<PAGE> 1
Filing pursuant to Rule 424(b)(1)
Registration No. 33-51619
$190,000,000
GENEVA STEEL
9 1/2% SENIOR NOTES DUE 2004
----------------------
Geneva Steel Company (the "Company") is offering $190,000,000 aggregate
principal amount of 9 1/2% Senior Notes Due 2004 (the "Senior Notes"). Interest
on the Senior Notes is payable semi-annually on January 15 and July 15 of each
year, commencing July 15, 1994, at the rate of 9 1/2% per annum. The Senior
Notes will mature on January 15, 2004 and are redeemable, in whole or in part,
at the option of the Company, on or after January 15, 1999, at the redemption
prices set forth herein plus accrued interest. At any time prior to January 15,
1997, the Company may redeem up to $50,000,000 principal amount of Senior Notes
with the net proceeds of a Public Equity Offering (as defined herein) at a
redemption price of 109.5% of the principal amount thereof plus accrued
interest.
In the event of a Change of Control (as defined herein), the Company is
obligated to make an offer to purchase all outstanding Senior Notes at a price
of 101% of the principal amount thereof plus accrued interest. In addition, the
Company is obligated to make offers to purchase Senior Notes at a redemption
price of 100% of the principal amount plus accrued interest with a portion of
the net cash proceeds of certain sales or other dispositions of assets.
The Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all senior debt of the Company,
which will be approximately $325,000,000 upon consummation of this offering. The
Senior Notes will be effectively subordinated to amounts outstanding under the
Company's secured Revolving Credit Facility (as defined herein) with respect to
the assets securing such facility.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN
INVESTMENT IN THE SENIOR NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------
Per Senior Note.............. 100.0% 2.5% 97.5%
- -----------------------------------------------------------------------------------------------
Total........................ $190,000,000 $4,750,000 $185,250,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from February 1, 1994.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at approximately
$600,000.
----------------------
The Senior Notes are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them, and subject to certain other
conditions. It is expected that delivery of the Senior Notes will be made in New
York, New York on or about February 1, 1994.
----------------------
CITICORP SECURITIES, INC. SALOMON BROTHERS INC
----------------------
The date of this Prospectus is January 24, 1994
<PAGE> 2
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), a Registration Statement on Form S-3 (the "Registration Statement") with
respect to the Senior Notes offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information pertaining to the Company and the Senior Notes, reference is hereby
made to the Registration Statement, including the exhibits thereto, which may be
obtained from the Public Reference Section of the Commission at the address set
forth below. Statements contained in this Prospectus regarding the contents of
any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document incorporated
or deemed to be incorporated by reference in, or filed as an exhibit to, the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
materials may be obtained at prescribed rates from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, such materials may also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005 and the
Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 1-10459) are incorporated herein by
reference: (a) Annual Report on Form 10-K for the fiscal year ended September
30, 1993; and (b) Current Report on Form 8-K dated December 2, 1993.
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Senior Notes
shall be deemed to be incorporated by reference herein. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon the written or oral request of such person, a copy of any or
all of the information incorporated by reference in this Prospectus, other than
exhibits to such information (unless such exhibits are specifically incorporated
by reference into the information that this Prospectus incorporates). Requests
for such copies should be directed to Ken C. Johnsen, Vice President, Secretary
and General Counsel, Geneva Steel Company, 10 South Geneva Road, Vineyard, Utah
84058, telephone (801) 227-9000.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES AND THE
COMPANY'S EXISTING 11 1/8% SENIOR NOTES DUE 2001 AT LEVELS ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
THE SENIOR NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE SENIOR
NOTES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THIS DOCUMENT MAY NOT BE PASSED ON IN THE UNITED KINGDOM TO ANY PERSON
UNLESS THAT PERSON IS OF A KIND DESCRIBED IN ARTICLE 9(3) OF THE FINANCIAL
SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1988 OR IS A
PERSON TO WHOM THIS DOCUMENT MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
Geneva Steel Company ("Geneva" or the "Company") owns and operates the only
integrated steel mill operating west of the Mississippi River. Located 45 miles
south of Salt Lake City, Utah, the Company's mill manufactures hot-rolled sheet,
plate and pipe products for sale primarily in the western and central United
States. Based on industry information and the Company's own estimates, Geneva
believes that it sold approximately 36% and 33% of the hot-rolled sheet and
plate, respectively, purchased in the eleven western states during the nine
months ended September 30, 1993.
The Company believes that its operating margins were among the most
favorable of all publicly-held domestic integrated steel producers during its
1991, 1992 and 1993 fiscal years. The Company attributes its relatively high
operating margins primarily to (i) its favorable labor costs and motivated
workforce, (ii) its transportation cost advantages in the western United States
markets over competitors in the central and eastern United States, and (iii) its
favorable costs of certain production inputs, particularly energy. The Company
believes that completion of its modernization program will enhance its operating
margins and strengthen its position as a low-cost producer of steel products.
Geneva's strategy is to preserve and strengthen the competitive position of
its products in western United States markets and to increase penetration of
markets in the central region of the country, while focusing on product mix
optimization. Geneva's sheet and plate customers include service centers and
distributors, steel processors and various end-users, including manufacturers of
welded tubing, highway guardrail, storage tanks, railcars, ships, and
agricultural and industrial equipment. The Company believes that sales of its
products, either directly or through service centers and distributors, to
automotive or appliance manufacturers have been immaterial.
The Company has undertaken a major modernization program intended to
strengthen its competitive position by reducing operating costs, broadening the
Company's product line, improving product quality and significantly increasing
throughput capacity of finished flat-rolled steel products. Management believes
that completion of the modernization program will enable the Company to produce
the widest continuously cast steel slabs in the world and position the Company
for additional market penetration, particularly with respect to plate products.
The Company believes that substantial operating cost savings were being realized
at December 31, 1993 as a result of completed modernization projects. The
Company expects that additional significant operating cost savings will be
realized as the remaining projects included in the modernization program are
completed. See "The Modernization Program."
To date, many of the projects included in the modernization program have
been completed. The most significant modernization project, in terms of total
costs and potential operating cost savings, is a continuous casting facility and
related improvements. The Company expects that construction of the continuous
caster and related improvements will be completed in March 1994 followed by a
start-up period of approximately six months. Other modernization projects are
scheduled for completion at various intervals through fiscal year 1995. These
projects consist of (i) a wide plate coiler and related plate processing
facilities, and (ii) rolling mill finishing stand improvements. The Company
currently plans to make capital expenditures aggregating approximately $118
million during fiscal years 1994 and 1995 (including approximately $33 million
spent during the first quarter of fiscal year 1994) in order to complete the
modernization program. In addition, management has budgeted approximately $60
million for continuing capital maintenance and other projects during these
years. As a result of this offering and other factors, however, the Company may
increase its capital spending during these years as other capital projects are
evaluated and undertaken.
