stated amount for each year of service. The plans' assets are principally invested by outside asset managers in marketable debt and equity securities. The company's funding policy is to make the annual contributions required by applicable regulations.
Domestic pension expense includes the following components:
Accrued domestic pension liability in the balance sheets is as follows:
Assumptions used in developing the domestic pension information were:
Domestic employees are eligible to participate in savings plans, which include a 401(k) feature. The Company matches employee contributions 50% to 100%, in ranges of 3% to 6% of basic earnings. Employees vest in matching contributions after attaining three years of service. Company matching contributions were $556,000, $430,000 and $390,000 for fiscal 1997, 1996 and 1995, respectively.
The Canadian subsidiary has a defined contribution pension plan covering substantially all of its salaried employees. The Company's contributions to the defined contribution pension plan include a noncontributory portion, which is a stated percentage of salary, and a contributory portion, in which the Company matches the employee's contribution 100% up to 5% of their salary. The Canadian subsidiary also has a defined benefit plan for its hourly employees.
Canadian pension expense includes the following components:
Accrued Canadian pension liability in the balance sheets is as follows:
The Canadian pension information was developed using a discount rate and a long term rate of investment return of 8% in fiscal 1997 and 1996.
7. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSION
Net postretirement benefit cost consisted of the following components:
The Company's postretirement benefit plans are not funded. The status of the plans' accumulated postretirement benefit obligation is as follows:
In fiscal 1994, the Company revised its agreement with the union at one of its plants to reduce the benefits to be in line with those at its other U.S. locations. Additionally, portions of the retired group exercised an irrevocable option to change to a comprehensive medical plan with capped employer contribution. The effect of these plan amendments was to reduce the total actuarial determined obligation by approximately $4.3 million. These amounts have been deferred and are being recognized as a reduction of the net postretirement benefit cost over eight years.
The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation as of March 31, 1997 was 10.5% for pre-age 65 payments (8.5% for post-age 65 payments) decreasing linearly each successive year until it reaches 5.5% in 2007 for pre-age 65 payments and 2003 for post-age 65 payments, after which it remains constant. A one percentage-point increase in assumed healthcare cost trend rate for each year would increase the accumulated postretirement benefit obligation and net postretirement benefit cost by approximately 2% and 12%, respectively. The assumed discount rate as of March 31, 1997 and 1996, used in determining the accumulated postretirement benefit obligation was 8.25% and 8.00%, respectively.
8. MANAGEMENT INCENTIVE PROGRAMS
The Company has a discretionary deferred compensation plan for certain key employees. The Company's policy is to expense and fund to a trust fund, annually, amounts for services rendered, $116,000, $141,000 and $256,000 in fiscal 1997, 1996, and 1995, respectively. The amounts vest 100%, five years from the grant date contingent upon continued employment or attainment of a normal retirement.
The Company has two programs that provide for the grant of incentive awards including stock options or restricted stock to officers, key employees, and non-employee directors. In 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has not changed its method of accounting for stock-based compensation. Pro forma compensation costs for options granted in fiscal
1997 and 1996 determined under the requirements of SFAS No. 123 resulted in an immaterial reduction of net income and earnings per share for each year.
Effective January 27, 1994, The Company's Board of Directors approved the officer and key employee stock option program. Under the program, stock options granted may be either options intended to qualify for federal income tax purposes as "incentive stock options" or options not qualifying for favorable tax treatment, "nonqualified stock options." In fiscal 1996, the shareholders approved an increase in the total number shares of common stock issuable under the program to 715,350 shares. The stock options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date they are granted. Details of stock options under the program are as follows:
The Company's Non-Employee Directors' Incentive Plan, which was adopted on March 3, 1994 and amended by the shareholders on July 20, 1996, provides for the issuance of shares to Directors (i) on a deferred basis, in lieu of payment of annual retainer fees and (ii) through options granted at the beginning of a director's terms or, on a discretionary basis, thereafter. The Plan reserves for issuance 60,000 shares for deferral elections and 100,000 shares for the granting of options. At the beginning of his or her term, each director is granted an option to purchase 10,000 shares at a price equal to the market price on the date of the grant, exercisable after three years or upon certain specified events, such as a sale or merger of the Company. Options grantable on a discretionary basis under the plan are exercisable no less than six months from the date of the grant. Deferral elections under the plan allow each eligible director to defer receipt of director fees in cash or common stock until a specified period after his or her resignation or certain other events, such as a sale or merger of the Company. Amounts deferred under this election were 5,581 shares in fiscal 1997 and 2,783 shares in fiscal 1996. Details of stock options under the plan are as follows:
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and various equipment under noncancelable leases expiring through February 2002. The future minimum obligations under noncancelable operating leases in effect at March 31, 1997 are: $696,000 in 1998, $551,000 in 1999, $458,000 in 2000, $429,000 in 2001, and $318,000 thereafter. Total rental expense for operating leases was $914,000, $855,000, and $560,000 in fiscal 1997, 1996, and 1995, respectively.
Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, none of such claims, suits or complaints is material and in the aggregate they will not have a material adverse effect on the Company's results of operations or financial condition.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data.
SCHEDULE II
COLD METAL PRODUCTS, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) ================================================================================
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information reported in Part I of this Form 10-K under the caption "Executive Officers of the Registrant," the information on pages 2 and 3 of the Proxy Statement under the heading "Election of Directors" and on page 9 of the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation set forth in the Proxy Statement on pages 5 through 6 under the heading "Executive Compensation," on pages 6 through 8 under the heading "Human Resources Committee Report on Executive Compensation," on page 8 under the heading "Performance Graph," as well as the information on pages 3 through 4 under the heading "Compensation of Directors," is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management set forth in the Proxy Statement on page 9 under the heading "Security Ownership of Certain Beneficial Owners and Management," is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Form 10-K.
1. Consolidated Financial Statements ---------------------------------
Included under Item 8 of this report: Opinion of Independent Public Accountants.
Consolidated Balance Sheets, March 31, 1997 and 1996
Consolidated Statement of Operations for the each of the three years in the period ended March 31, 1997. Consolidated Statement of Shareholders' Equity for each of the three years in the period ended March 31, 1997. Notes to Consolidated Financial Statement for each of the three years in the period ended March 31, 1997.
2. Supplemental Schedules ----------------------
Included under Item 8 of this report:
Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves
All other Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits --------
(b) Reports on Form 8-K
The Company filed a Current Report of From 8-K on July 3, 1996, and Form 8K-A amendment 1 dated August 27, 1996, and amendment 2 dated September 27, 1996 to report its purchase of the remaining outstanding shares of stock of Direct Steel, Inc.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibits 3 (i)(a)-(b), (10)(c)-(g), (10)(i), (10)(m), and (21) are incorporated herein by reference to the Company's Registration Statement on Form S-1, which was previously filed and became effective on March 21, 1994 at 4:00 p.m. (Commission file No. 33-74986.) Exhibits (3)(ii), and (10)(j)-(l), are incorporated herein by reference to the Company's Annual Report on Form 10-K (Commission file No. 1- 12870) for the fiscal year ended March 31, 1994. Exhibit (10)(a) is incorporated herein by reference to the Company's Report on Form 10-Q (Commission file No. 1-12870) for the fiscal quarter ended September 30, 1994. Exhibits 4, and (10)(o), are incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995. Exhibit (10)(b) is incorporated herein by reference to the Company's Report on Form 10-Q for the fiscal quarter ended September 30, 1995. Exhibits (10)(h) and (10)(n) are incorporated herein by reference to the Company's 1995 Proxy Statement filed on June 22, 1995. Exhibits (10)(p)-(s) are incorporated herein by reference to the
Company's Report on Form 10-Q (Commissions file No. 1-12870) for the fiscal quarter ended December 31, 1996. The remaining exhibits are contained herein.
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.
COLD METAL PRODUCTS, INC.
June 23, 1997 By /s/ James R. Harpster --------------------- James R. Harpster President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of June 23, 1997, by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ R. Quintus Anderson Chairman of the Board of Directors - ------------------------------- R. Quintus Anderson
/s/ James R. Harpster President, Chief Executive Officer - ------------------------------- and Director(Principal Executive James R. Harpster Officer)
/s/ Heidi A. Nauleau Director - ------------------------------- Heidi A. Nauleau
/s/ Gordon A. Wilber Director - ------------------------------- Gordon A. Wilber
/s/ Wilbur J. Berner Director - ------------------------------- Wilbur J. Berner
/s/ Claude F. Kronk Director - ------------------------------- Claude F. Kronk
/s/ Robert D. Neary Director - ------------------------------- Robert D. Neary
/s/ Edwin H. Gott, Jr. Director - ------------------------------- Edwin H. Gott, Jr.
/s/ Peter B. Sullivan Director - ------------------------------- Peter B. Sullivan
/s/ John E. Sloe Vice President, Chief Financial Officer - ------------------------------- (Principal Financial and Accounting John E. Sloe Officer)