UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000
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
No. 1-9820
BIRMINGHAM STEEL CORPORATION
DELAWARE 13-3213634
(State of Incorporation) (I.R.S. Employer Identification No.)
1000 Urban Center Parkway, Suite 300
Birmingham, Alabama 35242
(205) 970-1200
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 and 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 31,064,530 Shares of Common
Stock of the registrant were outstanding at May 9, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION (unaudited)
BIRMINGHAM STEEL CORPORATION
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 2000 1999
(Unaudited) (Audited)
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 935 $ 935
Accounts receivable, net of
allowance for doubtful accounts
$1,405 at March 31, 2000
and $1,207 at June 30, 1999 111,317 104,462
Inventories 160,074 161,801
Other current assets 7,991 53,324
------- -------
Total current assets 280,317 320,522
Property, plant and equipment:
Land and buildings 298,210 293,363
Machinery and equipment 628,263 714,094
Construction in progress 26,452 30,683
-------- --------
952,925 1,038,140
Less accumulated depreciation (305,805) (272,579)
Less allowance for loss on disposal of SBQ assets - (158,523)
------- ---------
Net property, plant and equipment 647,120 607,038
Excess of cost over net assets acquired 16,174 17,769
Other 22,713 25,408
-------- ---------
Total assets $966,324 $ 970,737
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 69,202 $ 96,336
Accrued interest payable 4,433 1,506
Accrued payroll expenses 13,163 9,930
Accrued operating expenses 8,618 10,636
Loss on purchase commitment 10,238 -
Other current liabilities 28,791 24,978
Current portion of long-term debt 129 10,157
Reserve for discontinued operations - 56,544
------- -------
Total current liabilities 134,574 210,087
Deferred liabilities 13,333 10,581
Loss on purchase commitment 30,000 -
Long-term debt less current portion 594,334 511,360
Minority interest in subsidiary - 7,978
Stockholders' equity:
Preferred stock, par value
$.01; authorized: 5,000 shares - -
Common stock, par value
$.01; authorized: 75,000
shares; issued: 31,065 at
March 31, 2000 and
29,836 at June 30, 1999 311 298
Additional paid-in capital 333,994 329,056
Treasury stock, 98 and 150
shares at March 31,
2000 and June 30, 1999,
respectively, at cost (501) (791)
Unearned compensation (793) (718)
Retained deficiency (138,928) (97,114)
-------- --------
Total stockholders' equity 194,083 230,731
--------- --------
Total liabilities and stockholders' equity $ 966,324 $970,737
========= ========
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
(unaudited) (unaudited)
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $253,141 $224,486 $719,434 $722,296
Cost of sales:
Other than depreciation
and amortization 234,581 193,642 641,179 619,745
Depreciation and amortization 13,167 14,939 44,882 44,922
-------- -------- -------- --------
Gross profit 5,393 15,905 33,373 57,629
Start-up and restructuring
costs and other unusual items 8,416 20,623 207,264 40,467
Selling, general and administrative 12,075 11,380 40,416 31,801
Interest 13,708 8,113 37,262 25,496
-------- -------- -------- --------
(28,806) (24,211) (251,569) (40,135)
Other income, net 571 1,801 2,620 13,087
Loss from equity investments (56) (3,434) (14,035) (6,789)
Minority interest in loss of subsidiary 2,296 1,796 7,978 3,725
-------- -------- -------- --------
Loss from continuing operations before income
taxes (25,995) (24,048) (255,006) (30,112)
Provision for income tax benefits - (8,417) (42,824) (10,539)
-------- -------- -------- --------
Loss from continuing operations (25,995) (15,631) (212,182) (19,573)
Discontinued operations
Reversal of loss on disposition,
(net of income taxes of $78,704) - - 173,183 -
-------- -------- -------- --------
Loss before extraordinary item (25,995) (15,631) (38,999) (19,573)
Restructuring of debt, (net of income taxes
of $924) - - (1,330) -
-------- -------- -------- --------
Net loss $(25,995) $(15,631) $(40,329) $(19,573)
======== ======== ======== ========
Weighted average shares outstanding 30,508 29,509 29,990 29,416
======== ======== ======== ========
Basic and diluted per share amounts:
Loss from continuing operations $ (0.85) $ (0.53) $ (7.07) $ (0.67)
Reversal of loss on disposition of discontinued
operations net of taxes - - 5.77 -
Restructuring of debt, net of income taxes - - (0.04) -
-------- -------- -------- --------
Net loss $ (0.85) $ (0.53) $ (1.34) $ (0.67)
======== ======== ======== ========
Cash dividends declared per share $ 0.000 $ 0.025 $ 0.025 $ 0.150
======== ======== ======== ========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
March 31,
----------- ----------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (40,329) $ (19,573)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Reversal of loss on discontinued operations, (net of income tax of $78,704) (173,183) -
Depreciation and amortization 44,882 44,922
Provision for doubtful accounts receivable 812 126
Deferred income taxes (42,824) (3,751)
Minority interest in loss of subsidiary (7,978) (3,725)
Loss from equity investments 14,035 6,789
Accrued loss on purchase commitment 40,238 -
Writeoff of excess of cost over net assets acquired 22,134 -
Asset impairment charges 98,111 -
Other 3,186 2,571
Changes in operating assets and liabilities:
Accounts receivable (7,667) 13,766
Inventories 1,727 67,895
Other current assets 17,188 (1,982)
Accounts payable (27,134) (20,647)
Other accrued liabilities 10,270 (9,280)
Deferred compensation 2,102 1,298
---------- -----------
Net cash (used in) provided by operating activities (44,430) 78,409
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (22,681) (118,081)
Proceeds from lease agreement - 7,779
Proceeds from disposal of property, plant, and equipment 1,030 3,377
Equity investment in American Iron Reduction, LLC - (3,750)
Reductions in other non-current assets (380) (1,349)
---------- -----------
Net cash used in investing activities (22,031) (112,024)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings and repayments - 5,000
Payment of debt issue costs (5,000) -
Borrowings under $30 million bridge facility - 13,200
Payments on long-term debt (10,161) -
Borrowings under revolving credit facility 1,044,232 1,388,706
Payments on revolving credit facility (961,125) (1,365,005)
Purchase of treasury stock - (3,209)
Cash dividends paid (1,485) (4,565)
---------- -----------
Net cash provided by financing activities 66,461 34,127
---------- -----------
Net (decrease) increase in cash and cash equivalents - 512
Cash and cash equivalents at:
Beginning of period 935 902
---------- -----------
End of period 935 $ 1,414
========== ===========
See accompanying notes.