The Company acquired the steel mill and related facilities from USX
Corporation ("USX") in August 1987. USX operated the steel mill from 1944 until
1986, when it placed the mill on hot idle status. From the date of the
acquisition through December 31, 1993, Geneva made approximately $408 million in
capital
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improvements and capital maintenance expenditures, including approximately $269
million for capital improvements pursuant to the Company's modernization
program. Unless otherwise noted, all amounts regarding capital expenditures
contained in this Prospectus include capitalized interest.
The Company was incorporated under Utah law in February 1987. The principal
executive offices of the Company are located at 10 South Geneva Road, Vineyard,
Utah 84058, and its telephone number is (801) 227-9000.
THE REFINANCING
The net proceeds of this offering will be used primarily to repay an
aggregate of approximately $90 million principal amount of privately-placed
senior and subordinated term debt bearing a weighted average interest rate of
11.24% (the "Private Debt"), plus contractual prepayment premiums currently
estimated at approximately $16 million and accrued interest of approximately $5
million (the "Refinancing"). The balance of the net proceeds will be used for
capital expenditures and general corporate purposes. See "Use of Proceeds" and
"Capitalization."
A portion of the Senior Notes will replace the Private Debt with
indebtedness having a lower interest rate and a longer maturity. The Refinancing
will also improve the Company's liquidity and financial flexibility by
increasing the amount of cash on hand by approximately $74 million, by
increasing access under the Company's existing $50 million revolving credit
facility (the "Revolving Credit Facility") to a total of $25 million in
borrowings thereunder and by eliminating near-term principal sinking fund
requirements contained in the Private Debt. The Private Debt includes
restrictions that currently limit borrowings under the Revolving Credit Facility
to a total of $20 million. With this additional liquidity, improved access and
the resulting financial flexibility, Geneva intends to pursue the rolling mill
finishing stand improvements, the final remaining project included in the
modernization program. The Company may also pursue other capital projects in
addition to those presently included in the Company's capital budget. See "The
Modernization Program."
THE OFFERING
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Notes Offered...................... $190 million aggregate principal amount of 9 1/2% Senior
Notes Due 2004 (the "Senior Notes").
Interest Payments.................. Interest will accrue from the date of issuance and will
be payable semi-annually on each January 15 and July 15,
commencing July 15, 1994.
Optional Redemption................ The Senior Notes are redeemable, in whole or in part, at
the option of the Company, on or after January 15, 1999,
at the redemption prices set forth herein plus accrued
interest. At any time and from time to time prior to
January 15, 1997, the Company may redeem in the
aggregate up to $50 million principal amount of Senior
Notes with the net proceeds of a Public Equity Offering
(as defined herein) at a redemption price of 109.5% of
the principal amount thereof plus accrued interest.
Change of Control Offer............ In the event of a Change of Control (as defined herein),
the Company is obligated to make an offer to purchase
all outstanding Senior Notes at a redemption price of
101% of the principal amount thereof plus accrued
interest.
Asset Sale Proceeds................ The Company is obligated to make offers to purchase
Senior Notes at a redemption price of 100% of the
principal amount plus accrued interest with a portion of
the net cash proceeds of certain sales or other
dispositions of assets.
</TABLE>
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Ranking............................ The Senior Notes will be senior obligations of the
Company ranking senior in right of payment to any
subordinated indebtedness of the Company, and pari passu
with the existing and future senior unsecured
indebtedness of the Company. The Senior Notes will be
effectively subordinated to the amounts outstanding
under the Company's secured Revolving Credit Facility
with respect to the assets securing such facility.
Certain Covenants.................. The Indenture relating to the Senior Notes will contain
certain covenants that, among other things, limit the
type and amount of additional indebtedness that may be
incurred by the Company or certain of its subsidiaries
and impose limitations on investments, loans, advances,
sales or transfers of assets, the making of dividends
and other payments, the creation of liens,
sale-leaseback transactions, certain transactions with
affiliates and certain mergers.
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RISK FACTORS
For a discussion of certain risks associated with an investment in the
Senior Notes, see "Risk Factors."
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SUMMARY FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT PER TON AMOUNTS; TONS IN THOUSANDS)
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<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31,
---------------------------------------------- -------------------
1989 1990 1991 1992 1993 1992 1993
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
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INCOME STATEMENT DATA:
Net sales........................... $525.0 $507.3 $446.0 $420.0 $465.2 $101.1 $127.1
Cost of sales....................... 402.9 409.7 393.2 406.3 443.5 99.4 115.6
------ ------ ------ ------ ------ ------ ------
Gross margin........................ 122.1 97.6 52.8 13.7 21.7 1.7 11.5
Selling, general and administrative
expenses.......................... 27.7 28.9 21.9 22.3 20.6 4.6 5.7
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations....... 94.4 68.7 30.9 (8.6) 1.1 (2.9) 5.8
------ ------ ------ ------ ------ ------ ------
Other income (expense):
Interest and other income......... 4.4 4.2 3.5 0.8 1.9 0.1 0.4
Interest expense(a)............... (6.9) (10.2) (6.2) (13.7) (17.1) (3.6) (3.5)
------ ------ ------ ------ ------ ------ ------
Total other income (expense).... (2.5) (6.0) (2.7) (12.9) (15.2) (3.5) (3.1)
------ ------ ------ ------ ------ ------ ------
Income (loss) before provision
(benefit) for income taxes........ 91.9 62.7 28.2 (21.5) (14.1) (6.4) 2.7
Provision (benefit) for income
taxes............................. 36.5 24.5 10.7 (8.4) (5.5) (2.5) 1.0
------ ------ ------ ------ ------ ------ ------
Net income (loss)................... $ 55.4 $ 38.2 $ 17.5 $(13.1) $ (8.6)(b) $ (3.9) $ 1.7(b)
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
BALANCE SHEET DATA:
Working capital..................... $ 68.1 $134.0 $105.9 $ 75.7 $ 89.2 $ 60.8 $ 56.4
Property, plant and equipment,
net............................... 56.5 102.7 204.2 252.8 314.6 258.0 355.5
Total assets........................ 206.6 308.4 375.9 390.5 498.4 392.5 508.3
Long-term debt...................... 33.4 110.6 160.0 178.2 225.0 169.5 225.0
Redeemable preferred stock.......... -- -- -- -- 36.0 -- 37.7
Total stockholders' equity.......... 97.9 133.5 154.4 141.8 135.8 138.0 136.0
OPERATING STATISTICS:
Net tons shipped.................... 1,368 1,375 1,274 1,323 1,511 337 386
Average selling price per ton....... $ 384 $ 369 $ 350 $ 317 $ 308 $ 300 $ 329
Manufacturing cost per ton(c)....... 281 285 299 294 280 280 285
OTHER DATA:
Ratio of earnings to fixed
charges(d)........................ 13.5x 5.6x 2.4x --(e) --(e) --(e) --(e)
EBITDA(f)........................... $101.7 $ 78.9 $ 44.1 $ 10.5 $ 21.8 $ 2.2 $ 11.4
Depreciation and amortization(g).... 7.4 10.2 13.2 19.1 20.7 5.2 5.6
Capital expenditures(h)............. 30.7 56.2 113.4 66.6 82.5 10.4 46.6
Capitalized interest................ 0.5 2.8 8.3 5.8 7.7 1.5 3.4
</TABLE>
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(a) Interest expense includes amortization of debt issuance costs and excludes
capitalized interest.
