<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1994
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5210
FLORIDA STEEL CORPORATION
Incorporated -- Florida Employer Identification No. -- 59-0792436
1715 Cleveland Street
Tampa, Florida 33606
Mailing Address:
P. O. Box 31328
Tampa, Florida 33631
Telephone No. 251-8811 - Area Code 813
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of the date of this report, the registrant had 200 shares
$.01 par value common stock outstanding.
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FLORIDA STEEL CORPORATION
CONDENSED STATEMENTS OF FINANCIAL POSITION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1994
(UNAUDITED)
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 397 $ 1,774
Accounts receivable, less allowance for estimated
losses ($1,500 at December 31, 1994
and $1,000 at March 31,1994) 69,974 69,218
Recoverable income taxes 300 300
Inventories 115,824 115,210
Other current assets 456 1,170
---------- ----------
TOTAL CURRENT ASSETS 186,951 187,672
REAL ESTATE HELD FOR SALE 7,600 7,600
PLANT AND EQUIPMENT 255,475 241,935
Less allowances for depreciation (27,894) (19,074)
---------- ----------
227,581 222,861
GOODWILL 95,066 98,163
DEFERRED FINANCING COSTS 5,544 7,367
OTHER ASSETS 29 43
---------- ----------
$ 522,771 $ 523,706
========== ==========
</TABLE>
2
<PAGE> 3
FLORIDA STEEL CORPORATION
CONDENSED STATEMENTS OF FINANCIAL POSITION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1994
(UNAUDITED)
----------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term borrowings $ 60,591 --
Trade accounts payable 42,082 $ 46,049
Accrued salaries, wages and employee benefits 13,708 17,388
Other current liabilities 10,993 7,837
Interest payable 1,875 4,732
-------- ---------
TOTAL CURRENT LIABILITIES 129,249 76,006
LONG-TERM BORROWINGS,
(INCLUDING NOTE PAYABLE TO PARENT OF $51,000
AT DECEMBER 31, 1994 AND $69,000 AT MARCH 31, 1994) 188,098 247,128
OTHER LIABILITIES 22,805 28,721
DEFERRED INCOME TAXES 49,325 46,852
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 1,000 shares authorized;
200 shares issued and outstanding -- --
Capital in excess of par 156,000 150,000
Deferred compensation (3,975) --
Deficit (18,731) (25,001)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 133,294 124,999
-------- ---------
$522,771 $ 523,706
======== =========
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
FLORIDA STEEL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1994 1993 1994 1993
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(RESTATED)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 469,597 $ 412,954 $ 147,826 $ 132,136
Operating expenses:
Cost of sales, excluding depreciation 402,924 370,604 123,894 120,031
Selling and administrative 22,167 16,785 7,061 5,920
Depreciation 10,453 11,488 3,592 3,862
Amortization of goodwill 3,097 3,046 1,033 1,015
--------- --------- --------- ---------
438,641 401,923 135,580 130,828
--------- ---------- --------- ---------
INCOME FROM OPERATIONS 30,956 11,031 12,246 1,308
Other expenses:
Interest 17,195 15,836 5,898 5,113
Amortization of deferred financing costs 1,823 1,958 608 653
--------- --------- --------- ---------
19,018 17,794 6,506 5,766
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES 11,938 (6,763) 5,740 (4,458)
Income tax (benefit) 5,668 (1,401) 2,553 (1,297)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 6,270 $ (5,362) $ 3,187 $ (3,161)
========= ========= ========= =========
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
FLORIDA STEEL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1994 1993
(UNAUDITED) (UNAUDITED)
(RESTATED)
--------------- -----------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 6,270 $ (5,362)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 10,453 11,488
Amortization 4,920 5,005
Provision for uncollectible accounts 500 442
Deferred compensation 525 --
Deferred income taxes 2,473 4,658
Loss on disposition of plant and equipment 398 141
-------- --------
25,539 16,372
Changes in operating assets and liabilities:
Decrease (increase) in recoverable income taxes -- (730)
Decrease (increase) in accounts receivable (1,256) (3,231)
Decrease (increase) in inventories (614) (14,781)
Decrease (increase) in other current assets 714 407
Decrease (increase) in other assets 14 (209)
Increase (decrease) in trade accounts payable (3,967) 3,769
Increase (decrease) in accrued salaries, wages, and employee benefits (3,680) (984)
Increase (decrease) in other current liabilities 3,156 (869)
Increase (decrease) in interest payable (2,857) (4,475)
Increase (decrease) in other liabilities (5,916) (680)
-------- --------
(14,406) (21,783)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 11,133 (5,411)
-------- --------
INVESTING ACTIVITIES
Additions to plant and equipment (15,698) (10,485)
Proceeds from sales of plant and equipment 127 169
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,571) (10,316)
-------- --------
FINANCING ACTIVITIES
Proceeds from sale of stock 1,500 --
Proceeds from short-term and long-term borrowings 1,561 16,679
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,061 16,169
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,377) 952
Cash and cash equivalents at beginning of period 1,774 1,773
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 397 $ 2,675
======== ========
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
These financial statements include the accounts of Florida Steel Corporation
(the "Company") a subsidiary of FLS Holdings ("FLS" or "Holdings").