</TABLE>
<PAGE>
BIRMINGHAM STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Significant Accounting Policies
Description of the Business
Birmingham Steel Corporation (the Company) owns and operates facilities in the
mini-mill sector of the steel industry. The Company also owns equity interests
in scrap collection and processing operations. The Company's rebar/merchant
segment produces a variety of steel products including semi-finished steel
billets, reinforcing bars and merchant products, such as rounds, flats, squares,
strips, angles and channels. These products are sold primarily to customers in
the steel fabrication, manufacturing and construction business. The Company has
regional warehouses and distribution facilities, which are used to distribute
its rebar and merchant products.
In addition, the Company's Special Bar Quality (SBQ) segment, which was reported
in discontinued operations prior to the second quarter of fiscal 2000, produces
high quality rod, bar and wire that is sold primarily to customers in the
automotive, agricultural, industrial fastener, welding, appliance and aerospace
industries in the Unites States and Canada.
Basis of Presentation
The accompanying unaudited consolidated financial statements are prepared in
accordance with accounting principals generally accepted in the United States
(GAAP) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date, and includes reclassifications to reflect the reversal
of discontinued operations accounting for the Company's SBQ line of business
(see Note 2).
In the opinion of management, all material adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 1999. Operating results for the interim periods
reflected herein are not necessarily indicative of the results that may be
expected for full fiscal year periods.
2. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In fiscal 1999, prior management of the Company announced plans to sell the
Company's SBQ operations, which includes rod, bar and wire facilities in
Cleveland, Ohio; a high quality melt shop in Memphis, Tennessee; and the
Company's 50% interest in American Iron Reduction, L.L.C. (AIR). Accordingly, as
required by APB Opinion 30 (as interpreted by EITF 95-18) the operating results
of the SBQ division were reflected as discontinued operations in the Company's
annual financial statements for fiscal 1999 and in the first quarter of fiscal
2000. On January 31, 2000, subsequent to a change in management which occurred
after a prolonged proxy contest, new management announced the Company would no
longer reflect its SBQ operations as discontinued operations. The change was
required as a result of new management's decision to reestablish its
Cleveland-based American Steel & Wire (AS&W) in the SBQ markets by purchasing
semi-finished steel billets from qualified third-party suppliers. Management's
decision to continue operating the AS&W facilities was based on the following
considerations:
o The Company's attempts to sell the facility had not been successful, and at
that time management believed that a sale in the near term would not
generate sufficient proceeds to pay down a meaningful amount of the
Company's long-term debt.
o New management believed there was a viable long-term market for AS&W's
high-quality rod, bar and wire products.
o The Company had identified several potential sources of high-quality
billets for the AS&W operations to replace Memphis as the primary supply
source.
Management also concluded that a sale of the entire SBQ line of business by the
end of fiscal 2000, as had been previously anticipated, was no longer likely
based upon the results of selling efforts to date and considering current market
conditions. In accordance with EITF 90-16, Accounting for Discontinued
Operations Subsequently Retained, the results of operations of the SBQ division
have been reported within continuing operations since the beginning of the
second quarter of fiscal 2000. In addition, the operating results of the SBQ
division for all periods prior to October 1, 1999 (previously reflected in
discontinued operations) have been reclassified from discontinued operations to
continuing operations. As a result of unwinding the discontinued operations
treatment of the SBQ division, the Company reversed the remaining balance of the
reserves for losses on disposal and operating losses, and their related income
tax effects, in the second quarter of fiscal 2000. The reversal of previously
established reserves (net of income tax) increased net income by $173,183,000
($5.77 per share) for the nine months ended March 31, 2000. Significant
components of the reversals are as follows (in thousands):
Nine Months Ended
March 31, 2000
------------------------
Reserve for estimated loss on disposal $195,343
Reversal and reclassification of SBQ operating losses 56,544
Less income tax (78,704)
------------------------
Net reversal $173,183
========================
Refer to Note 2 to the Company's 1999 consolidated financial statements for
further information on the nature and components of the estimated loss on
disposal.
Following is a summary of selected financial data for the SBQ division for prior
periods that were previously classified in discontinued operations (in
thousands):
Three Months Ended For the years ended June 30,
September 30, 1999 1999 1998 1997
Net sales $57,961 $270,398 $299,144 $311,233
Loss before income taxes $(21,420) $(85,261) $(40,112) $ (7,912)
In the Company's Form 10-Q for the quarter ended September 30, 1999, the loss
before income tax from the SBQ division was charged to the balance sheet reserve
that had been established in fiscal 1999. The division's operating results for
the second and third quarters of fiscal 2000 are presented in continuing
operations (see Note 8 for segment information).
The following is a summary of SBQ assets and liabilities at June 30, 1999 (as
reclassified in the accompanying balance sheet) and as reported in the
accompanying unaudited consolidated balance sheet at March 31, 2000 (in
thousands):
March 31, 2000 June 30, 1999
Current Assets:
Accounts receivable, net $ 31,404 $ 32,414
Inventories 46,422 61,471
Other 730 1,303
---------- -----------
78,556 95,188
Non-current Assets:
Net property, plant and equipment,
less valuation allowance of $85,000 at
3/31/00 and allocated loss on disposal
of $158,523 at 6/30/99 232,425 121,082
Excess of cost over net assets acquired
and other non-current assets, net of
reserve for loss of $22,134 824 1,446
Investment in AIR, net of reserve for
loss on permanent impairment of $13,889 - -
---------- ----------
Total SBQ division assets, net of valuation
allowances and reserves $ 311,805 $ 217,716
Current liabilities:
Accounts payable (421) (35,190)
Accrued loss on purchase commitment (10,238) -
Other accrued expenses (8,196) (14,440)
----------- ----------
(18,855) (49,630)
Non-current liabilities:
Long-term debt (42,159) (42,224)
Other non-current liabilities (1,966) (1,414)
Accrued loss on purchase
commitment-non-current (30,000) -
----------- ----------
Total SBQ division liabilities (92,980) (93,268)
----------- ----------
Net assets of SBQ division $ 218,825 $ 124,448
=========== ==========
As reflected in the table above, after reversing the previously established
reserves and allowances for losses on disposal, the Company evaluated the SBQ
assets for impairment. The Company also reconsidered the adequacy of its
reserves and provisions for contingencies, contract losses and other issues that
developed during fiscal 2000 related to both the rebar/merchant and SBQ
segments. The resulting charges and provisions are described in Note 3.