(b) Net income (loss) applicable to the Company's common stock for the fiscal
year ended September 30, 1993 and the three months ended December 31, 1993
was $(12.1) million and $0.03 million, respectively, as a result of
redeemable preferred stock dividends and accretion for original issue
discount. See Note 5 of the Notes to Financial Statements included elsewhere
herein.
(c) Includes direct variable and fixed costs of manufacturing, excluding
depreciation expense.
(d) For purposes of determining the ratio of earnings to fixed charges, earnings
consist of income (loss) before provision (benefit) for income taxes plus
interest expense. Fixed charges consist of interest expense plus capitalized
interest.
(e) For the fiscal years ended September 30, 1992 and 1993 and the three months
ended December 31, 1992 and 1993, earnings were inadequate to cover fixed
charges by $27.2 million, $21.8 million, $7.9 million and $0.6 million,
respectively.
(f) EBITDA is defined as earnings before interest and other income, interest
expense, provision (benefit) for income taxes, depreciation and
amortization.
(g) Excludes amortization of debt issuance costs.
(h) Includes capitalized interest.
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RISK FACTORS
Prospective purchasers of the Senior Notes offered hereby should consider
the specific factors set forth below as well as the other information contained
in this Prospectus.
RECENT LOSSES AND FUTURE OUTLOOK
Although the Company was profitable for the three months ended December 31,
1993, the Company incurred net losses in the 1992 and 1993 fiscal years due
primarily to lower steel prices. Notwithstanding the recent improvement in the
domestic steel industry, there can be no assurance that such improvement will
continue or that the Company will be able to maintain profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Although the Company believes that it will achieve significant operating
cost reductions as a result of completion of the modernization program, it
expects other costs will be substantially higher than in the past. As remaining
projects included in the modernization program such as the continuous caster are
completed, interest which is currently being capitalized will be expensed. In
addition, the issuance of the Senior Notes will result in substantial
incremental interest expense. Depreciation expense will also increase
significantly as the remaining facilities associated with the modernization
program and capital maintenance projects become operational. See "The
Modernization Program." In addition, the Company anticipates that certain raw
materials, labor and other operating costs will increase over time. See "-- Cost
of Raw Materials" and "-- Labor Agreement."
LEVERAGE AND CERTAIN RESTRICTIONS
The Company currently has, and after this offering will continue to have,
significant amounts of outstanding indebtedness. The indebtedness of the Company
and the restrictive covenants and tests contained in its debt instruments,
including the Indenture relating to the Senior Notes, could significantly limit
the Company's operating and financial flexibility. These factors could also
significantly restrict the Company's ability to withstand competitive pressures
or adverse economic consequences, including its ability to make necessary
capital expenditures related to the modernization program or otherwise. The
Company currently is, and upon the consummation of the Refinancing will be, in
compliance with the covenants and tests contained in the Revolving Credit
Facility and the indenture governing the Company's 11 1/8% senior notes due 2001
(the "11 1/8% Senior Notes").
As is the case with other asset-based borrowers, Geneva has a lockbox
arrangement with the lenders under the Revolving Credit Facility. When
borrowings in excess of $10 million are incurred by the Company under the
Revolving Credit Facility, this arrangement requires that all cash be deposited
with an affiliate of the agent bank and used to reduce the outstanding balance
thereunder. Geneva's ability to borrow under the Revolving Credit Facility is
based upon the level and quality of its inventory and accounts receivable and
also requires continued compliance with covenants and tests which, if breached,
could result in termination of such ability to borrow or cause a default under
the Company's debt instruments. Consequently, under such circumstances, the
Company's access to necessary operating funds may be adversely affected. The
Company has from time to time entered into amendments relaxing certain of the
covenants and tests in the Revolving Credit Facility and may be required to seek
additional amendments in the future. Although Geneva anticipates that it would
be able to obtain such amendments, there can be no assurance that the lenders
under the Revolving Credit Facility would agree to such amendments. The
Revolving Credit Facility is a floating rate obligation and, therefore, is
subject to changes in prevailing interest rates. As of December 31, 1993, there
were no amounts outstanding under the Revolving Credit Facility.
The Revolving Credit Facility expires in February 1995. Management believes
it will be necessary to replace or extend such facility at that time. The
Company's business is capital intensive requiring substantial funds for capital
expenditures and working capital. There can be no assurance that the Company
will be able to obtain financing required for its business on satisfactory terms
or at all. The Company's ability to obtain such financing may be adversely
affected by the highly leveraged nature of its capital structure or by other
factors. In addition, the Revolving Credit Facility, the indenture governing the
11 1/8% Senior Notes and the Indenture for the Senior Notes impose limitations
on the amount of indebtedness that Geneva may incur. If
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Geneva is unable to obtain such financing or if sufficient cash generated from
operations is not available, Geneva's liquidity may be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Senior Notes will be senior unsecured obligations of the Company which
are effectively subordinated to any amounts outstanding under the Revolving
Credit Facility with respect to the assets securing such facility. Borrowings
under the Revolving Credit Facility are secured by the Company's existing and
future inventory, accounts receivable, certain general intangibles and proceeds
thereof. Because the Company has pledged these assets as collateral under the
Revolving Credit Facility, in the event of a bankruptcy, liquidation,
reorganization or other dissolution of the Company, there may not be sufficient
assets remaining to satisfy the claims of the holders of the Senior Notes after
satisfying the claims of any holders of secured indebtedness. See "Description
of the Senior Notes."
DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company's performance is subject to financial, economic and other
factors, some of which are beyond its control. The ability of the Company to
make principal and interest payments on the Senior Notes will be dependent on
the Company's future performance. For the fiscal years ended September 30, 1992
and 1993 and for the three months ended December 31, 1993, the Company's
earnings were inadequate to cover fixed charges by $27.2 million, $21.8 million
and $0.6 million, respectively. Because the Company's current and expected debt
service requirements are substantial, a material deterioration in the Company's
results of operations could create difficulty in meeting debt service
requirements.