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all the information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. However, all adjustments which, in
the opinion of management, are necessary for a fair presentation have been
included. Such adjustments consisted of only normally recurring items.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. The results of the nine months
ended December 31, 1994 are not necessarily indicative of the results to be
expected for the fiscal year ending March 31, 1995.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Segment: The Company is engaged in steel production and the
manufacture, fabrication, and marketing of steel products, primarily for use in
construction and industrial markets.
Contract Revenue: Sales under contracts are recognized as deliveries of
materials are made. Included in trade accounts receivable at December 31, 1994
and March 31, 1994 are receivables amounting to approximately $25,401,000 and
$22,422,000 respectively, arising from the delivery of fabricated products
under both short-term and long-term contracts.
Cash Equivalents: The Company considers all highly liquid investments, with a
maturity of three months or less when purchased, to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (determined
principally by use of the first-in, first-out method) or market.
Real Estate Held for Sale: Real estate held for sale is carried at the lower
of cost or estimated fair value.
Plant and Equipment: Major renewals and betterments are capitalized and
depreciated over their estimated useful lives. Maintenance and repairs are
charged against operations as incurred. Upon retirement or other disposition
of plant and equipment, the cost and related allowances for depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations.
Plant start-up and other pre-operating costs of new facilities are charged
against operations as incurred. For financial reporting purposes, the Company
provides for depreciation of plant and equipment using the straight-line method
over the estimated useful lives of 10 to 30 years for buildings and
improvements and 3 to 18 years for machinery and equipment.
6
<PAGE> 7
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill: Goodwill consists of the excess of purchase price over the fair
value of acquired assets and liabilities. Goodwill is stated at cost less
accumulated amortization of $8,174,820 at December 31, 1994, and $5,077,155 at
March 31, 1994 respectively, and is amortized over 25 years.
Deferred Financing Costs: The deferred financing costs as of December 31, 1994
are net of accumulated amortization of $5,027,649 and relate principally to the
debt issued in December 1992. These amounts are amortized using the effective
yield method over the term of the respective debt instruments, which range from
3 years to 8 years.
Income Taxes: The provision for income taxes is based on financial statement
income and, therefore, includes deferred income taxes on items reported in
different periods for income tax purposes. The Company adopted SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109") effective October 1, 1992.
NOTE C -- INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1994
------------ ------------
<S> <C> <C>
Finished goods $ 71,626 $ 67,147
Work in-process 19,706 23,201
Raw materials and operating supplies 24,492 24,862
--------- ----------
$ 115,824 $ 115,210
========= ==========
</TABLE>
NOTE D -- REDEEMABLE PREFERRED STOCK
As of September 30, 1992, there were 1,600,806 shares of Redeemable Preferred
Stock outstanding with a liquidation preference of $53.33 and cumulative
quarterly dividends at the annual rate of 17.5%. As a result of the
acquisition of FLS by Kyoei, holders of the Redeemable Preferred Stock became
entitled to receive $18.128 per share, or an aggregate of $29,019,544.
