COLD METAL PRODUCTS 10-K/FISCAL YEAR END 3-31-02
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<TYPE>10-K
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<FILENAME>l95015ae10vk.txt
<DESCRIPTION>COLD METAL PRODUCTS 10-K/FISCAL YEAR END 3-31-02
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002. COMMISSION FILE NUMBER 1-12870.
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COLD METAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 16-1144965
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 GEORGETOWN DRIVE, SUITE 301, SEWICKLEY, PENNSYLVANIA 15143
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (724) 933-3445
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Shares American Stock Exchange
Par Value $.01 Per Share
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X (excluding this report) NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Trading in the registrant's common stock on the American Stock Exchange was
suspended on July 31, 2002. The aggregate market value of the voting common
shares, $.01 par value, held by non-affiliates of the registrant as computed by
reference to the closing price on the American Stock Exchange on July 30, 2002
was $2,561,125.
THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
OUTSTANDING AS OF SEPTEMBER 30, 2002 WAS 6,402,813.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
COLD METAL PRODUCTS, INC.
FORM 10-K - FISCAL YEAR ENDED MARCH 31, 2002
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TABLE OF CONTENTS
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DESCRIPTION PAGE
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PART I Item 1 Business...................................................1
2 Properties.................................................8
3 Legal Proceedings..........................................9
4 Submission of Matters to a Vote of Security Holders........9
PART II Item 5 Market and Dividend Information...........................10
6 Selected Consolidated Financial Data......................11
7 Management's Discussion and Analysis of
Results of Operations and Financial Condition.............12
7A Quantitative and Qualitative Disclosures About
Market Risk...............................................17
8 Financial Statements and Supplementary Data...............18
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures...................43
PART III Item 10 Directors and Executive Officers of the Registrant........43
11 Executive Compensation....................................46
12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ...........53
13 Certain Relationships and Related Transactions............55
14 Controls and Procedures...................................55
PART IV Item 15 Exhibits, Financial Statement, Schedules
and Reports on Form 8-K...................................56
Signatures................................................60
PART I
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ITEM 1. BUSINESS
General
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Cold Metal Products, Inc. together with its wholly owned subsidiaries
(collectively referred to herein as the "Company") is a corporation organized in
1980 under the laws of the State of New York. On August 16, 2002, Cold Metal
Products, Inc. and its wholly owned U.S. subsidiary, Alkar Steel Corporation,
each filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). Cold Metal Products, Ltd., a wholly
owned Canadian subsidiary, was not affected by the filings. The United States
corporations continue operations as debtors-in-possession. Further information
about the bankruptcy proceedings and their effect is set forth below in this
Form 10-K. 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 in some cases from other intermediate
steel processors, for further processing 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 specialty and conventional applications, and to a lesser extent,
processed sheet steel. "Specialty" strip is highly engineered to meet customer
needs in precision parts manufacturing while "conventional" strip is supplied to
high-volume manufacturers whose purchasing criteria emphasize quality, price and
service rather than unique specifications.
Production and distribution of specialty, 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 Company operates in one industry segment.
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 and normalizing to alter the gauge
thickness and physical properties of the material to permit its use in other
manufacturing activities. The Company also performs other highly specialized
operations to strip steel, including 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 grades that are
custom-designed to meet special customer and application requirements. Product
grades include specialty, ultra-low, high and very high carbon steel, alloy, and
high strength-low alloy, as well as low and medium carbon commodity grades of
steel. The Company discontinued the full process manufacturing of stainless
steel in fiscal 2002.
The Company believes that it is one of the few flat-rolled steel
processors with a significant position in both the specialty 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.
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, high-tolerance springs and pen clips. Specialty
strip production, prior to August 15, 2002, was principally performed at the
Company's Indianapolis, Indiana, and Youngstown, Ohio, plants. Effective August
15, 2002 the Company discontinued operations at these two facilities, as more
fully discussed below in "Recent Developments." Conventional strip products are
generally used in high-volume manufacturing applications that typically have
stringent quality requirements. Customer purchasing decisions are usually based
on prices offered by processors who can meet those requirements. Conventional
strip product applications 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. Conventional strip production takes place
principally at the Company's Ottawa, Ohio and Hamilton, Ontario plants. The
Company's subsidiary, Alkar Steel Corporation ("Alkar"), located in Roseville,
Michigan, distributes principally to the automotive industry both specialty and
conventional strip products produced at the Company's facilities or purchased
from others.
At its steel service center in Pointe Claire, Quebec, the Company
produces and distributes processed sheet steel consisting primarily of
hot-rolled, cold-rolled and galvanized steel. The steel service center purchases
sheet steel from primary steel producers and adds value by slitting, cutting to
length and providing warehousing services. This processed sheet steel is
typically used in applications that do not require precision tolerances, such as
for heating ducts and wall studs principally used in the construction industry.
The principal processing techniques--cold-rolling, annealing, slitting,
oscillate-winding and finishing--and the related equipment of the Company 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. The Company's Indianpolis, Indiana and Youngstown,
Ohio facilities also utilize continuous annealing lines, which soften
the strip steel by uncoiling the strip and passing it through a long
temperature-controlled furnace to produce more uniform and
grain-normalized properties in the strip. As more fully described in
"Recent Developments" section of this Form 10-K, the Company
announced the permanent closure of these two specialty strip
production facilities. Regarding the Indianapolis facility, the
Company and the United Steelworkers of America have agreed to permit
the processing of raw materials and work- in- process presently on
hand for a period of sixty days in order to further fulfill customer
orders, and the Company intends to pursue negotiations with
appropriate parties with a view toward longer term operation of that
facility. However, there can be no assurance regarding the outcome of
any such negotiations.
- 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 finishing operations are performed by the Company, including
coating and edge-conditioning. Coating, prior to August 15, 2002, was
performed internally on an electro-galvanizing line at the Youngstown
facility and is also performed 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.
Recent Developments
-------------------
On August 16, 2002 ("Petition Date") the Cold Metal Products, Inc. and
its wholly owned subsidiary, Alkar Steel Corporation, (collectively "Debtors")
filed voluntary petitions for reorganization under Chapter 11 ("Chapter 11") of
the Federal Bankruptcy Code ("Bankruptcy Code" in the United State Bankruptcy
Court in the Northern District of Ohio, Eastern Division ("Court.") Cold Metal
Products, Ltd., a wholly owned Canadian subsidiary, was not affected by the
filings. With respect to its domestic operations, the Company is managing its
business subsequent to the Petition Date, subject to Court approval, as
debtor-in-possession. The Debtors attributed the need to reorganize to extremely
limited cash availability existing under the terms of its existing credit
facilities that made it difficult to meet its financial obligations. Conditions
leading up to this situation included nearly two years of declining market
conditions for the Company's products and the Company's inability to attain
sufficient volume at appropriate price levels to support its fixed cost
structure and cost of funds.
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence as the filing date ("pre-petition claims") are stayed ("deferred,")
absent specific Court authorization to pay such claims, while the Company
continues to manage the business as debtor-in-possession and develops a plan of
reorganization that will enable it to emerge from these proceedings. The Company
has received approval from the Court to pay or otherwise honor certain of its
pre-petition obligations, including employee wages and certain employee
benefits, as it develops its plan of reorganization.
The amount of the claims to be filed by the creditors could be
significantly different than the amount of the liabilities recorded by the
Company. The Company has many executory contracts and other agreements that
could be rejected during the Chapter 11 proceedings. Under these proceedings,
the rights of and ultimate payments to pre-petition creditors and to equity
investors may be substantially altered. This could result in claims being
liquidated in the Chapter 11 proceedings at less (possibly substantially less)
than 100% of their face value, and the equity of the Company's equity investors
being diluted or cancelled. The Company's pre-petition creditors and its equity
investors will each have a vote in the plan of reorganization. Due to material
uncertainties, it is not possible to determine the additional amount of claims
that may arise or ultimately be filed, or predict the length of time that the
Debtors will continue to operate under the protection of Chapter 11, the outcome
of the Chapter 11 proceedings in general, whether the Company will continue to
operate in its present organizational structure, or the effects of the
proceedings on the business of the Company and its subsidiaries or on the
interests of the various creditors and security holders.
As a result of the Chapter 11 filings, Events of Default, as defined in
the related debt agreements, have occurred with respect to all of the Company's
secured and undersecured debt. Subsequent to the Petition Date, the debt
acquired under the terms of the DIP financing agreement is deemed secured under
the debtor-in possession financing order of the Court and will be classified as
a current liability; the undersecured pre-petition debt will be classified as
liabilities subject to compromise.