3. Start-Up and Restructuring Costs and other unusual Items
Start-up and restructuring costs and other unusual items consist of the
following (in thousands):
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
------- -------- -------- --------
Start-up expenses:
Memphis $ - $14,520 $15,396 $ 31,269
Cartersville 5,857 6,103 14,727 8,931
Other - - - 267
Asset impairment:
Memphis facility - - 85,000 -
Assets taken out of service - - 13,111 -
SBQ division excess of cost
over net assets acquired - - 22,134 -
Restructuring charges:
Severance and termination
benefits (Memphis) - - 2,473 -
Loss on purchase commitment - - 40,238 -
---------- -------- -------- ---------
Other unusual items:
Proxy solicitation 339 - 6,887 -
Executive severance 2,220 - 7,298 -
---------- -------- -------- ---------
$ 8,416 $ 20,623 $207,264 $ 40,467
========== ======== ======== =========
The above charges are reflected in the Company's reportable segments as follows
(in thousands):
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
------------------------ ------------------------
Rebar/Merchant $ 5,858 $ 6,103 $ 27,838 $8,931
SBQ - 14,520 165,241 31,269
Unallocated 2,558 - 14,185 267
------- ------- ------- ------
$ 8,416 $ 20,623 $ 207,264 $ 40,467
======= ======== ========= ========
As of March 31, 2000, none of the purchase commitment losses have been incurred.
All proxy solicitation costs accrued and $3.8 million of the accrued liabilities
for Memphis severance and termination benefits and executive severance have been
paid.
A narrative description of the significant items summarized in the preceding
tables follows:
Asset Impairment: On December 28, 1999, the Company announced the suspension of
operations at its melt shop facility in Memphis, Tennessee. The results of the
Company's impairment review indicated that the Memphis facility was impaired.
Accordingly, in the second quarter of fiscal 2000, the Company recorded an
impairment charge of $85 million representing the difference between the
carrying value of those assets and the estimated fair market value (based on an
appraisal) less estimated costs to sell the facility. Management is actively
pursuing a sale or other disposition of the Memphis facility, including joint
venture opportunities. As a result of the Company's decision to continue SBQ
rolling operations in Cleveland using third party billet sources, there is no
operational requirement to continue billet production in Memphis. Accordingly,
Memphis was treated as an asset held for disposition as of January 1, 2000, and
depreciation is no longer recognized. The estimated impairment loss also
reflects the expected loss on settlement of an operating lease for equipment at
Memphis. Substantially all of the steel produced at Memphis has historically
been transferred to Cleveland for further processing. Virtually all of the
Memphis facility's net sales are thus eliminated in the consolidated financial
statements. Consequently, closing the Memphis facility is not expected to cause
a decrease in SBQ net sales, provided the Company is able to secure an adequate
third-party billet source for the Cleveland rolling mill.
Considerable management judgment is necessary to estimate fair value,
accordingly, the ultimate loss on disposition of the facility could vary
significantly from the estimates used in determining the loss in the quarter
ended December 31, 1999. At March 31, 2000, the adjusted carrying value of the
Memphis facility, which is reflected in property, plant and equipment is $70.8
million.
Assets taken out of service: In the quarter ended December 31, 1999, the Company
wrote off equipment taken out of service during the quarter and recognized
losses of $13.1 million.
Intangible Write-off: The $22.2 million impairment charge for intangible assets
recognized in the second quarter of fiscal 2000 represents unamortized excess of
cost over net assets acquired related to the SBQ division. This excess of cost
over net assets acquired was previously written down as a part of the 1999
provision for loss on discontinued operations. After reversing the loss on
disposition (as described in Note 2), the Company effectively restored the
previous charge as a component of continuing operations (as required by EITF
90-16). Thus, the charge in the second quarter of fiscal 2000 is principally a
reclassification within the income statement and had no impact on cash flows for
the quarter or on stockholder's equity. The excess of cost over net assets
acquired was impaired because the estimated undiscounted cash flows of the SBQ
division were insufficient to cover the net carrying amount of the division's
assets, considering management's operating strategy and its plan for continuing
only the Cleveland facility as a part of ongoing operations.
Severance and Termination Benefits: In connection with the shut down of the
Memphis facility, the Company accrued severance and other employee related exit
costs of approximately $2.5 million in the quarter ended December 31, 1999. The
Memphis shut down resulted in the termination of approximately 250 employees,
including management, administrative, and labor positions. In accordance with
EITF 94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity, the Company established a liability for
severance and other related costs associated with involuntary termination of
employees. The affected employees were notified of their terminations and their
severance benefits before the end of the second quarter. Most of the Memphis
employees were terminated as of December 31, 1999 and the remaining employees
are expected to substantially complete mill clean-up and other exit activities
by May 31, 2000.
Loss on purchase commitment: Through June 30, 1999 the Company had made equity
investments of $23,750,000 in AIR, a 50% owned joint venture that operates a
direct reduced iron (DRI) facility in Convent, Louisiana. DRI is a substitute
for high grade scrap that, until December 31, 1999, was used to produce high
quality billets at the Company's Memphis facility. In the fourth quarter of
1999, the Company announced its intention to dispose of its investment in AIR as
a part of its plan of disposal for the SBQ line of business. Given market
conditions that persisted at that time, and continue to persist, the Company
concluded that its investment in AIR was impaired and included the estimated
loss on sale of its investment in AIR ($13,889,000) in the fourth quarter 1999
loss on disposal of the SBQ business. As described in Note 2, in the second
quarter of fiscal 2000, new management of the Company concluded that a sale of
the entire SBQ line of business was unlikely to occur in the near term, and the
previously accrued loss on disposition of the SBQ division, including the
previous write-down of the Company's investment in AIR, was reversed. However,
the Company continues to believe that the investment in AIR remains impaired.
Accordingly, the previous write-down of the AIR investment was reinstated
(reclassified) as a component of continuing operations in the second quarter of
fiscal 2000. The impairment loss is reflected in "Loss from equity investment"
in the consolidated statements of operations.
The AIR project is financed on a non-recourse basis to the Company and the other
venture partner. In the fourth quarter of fiscal 1999, AIR defaulted on $178.9
million of non-recourse project finance debt. The Company, AIR and the other
venture partner have continued workout discussions with AIR's lenders concerning
the project finance debt and the related DRI purchase commitments.
