UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission File Number 0-25032
------------------------------
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 25-1724540
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
600 Mayer Street
Bridgeville, PA 15017
(Address of principal executive offices, including zip code)
(412) 257-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 26, 1999, based on the closing price of $6.00 per share on
that date, was $15,427,566. For the purposes of this disclosure only, the
registrant has assumed that its directors, executive officers, and beneficial
owners of 5% or more of the registrant's Common Stock are the affiliates of the
registrant.
As of March 26, 1999, there were 6,320,036 shares of the Registrant's Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1998, and definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 25, 1999, are incorporated by reference
into Parts II and III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 8
Item 3. Legal Proceedings....................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..................... 11
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risks............. 12
Item 8. Financial Statements and Supplementary Data............................. 12
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 12
PART III
Item 10. Directors and Executive Officers of the Company......................... 13
Item 11. Executive Compensation.................................................. 13
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 13
Item 13. Certain Relationships and Related Transactions.......................... 13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 14
PART I
ITEM 1. BUSINESS
General
Universal Stainless & Alloy Products, Inc. (the "Company"), which was
incorporated in 1994, manufactures and markets semi-finished and finished
specialty steel products, including stainless steel, tool steel and certain
other alloyed steels. The Company's products are sold to rerollers, forgers,
service centers and original equipment manufacturers. The Company's products
are further processed by its customers for use primarily in the heavy equipment
manufacturing, power generation and aerospace industries. The Company also
provides conversion services on materials supplied by customers that lack
certain of the Company's production facilities or that are subject to their own
capacity constraints.
The Company's products are manufactured in a wide variety of grades, widths and
gauges in response to customer specifications. The Company is capable of
producing specialty steel products that include long products (ingots, blooms,
billets and bars), which are primarily used by customers to produce bar, rod and
wire, and flat rolled products (slabs and plates), which are used by customers
to produce fine-gauge plate, sheet and strip products. The Company also
produces customized shapes that are cold rolled from purchased coiled strip,
flat bar or extruded bar at its Precision Rolled Products department ("PRP").
Industry Overview
The specialty steel industry is a relatively small but distinct segment of the
overall steel industry. Specialty steels include stainless steels, high speed
and tool steels, electrical steels, high temperature alloys, magnetic alloys and
electronic alloys. Specialty steels are made with a high alloy content, which
enables their use in environments that demand exceptional hardness, toughness,
strength and resistance to heat, corrosion or abrasion, or combinations thereof.
Specialty steels generally must conform to more demanding customer
specifications for consistency, straightness and surface finish than carbon
steels.
The Company primarily manufactures stainless steel, tool steel and certain other
alloyed steels, including:
Stainless Steel. Stainless steel, which represents the largest part of the
specialty steel market, contains elements such as nickel, chrome and molybdenum
that give it unique qualities of resistance to rust, corrosion and heat, high
strength, good wear characteristics, natural attractiveness and ease of
maintenance. Stainless steel is used, among other applications, in the
automotive, aircraft and aerospace industries and in the manufacture of food
handling, chemical processing, pollution control and medical and health
equipment. The large number of applications for stainless steel has resulted in
the development of a greater variety of stainless steel metallurgical grades
than carbon steel.
Tool Steel. Tool steels contain elements of manganese, silicon, chrome and
molybdenum to produce specific hardness characteristics that enable them to
form, cut, shape and shear other materials in the manufacturing process. These
hardness characteristics are brought out by heating and cooling at precise rates
in the heat treating process. Tool steels are utilized in the manufacture of
metals, plastics, pharmaceuticals, electronics, optics and paper and aluminum
extrusions.
High Temperature Alloy Steel. These steels are designed to meet critical
requirements of heat resistance and structural integrity. They generally have a
very high nickel content relative to other types of specialty steels. High
temperature alloy steels are manufactured for use generally in the aerospace
industry.
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High Strength Low Alloy Steel. High strength low alloy steel is a relative term
that refers to those steels that maintain alloying elements that range in
versatility. The alloy element of such steels as nickel, chrome and molybdenum
typically exceed the alloy element of carbon steel but not that of high
temperature alloy steel.
Net sales by principal product line were as follows (dollars in thousands):
Year ended December 31, 1998 1997 1996
---- ---- ----
Stainless steel $53,661,000 $60,700,000 $46,903,000
Tool steel 7,548,000 10,467,000 8,019,000
High-temperature alloy steel 4,387,000 2,636,000 728,000
Conversion service 3,690,000 4,834,000 3,804,000
Other 3,309,000 2,664,000 804,000
----------- ----------- -----------
$72,595,000 $81,301,000 $60,258,000
----------- ----------- -----------
Raw Materials
Scrap Metal
The Company's major raw material is ferrous scrap metal, which is generated
principally from industrial, automotive, demolition and railroad sources and is
purchased in the open market through a number of scrap brokers and dealers or by
direct purchase. The Company purchases approximately 80% of its scrap metal
from three principal domestic suppliers. The long-term demand for scrap metal
and its importance to the domestic specialty steel industry may be expected to
increase as steelmakers continue to expand scrap metal-based electric furnace
capacity with additions to or replacements of existing integrated specialty
steel manufacturing facilities that use iron ore, coke and limestone as their
raw materials. The high quality of the Company's products requires use of
premium grades of scrap metal, the supply of which is more limited. The Company
has not experienced difficulty to date in purchasing adequate scrap metal for
its production processes. The Company believes that adequate supplies of scrap
metal will continue to be available in sufficient quantities for the foreseeable
future.
Alloys
The Company purchases various materials for use as alloy additions, some of
which come from Canada (principally nickel) and other foreign countries.
Certain of those alloys (principally chrome) are supplied by South African
manufacturers and any political disruptions in that country could interfere with
the delivery of those materials.
PRP Starting Materials
PRP's principal starting materials consist of metallic flat bar, extruded "near
shaped" bar and coiled strip, which the Company cold rolls to customer
specification to produce special shapes. The Company generally purchases those
starting materials from steel strip coil suppliers, extruders, flat rolled
producers and service centers. The Company believes that adequate supplies of
starting material for PRP will continue to be available in sufficient quantities
for the foreseeable future.
The cost of raw material is approximately 45% of the Company's total cost of
products sold. Raw material prices vary based on numerous factors, including
quality, and are subject to frequent market fluctuations and future prices
cannot be predicted with any degree of certainty. Therefore, the Company does
not maintain any long-term written agreements with any of its raw material
suppliers. The Company has established arrangements with certain raw material
suppliers that permit the Company to purchase certain raw materials at set
prices for up to 30 days, which may protect the Company against short-term price
increases in raw materials after it has agreed to manufacture products for its
customers at specified prices, which reflect those set raw material prices.
2
Customers
The Company's principal customers are rerollers, forgers, service centers and
original equipment manufacturers, which primarily include the power generation
and aerospace industries. For the year ended December 31, 1998, Talley Metals
Technology, Inc., a subsidiary of Carpenter Technology Corporation, and its
affiliates accounted for 35% of the Company's net sales. No other customer
accounted for more than 10% of the Company's net sales for the year ended
December 31, 1998. The Company's five largest customers in the aggregate
accounted for approximately 57% of net sales. A principal element of the
Company's business strategy is to seek new customers so that over time it will
reduce its dependence on one or a small number of customers. The Company's
customer base increased from 167 at December 31, 1997 to 200 at December 31,
1998.
The Company's products are marketed directly to its customers by Company
personnel, including the Company's President and Chief Executive Officer, its
PRP General Manager, five full-time sales persons and two independent sales
representatives. In view of the relatively small number of prospective
customers for the Company's customized products, the strong business
relationships with its customers and the thorough product knowledge and
substantial experience with actual and prospective customers of those management
and marketing persons, the Company believes its sales force is adequate for its
current and immediately foreseeable needs.
3
Backlog
The Company manufactures products to meet specific customer orders, generally
fulfilling orders in eight weeks or less, and consequently does not manufacture
for inventory purposes. The Company's backlog of orders on hand as of December
31, 1998, was approximately $10.8 million as compared to $20.9 million at the
same time in 1997. The decrease in backlog of orders on hand as of December 31,
1998 as compared to December 31, 1997 primarily resulted from increased import
levels and lower selling prices due to competition. Customer orders are
generally subject to cancellation with the payment of a penalty charge prior to
delivery. The Company's backlog may not be indicative of actual sales and
therefore should not be used as a measure of future revenue.
Competition
The Company believes itself to be one of approximately 20 domestic manufacturers
that produce specialty steel and one of approximately five domestic specialty
steel manufacturers that produce special shapes. Of that number of firms that
produce specialty steel, the Company believes five companies currently compete
within the Company's selected markets, although other specialty steel mills have
the capability of producing, and hence competing with, some of or all the
Company's specialty steel products.
Major competitors of the Company in the specialty steel market include fully
integrated specialty steel producers such as Allegheny-Teledyne, Inc.; Carpenter
Technology Corporation; AL Tech Specialty Steel Corporation; Slater Steels
Corporation; and The Timken Company. Although Electralloy, a subsidiary of G.O.
Carlson Inc., and First Mississippi Steels, Inc. generally produce only
stainless steel ingots, they can also compete with the Company by utilizing
outside conversion services. Additionally, there are several smaller electric
arc furnace melt shops that also produce specialty steel. The major competitors
of the Company in the special shapes market served by PRP include Rathbone
Precision Metals, Inc., a subsidiary of Carpenter Technology Corporation;
Precision Shapes, Inc.; and J.T. Slocomb Company.
Competition in the Company's markets is based upon product quality, delivery
capability, customer service and price. Maintaining high standards of product
quality while keeping production costs at competitive levels is essential to the
Company's ability to compete in its markets. The ability of a manufacturer to
respond quickly to customer orders currently is, and is expected to remain,
important in the specialty steel market. The Company believes its universal
rolling mill provides it with a competitive advantage as the only domestic mill
that can produce both long product and flat rolled product. The Company
believes it has the ability to fill customers' orders in a shorter lead time for
delivery of those products than a fully-integrated specialty steel mill
currently can achieve, which provides it with another competitive advantage.
The short lead time may also enable the Company to avoid maintaining a high
level of inventory of raw materials, thereby reducing the Company's cost of
production.
The domestic specialty steel industry is frequently affected by general economic
conditions. Further, the Company also faces competition from producers of
certain materials, particularly aluminum, composites and plastics, that compete
with steel in many markets. In addition, many of the finished products sold by
the Company's customers are in direct competition with finished products
manufactured by foreign sources, which may affect the demand for those
customers' products. Any competitive factor that adversely affects the market
for finished products manufactured by the Company's customers could indirectly
adversely affect the demand for the Company's specialty steel products.
4
Employee Relations
The Company considers the maintenance of good relations with its employees to be
important to the successful conduct of its business. The Company has profit-
sharing plans for certain salaried employees and all of its United Steel Workers
of America (USWA) employees and has equity ownership programs for all of its
eligible employees, in an effort to forge an alliance between its employees
interests and those of the Company's stockholders. At December 31, 1998, the
Company had 224 employees at its Bridgeville facility and 56 employees at its
Titusville facility, of whom 176 and 47 were USWA members located in Bridgeville
and Titusville, respectively.
In August 1997, the Company and the USWA completed negotiation of a new five-
year comprehensive collective bargaining agreement (the "Bridgeville CBA") that
recognizes the USWA as the exclusive representative for the Company's hourly
Bridgeville employees with respect to the terms and conditions of their
employment. The basic structure of the Bridgeville CBA is similar to the
original four-year agreement which contained certain wage, benefit and work rule
terms which permitted the Company to be competitive in the domestic specialty
steel industry.
In connection with the June 1995 acquisition of the Titusville facility the
Company entered into a five-year collective bargaining agreement with the USWA
covering employees at the Titusville facility (the "Titusville CBA"). The
Titusville CBA contains substantially similar terms to those included in the
Bridgeville CBA, but each of the agreements is separate and neither agreement is
conditioned on the renewal of or compliance with the other agreement.
The Company has profit-sharing plans that cover certain salaried employees and
all hourly employees. The profit-sharing plans provide for the sharing of pre-
tax profits in excess of specified amounts. The Company maintains separate
401(k) retirement plans for its hourly and salary employees. Pursuant to each
plan, participants may elect to make pre-tax contributions to the plan, subject
to certain limitations imposed under the Internal Revenue Code of 1986, as
amended (the "Code"). Company matching contributions are not permitted under the
plans. In addition, the Company is required to make semi-annual contributions
to the plans based on service. The Company also provides life insurance and
health coverage for its hourly and salary employees.
Armco Agreement
Armco, the former owner of certain assets of the Company, retained
responsibility for any employee benefit obligations existing prior to August 15,
1994 with respect to persons previously employed at the Bridgeville facility. In
addition, Armco agreed to indemnify the Company up to $3.0 million in the
aggregate with respect to any such liabilities that may arise prior to August
15, 2004.
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan (the "Plan"), the Company is
authorized to issue up to 90,000 shares of Common Stock to its full-time
employees, nearly all of whom are eligible to participate. Under the terms of
the Plan, employees can choose as of January 1 and July 1 of each year to have
up to 10% of their total earnings withheld to purchase up to 100 shares of the
Company's Common Stock each six-month period. The purchase price of the stock
is 85% of the lower of its beginning-of-the-period or end-of-the-period market
prices.
Safety
The Company has established and seeks to maintain appropriate safety standards
and policies for its employees. To encourage plant safety, the USWA Agreements
provide that employees will be entitled to receive ratably 50% of the savings,
if any, of reduced workers' compensation premiums obtained due to reductions in
the state experience modifier issued to the Company.
5
Executive Officers
The following table sets forth, as of December 31, 1998, certain information
with respect to the executive officers of the Company:
NAME (AGE) EXECUTIVE OFFICER SINCE POSITION
Clarence M. McAninch (63) 1994 President and Chief Executive Officer
A. Bruce Kennedy (40) 1998 Vice President, Operations
Paul McGrath (47) 1997 Director of Employee Relations,
General Counsel and Secretary
Richard M. Ubinger (39) 1994 Chief Financial Officer, Principal
Accounting Officer and Treasurer
Clarence M. McAninch, 63, has been President and Chief Executive Officer and a
Director of the Company since July 1994. Mr. McAninch served as Vice President,
Sales and Marketing, of the Stainless and Alloy Products Division of Armco Inc.
from 1992 to 1994.
A. Bruce Kennedy, 40, has been Vice President, Operations since August 1998.
Mr. Kennedy was employed by Kurtz Steel Company for the previous 17 years, most
recently as President and Chief Executive Officer from January 1991 to May 1998.
Paul A. McGrath, 47, has been General Counsel and Director of Employee Relations
since January 1995 and was appointed Secretary in May 1996. Prior thereto, he
was employed by Westinghouse Electric Corporation for approximately 24 years in
various management positions.
Richard M. Ubinger, 39, has been Chief Financial Officer and Principal
Accounting Officer of the Company since August 1994, and was appointed Assistant
Secretary in November 1995 and Treasurer in May 1996. From 1981 to 1994, Mr.
Ubinger was employed by Price Waterhouse LLP (currently known as
PricewaterhouseCoopers LLP) in its audit department, and he served in the
capacity of Senior Manager for Price Waterhouse LLP since 1990. Mr. Ubinger is
a Certified Public Accountant.
Patents and Trademarks
The Company does not consider its business to be materially dependent on patent
or trademark protection, and believes it owns or maintains effective licenses
covering all the intellectual property used in its business. The Company seeks
to protect its proprietary information by use of confidentiality and non-
competition agreements with certain employees.
Risk Factors
The Company's business and results of operations are subject to a wide range of
substantial business and economic factors including, but not limited to the
factors discussed below, many of which are not within the Company's control.
Significant Customer and Concentrated Customer Base
For the year ended December 31, 1998, the Company's largest customer, Talley
Metals Technology, Inc., a subsidiary of Carpenter Technology Corporation, and
its affiliates accounted for approximately 35% of the Company's net sales. The
Company's five largest customers in the aggregate accounted for approximately
57% of net sales. An adverse change in, or termination of, the Company's
relationship with one or more of its major customers or one or more of its
market segments could have a material adverse effect upon the Company. In
addition, a number of the Company's customers are also competitors of the
Company. See "Business--Customers" and "Business--Competition".
6
Reliance on Critical Manufacturing Equipment
The Company's manufacturing processes are dependent upon certain critical pieces
of specialty steelmaking equipment, such as the Company's electric arc-furnace
and universal rolling mill. In the event a critical piece of equipment should
become inoperative as a result of unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed
which may have a negative effect on the Company's financial results. See
"Properties."
Competition
The Company competes with domestic and foreign sources of specialty steel
products. In addition, many of the finished products sold by the Company's
customers are in direct competition with finished products manufactured by
foreign sources, which may affect the demand for those customers' products. Any
competitive factor that adversely affects the market for finished products
manufactured by the Company's customers could indirectly adversely affect the
demand for the Company's semi-finished products. Additionally, the Company's
products compete with products fashioned from alternative materials such as
aluminum, composites and plastics, the production of which includes domestic and
foreign enterprises. Competition in the Company's field is intense and is
expected to continue to be so in the foreseeable future. There can be no
assurance that the Company will be able to compete successfully in the future.
See "Business--Competition."
Environmental Issues
The Company is subject to demanding federal, state and local environmental laws
and regulations ("Environmental Laws") governing, among other things, air
emissions, waste water discharge and solid and hazardous waste disposal. The
Company leases or owns certain real property and operates equipment previously
owned and used in the manufacture of steel products by Armco. In connection
with the acquisition of the Bridgeville facility assets, Armco agreed to retain
responsibility for certain liabilities asserted against Armco under
Environmental Laws. Because the indemnification is the Company's exclusive
remedy against Armco for a given environmental liability, the Company will be
materially dependent upon that indemnity should any environmental liability
arise. There can be no assurance that the indemnities from Armco will fully
cover any or all environmental liabilities, and there can be no assurance that
the Company will have the financial resources to discharge the liabilities if
legally compelled to do so.
Environmental laws and regulations have changed rapidly in recent years, and the
Company may be subject to increasingly stringent environmental standards in the
future. The Armco indemnities do not cover liability with respect to violations
of Environmental Laws or the existence of environmental conditions stemming from
any changes, modifications or amendments to Environmental Laws effective after
August 15, 1994, with respect to the Bridgeville facility, or effective after
June 2, 1995, with respect to the Titusville facility, and there is no assurance
that the Company will not incur any such liability. See "Properties--
Environmental Compliance."
Supply of Raw Materials and Cost of Raw Materials
The Company relies on a limited number of suppliers, some of which are foreign
owned, for its raw material needs which currently account for approximately 45%
of the Company's total cost of products sold. Raw material prices are
affected by cyclical, seasonal and other market factors. In addition, the
supply of premium grades of scrap metal used by the Company is more limited than
the supply of lower grades of scrap metal. Further, nickel and chrome, key
ingredients in certain alloys produced by the Company and significant cost
components, are available substantially only from foreign sources, some of which
are located in countries that may be subject to unstable political and economic
conditions. Those conditions might disrupt supplies or affect the prices of the
raw materials used by the Company. The Company does not maintain long-term
supply agreements with any of its independent suppliers. If its supply of raw
materials were interrupted, the Company might not be able to obtain sufficient
quantities of raw materials, or obtain sufficient quantities of such materials
at satisfactory prices, which, in either case, could adversely affect the
Company's results of operations. In addition, significant increases in the
7
price of the Company's principal raw materials could adversely affect the
Company's financial results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Raw Materials."
Year 2000 Readiness Disclosure
The following statements are provided pursuant to the provisions of the Year
2000 Information and Readiness Disclosure Act of 1998.
Since inception in August 1994, the Company has been engaged in a program to
modernize and replace its computerized production control and management
information systems. Although not the primary purpose of the program, the new
systems were designed to avoid any Year 2000 problems that might otherwise
arise. In addition, the Company has identified and tested all other critical
pieces of equipment and has not identified any non-compliance issues internally.