On August 15, 2002 the Company announced the permanent closure of its
specialty strip production facilities located in Indianpolis, Indiana and
Youngstown, Ohio. This action was necessitated by the high operating cost
structure of these two facilities, particularly the Youngstown facility, and the
aforementioned market decline for the Company's products, which was more
pronounced for its specialty strip products. The closure of these two facilities
resulted in the termination of approximately 200 hourly and salaried employees.
The Company has entered into temporary agreements with the United Steelworkers
of America, which represents the interests of hourly employees at each of these
facilities, to remove finished products from these facilities for delivery to
customers. Regarding the Indianapolis facility, the Company and the United
Steelworkers of America have further agreed, as duly approved in the Chapter 11
proceedings, to permit the processing of raw materials and work- in- process
presently on hand for a period of sixty days in order to further fulfill
customer orders, and the Company intends to pursue negotiations with appropriate
parties with a view toward longer term operation of that facility. However,
there can be no assurance regarding the outcome of any such negotiations.
On June 11, 2002 the Company entered into a Strategic Alliance and
Processing Agreement with Samuel, Son & Co. Limited, a Canadian corporation
("Samuel"). Under this Agreement the Company will make certain of its facilities
available for the processing of steel owned by Samuel and will be the exclusive
processor of strip steel for Samuel in the North American market. Pursuant to
the Agreement, the Company's Hamilton, Ontario facility will be identified as
the "Samuel CMP Hamilton Strip Processing Plant," and will be used only for
processing products sold by Samuel or the Company, each of which will remain
active independently in the market for strip steel.
As part of its efforts to rationalize capacity with current market
conditions during the second half of fiscal 2001, the Company restructured its
manufacturing operations by adopting a plan to discontinue manufacturing at its
New Britain, Connecticut facility and reduce the size of its Hamilton, Ontario
facility workforce. These actions resulted in personnel reductions of
approximately 100 salaried and hourly employees.
Raw Materials
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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 to a lesser extent,
from other intermediate steel processors. The Company has
developed cooperative relationships with its principal suppliers, primarily
domestic integrated steel producers, that the Company believes will enable it to
assure itself of the availability of steel. The Company has also developed
supply relationships with several primary steel producers outside of the U.S.
and Canada. Over the last three fiscal years, less than 10% of the Company's
steel requirements were purchased from suppliers outside North America. 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, affords some protection in view of limited steel
supply in North America.
Subsequent to the end of the fiscal year 2002, the Company has been
hampered in its ability to maintain adequate levels of inventory in connection
with declining liquidity and uncertainty about its ability to remain
economically viable as a result of events leading up to the Chapter 11 filings
previously discussed.
Raw materials comprise the Company's largest component of costs of
sales. These costs can vary over time, often significantly, due to changes in
steel pricing that may occur for a number of reasons. Factors that significantly
influence steel costs include available industry capacity, general economic
conditions, both domestically and on a worldwide basis, and government trade
policies. The Company attempts to pass on price changes as market conditions or
contractual pricing agreements permit. In periods of rising steel prices, the
Company's ability to pass on additional costs through the supply chain generally
lags increases in the Company's raw material costs, temporarily compressing the
Company's profit margins, while conversely, in periods of falling steel prices,
the Company's ability to acquire lower costs materials usually precedes market
price concessions to its customers, thereby temporarily increasing the Company's
profit margins.
Recent trade initiatives by the United States government implemented to
protect domestic steel producers, commonly referred to as "Section 201 tariffs,"
could have an unfavorable short-term impact on the Company's margins because the
tariffs were imposed on imported steel products that were either not produced
domestically, or were otherwise unavailable from domestic producers because
their products were not qualified as suitable for the Company's customers'
needs. Several of the Company's customers have resisted price increases
resulting from increased tariff costs. However, recent action by the government
to ease the effects of Section 201 through the granting of specific product
exemptions indicates that the adverse effects of Section 201 on the Company may
be moderated in the future, although there can be no assurance of such
moderation.
Patents and Trademarks
----------------------
The Company has no patents material to its business. With respect to
trademarks, the Company has developed and produces the UniForm(R) series of
specialty strip products and also a proprietary LaserMatte(R) finish utilizing
laser texturing technology as shown below:
Product Application
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UniForm(R) 100 Magnetic shielding and relay applications
UniForm(R) 200 Extra-deep drawn parts
UniForm(R) 300 Cut-shaped parts
UniForm(R) 500 Severely bent or stretched formed parts
UniForm(R) 700 Pre-hardened flat parts
UniForm(R) 800 High-strength parts requiring high ductility
Lasermatte(R) Laser-generated surface finish for deep drawing, friction and
bonding applications
The Company's ability to manufacture the UniForm(R) products described
above is dependent on operating its specialty strip production plants located in
Indianpolis, Indiana, and Youngstown, Ohio. As more fully described in "Recent
Developments" section of this Form 10-K, the Company has announced the permanent
closure of these specialty strip production facilities. The Company and the
United Steelworkers of America have agreed to permit temporary processing of raw
materials and work-in-process presently for a limited period at its Indianpolis
facility, and the Company intends to pursue negotiations with appropriate
parties with a view toward longer-term operation of this facility. However,
there can be no assurance regarding the outcome of any such negotiations. With
the closure of the Youngstown, Ohio facility, the Company will no longer produce
Lasermatte(R) surface finish.
Seasonality
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The Company normally experiences lower levels of net sales in the
months of July, November and December, due primarily to holiday periods and
customer plant shutdowns. In addition, under conditions presently prevailing in
the markets the Company serves, volume levels are significantly affected by
general economic conditions occurring in end-user markets, and supply/demand
imbalances that are likely to fluctuate significantly over the short term.
Working Capital Requirements
----------------------------
The Company generally maintains its inventory 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 its
inventory practices are comparable to other companies in the intermediate steel
processing industry. Subsequent to the end of the fiscal year 2002, the Company
has been hampered in its ability to maintain adequate levels of inventory in
connection with declining liquidity and uncertainty about its ability to remain
economically viable as a result of events leading up to the Chapter 11 filings
previously discussed. At this time the Company continues to work with its
customers to minimize disruptions in their supply chain.
Customers
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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, 2002, 41%
of the Company's net sales were to the automotive market. These 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 is almost equally divided among the other markets served.
During the fiscal year ended March 31, 2002, the Company sold products
to approximately 1,100 customers with the largest single customer accounting for
approximately 6% of the Company's net sales. During the fiscal year ended March
31, 2002, approximately 33% of the Company's net sales were made pursuant to
arrangements with customers that contemplate deliveries over a period of 12
months or more.
For the fiscal year ended March 31, 2002, approximately 70% of the
Company's net sales were to customers in the U.S. and 30% were to customers in
Canada. Less than 1% of the Company's net sales in each of its last three
fiscal years was derived from sales to customers outside the U.S. and Canada.
Backlog
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At March 31, 2002, the Company's backlog was approximately $41 million
compared with approximately $36 million at March 31, 2001. The increase in
backlog as of March 2002 reflected improvement in market conditions after a
protracted contraction in the Company's business. Management estimates that
substantially all of the existing backlog will be shipped during the current
fiscal year.
Competition
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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.
Imported processed steel from Japan and Europe also competes with the Company's
strip steel products, and there are indications that Chinese steel producers
will become more active in the Company's marketplace in the future.
Compliance With Environmental Regulations
-----------------------------------------
The Company's steel processing facilities are subject to 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.
The Company retains the services of an environmental consultant who
continuously reviews the Company's operations to ensure compliance with
environmental laws and regulations. While the Company's facilities are
predominantly 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 at which
it continues to conduct operations will require the Company to incur material
remediation costs.
During fiscal year 2001, the Company recognized a $.5 million charge
for anticipated environmental remediation costs related to the New Britain,
Connecticut facility closure. Subsequent to the end of its fiscal year ended
March 31, 2002, the Company announced the closure of its Indianpolis, Indiana
and Youngstown, Ohio facilities. In connection with the closure of these
facilities, although management is not aware of any material remediation
requirements, the Company may be required to incur environmental remediation
costs and the amount of such costs could be material.
Employees
---------
As of September 30, 2002, the Company employed a total of 350 people,
consisting of 142 salaried, 115 union hourly, and 93 non-union hourly employees.