CYCLICALITY, COMPETITION AND OTHER INDUSTRY FACTORS
The steel industry is cyclical in nature and highly competitive. During the
past several years, domestic integrated steel producers have suffered
substantial losses primarily as a result of high levels of steel imports,
worldwide production overcapacity, a general economic downturn, increased
domestic and international competition, and other factors. Moreover, the
domestic steel industry is affected by economic conditions generally, as has
been the case with the recent recession and its adverse impact on both the
industry and the Company. The Company, like other steel producers, is highly
sensitive to price changes with respect to its products. Consequently, any
downward movement in pricing could have a material adverse effect on the Company
given its high fixed costs of operations.
In the United States, the Company faces increasing competitive pressures
from mini-mills. Mini-mills are generally smaller volume steel producers which
use ferrous scrap metal as their basic raw material and serve regional markets.
These operations generally produce lower margin, commodity type steel goods such
as bars, rods and structural products. A number of mini-mills also produce plate
and pipe products that compete directly with the Company's products. In
addition, several mini-mills have announced intentions to construct facilities
that will produce wide plate in coil form, thereby potentially competing with
products produced by the Company. Recently developed thin slab casting/direct
rolling techniques have allowed mini-mills to produce types of sheet products
that have traditionally been supplied by integrated producers. The Company also
faces increasing competition from producers of certain materials such as
aluminum, composites, plastics and concrete which compete with steel in many
markets.
The highly competitive nature of the domestic steel industry has been
aggravated further by the restructuring of certain domestic integrated producers
under federal bankruptcy laws. A number of these producers have recently
completed reorganization proceedings which may result in reduced operating costs
and promote the continued operation and modernization of competing production
facilities. As a result, existing overcapacity could further increase and
additional price pressure may be experienced.
Foreign competition is a significant factor in the steel industry and has
adversely affected product prices in the United States and tonnage sold by
domestic producers. The intensity of foreign competition is substantially
affected by fluctuations in the value of the United States dollar against
several other currencies. The attractiveness of the United States steel markets
to foreign producers has been diminished somewhat during recent years by a
substantial decline in the value of the United States dollar relative to certain
foreign
8
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currencies. However, foreign exchange rates are subject to substantial
fluctuations, and there can be no assurance that this condition will continue to
exist.
The Company's competitive position may also be adversely affected by the
outcome of rulings in various trade cases involving the Company and other
domestic and foreign steel producers. On July 27, 1993, the International Trade
Commission (the "ITC") issued final injury determinations in the United States
flat-rolled steel cases. The ITC found injury in 97% of the value of the subject
imports in the cut-to-length plate product cases, 92% in the higher-value-added
corrosion resistant product cases, 37% in the cold-rolled product cases and no
injury in the hot-rolled product cases. Anti-dumping and countervailing duties
are being collected on all imports covered by the affirmative ITC
determinations. The domestic producers and many of the foreign producers have
appealed the ITC determinations to the United States Court of International
Trade. The failure to impose significant duties, or the lifting of existing
duties, could have an adverse effect on prevailing prices for the Company's
products affected thereby. The ITC rulings pertaining to the plate cases have
generally benefitted the Company; however, the positive impact of such cases has
been offset to the extent other foreign plate producers have increased shipments
into the domestic market. The Company is concerned that the hot-rolled product
market could come under increased price and volume pressure from foreign
imports. The Company has also been involved in several trade cases in Mexico and
Canada.
Many foreign steel producers are controlled or subsidized by foreign
governments whose decisions concerning production and exports may be influenced,
in part, by political and social policy considerations as well as by prevailing
market conditions and profit opportunities. Despite relatively low steel prices
and profit margins, many foreign producers have continued to ship steel products
into the domestic market. Moreover, existing trade laws and regulations may be
inadequate to prevent unfair trade practices whereby imports could pose
increasing problems for the domestic steel industry and the Company. See
"Business -- Competition and Other Market Factors."
NEED TO MODERNIZE; CAPITAL EXPENDITURES
Many of the Company's competitors have implemented steel-making
technologies not yet implemented by the Company. The Company believes that its
modernization program is necessary in order to achieve levels of productivity
and quality already attained by many of its competitors. There can be no
assurance that the projected benefits of the modernization program will actually
be achieved, sufficient product demand will exist for the additional throughput
capacity, substantial production interruptions or other start-up difficulties
will not be encountered in implementing the program, or the capital improvements
contemplated by the modernization program can be completed in a timely manner or
for the amounts budgeted. The Company may experience significant unexpected
operating problems, particularly as the continuous caster is phased into
operation. The Company anticipates that in any event it will temporarily incur
significant start-up and transition costs as the remaining projects are
completed and implemented. Upon completion of the Refinancing, the Company
believes it will have sufficient liquidity and financial flexibility to complete
the remaining modernization and planned capital maintenance and other projects.
However, there can be no assurance that such liquidity will be adequate to fund
completion of these projects. Failure to complete, or a substantial disruption
or delay in implementing, the remaining projects of the modernization program
would likely have a material adverse effect on the Company's results of
operations and competitive position. See "The Modernization Program."
Notwithstanding completion of the modernization program, management
believes that the Company will continue to require future improvements and
additional modernization projects that will require substantial capital
expenditures. These expenditures are expected to be made in various aspects of
the manufacturing process, particularly with respect to emerging technologies
for the production of iron and steel. The Company believes that foreign and
domestic producers will also continue to invest heavily to replace aging or
obsolete facilities and to achieve increased production efficiencies and
improved product quality. The Company also believes that it will be required to
make significant capital expenditures to upgrade or replace existing coke and
iron-making facilities. Moreover, the Company expects that capital maintenance
expenditures for its existing coke, iron-making and other facilities will be
substantial. Additionally, the Company does not have the financial resources of
some of its competitors. Like other domestic integrated producers, the Company
is
9
<PAGE> 10
reviewing alternative production processes that may be required in the future
due to competitive, environmental and other factors.
ENVIRONMENTAL REGULATION
Compliance with environmental laws and regulations is a significant factor
in the Company's business. Environmental legislation and regulations have
changed rapidly in recent years and it is likely that the Company will be
subject to increasingly stringent environmental standards in the future. The
Company will likely be required to make significant additional expenditures
relating to environmental matters on an ongoing basis. There can be no assurance
that these expenditures, or other expenditures and penalties resulting from
unforeseen circumstances, administrative actions or liabilities relating to
environmental matters, will not have a material adverse effect on the Company's
results of operations or financial condition. See "Business -- Environmental
Matters."
COST OF RAW MATERIALS
The Company's operations require substantial amounts of raw materials,
including iron ore, iron ore pellets, coal, coke, limestone, oxygen, natural gas
and electricity. The cost of these materials has been susceptible in the past to
fluctuations in price and availability and is expected to increase over time.
Worldwide competition in the steel industry has frequently limited the ability
of steel producers to raise finished product prices to recover higher raw
material costs. The Company's future profitability will be adversely affected to
the extent it is unable to pass on higher raw material costs to its customers.
See "Business -- Raw Materials and Related Services."