Therefore, the Company believes that its internal systems will be Year 2000
compliant in all material respects without incurring significant expenditures.
Any expenditures will be financed with cash from operations.
The Company currently believes the most significant impact of the Year 2000
issue could be an interrupted supply of goods and services from the Company's
vendors and interrupted supply of orders from the Company's customers. In order
to assess the state of readiness, surveys have been sent to all major vendors
and customers to determine the current status of their Year 2000 evaluation.
Responses have been received from approximately 70 percent of these vendors and
customers in which each respondent has confirmed that efforts to become Year
2000 compliant are, at a minimum, in process. Due to the uncertainties
associated with the ability of critical vendors and customers to resolve any
known or unknown Year 2000 compliance issues, the Company may experience a
material adverse effect on future results of operations if such issues are not
resolved. While no contingency plans have been established at the present time,
contingency plans will be developed to mitigate any risk identified.
ITEM 2. PROPERTIES
The Company leases its Bridgeville facility from Armco (the "Armco Lease") and
owns the Titusville facility. The Bridgeville facility is leased pursuant to a
long-term lease from Armco for ten years from August 15, 1994, which includes
the payment by the Company of real and personal property taxes, water and sewage
charges, special assessment and insurance premiums associated therewith, with
three five-year options to renew on the same terms at the sole discretion of the
Company. The Armco Lease provides the Company with an option to purchase
substantially all of the leased premises for $1 any time during the term of the
Armco Lease prior to August 15, 2015. The building that houses the electro-slag
remelting equipment, which is nearby, but not contiguously located, to the other
facilities, is included in the ten-year initial lease term only. The Company
anticipates relocating the equipment it owns in that facility in close proximity
to the melt shop complex in an existing building prior to the expiration of that
initial ten-year term. The Armco Lease is assignable with the written consent
of Armco, which consent cannot be unreasonably withheld. The Company is
responsible for compliance with all environmental laws related to the property
subsequent to August 15, 1994, subject to liabilities Armco retained and
indemnification obligations under the asset agreement related to the Bridgeville
facility (the "Asset Agreement").
In early 1999, the Company successfully completed the round-bar finishing
facility at the Bridgeville location. The facility includes heat treating and
processing equipment which enables the Company to produce completely finished 2-
inch to 6-inch round bar products.
The Bridgeville facility consists of approximately 600,000 square feet of floor
space on approximately 50 acres. The Bridgeville facility contains melting,
electro-slag remelting, conditioning, rolling, annealing and various other
processing equipment. Substantially all products shipped from the Bridgeville
facility are processed through its melt shop and universal rolling mill
operations.
8
The Titusville facility consists of approximately 10 acres and includes seven
separate buildings, including two principal buildings of approximately 265,000
square feet in total area. The Titusville facility contains vacuum-arc
remelting and various rolling and finishing equipment.
Specialty steel production is a capital intensive industry. The Company
believes that its facilities and equipment are suitable for its present needs.
The Company believes, however, that it will continue to require capital from
time to time to add new equipment and to repair or replace existing equipment to
remain competitive and to enable it to manufacture quality products and provide
delivery and other support service assurances to its customers.
Environmental Compliance
The Company is subject to Environmental Laws, including those governing
discharges of pollutants into the air and water, the generation, handling and
disposal of solid and hazardous substances and the remediation of contamination
associated with generation, handling and disposal activities. The Company is
subject periodically to environmental compliance reviews by various regulatory
offices. Additionally, the Company monitors its compliance with Environmental
Laws applicable to it and, accordingly, believes that it is currently in
compliance with all laws and regulations in all material respects. The Company
has not made to date and does not anticipate making any significant expenditures
for environmental control facilities, but could incur costs, which may be
significant, related to environmental compliance at any time or from time to
time in the future.
Bridgeville Facility
The Company has not incurred to date and does not anticipate incurring any
remediation costs from environmental conditions at the Bridgeville facility.
The Company does not expect that any remediation that may be required at the
Bridgeville facility will have a material adverse effect on the Company's
results of operations, liquidity or financial condition. The Company operates
production and processing equipment, which it owns, on real property that is
leased from Armco. Armco remains contractually obligated for environmental
matters, including compliance with laws governing the removal of hazardous
materials and the elimination of hazardous conditions, which stem from any
operations or activities at the leased Bridgeville facility prior to August 15,
1994. In addition, Armco has agreed to indemnify the Company against any
liability arising as a result of any of those matters with respect to the
Bridgeville facility to the extent of $6.0 million in the aggregate until 2004
and has further agreed (subject to the indemnity limits) to pay up to $250,000
for each 30-day period and up to $1.0 million in reimbursement for certain non-
recoverable operating costs should the Company's business be interrupted by
reason of matters arising under Environmental Laws that stem from occurrences
prior to August 15, 1994. Except as required by law or for the protection of
public health or the safety of its employees, the Company is contractually
prohibited from taking voluntary or discretionary action to accelerate or delay
the timing, or increase the cost of, Armco's environmental obligations with
respect to the Bridgeville facility. Prior to entering into the Asset
Agreement, Armco and the Company identified certain environmental conditions
existing at the Bridgeville facility, including asbestos in various structures,
oils and electrical devices containing PCBs, that Armco or the Company has
remediated at Armco's expense. The Company's Bridgeville facility includes an
overhead and rooftop system (the "bag house") to remove waste gases generated by
its melting operations. The bag house facility associated with that system
collects oxides and non-metallic residue for reclaiming purposes. An
independent reclaiming contractor purchases the oxides and non-metallic residue,
removes the residue and converts it into metallic form for sale back to the
Company as scrap metal. This reclaiming process enables the Company to dispose
of the unwanted residue, while at the same time recovering some raw materials
for the manufacture of specialty steel.
Titusville Facility
The Company operates its production and processing equipment that was acquired
from Armco on real property the Company owns. Armco has agreed to indemnify the
Company to the extent of $3.0 million in the aggregate against liability for
environmental matters, including compliance with laws governing the
9
removal of hazardous materials and the elimination of hazardous conditions,
which pertain to environmental conditions existing on or under the Titusville
facility prior to June 2, 1995. In addition, Armco has agreed to indemnify the
Company for any liabilities arising out of environmental conditions existing
offsite as of June 2, 1995, and that indemnification is not subject to the $3.0
million limitation. In connection with the acquisition of the Titusville
facility, the Company conducted a Phase I and Phase II environmental study (the
"Study") of the parcel of real estate acquired, and the Company believes the
amount and terms of Armco's indemnity are sufficient to protect the Company
against environmental liabilities arising at the Titusville facility from
environmental conditions existing as of June 2, 1995. The Study revealed
asbestos in certain areas adjacent to the Titusville facility, which Armco has
remediated at its expense, and some electrical equipment containing PCBs that
the Company is remediating at its expense, which is not material. Additionally,
the Study noted that as is typical of the Titusville, Pennsylvania area
generally, there is regional soil and groundwater hydrocarbon contamination
present at above applicable cleanup standards, reflecting the fact that this
area contains natural petroleum deposits and that petroleum refining operations
had been conducted nearby. Any contamination of this type on the Company's
property flows from outside its boundaries, to the extent it is not indigenous
to the underlying ground. The Company believes it unlikely that it or Armco will
be required to provide cleanup at the Titusville facility for the local
hydrocarbon contamination or, if it were, the Company believes this action would
be part of a large program addressing the entire area. To date, the Company has
not been contacted by any environmental governmental authority concerning this
matter. Notwithstanding Armco's indemnification obligations with respect to the
Titusville facility, if the Company accelerates the timing or increases the cost
of any environmental obligation retained by Armco except as required by law or
for the protection of public health or the safety of its employees, the Company
shall bear such accelerated or increased cost. If the Company accelerates the
timing or increases the cost of any environmental obligation retained by Armco
with respect to the Titusville facility as a result of seeking financing or the
sale of less than a controlling interest in the voting stock of the Company,
such accelerated or increased cost shall be borne equally by Armco and the
Company. Certain processes that were employed by Armco, and certain facilities
used by Armco that may have involved or been the site of activities that could
have caused environmental pollution at the Titusville facility, are not employed
or used by the Company. There may be other environmental conditions that have
not been identified by regulatory authorities but which may later be determined
to require remediation.
The Company's exclusive remedies for reimbursement from Armco for losses
stemming from pre-closing environmental conditions at each of the Bridgeville
facility and the Titusville facility are the indemnities agreed to with respect
to each of the facilities. There can be no assurance that those indemnities
will fully cover all environmental liabilities, especially if the relevant
regulatory authorities or others were to proceed solely against the Company with
respect to those liabilities at the Bridgeville facility that arise out of
conditions existing prior to the commencement of the Armco Lease on August 15,
1994 (an event the Company believes is unlikely), and there can be no assurance
that the Company will have the financial resources to discharge those
liabilities if legally compelled to do so. See "Risk Factors--Environmental
Issues."
Based on the foregoing and the experience of its senior executives with respect
to both Armco's and the Company's facilities and the equipment and processes
employed at the Bridgeville facility, and the results of the Phase I and Phase
II environmental study of the Titusville facility, the Company believes the
amount and terms of the Armco indemnities are sufficient to protect the Company
against environmental liabilities arising from environmental conditions prior to
August 15, 1994, with respect to the Bridgeville facility, and prior to June 2,
1995, with respect to the Titusville facility.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's best
knowledge, threatened against the Company.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
At December 31, 1998, a total of 6,320,036 shares of the Company's Common Stock,
par value $.001 per share, were issued and outstanding, and held by
approximately 211 holders of record.
Certain holders of Common Stock and the Company are party to a stockholder
agreement. That agreement maintains in effect certain registration rights
granted to non-management stockholders, which provides to them two demand
registration rights exercisable at any time upon written request for the
registration of Restricted Shares of Common Stock having an aggregate net
offering price of at least $5,000,000 (the "Registrable Securities").
Price Range of Common Stock
The information called for by this item is set forth on page 35 of the Annual
Report to Stockholders for the year ended December 31, 1998, which is
incorporated herein by reference.
Preferred Stock
The Company's Certificate of Incorporation provides that the Company may, by
vote of its Board of Directors, issue the Preferred Stock in one or more series
having the rights, preferences, privileges and restrictions thereon, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or designation of such series, without further vote or
action by the stockholders. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
The Company has no outstanding Preferred Stock and has no plans to issue any of
the authorized Preferred Stock.
Dividends
The Company has never paid a cash dividend on its Common Stock and currently has
no plans to pay dividends in the foreseeable future. Restrictions contained in
the Company's Credit Agreement with PNC currently prohibits the payment of cash
dividends on Common Stock.
11
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is set forth on page 36 of the Annual
Report to Stockholders for the year ended December 31, 1998, which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this item is set forth on pages 15 through 19 of
the Annual Report to Stockholders for the year ended December 31, 1998, which
are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Prices for the Company's raw materials are subject to frequent market
fluctuations. The Company does not maintain long term supply agreements for its
raw material needs. Raw material price increases are normally off-set by
selling price increases and surcharges.
The Company is exposed to market risk from changes in interest rates related to
its long-term debt. At December 31, 1998, the Company's total long-term debt,
including the current portion was $12,958,000. Of that amount, $2,958,000 has
fixed rates and $10,000,000 bears a variable rate. Assuming a 10% increase in
interest rates on the Company's variable rate (an increase from the December 31,
1998 interest rate of 6.34% to an interest rate of 6.98%), annual interest
expense would be approximately $63,000 higher based on the December 31, 1998
balance of variable rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth on pages 21 through 34 of
the Annual Report to Stockholders for the year ended December 31, 1998, which
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the directors of the Company is set forth in the
Proxy Statement (the "Proxy Statement") to be sent to stockholders in connection
with the Company's Annual Meeting of Stockholders to be held on May 25, 1999,
under the heading "Proposal No. 1--Election of Directors," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1) Consolidated Financial Statements:
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, appearing on pages 20 through 34 of the
accompanying Annual Report, are incorporated by reference in this Form 10-K
Annual Report.
2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and have therefore been
omitted.
3) Exhibits:
Exhibit
- -------
Number Description Page No.
- ------- ----------- --------
2.1 Certificate of Merger, dated July 29, 1994, between Universal Stainless & Alloy Products, Inc., a Pennsylvania
Corporation, and the Company (incorporated herein by reference to Exhibit 2.1 to Registration No. 33-85310).
2.2 Agreement and Plan of Merger, dated July 28, 1994, among Universal Stainless & Alloy Products, Inc., a
Pennsylvania Corporation, and the Company (incorporated herein by reference to Exhibit 2.2 to Registration No.
33-85310).
2.3 Asset and Real Property Purchase Agreement, dated as of June 2, 1995, by and between Armco Inc. and the Company
(incorporated herein by reference to Exhibit 2.3 to Registration No. 33-97896).
3.1 Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to
Registration No. 33-85310).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to Registration No. 33-85310).
4.1 Specimen copy of Stock Certificate for shares of Common Stock (filed herewith).
4.2 Form of Representative's Warrant Agreement (including Form of Representative's Warrant Certificate) (incorporated
herein by reference to Exhibit 4.2 to Registration No. 33-85310).
10.1 Stockholders Agreement, dated as of August 1, 1994, by and among the Company and its existing stockholders
(incorporated herein by reference to Exhibit 10.8 to Registration No. 33-85310).
10.2 Asset Purchase Agreement, dated August 15, 1994, by and between the Company and Armco Inc., as amended by letter
agreement, dated October 5, 1994, by and between the Company and Armco, Inc. (incorporated herein by reference to
Exhibit 10.12 to Registration No. 33-85310).
10.3 Lease Agreement, dated August 15, 1994, by and between Armco Inc. and the Company (incorporated herein by
reference to Exhibit 10.9 to Registration No. 33-85310).
10.4 Security Agreement, dated August 15, 1994, by and between the Company and Armco Inc. (incorporated herein by
reference to Exhibit 10.21 to Registration No. 33-85310).
10.5 Employment Agreement, dated November 20, 1998 by and between the Company and Clarence M. McAninch (filed
herewith).
14
EXHIBIT
- -------
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- -------
10.6 Employment Agreement, dated August 15, 1998, by and between the Company and Daniel J. DeCola, Sr. (filed
herewith).
10.7 Employment Agreement, dated August 1, 1998, by and between the Company and A. Bruce Kennedy (filed herewith).
10.8 Employment Agreement dated January 1, 1998 between the Company and Paul McGrath (incorporated herein by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.9 Employment Agreement dated January 1, 1998 between the Company and Richard M. Ubinger (incorporated herein by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.10 1994 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.25 to Registration No. 33-85310).
10.11 Collective Bargaining Agreement, dated May 3, 1995, by and between the Company and United Steelworkers of America
(incorporated herein by reference to Exhibit 10.42 to Registration No. 33-97896).
10.12 Collective Bargaining Agreement, dated September 1, 1997, by and between the Company and United Steelworkers of
America (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.13 Credit Agreement, dated as of January 30, 1998, between the Company and PNC Bank, National Association, with
Exhibits and Schedules (incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.14 Security Agreement and Collateral Assignment, dated as of January 30, 1998, by and between the Company and PNC
Bank, National Association (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.15 Note, dated as of January 30, 1998, by and between the Company and PNC Bank, National Association (incorporated
herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.16 Landlord's Waiver, dated as of January 30, 1998, by Armco Inc (incorporated herein by reference to Exhibit 10.16
to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.17 Open-End Leasehold Mortgage, Collateral Assignment and Security Agreement dated as of January 30, 1998, by the
Company in favor of PNC Bank, National Association (incorporated herein by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.18 First Amendment to Credit Agreement, dated as of December 31, 1998, between the Company and PNC Bank, National
Association (filed herein).
10.19 Supply Contract Agreement, dated as of January 1, 1999, between the Company and Talley Metals Technology, Inc. a
subsidiary of Carpenter Technologies, Inc. (filed herein).
10.20 Loan Agreement, dated October 3, 1995, by and between the Company and Commonwealth of Pennsylvania (incorporated
herein by reference to Exhibit 10.47 to Registration No. 33-97896).
10.21 Note, dated October 3, 1995, for the principal sum of $500,000, by the Company, in favor of the Commonwealth of
Pennsylvania (incorporated herein by reference to Exhibit 10.48 to Registration No. 33-97896).
15
EXHIBIT
- -------
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- -------
10.22 Security Agreement, dated October 3, 1995, by and between the Company and the Commonwealth of Pennsylvania
(incorporated herein by reference to Exhibit 10.48 to Registration No. 33-97896).
10.23 Underwriting Agreement, dated December 14, 1994, among the Company and Keane Securities Co., Inc., as
representatives of the several underwriters (incorporated herein by reference to Exhibit 10.52 to Registration
No. 33-85310).
10.24 Equipment Purchase Agreement dated as of November 6, 1997 between the Company and Hetran, Inc. for the purchase of
certain bar finishing equipment (incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
13.01 Selected pages of the Company's 1998 Annual Report to Shareholders incorporated by reference into Parts II and
III of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
23.01 Consent of PricewaterhouseCoopers LLP.
24.01 Powers of Attorney (included on the signature page hereto).
27.01 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the fourth quarter of
1998:
The Company's Current Reports on Form 8-K, dated October 19, 1998 and
November 25, 1998.
16
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on March
30, 1999.
Universal Stainless & Alloy Products, Inc.
By: /s/ C. M. McAninch
--------------------------------------
Clarence M. McAninch
President and Chief Executive Officer
Power of Attorney
Each of the officers and directors of Universal Stainless & Alloy Products,
Inc., whose signature appears below in so signing also makes, constitutes and
appoints Clarence M. McAninch and Paul A. McGrath, and each of them acting
alone, his true and lawful attorney-in-fact, with full power of substitution,
for him in any and all capacities, to execute and cause to be filed with the
Securities Exchange Commission any and all amendment or amendments to this
Report on Form 10-K, with exhibits thereto and other documents connected
therewith and to perform any acts necessary to be done in order to file such
documents, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ C. M. McAninch
- ------------------------------------ President, Chief Executive Officer March 30, 1999
Clarence M. McAninch and Director
/s/ Richard M. Ubinger
- ------------------------------------ Chief Financial Officer and Treasurer, March 30, 1999
Richard M. Ubinger (Principal Accounting Officer)
/s/ Douglas M. Dunn
- ------------------------------------ Director March 30, 1999
Douglas M. Dunn
/s/ George F. Keane
- ------------------------------------ Director March 30, 1999
George F. Keane
/s/ Udi Toledano
- ------------------------------------ Director March 30, 1999
Udi Toledano
/s/ D. Leonard Wise
- ------------------------------------ Director March 30, 1999
D. Leonard Wise
17
Exhibit 4.1
060473
Number Shares
USC ________ ________
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP 913837 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that ___________________________________________________________
is the owner of _______________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(hereinafter called the "Corporation") transferable on the books
of the Corporation in person or by duly authorized attorney
upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to all the provisions of the Certificate of Incorporation
and By-laws of the Corporation and the amendments from time to time made
thereto, copies of which are or will be on file at the principal office of the
Corporation to all of which the holder by acceptance hereof assents. This
Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CORPORATE
SEAL
1994
DELAWARE
Dated:
/s/ Paul A. McGrath /s/ C. M. McAninch
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT
BY AND REGISTRAR
AUTHORIZED OFFICER
AMERICAN BANK NOTE COMPANY.
The Company will furnish to any shareholder upon request and without charge
a full statement of the designation, relative rights, preferences and
limitations of the shares of each class authorized to be issued and the
designation, relative rights, preferences and limitations of each series of
preferred shares which the Company is authorized to issue so far as the same
have been fixed, and the authority of the Board of Directors of the Company to
designate and fix the relative rights, preferences and limitations of other
series.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--_____________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated ___________________________
_______________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:_______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST,
STOLEN, MUTILATED OR DESTROYED, THE CORPORATION
WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION
TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
Exhibit 10.5
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made as of the 20th day of November, 1998
---- -------- -
by and between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a Delaware
corporation (the "Company"), and Clarence M. McAninch (the "Employee").