The total employee count is down from 578 people as of June 30, 2001 principally
as a result of the reduction in force in connection with restructuring plans. As
a result of the strategic alliance with Samuel & Son, it is expected that the
employment levels at certain of the Company's facilities will grow moderately to
accommodate significant increase in product demand. The Company is a party to
four collective bargaining agreements at three of its manufacturing facilities
and its Quebec service center. During the year ended March 31, 2001, the Company
negotiated a contract extension through August 2005 at its Indianapolis, Indiana
facility, and in June 2001 negotiated a contract extension through August 2004
at its Youngstown, Ohio facility. During the year ended March 31, 2000 the
Company negotiated a contract extension through December 2004 at its Hamilton,
Ontario facility, and in May 2000 entered into a five year contract with the
employees of its Point Claire, Quebec service center. In connection with the
plant closures, the Company will be required to negotiate effects of the plant
shutdowns relative to the aforementioned collective bargaining agreements
covering employees at its Indianapolis, Indiana and Youngstown, Ohio facilities.
The Company believes its employee relations at currently operating facilities
are good.
ITEM 2. PROPERTIES
The following table sets forth the location, square footage and use of
each of the Company's principal production facilities as of March 31, 2002.
<TABLE>
<CAPTION>
Square Owned or
Location Footage Type of Facility Leased (1)
---------------------------------------------------------------------------------------------
<S> <C> <C>
Indianapolis, Indiana 147,000 Specialty/Conventional Strip production Owned (2)
Hamilton, Ontario 314,000 Conventional Strip production Owned
New Britain, Connecticut 290,000 Idle Owned (2)
Ottawa, Ohio 145,000 Conventional Strip production Owned
Pointe Claire, Quebec 45,000 Steel service center Owned
Roseville, Michigan 58,000 Steel service center Leased (3)
Youngstown, Ohio 430,000 Specialty Strip production Owned (2)
</TABLE>
(1) Each of the facilities owned by the Company is subject to the liens of
financial institutions providing revolving and term loan credit facilities.
(2) The Company discontinued specialty strip production at its New Britain,
Connecticut facility in November 2001 and is currently in negotiations to
sell this facility. On August 15, 2002 the Company announced the permanent
closure of its Indianpolis, Indiana and Youngstown, Ohio facilities.
(3) Leased under agreement for $300,000 per year payable to John M. Fayad,
President of the Alkar Steel Corporation. Lease term expires March 31, 2003,
subject to one three-year renewal option. Mr. Fayad owned the premises
occupied by Alkar at the time of its acquisition by the Company and the
terms of the lease were negotiated as a part of the acquisition transaction.
The Company believes that the rental rate of approximately $5.18 per square
foot net of taxes and utilities is consistent with fair market lease values
for similar facilities in the Detroit metropolitan area.
Changes in product mix result in significant variations in productive
capacity of the Company's facilities in any measurable period. The Company
estimates that its facilities operated at an estimated 57% of productive
capacity in fiscal 2002.
ITEM 3. LEGAL PROCEEDINGS
On August 16, 2002, Cold Metal Products, Inc. and its wholly-owned
subsidiary, Alkar Steel Corporation, each filed a voluntary petition for relief
under the Bankruptcy Code, with the United States Bankruptcy Court for the
Northern District of Ohio, Eastern Division, as Cases Number 02-43619 and
02-43620, respectively. Pursuant to Sections 1107 and 1108 of the Bankruptcy
Code, each petitioning corporation remains in possession of its assets and
continues to operate as a debtor-in-possession. The filings cover domestic
assets only and do not affect Cold Metal Products, Ltd., a wholly owned Canadian
subsidiary, which operates facilities in Hamilton, Ontario Canada and Montreal,
Quebec Canada.
As of March 31, 2002 no material legal proceedings were pending against
the Company. Certain claims, suits and complaints arising in the ordinary course
of the Company's 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the shareholders in
the fourth quarter of the fiscal year ended March 31, 2002.
PART II
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ITEM 5. MARKET AND DIVIDEND INFORMATION
As of September 30, 2002, there were 6,402,813 shares of common stock
outstanding that were held by 92 holders of record and 755 individual
participants in security position listings. The Company's common stock was
traded on the American Stock Exchange under the symbol CLQ. Trading in the
Company's common stock on the American Stock Exchange was suspended on July 31,
2002. Additional information regarding the principal market for the Company's
common stock and market prices, based on selling prices, for the Company's
common stock is set forth below.
MARKET PRICE RANGES
-------------------
FISCAL YEAR ENDING MARCH 31,
2002 2001
--------------------------------------------
HIGH LOW High Low
---- --- ---- ---
First Quarter $1.50 $1.15 $3.88 $2.88
Second Quarter $1.29 $0.60 $3.50 $2.38
Third Quarter $0.60 $0.24 $2.75 $1.13
Fourth Quarter $0.53 $0.25 $2.38 $1.21
The Company declared its first regular quarterly dividend of $.05 per
share on October 19, 1999 and continued to pay such dividends through October
2000. At the present time, the Company does not have the ability to pay
dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 161,266 $ 214,484 $ 208,612 $ 253,240 $ 294,019
Cost of sales (1) 150,071 201,618 182,271 239,359 270,210
------------------------------------------------------------------------
Gross profit (1) 11,195 12,866 26,341 13,881 23,809
Selling, general, and administrative expenses 14,807 17,026 14,374 17,747 16,343
Special charges 340 2,205 -- 6,636 --
------------------------------------------------------------------------
Operating (loss) income (1) (3,952) (6,365) 11,967 (10,502) 7,466
Interest expense 3,428 4,923 3,460 4,418 4,624
------------------------------------------------------------------------
(Loss) income before income taxes (1) (7,380) (11,288) 8,507 (14,920) 2,842
Income tax (benefit) expense (1) 12,384 (4,510) 3,264 (4,318) 1,156
------------------------------------------------------------------------
Net (loss) income (1) $ (19,764) $ (6,778) $ 5,243 $ (10,602) $ 1,686
========================================================================
Net (loss) earnings per share:
Basic (1) $ (3.08) $ (1.06) $ .82 $ (1.52) $ 0.24
========================================================================
Diluted (1) $ (3.08) $ (1.06) $ .81 $ (1.52) $ 0.24
========================================================================
Weighted average shares outstanding:
Basic 6,411,940 6,394,854 6,408,586 6,985,612 7,142,026
========================================================================
Diluted 6,411,940 6,394,854 6,445,141 6,985,612 7,142,026
========================================================================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets (1) $ 99,298 $ 123,692 $ 139,182 $ 123,577 $ 151,684
Working capital (deficiency) (1,2) $ (30,761) $ 36,021 $ 41,248 $ 26,497 $ 58,842
Long-term debt (2) $ -- $ 59,383 $ 52,621 $ 37,356 $ 60,859
Shareholders' equity (deficiency) (1) $ (3,891) $ 16,938 $ 28,085 $ 23,078 $ 37,012
</TABLE>
(1) Amounts for years prior to fiscal year ended March 31, 2002 have been
restated to reflect change in accounting for inventories from the last-in,
first-out (LIFO) method to the specific identification method.
(2) Amounts for fiscal year ended March 31, 2002 reflect $57,716 of amounts due
under all long-term borrowing agreements being classified as current
obligations as a result of Events of Default, as defined under such
agreements, having occurred as of such date.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis provides information with respect
to the results of operations of the Company for fiscal 2002, 2001 and 2000 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:
YEAR ENDED MARCH 31,
2002 2001 2000
-----------------------------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 93.1 94.0 87.4
-----------------------------
Gross profit 6.9 6.0 12.6
Selling, general, and administrative expenses 9.2 7.9 6.9
Special charges 0.2 1.0 --
-----------------------------
Operating (loss) income (2.5) (2.9) 5.7
Interest expense 2.1 2.3 1.7
-----------------------------
(Loss) income before income taxes (4.6) (5.2) 4.0
Income tax expense (benefit) 7.7 (2.1) 1.5
-----------------------------
Net (loss) income (12.3)% (3.1)% 2.5%
=============================
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales in fiscal 2002 of $161.3 million were $53.2 million, or 24.8%
lower than the Company's net sales of $214.5 million in fiscal 2001, reflecting
the effect of the significantly weaker market conditions throughout the 2002
fiscal year. Tons shipped decreased 17.7%, accounting for $37.9 million of
revenue decrease, while lower prices and product mix decreased sales by $15.3
million.
Gross profit in fiscal 2002 was $11.2 million, or 6.9% of net sales,
reflecting a $1.7 million decrease over fiscal 2001. The primary factors
affecting gross margins were weaker market conditions and a shift in product mix
to lower margin service center sales, and the effect of resulting lower activity
levels in relation to the Company's fixed operating cost structure, offset in
part by reductions in fixed cost levels associated with facilities
restructuring.
Selling, general and administrative costs of $14.8 million for fiscal
2002 represented 9.2% of net sales compared to $17.0 million, or 7.9% of net
sales for fiscal 2001. The overall decrease primarily reflected the lower
administrative costs associated with cost reductions at idled or scaled back
facilities.