In connection with AIR's project financing agreements, the Company and its
venture partner have each agreed to purchase 50% of AIR's annual DRI production
(up to 600,000 metric tons), if tendered, at prices which are equivalent to
AIR's total production costs (excluding depreciation and amortization but
including debt service payments under AIR's project finance obligations). The
market price of DRI has remained approximately $30 per ton less than the price
that the venture partners are committed to pay under the DRI purchase commitment
to AIR. In the Company's Annual Report on Form 10-K for the year ended June 30,
1999, the Company disclosed that although it intended to dispose of its interest
in AIR as a part of its overall plan of disposal for the SBQ line of business,
the Company could remain obligated to purchase DRI from AIR after the disposal
of the SBQ business. At the end of fiscal 1999, the Company had no viable
strategy for terminating or settling the DRI purchase commitment. Furthermore,
because of the length of the remaining term of the commitment at that time
(approximately 8 years), prior management of the Company concluded that it could
not reasonably predict DRI price movements over such a long period, and
consequently it could not reasonably estimate the ultimate amount of loss, if
any, on the DRI purchase commitment. The Company disclosed that if it is unable
to find a buyer or another third party to assume its obligations under the AIR
purchase agreement and future market prices for DRI remain less than the
committed costs under the purchase agreement, the Company would incur losses on
future merchant DRI sales. On the other hand, if the market price of DRI
increases during the term of the purchase commitment, the Company could generate
trading profits from merchant DRI sales.
New management has continued negotiations with AIR's lenders and the Company's
venture partner to find an acceptable alternative to the Company's continued
participation in the AIR project. Based on these negotiations, the Company is
pursuing an exit strategy that will provide for the sale of the project,
settlement of AIR's obligations under its nonrecourse financing obligations and
settlement of the Company's and its venture partner's DRI purchase commitments.
Management believes that a sale of the facility can be completed in one to two
years. The Company will continue to be obligated to purchase approximately
300,000 metric tons per year (approximately equal to the 1999 run rate) until a
sale is completed. Management expects that during this time, the current spread
between the Company's committed cost under the DRI purchase contract and the
market price of DRI will essentially remain at the current level. Management
also expects to be able to resale substantially all of its share of AIR's
production to third parties in the merchant DRI market, but the Company will
incur continuing losses on these merchant DRI activities, at least for the near
term. In addition, management expects that the Company will absorb a portion of
the expected loss on sale of AIR's production facility. Accordingly, the Company
recorded a $40.2 million loss on the AIR purchase commitment in the second
quarter of fiscal 2000, of which $30 million is classified as non-current and
the remainder is classified as a current liability.
As is the case with all estimates that involve predictions of future outcomes,
management's estimate of the loss is subject to change. The principal factors
which could cause the actual results to vary are the length of time the Company
remains obligated under the purchase commitment until an acceptable sale of the
AIR facility can be completed, the proceeds from the sale, fluctuations in the
market price of DRI and changes in AIR's production costs.
Proxy Solicitation: These costs, principally consisting of legal, public
relations and other consulting fees, were incurred in the Company's defense of a
proxy contest led by The United Company Shareholder Group (the "United Group").
On December 2, 1999, the Company and United Group reached a settlement
appointing John D. Correnti as Chairman and Chief Operating Officer and
appointing nine new board members approved by the group. The charges include
approximately $1.6 million to reimburse the United Group for certain of its
costs in connection with the proxy fight. As agreed, this portion of the total
costs was settled through issuing 498,733 of the Company's common stock to the
United Company during the third quarter.
Executive Severance: As a result of the proxy contest, several executives,
including the former CEO, terminated their employment during the second and
third quarters of fiscal 2000. As more fully described in the Company's Annual
Report on Form 10-K, several key executives of the Company are covered by the
Company's executive severance plan, which provides for specified benefits after
a change in control of a majority of the Board of Directors of the Company,
among other triggering events. Through March 31, 2000, six executives covered by
the Plan have been severed. The executive severance provision recorded in the
quarters ended December 31, 1999 and March 31, 2000 reflects only those
executives who were terminated by the end of these respective quarters.
Additional executive severance expenses incurred in the quarter ended March 31,
2000 were approximately $2.2 million.
4. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market, as
summarized in the following table (in thousands):
March 31, 2000 June 30, 1999
Raw Materials and Mill Supplies $ 48,146 $ 52,658
Work-in-Process 33,790 40,928
Finished Goods 78,138 68,215
--------------- ------------------
$ 160,074 $ 161,801
=============== ==================
5. LONG-TERM DEBT
On May 15, 2000, the Company and its lenders executed amendments to its
principal debt and letter of credit agreements to provide for the continuation
of the Company's borrowing arrangements on a long-term basis. These amendments
replace previous amendments, which were negotiated by the Company's prior
management in October 1999.
Among other things, the new amendments generally provide more operating
flexibility, modifications to financial covenants and $25 million in new funding
commitments from the lenders. The new agreements maintain the interest rates or
spreads currently in effect for the Company's debt. The lenders have also agreed
that a change in control did not occur as a result of the recent proxy contest
and resulting change in management. In addition, the new agreement allows the
Company to retain $100 million of proceeds from issuance of new equity.
The new $25 million commitment is to Birmingham Southeast, LLC (BSE), an
85%-owned subsidiary which includes the Cartersville and Jackson operations. The
new loan is secured by substantially all of the assets of Cartersville and
Jackson, and bears interest at the rate of LIBOR plus 4%. The new loan
provisions allow up to $10 million to be used to repay amounts owed by BSE to
the Company, with the remaining $15 million to be used for capital expenditures,
deferred maintenance and working capital for Cartersville and Jackson.
In exchange for the financing agreement modifications and the new $25 million
funding commitment, the lenders received warrants to purchase 3 million of the
Company's common shares for a 10-year period. The warrants are exercisable at a
price of $3 per share. The Company will record the fair value of the warrants as
an equity transaction in the quarter ending June 30, 2000. The portion of the
warrant value that is allocated to the Senior Notes will be recognized as debt
extinguishment loss in the quarter ending June 30, 2000. The portion of the
warrant expense attributable to the Revolving Credit Agreement and the new $25
million loan will be amortized over the remaining terms of the debt (January
2002) as a component of interest expense.