--------------------
WITNESSETH:
In consideration of the covenants and agreements herein contained, and
intending to be legally bound hereby, the Company and Employee agree that this
Agreement supercedes any previous and/or existing Employment Agreement between
the parties. Any notices or other requirements required for termination of
previous agreements are hereby considered given. The Company and Employee
further agree as follows:
Article 1. - Employment
-----------------------
1.1. Employment. The Company agrees to employ Employee, and Employee
----------
agrees to serve the Company, for the period stated in Article 2 hereof (the
"Term of Employment") and upon the other terms and conditions herein provided.
1.2. Position and Responsibilities. The Company hereby employs
-----------------------------
Employee, and Employee agrees to serve as President and Chief Executive Officer
of the Company and to accept such other responsibilities as may be assigned to
Employee, subject to the general direction, approval and control of the
directives of the Board of Directors, from time to time during the Term of
Employment.
1.3. Duties. During the Term of Employment, Employee shall devote
------
all of his business time, attention, skill and efforts to the faithful
performance of his duties hereunder.
Article 2. - Term
-----------------
The Term of Employment shall commence as of November 20, 1998
----------- -
(the "Effective Date"), and shall continue until the 1st anniversary of the
---
Effective Date (the "Expiration Date"), unless sooner terminated by one of the
parties as permitted in this Agreement or the term of the Agreement will
automatically extend for one-year periods, expiring on November 20th of each
subsequent year, barring a notice by the Company not to extend, delivered at
least sixty (60) days prior to any expiration date.
Article 3. - Compensation
-------------------------
3.1. Salary. As compensation to the Employee for the performance of
------
services hereunder, the Company shall pay to the Employee a base salary (the
"Salary") of Two hundred thousand dollars ($200,000.00) per year. Installments
------------------------------------------
of the Salary shall be paid to the Employee in accordance with the standard
procedure of the Company, which at the present time is once every two (2) weeks.
During the period of this Agreement, Employee's salary shall be reviewed at
least annually and may be adjusted if the Board of Directors of the Company (the
1
"Board"), the Compensation Committee (the "Compensation Committee") or the
Compensation Sub-Committee ("Sub-Committee") determines that an adjustment is
appropriate on the basis of the types of factors it generally takes into account
in adjusting the salaries of employees of the Company.
3.2 Bonus The Employee shall be eligible to receive a bonus, as
-----
additional compensation, as approved by the Board, or the Compensation
Committee, or the Sub-Committee.
3.3 Reimbursement of Expenses. The Company will reimburse the
-------------------------
Employee for those customary and necessary business expenses incurred by him in
the performance of his duties and activities on behalf of the Company. Except
as provided in this Agreement, such expenses will be reimbursed only on
presentation by the Employee of appropriate documentation to substantiate such
expenses pursuant to the policies and procedures of the Company governing
reimbursement of business expenses to its Employees.
3.4 Participation in Plans. The Employee shall be entitled to
----------------------
participate in any applicable incentive compensation or bonus plan, medical,
dental, health, hospitalization, travel, accident, life, and/or disability
insurance plans and in any sick leave and/or salary continuation plan, vacation
(which shall not be less than two (2) weeks per year), holiday pay, retirement
or employee benefit plan or program generally offered by the Company to its
salaried employees, or as specified herein.
3.5 Automobile. In recognition of Employee's need of an automobile
----------
for business purposes, Employer shall provide Employee with an automobile, a
late-model sedan manufactured by a United States automobile manufacturer,
including all related maintenance, repairs, insurance and other costs, and a
modern portable telephone for carrying out his duties under this Agreement.
3.6 Insurance. (a) Employer may, in its sole and absolute
---------
discretion, at any time after the execution of this Agreement, apply for and
procure as owner for its own benefit life insurance or disability insurance on
Employee, in such amounts and in such form or forms as Employer may determine.
The Employee shall, at the request of Employer, subject to such medical
examinations, supply such information and execute such documents as may be
required by the insurance company or companies to whom Employer has applied for
such insurance.
(b) Employer shall also apply for and procure for Employee's benefit a
life insurance policy on Employee, listing Employee's designated beneficiaries,
in the amount of two million dollars ($2,000,000) for the term of this
Agreement.
3.7 Physical Condition of Employee. In entering into this
------------------------------
Agreement, Employer is relying on the good health and physical condition of
Employee. Employee hereby represents and warrants to Employer that, to the best
of his knowledge and belief, he is in good health and physical condition and
knows of no mental or physical limitation which could cause him to be unable to
perform his duties under the terms of this Agreement.
2
3.8 Right to Indemnification. The Company shall indemnify and hold
-------------------------
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, the Employee who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") by reason of the fact that the Employee, is or was an officer of
the Company, including service with respect to employee benefit plans, against
all liability and loss suffered and expenses (including attorneys' fees)
reasonably incurred by the Employee. The Company shall be required to indemnify
the Employee in connection with a proceeding (or part thereof) initiated by the
Employee only if the proceeding (or part thereof) was authorized by the Board of
Directors of the Company.
The Company shall pay the expenses (including attorney's fees)
incurred in defending any proceeding in advance of its final disposition,
provided, however, that the payment of expenses incurred by a director or
- -------------------
officer in advance of the final disposition of the proceeding shall be made only
upon receipt of an undertaking by the director or officer to repay all amounts
advanced if it should be ultimately determined that the director or officer is
not entitled to be indemnified under this Article or otherwise.
If a claim for indemnification or payment of expenses under this
Article is not paid in full within sixty days after a written claim therefore
has been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Company shall have the burden of proving that the claimant was not entitled
to the requested indemnification or payment of expenses under applicable law.
The rights conferred on the Employee by this Section 3.8 shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Restated Certificate of Incorporation, the
Company By-Laws, agreement, vote of stockholders or disinterested directors or
otherwise.
The Company's obligation, if any, to indemnify the Employee who was or
is serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or
nonprofit enterprise.
3.9 Adherence to Standards. Employee shall adhere to all the
----------------------
policies, practices and procedures as set forth expressly, in writing, by
Employer's Board of Directors and shall not, knowingly and intentionally, during
the term of his employment with Employer, engage in any conduct, or expressly
condone any act or conduct of other persons, which causes Employer to be (i) in
violation of any law or statute, unless such action is approved by Employer's
Board of Directors or (ii) in violation of any express directives or resolutions
of Employer's Board of Directors; provided however, if Employee discovers a
violation of law in which he did not participate which has exposed Employer to
liability, he shall report such violation to the Board of Directors immediately
upon discovery of such violation, at which time he shall have fulfilled his
obligations hereunder with respect to that violation, and shall not be in breach
of this Section 3.9 in connection with that violation.
3
Article 4. - Termination of Employment
--------------------------------------
4.1. Definitions. For the purposes hereof:
-----------
(a) "Disability" shall be deemed to have occurred at the same time as
the Employee has been determined to be entitled to benefits under the Company's
Short Term or Long Term Disability Plan then in effect.
(b) "Cause" shall mean any of the following: (i) Employee's personal
dishonesty, incompetence or willful misconduct; (ii) Employee's willful
violation of any law or material rule or regulation, provided that such
violation is demonstrably and materially injurious to the assets, operations or
business prospects of the Company; (iii) the conversion or embezzlement for the
personal benefit of the Employee of corporate funds or property or a material
business opportunity of the Company; (iv) the misuse by the Employee for his
personal benefit of any trade secrets or other information of the Company in
violation of the provisions of Article 7 of this Agreement; or (v) Employee's
material breach of any other provision of this Agreement which is not cured
within thirty (30) days of receipt of notice of such breach from Company.
(c) "Good Reason" shall, absent the Employee's express written consent
to such action, mean the occurrence of any one of the following: (i) following a
Change of Control, the removal of the Employee as President and Chief Executive
Officer of the Company (by reason other than death, disability or cause); (ii)
any material breach by the Company of its respective or joint obligations
contained in this Agreement not cured within 30 days after written notice; (iii)
the assignment to the Employee of any duties inconsistent with his status as
President and Chief Executive Officer of the Company or a substantial alteration
in the nature or status of the Employee's duties and responsibilities which
renders the Employee's position to be of less dignity, responsibility or scope;
(iv) a reduction by the Company in the Employee's annual base salary as in
effect on the date hereof or as the same may be increased from time to time,
except for proportional across-the-board salary reductions due to economic
conditions of the Company similarly affecting all Executive Employees of the
Company, for at least six (6) months, provided, however, that in no event shall
the Employee's base salary be reduced by more than fifteen percent (15%) below
the per year amount set forth in Section 3.1 hereof without the Employee's
consent; (v) the relocation of the principal executive offices of the Company to
a location outside the Greater Pittsburgh Metropolitan area or the Company's
requiring the Employee to be based anywhere other than Company's principal
executive offices except for required travel on Company's business; or (vi) any
material reduction by the Company of the benefits enjoyed by the Employee under
any of the savings, life insurance, medical, health-and-accident, disability or
other employee welfare benefit plans or programs, including vacation days,
corporate time, provided that this paragraph (vi) shall not apply to any
proportional across-the-board reduction or action similarly affecting all
executives of the Company; (vii) within sixty (60) days of receipt of notice not
to extend this Agreement, the employee may elect to resign for "Good Reason" in
which case the notice not to extend shall constitute notice to the Company by
the employee of the "Good Reason."
Notwithstanding the foregoing, except as stated in (vii) of this
section, no event of "Good Reason" shall be deemed to have occurred unless
Employee provides to the General Counsel written notice of the facts and
circumstances which Employee believes constitutes "Good Reason"
4
under this Section 4.1(c) and such facts and circumstances are not corrected or
otherwise cured by the Company within thirty (30) days of receipt thereof.
For purposes of this Agreement, a Change of Control shall be deemed to
have occurred the earlier of (i) if, in any transaction or a series of related
transactions consummated in a ninety day period, more than fifty percent (50%)
of the then outstanding voting common stock of the Company is sold to a person
or group; (ii) a merger or consolidation of the Company and another entity in
which the Company is not the surviving corporation or in which more than fifty
percent (50%) of the equity ownership of the Company changes and (iii) the sale
of substantially all of the assets of the Company.
(d) "Notice of Termination" shall mean written notice which shall
indicate the specific termination or resignation provisions in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination or resignation under the
provision so indicated and shall include a certified statement of the General
Counsel approving such termination in the case of a Termination by the Company
for Cause or Without Cause.
(e) "Date of Termination" shall mean the date specified in the Notice
of Termination as the effective date of the Employee's employment termination
for any reason or the Employee's effective date of resignation, which ever is
earlier.
Article 5. - Compensation Upon Termination
------------------------------------------
5.1. Death. If the Employee dies during the Term, this Employment
-----
Agreement shall terminate and any benefits accruing and owing to Employee by
Employer at the time of his death shall inure to the benefit of his successors,
assigns and/or personal representatives.
5.2. Disability. If during the Term of this Agreement, the Employee
----------
becomes physically or mentally disabled, whether totally or partially, so that
the Employee is unable substantially to perform his duties hereunder for (i) a
period of three (3) consecutive months or (ii) for shorter periods aggregating
four (4) months during any 12-month period such that Employee's performance is
materially impaired, the Employer may at any time after the last day of the
three (3) consecutive months of disability or the day on which the shorter
periods of disability equal an aggregate of four (4) months, terminate this
Employment Agreement by written notice addressed to the Employee, upon which
notice this Employment shall terminate during such disability. The Company
shall pay to the Employee for a period of four (4) weeks, payments on the
regular pay dates in an amount equal to 100% of his then regular bi-weekly pay
(1/26 of annual base pay), and for a period of twenty-two (22) weeks, payments
on the regular pay dates, 60% of his then regular bi-weekly pay (1/26 of annual
base pay), in addition thereto, the Employee shall be entitled to receive such
amounts as are then provided pursuant to applicable plans, programs or
arrangements. The Company may carry insurance to cover this liability and in
such case would not require a separate salary continuation.
5
5.3. By the Company with Cause or if the Employee Resigns or Quits
-------------------------------------------------------------
without Good Reason. If the Employee's employment hereunder is terminated by
- -------------------
the Company for Cause, or if the Employee resigns or quits without good reason,
the Company shall pay to the Employee his full base salary through the Date of
Termination but at a rate no greater than that in effect at the time Notice of
Termination is given, and the Company shall have no further obligations to the
Employee under this Agreement.
If a discharge for Cause occurs based upon alleged facts upon which
Employee and Employer are in dispute, until such time as an arbitration
proceeding in accordance with paragraph A. below shall have resolved the
dispute, Employee shall be entitled to continue to receive his salary until the
earlier to occur of (i) 90 days from the date of the contested Discharge for
Cause or (ii) the date of the final decision in the arbitration proceeding set
forth in paragraph A below:
A. Any controversy, dispute or claim under this Section 5.3 shall be
submitted to arbitration in Pittsburgh, Pennsylvania, under the following
provisions:
Employee shall submit in writing to the Company a statement
("Claim statement") describing such matter or dispute and the resolution or
relief sought and naming one qualified reputable individual willing and able to
act as an arbitrator. A counterstatement ("Counterstatement") from the company
shall be delivered to Employee within ten (10) business days after receipt of
the Claim Statement, or the right to file the Counterstatement shall be
irrevocably waived and the dispute will be heard by the sole arbitrator
designated. Any Counterstatement shall name one qualified reputable individual
willing and able to act as an arbitrator. If two (2) arbitrators have been so
appointed the two (2) arbitrators so appointed shall jointly select a third
arbitrator within ten (10) business days after the date of the Counterstatement.
Any qualified reputable individual selected shall be an existing member of the
American Arbitration Association or other nationally recognized group of
arbitrators of similar stature. If three (3) arbitrators will decide the
dispute, they (the "Arbitrators") shall confer within ten (10) business days
after the selection or other determination of the third arbitrator. The
Arbitrators may, if they so desire and agree (or if no Counterstatement is
filed, the sole arbitrator may) invite submission of further statements or
evidence, hold hearings in Pittsburgh, Pennsylvania, and/or consult outside
experts for assistance in deciding such matter or dispute, but it is the
parties' intent that the Arbitrators (or sole arbitrator) reach a decision
promptly and no later than twenty (20) business days after the selection of the
third arbitrator or the failure to timely file a Counterstatement. Should any
hearings be held by the Arbitrators (or the sole arbitrator) the parties to the
dispute may be present with the full right on their part to cross-examine. The
majority decision of the Arbitrators (or the decision of the sole arbitrator) as
to each and all mater(s) or dispute(s) so submitted for decision shall be final
and binding upon all parties hereto. In resolving any matter or dispute, the
Arbitrators (or sole arbitrator) may fashion any remedy or hereby release any
and all errors which may occur in such proceedings and the Arbitrators (or sole
arbitrator) from any and all liability for actions taken or omissions made in
good faith in such capacity. The parties to the dispute shall bear equally the
fees of, and expenses incurred by, the Arbitrators (or sole arbitrator) in
resolving any and all such matters and disputes. A business day shall mean any
day other than Saturday, Sunday and days on which banks in Pennsylvania are
prohibited from doing business. Without limiting the foregoing the Arbitrators
(or sole arbitrator) shall have all of the powers and the parties shall hold all
the rights
6
accorded to arbitrators in commercial arbitrations under the rules of the
American Arbitration Association.
5.4. By the Company Without Cause or by the Employee by Resignation
--------------------------------------------------------------
for Good Reason. If the Employee's employment hereunder is terminated by the
- ---------------
Company without Cause or is terminated by the Employee pursuant to his
Resignation for Good Reason, then the Employee shall be entitled to the benefits
provided below, which shall constitute complete satisfaction of the obligations
of the Company to the Employee under this Agreement:
(a) The Company shall pay the Employee his full annual base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given.
(b) Subsequent to the Date of Termination, the Company shall pay as
severance pay to the Employee, a lump sum payment equal to the Employee's full
base salary at the rate then in effect for a period of eighteen (18) months, or
pay to the Employee the full base salary rate in the regular pay periods for
eighteen (18) months from termination.
(c) The Company will provide health care benefits to the employee as
provided prior to termination for the employee and eligible dependents for
eighteen (18) months at no cost to the employee. This period will not reduce the
eligible COBRA period.
(d) The Employee shall not be required to mitigate the amount of any
payments provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Agreement be
reduced by any compensation earned by the Employee as the result of employment
by another employer, or otherwise.
(e) Notwithstanding any provisions herein to the contrary, the
Employee shall be entitled to receive all benefits to which the Employee is
entitled under the terms of any of the Company's qualified employee benefit
plans and any other plan, program or arrangement relating to retirement or other
benefits including, without limitation, any employee stock ownership plan or any
plan now in effect which is established (with approval of the Board of
Directors) as a supplement to any of the aforenamed plans, except as otherwise
provided in such plans as a result of the Employee's termination of employment.
5.5. Termination at the Cessation of the Term. The Employee's
----------------------------------------
employment hereunder will terminate at the end of the Term on 60 day's notice.
All salary and benefits of the Employee hereunder will continue to be paid to
the Employee only for the remainder of the Term of this Employment Agreement.
Article 6. - Duties of Employee After
-------------------------------------
Termination of Employment
-------------------------
Following any termination of Employee's employment and for a period of
ninety (90) days thereafter, the Employee shall fully cooperate with the Company
in all matters relating to the winding up and orderly transfer of the Employee's
work on behalf of the Company. Not later than the effective date of any
termination of the employment, the Employee will immediately deliver to the
Company any and all of the Company's property of any kind or nature
7
whatsoever in the Employee's possession, custody or control, including, without
limitation any and all Confidential Information as that term is defined in
Section 7 of this Agreement.
Article 7. - Confidential Information; Invention Assignment
-----------------------------------------------------------
7.1. Confidential Relationship. Employee understands and agrees that
-------------------------
all company manuals, company policies, marketing plans and surveys, product
designs, schematics, specifications and product location and installation data,
formulae, processes, methods, machines, compositions, customer information,
ideas, inventions, financial information and plans of the Company and all
records, correspondence, files, customer lists, data and other information
pertaining to or concerning the Company, its principals, vendors and customers
(collectively the "Confidential Information") contain valuable confidential
information that is owned by the Company, and, therefore, that during the period
of employment hereunder and at all times thereafter, Employee shall not utilize
such Confidential Information for his own benefit or for the benefit of any
person or entity other than the Company, nor shall he divulge or communicate any
such Confidential Information to any person or entity without the express
authorization of the Company. The Employee agrees that, on the termination of
his employment, he will immediately surrender to the Company any and all
Confidential Information in his possession pertaining to the Company and its
business.
7.2. Assignment of Rights. All inventions, discoveries, designs,
--------------------
developments, technology, computer programs, writings and reports that are made
or conceived of by the Employee in the course of his employment with the
Company, whether or not patentable or copyrightable, shall become and remain the
sole property of the Company without additional compensation to Employee. The
Employee recognizes that all such works shall be considered works-for-hire and
hereby transfers and assigns any right, title, copyright and interest that
Employee acquires in such works to the Company and will, from time to time, give
the Company all reasonable assistance, execute all papers and do all things that
may reasonably be required to protect and preserve the rights of the Company in
such works.
7.3. No Breach of Other Obligations. The Employee represents that, in
------------------------------
the course of performing services for the Company, he will not breach any
agreement he may have with others with respect to confidential information, and
will not bring to the Company or use in any way any materials or documents
obtained from others under an agreement of confidentiality.