MARKET AND CUSTOMER CONCENTRATION
Approximately 41% of the Company's sales during fiscal year 1993 were made
to customers in the western United States. In addition to the factors regarding
competition discussed above, the western market is particularly subject to
intense competition from importers. Moreover, several mini-mill operators have
announced or expressed an intention to construct new sheet product facilities in
the western United States and other regions that, if constructed, are expected
to further increase competition. Given the limited size of this market, one
aspect of the Company's strategy has been to increase its shipments to markets
in the central United States. The Company's penetration of these markets,
however, may be limited due to higher shipping costs than competitors located in
the eastern and central United States. Substantially all of the Company's sales
in the central United States are currently made through Mannesmann Pipe and
Steel Corporation ("Mannesmann"), a subsidiary of a major German industrial
company, which accounted for approximately 41% of the Company's sales in fiscal
year 1993. Any termination or disruption of the Company's arrangement with
Mannesmann could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Marketing; Principal
Customers."
LABOR AGREEMENT
The Company has approximately 2,600 full-time employees, of whom
approximately 2,090 are represented by the United Steelworkers of America under
a collective bargaining agreement that was renegotiated in August 1993. The
negotiations were more difficult than previously experienced. The new agreement
expires in February 1995, contains wage increases over the prior contract and
implements a performance dividend plan that could, in certain years, further
increase the Company's labor costs. There can be no assurances regarding the
effect of future labor negotiations or the outcome thereof. See
"Business -- Employees; Labor Agreement."
CONTROL BY CLASS B STOCKHOLDERS
Joseph A. Cannon, Chairman of the Board and Chief Executive Officer, and
Robert J. Grow, President and Chief Operating Officer, together beneficially own
substantially all of the outstanding shares of the Company's Class B Common
Stock and control approximately 62% of the total voting power of the Company.
10
<PAGE> 11
Accordingly, Messrs. Cannon and Grow are able to determine the outcome of most
matters required to be submitted to stockholders for approval, including the
election of directors, amendment of the Company's articles of incorporation
(except when a class vote is required by law) and sale of all or substantially
all of the Company's assets, and to prevent certain mergers or consolidations
involving the Company.
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES
The Senior Notes comprise a new issue of securities for which there is
currently no public market. If the Senior Notes are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities,
performance of the Company and other factors. The Company does not intend to
apply for listing of the Senior Notes on any securities exchange. Citicorp
Securities, Inc. and Salomon Brothers Inc have informed the Company that they
currently intend to make a market in the Senior Notes. However, such
underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given as
to whether an active trading market will develop or be maintained for the Senior
Notes.
THE REFINANCING
The net proceeds of this offering will be used primarily to repay the
Private Debt consisting of an aggregate of approximately $90 million principal
amount of privately-placed senior and subordinated term debt bearing a weighted
average interest rate of 11.24%, plus contractual prepayment premiums currently
estimated at approximately $16 million and accrued interest of approximately $5
million. The balance of the net proceeds will be used for capital expenditures
and general corporate purposes. See "Use of Proceeds" and "Capitalization."
A portion of the Senior Notes will replace the Private Debt with
indebtedness having a lower interest rate and a longer maturity. The Refinancing
will also improve the Company's liquidity and financial flexibility by
increasing the amount of cash on hand by approximately $74 million, by
increasing access under the Revolving Credit Facility to a total of $25 million
in borrowings thereunder and by eliminating near-term principal sinking fund
requirements contained in the Private Debt. The Private Debt includes
restrictions that currently limit borrowings under the Revolving Credit Facility
to a total of $20 million. With this additional liquidity, improved access and
the resulting financial flexibility, Geneva intends to pursue the rolling mill
finishing stand improvements, the final remaining project included in the
modernization program. The Company may also pursue other capital projects in
addition to those presently included in the Company's capital budget. See "The
Modernization Program."
THE MODERNIZATION PROGRAM
OVERVIEW
In February 1990, the Company announced a major modernization program
intended to strengthen its competitive position. The modernization program was
undertaken to reduce operating costs, broaden the Company's product line,
improve product quality and increase throughput capacity of finished flat-rolled
steel products from approximately 1.4 to 1.9 million tons per year. The
modernization program provides for improvements principally to the Company's
steel-making, casting, rolling and finishing facilities. Management believes
that completion of the modernization program will enable the Company to produce
the widest continuously cast steel slabs in the world and position the Company
for additional market penetration, particularly with respect to plate products.
To date, many of the projects included in the modernization program have
been completed. The most significant modernization project, in terms of total
cost and potential operating cost savings, is the continuous casting facility
and related improvements. The Company expects that construction of the
continuous caster and related improvements will be completed in March 1994
followed by a start-up period of approximately six months. The total estimated
cost of the continuous caster project is $154.2 million, of which approximately
$121.2 million had been spent as of December 31, 1993.
Modernization program expenditures were approximately $84 million, $56
million, $61 million and $33 million for fiscal years 1991, 1992 and 1993 and
the three months ended December 31, 1993, respectively. The Company also spent
approximately $29 million, $10 million, $21 million and $14 million during such
11
<PAGE> 12
periods, respectively, on continuing capital maintenance and other projects.
Management believes that the modernization projects completed to date have
resulted in certain reduced production costs, increased throughput capacity and
improved product quality.
The modernization program was planned from the outset to be flexible and
has been managed accordingly. The Company has periodically revised the
modernization program in response to various technological, financial, market
and other operating considerations. For example, the Company has recently
increased the estimated cost of the continuous caster project by approximately
$28 million over prior budgeted amounts due to various scope changes, an
accelerated construction schedule, additional spare equipment and higher than
previously anticipated training, construction, engineering and start-up costs.
Several of the scope changes were made in connection with the Company's plan to
increase throughput beyond the anticipated 1.9 million ton annual rate. The
Company has also separated the wide plate coiler project into two specific
phases and is undertaking engineering and preliminary work with respect to the
rolling mill finishing stand improvements.
Upon completion of the Refinancing, the Company believes that it will have
sufficient liquidity and financial flexibility to complete the remaining
modernization and planned capital maintenance and other projects. Given the
additional liquidity, improved access to borrowings under the Revolving Credit
Facility and the resulting financial flexibility, the Company intends to pursue
the rolling mill finishing stand improvements, the final remaining project
included in the modernization program. The Company may also pursue other capital
projects in addition to those presently included in the Company's capital
budget. Geneva plans to manage the construction and completion of the remaining
projects included in the modernization program and other capital projects based
upon future operating results, availability of funds, market conditions and
other factors.
COMPLETED PROJECTS
Since announcing the modernization program, the Company has completed (i)
installation of two basic oxygen process ("Q-BOP") steel-making furnaces which
began operating in October 1991, (ii) a direct rolling and large coil project,
including installation of a coilbox and an in-line steel slab conditioning or
"scarfing" facility, (iii) installation of various environmental projects,
including a biological wastewater treatment facility, benzene mitigation
equipment and coke oven gas desulfurization facility, and (iv) various other
projects such as additional plate shipping and coil storage facilities. The
major components of the completed projects are described below.