During fiscal year 2002 the Company incurred $0.3 million of special
charges related to negotiated benefits with hourly employees at its idled New
Britain, Connecticut facility.
This compares to $2.2 million of special charges associated with plans adopted and
substantially implemented in the prior fiscal year in connection with the
shutdown of this facility and a reduction in force at the Hamilton, Ontario
facility. The special charges recognized in fiscal 2001 were comprised of a $1.3
million equipment impairment charge associated with operating assets in New
Britain and reduction in force costs of $.9 million related to the termination
of salaried and hourly employees.
Interest expense was $3.4 million, or 2.1% of net sales for fiscal 2002
as compared to $4.9 million or 2.3% of net sales for fiscal 2001. Lower expense
was primarily attributable to the substantial interest rate cuts throughout the
fiscal year and the reduction of borrowings throughout the fiscal year.
Income tax expense for fiscal 2002 was $12.4 million, or 7.7% of net
sales compared to an income tax benefit of $4.5 million, or 2.1% of net sales
for fiscal 2001. In the fourth quarter of fiscal 2002 management determined that
it was necessary to record deferred tax charges of $14.6 million, comprised of
$11.8 million increase in the deferred tax valuation allowance to reflect the
estimated realization of net deferred tax assets and $2.8 million associated
with the tax effect of a deemed dividend attributable to the operating results
of its Canadian subsidiary. In addition, the Company has discontinued
recognizing any additional net deferred tax benefits associated with current
operating losses. As a result, the Company's effective income tax rate is
substantially higher than would be expected based upon statutory tax rates.
Net (loss) for fiscal 2002 was $(19.8) million, or $(3.08) per share as
compared to $(6.8) million, or $(1.06) per share for fiscal 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales in fiscal 2001 of $214.5 million were $5.9 million, or 2.8%
higher than the Company's net sales of $208.6 million in fiscal 2000, reflecting
the effect of the Alkar acquisition offset by significantly weaker market
conditions during the second half of the 2001 fiscal year. Tons shipped
increased 4.5%, accounting for $9.4 million of revenue increase, while lower
prices and product mix decreased sales by $3.5 million. Adjusting to remove the
incremental effect of the Alkar acquisition, net sales declined $18.5 million,
with $13.4 million of the decrease associated with volume decline and $5.1
million attributable to lower priced product.
Gross profit in fiscal 2001 was $12.9 million, or 6.0% of net sales,
reflecting a $13.5 million decrease over fiscal 2000 after taking into
consideration the restatement of these amounts due to the Company's change in
accounting for inventories from the last-in, first-out (LIFO) method in fiscal
2002. The effect of this change was to reduce gross margins by increasing cost
of goods sold by $1.6 million in fiscal 2001, while cost of goods sold
decreased, and gross margins increased, $1.1 million for fiscal year 2000 as a
result of this accounting change. Other significant factors affecting gross
margins were weaker market conditions, particularly in the last two quarters of
fiscal year 2001 and the effect of resulting low activity levels in relation to
the Company's fixed operating cost structure. In addition, provisions for an
inventory valuation reserve of $1.6 million and an environmental remediation
reserve of $.5 million contributed to the gross margin decreases in the same
periods.
Selling, general and administrative costs of $17.0 million for fiscal
2001 represented 7.9% of net sales compared to $14.4 million, or 6.9% of net
sales for fiscal 2000. The increase primarily
reflected the addition of costs associated with Alkar. Lower incentive
compensation levels mostly offset incremental costs associated with increased
executive staffing levels in fiscal 2001.
Interest expense was $4.9 million, or 2.3% of net sales for fiscal 2001
as compared to $3.5 million or 1.7% of net sales for fiscal 2000. Higher expense
was primarily attributable to the additional indebtedness related to the Alkar
acquisition, as well as higher market interest rates during most of the fiscal
year.
Loss before income taxes was $(11.3) million, or (5.2)% of net sales
for fiscal 2001, compared to pre-tax income of $8.5 million, or 4.0% of net
sales for fiscal 2000. Each of the amounts has been adjusted to reflect the
effects of the accounting change for inventory described above.
Income tax (benefit) for fiscal 2001 was $(4.5) million, or (2.1)% of
net sales compared to income tax expense of $3.3 million, or 1.5% of net sales
for fiscal 2000. The effective tax rate was (40.0)% for fiscal 2001, compared to
38.4% for fiscal 2000 reflecting the recovery of certain income taxes previously
paid and adjusted upon appeal in Canada.
Net (loss) for fiscal 2001 was $(6.8) million, or $(1.06) per share as
compared to net income of $5.2 million, or $.82 per share for fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to fund working capital needs
and capital expenditures. In fiscal 2002, cash provided by operating activities
was $8.0 million, comprised of cash used to support operations of $4.0 million,
offset by working capital changes principally associated with reductions of $2.8
million accounts receivable and $7.9 million inventory, as well as a $1.5
million increase in trade credit. The accounts receivable and inventory working
capital changes reflect the overall weak market conditions experienced by the
Company throughout most of the fiscal year. Trade credit increased, in part, as
a reflection of higher material costs associated with fourth quarter purchases
as a result of supply side market strength following the idling of Acme Steel
and LTV Steel, two of the Company's more significant suppliers, together with
relatively higher purchasing levels late in the fiscal year to support a modest
recovery in business demand.
Subsequent to the end of the fiscal year, the prolonged weak market
conditions and continuing operating losses sustained by the Company
significantly impaired the Company's liquidity. This situation, combined with a
sharp tightening of steel supply, adversely affected the Company's ability to
acquire the amount of steel necessary to meet current demand for the Company's
products and substantially contributed to the Company taking action to seek
protection in under Chapter 11 of the Federal Bankruptcy Code, as more fully
described below.
Net cash used in investing activities for fiscal 2002 totaled $1.5
million of capital equipment spending compared to $5.0 million in the prior
year. In order to conserve cash resources, the Company minimized capital
spending.
Cash flows from financing activities used $6.5 million in fiscal 2002,
of which $4.5 million was used to reduce the Company's primary lending facility.
In addition, $1.9 million was used to repay term loans in accordance with stated
terms.
The Company's primary lending facility was a revolving credit and term
loan agreement that provided up to a maximum of $70 million of borrowing
availability based upon levels of eligible collateral comprised of trade
accounts receivable, inventories and fixed assets. As of March 31, 2002, $42.0
million was borrowed under the terms of this agreement, representing
substantially all of the borrowing availability. This credit agreement, as
amended, included interest at LIBOR plus 2.5% and was secured by substantially
all of the assets of the Company, except fixed assets located at the Company's
Ottawa, Ohio facility. The Company's Ottawa, Ohio assets secure a long-term
borrowing agreement ("Ottawa term loan") used to finance the expansion and
improvement of that facility's cold rolling mill. At March 31, 2002,
approximately $13.9 million was outstanding under this borrowing agreement.
At March 31, 2002, the Company was in non-compliance with certain
financial ratios pertaining to minimum net worth and financial leverage set
forth in its borrowing agreements, as well as certain other reporting
provisions. In addition, on June 30, 2002 the Company failed to pay the
regularly scheduled quarterly installment of principal and interest due under
the Ottawa term loan as a result of liquidity constraints. The Company and its
lenders were unsuccessful in negotiating amended borrowing arrangements that
would have provided sufficient liquidity to enable the Company to continue
operating and meet its financial obligations as they became due. As a result, on
August 16, 2002 the Company filed for protection under Chapter 11 of the Federal
Bankruptcy Code. In connection with this filing and with Court approval, the
Company refinanced its revolving credit and term loan facility with its existing
lender group under a debtor-in-possession financing arrangement that provides up
to $48 million of financing. This agreement is secured by the same assets that
collateralized the revolving credit and term loan facility, and bears interest
at prime + .55% for the revolving credit and prime + 1.05% for the term portion.
The Ottawa term loan is considered to be undersecured under the
debtor-in-possession financing order, and stated principal and interest payments
required under this agreement are currently being deferred.
Management expects that its debtor-in-possession financing arrangements
will be sufficient to meet planned working capital, capital expenditures and
other cash requirements until such time as it obtains approval for a plan or
reorganization. However, due to material uncertainties associated with the
outcome of the Chapter 11 proceedings in general, and the effects of such
proceedings on the business of the Company and its subsidiaries, there can be no
assurances that such plan will be approved or whether the Company will obtain
sufficient liquidity enabling it to continue to operate in its present
organizational structure.
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
customers' temporary plant shutdowns.