Article 8. - Source of Payments
-------------------------------
All payments provided for under this Agreement shall be paid in cash
from the general funds of the Company and no special or separate fund shall be
established and no other segregation of assets shall be made to assure payment
unless specifically permitted herein. No trust or fiduciary relationship with
respect to payments shall be deemed created hereby and, to the extent that any
person acquires a right to receive payments hereunder, such right shall be no
greater than the rights of a general creditor of the Company.
8
Article 9. - Covenants Against Competition; No Solicitation
-----------------------------------------------------------
9.1. Restrictive Covenant - Non-Compete. During the term of this
-----------------------------------
Employment Agreement, and for a period of one (1) year following the termination
of the Employees' employment hereunder, in the case of (i) a "Discharge for
Cause", (ii) a voluntary resignation by the Employee, or (iii) termination
without cause, and in consideration of the Employer's agreement to pay the
Employee the salary, bonus and benefits described herein, the Employee agrees
that he shall not, directly or indirectly, engage or be interested in any
business of producing, manufacturing, marketing or distributing semi-finished
stainless steel products as produced by Employer or any other product which the
Company may engage in selling (the "Steel Business") and competing with
Employer, anywhere in the Unites States, without the prior written consent of
Employer, which consent will not be withheld unreasonably. The Employee shall be
deemed to be, directly or indirectly, engaged in such a business if he is
engaged in that type of business as a stockholder, director, officer, employee,
salesman, sales representative, agent broker, partner, individual proprietor,
lender, consultant or in any similar capacity, except that beneficial ownership
by the Employee (together with any one or more members of his immediate family
and together with any entity under his direct or indirect control) of 12% or
less of the outstanding shares of capital stock of any corporation which may be
engaged in the Steel Business which stock is listed on a national securities
exchange or publicly traded in the over-the-counter market shall not constitute
a breach of the covenants in this paragraph.
9.2. Restrictive Covenant - Non-Solicitation. The Employee shall
---------------------------------------
not directly or indirectly for a period of one (1) year following the
termination of the Employee's employment hereunder for any reason actively
solicit business from or engage in business with persons or entities which were
the customers of the Employer at anytime during the Employee's employment
hereunder, which solicitation or engagement is made for the purpose of selling
semi-finished steel products or any other product which the Company may engage
in selling in competition with Employer. This paragraph, however, shall not
prevent the Employee from soliciting or engaging in business with such persons
or entities if such solicitation or business does not involve sales of semi-
finished stainless steel products or any other product which employer may engage
in selling.
9.3. Restrictive Covenant - Restricted Hiring. The Employee shall
----------------------------------------
not directly or indirectly for a period of one (1) year following the
termination of the Employee's employment hereunder for any reason actively
solicit for employment any person who is employed by the Employer during the
term of the Employees' employment, for the purpose of engaging in the sale of
semi-finished stainless steel products or any other product which Employer may
engage in selling.
9.4. Rights and Remedies upon Breach. If the Employee breaches any of
--------------------------------
the provisions of Paragraphs 9.1, 9.2, or 9.3 hereof (the "Restrictive
Covenants"), the Employer shall have the following rights and remedies, each of
which rights and remedies shall be independent of the others and severally
enforceable, and each of which is in addition to, and not in lieu of, any other
rights and remedies available to the Employer under law or in equity:
1. Specific Performance. The right and remedy to have the Restrictive
--------------------
Covenants specifically enforced by any court of competent
9
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Employer and
that money damages would not provide an adequate remedy to the Employer.
2. Accounting. The right and remedy to require the Employee to
----------
account for and pay over to the Employer all compensation, profits, monies,
accruals, increments or other benefits derived or received by him as the
result of any transactions constituting a breach of the Restrictive
Covenants.
9.5 Severability of Covenants. The Employee acknowledges and
-------------------------
agrees that the Restrictive Covenants are reasonable and valid in geographical
and temporal scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect, without regard to the invalid portions.
9.6 Blue-Pencilling. If any court determines that any of the
----------------
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced for, such provision shall then be enforceable.
9.7 Enforceability in Jurisdictions. The Employer and the Employee
--------------------------------
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the geographical scope of such
Covenants. If the courts of any one or more of such jurisdictions hold the
Restrictive Covenants unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the Employer and the Employee that such
determination not bar or in any way affect the Employer's right to the relief
provided in this Section in the courts of any other jurisdiction within the
geographical scope of such Covenants, as to breaches of such Covenants in such
other respective jurisdictions, such Covenants as they relate to each
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
Article 10. - Miscellaneous
---------------------------
10.1 Indulgences, Etc. Neither the failure nor any delay on the part
----------------
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
10.2 Notices. All notices or communications hereunder shall be in
-------
writing, addressed as follows:
10
To the Company:
General Counsel
Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, PA 15017
To the Employee:
Clarence M. McAninch
113 Huron
Carnegie, PA 15106
Any such notice or communication shall be sent by certified or registered mail,
return receipt requested, postage prepaid, addressed as above (or to such other
address as such party may designate in writing from time to time), and the
actual date of receipt, as shown by the receipt therefor, shall determine the
time at which notice was given.
10.3 Assignment; Agreement. This Agreement shall be binding upon
---------------------
and inure to the benefit of the heirs and personal representatives of the
Employee, but neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Employee.
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company) to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of his Agreement and shall entitle the
Employee to compensation from the Employer in the same amount and on the same
terms as the Employee would be entitled hereunder if the Employee terminated his
employment pursuant to his Resignation for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be the Date of Termination. As used in this Agreement,
"Company" shall mean as hereinbefore defined and any successor to the business
and/or assets as aforesaid of either of them which assumes and agrees to perform
this Agreement by operation of law or otherwise.
10.4 Entire Agreement; Amendment. This Agreement represents the
---------------------------
entire agreement of the parties with respect to the subject matter hereof and
will supersede all prior agreements and understandings between the Employee and
the Company regarding the subject matter herein. This Agreement may be amended
or any provision hereof waived at any time only by written agreement of the
parties hereto.
11
10.5 Governing Law. This Agreement and its validity, interpretation,
-------------
performance and enforcement shall be governed by the laws of the Commonwealth of
Pennsylvania, other than the conflict of laws provisions of such laws.
10.6 Severability. If, for any reason, any provision of this
------------
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the remainder of such provision that is not held so invalid,
and the remainder of such provision, together with all other provisions of this
Agreement, shall to the full extent consistent with law continue in full force
and effect.
10.7 Headings. The Article and Section headings in this Agreement
--------
are for convenience of reference only; they form no part of this Agreement and
shall not affect its interpretation.
10.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
10.9 Jurisdiction. All disputes arising from or concerning this
------------
Agreement and employment relationship shall only be brought in any court of
competent jurisdiction located in Allegheny County, Pennsylvania.
IN WITNESS WHEREOF, the Company and the Employee have duly executed
this Agreement as of the day and year first written above.
UNIVERSAL STAINLESS & ALLOY
PRODUCTS, INC.
By:
-------------------------------
Title:
----------------------------
EMPLOYEE
----------------------------------
Clarence M. McAninch
12
Exhibit 10.6
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made as of the 15th day of August, 1998 by and
---- ------- -
between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a Delaware corporation (the
"Company"), and Daniel J. DeCola (the "Employee").
----------------
WITNESSETH:
In consideration of the covenants and agreements herein contained, and
intending to be legally bound hereby, the Company and Employee agree that this
Agreement supercedes any previous and/or existing Employment Agreement between
the parties. Any notices or other requirements required for termination of
previous agreements are hereby considered given. The Company and Employee
further agree as follows:
Article 1. - Employment
-----------------------
1.1. Employment. The Company agrees to employ Employee, and Employee
----------
agrees to serve the Company, for the period stated in Article 2 hereof (the
"Term of Employment") and upon the other terms and conditions herein provided.
1.2. Position and Responsibilities. The Company employs Employee,
-----------------------------
and Employee agrees to serve as Manager, Rolling & Finishing Operations of the
Company and to accept such other responsibilities as may be assigned to Employee
by the Company from time to time during the Term of Employment.
1.3. Duties. During the Term of Employment, Employee shall devote
------
all of his business time, attention, skill and efforts to the faithful
performance of his duties hereunder.
Article 2. - Term
-----------------
The Term of Employment shall commence as of August 15, 1998 (the
--------- -
"Effective Date"), and shall continue until the 1st anniversary of the
---
Effective Date (the "Expiration Date"), unless sooner terminated by one of the
parties as permitted in this Agreement or the term of the Agreement will
automatically extend for one-year periods, expiring on August 15 of each
subsequent year, barring a notice by the Company not to extend, delivered at
least sixty (60) days prior to any expiration date.
Article 3. - Compensation
-------------------------
3.1. Salary. As compensation to the Employee for the performance of
------
services hereunder, the Company shall pay to the Employee a base salary (the
"Salary") of One hundred and thirty-four thousand dollars ($134,000.00) per
----------------------------------------------------------
year. Installments of the Salary shall be paid to the Employee in accordance
with the standard procedure of the Company, which at the present time is once
every two (2) weeks. During the period of this Agreement, Employee's salary
shall be reviewed at least annually and may be adjusted if the Board of
Directors of the Company (the "Board"), the Compensation Committee (the
"Compensation Committee"), or the
-1-
President of the Company (President) determines that an adjustment is
appropriate on the basis of the types of factors it generally takes into account
in adjusting the salaries of employees of the Company.
3.2. Reimbursement of Expenses. The Company will reimburse the
-------------------------
Employee for those customary and necessary business expenses incurred by him in
the performance of his duties and activities on behalf of the Company. Except
as provided in this Agreement, such expenses will be reimbursed only on
presentation by the Employee of appropriate documentation to substantiate such
expenses pursuant to the policies and procedures of the Company governing
reimbursement of business expenses to its Employees.
3.3. Participation in Plans. The Employee shall be entitled to
----------------------
participate in any incentive compensation or bonus plan, life, medical, dental,
health, hospitalization, travel, accident and/or disability insurance plans and
in any sick leave and/or salary continuation plan, vacation (which shall not be
less than two (2) weeks per year), holiday pay, retirement or employee benefit
plan or program generally offered by the Company to its salaried employees.
Article 4. - Termination of Employment
--------------------------------------
4.1. Definitions. For the purposes hereof:
-----------
(a) "Disability" shall be deemed to have occurred at the same
time as the Employee has been determined to be entitled to benefits under the
Company's Short Term or Long Term Disability Plan then in effect.
(b) "Cause" shall mean any of the following: (i) Employee's
personal dishonesty, incompetence or willful misconduct; (ii) Employee's willful
violation of any law or material rule or regulation, provided that such
violation is demonstrably and materially injurious to the assets, operations or
business prospects of the Company; (iii) the conversion or embezzlement for the
personal benefit of the Employee of corporate funds or property or a material
business opportunity of the Company; (iv) the misuse by the Employee for his
personal benefit of any trade secrets or other information of the Company in
violation of the provisions of Article 7 of this Agreement; or (v) Employee's
material breach of any other provision of this Agreement which is not cured
within thirty (30) days of receipt of notice of such breach from Company.
(c) "Good Reason" shall, absent the Employee's express written
consent to such action, mean the occurrence of any one of the following: (i)
following a Change of Control, the removal of the Employee as Manager, Rolling &
Finishing Operations of the Company (by reason other than death, disability or
cause); (ii) any material breach by the Company of its respective or joint
obligations contained in this Agreement not cured within 30 days after written
notice; (iii) the assignment to the Employee of any duties inconsistent with his
status as Manager, Rolling & Finishing Operations of the Company or a
substantial alteration in the nature or status of the Employee's duties and
responsibilities which renders the Employee's position to be of less dignity,
responsibility or scope; (iv) a reduction by the Company in the Employee's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time, except for proportional across-the-board salary
reductions due to economic conditions of the Company similarly affecting all
Employees of the Company, for at least six (6) months,
-2-
provided, however, that in no event shall the Employee's base salary be reduced
by more than fifteen percent (15%) below the per year amount set forth in
Section 3.1 hereof without the Employee's consent; (v) the relocation of the
principal executive offices of the Company to a location outside the Greater
Pittsburgh Metropolitan area or the Company's requiring the Employee to be based
anywhere other than Company's principal executive offices except for required
travel on Company's business; or (vi) any material reduction by the Company of
the benefits enjoyed by the Employee under any of the savings, life insurance,
medical, health-and-accident, disability or other employee welfare benefit plans
or programs, including vacation days, corporate time, provided that this
paragraph (vi) shall not apply to any proportional across-the-board reduction or
action similarly affecting all executives of the Company; (vii) within sixty
(60) days of receipt of notice not to extend this Agreement, the employee may
elect to resign for "Good Reason" in which case the notice not to extend shall
constitute notice to the Company by the employee of the "Good Reason."
Notwithstanding the foregoing, except as stated in (vii) of this section,
no event of "Good Reason" shall be deemed to have occurred unless Employee
provides to the President of the Company written notice of the facts and
circumstances which Employee believes constitutes "Good Reason" under this
Section 4.1(c) and such facts and circumstances are not corrected or otherwise
cured by the Company within thirty (30) days of receipt thereof.
For purposes of this Agreement, a Change of Control shall be deemed to have
occurred the earlier of (i) if, in any transaction or a series of related
transactions consummated in a ninety day period, more than fifty percent (50%)
of the then outstanding voting common stock of the Company is sold to a person
or group; (ii) a merger or consolidation of the Company and another entity in
which the Company is not the surviving corporation or in which more than fifty
percent (50%) of the equity ownership of the Company changes and (iii) the sale
of substantially all of the assets of the Company.
(d) "Notice of Termination" shall mean written notice which
shall indicate the specific termination or resignation provisions in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination or resignation
under the provision so indicated and shall include a certified statement of the
Company President approving such termination in the case of a Termination by the
Company for Cause or Without Cause.
(e) "Date of Termination" shall mean the date specified in the
Notice of Termination as the effective date the Employee's employment is
terminated for any reason or the Employee's effective date of resignation, which
ever is earlier.
Article 5. - Compensation Upon Termination
------------------------------------------
5.1. Death. If the Employee's employment hereunder terminates by
-----
reason of his death, his beneficiaries shall be entitled to receive from the
Company such amounts as are then provided pursuant to plans, programs or
arrangements currently in effect or as approved from time to time by the Board
of Directors.
-3-
5.2. Disability. If the Employee's employment hereunder terminates
----------
by reason of his Disability, the Company shall pay to the Employee for a period
of one (1) month, payments on the regular pay dates in an amount equal to 100%
of his then monthly salary, and for a period of five (5) months, payments on the
regular pay dates, 60% of his then monthly salary, in addition thereto, the
Employee shall be entitled to receive such amounts as are then provided pursuant
to plans, programs or arrangements. The Company may carry insurance to cover
this liability and in such case would not require a separate salary
continuation.
5.3. By the Company with Cause or if the Employee Resigns or Quits
-------------------------------------------------------------
without Good Reason. If the Employee's employment hereunder is terminated by
- -------------------
the Company for Cause, or if the Employee resigns or quits without good reason,
the Company shall pay to the Employee his full base salary through the Date of
Termination but at a rate no greater than that in effect at the time Notice of
Termination is given, and the Company shall have no further obligations to the
Employee under this Agreement.
5.4. By the Company Without Cause or by the Employee by Resignation
--------------------------------------------------------------
for Good Reason. If the Employee's employment hereunder is terminated by the
- ---------------
Company without Cause or is terminated by the Employee pursuant to his
Resignation for Good Reason, then the Employee shall be entitled to the benefits
provided below, which shall constitute complete satisfaction of the obligations
of the Company to the Employee under this Agreement:
(a) The Company shall pay the Employee his full annual base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given.
(b) Subsequent to the Date of Termination, the Company shall
pay as severance pay to the Employee, a lump sum payment equal to the Employee's
full base salary at the rate then in effect for a period of twelve (12) months,
or pay to the Employee the full base salary rate in the regular pay periods for
twelve months from termination.
(c) The Company will provide health care benefits as provided
prior to termination for the employee and eligible dependents for twelve (12)
months at no cost to the employee. This period will not reduce the eligible
COBRA period.
(d) The Employee shall not be required to mitigate the amount
of any payments provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Agreement be
reduced by any compensation earned by the Employee as the result of employment
by another employer, or otherwise.
(e) Notwithstanding any provisions herein to the contrary, the
Employee shall be entitled to receive all benefits to which the Employee is
entitled under the terms of any of the Company's qualified employee benefit
plans and any other plan, program or arrangement relating to retirement or other
benefits including, without limitation, any employee stock ownership plan or any
plan now in effect which is established (with approval of the Board of
Directors) as a supplement to any of the aforenamed plans, except as otherwise
provided in such plans as a result of the Employee's termination of employment.
-4-
Article 6. - Duties of Employee After
-------------------------------------
Termination of Employment
-------------------------
Following any termination of Employee's employment and for a period of
ninety (90) days thereafter, the Employee shall fully cooperate with the Company
in all matters relating to the winding up and orderly transfer of the Employee's
work on behalf of the Company. Not later than the effective date of any
termination of the employment, the Employee will immediately deliver to the
Company any and all of the Company's property of any kind or nature whatsoever
in the Employee's possession, custody or control, including, without limitation
any and all Confidential Information as that term is defined in Section 7 of
this Agreement.
Article 7. - Confidential Information; Invention Assignment
-----------------------------------------------------------
7.1. Confidential Relationship. Employee understands and agrees that
-------------------------
all company manuals, company policies, marketing plans and surveys, product
designs, schematics, specifications and product location and installation data,
formulae, processes, methods, machines, compositions, customer information,
ideas, inventions, financial information and plans of the Company and all
records, correspondence, files, customer lists, data and other information
pertaining to or concerning the Company, its principals, vendors and customers
(collectively the "Confidential Information") contain valuable confidential
information that is owned by the Company, and, therefore, that during the period
of employment hereunder and at all times thereafter, Employee shall not utilize
such Confidential Information for his own benefit or for the benefit of any
person or entity other than the Company, nor shall he divulge or communicate any
such Confidential Information to any person or entity without the express
authorization of the Company. The Employee agrees that, on the termination of
his employment, he will immediately surrender to the Company any and all
Confidential Information in his possession pertaining to the Company and its
business.
7.2. Assignment of Rights. All inventions, discoveries, designs,
--------------------
developments, technology, computer programs, writings and reports that are made
or conceived of by the Employee in the course of his employment with the
Company, whether or not patentable or copyrightable, shall become and remain the
sole property of the Company without additional compensation to Employee. The
Employee recognizes that all such works shall be considered works-for-hire and
hereby transfers and assigns any right, title, copyright and interest that
Employee acquires in such works to the Company and will, from time to time, give
the Company all reasonable assistance, execute all papers and do all things that
may reasonably be required to protect and preserve the rights of the Company in
such works.
7.3. No Breach of Other Obligations. The Employee represents that,
------------------------------
in the course of performing services for the Company, he will not breach any
agreement he may have with others with respect to confidential information, and
will not bring to the Company or use in any way any materials or documents
obtained from others under an agreement of confidentiality.
-5-
Article 8. - Source of Payments
-------------------------------
All payments provided for under this Agreement shall be paid in cash
from the general funds of the Company and no special or separate fund shall be
established and no other segregation of assets shall be made to assure payment
unless specifically permitted herein. No trust or fiduciary relationship with
respect to payments shall be deemed created hereby and, to the extent that any
person acquires a right to receive payments hereunder, such right shall be no
greater than the rights of a general creditor of the Company.
Article 9. - Miscellaneous
--------------------------
9.1. Indulgences, Etc. Neither the failure nor any delay on the part
----------------
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
9.2. Notices. All notices or communications hereunder shall be in
-------
writing, addressed as follows:
To the Company:
President
Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, PA 15017
To the Employee:
Daniel J. DeCola
2257 Chicora Road
Chicora, PA 16025
Any such notice or communication shall be sent by certified or registered mail,
return receipt requested, postage prepaid, addressed as above (or to such other
address as such party may designate in writing from time to time), and the
actual date of receipt, as shown by the receipt therefor, shall determine the
time at which notice was given.