Basic Oxygen Process Facility. A major focus of the modernization program
has been to improve the process of refining iron into steel by replacing the
mill's open hearth furnaces with two Q-BOP furnaces. The Company acquired the
Q-BOP furnaces which were previously operated in a Chicago steel mill. The Q-BOP
furnaces were then upgraded and installed at the Company's mill and began
operating in October 1991. The Q-BOP furnaces have improved production yields
and product quality, increased throughput capacity and reduced production costs
and airborne particulate emissions. Although the Company has not obtained any
independent appraisal, it believes that its purchase of the previously owned
Q-BOP furnaces enabled it to obtain current steel-making technology at a
substantially lower cost than if it had acquired and installed new Q-BOP
furnaces. The Q-BOP furnaces cost approximately $77.2 million.
Direct Rolling and Large Coil Project. The Company has installed a
coilbox, an in-line steel slab conditioning or "scarfing" facility and other
rolling mill improvements that have recently resulted in cost savings and
production benefits. In March 1992, the Company completed its in-line
conditioning and direct rolling facilities which permit a significant portion of
steel slabs to be rolled directly from ingots into finished products without
going through a conventional reheating process. These facilities, together with
the Company's coilbox, enable the Company to save energy, increase productivity
and produce larger, higher quality hot-rolled coil products of up to 60,000
pounds. These large coil products permit end-users, including the Company's own
finishing units, to increase their manufacturing efficiencies and attain
improved yields and more consistent gauge and shape performance. The Company
believes that its ability to produce large coil products has provided access to
new markets in which it was previously unable to compete. The direct rolling and
large coil project cost approximately $32.5 million.
12
<PAGE> 13
Environmental and Other Projects. The modernization program also provided
for the installation of various environmental projects, such as benzene
mitigation equipment, a coke oven gas desulfurization facility and a wastewater
treatment facility. Construction of each of these projects was completed during
the period September 1990 through November 1993. Various other improvements to
the steel mill have been completed such as additional plate shipping and coil
storage facilities. The Company has also budgeted for other environmental
capital projects not included in the modernization program. See
"Business -- Environmental Matters." The total costs of the environmental and
other projects within the modernization program were approximately $32.0
million.
Estimated Operating Cost Savings. The Company believes that it was
realizing estimated operating cost savings (excluding depreciation) of $23 per
ton at December 31, 1993 as a result of the completed projects. The estimated
operating cost savings include $19 per ton associated with the Q-BOP furnaces
and $8 per ton related to the direct rolling and large coil project, offset by
$4 per ton of cost increases associated with the environmental and other
projects. The amounts related to estimated operating cost savings for each of
the completed projects are based on a comparison of historical operating costs
prior to construction of such project and the same historical operating costs
assuming that the project is fully implemented and that all other factors remain
constant. The estimated operating cost savings for the completed projects do not
take into account increases or decreases in operating costs that were unrelated
to the modernization program, such as changes in product mix, wage rates and raw
material costs. In addition, the estimated operating cost savings do not take
into account any increased depreciation or interest costs which have been
substantially higher as a result of the completed projects. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Upon full implementation of the continuous casting facility, the Company
expects to increase its percentage of direct rolled products, which affects the
cost savings related to the direct rolling and large coil project. This increase
is anticipated to result in an additional $2 per ton estimated operating cost
savings related to the project.
REMAINING PROJECTS
Remaining projects included in the modernization program are scheduled for
completion at various intervals through fiscal year 1995. These projects consist
of (i) the continuous casting facility and related improvements, (ii) a wide
plate coiler and related plate processing facilities, and (iii) rolling mill
finishing stand improvements. The Company currently plans to make capital
expenditures aggregating approximately $118 million during fiscal years 1994 and
1995 in order to complete the modernization program. In addition, management has
budgeted approximately $60 million for continuing capital maintenance and other
projects during these years. As a result of this offering and other factors,
however, the Company may increase its capital spending during these years as
other capital projects are evaluated and undertaken. The major components of the
remaining projects included in the modernization program are described below.
Continuous Casting Facility and Related Improvements. The Company is
nearing completion of its continuous casting facility designed by SMS Concast,
Inc. The caster is currently being equipped with segments to produce steel slabs
ranging from 4" to 8.6" in thickness. The caster is designed, however, to also
accept segments to produce slabs thinner than 4" in thickness. Because the
Company's rolling mill, which includes two roughing mills and six finishing
stands, is expected to have sufficient reduction capability, the Company is not
presently procuring or budgeting for segments or other facilities necessary to
produce and process slabs thinner than 4" in thickness. The continuous casting
facility will substantially replace the Company's ingot mold operations. The
caster project also includes a ladle metallurgy furnace, which will allow the
Company to more precisely control the temperature and metallurgy of its liquid
steel. The Company has situated its caster and related improvements to feed
directly into its rolling mill, thereby minimizing costly handling and reheating
of slabs. The Company expects that the continuous caster and related
improvements will improve the mill's finished product yield, reduce energy and
labor costs, increase throughput capacity and improve the metallurgical and
surface quality of its products. The Company anticipates that the construction
of the continuous caster and related improvements will be completed in March
1994 followed by a start-up period of approximately six months. As of December
31, 1993, the Company had spent approximately $121.2 million of the estimated
$154.2 million in total costs necessary to complete the project.
13
<PAGE> 14
Wide Plate Coiler and Related Plate Processing Facilities. The wide plate
coiler project allows the Company to coil plate directly after being rolled on
the Company's finishing stands. The project includes uncoiling facilities and
other related equipment to further process and handle plate in coil form. Geneva
has divided the wide plate coiler project into two phases, the first of which is
expected to be completed contemporaneously with the start-up of the continuous
casting facility. This phase will allow Geneva to direct roll coiled plate up to
96" in width and to uncoil and shear plate up to 120" wide. The second phase of
the project includes improvements designed to coil plate up to 120" in width and
1" in thickness. Completion of this phase is currently estimated for December
1994. The Company's plan to produce wide plate in coil form takes full advantage
of its unique wide finishing mill and continuous caster. These facilities,
together with the completion of various other aspects of the modernization
program, will significantly increase throughput of plate products, provide
improved product gauge, shape and metallurgical uniformity, and improve plate
yields, thereby reducing production costs. The Company believes that the
capability to produce wide plate in coil form will be a significant competitive
advantage. Management believes the total project costs will be approximately
$27.0 million, including $8.7 million for the first phase. As of December 31,
1993, the Company had spent approximately $4.0 million on this project.
Rolling Mill Finishing Stand Improvements. The Company has a six-stand
132-inch combination continuous rolling mill, the widest of its type in the
world, which gives the Company the flexibility to alter its mix of sheet and
plate products in response to customer demands and changing market conditions.