INFLATION/IMPACT OF CHANGING PRICES
The Company's largest component of cost of sales is raw material costs.
The Company does not believe that inflation has had a significant impact on the
results of its operations over the periods presented. In recent periods, steel
pricing has fluctuated significantly due to a variety of reasons, including,
among others, the condition of the global economy, changing domestic steel
making capacity, and government trade policies. The Company finds that its
products must be competitively priced, which can affect its ability to pass on
price increases to customers as market conditions change. Volatile market
conditions for low carbon steel has affected the pricing for the Company's
product mix even though it is weighed more heavily towards high carbon products,
creating further compression on the Company's margins. In addition, particularly
in light of the events of September 11, 2001, the Company is exposed to
significant market fluctuations of costs of insurance for various risks,
including healthcare and workers compensation coverages for employees, and
insurance coverage against risks of loss related to general property and
casualty risks.
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. In fiscal 2001, the Company incurred environmental
related costs of approximately $.8 million, including a $.5 million charge for
anticipated environmental remediation costs related to the New Britain facility
closure. Subsequent to the end of its fiscal year ended March 31, 2002, the
Company announced the closure of its Indianpolis, Indiana and Youngstown, Ohio
facilities. In connection with the closure of these facilities, although
management is not aware of any material remediation requirements, the Company
may be required to incur environmental remediation costs and the amount of such
costs could be material. Capital expenditures and expenses attributable to
ongoing environmental control compliance were approximately $125,000 in fiscal
2002, and are expected to remain at that level for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The adoption
of this standard by the Company on April 1, 2001 did not have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
that addresses financial accounting and reporting for business combinations and
prescribes that all business combinations are to be accounted for using one
method, the purchase method. This standard is required to be adopted for all
business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Statement of Financial Accounting Standards ("SFAS") No. 142
changes the accounting for goodwill and certain intangible assets from an
amortization method to an impairment only approach. Goodwill and intangibles
with indefinite lives are no longer subject to amortization, but are subject to
at least an annual assessment for impairment by applying a fair value based
test. The Company is required to implement SFAS No. 142 for its fiscal year
beginning April 1, 2002 and
plans to adopt this new accounting standard in the first quarter. It is expected
that the adoption of SFAS No. 142 will result in non-cash charge of $5.3 million
related to the unamortized goodwill associated with the acquisition of Alkar
Steel Corporation (see Note 3 to the consolidated financial statements.) This
charge will be recorded by the Company as a cumulative effect of an accounting
change upon adoption of this accounting standard in the first quarter of the
fiscal year ending March 31, 2003.
The FASB also issued Statement No. 143 "Accounting for Asset Retirement
Obligations ("SFAS 143") in June 2001. SFAS 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred, with subsequent adjustments occurring as changes to
estimates of the settlement obligation become known. A corresponding increase in
the carrying amount of the related long-lived asset is recognized and is subject
to depreciation over the remaining useful life of the asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. SFAS 143 is required to be adopted for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to
be Disposed of. SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed by sale. SFAS
144 is effective for fiscal years beginning after December 15, 2001.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS
145). SFAS 145 states that the rescission of FASB Statement No. 4 shall be
applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's major market risk exposure is in the areas of possible
fluctuations in interest rates as they relate to its variable rate debt and
Canadian dollar currency rate fluctuations as they relate to U.S. dollar debt
carried on the books of the Canadian subsidiary. The Company does not enter into
derivative financial investments for trading, speculation or other purposes. The
Company believes that its market risk exposure is not material to the Company's
financial position, liquidity or results of operations. The Company would be
sensitive to a 10% market rate change in interest under its credit agreements in
the approximate pre-tax amount of $.9 million. The Company would be sensitive to
a 10% change in the Canadian currency exchange rate in the approximate pre-tax
amount of $.4 million.
FORWARD-LOOKING INFORMATION
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "expect," "believe," anticipate," "plan" and similar
expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, general business and economic conditions,
competitive factors such as availability and pricing of steel, changes in
customer demand, work stoppages by customers, potential equipment malfunctions,
the Company's ability to develop and obtain a plan of reorganization during its
Chapter 11 proceedings or other risks and uncertainties discussed herein. The
reader should not place undue reliance on the forward-looking statements
contained in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
-----------------------------
Financial Statements
Independent Auditors' Report............................................ 19
Consolidated Balance Sheets at March 31, 2002 and 2001.................. 21
Consolidated Statements of Operations for the three years
ended March 31, 2002.................................................. 22
Consolidated Statements of Shareholders' Equity (Deficiency)
for the three years ended March 31, 2002.............................. 23
Consolidated Statements of Cash Flows for the three years
ended March 31, 2002.................................................. 24
Notes to Consolidated Financial Statements.............................. 25
Supplementary Data
Quarterly Unaudited Financial Data...................................... 40
Schedule II - Valuation and Qualifying Accounts and Reserves............ 42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Cold Metal Products
Sewickley, PA
We have audited the accompanying consolidated balance sheets of Cold Metal
Products, Inc. and Subsidiaries (the "Company") as of March 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
March 31, 2002. Our audits also included the financial statement schedules
listed in the Index at Item 14(a)(2). These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
Subsidiaries as of March 31, 2002 and 2001 and the results of their operations
and cash flows for each of the three years in the period ended March 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for inventories from the last-in,
first-out method to the specific identification method and retroactively
restated the 2001 and 2000 consolidated financial statements for the change.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company's recurring losses, limited cash availability, current liabilities in
excess of current assets, and voluntary
petitions filed on August 16, 2002 for protection under Chapter 11 of the
Federal Bankruptcy Code raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The accompanying consolidated financial statements do not include
adjustments relating to the recovery and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Cleveland, Ohio
August 16, 2002
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
Cold Metal Products, Inc. and Subsidiaries
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31,
2002 2001
-------------------------
(Restated--Note 2)
------------------
ASSETS
Cash $ 1,463 $ 1,547
Receivables 22,338 25,239
Inventories 27,220 35,147
Prepaid and other current assets 690 3,027
---------------------------
Total current assets 51,711 64,960
Property, plant and equipment - at cost 75,557 79,387
Less accumulated depreciation (38,573) (38,963)
---------------------------
Property, plant and equipment - net 36,984 40,424
Other non-current assets 10,603 18,308
---------------------------
Total assets $ 99,298 $ 123,692
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Short-term borrowings $ 57,716 $ 4,818
Accounts payable 17,193 15,756
Other current liabilities 7,563 8,365
---------------------------
Total current liabilities 82,472 28,939
Long-term debt -- 59,383
Postretirement and other benefits 20,168 18,432
Deferred income taxes 549 --
Shareholders' equity (deficiency):
Common stock, $.01 par value; 15,000,000 shares
authorized, 7,532,250 shares issued 75 75
Additional paid-in capital 25,329 25,302
Retained earnings (deficiency) (15,194) 4,570
Accumulated other comprehensive loss (8,538) (7,446)
Less treasury stock, 1,147,759 shares at cost (5,563) (5,563)
---------------------------
Total shareholders' equity (deficiency) (3,891) 16,938
---------------------------
Total liabilities and shareholders' equity
(deficiency) $ 99,298 $ 123,692
===========================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Cold Metal Products, Inc. and Subsidiaries
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
2002 2001 2000
-----------------------------------------
(Restated-Note 2)
-------------------------
Net sales $ 161,266 $ 214,484 $ 208,612
Cost of sales 150,071 201,618 182,271
----------------------------------------
Gross profit 11,195 12,866 26,341
Selling, general, and administrative
expenses 14,807 17,026 14,374
Special charges 340 2,205 --
Interest expense 3,428 4,923 3,460
----------------------------------------
(Loss) income before income taxes (7,380) (11,288) 8,507
Income tax expense (benefit) 12,384 (4,510) 3,264
----------------------------------------
Net (loss) income $ (19,764) $ (6,778) $ 5,243
========================================
Net (loss) earnings per share:
Basic $ (3.08) $ (1.06) $ 0.82
========================================
Diluted $ (3.08) $ (1.06) $ 0.81
========================================
Weighted average shares outstanding:
Basic 6,411,940 6,394,854 6,408,586
========================================
Diluted 6,411,940 6,394,854 6,445,141
========================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
Cold Metal Products, Inc. and Subsidiaries