9.3. Assignment; Agreement. This Agreement shall be binding upon and
---------------------
inure to the benefit of the heirs and personal representatives of the Employee,
but neither this Agreement nor any rights hereunder shall be assignable or
otherwise subject to hypothecation by the Employee.
-6-
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company) to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of his Agreement and shall entitle the
Employee to compensation from the Employer in the same amount and on the same
terms as the Employee would be entitled hereunder if the Employee terminated his
employment pursuant to his Resignation for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be the Date of Termination. As used in this Agreement,
"Company" shall mean as hereinbefore defined and any successor to the business
and/or assets as aforesaid of either of them which assumes and agrees to perform
this Agreement by operation of law or otherwise.
9.4. Entire Agreement; Amendment. This Agreement represents the
---------------------------
entire agreement of the parties with respect to the subject matter hereof and
will supersede all prior agreements and understandings between the Employee and
the Company regarding the subject matter herein. This Agreement may be amended
or any provision hereof waived at any time only by written agreement of the
parties hereto.
9.5. Governing Law. This Agreement and its validity, interpretation,
-------------
performance and enforcement shall be governed by the laws of the Commonwealth of
Pennsylvania, other than the conflict of laws provisions of such laws.
9.6. Severability. If, for any reason, any provision of this
------------
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the remainder of such provision that is not held so invalid,
and the remainder of such provision, together with all other provisions of this
Agreement, shall to the full extent consistent with law continue in full force
and effect.
9.7. Headings. The Article and Section headings in this Agreement
--------
are for convenience of reference only; they form no part of this Agreement and
shall not affect its interpretation.
9.8. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
-7-
IN WITNESS WHEREOF, the Company and the Employee have duly executed
this Agreement as of the day and year first written above.
UNIVERSAL STAINLESS & ALLOY
PRODUCTS, INC.
By:
-------------------------
C.M. McAninch
Title: President & CEO
----------------------
EMPLOYEE
-------------------------
Daniel J. DeCola
-8-
Exhibit 10.7
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made as of the 1st day of August, 1998 by and
--- ------- -
between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a Delaware corporation (the
"Company"), and Bruce Kennedy (the "Employee").
-------------
WITNESSETH:
In consideration of the covenants and agreements herein contained, and
intending to be legally bound hereby, the Company and Employee agree that this
Agreement including the Employment Offer letter dated June 24, 1998 ("Offer
Letter") which is hereby incorporated by reference, supercedes any previous
and/or existing Employment Agreement between the parties. The Company and
Employee further agree as follows:
Article 1. - Employment
-----------------------
1.1. Employment. The Company agrees to employ Employee, and Employee
----------
agrees to serve the Company, for the period stated in Article 2 hereof (the
"Term of Employment") and upon the other terms and conditions herein provided.
1.2. Position and Responsibilities. The Company employs Employee,
-----------------------------
and Employee agrees to serve as Vice President of Operations of the Company and
to accept such other responsibilities as may be assigned to Employee by the
Company from time to time during the Term of Employment.
1.3. Duties. During the Term of Employment, Employee shall devote
------
all of his business time, attention, skill and efforts to the faithful
performance of his duties hereunder.
Article 2. - Term
-----------------
The Term of Employment shall commence as of August 1 , 1998 (the
-------- -
"Effective Date"), and shall continue until the 1st anniversary of the
---
Effective Date (the "Expiration Date"), unless sooner terminated by one of the
parties as permitted in this Agreement or the term of the Agreement will
automatically extend for one-year periods, expiring on August 1 of each
subsequent year, barring a notice by the Company not to extend, delivered at
least sixty (60) days prior to any expiration date.
Article 3. - Compensation
-------------------------
3.1. Salary. As compensation to the Employee for the performance of
------
services hereunder, the Company shall pay to the Employee a base salary (the
"Salary") of One hundred and fifty thousand dollars ($150,000.00) per year.
----------------------------------------------------
Installments of the Salary shall be paid to the Employee in accordance with the
standard procedure of the Company, which at the present time is once every two
(2) weeks. During the period of this Agreement, Employee's salary shall be
reviewed at least annually and may be adjusted if the Board of Directors of the
Company (the "Board"), the Compensation Committee (the "Compensation
Committee"), or the President of
-1-
the Company (President) determines that an adjustment is appropriate on the
basis of the types of factors it generally takes into account in adjusting the
salaries of employees of the Company.
3.2. Reimbursement of Expenses. The Company will reimburse the
-------------------------
Employee for those customary and necessary business expenses incurred by him in
the performance of his duties and activities on behalf of the Company as Vice
President of Operations. Except as provided in this Agreement, such expenses
will be reimbursed only on presentation by the Employee of appropriate
documentation to substantiate such expenses pursuant to the policies and
procedures of the Company governing reimbursement of business expenses to its
Employees.
3.3. Participation in Plans. The Employee shall be entitled to
----------------------
participate in any incentive compensation or bonus plan, life, medical, dental,
health, hospitalization, travel, accident and/or disability insurance plans and
in any sick leave and/or salary continuation plan, vacation (which shall not be
less than two (2) weeks per year), holiday pay, retirement or employee benefit
plan or program generally offered by the Company to its officers.
3.4. Right to Indemnification. The Company shall indemnify and hold
-------------------------
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, the Employee who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") by reason of the fact that the Employee, is or was an officer of
the Company, including service with respect to employee benefit plans, against
all liability and loss suffered and expenses (including attorneys' fees)
reasonably incurred by the Employee. The Company shall be required to indemnify
the Employee in connection with a proceeding (or part thereof) initiated by such
person only if the proceeding (or part thereof) was authorized by the Board of
Directors of the Company.
The Company shall pay the expenses (including attorney's fees)
incurred in defending any proceeding in advance of its final disposition,
provided, however, that the payment of expenses incurred by a director or
- -------------------
officer in advance of the final disposition of the proceeding shall be made only
upon receipt of an undertaking by the director or officer to repay all amounts
advanced if it should be ultimately determined that the director or officer is
not entitled to be indemnified under this Article or otherwise.
If a claim for indemnification or payment of expenses under this
Article is not paid in full within sixty days after a written claim therefore
has been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Company shall have the burden of proving that the claimant was not entitled
to the requested indemnification or payment of expenses under applicable law.
The rights conferred on the Employee by this Section 3.4 shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Restated Certificate of Incorporation, the
Company By-Laws, agreement, vote of stockholders or disinterested directors or
otherwise.
-2-
The Company's obligation, if any, to indemnify the Employee who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or
nonprofit enterprise.
Article 4. - Termination of Employment
--------------------------------------
4.1. Definitions. For the purposes hereof:
-----------
(a) "Disability" shall be deemed to have occurred at the same
time as the Employee has been determined to be entitled to benefits under the
Company's Short Term or Long Term Disability Plan then in effect.
(b) "Cause" shall mean any of the following: (i) Employee's
personal dishonesty, incompetence or willful misconduct; (ii) Employee's willful
violation of any law or material rule or regulation, provided that such
violation is demonstrably and materially injurious to the assets, operations or
business prospects of the Company; (iii) the conversion or embezzlement for the
personal benefit of the Employee of corporate funds or property or a material
business opportunity of the Company; (iv) the misuse by the Employee for his
personal benefit of any trade secrets or other information of the Company in
violation of the provisions of Article 7 of this Agreement; or (v) Employee's
material breach of any other provision of this Agreement which is not cured
within thirty (30) days of receipt of notice of such breach from Company.
(c) "Good Reason" shall, absent the Employee's express written
consent to such action, mean the occurrence of any one of the following: (i)
following a Change of Control, the removal of the Employee as Vice President of
Operations of the Company (by reason other than death, disability or cause);
(ii) any material breach by the Company of its respective or joint obligations
contained in this Agreement not cured within 30 days after written notice; (iii)
the assignment to the Employee of any duties inconsistent with his status as
Vice President of Operations of the Company or a substantial alteration in the
nature or status of the Employee's duties and responsibilities which renders the
Employee's position to be of less dignity, responsibility or scope; (iv) a
reduction by the Company in the Employee's annual base salary as in effect on
the date hereof or as the same may be increased from time to time, except for
proportional across-the-board salary reductions due to economic conditions of
the Company similarly affecting all Employees of the Company, for at least six
(6) months, provided, however, that in no event shall the Employee's base salary
be reduced by more than fifteen percent (15%) below the per year amount set
forth in Section 3.1 hereof without the Employee's consent; (v) the relocation
of the principal executive offices of the Company to a location outside the
Greater Pittsburgh Metropolitan area or the Company's requiring the Employee to
be based anywhere other than Company's principal executive offices except for
required travel on Company's business; or (vi) any material reduction by the
Company of the benefits enjoyed by the Employee under any of the savings, life
insurance, medical, health-and-accident, disability or other employee welfare
benefit plans or programs, including vacation days, corporate time, provided
that this paragraph (vi) shall not apply to any proportional across-the-board
reduction or action similarly affecting all executives of the Company; (vii)
within sixty (60) days of receipt of notice not to extend this Agreement, the
-3-
employee may elect to resign for "Good Reason" in which case the notice not to
extend shall constitute notice to the Company by the employee of the "Good
Reason."
Notwithstanding the foregoing, except as stated in (vii) of this section,
no event of "Good Reason" shall be deemed to have occurred unless Employee
provides to the President of the Company written notice of the facts and
circumstances which Employee believes constitutes "Good Reason" under this
Section 4.1(c) and such facts and circumstances are not corrected or otherwise
cured by the Company within thirty (30) days of receipt thereof.
For purposes of this Agreement, a Change of Control shall be deemed to have
occurred the earlier of (i) if, in any transaction or a series of related
transactions consummated in a ninety day period, more than fifty percent (50%)
of the then outstanding voting common stock of the Company is sold to a person
or group; (ii) a merger or consolidation of the Company and another entity in
which the Company is not the surviving corporation or in which more than fifty
percent (50%) of the equity ownership of the Company changes and (iii) the sale
of substantially all of the assets of the Company.
(d) "Notice of Termination" shall mean written notice which
shall indicate the specific termination or resignation provisions in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination or resignation
under the provision so indicated and shall include a certified statement of the
Company President approving such termination in the case of a Termination by the
Company for Cause or Without Cause.
(e) "Date of Termination" shall mean the date specified in the
Notice of Termination as the effective date the Employee's employment is
terminated for any reason or the Employee's effective date of resignation, which
ever is earlier.
Article 5. - Compensation Upon Termination
------------------------------------------
5.1. Death. If the Employee's employment hereunder terminates by
-----
reason of his death, his beneficiaries shall be entitled to receive from the
Company such amounts as are then provided pursuant to plans, programs or
arrangements currently in effect or as approved from time to time by the Board
of Directors.
5.2. Disability. If the Employee's employment hereunder terminates
----------
by reason of his Disability, the Company shall pay to the Employee for a period
of one (1) month, payments on the regular pay dates in an amount equal to 100%
of his then monthly salary, and for a period of five (5) months, payments on the
regular pay dates, 60% of his then monthly salary, in addition thereto, the
Employee shall be entitled to receive such amounts as are then provided pursuant
to plans, programs or arrangements. The Company may carry insurance to cover
this liability and in such case would not require a separate salary
continuation.
-4-
5.3. By the Company with Cause or if the Employee Resigns or Quits
-------------------------------------------------------------
without Good Reason. If the Employee's employment hereunder is terminated by
- -------------------
the Company for Cause, or if the Employee resigns or quits without good reason,
the Company shall pay to the Employee his full base salary through the Date of
Termination but at a rate no greater than that in effect at the time Notice of
Termination is given, and the Company shall have no further obligations to the
Employee under this Agreement.
5.4. By the Company Without Cause or by the Employee by Resignation
--------------------------------------------------------------
for Good Reason. If the Employee's employment hereunder is terminated by the
- ---------------
Company without Cause or is terminated by the Employee pursuant to his
Resignation for Good Reason, then the Employee shall be entitled to the benefits
provided below, which shall constitute complete satisfaction of the obligations
of the Company to the Employee under this Agreement:
(a) The Company shall pay the Employee his full annual base
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given.
(b) Subsequent to the Date of Termination, the Company shall pay
as severance pay to the Employee, a lump sum payment equal to the Employee's
full base salary at the rate then in effect for a period of twelve (12) months,
or pay to the Employee the full base salary rate in the regular pay periods for
twelve months from termination.
(c) The Company will provide health care benefits as provided
prior to termination for the employee and eligible dependents for twelve (12)
months at no cost to the employee. This period will not reduce the eligible
COBRA period.
(d) The Employee shall not be required to mitigate the amount
of any payments provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Agreement be
reduced by any compensation earned by the Employee as the result of employment
by another employer, or otherwise.
(e) Notwithstanding any provisions herein to the contrary, the
Employee shall be entitled to receive all benefits to which the Employee is
entitled under the terms of any of the Company's qualified employee benefit
plans and any other plan, program or arrangement relating to retirement or other
benefits including, without limitation, any employee stock ownership plan or any
plan now in effect which is established (with approval of the Board of
Directors) as a supplement to any of the aforenamed plans, except as otherwise
provided in such plans as a result of the Employee's termination of employment.
Article 6. - Duties of Employee After
-------------------------------------
Termination of Employment
-------------------------
Following any termination of Employee's employment and for a period of
ninety (90) days thereafter, the Employee shall fully cooperate with the Company
in all matters relating to the winding up and orderly transfer of the Employee's
work on behalf of the Company. Not later than the effective date of any
termination of the employment, the Employee will immediately deliver to the
Company any and all of the Company's property of any kind or nature
-5-
whatsoever in the Employee's possession, custody or control, including, without
limitation any and all Confidential Information as that term is defined in
Section 7 of this Agreement.
Article 7. - Confidential Information; Invention Assignment
-----------------------------------------------------------
7.1. Confidential Relationship. Employee understands and agrees that
-------------------------
all company manuals, company policies, marketing plans and surveys, product
designs, schematics, specifications and product location and installation data,
formulae, processes, methods, machines, compositions, customer information,
ideas, inventions, financial information and plans of the Company and all
records, correspondence, files, customer lists, data and other information
pertaining to or concerning the Company, its principals, vendors and customers
(collectively the "Confidential Information") contain valuable confidential
information that is owned by the Company, and, therefore, that during the period
of employment hereunder and at all times thereafter, Employee shall not utilize
such Confidential Information for his own benefit or for the benefit of any
person or entity other than the Company, nor shall he divulge or communicate any
such Confidential Information to any person or entity without the express
authorization of the Company. The Employee agrees that, on the termination of
his employment, he will immediately surrender to the Company any and all
Confidential Information in his possession pertaining to the Company and its
business.
7.2. Assignment of Rights. All inventions, discoveries, designs,
--------------------
developments, technology, computer programs, writings and reports that are made
or conceived of by the Employee in the course of his employment with the
Company, whether or not patentable or copyrightable, shall become and remain the
sole property of the Company without additional compensation to Employee. The
Employee recognizes that all such works shall be considered works-for-hire and
hereby transfers and assigns any right, title, copyright and interest that
Employee acquires in such works to the Company and will, from time to time, give
the Company all reasonable assistance, execute all papers and do all things that
may reasonably be required to protect and preserve the rights of the Company in
such works.
7.3. No Breach of Other Obligations. The Employee represents that,
------------------------------
in the course of performing services for the Company, he will not breach any
agreement he may have with others with respect to confidential information, and
will not bring to the Company or use in any way any materials or documents
obtained from others under an agreement of confidentiality.
Article 8. - Source of Payments
-------------------------------
All payments provided for under this Agreement shall be paid in cash
from the general funds of the Company unless the Company in its sole discretion,
elects to have insurance coverage to provide for payments, and no special or
separate fund shall be established and no other segregation of assets shall be
made to assure payment unless specifically permitted herein. No trust or
fiduciary relationship with respect to payments shall be deemed created hereby
and,
-6-
to the extent that any person acquires a right to receive payments hereunder,
such right shall be no greater than the rights of a general creditor of the
Company.
Article 9. - Miscellaneous
--------------------------
9.1. Indulgences, Etc. Neither the failure nor any delay on the part
----------------
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
9.2. Notices. All notices or communications hereunder shall be in
-------
writing, addressed as follows:
To the Company:
President
Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, PA 15017
To the Employee:
Bruce Kennedy
751 Lincoln Road
Grosse Pointe, MI 48230
Any such notice or communication shall be sent by certified or registered mail,
return receipt requested, postage prepaid, addressed as above (or to such other
address as such party may designate in writing from time to time), and the
actual date of receipt, as shown by the receipt therefor, shall determine the
time at which notice was given.
9.3. Assignment; Agreement. This Agreement shall be binding upon and
---------------------
inure to the benefit of the heirs and personal representatives of the Employee,
but neither this Agreement nor any rights hereunder shall be assignable or
otherwise subject to hypothecation by the Employee.
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company) to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of his Agreement and shall entitle the
Employee to compensation from the Employer in the same amount and on the same
terms as the Employee would be entitled hereunder if the Employee terminated his
employment pursuant to his Resignation for Good Reason, except that for purposes
of implementing the foregoing, the
-7-
date on which any such succession becomes effective shall be the Date of
Termination. As used in this Agreement, "Company" shall mean as hereinbefore
defined and any successor to the business and/or assets as aforesaid of either
of them which assumes and agrees to perform this Agreement by operation of law
or otherwise.
9.4. Entire Agreement; Amendment. This Agreement, including the
---------------------------
Employment Offer, represents the entire agreement of the parties with respect to
the subject matter hereof and will supersede all prior agreements and
understandings between the Employee and the Company regarding the subject matter
herein. This Agreement may be amended or any provision hereof waived at any
time only by written agreement of the parties hereto.
9.5. Governing Law. This Agreement and its validity, interpretation,
-------------
performance and enforcement shall be governed by the laws of the Commonwealth of
Pennsylvania, other than the conflict of laws provisions of such laws.
9.6. Severability. If, for any reason, any provision of this
------------
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the remainder of such provision that is not held so invalid,
and the remainder of such provision, together with all other provisions of this
Agreement, shall to the full extent consistent with law continue in full force
and effect.
9.7. Headings. The Article and Section headings in this Agreement
--------
are for convenience of reference only; they form no part of this Agreement and
shall not affect its interpretation.
9.8. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Employee have duly executed
this Agreement as of the day and year first written above.
UNIVERSAL STAINLESS & ALLOY
PRODUCTS, INC.
By:
------------------------------
C.M. McAninch
Title: President & CEO
---------------
EMPLOYEE
---------------------------------
Bruce Kennedy
-8-
Exhibit 10.18
First Amendment To Second Amended
And Restated Credit Agreement
This FIRST AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(this "First Amendment") is made as of December 31, 1998 and entered into by and
between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a corporation organized and
existing under the laws of Delaware (the "Borrower") and PNC BANK, NATIONAL
ASSOCIATION (the "Bank") and amends that certain Second Amended and Restated
Credit Agreement dated as of January 30, 1998 by and between the Borrower and
the Bank (the Second Amended and Restated Credit Agreement, as amended through
the date hereof, is hereinafter referred to as the "Original Credit Agreement").
W I T N E S S E T H :
WHEREAS, the Borrower and the Bank entered into the Original Credit Agreement;
and
WHEREAS, upon the request of the Borrower, the Bank has agreed to modify the
Original Credit Agreement, all as more particularly set forth herein.