Based upon the current level of the Company's operations and current industry
conditions, the Company anticipates that it will have sufficient resources to
make all required interest and principal payments under the credit agreement and
Senior Notes through December 15, 2001. However, the Company is required to make
significant principal repayments on December 15, 2001 and, accordingly, may be
required to refinance its obligations under the Revolving Credit Agreement and
Senior Notes on or prior to such date. There can be no assurance that any such
refinancing would be possible at such time, or, if possible, that acceptable
terms could be obtained, particularly in view of the Company's high level of
debt, the restrictive covenants under the financing agreements, the Company's
obligations to AIR (See Note 3) and the fact that substantially all of the
Company's assets have been pledged to the banks and Senior Noteholders.
6. INCOME TAXES
In connection with the Company's reversal of discontinued operations treatment
of the SBQ division, the Company reversed the related $78,704,000 deferred tax
asset in the second quarter of fiscal 2000.
The company established certain charges and provisions in the second quarter of
fiscal 2000 (See Note 3), resulting in significant deferred tax benefits.
However, the deferred tax assets attributable to the fiscal 2000 losses are not
expected to be realized in the near term. Accordingly, the Company provided a
valuation allowance in the tax provision applicable to continuing operations to
reduce its net deferred tax assets to zero. As a result, no tax benefit was
recognized on the loss incurred in the third quarter.
7. CONTINGENCIES
Environmental
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluents, air
emissions and furnace dust management and disposal. The Company believes that it
is currently in compliance with all known material and applicable environmental
regulations.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Such claims are generally covered
by various forms of insurance. In the opinion of management, any uninsured or
unindemnified liability resulting from existing litigation would not have a
material effect on the Company's business, its financial position, liquidity or
results of operations.
<PAGE>
8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: rebar/merchant and SBQ. Summarized
financial information concerning the Company's reportable segments is shown in
the following table.
Three months ended March 31, 2000
- --------------------------------- Rebar/
Merchant SBQ Total
Net Sales $ 194,093 $ 59,048 $ 253,141
Intersegment revenue 7,774 3,364 11,138
Start-up costs and unusual items
reflected in segment profit (loss) 5,858 - 5,858
Segment profit (loss) (3,703) (19,083) (22,786)
Nine months ended March 31, 2000
- -------------------------------- Rebar/
Merchant SBQ Total
Net Sales $ 540,510 $178,924 $ 719,434
Intersegment revenue 24,847 3,489 28,336
Start-up costs and unusual items
reflected in segment profit (loss) 27,838 165,241 193,079
Segment profit (loss) (8,259) (187,510) (195,769)
Segment assets 1,150,120 320,522 1,470,642
Three months ended March 31, 1999
- --------------------------------- Rebar/
Merchant SBQ Total
Net Sales $ 152,179 $ 72,307 $ 224,486
Intersegment revenue 1,048 45 1,093
Start-up costs and unusual items
reflected in segment profit (loss) 6,103 14,520 20,623
Segment profit (loss) 3,235 (24,263) (21,028)
Nine months ended March 31, 1999
- -------------------------------- Rebar/
Merchant SBQ Total
Net Sales $ 525,908 $ 196,388 $ 722,296
Intersegment revenue 2,177 98 2,275
Start-up costs and unusual items
reflected in segment profit (loss) 8,931 31,269 40,200
Segment profit (loss) 42,280 (62,736) (20,456)
Segment assets 1,224,454 462,961 1,687,415
<TABLE>
Reconciliations
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
<S> <C> <C> <C> <C>
Revenue
- -------
Total external revenue
for reportable segments $ 253,141 $ 224,486 $ 719,434 $ 722,296
Intersegment revenue for
reportable segments 11,138 1,093 28,336 2,275
Elimination of intersegment
revenue (11,138) (1,093) (28,336) (2,275)
---------- ---------- ---------- ----------
Total consolidated revenue $ 253,141 $ 224,486 $ 719,434 $ 722,296
========== ========== ========== ==========
Operating Loss
- --------------
Total loss for reportable
segments $(22,786) $ (21,028) $(195,769) $ (20,456)
Unallocated unusual items (2,558) - (14,185) (267)
Other unallocated costs (651) (3,020) (45,052) (9,389)
---------- ---------- ---------- ----------
Loss from continuing
operations before
income taxes $ (25,995) $ (24,048) $(255,006) $ (30,112)
========== ========== ========== ==========
Assets
- ------
Total assets for reportable segments $1,470,642 $1,687,415
Elimination of intercompany balances (453,533) (159,316)
Other eliminations (50,785) (301,974)
---------- ----------
Total assets $ 966,324 $1,226,125
========== ==========
</TABLE>
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are recorded at
cost plus $25 per unit, however, the intercompany profit is eliminated for
consolidated reporting. The Company evaluates performance based on operating
earnings of the respective facilities.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
In December 1999, following a proxy contest, the Company's shareholders elected
new management and reconstituted the Board of Directors. The financial results
for the third quarter ended March 31, 2000 reflect the influence of decisions
implemented by prior management, as well as expenses associated with the proxy
contest and severance of former members of management. The results also reflect
wind-down costs related to the Memphis melt shop, which suspended operations on
January 1,2000.
In a press release dated May 1, 2000, management reported a number of
significant achievements which occurred during the third quarter, which have
improved financial viability and positioned the Company to improve financial
results in the future. These achievements included:
o Settlement of remaining expenses associated with the proxy contest ($6.9
million)
o Conclusion of expenses expected to be paid in connection with severance
payments to former members of management and former Memphis employees ($9.8
million)
o Conclusion of shut-down expenses related to the suspension of operations at
Memphis ($5.7 million)
o Net reduction in corporate office personnel, which is expected to reduce
annual expenses by more than $2 million
o Implementation of a turnaround plan at Cleveland
o Reduction in inventories by $39 million since December 31, 1999
o Reduction in accounts payable by $31 million since December 31, 1999
o Improved trade credit and relationships with vendors
o Completion of Phase I of construction of the new Cartersville rolling mill
o Increasing productivity and sales at the new Cartersville rolling mill
o Improved borrowing capacity as a result of suspension of operations at
Memphis, improvements at Cleveland and Cartersville and reduction in total
inventories
o Reaching of a new and more flexible financing agreement with the Company's
lenders
o Agreement by the Company's lenders to commit $25 million of new funding upon
closing of the new financing agreement
o Resolution of issues with lenders and co-sponsor concerning the Company's 50%
interest in American Iron Reduction (a joint venture to produce direct reduced
iron)
Many of the items are more fully described in the footnotes to the Consolidated
Financial Statements and elsewhere herein and in Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
In August 1999, prior management of the Company announced a strategic
restructuring plan to dispose of its special bar quality (SBQ) operations in
order to focus on its core rebar, merchant product and scrap businesses. In its
results for the fourth quarter of fiscal 1999, the Company recorded $173.2
million in charges for the estimated loss on the sale of the SBQ operations,
which included a $56.5 million pre-tax provision for estimated losses during the
expected one-year disposal period.