In June and July 1992, two lawsuits purporting to be class actions on behalf of
all holders of Redeemable Preferred Stock were filed in State Chancery Court in
Delaware against Holdings and each of its directors. The suits challenged the
consideration to be paid to holders of the Redeemable Preferred Stock in the
Kyoei Steel Acquisition.
In October 1993, counsel for the plaintiffs in the Consolidated Action and
counsel for the petitioners in the Appraisal Action reached an agreement in
principle with counsel for Holdings to settle the Appraisal Action and the
Consolidated Action. The parties filed the definitive documentation for the
settlement, and applied for approval thereof by the Court of Chancery, on
February 24, 1994. After notice to affected former holders of the Redeemable
7
<PAGE> 8
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D -- REDEEMABLE PREFERRED STOCK - Continued
Preferred Stock, at a hearing on May 5, 1994, the Court of Chancery entered an
order (the "Settlement Order") (1) certifying a class consisting of all owners
of the Redeemable Preferred Stock on June 26, 1992, and the successors in
interest, transferees and assigns, excluding Kyoei and FLS Acquisition Corp.,
and (2) approving the settlement.
There were no appeals from the Settlement Order which, therefore, became final
on June 6, 1994 and payments were made in June to those submitting their stock
certificates. At December 31, 1994 approximately 52,485 shares have not been
submitted.
Under the settlement, Holdings has agreed to pay: (a) to those persons and
entities who owned shares of the Redeemable Preferred Stock on December 21,
1992, and who did not earlier receive payment of the $18.128 per share of price
offered in the Kyoei Steel Acquisition, the amount of $18.128 per share; (b) to
those persons and entities who owned shares of the Redeemable Preferred Stock
on December 21, 1992, the amount of $0.707 per share; (c) to those persons and
entities who were determined to have validly exercised appraisal rights as to
shares of the Redeemable Preferred Stock which they owned on December 21, 1992,
the additional amount of $0.40 per share; and (d) to the attorneys for the
plaintiffs in the Consolidated Action and for the petitioners in the Appraisal
Action, the amount of $325,000. To receive any such payments, the former
owners of the Redeemable Preferred Stock must submit their stock certificates
to Holdings, if they have not earlier done so.
NOTE E -- BORROWINGS
Long-term borrowings consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ ---------
<S> <C> <C>
Revolving Credit Agreement $ 55,610 $ 41,279
First Mortgage Notes 100,000 100,000
Subordinated Intercompany Note 50,000 50,000
Subordinated Debentures ("Debentures") 13,035 13,035
Industrial Revenue Bonds 10,875 10,875
Note to Parent 996 19,122
Equipment Trade Loan Agreements 8,173 2,817
Bank of Tokyo Loan 10,000 10,000
--------- ---------
248,689 247,128
--------- ---------
Less: Current portion of long-term borrowings 60,591 --
--------- ---------
$ 188,098 $ 247,128
========= =========
</TABLE>
8
<PAGE> 9
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E -- BORROWINGS - Continued
The Debentures bear interest at 14.5% and mature in fiscal 2001, but may be
redeemable if certain tests are met, at the option of the Company, in whole or
in part from time to time, on and after December 31, 1994 at redemption prices
(expressed as percentages of the outstanding principal amount) if redeemed
during the twelve-month period commencing on November 15 of the year set forth
below, plus, in each case accrued interest thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1994 104%
1995 102%
1996 and thereafter 100%
</TABLE>
The Company entered into a revolving credit agreement with BT Commercial
Corporation ("BTCC"), as agent, which consists of a three year revolving credit
facility for making revolving credit loans and issuing letters of credit in the
aggregate principal amount of up to $100 million (the "Revolving Credit
Agreement"). Loans and letters of credit under the Revolving Credit Agreement
are limited, in the aggregate, to the lesser of the $100 million commitment
amount and a "borrowing base" amount. Letters of credit are subject to an
aggregate sublimit of $30 million. The borrowing base will not exceed the sum
of 85% of eligible accounts receivable plus 60% of eligible inventory that is
scrap, billets, rebar, and merchant bars plus all other eligible inventory.