NOW THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
with the intent to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO ORIGINAL CREDIT AGREEMENT
---------------------------------------
Section 1.01 Amendments to Section 1.1 of the Original Credit Agreement. (a)
----------------------------------------------------------
The following defined terms and the definitions therefor are hereby added to
Section 1.1 of the Original Credit Agreement and inserted in correct
alphabetical order:
First Amendment: The First Amendment to Second Amended and
---------------
Restated Credit Agreement entered into by and between the Borrower and the
Bank and dated as of the First Amendment Effective Date
First Amendment Effective Date: December 31, 1998
------------------------------
(b) The definitions for the following defined terms and the definitions
therefor contained in the Original Credit Agreement are hereby amended and
restated in their entirety as follows:
Term Loan Maturity Date: June 30, 2006
-----------------------
Term Note: The Term Note substantially in the form of Exhibit
----------
"C-1" to the First Amendment duly executed by the Borrower and delivered
to the Bank together with all extensions, renewals, amendments,
substitutions and replacements thereto and thereof.
Section 1.02. Amendment of Section 2.2a of the Original Credit Agreement.
----------------------------------------------------------
Section 2.2a of the Original Credit Agreement is hereby amended and restated in
its entirety as follows:
2.2a Term Loan Commitment. The Bank agrees, subject to the
--------------------
terms hereof and relying on the representations and warranties herein set
forth, that the Borrower shall have the right to borrower in one or more
disbursements from the Closing Date to and including June 30, 1999 an
aggregate principal amount not to exceed $15,000,000.
Section 1.03. Amendment to Section 2.2d(i). Section 2.2d(i) of the Original
----------------------------
Agreement is hereby amended and restated in its entirety as follows:
(i) Scheduled Principal Payments. Principal of the Term Loan
----------------------------
shall be repaid in twenty-eight (28) consecutive quarterly installments
beginning September 30, 1999 and continuing thereafter on the last day of
each December, March, June and September to and including the Term Loan
Maturity Date. Each of the first twenty four quarterly installments will
be in an amount equal to three and one half percent (3.5%) of the
principal balance of the Term Loan at the opening of business on July 1,
1999. Each of the twenty-fifth through twenty-eighth quarterly
installments will be in an amount equal to four percent (4%) of the
principal balance of the Term Loan at the opening of business on July 1,
1999.
Section 1.04. Amendment to Section 2.2d(iii)(B). Section 2.2d(iii)(B) is
---------------------------------
hereby amended and restated in its entirety as follows:
(B) Excess Cash Flow. On March 31, 2000 and on March 31 of
----------------
each year thereafter during the term hereof when the outstanding principal
balance of the Term Loan is equal to or greater than $7,500,000, the
Borrower shall make a payment on the outstanding principal balance of the
Term Loan, in an amount equal to (i) twenty-five percent (25%) of the
Consolidated Excess Cash Flow for Fiscal Year 1999 for the payment due
March 31, 2000 and (ii) fifty percent (50%) of Consolidated Excess Cash
Flow for the immediately preceding Fiscal Year for payments due on and
after March 31, 2001. To the extent that the Borrower, in such immediately
preceding Fiscal Year, has made voluntary prepayments of principal of the
Term Loan, the amount of the mandatory prepayment then due hereunder shall
be reduced by the aggregate amount of such voluntary prepayments made in
such immediately preceding Fiscal Year.
Section 1.05. Amendment to Section 2.8c. Section 2.8c is hereby amended and
-------------------------
restated in its entirety as follows:
2.8c Term Loan Commitment Fee. The Borrower shall pay to the
------------------------
Bank on the last day of March, June, September and December to and
including June 30, 1999 a Term Loan Commitment Fee calculated on the basis
of the actual number of days elapsed, using a year of 360 days at a rate
of 1/2 of 1% per annum on the average daily (computed at the opening of
business) unused amount of the Term Loan Commitment (i.e., the Term Loan
Commitment less the outstanding principal amount of the Term Loan) for the
period or Fiscal Quarter then ended.
-2-
ARTICLE II
BORROWER'S SUPPLEMENTAL REPRESENTATIONS
---------------------------------------
Section 2.01. Incorporation by Reference. As an inducement to the Bank to
--------------------------
enter into this First Amendment, the Borrower hereby repeats herein for the
benefit of the Bank each of the representations and warranties made by the
Borrower in the Original Credit Agreement, as amended hereby, except that for
purposes hereof such representations and warranties shall be deemed to extend to
and cover this First Amendment.
ARTICLE III
CONDITIONS PRECEDENT
--------------------
Section 3.01 Conditions Precedent. Each of the following shall be a condition
--------------------
precedent to the effectiveness of this First Amendment:
(a) The Bank shall have received, on or before the First Amendment
Effective Date, the following items, each, unless otherwise indicated, dated on
or before the First Amendment Effective Date and in form and substance
satisfactory to the Bank:
(i) A duly executed counterpart original of this First Amendment;
(ii) A duly executed Term Note in the form of Exhibit "C-1";
(iii) A certificate from the Secretary of the Borrower certifying
that the Articles of Incorporation and Bylaws of the Borrower
previously delivered to the Bank are true, complete, and correct;
and
(iv) Such other instruments, documents and opinions of counsel as the
Bank shall reasonably require, all of which shall be satisfactory
in form and content to the Bank
(b) The following statements shall be true and correct on the First
Amendment Effective Date and the Bank shall have received a certificate signed
by an Authorized Officer of the Borrower, dated the First Amendment Effective
Date, stating that:
(i) the representations and warranties made pursuant to this First
Amendment and in the other Loan Documents, as amended hereby. are
true and correct on and as of the First Amendment Effective Date
as though made on and as of such date;
(ii) no petition by or against the Borrower has at any time been filed
under the United States Bankruptcy Code or under any similar act;
(iii) taking into account the amendments set forth in this First
Amendment, no Event of Default or event which with the giving of
notice, the passage of time or both would become an Event of
Default has occurred and is continuing, or would result from the
execution of or performance under this First Amendment;
-3-
(iv) taking into account the amendments set forth in this First
Amendment, no material adverse change in the properties,
business, operations, financial condition or prospects of the
Borrower has occurred which has not been disclosed to the Bank;
and
(v) taking into account the amendments set forth in this First
Amendment, the Borrower has in all material respects performed
all agreements, covenants and conditions required to be performed
on or prior to the date hereof under the Original Credit
Agreement and the other Loan Documents.
ARTICLE IV
GENERAL PROVISIONS
------------------
Section 4.01 Ratification of Terms. Except as expressly amended by this First
---------------------
Amendment, the Original Credit Agreement and each and every representation,
warranty, covenant, term and condition contained therein is specifically
ratified and confirmed. The Borrower hereby confirms that any collateral for
the Obligations, including but not limited to liens, Encumbrances, security
interests, mortgages and pledges granted by the Borrower or third parties, shall
continue unimpaired and in full force and effect. The Borrower expressly
ratifies and confirms the waiver of jury trial provisions contained in the
Original Credit Agreement and the other Loan Documents.
Section 4.02 References. All notices, communications, agreements,
----------
certificates, documents or other instruments executed and delivered after the
execution and delivery of this First Amendment in connection with the Original
Credit Agreement, any of the other Loan Documents or the transactions
contemplated thereby may refer to the Original Credit Agreement without making
specific reference to this First Amendment, but nevertheless all such references
shall include this First Amendment unless the context requires otherwise. From
and after the First Amendment Effective Date, all references in the Original
Credit Agreement and each of the other Loan Documents to the "Agreement" shall
be deemed to be references to the Original Credit Agreement as amended hereby.
Section 4.03 Incorporation Into Original Credit Agreement. This First
--------------------------------------------
Amendment is deemed incorporated into the Original Credit Agreement. To the
extent that any term or provision of this First Amendment is or may be deemed
expressly inconsistent with any term or provision of the Original Credit
Agreement, the terms and provisions hereof shall control.
Section 4.04 Counterparts. This First Amendment may be executed in different
------------
counterparts, each of which when executed by the Borrower and the Bank shall be
regarded as an original, and all such counterparts shall constitute one First
Amendment.
Section 4.05 Capitalized Terms. Except for proper nouns and as otherwise
-----------------
defined herein, capitalized terms used herein as defined terms shall have the
same meanings herein as are ascribed to them in the Original Credit Agreement,
as amended hereby.
Section 4.06 Taxes. The Borrower shall pay any and all stamp and other taxes
-----
and fees payable or determined to be payable in connection with the execution,
delivery, filing and
-4-
recording of this First Amendment and such other documents and instruments as
are delivered in connection herewith and agrees to save the Bank harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes and fees.
Section 4.07 Costs and Expenses. The Borrower will pay all costs and expenses
------------------
of the Bank (including, without limitation, the reasonable fees and the
disbursements of the Bank's counsel, Tucker Arensberg, P.C.) in connection with
the preparation, execution and delivery of this First Amendment and the other
documents, instruments and certificates delivered in connection herewith.
Section 4.08 GOVERNING LAW. THIS FIRST AMENDMENT AND THE RIGHTS AND
-------------
OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PROVISIONS
THEREOF REGARDING CONFLICTS OF LAW.
Section 4.09 Headings. The headings of the sections in this First Amendment
--------
are for purposes of reference only and shall not be deemed to be a part hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-5-
IN WITNESS WHEREOF, the parties hereto, with the intent to be legally bound
hereby, have caused this First Amendment to Second Amended and Restated Credit
Agreement to be duly executed by their respective proper and duly authorized
officers as a document under seal, as of the day and year first above written.
Attest: Universal Stainless & Alloy Products, Inc.
By: (Seal)
- ----------------------------- ---------------------------------------
Name: Name:
Title: Title:
PNC Bank, National Association
By: (Seal)
---------------------------------------
Name:
Title:
-6-
Exhibit 10.19
Universal Stainless & Alloy Products Sales Agreement
This AGREEMENT is made and entered into as of the ___________ day of __________,
1999, by and between UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC., a Delaware
corporation (hereinafter "Universal") and TALLEY METALS TECHNOLOGY, a Carpenter
Company (hereinafter "Talley Metals").
WITNESSETH:
-----------
WHEREAS, Talley Metals desires to insure a supply of billets for use in its
rolling and finishing operations; and
WHEREAS, Universal desires to sell billets and allocate a portion of its monthly
capacity to manufacture billets on a continuing basis;
NOW, THEREFORE, Universal and Talley Metals the ("Parties" or separately
"Party"), intending to be legally bound, in consideration of the premises and
the mutual covenants and agreements contained herein, agree as follows:
1. BILLET QUANTITIES During the term of this Agreement, Universal shall
-----------------
sell to Talley Metals and Talley Metals shall purchase from Universal,
stainless steel billets (hereinafter the "Billets") in an aggregate
quantity, of no less than three million (3,000,000) pounds and no more
than six million (6,000,000) pounds per month. On an annual basis
Talley Metals purchases from Universal will average three million five
hundred thousand pounds (3,500,000) pounds per month.
2. RESERVED CAPACITY Universal will set aside such capacity as necessary
-----------------
to produce the billet quantities as ordered during the first week in
any month for a shipment in the subsequent month, according to the
terms of this Agreement. Talley Metals will give as much advanced
notice as possible if the order quantity will vary significantly from
month to month. Reserved capacity is based on heat-lot quantities. If
product is rejected by Universal during processing, the order will be
considered complete based on the shipped weight.
3. BILLET SIZES AND SPECIFICATIONS The Billets shall be provided by
-------------------------------
Universal in the sizes and grades requested by Talley Metals' purchase
orders and "Stainless grades" regularly produced by Universal and
requested in accordance with the specifications set forth by Talley
Metals and previously approved by Universal. The Billets shall be
square, with rounded corners, in thickness of four and one-half (4.5")
to eight (8") inches by ten (10") inches, and shall be delivered in
such lengths as Talley Metals shall specify in its monthly purchase
orders, but in no event shorter than twenty-two feet (22') or longer
than forty feet (40').
Universal represents and warrants to Talley Metals that the Billets
delivered by Universal pursuant to this Agreement have been produced
in accordance with good mill practice with respect to dimensions,
weight, straightness,
1
section, composition and mechanical properties and has been inspected
to assure Billets will meet all applicable standard industry
specifications and all of the specifications set forth in this
Agreement and Talley Metals purchase orders.
4. BILLET PRICES Pricing will be based on Universal's offering to Talley
-------------
metals dated 5/28/98 and 6/1/98. Exhibit "A" of this Agreement.
Monthly adjustments to that offering will be made to address market
changes in key raw material prices per existing formulas.
Any price changes, outside established formulas to adjust for raw
material price fluctuation, must be negotiated in good faith and
agreed to in writing by both parties prior to implementation and be
consistent with market conditions and price changes then common in the
industry.
5. BILLET ORDER; DELIVERY
----------------------
(a) Talley Metals will place orders in heat lot quantities specifying
grade, billet size, and requested delivery on their standard
purchase order form. Orders will be acknowledged by Universal on
their standard acknowledgement form.
(b) The parties acknowledge that this Agreement has been entered into
with the intention that Universal shall retain the capacity
needed to supply Talley Metals with its desired quantity of
Billets. Universal must report all material changes in their
plans, forecast, etc. for manufacturing Billets to Talley Metals
as soon as such plans are known. Talley Metals will advise
Universal of any change to monthly purchases or changes in usage
by grade as soon as such information is available.
(c) The prices and delivery for Billets ordered outside of the first
week of any calendar month shall be as agreed upon by the parties
at the time of order placement.
(d) The Billet prices in all cases shall be exclusive of freight and
insurance, the payment of which shall be solely Talley Metals'
responsibility.
Billets are purchased F.O.B. Bridgeville, PA and Talley Metals
accepts all risk of loss at that time. It is recognized that
Billets are not accepted by Talley Metals until they have arrived
at Talley metals and have been inspected to determine
acceptability under quality standards specified in this
Agreement.
(e) Talley Metals guarantees the minimum order quantity of three
million pounds (3,000,000) of Billet each month during the term
of this Agreement.
(f) Talley Metals purchase orders are placed upon the condition that
Universal shall not assign it or any interest therein, including
any payment due or to become due with respect thereto, and any
assignment or any attempt to assign shall be void without Talley
Metals prior written consent and that Talley Metals shall be
entitled at all times, to setoff any
2
undisputed amounts owing from Universal to Talley against any
amount due or owing Universal with respect to this order.
6. PAYMENT. Talley Metals will pay to Universal the full invoiced amount
-------
within forty-five (45) days of delivery of material.
7. TERM. The term of this Agreement shall commence on the date hereof and
----
continue for a period of eighteen (18) months. This Agreement will
automatically renew each month with the placement of each separate
order placed by Talley Metals unless and until notice not to renew is
given in writing by either party.
Notwithstanding the foregoing Agreement is cancelable at any time
after the expiration of the initial eighteen-month period upon the
provision of 90 days prior written notice by either party. Either
party may terminate the Agreement at any time in the event that the
other party materially breaches its obligations as stated in this
Agreement.
Either Party may terminate immediately upon the other Party declaring
insolvency or bankruptcy.
8. FORCE MAJEURE. Both parties will make a good faith effort to perform
-------------
hereunder. Neither party, however, shall be liable for delay in
performance or for failure to render any performance under this
Agreement (and without in any way limiting the generality of the
foregoing, any such delay or failure shall be excused) when such delay
or failure is caused by governmental regulations (whether or not
valid, fire, strike, war, flood, accident, epidemic, embargo,
appropriation of plant or product, in whole or in part by Federal or
State authority and any other cause or causes, whether of like or
different nature, beyond the reasonable control of such party;
provided, however that notwithstanding any provisions herein to the
contrary, Talley Metals shall be entitled, in any such event, to
purchase its required amounts in whole or in part from other vendors
and, if necessary, to reduce its obligations hereunder in order to
contract for such other supply requirements at such times that
Universal cannot meet the supply requirements. Once events change
allowing Universal to again supply Talley Metals, Talley Metals must
do so in accordance with the terms and conditions set forth in this
Agreement. Each party shall promptly notify the other of the
occurrence (and the likelihoods of the occurrence) of any such event
or condition and shall keep the other party fully informed of all
relevant information. In the event Talley Metals purchases billets
from another source under circumstances where Universal cannot or does
supply the same, such purchases shall be counted for purposes of the
purchase requirements and restriction set forth in this Agreement.
9. SUCCESSOR AND ASSIGNS. This Agreement shall be binding on and inure to
---------------------
the benefit of the parties hereto and their respective successors and
assigns.
10. GOVERNING LAW. This Agreement and the rights and obligations of the
--------------
parties hereunder shall be governed by and construed in accordance
with the laws of Pennsylvania
3
11. CONFIDENTIALITY; DISCLOSURE. The parties hereby agree that they will
---------------------------
direct, and will use their best efforts to cause their directors,
officers, employees, advisors and representatives of their advisors
(collectively, the "Permitted Persons") to use the information in
this Agreement solely for the purpose of evaluating and/or affecting
the purchase and sale of Billets and that such information will be
kept confidential by the parties and their Permitted Persons (it
being understood and agreed that the efforts used to keep such
request for information confidential shall not be less than the
efforts currently used to keep non-public information about
themselves confidential); provided, however, that any disclosure of
such information may be made to which both parties consent in writing
prior to the disclosure of such request. Notwithstanding the
foregoing, either party hereto will be permitted to make disclosures
required by law.
The parties also hereby agree that all designs, drawings, patterns or
customer chemistries provided by or on behalf of Talley Metals to
Universal or information or material regarding or relating to Talley
Metals' customers shall be deemed "Confidential Information" of
Talley Metals whether or not such information is marked confidential.
12. ENTIRE AGREEMENT; NO ORAL MODIFICATION. This Agreement represents the
--------------------------------------
entire agreement of the parties with respect to the subject matter
hereof, and all prior agreements, whether oral or written, are
revoked and superseded by this Agreement. No representation,
warranty, inducement or oral agreements have been made or relied upon
by either party except as expressly stated herein. This Agreement may
not be changed, modified, altered or amended in any way except in
writing signed by both parties. Any attempt at oral modification
shall be void and of no force or effect.
13. HEADINGS; CONSTRUCTION. The Articles and Section headings contained
----------------------
in this Agreement are for reference purposes only and will not affect
in any way the meaning or interpretation of this Agreement. Unless
the context clearly otherwise requires, the words "hereby", "hereof",
"herein", "hereto", "hereunder", and "hereinafter" and any similar
term used in this Agreement refers to this Agreement as a whole and
not merely the subsection or section in which such terms are used.
14. COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but both of which shall be deemed
one and the same Agreement.
15. SEVERABILITY. The parties agree that should any part or portion of
------------
this Agreement be found to be unenforceable, that the remainder of
this Agreement be enforced, to the extent that it is legal and
practicable to do so.
4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Universal Stainless & Alloy Products Talley Metals Technology,
Inc., a Delaware Corporation A Carpenter Company
By: By:
------------------------------- ------------------------------
Its: Its:
------------------------------ -----------------------------
Carpenter Technology Corporation
By:
------------------------------
Its:
-----------------------------
5
1998 Financial Review
- -------------------------------------------------------------------------------
15 Management's Discussion and Analysis of
Financial Condition and Results of Operations
20 Report of Independent Accountants
21 Consolidated Statement of Operations
22 Consolidated Balance Sheet
23 Consolidated Statement of Cash Flows
24 Notes to the Consolidated Financial Statements
35 Price Range of Common Stock
36 Five-Year Summary
- ---------------------------------------------------
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 13
FORWARD-LOOKING INFORMATION SAFE HARBOR
This Annual Report contains historical information and forward-looking
statements. Statements looking forward in time, including statements regarding
future growth, cost savings, expanded production capacity, broader product
lines, greater capacity to meet customer quality, price and delivery needs,
enhanced competitive posture, and Year 2000 compliance, are included in this
Annual Report pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. Further,
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided in
this Annual Report, please refer to the discussions of risk factors detailed in,
as well as the other information contained in, this Annual Report, the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 and other
reports on file with the Securities and Exchange Commission.