In January 2000, the Company's new management decided to retain its SBQ rolling
mill facilities in Cleveland, Ohio, which represent a substantial portion of the
previously discontinued SBQ operations. As a result, the Company was required to
reestablish the SBQ operations as part of continuing operations. The financial
statements for the second quarter of fiscal 2000 include the reversal of $151.8
million of the original $173.2 million charge and the reclassification of the
SBQ operations as a component of continuing operations. The effect of recovering
the previous charges was substantially offset by re-establishing most of the
previous reserves ($143.4 million after-tax) as described under the caption
"Start-Up and Restructuring Costs and Other Unusual Items".
Results from Operations
The Company reported a net loss of $ 26 million or $.85 per share, basic and
diluted, for the third quarter of fiscal 2000 compared with a net loss of $15.6
million or $.53 per share in the third quarter of fiscal 1999. The loss for the
current period reflects $ 8.4 million in unusual charges, including proxy and
executive severance expenses related to the recent proxy contest, start-up
expenses and other unusual items, as more fully described in the footnotes to
the Consolidated Financial Statements.
Sales
The following tables compare shipments and average selling prices per ton for
the third quarters of fiscal 2000 and 1999 and the nine months ended March 31,
2000 and 1999:
Three months ended March 31,
-----------------------------------------------------
2000 1999
Average Average
Sales Sales
Product Tons Shipped Price Tons Shipped Price
---------------------- ----------------------------
Rebar Products 346,019 $262 308,277 $262
Merchant Products 260,705 308 211,346 302
SBQ Products 144,766 392 177,762 412
Billets/Other 73,062 221 9,668 215
---------------------- ----------------------------
Totals 824,552 $296 707,053 $311
---------------------- ----------------------------
Nine months ended March 31,
---------------------------------------------------------
2000 1999
Average Average
Sales Sales
Product Tons Shipped Price Tons Shipped Price
---------------------- ----------------------------
Rebar Products 1,087,215 $264 957,099 $283
Merchant Products 721,849 306 649,526 331
SBQ Products 441,507 403 460,978 429
Billets/Other 120,323 244 144,039 216
--------------------- ----------------------------
Totals 2,370,894 $302 2,211,642 $326
--------------------- ----------------------------
Sales for the third quarter of fiscal 2000 were $253.1 million, up 12.7% from
fiscal 1999 third quarter sales of $224.5 million. The increase was attributable
to a 16.6% increase in total tons shipped from 707,053 tons in the third quarter
of fiscal 1999 to 824,552 tons in the third quarter of fiscal 2000. The increase
in tons shipped was, however, offset by a $15 average price per ton decrease in
average selling prices in the current year period. Average selling prices for
steel products generally declined throughout the 1999 calendar year, primarily
because of increased imports of steel products and unfavorable trends in product
mix, as lower priced rebar and billets accounted for a higher percentage of
total shipments. Recently, imports of steel products have declined, and the
Company has announced price increases which are expected to take effect in
future periods.
Fiscal year 2000 sales for the nine months ended March 31, 2000 were $719.4
million, down 0.4% from $722.3 million from the same period last year. While
shipments increased to 2,370,894 tons from 2,211,642 tons in the prior year,
average selling price per ton decreased $24 per ton due to the impact of imports
on the steel market and general market downward pressure on pricing.
Cost of Sales
As a percentage of net sales, cost of sales (other than depreciation and
amortization) increased to 92.7 % in the current quarter compared to 86.3% in
the third quarter of fiscal 1999. For the nine months ended March 31, 2000, cost
of sales (other than depreciation and amortization) as a percentage of sales
were 89.1 % compared to 85.8% for the comparable period last year. The
percentage increase in cost of sales for the quarter and the nine month periods
resulted primarily because of lower average sales prices, along with higher
operating lease costs for equipment at the Cartersville, Georgia facility which
became operational in the second half of fiscal 1999. In addition, the Company
recognized $ 3.8 million in inventory writedowns (primarily for lower of cost or
market adjustments) during the third quarter and established a liability of $ .9
million for a sales and use tax assessment in the second quarter of fiscal 2000.
Depreciation and amortization expense for the nine-month period of fiscal 2000
was essentially unchanged from the same period of the prior year. Depreciation
and amortization expense for the third quarter of fiscal 2000 declined from the
third quarter of fiscal 1999 as a result of the cessation of depreciation
associated with the Memphis facility, which suspended operations on January 1,
2000, and the second quarter write-off of excess of cost over net assets
acquired associated with the Company's SBQ operations.
Selling, General and Administrative (SG&A)
For the third quarter of fiscal 2000, SG&A expenses increased from $11.4 million
to $12.1 million, or 6.1% above the same period last year. As a percentage of
net sales, SG&A expense declined to 4.8% in the current fiscal quarter from 5.1%
in the third quarter last year, principally because of the 12.7% increase in
sales. For the first nine months of fiscal 2000, SG&A expense increased from
$31.8 million in 1999 to $40.4 million, or 27.0%, and increased as a percentage
of sales from 4.4% to 5.6%.
The increase in current year expenses relates to higher salaries and benefits
associated with increased headcount and increased computer equipment and
telephone equipment lease expense. In accordance with new management goals to
streamline operations, the Company believes that expenses related to salaries
and benefits will be reduced in future months as a result of recent reductions
at Memphis, Cleveland and the corporate headquarters.
Start-Up and Restructuring Costs and Other Unusual Items
Start-up expense, restructuring cost and other unusual items amounted to $8.4
million in the third quarter of fiscal 2000, compared to $20.6 million in the
same period last year. Substantially all of these costs relate to start-up
expenses at the Cartersville, Georgia mid-section mill (which began operations
in March 1999) and proxy and executive severance expenses related to the proxy
contest and change in management. The Company expects to continue incurring
start-up costs at Cartersville through the quarter ended June 30, 2000, at which
time management anticipates that the facility will be producing at or near
break-even operating level. In December 1999, the Company announced suspension
of operations at the Memphis facility. The Company has completed the shut down
at Memphis and expects to incur costs of approximately $1 million per month to
maintain the facility until it is sold or otherwise disposed of.