The Revolving Credit Agreement provides that the foregoing advance rates and
the criteria for eligibility of accounts receivable and inventory may be
adjusted by BTCC from time to time. Loans based on eligible inventory are
subject to an inventory sublimit. The Revolving Credit Agreement is
collateralized by first priority security interests in all accounts receivable
and inventory of the Company.
The Revolving Credit Agreement contains (a) covenants standard for BTCC's
secured financing generally and other covenants deemed appropriate by BTCC,
including, without limitation, financial ratios, limitations on indebtedness,
limitations on liens and limitations on loans, investments, dispositions of
assets and dividends and distributions and (b) events of default deemed
appropriate by BTCC. The Company is in compliance with these covenants at
December 31, 1994. Under the Company's current projections, the Company will
be in compliance with these covenants throughout the fiscal year. Continued
compliance may be affected by events or circumstances beyond the control of the
Company.
A portion of the loans under the Revolving Credit Agreement bear interest at a
per annum rate equal to the Bankers Trust Company Prime Rate plus 1.75%, and a
portion of the loans bear interest at a percent per annum rate equal to the
Bankers Trust Company's 30-, 60-, or 90-day Eurodollar Rate (the "Eurodollar
Rate") plus 3.25%. The average interest rate at December 31, 1994 was 9.5%.
In addition, the Revolving Credit Agreement provides for a .5% per annum unused
line fee on the unused portion of the revolving credit facility.
9
<PAGE> 10
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E -- BORROWINGS - Continued
The First Mortgage Notes were issued under an indenture (the "Indenture") as of
December 15, 1992 by and among the Company and Shawmut Bank Connecticut, N.A.,
as Trustee (the "Trustee"). The First Mortgage Notes are secured senior
obligations of the Company limited in aggregate principal amount to
$100,000,000 and will mature on December 15, 2000. Interest on the First
Mortgage Notes will accrue at the rate of 11 1/2% per annum and will be payable
semiannually on each June 15 and December 15, commencing on June 15, 1993, to
the holder of record on the immediately preceding June 1 and December 1.
Interest on the First Mortgage Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the
original date of issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
The First Mortgage Notes will be redeemable, at the option of the Company, in
whole or in part from time to time, on or after December 15, 1996 at redemption
prices (expressed as percentages of the outstanding principal amount) if
redeemed during the twelve-month period commencing on December 15 of the year
set forth below, plus, in each case, accrued interest thereon to the date of
redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1996 103.833%
1997 101.916%
1998 and thereafter 100.000%
</TABLE>
The First Mortgage Notes rank pari passu with respect to the payment in full of
the principal and interest on all existing and future senior indebtedness of
the Company and rank senior to all subordinated indebtedness of the Company,
including the Debentures and the Subordinated Intercompany Note described
below. The Company will not issue any indebtedness that is subordinated to any
other indebtedness of the Company unless each subordinated indebtedness is
subordinated to the same extent to the First Mortgage Notes.
The Company has assigned and pledged as collateral (the "Collateral") to the
Trustee for the benefit of the Trustee and the Holders of the First Mortgage
Notes a security interest in certain of its real and personal property
summarized below, whether now owned or hereafter acquired, together with the
proceeds therefrom and permanent additions and accessions thereto, but such
security interest will not extend to the inventory or accounts receivable of
the Company, which will be pledged to secure the obligations under the New
Revolving Credit Agreement. The Collateral for the First Mortgage Notes will
represent substantially all the real and personal property (other than
inventory and accounts receivable) of the Company's five minimills. The
security interest in the Collateral will be a first priority interest (to the
extent attainable by filing or possession), subject to certain permitted
encumbrances, which encumbrances, in the judgment of the Company, will not
adversely affect the value of the collateral.