14 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
An analysis of the Company's operations is as follows (dollars in thousands):
1998 1997 1996
- ------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------
Net sales
Stainless steel $53,661 73.9% $60,700 74.7% $46,903 77.8%
Tool steel 7,548 10.4 10,467 12.9 8,019 13.3
High-temperature
alloy steel 4,387 6.0 2,636 3.2 728 1.2
Conversion services 3,690 5.1 4,834 5.9 3,804 6.3
Other 3,309 4.6 2,664 3.3 804 1.4
- ------------------------------------------------------------------------------------------
Total net sales 72,595 100.0 81,301 100.0 60,258 100.0
- ------------------------------------------------------------------------------------------
Cost of products sold
Raw materials 26,839 37.0 32,601 40.1 24,208 40.2
Other 33,256 45.8 32,427 39.9 23,986 39.8
- ------------------------------------------------------------------------------------------
Total cost of
products sold 60,095 82.8 65,028 80.0 48,194 80.0
- ------------------------------------------------------------------------------------------
Selling and administrative
expenses 4,934 6.8 4,699 5.8 4,533 7.5
- ------------------------------------------------------------------------------------------
Operating income $ 7,566 10.4% $11,574 14.2% $ 7,531 12.5%
- -------------------------------------------------------------------------------------------------------
Net sales by market segment are as follows (dollars in thousands):
1998 1997 1996
- ------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------
Rerollers $32,990 45.4% $41,196 50.7% $29,896 49.6%
Forgers 17,144 23.6 13,846 17.0 7,797 12.9
Service centers 12,809 17.6 11,864 14.6 10,503 17.4
Original equipment
manufacturers 5,840 8.1 9,200 11.3 8,168 13.6
Conversion services 3,690 5.1 4,834 6.0 3,804 6.3
Miscellaneous 122 0.2 361 0.4 90 0.2
- ------------------------------------------------------------------------------------------
$72,595 100.0% $81,301 100.0% $60,258 100.0%
- -------------------------------------------------------------------------------------------------------
1998 Results as Compared to 1997 The decrease in 1998 net sales reflects reduced
shipments to all of the Company's market segments primarily due to increased
imports. The Company shipped approximately 45,500 tons in 1998, compared to
55,300 tons in 1997. The decrease in net sales of stainless steels also resulted
from lower selling prices due to price competition created by increased import
levels and the lower cost of nickel during 1998. Increased shipments of low-
alloy and high-temperature alloy steels, introduced in 1997, and of bar mill
products partially offset the decline in net sales.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 15
Management's Discussion and Analysis (continued)
Cost of products sold, as a percent of net sales, increased in 1998 as compared
to 1997 despite lower acquisition costs for the Company's primary raw materials.
Changes in product mix resulting from bar mill shipments as well as increases in
utility, depreciation and maintenance costs more than offset the benefits
received from lower raw material costs.
Selling and administrative expenses increased from $4.7 million in 1997 to $4.9
million in 1998. The increase primarily related to higher selling expenses and
charges relating to certain quality issues which were partially offset by lower
insurance costs.
The 1998 results benefited from the settlement of an insurance claim related to
the 1995 electrical component breakdown in a drive motor at the Company's
Bridgeville facility universal rolling mill. The settlement, net of costs
incurred in connection with the Company's claim, was approximately $750,000.
Interest expense and other financing costs increased by $113,000 as a result of
borrowings under a term loan from PNC Bank to finance capital expenditures.
Other income (expense) was impacted negatively by the costs associated with
pursuing the acquisition of AL Tech Specialty Steels, Inc. and the removal of
buildings at the Bridgeville facility. These costs were partially offset by a
government grant received by the Company in connection with the expansion of
operations at the Bridgeville facility.
The 1998 effective income tax rate was 36.3% compared to 37.0% in 1997. The
decrease in the effective tax rate is directly attributable to a lower effective
rate for state income taxes.
1997 Results as Compared to 1996 The increase in net sales in 1997 reflects
increased shipments to all of the Company's market segments. The Company shipped
approximately 55,300 tons in 1997, compared to shipments of 40,300 tons in 1996.
The increase in net sales of stainless steels was achieved through increased
shipments of long products to the reroller market, partially offset by lower
pricing due to import competition and lower nickel costs during 1997. Increased
shipments to forgers and original equipment manufacturers are a result of higher
demand for the Company's products from the aerospace and power generation
markets. The increase in net sales of tool steel was generated from the
Company's growing service center customer base, which generated increased
shipments of plate products. The remaining increase in the Company's net sales
for 1997 is primarily attributed to the introduction of several new products
within the low-alloy and high-temperature alloy steel families.
Cost of products sold, as a percent of net sales, remained constant between 1996
and 1997. Decreases in the acquisition costs for the Company's primary raw
materials and cost savings generated from completed capital expenditure projects
were offset by the impact of lower selling prices in the stainless steel area
and higher than expected manufacturing costs related to several new product
introductions, as noted above.
Selling and administrative expenses remained relatively constant between 1996
and 1997. This primarily reflected the addition of personnel as a result of
continued growth of the Company's business, offset by lower insurance costs.
16 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis (continued)
Interest expense and other financing costs increased from $131,000 in 1996 to
$248,000 in 1997 primarily due to increased borrowings. Other income (expense),
net decreased from $211,000 in 1996 to $112,000 in 1997 primarily due to
decreased interest income earned on cash available for investment. The Company
used available cash and borrowings to fund capital expenditures incurred during
1996 and 1997.
The effective income tax rate utilized in 1997 and 1996 was 37%.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations in 1998 and 1997 of $6.9 million
and $1.1 million, respectively. This increase is primarily due to the collection
of accounts receivable partially offset by the payment of accounts payable.
At December 31, 1998, working capital approximated $21.8 million, as compared to
$20.1 million at December 31, 1997. The ratio of current assets to current
liabilities at December 31, 1998 and 1997, was 4.3:1 and 2.8:1, respectively.
The debt to capitalization ratio was 23% at December 31, 1998, and 13% at
December 31, 1997. The increase in working capital was primarily attributable to
increases in cash, inventory and prepaid income taxes as well as a decrease in
accounts payable which were partially offset by a decrease in accounts
receivable.
Capital Expenditures and Investments The Company's capital expenditures were
approximately $12.1 million and $8.1 million in 1998 and 1997, respectively.
Capital expenditures in 1999 are expected to approximate $5.0 million and will
be used primarily to complete projects previously initiated and for
infrastructure improvements. These expenditures are expected to be funded
substantially from internally generated funds.
PNC Credit Agreement On January 30, 1998, the Company entered into the Second
Amended and Restated Credit Agreement, as subsequently amended, with PNC Bank
for a $6.5 million revolving credit facility through April 2001 (the "PNC Line")
and a $15.0 million seven-year term loan (the "PNC Term Loan"), secured by
substantially all of the Company's assets. Borrowings under the PNC Term Loan
aggregated $10.0 million in 1998 and additional borrowings may occur from time
to time until June 30, 1999 with scheduled quarterly principal payments
commencing on September 30, 1999. Interest incurred from borrowings under the
PNC Line and the PNC Term Loan is based on short-term market rates, which may be
further adjusted based upon the Company maintaining certain financial ratios. As
a condition of the PNC Line and the PNC Term Loan, the Company is required to
maintain certain levels of net worth, working capital and other financial
ratios; to limit the amount of capital expenditures it may incur without PNC
Bank's approval; and to restrict the payment of dividends. As of December 31,
1998, the Company was in compliance with all financial ratios and restrictive
covenants.
Government Financing Programs The Company has entered into several separate
loan agreements with the Commonwealth of Pennsylvania's Department of Commerce
aggregating $1.6 million with terms ranging from seven to twenty years. The
Company also entered into a ten-year loan agreement with the Redevelopment
Authority of Allegheny County Economic Development Fund in the amount of $1.5
million. The loans bear interest at rates ranging from 5% to 6% per annum.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 17
Management's Discussion and Analysis (continued)
Stock Repurchase Program On October 19, 1998, the Company initiated a stock
repurchase program to repurchase from time to time up to a total of 315,000
shares of its outstanding Common Stock in open market transactions at market
prices. During 1998, the Company repurchased a block of 75,000 shares at a cost
of $478,000. Cash from operations financed the repurchase of Common Stock.
Supply Contract In November 1998, the Company entered into a supply contract
agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter
Technologies, Inc., covering a period of at least 18 months. Under terms of the
agreement, the Company will supply Talley Metals with an average of 1,750 tons
of stainless reroll billet products per month. The value of the contract on a
monthly basis will depend on product mix and key raw material prices.
Environmental Matters The Company, as well as other steel companies, is subject
to demanding environmental standards imposed by federal, state and local
environmental laws and regulations. In connection with the acquisition of the
Bridgeville facility assets from Armco in 1994, Armco agreed to retain
responsibility for liabilities asserted against Armco under environmental laws
with respect to environmental conditions existing at the Bridgeville facility
prior to commencement of the long-term net lease of that facility on August 15,
1994, and to indemnify the Company up to $6.0 million in the aggregate over ten
years. Such indemnification expires on August 15, 2004. Certain environmental
conditions that were identified as having existed as of August 15, 1994, have
been remediated by Armco at its expense.
In connection with the Company's June 2, 1995 agreement with Armco to purchase
certain assets and a parcel of real property located at Titusville, Armco agreed
to indemnify the Company up to $3.0 million in the aggregate for liabilities
under environmental laws arising out of conditions on or under the Titusville
property existing prior to June 2, 1995. Armco's obligation to indemnify the
Company for any liabilities arising out of environmental conditions existing
off-site as of June 2, 1995, is not subject to the $3.0 million limitation.
Management is not aware of any financial difficulties being experienced by Armco
that would prevent its performance under the acquisition agreements. In
addition, management is not aware of any environmental conditions or the
incurrence of other liabilities at the Bridgeville or Titusville facilities, for
which Armco has agreed to indemnify the Company, nor of any material
environmental condition requiring remediation and affecting the Company other
than those identified in the preceding discussion.
Year 2000 The following statements are provided pursuant to the provisions of
the Year 2000 Information and Readiness Disclosure Act of 1998.
Since inception in August 1994, the Company has been engaged in a program to
modernize and replace its computerized production control and management
information systems. Although not the primary purpose of the program, the new
systems were designed to avoid any Year 2000 problems that might otherwise
arise. In addition, the Company has identified and tested all other critical
pieces of equipment and has not identified any non-compliance issues internally.
Therefore, the Company believes that its internal systems will be Year 2000
compliant in all material respects without incurring significant expenditures.
Any expenditures will be financed with cash from operations.
18 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis (continued)
The Company currently believes the most significant impact of the Year 2000
issue could be an interrupted supply of goods and services from the Company's
vendors and interrupted supply of orders from the Company's customers. In order
to assess the state of readiness, surveys have been sent to all major vendors
and customers to determine the current status of their Year 2000 evaluation.
Responses have been received from approximately 70 percent of these vendors and
customers in which each respondent has confirmed that efforts to become Year
2000 compliant are, at a minimum, in process. Due to the uncertainties
associated with the ability of critical vendors and customers to resolve any
known or unknown Year 2000 compliance issues, the Company may experience a
material adverse effect on future results of operations if such issues are not
resolved. While no contingency plans have been established at the present time,
contingency plans will be developed to mitigate any risk identified.
Short- and Long-Term Liquidity The Company expects to meet substantially all of
its short-term liquidity requirements with internally generated funds and
borrowings under the PNC Credit Agreement. At December 31, 1998, the Company had
$6.5 million and $5.0 million available under the PNC Line and the PNC Term
Loan, respectively.
The Company's long-term liquidity depends upon its ability to obtain additional
orders from its customers, attract new customers and control costs during
periods of low demand or pricing in the event of a downturn in general economic
conditions.
General Actual results will be affected by a wide range of factors including
timing, cancellation or delay of customer orders; changes in product mix; the
concentrated nature of the Company's customer base to date and the Company's
dependence on its significant customers; the Company's reliance on certain
critical manufacturing equipment; competition; the Company's ongoing requirement
for continued compliance with environmental laws; the supply and cost of the
Company's raw materials and the significant fluctuations that may occur in raw
material prices; and Year 2000 compliance by the Company and its major vendors
and customers. Any unfavorable change in the foregoing or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. Many of these factors are not within the Company's
control, and there can be no assurances regarding the Company's future sales or
earnings. For a discussion of these and other matters, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 and other
reports on file with the Securities and Exchange Commission.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 19
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Universal Stainless & Alloy
Products, Inc., and its subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 20, 1999
20 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Consolidated Statement of Operations
For the Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net sales $72,595 $81,301 $60,258
Cost of products sold 60,095 65,028 48,194
Selling and administrative expenses 4,934 4,699 4,533
- ----------------------------------------------------------------------------------------------
Operating income 7,566 11,574 7,531
Insurance settlement 750 -- --
Interest expense and other financing costs (361) (248) (131)
Other income (expense), net (93) 112 211
- ----------------------------------------------------------------------------------------------
Income before taxes 7,862 11,438 7,611
Provision for income taxes 2,858 4,232 2,818
- ----------------------------------------------------------------------------------------------
Net income $ 5,004 $ 7,206 $ 4,793
- ---------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 0.79 $ 1.15 $ 0.76
Diluted $ 0.79 $ 1.12 $ 0.76
- ----------------------------------------------------------------------------------------------
Weighted-average number of shares of
Common Stock outstanding 6,304,524 6,285,531 6,270,952
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 21
Consolidated Balance Sheet
December 31, 1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 1,437 $ 177
Accounts receivable (less allowance for
doubtful accounts of $358 and $298) 8,843 14,503
Inventory 16,182 15,471
Other current assets 1,980 894
- ---------------------------------------------------------------------------
Total current assets 28,442 31,045
Property, plant and equipment, net 35,710 24,887
Other assets 298 219
- ---------------------------------------------------------------------------
Total assets $64,450 $56,151
- -----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Trade accounts payable $ 3,166 $ 4,705
Bank overdrafts 1,145 3,296
Current portion of long-term debt 1,117 338
Accrued employment costs 957 1,704
Other current liabilities 228 916
- ---------------------------------------------------------------------------
Total current liabilities 6,613 10,959
Long-term debt 11,841 5,441
Deferred taxes 3,431 1,983
- ---------------------------------------------------------------------------
Total liabilities $21,885 $18,383
- ---------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity
Senior Preferred Stock, par value $.001 per share;
liquidation value $100 per share; 2,000,000
shares authorized; and 0 shares issued
and outstanding -- --
Common Stock, par value $.001 per share;
10,000,000 shares authorized; 6,320,036 and
6,290,823 shares issued and outstanding 6 6
Additional paid-in capital 25,787 25,516
Retained earnings 17,250 12,246
Treasury Stock at cost; 75,000 and 0 common
shares held (478) --
- ---------------------------------------------------------------------------
Total stockholders' equity 42,565 37,768
- ---------------------------------------------------------------------------
Total liabilities and stockholders' equity $64,450 $56,151
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
22 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Consolidated Statement of Cash Flows
For the Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities
Net income $ 5,004 $ 7,206 $ 4,793
Adjustments to reconcile to net cash and
cash equivalents provided by
operating activities:
Depreciation and amortization 1,516 1,109 541
Deferred taxes 1,566 750 728
Changes in assets and liabilities:
Accounts receivable, net 5,660 (5,094) (1,577)
Inventory (711) (5,687) (2,679)
Accounts payable and bank overdrafts (3,690) 2,144 780
Accrued employment costs (747) 301 716
Other, net (1,742) 336 339
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,856 1,065 3,641
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (12,146) (8,145) (11,409)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,146) (8,145) (11,409)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of long-term debt 10,000 500 2,114
Long-term debt repayment (382) (300) (125)
Proceeds from issuance of Common Stock 244 65 18
Borrowings under revolving line of credit 24,855 24,922 --
Repayments under revolving line of credit (27,640) (22,137) --
Deferred financing costs (49) (12) (58)
Purchase of Treasury Stock (478) -- --
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,550 3,038 1,949
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,260 (4,042) (5,819)
Cash and cash equivalents at beginning of period 177 4,219 10,038
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,437 $ 177 $ 4,219
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Interest paid (net of amount capitalized) $ 298 $ 226 $ 72
Income taxes paid $ 2,698 $ 3,428 $ 1,888
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 23
Notes to the Consolidated Financial Statements
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Description of the Company Universal Stainless & Alloy Products, Inc. (the
"Company") manufactures and markets semi-finished and finished specialty steel
products, including stainless steel, tool steel and certain other alloyed
steels. The Company's manufacturing process involves melting, remelting,
treating and hot and cold rolling of semi-finished and finished specialty
steels. The Company's products are sold to rerollers, forgers, service centers
and original equipment manufacturers, which primarily include the power
generation and aerospace industries. The Company also provides conversion
services on materials supplied by customers that lack certain of the Company's
production facilities or that are subject to their own capacity constraints.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents Cash equivalents are stated at cost plus accrued
interest, which approximates market value. Cash equivalents include only
securities having a maturity of three months or less at the time of purchase.
Concentration of Credit Risk Financial instruments that potentially subject the
Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable. The Company limits its credit risk associated with cash and
cash equivalents by placing its investments in high-grade short-term
instruments. With respect to accounts receivable, the Company limits its credit
risk by performing ongoing credit evaluations and, when deemed necessary,
requiring letters of credit, guarantees or collateral.
Inventories Inventories are stated at the lower of cost or market with cost
determined by the first-in, first-out (FIFO) method. Such costs include the
acquisition cost for raw materials and supplies, direct labor and applied
manufacturing overhead.
Scrap metal together with alloy additives, principally nickel, chrome and
molybdenum, currently account for more than 40% of the Company's total cost of
products sold. A substantial portion of the alloy additives is available only
from foreign sources, some of which are located in countries that may be subject
to unstable political and economic conditions. Those conditions might disrupt
supplies or affect the prices of the raw materials used by the Company. The
Company has implemented sales price surcharges to help offset the impact of raw
material price fluctuations.
Operating materials consist of production molds and rolls that will normally be
consumed within one year and are accounted for as inventory.
24 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Notes to the Consolidated Financial Statements (continued)
Property, Plant and Equipment Property, plant and equipment is recorded at
cost. Maintenance and repairs are charged to expense as incurred, and costs of
improvements and renewals are capitalized. Costs incurred in connection with the
construction or major rebuild of facilities, including interest directly related
to the project, are capitalized as construction in progress. No depreciation is
recognized on these assets until placed in service.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the related assets. The estimated useful lives
of plant and equipment range from three to twenty years.
The Company's manufacturing processes are dependent upon certain pieces of
specialty steelmaking equipment, such as the Company's electric arc furnace and
universal rolling mill. In the event a critical piece of equipment should become
inoperative as a result of an unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed.
Revenue Recognition Revenue from the sale of products is recognized upon
passage of title to the customer, which in most cases coincides with shipment of
the related products or the performance of conversion services.
Earnings Per Common Share Basic earnings per common share is computed by
dividing net income by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of common shares outstanding plus all dilutive
potential common shares outstanding during the period. Dilutive common shares
are determined using the treasury stock method. Under the treasury stock method,
exercise of options and warrants are assumed at the beginning of the period when
the average stock price during the period exceeds the exercise price of
outstanding options and warrants and, common shares are assumed issued. The
proceeds from exercise are assumed to be used to purchase common stock at the
average market price during the period. The incremental shares to be issued are
considered to be the dilutive potential common shares outstanding.
Segment Information In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" utilizing the "management approach." The management
approach is based on the way the chief operating decision maker organizes
segments within the Company for making operating decisions and assessing
performance.
Reclassifications Certain prior year amounts have been reclassified to conform
with the 1998 presentation.