Operating results for the nine months ended March 31, 2000 reflect the reversal
of discontinued operations accounting which had been adopted by the Company in
August 1999. The accounting treatment for retaining the discontinued SBQ segment
required the reversal of $173.2 million of reserves, which had been previously
established for estimated losses to be incurred until disposition of the SBQ
operations. Although the discontinued operations reserves were reversed in the
second quarter of fiscal 2000, most of the previous charges were restored to
fairly state SBQ assets, liabilities, and operating results. These items were
expensed in the fiscal 2000 second quarter and substantially offset the reversal
of the prior year charges. Following is a summary of the after-tax charges for
the SBQ operations which offset the income from reversal of discontinued
operations reserves:
Charge
(Net of Tax Benefit)
-------------------
SBQ loss from operations - first quarter fiscal 2000 $ 13,922
SBQ loss from operations - second quarter fiscal 2000 11,658
Asset impairment - Memphis facility 55,250
Asset impairment - Investment in AIR 9,028
Loss on purchase commitment - AIR 26,154
Asset impairment - SBQ division excess of cost over
net assets acquired 22,134
Severance and termination benefits - Memphis 1,608
Inventory and other adjustments at Memphis
and Cleveland 3,624
-------------------
Total $ 143,378
===================
In addition to above adjustments, reserves and other charges for SBQ operations,
the Company incurred other unusual charges during the nine months ended March
31, 2000. The following table summarizes these pre-tax charges:
Description Charge
---------------------------------------------- -------------------
Proxy solicitation expenses $ 6,887
Executive severance 7,298
Asset impairment - Assets taken out of service 13,111
-------------------
Total $ 27,296
===================
For additional discussion of each of the above items refer to Note 3 of the
Consolidated Financial Statements.
Interest Expense
Interest expense increased to $13.7 million in the third quarter of fiscal 2000
from $8.1 million in the same period last year. For the nine months ended March
31, 2000, interest expense increased to $37.3 million from $25.4 million in the
same period last year. Higher interest charges are the result of a series of
modifications to the Company's long-term debt agreements, which increased the
Company's average borrowing rate to 8.72 % in the third quarter of fiscal 2000
from 6.54 % in the same period last year. For the nine months, the average
borrowing rate increased to 8.04 % from 6.53 % last year. The recurring
amortization of debt issue costs is also higher in 2000, reflecting the impact
of amendment fees and other issuance costs incurred in connection with amending
our debt agreement. Additionally, interest expense increased because of a
decline in capitalized interest previously attributed to the mid-section mill
project at the Cartersville, Georgia facility, which was placed in service in
the third quarter of fiscal 1999.
Income Taxes
In the second quarter of fiscal 2000, the Company established a valuation
allowance to reduce the carrying amount of net deferred tax assets to zero. The
valuation allowance was considered necessary because in management's view, the
realization of tax benefits from operating loss carryforwards and other
deductible temporary differences was not assured in the near term. Similarly, no
tax benefit was recognized in the third quarter because the tax benefit of the
third quarter loss was offset by a further increase in the valuation allowance.
The Company does not expect to pay federal income taxes in the foreseeable
future because of the substantial net operating losses that will be available to
offset future taxable income, if any. In January 2000, the Company received a $
10.6 million tax refund from the carryback of fiscal 1999 losses to prior years.
Liquidity and Capital Resources
Operating Activities
Net cash used in operating activities was $44.4 million for the nine months
ended March 31, 2000, compared to cash provided of $78.4 million for the
comparable period in fiscal 1999. Cash required for operating activities
increased because of continued operating losses at the Company's Memphis,
Cleveland and Cartersville operations. Management believes the Cartersville
operation is approaching the end of start-up operations, and has established a
goal of achieving a breakeven cash operating level by July 2000.
As part of the Company's decision to retain the previously discontinued SBQ
segment, the Company will continue operations at the Cleveland mill while the
Memphis facility has been idled and is held for disposition. The Company
estimates the carrying cost of the Memphis facility to be less than $1 million
per month. During the third quarter of fiscal 2000, the Company arranged for the
purchase of high quality billets from several third parties to support
operations at Cleveland and to help a turnaround of operations. These third
party billets began arriving in Cleveland in April, and the Company is
attempting to first return Cleveland to a breakeven operating performance and
then to profitability. The Company also continues to explore opportunities to
sell or participate in a joint venture involving the Memphis and Cleveland SBQ
operations.
Investing Activities
Net cash used in investing activities was $22.0 million for the nine months
ended March 31, 2000, as compared to $112.0 million in the same period last
year. The change was attributable to reduced capital spending for major projects
at the Memphis melt shop and the Cartersville mid-section mill. The debt
covenants in the Company's new amended financing agreements restrict capital
expenditures to $40 million for fiscal 2000, $35 million in fiscal 2001 and $30
million in fiscal 2002. However, the new financing agreements allow the Company
to carryover unused capital expenditures to succeeding fiscal years. Through the
nine months ended March 31, 2000, capital expenditures were $22.7 million. The
Company believes the level of capital expenditures allowed in the new financing
agreements is adequate to support management's plans for the ongoing operations.
Financing Activities
Net cash provided by financing activities was $66.5 million for the first nine
months of fiscal 2000, compared to $34.1 million in the same period last year.
Net outstanding borrowings on the Company's revolving credit facility increased
$83.1 million during the nine months of fiscal 2000. The Company also made a
principal reduction payment on an Industrial Revenue Bond totaling $10 million
and paid $5 million debt issue costs in the second quarter of 2000.