10
<PAGE> 11
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E -- BORROWINGS - Continued
The Company has issued to Holdings a $50 million note ("the Subordinated
Intercompany Note") which has the same requirements as the Holdings Debt
Investment described below. The Subordinated Intercompany Note matures on
December 21, 2002; is not transferable, by way of sale, pledge, hypothecation
or otherwise; bears interest at the same interest rate as the Holdings Debt
Investment; does not contain any covenants or mandatory prepayment terms; is
subordinated to all senior indebtedness of the Company for borrowed money; and
does not require the Company to pay interest at any time there is a default
under the First Mortgage Notes, the New Revolving Credit Facility or any other
senior indebtedness.
The Holdings Debt Investment is an unsecured obligation of FLS in the aggregate
principal amount of $50 million and matures on December 21, 2002. The Holdings
Debt Investment bears interest semiannually at a floating rate equal to the
lesser of (i) the 180-day Eurodollar Rate plus 0.7% and (ii) 6% prior to
December 21, 1993, 9% prior to December 21, 1997, or 12% thereafter (subject,
in each case, to an increase of 2% on overdue principal and interest) and is
repayable at the option of FLS at any time after the initial borrowing, without
penalty or premium. The interest rate at December 31, 1994 was 7.8%. If
Kyoei's ownership of voting securities of FLS is less than majority, or FLS
does not own at least 80% of the voting securities of the Company, FLS will be
required to repay the Holdings Debt Investment. Until such time that all
obligations under the New Revolving Credit Facility or the First Mortgage Notes
have been paid in full, the holders of the Holding Debt Investment may not
exercise any remedies against FLS or its assets upon event of default other
than to accelerate the Original Holdings Debt Investment for 179 days after the
occurrence of the event of default.
The Company also has outstanding borrowings in the amount of $10.9 million
obtained through industrial revenue bonds ("IRB's") issued to construct
facilities in Jackson, Tennessee; Charlotte, North Carolina; Jacksonville,
Florida; and Plant City, Florida. The interest rates on these bonds generally
range from 50% to 75% of the prime rate averaging 5.4% at December 31, 1994.
The industrial revenue bonds generally mature in fiscal 2004. The IRB's are
backed by irrevocable letters of credit issued pursuant to the New Revolving
Credit Agreement. As of December 31, 1994, the Company also had an additional
$7 million of outstanding letters of credit, primarily for insurance-related
matters and surety bonds.
The Company has borrowed $5.0 million as of December 31, 1994 as part of a
total $5.5 million loan (the "Equipment Trade Loan Agreement") from Mitsubishi
International Corporation. The loan proceeds are to be used for the purchase
of steel mill equipment which shall collateralize the loans. Interest will be
computed on the basis of a 360-day year at 7.75% simple interest with the loans
maturing December 29, 1995. In addition, Marubeni America Corporation has
provided $3.2 million of a total $4.5 million agreement with implicit interest
of 8.5% which matures on April 15, 1996.
As of March 28, 1994, the Company entered into a subordinated note agreement
(the "Bank of Tokyo Loan") with the Bank of Tokyo, LTD., New York Agency. The
Company pays interest on the $10 million note semiannually on each March 28 and
September 28 commencing September 28, 1994. Interest will be computed on a 360
day basis at the six-month Eurodollar Rate plus 1.5%. The interest rate at
December 31, 1994 was 7.2%. These notes are subordinated to the Company's
senior debt and the Company may not make payments if the senior debt is in
default until certain conditions are met.
11
<PAGE> 12
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E -- BORROWINGS - Continued
The maturities of long-term borrowings for the fiscal years are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL
YEAR
-----
<S> <C>
1996 $ 10,996
1997 3,192
1998 --
1999 and thereafter 173,910
----------
$ 188,098
==========
</TABLE>
NOTE F -- ENVIRONMENTAL MATTERS
Because the Company is involved in the manufacture of steel, it produces and
uses certain substances that may pose environmental hazards. The principal
hazardous waste generated by current and past operations is emission control
dust ("EC dust"), a residual from the production of steel in electric arc
furnaces. The emission control dust generated by current operations is shipped
to zinc reclamation facilities under applicable environmental laws. In the
past, some of the Company's facilities and those of some reclaimers to whom
shipments were made became contaminated by emission control dust. In addition,
during the early 1970s, contamination involving polychlorinated biphenyls
(PCBs), a toxic chemical, occurred at several of the Company's facilities.