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999, as previously $ 75 $25,360 $ 6,974 $(4,731) $(5,327) $ 22,351
reported
Effect of change in accounting for
inventory--Note 2 727 727
--------- ---------
Balance, March 31, 1999, as restated 7,701 23,078
Net income -- -- 5,243 -- -- 5,243
Foreign currency translation adjustment -- -- -- 708 -- 708
---------
Comprehensive income 5,951
Cash dividends -- -- (638) -- -- (638)
Stock compensation -- 11 -- -- -- 11
Acquisition of treasury stock -- -- -- -- (317) (317)
-----------------------------------------------------------------------------
Balance, March 31, 2000 75 25,371 12,306 (4,023) (5,644) 28,085
Net loss -- -- (6,778) -- -- (6,778)
Minimum pension liability adjustment -- -- -- (1,982) -- (1,982)
Foreign currency translation adjustment -- -- -- (1,441) -- (1,441)
---------
Comprehensive loss (10,201)
Cash dividends -- -- (958) -- -- (958)
Stock compensation -- (69) -- -- 81 12
-----------------------------------------------------------------------------
Balance, March 31, 2001 75 25,302 4,570 (7,446) (5,563) 16,938
Net loss -- -- (19,764) -- -- (19,764)
Minimum pension liability adjustment -- -- -- (915) -- (915)
Foreign currency translation adjustment -- -- -- (177) -- (177)
---------
Comprehensive loss (20,856)
Stock compensation -- 27 -- -- -- 27
-----------------------------------------------------------------------------
Balance, March 31, 2002 $ 75 $25,329 $ (15,194) $(8,538) $(5,563) $ (3,891)
=============================================================================
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cold Metal Products, Inc. and Subsidiaries
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------
2002 2001 2000
---------------------------------
(Restated -Note 2)
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (19,764) $ (6,778) $ 5,243
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Depreciation and amortization 4,284 3,823 3,429
Special charges -- 1,236 --
Foreign currency translation adjustment 63 97 --
Loss (gain) on sales of assets (47) 67 (136)
Deferred income taxes 11,430 (4,394) 2,015
Deferred directors' fees 27 12 11
---------------------------------
(4,007) (4,336) 10,562
Changes in operating assets and liabilities
excluding assets acquired and sold:
Receivables 2,816 8,043 (7,861)
Inventories 7,868 9,046 (4,887)
Prepaid and other assets 773 2,918 (598)
Accounts payable 1,494 (9,311) 4,430
Accrued expenses and other liabilities (980) (3,579) (1,034)
---------------------------------
Net cash provided by operating
activities 7,964 1,180 612
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,522) (5,028) (3,007)
Acquisition of Alkar, net of cash acquired -- (137) (13,939)
Proceeds from sale of assets (principally
Ontario service centers) 76 -- 15,330
---------------------------------
Net cash used in investing activities (1,446) (5,165) (1,616)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit and term loan
facility 115,452 170,792 162,678
Payments of revolving credit and term loan
facility (119,999) (163,990) (159,618)
Proceeds from other debt -- -- 2,075
Payments of other debt (1,937) (1,778) (1,535)
Payment of dividends -- (958) (638)
Acquisition of treasury stock -- -- (755)
---------------------------------
Net cash provided by (used in)
financing activities (6,484) 4,066 2,207
Net increase in cash 34 81 1,203
Effect of exchange rate change on cash (118) (93) (43)
Cash at beginning of period 1,547 1,559 399
---------------------------------
Cash at end of period $ 1,463 $ 1,547 $ 1,559
=================================
Supplemental Disclosure of Cash Flow
Information:
Interest paid $ 3,414 $ 4,908 $ 3,444
=================================
Income taxes (refunded) paid $ (82) $ (502) $ 156
=================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cold Metal Products, Inc. and Subsidiaries
--------------------------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND OTHER INFORMATION
INCLUDING SUBSEQUENT EVENT--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY
CODE
Consolidation--The consolidated financial statements include the
accounts of the Company and its subsidiaries, Cold Metal Products, Limited, a
Canadian Company and Alkar Steel Corporation ("Alkar"), a Michigan corporation.
All significant intercompany transactions and accounts have been eliminated.
Proceedings Under Chapter 11 of Federal Bankruptcy Code--On August 16,
2002 ("Petition Date") Cold Metal Products, Inc. and its wholly owned
subsidiary, Alkar Steel Corporation, (collectively "Debtors") filed voluntary
petitions for reorganization under Chapter 11 ("Chapter 11") of the Federal
Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court in the
Northern District of Ohio, Eastern Division ("Court.") Cold Metal Products,
Ltd., a wholly owned Canadian subsidiary, was not included in the filing.
The Debtors attributed the need to reorganize to extremely limited cash
availability under the terms of its existing credit facilities that made it
difficult to meet its financial obligations. Conditions leading up to this
situation included nearly two years of declining market conditions for the
Company's products and the Company's inability to attain sufficient volume at
appropriate price levels to support its fixed cost structure and cost of funds.
The Debtors are currently managing their affairs and operating their
business as debtors-in-possession while the Chapter 11 cases are pending. As
debtors-in-possession, the Debtors may not engage in transactions outside of the
ordinary course of business without approval, after hearing, of the Bankruptcy
Court. As part of the Chapter 11 cases, the Debtors intend to develop and
propose for confirmation pursuant to Chapter 11 a plan of reorganization that
will restructure the operations and liabilities of the Company to the extent
necessary to result in the continuing viability of the Company. A filing date
for such a plan has not been determined.
Under Chapter 11, actions by creditors to collect claims in existence
as the filing date ("pre-petition claims") are stayed ("deferred,") absent
specific Court authorization to pay such claims, while the Company continues to
manage the business as debtor-in-possession and acts to develop a plan of
reorganization for the purpose of emerging from these proceedings. The Company
received approval from the Court to pay or otherwise honor certain of its
pre-petition obligations, including but not limited to employee wages and
certain employee benefits, as it develops its plan of reorganization.
The amount of the claims to be filed by the creditors could be
significantly different than the amount of the liabilities recorded by the
Company. The Company also has many executory contracts and other agreements that
could be rejected during the Chapter 11 proceedings. Under these proceedings,
the rights of and ultimate payments to pre-petition creditors and to equity
investors may be substantially altered. This could result in claims being
liquidated in the Chapter 11 proceedings at less (possible substantially less)
than 100% of their face value, and the equity of the Company's equity investors
being diluted or cancelled. The Company has not yet proposed a
plan of reorganization. The Company's pre-petition creditors and its equity
investors will each have a vote in the plan of reorganization.
The Chapter 11 process presents inherent material uncertainty; it is
not possible to determine the additional amount of claims that may arise or
ultimately be filed, or predict the length of time that the Debtors will
continue to operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, whether the Company will continue to operate
in its present organizational structure, or the effects of the proceedings on
the business of the Company and its subsidiaries or on the interests of the
various creditors and security holders.
As a result of the Chapter 11 filings, Events of Default, as defined in
the related debt agreements, have occurred subsequent to March 31, 2002. On
August 16, 2002, the Company entered into a Debtor-in-Possession Revolving
Credit and Term Loan Agreement (DIP Credit Agreement) with its existing primary
lender group to provide secured debtor-in-possession financing to the Company.
The maximum borrowings under the DIP Credit Agreement are $48 million in the
aggregate, including up to $35 million revolving line of credit and a $12.8
million term loan. Advances under the revolving credit portion of the DIP Credit
Agreement bear interest at the rate of prime +.55% and the term loan portion
bears interest at the rate of prime + 1.05%. A borrowing base limits the amount
of borrowing availability at any time. The DIP Credit Agreement grants a
security interest in the accounts receivable, inventory and substantially all
the remaining assets of the Company except for the Company's fixed assets
located at its Ottawa, Ohio facility and certain machinery and equipment located
at the Company's Indianpolis, Indiana facility. The DIP Credit Agreement also
contains certain restrictive covenants that, among other things, restrict the
Company's ability to incur additional indebtedness or guarantee the obligations
of others. The Company is also required to maintain minimum cumulative EBITDA,
as defined in the DIP Credit Agreement, and limit its capital expenditures.
Although the Company has entered into the DIP Credit Agreement, the
Company may require additional financing to meet its cash flow requirements.
Restrictive covenants included in the debtor-in-possession credit facility and
oversight by the Bankruptcy Court limit the Company's ability to incur
additional indebtedness, or sell assets (substantially all of which are
pledged), and may otherwise limit the operational and financial flexibility of
the Company.
Going Concern Matters--The accompanying consolidated financial
statements have been prepared on a going concern basis of accounting and do not
reflect any adjustments that might result if the Company is unable to continue
as a going concern. The Company's recurring losses and level of cash flows from
operations, current liabilities in excess of current assets, shareholders'
deficiency and the subsequent Chapter 11 cases raise substantial doubt about the
Company's ability to continue as a going concern. As discussed above, management
intends to submit a plan of reorganization to the Bankruptcy Court. The ability
of the Company to continue as a going concern and appropriateness of using the
going concern basis of accounting is dependent upon, among other things, (i) the
Company's ability to comply with the debtor-in-possession financing agreements,
(ii) submission and confirmation of a plan of reorganization under the
Bankruptcy Code, (iii) the Company's ability to achieve profitable operations
after such confirmation, and (iv) the Company's ability to generate sufficient
cash from operations to meet its obligations.