NOTE 2: INVENTORY
The major classes of inventories are as follows (dollars in thousands):
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Raw materials and supplies $ 2,358 $ 2,869
Semi-finished steel products 11,152 10,569
Operating materials 2,672 2,033
- -----------------------------------------------------------------------------------------------------
Total inventory $16,182 $15,471
- -------------------------------------------------------------------------------------------------------------------
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 25
Notes to the Consolidated Financial Statements (continued)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in thousands):
December 31, 1998 1997
- ----------------------------------------------------------------------------------
Land and land improvements $ 822 $ 832
Buildings 2,591 1,699
Machinery and equipment 31,903 21,418
Construction in progress 3,655 2,726
- -----------------------------------------------------------------------
38,971 26,675
Accumulated depreciation (3,261) (1,788)
- -----------------------------------------------------------------------
Property, plant and equipment, net $35,710 $24,887
- ----------------------------------------------------------------------------------
Property, plant and equipment includes a capital lease with Armco for the land
and certain buildings and structures located in Bridgeville (the "Armco Lease").
The lease is for a ten-year term commencing on August 15, 1994, with three five-
year options to renew on the same terms at the Company's discretion at a rental
of $1 per year plus payment of real and personal property taxes and other
charges associated with the property. The Company also has an option under the
lease to buy substantially all of the leased premises for $1 at any time during
the term of the Armco Lease prior to August 15, 2015.
In 1998, the Company entered into two new capital leases with unrelated third
parties for machinery and equipment at the Bridgeville facility. Under the terms
of both of the leases, the Company has the option to purchase the leased
machinery and equipment for $1 at the end of the five-year term. The total value
of the leased machinery and equipment is $346,000.
The Company capitalized $421,000 and $53,000 of its interest costs associated
with the PNC Line and the PNC Term Loan in 1998 and 1997, respectively.
NOTE 4: LONG-TERM DEBT AND OTHER FINANCING
Long-term debt consists of the following (dollars in thousands):
December 31, 1998 1997
- -------------------------------------------------------------
PNC Term Loan $10,000 --
PNC Line -- $2,785
Government debt 2,516 2,788
Capital lease obligations 442 206
- -----------------------------------------------------
12,958 5,779
Less amounts due within one year (1,117) (338)
- -----------------------------------------------------
Total long-term debt $11,841 $5,441
- -------------------------------------------------------------
26 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Notes to the Consolidated Financial Statements (continued)
On January 30, 1998, the Company entered into the Second Amended and Restated
Credit Agreement, as subsequently amended, with PNC Bank (the "PNC Credit
Agreement") for a $6,500,000 revolving credit facility through April 2001 (the
"PNC Line") and a $15,000,000 seven-year term loan (the "PNC Term Loan"),
secured by substantially all of the Company's assets. Additional borrowings
under the PNC Term Loan may occur from time to time until June 30, 1999 with
scheduled quarterly principal payments commencing on September 30, 1999.
Interest incurred from borrowings under the PNC Line and the PNC Term Loan is
based on short-term market rates, which may be further adjusted based upon the
Company maintaining certain financial ratios. The PNC Term Loan currently bears
interest at a rate equal to the Euro-dollar rate plus 125 basis points. As a
condition of the PNC Credit Agreement, the Company is required to maintain
certain levels of net worth, working capital and other financial ratios; to
limit the amount of capital expenditures it may incur without PNC Bank's
approval; and to restrict the payment of dividends.
The Company has entered into several separate loan agreements with the
Commonwealth of Pennsylvania's Department of Commerce aggregating $1,600,000
with terms ranging from seven to twenty years. In 1996 the Company also entered
into a ten-year loan agreement with the Redevelopment Authority of Allegheny
County Economic Development Fund in the amount of $1,514,000. The loans bear
interest at rates ranging from 5% to 6% per annum. The annual required principal
and interest payments under these loan agreements for each of the next five
years approximate $420,000.
Scheduled maturities of long-term obligations due in 1999 and thereafter are:
1999, $1,117,000; 2000, $1,836,000; 2001, $1,808,000; 2002, $1,807,000; 2003,
$1,696,000; and after 2003, $4,694,000.
NOTE 5: RETIREMENT PLANS
The Company has defined contribution retirement plans that cover substantially
all employees. The Company's contributions to the hourly employee plan are based
on time worked while contributions to the salaried plan are established as a
fixed amount per month. Company contributions to both plans are funded at six-
month intervals. The total expense for the years ended December 31, 1998, 1997
and 1996, was $286,000, $251,000 and $192,000, respectively.
No other post-retirement benefit plans exist.
NOTE 6: INCOME TAXES
Components of the provision for income taxes are as follows (dollars in
thousands):
For the Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
Current provision:
Federal $1,245 $3,113 $1,869
State 47 369 221
- ----------------------------------------------------------------------
1,292 3,482 2,090
- ----------------------------------------------------------------------
Deferred provision:
Federal 1,416 682 654
State 150 68 74
- ----------------------------------------------------------------------
1,566 750 728
- ----------------------------------------------------------------------
Provision for income taxes $2,858 $4,232 $2,818
- ----------------------------------------------------------------------
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 27
Notes to the Consolidated Financial Statements (continued)
A reconciliation of the federal statutory tax rate and the Company's effective
tax rate is as follows:
For the Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Federal statutory tax 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.3 2.7 2.9
Other, net 0.0 0.3 0.1
- ------------------------------------------------------------------------------------------
Effective tax rate 36.3% 37.0% 37.0%
- ----------------------------------------------------------------------------------------------------------
Deferred taxes result from the following (dollars in thousands):
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Receivables $ 173 $ 112
Inventory 238 229
Organizational expenses 36 90
Accrued liabilities 145 279
- ------------------------------------------------------------------------------------------
$ 592 $ 710
- ------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $3,431 $ 1,983
- ----------------------------------------------------------------------------------------------------------
NOTE 7: STOCKHOLDERS' EQUITY
Common Additional
Shares Common Paid-In Retained Treasury Treasury
(Dollars in thousands) Outstanding Stock Capital Earnings Shares Stock
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 6,270,000 $6 $25,338 $ 247 -- $ --
Common Stock Issuance under
Employee Stock Plan 11,300 95
Common Stock Issuance under
Employee Stock Purchase Plan 2,434 18
Net income 4,793
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 6,283,734 6 25,451 5,040 -- --
Common Stock Issuance under
Employee Stock Purchase Plan 7,089 65
Net income 7,206
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 6,290,823 6 25,516 12,246 -- --
Common Stock Issuance under
Employee Stock Purchase Plan 8,880 63
Exercise of Stock Options 20,333 208
Purchase of Treasury Stock 75,000 (478)
Net income 5,004
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 6,320,036 $6 $25,787 $17,250 75,000 $(478)
- --------------------------------------------------------------------------------------------------------------------------
28 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Notes to the Consolidated Financial Statements (continued)
The Company has 2,000,000 authorized shares of Senior Preferred Stock. At
December 31, 1998, there were no shares issued or outstanding.
In connection with the 1994 initial public offering, the underwriters received
warrants, which expire on December 14, 1999, to purchase 162,500 shares of the
Company's Common Stock at an exercise price of $10.80 per share.
On May 22, 1996, the Company's Board of Directors adopted an employee stock plan
for the purpose of issuing 100 shares of Common Stock of the Company at no cost
to each eligible employee. Non-executive employees not eligible for stock
options under the 1994 Stock Incentive Plan, described in Note 9, who did not
receive 100 shares of Common Stock of the Company at no cost in prior periods
were eligible employees under the plan. The Company issued 11,300 shares of the
Company's Common Stock in 1996. The costs of this issuance was recorded as
compensation expense. The plan was terminated in 1996.
On October 19, 1998, the Company's Board of Directors implemented a stock
repurchase program. Under the program, the Company may repurchase up to 315,000
shares, or approximately 5%, of the Company's Common Stock in open market
transactions at market prices. On December 10, 1998, the Company purchased
75,000 shares of the Company's Common Stock at a sale price of $6.375 per share.
NOTE 8: BASIC AND DILUTED EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996 is performed as follows (dollars in thousands,
except share amounts and per share amounts):
1998 1997 1996
Income Shares Income Shares Income Shares
- -------------------------------------------------------------------------------------------------------
Income available to
common stockholders $5,004 6,304,524 $7,206 6,285,531 $4,793 6,270,952
Effect of
dilutive securities 50,707 131,544 22,514
Income available to
common stockholders
plus assumed
conversion $5,004 6,355,231 $7,206 6,417,075 $4,793 6,293,466
- --------------------------------------------------------------------------------------------
Earnings per
common share:
Basic $ 0.79 $ 1.15 $0.76
Diluted $ 0.79 $ 1.12 $0.76
- -------------------------------------------------------------------------------------------------------
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 29
Notes to the Consolidated Financial Statements (continued)
NOTE 9: STOCK COMPENSATION PLANS
At December 31, 1998, the Company has two stock-based compensation plans that
are described below:
Incentive compensation plan On September 23, 1994, the Company's Board of
Directors adopted the Company's 1994 Stock Incentive Plan as amended (the "1994
Plan") for the purpose of issuing stock options to non-employee directors, other
than those directors owning more than 5% of the Company's outstanding Common
Stock, officers and other key employees of the Company who are expected to
contribute to the Company's future growth and success. Under the 1994 Plan, the
Company may grant options up to a maximum of 650,000 shares of Common Stock.
Options granted to non-employee directors vest over a three-year period, and
options granted to employees vest over a four-year period. All options under the
1994 Plan will expire no later than ten years after the grant date.
A summary of the 1994 Plan activity as of and for the years ended December 31,
1998, 1997 and 1996 is presented below:
1998 1997 1996
--------------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------
Fixed options
Outstanding at
beginning of year 498,667 $ 9.97 335,500 $ 9.20 208,000 $ 9.63
Granted 70,000 9.94 215,500 11.03 130,000 8.54
Exercised (20,333) 8.85 -- -- -- --
Forfeited (59,834) 9.21 (52,333) 9.36 (2,500) 10.25
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 488,500 $10.10 498,667 $ 9.97 335,500 $ 9.20
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable
at year-end 281,232 177,751 108,875
- --------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value
of options granted
during the year $ 6.52 $ 6.62 $ 4.88
- --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$8.00 to $12.25 488,500 7.7 years $10.10 281,232 $9.98
- -----------------------------------------------------------------------------------------------------------------
30 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Notes to the Consolidated Financial Statements (continued)
Employee Stock Purchase Plan Under the 1996 Employee Stock Purchase Plan, the
Company is authorized to issue up to 90,000 shares of Common Stock to its full-
time employees, nearly all of whom are eligible to participate. Under the terms
of the plan, employees can choose as of January 1 and July 1 of each year to
have up to 10% of their total earnings withheld to purchase shares of the
Company's Common Stock. The purchase price of the stock is 85% of the lower of
its beginning-of-the-period or end-of-the-period market prices. As of December
31, 1998, the Company has issued 18,403 shares of Common Stock since the plan's
inception.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plan and its stock purchase plan. Had compensation cost for the Company's stock-
based compensation plans been determined based on the fair value of the awards
at the grant dates in accordance with Financial Accounting Standards Board
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (dollars in thousands,
except per share amounts):
For the Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
Net income
As reported $5,004 $7,206 $4,793
Pro forma $4,673 $6,874 $4,608
- -----------------------------------------------------------
Basic earnings per common share
As reported $ 0.79 $ 1.15 $ 0.76
Pro forma $ 0.74 $ 1.09 $ 0.73
- --------------------------------------------------------------------
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants issued in 1998, 1997 and 1996; dividend yield of
0.0% for each year; interest rate of 6.0% for each year; expected volatility of
75.0%, 65.0% and 60.0%, respectively; and expected lives for options of five
years.
Cash-Incentive Plans The Company has a management cash-incentive plan covering
certain key executives and employees and profit-sharing plans that cover the
remaining employees. The profit-sharing plans provide for the sharing of pre-tax
profits in excess of specified amounts. For the years ended December 31, 1998,
1997 and 1996, the Company expensed $1,246,000, $1,679,000 and $1,038,000,
respectively, under these plans.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 31
Notes to the Consolidated Financial Statements (continued)
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company, as well as other steel companies, is subject to demanding
environmental standards imposed by federal, state and local environmental laws
and regulations. In connection with the acquisition of the Bridgeville facility
assets from Armco in 1994, Armco agreed to retain responsibility for liabilities
asserted against Armco under environmental laws with respect to environmental
conditions existing at the Bridgeville facility prior to commencement of the
long-term net lease of that facility with Armco on August 15, 1994, and to
indemnify the Company up to $6.0 million in the aggregate over ten years. Such
indemnification expires on August 15, 2004. Certain environmental conditions
that were identified as having existed as of August 15, 1994, have been
remediated by Armco at its expense.
In connection with the Company's June 2, 1995, agreement with Armco to purchase
certain assets and a parcel of real property located at Titusville, Armco agreed
to indemnify the Company up to $3.0 million in the aggregate for liabilities
under environmental laws arising out of conditions on or under the Titusville
property existing prior to June 2, 1995. Armco's obligation to indemnify the
Company for any liabilities arising out of environmental conditions existing
off-site as of June 2, 1995, is not subject to the $3.0 million limitation.
Management is not aware of any financial difficulties being experienced by Armco
that would prevent its performance under the acquisition agreements. In
addition, management is not aware of any environmental conditions or the
incurrence of other liabilities at the Bridgeville or Titusville facilities, for
which Armco has agreed to indemnify the Company, nor of any material
environmental condition requiring remediation and affecting the Company other
than those identified in the preceding discussion.
The Company maintains insurance for both property damage and business
interruption applicable to its production facilities, including the universal
rolling mill. In 1998, the Company settled its claim under its Boiler and
Machinery policy related to the drive motor at the Bridgeville facility's
universal rolling mill, which caused an approximately six-week production halt
in 1995. After deducting all costs associated with the settlement, the Company
received approximately $750,000.
32 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Notes to the Consolidated Financial Statements (continued)
NOTE 11: SEGMENT AND RELATED INFORMATION
The Company is comprised of two operating locations, the Bridgeville facility
and the Titusville facility, and one corporate headquarters. The nature of the
products and services, production processes, customer type and distribution
methods are generally similar for both operating locations. In addition, the
assessment of performance and allocation of resources is performed by the chief
operating decision maker at the corporate level rather than by operating
location. As such, the Company operates as a single segment.
The following table presents net sales by product line (dollars in thousands):
1998 1997 1996
- --------------------------------------------------------------------
Net sales
Stainless steel $53,661 $60,700 $46,903
Tool steel 7,548 10,467 8,019
High-temperature alloy steel 4,387 2,636 728
Conversion services 3,690 4,834 3,804
Other 3,309 2,664 804
- ----------------------------------------------------------
Total net sales $72,595 $81,301 $60,258
- --------------------------------------------------------------------
Net sales from the Company's largest customer and its affiliates were
approximately 35%, 44% and 46% of total 1998, 1997 and 1996 net sales,
respectively. The accounts receivable balances from the same customer comprised
approximately 9% and 32% of total accounts receivable at December 31, 1998 and
1997, respectively.
The Company derives less than 10% of its revenues from markets outside of the
United States and the Company has no assets located outside the United States.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 33
Notes to the Consolidated Financial Statements (continued)
NOTE 12: QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
1998 Data
Net sales $22,349 $21,163 $15,977 $13,106
Gross profit 3,882 3,831 2,836 1,951
Operating income 2,742 2,495 1,687 642
Net income 1,811 1,535 982 676
Earnings per common share
Basic (a) $ 0.29 $ 0.24 $ 0.16 $ 0.11
Diluted $ 0.28 $ 0.24 $ 0.16 $ 0.11
- ---------------------------------------------------------------------------------------------------------
1997 Data
Net sales $18,771 $20,809 $22,081 $19,640
Gross profit 3,712 4,395 4,542 3,624
Operating income 2,571 3,094 3,319 2,590
Net income 1,611 1,947 2,053 1,595
Earnings per common share
Basic $ 0.26 $ 0.31 $ 0.33 $ 0.25
Diluted (a) $ 0.26 $ 0.31 $ 0.32 $ 0.24
- ---------------------------------------------------------------------------------------------------------
(a) Earnings per share for the year is less than the sum of the quarterly
earnings per share due to the change in shares each quarter.
34 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Price Range of Common Stock
The Common Stock is listed on the Nasdaq National Market under the symbol
"USAP." The following table sets forth the range of high and low sale prices per
share of Common Stock, for the periods indicated below:
High Low
- ------------------------------------------------
Year 1998
First quarter $14-3/8 $11-7/16
Second quarter $ 14 $ 9
Third quarter $10-1/2 $ 5-3/16
Fourth quarter $ 7-1/2 $ 4-1/4
- ------------------------------------
Year 1997
First quarter $11-3/4 $ 8-7/8
Second quarter $13-3/4 $ 9-3/8
Third quarter $17-1/4 $ 12-3/4
Fourth quarter $17-3/4 $ 12-3/8
- ------------------------------------------------
The Company has never paid a cash dividend on its Common Stock and currently has
no plans to pay dividends in the foreseeable future. The PNC Credit Agreement
contains restrictions on the Company's ability to pay dividends on Common Stock.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT 35
Five-Year Summary
For the Years Ended December 31, 1998 1997 1996 1995 1994(a)
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Summary of Operations
Net sales $72,595 $81,301 $60,258 $46,992 $ 5,743
Operating income (loss) 7,566 11,574 7,531 3,202 (1,655)
Income (loss) before extraordinary items 5,004 7,206 4,793 2,723 (1,842)
Extraordinary items (b) -- -- -- -- (634)
Net income (loss) 5,004 7,206 4,793 2,723 (2,476)
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share
Income (loss) before extraordinary items $ 0.79 $ 1.12 $ 0.76 $ 0.57 $ (0.62)
Extraordinary items -- -- -- -- (0.22)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 0.79 $ 1.12 $ 0.76 $ 0.57 $ (0.84)
- -----------------------------------------------------------------------------------------------------------------
Financial Position at Year-End
Working capital $21,829 $20,086 $15,981 $19,283 $ 6,857
Total assets 64,450 56,151 42,098 32,437 14,757
Total debt 12,958 5,779 2,794 535 772
Stockholders' equity 42,565 37,768 30,497 25,591 8,875
- -----------------------------------------------------------------------------------------------------------------
Other Data
Capital expenditures $12,146 $ 8,145 $11,409 $ 3,039 $ 132
Depreciation and amortization 1,516 1,109 541 304 133
Return on stockholders' equity 11.8% 19.1% 15.7% 10.6% --
Debt to total capitalization 23.3 13.3 8.4 2.1 8.0
Employees 280 270 208 172 104
Customers 200 167 136 77 25
- -----------------------------------------------------------------------------------------------------------------
(a) The Company began operating the Bridgeville facility on August 15, 1994, and
initial shipments of semi-finished steel were made on September 19, 1994.
(b) During 1994, the Company recorded an extraordinary loss for the early
extinguishment of debt and the early termination of a bank agreement.
36 UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 1998 ANNUAL REPORT
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-98534) and
the Registration Statements on Forms S-8 (No. 333-13599, No. 333-13509 and No.
333-13511) of Universal Stainless & Alloy Products, Inc. of our report dated
January 20, 1999, appearing on page 20 of the Annual Report to Stockholders
which is incorporated by reference into this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 30, 1999
5
1,000
YEAR YEAR
DEC-31-1998 DEC-31-1997
DEC-31-1998 DEC-31-1997
1,437 177
0 0
9,366 14,801
(358) (298)
16,182 15,471
28,442 31,045
38,971 26,675
(3,261) (1,788)
64,450 56,151
6,613 10,959
11,841 5,441
0 0
0 0
6 6
42,559 37,762
64,450 56,151
72,595 81,301
72,595 81,301
60,095 65,028
60,095 65,028
4,874 4,639
60 60
336 (141)
7,862 11,438
2,858 4,232
5,004 7,206
0 0
0 0
0 0
5,004 7,206
0.79 1.15
0.79 1.12