Environmental legislation and regulation at both the federal and state level is
subject to change, which may increase the cost of compliance. Various possible
methods of remediation are presently being studied for approval; however, it is
expected that the investigation and remediation process will take a number of
years. Although the ultimate costs associated with the remediation are not
presently known, the Company has recorded a reserve at December 31, 1994 of
approximately $20 million, the estimated cost of remediation. The Company's
estimate of the remediation costs is based on its review of each site and the
nature of such problems. The Company then determines for each site the
expected remediation methods, and the estimated cost for each step of
remediation. In all such determinations, the Company employs outside
consultants, and providers of such remedial services where necessary, to
assist in making such determinations.
NOTE G -- LITIGATION
The Company is defending various claims and legal actions which are common to
its operations. While it is not feasible to predict or determine the ultimate
outcome of these matters, none of them, in the opinion of management, will have
a material effect on the Company's financial position or results of operations.
12
<PAGE> 13
FLORIDA STEEL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE H -- RESTATEMENT
The Company determined that the first-in, first-out (FIFO) method is a more
appropriate method of accounting for the cost of its inventories and results in
a better matching of costs with related revenues. The use of FIFO conforms the
accounting for inventories of the Company with that of its parent, Kyoei.
Additionally, the sales prices the Company charges its customers is directly
affected by any changes in the price of the Company's primary raw material
("Scrap"). However, this affect on future sales prices occurs after changes in
the price of scrap, and as a result, FIFO provides a better matching of costs
and revenues. The Company also believes that the FIFO method is a more
accurate measure of the financial position of the Company as it reflects
inventories at amounts closer to their current cost. Therefore, during the
quarter ended December 31, 1993, the Company changed its accounting for
inventories from the last-in, first-out (LIFO) basis to the FIFO basis of
accounting. This change was effective in all periods subsequent to December
31, 1992.
The change resulted in the restatement of the Condensed Statements of
Operations of Cost of Sales, Income Tax (Expense) Benefit, Net Loss and
Retained Earnings as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, 1993
PRIOR TO
RESTATEMENT AS RESTATED
----------- -----------
<S> <C> <C>
COST OF SALES $374,211 $370,604
INCOME TAX (EXPENSE) BENEFIT 1,464 1,401
NET LOSS 4,449 5,362
RETAINED EARNINGS AT
DECEMBER 31, 1993 142,981 142,349
</TABLE>
NOTE I -- EMPLOYMENT AGREEMENT
Effective June 1, 1994, the Company entered into an employment agreement with
Mr. Phillip Casey to serve as the Company's Chairman of the Board of Directors
and Chief Executive Officer. The Agreement includes a one time signing bonus
of $500,000, base annual salary of $300,000, equity interest of 7.5% of the
outstanding common stock of the Company to vest ratably over the next five
years, (recorded in the June 30, 1994 condensed financial statements as an
increase in capital in excess of par of $4,500,000, an increase in deferred
compensation of $4,425,000, and as an increase in salary expense of $75,000), a
tax bonus in the amount of $1,946,000 for the taxes payable by Mr. Casey with
respect to his receipt of the 7.5% equity interest, recorded in the September
30, 1994 quarter plus other benefits commensurate with his position. On
November 1, 1994, Mr. Casey purchased an additional 2.5% of the outstanding
common stock of the Company for $1,500,000. The agreement provides for certain
termination benefits and places restrictions on the disposition of the
Company's stock.
13
<PAGE> 14
FLORIDA STEEL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1994, the Company's total outstanding borrowings were $248.7
million compared with $247.1 million at March 31, 1994. Outstanding borrowings
under the $100 million Revolving Credit Agreement were $55.6 million with
availability additionally reduced by letters of credit of $17.8 million and
$1.0 million specifically reserved for the payment of the obligation owed to
Holdings for the payout of the preferred stock settlement. Revolving credit
availability at the end of December 1994 was $25.6 million with cash and cash
equivalents of $400 thousand.