The final phase of the rolling mill modernization includes various additional
improvements to the Company's six finishing stands. These improvements are
designed to enhance the shape and gauge of the Company's products and to
increase throughput capacity. Completion of the finishing stand improvements is
currently scheduled for June 1995. The total costs of the rolling mill finishing
stand improvements are estimated to be approximately $30.7 million, of which
approximately $2.3 million had been incurred as of December 31, 1993.
The Company's modernization program is under continuous review, and it is
possible that the Company may in the future elect to make further changes in the
design of, and amounts budgeted for, its remaining projects and improvements.
Upon completion of the modernization program, the Company believes that its
mill, like those of other steel producers, will continue to require future
improvements and additional modernization projects that are critical to the
Company's long-term ability to compete. See "Risk Factors -- Need to Modernize;
Capital Expenditures."
Estimated Operating Cost Savings. The Company estimates that the remaining
projects included in the modernization program will result in reduced operating
costs (excluding depreciation) of approximately $39 per ton. The estimated
operating cost savings are based upon certain assumptions, and are subject to
associated qualifications and limitations, as discussed below. The estimated
savings in operating costs are expected to be realized after full implementation
of the continuous caster and wide plate coiler projects. No cost savings
associated with the rolling mill finishing stand improvements have been included
in the Company's cost savings estimates.
Amounts related to the estimated savings in operating costs for the
remaining projects are based on a comparison of recent operating costs (adjusted
for the future expected product mix) and the same operating costs after full
implementation of the remaining projects, assuming all other factors remain
constant. For purposes of this comparison, the Company has assumed a product mix
of approximately 49%, 46% and 5% of total tons produced for plate, sheet and
pipe products, respectively.
The estimated operating cost savings for the remaining projects do not take
into account increases or decreases in operating costs that are unrelated to the
modernization program, such as changes in wage rates and raw material costs. In
addition, the estimated operating cost savings do not take into account any
increased depreciation or interest costs which will be substantially higher as a
result of completion of the remaining projects. Consequently, the estimated
operating cost savings are not necessarily indicative of the Company's results
of operations or expected financial performance for any period. The Company
anticipates that in any event it will temporarily incur significant start-up and
transition costs as the remaining projects are completed and implemented. See
"Risk Factors -- Recent Losses and Future Outlook."
14
<PAGE> 15
The Company recently shifted its product mix to a higher percentage of
lower-cost sheet products because, given existing market conditions and the
Company's current manufacturing capabilities, such products contributed to a
higher overall operating margin. The shift also resulted from downtime
associated with upgrading various facilities used to process plate products.
Once the remaining projects are fully implemented, the Company expects to
realize substantially lower manufacturing costs and higher throughput rates for
plate products. Consequently, the Company intends to produce a higher percentage
of plate products in order to maximize operating margins.
While the operating margins associated with plate products are expected to
be higher relative to sheet products, the costs of producing plate products will
also be higher. Consequently, as the Company increases its production of plate
products, overall manufacturing costs per ton will reflect a corresponding
increase. Therefore, the Company does not expect that its future average
manufacturing costs per ton will reflect the full amount of the estimated
operating cost savings. The Company believes, however, that the effect of the
increase in overall manufacturing costs from increased plate production will be
more than offset by the associated operating margin benefits.
The estimated operating cost savings of $39 per ton for the remaining
projects include $28 per ton resulting from expected yield and other process
improvements and $11 per ton associated with allocating fixed operating costs,
including current labor costs of certain operations, over an increased
throughput capacity of 1.9 million tons. The Company previously estimated that
the operating cost savings related to the anticipated yield and other process
improvements and increased throughput capacity would be approximately $31 per
ton and $17 per ton, respectively. The estimate of the expected yield and other
process benefits has been revised based on recent cost studies and operating
data. Moreover, the Company believes that a portion of the $17 per ton estimated
operating cost savings has already been realized due to increased shipments from
approximately 1.3 million tons during fiscal year 1992 to approximately 1.5
million tons during fiscal year 1993. There can be no assurance that the Company
will realize the anticipated yield and other process improvements, that sales of
higher production will increase beyond levels previously achieved or that such
increased sales will not adversely affect the Company's price realization.
In conjunction with the continuous caster and other modernization projects,
the Company is implementing additional improvements designed to increase annual
capacity above 1.9 million tons and is evaluating other improvements for
achieving increased shipments. There can be no assurance that the Company will
be able to achieve production capacity at or above 1.9 million tons or that such
increased capacity can be achieved without incurring significant additional
costs.
In addition to the assumption discussed above, each of the estimates
associated with remaining projects is based upon certain design and engineering
assumptions and the realization of certain operational benefits. Because the
estimated operating cost savings are based upon a number of assumptions and are
subject to significant uncertainties, many of which are beyond the control of
the Company, there can be no assurance that they will be realized and actual
results may vary significantly from those indicated. See "Risk Factors -- Need
to Modernize; Capital Expenditures."
15
<PAGE> 16
USE OF PROCEEDS
The net proceeds from this offering are estimated to be approximately
$184,650,000. The Company intends to use such proceeds primarily to repay an
aggregate of $89,991,000 principal amount of indebtedness constituting the
Private Debt, plus contractual prepayment premiums currently estimated at
approximately $16,000,000 and accrued interest of approximately $5,000,000. The
balance of the net proceeds will be used for capital expenditures and general
corporate purposes. The Private Debt consists of $64,410,000 principal amount of
11.4% senior notes (the "11.4% Senior Notes"), $22,623,000 principal amount of
10.55% senior notes (the "10.55% Senior Notes" and, together with the 11.4%
Senior Notes, the "Private Senior Notes") and $2,958,000 principal amount of 13%
subordinated notes (the "Subordinated Notes" and, together with the Private
Senior Notes, the "Private Debt"). The weighted average interest rate of the
Private Debt is 11.24%. The Private Senior Notes mature in 1999 and, commencing
in 1995, require level annual sinking fund payments of $29,000,000 until paid in
full. The Subordinated Notes mature in 2000 and, commencing in 1995, require
level annual sinking fund payments of $1,500,000 until paid in full. The
Subordinated Notes comprise all of the Company's existing subordinated
indebtedness. Upon the closing of this offering, the Company will call for
repayment of the Private Debt, which repayment is expected to be completed
within 30 days thereafter. See "The Refinancing."