Management believes that a plan of reorganization, as contemplated,
subject to approval of the Bankruptcy Court and adequate debtor-in-possession
financing, along with cash provided by
operations, will provide sufficient liquidity to allow the Company to continue
as a going concern; however, there can be no assurance that the sources of
liquidity will be available or sufficient to meet the Company's needs. The
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Financial Statement Presentation--The accompanying consolidated
financial statements do not give effect to any adjustment to the carrying value
of assets or amounts and classifications of liabilities that might be necessary
as a result of resolving the bankruptcy. For financial statement periods after
August 16, 2002 (the Petition Date), the Company's consolidated financial
statements will be presented in accordance with the AICPA Statement of Position
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code. A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. On confirmation of a plan of
reorganization, the Company expects to utilize "Fresh Start Accounting" in
accordance with the guidelines for accounting for emergence from bankruptcy.
Under Fresh Start Accounting, a revaluation of Company assets to reflect current
values can be expected.
2. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description--The Company operates in one business segment, the
intermediate steel processing business, and processes strip and sheet steel to
meet the critical requirements of precision parts manufacturers. Through cold
rolling, annealing, normalizing, slitting, edge-conditioning, oscillate-winding,
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. The Company derived revenues from customers in the United States
of approximately $113.3 million, $155.1 million, and $146.8 million in fiscal
2002, 2001 and 2000, respectively. The remainder of the Company's revenues is
related to customers in Canada.
During fiscal 2002, 2001 and 2000, approximately 41%, 45% and 38% of
the Company's sales, respectively, and 38% and 43% of accounts receivable at
March 31, 2002 and 2001, respectively, were with companies in the automotive
industry. The balance of the Company's net sales was approximately equally
divided among the other markets served. One customer accounted for 6%, 12% and
14% of sales in fiscal 2002, 2001 and 2000, respectively and 9% and 15% of
accounts receivable at March 31, 2001 and 2000, respectively. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral.
Production facilities were located in Youngstown and Ottawa, Ohio;
Indianapolis, Indiana; Detroit, Michigan; Hamilton, Ontario, Canada; and Pointe
Claire, Quebec, Canada. The Company has long-lived assets located in the United
States of $41.8 million and $52.5 million at March 31, 2002 and 2001,
respectively. The remainder of the Company's long-lived assets is related to
operations in Canada. Effective August 15, 2002 the Company announced the
closure of its facilities in Youngstown, Ohio and Indianapolis, Indiana.
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.
Inventories--Inventories are valued at the lower of cost or market.
Cost is determined using the specific identification method. In fiscal year
2002, the Company changed its accounting method for strip steel inventories
produced domestically from the last-in, first-out (LIFO) method to the specific
identification method because management believes this method results in a
better matching of costs with related revenues during periods of fluctuating
material prices and this is the primary method of accounting for inventories
used in the industry.
The Company's financial statements have been retroactively restated to
adjust for this change in accounting principle, and the results of operations
previously reported for fiscal 2001 and 2000 have been restated. As a result of
this accounting change, costs of goods sold increased, and gross profit
declined, by $1.6 million in fiscal 2001, while cost of goods sold decreased,
and gross profit increased, by $1.1 million for fiscal year 2000. After giving
consideration to income taxes, the Company's results of operations for fiscal
years ended March 31, 2001 and 2000 reported in the accompanying financial
statements reflect an increase to net loss of $1.0 million ($0.16 per basic and
diluted share) for 2001 and an increase to net income of $.7 million ($0.11 per
basic and diluted share) for fiscal 2000. Had the Company not changed its method
of accounting for inventory in fiscal 2002, current year net loss would have
decreased by $.3 million, or $.05 per share.
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.
Goodwill--Goodwill is amortized using the straight-line method over a
period of 20 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 cash flows. The
Company recorded approximately $5.9 million of goodwill in connection with its
acquisition of Alkar Steel Corporation (see Note 3.) Amortization expense
associated with goodwill was $293,000 during each of the years ended March 31,
2002 and 2001. The unamortized carrying value of goodwill associated with this
acquisition was $5.3 million at March 31, 2002.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Statement of Financial Accounting Standards ("SFAS") No. 142
changes the accounting for goodwill and certain intangible assets from an
amortization method to an impairment only approach. Goodwill and intangibles
with indefinite lives are no longer subject to amortization, but are subject to
at least an annual assessment for impairment by applying a fair value based
test. The Company is required to implement SFAS No. 142 for its fiscal year
beginning April 1, 2002 and plans to adopt this new accounting standard in the
first quarter. It is expected that the adoption of SFAS No. 142 will result in
non-cash charge of $5.3 million related to the unamortized goodwill associated
with the acquisition of Alkar Steel Corporation (see Note 3.) This charge will
be recorded by the Company as a cumulative effect of an accounting change upon
adoption of this accounting standard.
Revenue Recognition--Revenue is recognized when products are shipped to
customers. All amounts billed to a customer in a sale transaction, including
amounts related to shipping and handling, are classified as revenue. Sales
returns and allowances are treated as a reduction to sales and are provided for
based on historical experience and current estimates.
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
measurement date. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans in the accompanying financial statements.
Earnings (Loss) Per Share--Basic earnings (loss) per share is computed
based upon the weighted average number of common shares outstanding during the
periods presented. An earnings per share computation assuming dilution that
gives effect to the dilutive effect of outstanding stock options is also
presented. In fiscal years ended March 31, 2002 and 2001, the effects of the
Company's stock option plans were anti-dilutive; in fiscal year 2000, these
plans resulted in assuming an additional 36,555 weighted average shares
outstanding creating a dilutive effect on earnings per share.
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.
New Accounting Standards--The FASB issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of this standard by the Company on
April 1, 2001 did not have a significant impact on the financial position,
results of operations, or cash flows of the Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
that addresses financial accounting and reporting for business combinations and
prescribes that all business combinations are to be accounted for using one
method, the purchase method. This standard is required to be adopted for all
business combinations initiated after June 30, 2001.
The FASB also issued Statement No. 143 "Accounting for Asset Retirement
Obligations ("SFAS 143") in June 2001. SFAS 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred, with subsequent adjustments occurring as changes to
estimates of the settlement obligation become known. A corresponding increase in
the carrying amount of the related long-lived asset is recognized and is subject
to depreciation over the remaining useful life of the asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. SFAS 143 is required to be adopted for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to
be Disposed of. SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed by sale. SFAS
144 is effective for fiscal years beginning after December 15, 2001.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS
145). SFAS 145 states that the rescission of FASB Statement No. 4 shall be
applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
The Company has not completed its assessments of the effects of
adopting SFAS 143 through 146 on its financial statements.
3. ACQUISITION
Effective March 31, 2000, the Company acquired all of the outstanding
stock of Alkar Steel Corporation for a purchase price of $14.1 million,
including $5.5 million of debt paid at closing. The acquisition was accounted
for as a purchase and, accordingly, assets and liabilities were recorded at
estimated fair values, including $13.0 of current assets, $.6 million of
machinery and equipment, and $5.4 million of current liabilities. The excess of
the purchase price over the fair value of the underlying assets acquired by the
Company totaled $5.9 million and was recorded as goodwill.
The fiscal 2000 operating results do not include any amounts
attributable to the Alkar acquisition. Unaudited pro forma consolidated results
of operations assuming the acquisition had occurred on April 1, 1999 and giving
effect to certain adjustments based on the allocation of the purchase price
reflect net sales of $ 233.0 million, net income of $5.4 million, and $0.85
basic net earnings per share. The unaudited pro forma information does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
operations.
4. SPECIAL CHARGES
As part of its efforts to rationalize capacity with current market
conditions during the second half of fiscal 2001, the Company restructured its
manufacturing operations by adopting a plan to discontinue manufacturing at its
New Britain, Connecticut facility and reduce the size of its Hamilton, Ontario
facility workforce. These actions resulted in special charges totaling $2.2
million being recognized in fiscal 2001, including a $1.3 million equipment
impairment charge associated with operating assets in New Britain, and reduction
in force costs of $.9 million related to the termination of 43 salaried and
hourly employees. Additional employee termination benefits of $340,000 were
negotiated with certain hourly employees as part of the New Britain closure that
was completed in October 2001, and were recognized and paid in fiscal 2002.