The net cash provided by operating activities of $2.2 million during the
quarter was primarily due to the Company's stronger earnings position. Net
income for the quarter ended December 31, 1994, was $3.2 million (on a 12%
increase in sales) versus a net loss of $3.2 million for the same period a year
earlier. Working capital at the end of the third quarter decreased to $57.7
million compared with $114.4 million at the end of September 1994 and $110.2
million for the same period a year ago. The current ratio at December 31, 1994
was 1.4 compared with 2.5 as of September 30, 1994. This significant change
resulted primarily from the reclassification of $60.6 million from long term
debt to a current liability representing the Revolving Credit Agreement and an
Equipment Loan Agreement maturing in December, 1995. Negotiations concerning a
replacement revolving credit facility will begin this quarter and it is
anticipated will be finalized prior to July, 1995 with the Company seeking at
least a similar committed loan amount, and terms and conditions as favorable as
the present agreement.
Net cash provided by financing activities was reduced to $3.4 million during
the quarter ended December 31, 1994 from $9.8 million for the same period last
year. Capital expenditures were $8.0 million in the December 1994 quarter and
projected to be $26 million for fiscal year 1995. At the quarter end,
approximately $1 million remained to be paid of the $19.1 million originally
reserved for the payout related to the preferred stock settlement arising from
Company's 1992 acquisition.
While both the senior First Mortgage notes and Revolving Credit Agreements
contain certain restrictions to incur additional indebtedness, the Company is
allowed to borrow an additional $6.8 million to finance the acquisition of
fixed assets in addition to the revolving credit availability. The Company
believes that these available financing facilities and the cash flow generated
from operations will be sufficient to fund day-to-day operations and the
contemplated capital expenditure program. The Company is currently in
compliance with all of the covenants of its loan agreements.
14
<PAGE> 15
FLORIDA STEEL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales, excluding depreciation 85.8 89.7 83.8 90.8
Selling and administrative 4.7 4.1 4.8 4.5
Depreciation 2.2 2.8 2.4 2.9
Amortization of goodwill .7 .7 .7 .8
----- ----- ----- -----
93.4 97.3 91.7 99.0
----- ----- ----- -----
INCOME FROM OPERATIONS 6.6 2.7 8.3 1.0
Other expenses:
Interest 3.7 3.8 4.0 3.9
Amortization of deferred financing costs .4 .5 .4 .5
----- ----- ----- -----
4.1 4.3 4.4 4.4
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES 2.5 (1.6) 3.9 (3.4)
Income tax (benefit) 1.2 (.3) 1.7 (1.0)
----- ----- ----- -----
NET INCOME (LOSS) 1.3 (1.3) 2.2 (2.4)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
Product (Tons) 1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Fabricated Rebar 267,535 253,848 82,399 81,521
Stock Rebar 387,347 344,447 105,870 125,458
Merchant Bar 400,280 345,495 135,930 110,035
Rods 97,362 95,024 31,791 25,231
Billets 112,259 231,506 27,536 53,259
--------- --------- -------- --------
Total Tonnage 1,264,783 1,270,320 383,526 395,504
Selling Price Per Ton
Fabricated Rebar $413 $367 $431 $374
Stock Rebar 324 281 339 281
Merchant Bar 354 328 360 334
Rods 334 325 345 341
Billets 225 217 241 219
Scrap Cost Per Ton $127 $114 $133 $123
</TABLE>
15
<PAGE> 16
FLORIDA STEEL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Continued
Sales: As a result of an exceptionally mild winter season, favorable steel
demand and price stability were acheived in the December quarter. There were
356,000 tons of finished products shipped in the current quarter compared with
342,000 tons a year ago. The finished products shipment for the nine months
ended December 31, 1994, totaled 1,153,000 tons versus 1,039,000 tons or a 11.0
percent increase. Billet shipments were down to 28,000 tons for the quarter
ended December 31, 1994, compared with 53,000 tons for the same quarter last
year. The nine month period billet shipments were down to 112,000 tons versus
232,000 tons. Billet sales for the current quarter and year to date were
primarily domestic shipments while the prior year sales included export
shipments at low prices.