At March 31, 2000, the Company was not in compliance with the fixed charges
coverage covenants pertaining to its $ 280 million senior notes, $ 300 million
revolving credit agreement and letter of credits underlying its capital lease
and industrial revenue bond obligations. On May 15, 2000, the Company reached a
new financing accord with its lenders which, among other things, provides
greater operating flexibility, modifies financial covenants and provides $25
million in new funding commitments. In exchange for these modifications, the
lenders received warrants to purchase 3 million shares of the Company's common
shares over a ten-year period. The modifications to the Company's financing
agreements are more fully described in Note 5 to the Consolidated Financial
Statements. At March 31, 2000, the Company had availability of $26.4 million
under its revolving credit facility. Management believes the availability under
the revolver, together with the new $25 million facility provided to Birmingham
Southeast, LLC, an 85% owned subsidiary of the company, as part of the recent
financing agreement amendments, will be sufficient to support operations and
capital expenditures through the term of the financing agreements. Based upon
the current level of the Company's operations and current industry conditions at
this time, the Company anticipates it will have sufficient resources to make all
required interest and principal payments under the credit agreement and Senior
Notes through December 15, 2001. However, the Company is required to make
significant principal repayments on December 15, 2001, and, accordingly, will
likely be required to refinance its obligations under the Revolving Credit
Agreement and Senior Notes on or prior to such date. There can be no assurance
that any such refinancing would be possible at such time, or, if possible, that
acceptable terms could be obtained, particularly in view of the Company's recent
history of operating losses and its high level of debt.
Management believes the Company will be in compliance with the restrictive
covenants in the new financing agreement in the near term. The Company is
currently in compliance with the restrictive debt covenants governing its loan
agreements. However, should factors described under "Risk factors" in the
Company's 10-K filing for fiscal 1999 adversely affect future operating results,
the Company could violate one or more of its restrictive covenants within the
next twelve months. For additional discussion of long-term debt refer to Note 5
of the Consolidated Financial Statements.
Working Capital
Working capital at the end of the third quarter of fiscal 2000 was $145.7
million, compared to $110.4 million at June 30, 1999. The increase in working
capital was primarily attributable to increased sales and accounts receivable
and a reduction in accounts payable. In the second quarter of fiscal 2000, the
Company established a $ 10.2 million reserve to cover expected losses for the
next year associated with the Company's investment in American Iron Reduction
(See Note 3 of the Consolidated Financial Statements). Accounts payable declined
primarily because of suspension of operations at Memphis and general spending
curtailments throughout the Company as part of an initiative to conserve cash.
These spending reductions were partially offset by the acceleration of payments
to vendors, a substantial portion of which was funded by the Company's revolving
credit facility. During the third quarter, the Company generated sufficient cash
from operations to enable an improvement in payments to vendors.
Market Risk Sensitive Instruments
There have been no material changes in the Company's inherent market risks since
the disclosures made as of June 30, 1999, in the Company's annual report on Form
10-K.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $2.2 million during 1999 in connection with remediating
its systems. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Risk Factors That May Affect Future Results; Forward Looking Statements
This quarterly report includes forward-looking statements based on our current
expectations and projections about future events, including: market conditions;
future financial performance and potential growth; effect of indebtedness;
future cash sources and requirements, including expected capital expenditures;
competition and production costs; strategic plans, including estimated proceeds
from and the timing of asset sales including the sale of the SBQ division; and
the Company's interests in AIR and Pacific Coast; environmental matters and
liabilities; possible equipment losses; Year 2000 issues; labor relations; and
other matters. These forward-looking statements are subject to a number of risks
and uncertainties, including those identified in Exhibit 99.1 to the Annual
Report on Form 10-K for fiscal year 1999, which could cause our actual results
to differ materially from historical results or those anticipated and certain of
which are beyond our control. The words "believe," "expect," "anticipate" and
similar expressions identify forward-looking statements. All forward-looking
statements included in this document are based upon information available to the
Company on the date hereof, and the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. It is important to note that the
Company's actual results could differ materially from those described or implied
in such forward-looking statements. Moreover, new risk factors emerge from time
to time and it is not possible for the Company to predict all such risk factors,
nor can the Company assess the impact of all such risk factors on its business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those described or implied in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to the information in MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS under the caption MARKET RISK SENSITIVE INSTRUMENTS
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On January 7, 2000, the Company's Board of Directors unanimously approved to
reimburse the United Company in unregistered stock for all expenses incurred in
connection with the recent proxy contest led by the United Company to change the
Company's management. On February 15, 2000, the Company consummated the
reimbursement by granting the United Company 498,733 unregistered shares of the
Company's common stock. These shares were issued pursuant to an exemption by
reason of Section 4 (2) of the Securities Act of 1933, as amended.
On May 15, 2000, pursuant to a resolution of the Board of Directors of the
Company adopted by unanimous consent on May 10, 2000, the Company issued Common
Stock Purchase Warrants (the "Warrants") to purchase three million (3,000,000)
shares of the Company's Common Stock to certain financial institutions in
consideration of the agreement of these financial institutions who are creditors
of the Company to enter into certain amendments to loan covenants of the Company
under its various credit facilities and in consideration of a commitment by
certain of these financial institutions to make available to Birmingham
Southeast, LLC, an 85% owned subsidiary of the Company, a $25,000,000 line of
credit for capital expenditures, deferred maintenance and working capital. The
Warrants are exercisable at an exercise price of $3.00 per share. The Warrants
were vested upon issuance and expire on May 15, 2010 at 5:00 p.m. The number of
shares for which the Warrants are exercisable and the exercise price are subject
to adjustment upon certain events as more fully described in the Warrants. The
Warrants were issued pursuant to an exemption from registration by reason of
Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
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.
Birmingham Steel Corporation
May 15, 2000
/s/ J. Daniel Garrett
------------------------------
J. Daniel Garrett
Vice President Finance
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the MArch
31, 2000 Consolidated Balance Sheets and Consolidated Statements of Operations
of Birmingham Steel Corporation and is qualified in its entirety by reference to
such:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-END> Mar-31-2000
<CASH> 935
<SECURITIES> 0
<RECEIVABLES> 111,317
<ALLOWANCES> 1,405
<INVENTORY> 160,074
<CURRENT-ASSETS> 280,317
<PP&E> 952,925
<DEPRECIATION> 305,805
<TOTAL-ASSETS> 966,324
<CURRENT-LIABILITIES> 134,574
<BONDS> 43,500
0
0
<COMMON> 311
<OTHER-SE> 193,772
<TOTAL-LIABILITY-AND-EQUITY> 966,324
<SALES> 253,141
<TOTAL-REVENUES> 253,141
<CGS> 248,064
<TOTAL-COSTS> 248,064
<OTHER-EXPENSES> 12,075
<LOSS-PROVISION> 8,416
<INTEREST-EXPENSE> 13,708
<INCOME-PRETAX> (25,995)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,995)
<EPS-BASIC> (.85)
<EPS-DILUTED> (.85)
</TABLE>