5. OTHER BALANCE SHEET INFORMATION
MARCH 31,
2002 2001
---------------------
(IN THOUSANDS)
RECEIVABLES:
Receivables $ 23,852 $ 26,859
Less reserves and allowances (1,514) (1,620)
---------------------
$ 22,338 $ 25,239
=====================
INVENTORIES:
Raw materials $ 10,603 $ 16,568
Work in process 10,462 10,395
Finished goods 6,155 8,184
---------------------
$ 27,220 $ 35,147
=====================
PREPAID AND OTHER CURRENT ASSETS:
Prepaid expenses $ 690 $ 599
Taxes receivable -- 629
Deferred income taxes -- 1,799
---------------------
$ 690 $ 3,027
=====================
PROPERTY, PLANT AND EQUIPMENT (USED IN OPERATIONS):
Land $ 1,305 $ 1,556
Buildings 13,109 15,300
Machinery and equipment 60,406 61,810
Construction in process 737 721
---------------------
$ 75,557 $ 79,387
=====================
OTHER NON-CURRENT ASSETS:
Deferred income taxes $ -- $ 8,672
Goodwill 5,268 5,561
Pension 3,319 3,370
Property and equipment held for sale 1,378 --
Other 638 705
---------------------
$ 10,603 $ 18,308
=====================
OTHER CURRENT LIABILITIES:
Payroll and related employee benefits $ 4,091 $ 5,902
Income taxes 654 359
Other 2,818 2,104
---------------------
$ 7,563 $ 8,365
=====================
6. DEBT
SHORT-TERM LONG-TERM
---------- ---------
MARCH 31, MARCH 31,
2002 2001 2002 2001
-------------------------------------------
(IN THOUSANDS)
Committed revolver/term facility:
Revolving portion $29,650 $1,680 $ -- $32,906
Term portion $12,383 $1,200 -- $10,794
Term note 13,928 1,789 -- 13,928
Lease financing 1,715 149 -- 1,755
-------------------------------------------
Total $57,716 $4,818 $ -- $59,383
===========================================
The Company had borrowed $42.0 million under the terms of a committed
revolving and term loan credit facility that by its terms provided availability
up to a maximum of $70.0 million, based on a percentage of accounts receivable
and inventory, as well as stated loans for fixed assets. Including approximately
$1.5 million of outstanding letters of credit supported by this facility, the
Company had utilized substantially all its borrowing availability under the
terms of this agreement. The facility was secured by substantially all of the
assets of the Company except for all the fixed assets located at the Company's
Ottawa, Ohio facility and certain machinery and equipment leased under a
financing lease and located at the Company's Indianpolis, Indiana facility.
Under the provisions of a separate term loan (Ottawa term loan) secured by the
Company's Ottawa, Ohio facility property, plant and equipment and a lease
financing agreement secured by a slitter located at the Company's Indianapolis
facility (slitter lease), the Company owed a total of $15.7 million. At March
31, 2002 the Company was in non-compliance with certain covenants set forth in
its financing agreements. Accordingly, all such amounts due under the terms of
these agreements are included in current liabilities in the Company's balance
sheet as of March 31, 2002.
At March 31, 2002, the Company's credit agreements bear interest as
follows: revolving credit and term loan agreement--LIBOR + 2.5% (weighted
average rates of 4.6% and 6.1% for the years ended March 31, 2002 and 2001,
respectively); Ottawa term loan--8.8%; and slitter lease--8.1%.
On August 16, 2002, Cold Metal Products, Inc. and its wholly owned
subsidiary, Alkar Steel Corporation, filed voluntary petitions for
reorganization under Chapter 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court in the Northern District of Ohio, Eastern Division. Cold
Metal Products, Ltd., the Company's wholly owned Canadian subsidiary, was not
affected by the filings. Refer to Note 1 for additional information related to
these filings, including a description of the DIP financing agreement.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, operating loss
and capital loss carryforwards, and tax credit carryforwards.
Components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
2002 2001
---------------------------------------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS
Postemployment benefit obligations $ 5,252 $ 5,505
Inventory basis differences 279 379
Reserves not currently deductible 1,183 1,499
Minimum pension obligation 1,739 1,215
Tax operating loss carryforwards (expire 2012-2021) 10,149 8,330
Tax capital loss carryforwards 728 775
Tax credit carryforwards (expire 2003-2006 and unlimited) 410 523
---------------------------------------
19,740 18,226
Valuation allowance (13,013) (1,175)
---------------------------------------
6,727 17,051
DEFERRED TAX LIABILITIES
Property, plant and equipment basis differences (6,333) (5,254)
Pension (943) (1,326)
---------------------------------------
Net deferred tax assets (liabilities) $ (549) $ 10,471
=======================================
</TABLE>
The provision (benefit) for income taxes includes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
2002 2001 2000
-----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
U.S. federal $ -- $ 33 $ --
Canadian federal and provincial 843 (145) 1,246
State and local (3) (4) 3
-----------------------------------------------------------
840 (116) 1,249
Deferred taxes:
U.S. (federal and state) 11,628 (4,283) 966
Canadian (84) (111) 1,049
-----------------------------------------------------------
11,544 (4,394) 2,015
-----------------------------------------------------------
Total $ 12,384 $ (4,510) $ 3,264
===========================================================
</TABLE>
Reconciliations of the U.S. federal statutory tax rate to the
effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
2002 2001 2000
-----------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0 % 35.0% 35.0%
Effect of graduated rates (1.0) (1.0) (1.0)
Effect of Canadian rates .2 -- 1.9
State taxes (15.6) 3.5 0.7
Deemed distribution of Canadian subsidiary earnings (38.0) -- --
Revision of prior year estimates (4.5) 2.8 --
Change in valuation allowance (141.5) (0.6) --
Other (2.4) 0.3 1.6
-----------------------------------------------
Effective tax rate (167.8)% 40.0% 38.4%
===============================================
</TABLE>
In the fourth quarter of fiscal 2002 management determined that it was
necessary to record deferred tax charges of $14.6 million, comprised of $11.8
million increase in the deferred tax valuation allowance to reflect the
estimated realization of net deferred tax assets and $2.8 million associated
with the tax effect of net operating loss carryforwards utilized to offset a
deemed dividend attributable to the operating results of its Canadian
subsidiary. In addition, the Company discontinued recognizing any additional
deferred tax benefits associated with current operating losses. As a result, the
Company's effective income tax rate is substantially higher than would be
expected based upon statutory tax rates.
8. EMPLOYEE BENEFIT PLANS
The Company has various pension plans covering substantially all of its
employees. The Company's hourly employees and domestic salaried employees are
covered by noncontributory defined benefit plans. These plans generally provide
benefits based upon a formula using employees' fiscal average earnings or at a
stated amount for each year of service. Plan assets are principally invested by
outside asset managers in marketable debt and equity securities. The Company's
funding policy is to make actuarially determined annual contributions to provide
the plans with sufficient assets to meet future benefit payments consistent with
the funding requirements of applicable regulations. The Company also contributed
to a domestic multi-employer plan under a collective bargaining agreement
covering its hourly workers at the now idled New Britain, Conn. facility. Such
costs were previously accrued and funded as incurred, however with the shutdown
of that facility, the Company is no longer obligated to accrue for any further
retirement costs related to those employees.
Certain health care and life insurance benefits are provided for
eligible retirees through an unfunded postretirement benefit plan. The extent of
benefits provided is dependent upon the retiree's years of service, age and
retirement date.
The following tables summarize the change in benefit obligations, plan
assets, funded status, and net periodic benefit costs of the Company's pension
and postretirement benefits plans:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT
---------------- --------------------
BENEFITS
--------------------
MARCH 31,
2002 2001 2002 2001
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefits obligation at beginning of year $ 37,608 $ 34,046 $ 13,236 $ 13,373
Service cost 991 901 176 177
Interest cost 2,686 2,509 961 920
Participant contributions -- -- 390 296
Amendments 803 356 -- --
Actuarial (gain) loss 753 2,351 585 (243)
Benefits paid (2,343) (2,048) (1,474) (1,224)
Divestitures (485) -- -- --
Foreign currency exchange rates (70) (507) (9) (63)
Curtailments (291) -- (351) --
-----------------------------------------------------------------
Benefit obligation at end of year 39,652 37,608 13,514 13,236
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 32,889 39,183 -- --
Actual return on plan assets 706 (4,075) -- --
Employer contribution 95 393 -- --
Benefits paid (2,343) (2,048) -- --
Divestitures (485) -- -- --
Foreign currency exchange rates (70) (564) -- --