Average selling prices for all mill finished tons shipped were up $50 per ton
or 13.1 percent for the quarter ended December 31, 1994, versus the comparable
quarter a year ago and up $12 per ton higher than the September 1994 quarter.
Fabricated selling prices increased $57 per ton for the current quarter versus
a year ago and were $18 per ton over the previous quarter. A stock rebar price
increase of $10 per ton has been announced effective March 6, 1995.
Net sales for the three-month period ended December 31, 1994, were 11.9 percent
higher than the previous three-month period one year ago. Net sales for the
nine-month period ended December 31, 1994, were 13.7 percent higher than the
nine-month period ended December 31, 1993.
Cost of Sales: Cost of sales excluding depreciation, was 83.8 percent of net
sales for the three-month period ended December 31, 1994, as compared with 90.8
percent for the three-month period ended December 31, 1993. Cost of sales,
excluding depreciation, was 85.7 percent of net sales for the nine-month period
ended December 31, 1994, as compared to 89.7 percent for the nine-month period
ended December 31, 1993. Scrap costs per ton were $133 for the quarter ended
December 31, 1994, versus $123 a year ago and were $127 for the current nine
months versus $114 a year ago. Manufacturing conversion costs were $13 per ton
lower in the current quarter compared with a year ago and $10 per ton lower for
the year-to-date period versus a year ago. The primary reasons for the decrease
in the cost of sales, excluding depreciation, were the favorable effect of
higher selling prices and increased shipments.
Selling and Administrative Expenses: Selling and administrative expenses were
4.8% of sales for the quarter ended December 31, 1994 as compared with 4.5% of
sales for the December 31, 1993 quarter, a result of higher employee costs.
The nine month period costs for the current year included employment fees and
bonus related to the hiring of the new Chairman of the Board and Chief
Executive Officer.
16
<PAGE> 17
FLORIDA STEEL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Continued
Depreciation: Depreciation for the three- and nine-month periods ended
December 31, 1994 was lower than the previous three- and nine-month periods
ended December 31, 1993 because of the closing of the Tampa Melt Shop.
Amortization: Amortization of goodwill for the three- and nine-month periods
of fiscal 1995 was slightly higher than a year ago.
Interest Expense: Interest expense for the three- and nine-month periods of
fiscal 1995 was higher than in the respective periods of fiscal 1994 because of
higher average debt and higher interest rates.
Income Taxes: The effective federal and state income tax rate for the three-
and nine-month periods ended December 31, 1994 and 1993 was 37.7% excluding the
effect of the amortization of goodwill, which is not deductible for income tax
purposes.
17
<PAGE> 18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending various claims and legal actions which are common to
its operations. While it is not feasible to predict or determine the outcome
of these matters, none of them, in the opinion of management, will have a
material effect on the Company's financial position or results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
AUDITOR CHANGE
Form 8-K was filed on November 2, 1994 to reflect the engagement of a new
independent accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA STEEL CORPORATION
Date: February 7, 1995 /s/ T. G. Creed
---------------------------------------------------
T. G. Creed, President and Chief Operating Officer
Date: February 7, 1995 /s/ M. F. Hill
---------------------------------------------------
M. F. Hill, Vice President and Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLORIDA STEEL CORPORATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 397
<SECURITIES> 0
<RECEIVABLES> 71,474
<ALLOWANCES> 1,500
<INVENTORY> 115,824
<CURRENT-ASSETS> 186,951
<PP&E> 255,475
<DEPRECIATION> 27,894
<TOTAL-ASSETS> 522,771
<CURRENT-LIABILITIES> 129,249
<BONDS> 188,098
<COMMON> 0
0
0
<OTHER-SE> 133,294
<TOTAL-LIABILITY-AND-EQUITY> 522,771
<SALES> 469,597
<TOTAL-REVENUES> 469,597
<CGS> 413,377
<TOTAL-COSTS> 413,377
<OTHER-EXPENSES> 24,764
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 19,018
<INCOME-PRETAX> 11,938
<INCOME-TAX> 5,668
<INCOME-CONTINUING> 6,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,270
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