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1993, and as adjusted to reflect this offering, including
application of the net proceeds thereof. See "Use of Proceeds." This table
should be read in conjunction with the financial statements (including the notes
thereto) appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................................ $ 16,130 $ 89,789
-------- --------
-------- --------
LONG-TERM DEBT:
Revolving Credit Facility(a)......................................... $ -- $ --
Private Senior Notes due 1999(b)..................................... 87,033 --
11 1/8% Senior Notes due 2001(c)..................................... 135,000 135,000
9 1/2% Senior Notes due 2004(d)...................................... -- 190,000
Subordinated Notes due 2000(b)....................................... 2,958 --
-------- --------
Total long-term debt....................................... 224,991 325,000
-------- --------
REDEEMABLE PREFERRED STOCK:
Series B, no par value, 400,000 shares issued and outstanding with an
aggregate liquidation value of $44.6 million(e).................... 37,665 37,665
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 3,600,000 shares authorized for all
series, excluding Series B......................................... -- --
Class A Common Stock, no par value, 60,000,000 shares authorized,
14,390,886 shares issued(f)........................................ 86,264 86,264
Class B Common Stock, no par value, 50,000,000 shares authorized,
22,295,138 shares issued(f)........................................ 11,770 11,770
Warrants to purchase 1,132,000 shares of Class A Common Stock(e)..... 5,360 5,360
Retained earnings(g)................................................. 52,573 41,782
Class A Common Stock held in treasury, at cost 1,519,741 shares(h)... (19,967) (19,967)
-------- --------
Total stockholders' equity................................. 136,000 125,209
-------- --------
Total capitalization.................................. $398,656 $487,874
-------- --------
-------- --------
</TABLE>
- ---------------
(a) For a description of the Revolving Credit Facility, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(b) Reflects the repayment of $87,033,000 of the Private Senior Notes due 1999
and $2,958,000 of the Subordinated Notes due 2000 in connection with the
Refinancing. See "Use of Proceeds." Sufficient funds to complete the
repayment will be held in an escrow account. Pending repayment, the Company
may be in technical violation of the additional indebtedness limitation
contained in the Private Debt, which violation will be remedied upon
repayment.
(c) For a description of the 11 1/8% Senior Notes due 2001, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(d) For a description of the 9 1/2% Senior Notes due 2004, see "Description of
the Senior Notes."
(e) For a description of the redeemable preferred stock and related warrants,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 5 of the
Notes to Financial Statements included elsewhere herein. Pro forma net loss
per share for the year ended September 30, 1993 would have been $1.01
compared to the historical loss of $.80 had the preferred stock been issued
as of the beginning of fiscal year 1993.
(f) Shares of Class A Common Stock are issuable upon conversion of outstanding
Class B Common Stock at the rate of ten shares of Class B Common Stock for
one share of Class A Common Stock.
(g) Reflects the after tax write-off of prepayment penalties in the amount of
approximately $9,760,000 and debt issuance costs in the amount of
approximately $1,031,000 associated with the refinancing of the Private
Debt.
(h) Shares issued and held in treasury include (i) 250,800 shares of Class A
Common Stock issuable pursuant to stock option agreements between the
Company and certain existing and a former member of senior management of
the Company, and (ii) 279,200 shares of Class A Common Stock issuable
pursuant to options granted under the Geneva Steel Key Employee Plan.
17
<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial information presented below (other than the
information under the caption "Operating Statistics," and "EBITDA" and
"Depreciation and amortization" under the caption "Other Data") for, and as of
the end of, each of the fiscal years ended September 30, 1989 through 1993 has
been derived from the financial statements of the Company, which have been
audited by Arthur Andersen & Co., independent public accountants. The selected
financial information presented below for, and as of the end of, the three
months ended December 31, 1992 and 1993 has been derived from unaudited
financial statements of the Company which, in the opinion of management, reflect
all adjustments which are of a normal recurring nature necessary for a fair
presentation of the results for such periods. Results for the unaudited period
ended December 31, 1993, set forth herein, are not necessarily indicative of the
results to be expected for the Company's full fiscal year. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements (including the notes thereto) included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------------------------------------ -----------------------
1989 1990 1991 1992 1993 1992 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER TON AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $525,018 $507,297 $445,981 $420,026 $465,181 $101,149 $127,099
Cost of sales........... 402,959 409,680 393,180 406,291 443,458 99,468 115,626
-------- -------- -------- -------- -------- -------- --------
Gross margin............ 122,059 97,617 52,801 13,735 21,723 1,681 11,473
Selling, general and
administrative
expenses.............. 27,668 28,953 21,881 22,322 20,621 4,635 5,682
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............ 94,391 68,664 30,920 (8,587) 1,102 (2,954) 5,791
-------- -------- -------- -------- -------- -------- --------
Other income (expense):
Interest and other
income.............. 4,376 4,194 3,464 807 1,885 70 433
Interest expense(a)... (6,854) (10,171) (6,165) (13,695) (17,096) (3,570) (3,472)
-------- -------- -------- -------- -------- -------- --------
Total other income
(expense)......... (2,478) (5,977) (2,701) (12,888) (15,211) (3,500) (3,039)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision (benefit)
for income taxes...... 91,913 62,687 28,219 (21,475) (14,109) (6,454) 2,752
Provision (benefit) for
income taxes.......... 36,521 24,448 10,665 (8,383) (5,503) (2,517) 1,042
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 55,392 $ 38,239 $ 17,554 $(13,092) $ (8,606)(b) $ (3,937) $ 1,710(b)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital......... $ 68,101 $134,022 $105,926 $ 75,654 $ 89,167 $ 60,802 $ 56,438
Property, plant and
equipment, net........ 56,504 102,677 204,150 252,797 314,590 258,037 355,531
Total assets............ 206,593 308,402 375,888 390,462 498,384 392,543 508,336
Long-term debt.......... 33,447 110,553 160,000 178,182 224,991 169,524 224,991
Redeemable preferred
stock................. -- -- -- -- 35,986 -- 37,665
Total stockholders'
equity................ 97,949 133,508 154,416 141,832 135,775 138,009 136,000
OPERATING STATISTICS:
Net tons shipped........ 1,368 1,375 1,274 1,323 1,511 337 386
Average selling price
per
ton................... $ 384 $ 369 $ 350 $ 317 $ 308 $ 300 $ 329
Manufacturing cost per
ton(c)................ 281 285 299 294 280 280 285
OTHER DATA:
Ratio of earnings to
fixed charges(d)...... 13.5x 5.6x 2.4x --(e) --(e) --(e) --(e)
EBITDA(f)............... $101,702 $ 78,895 $ 44,140 $ 10,489 $ 21,840 $ 2,161 $ 11,432
Depreciation and
amortization(g)....... 7,311 10,231 13,220 19,077 20,738 5,115 5,641
Capital
expenditures(h)....... 30,678 56,219 113,410 66,617 82,534 10,356 46,583
Capitalized interest.... 461 2,794 8,342 5,774 7,696 1,466 3,360
</TABLE>
- ---------------
(a) Interest expense includes amortization of debt issuance costs and excludes
capitalized interest.
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<PAGE> 19
(b) Net income (loss) applicable to the Company's common stock for the fiscal
year ended September 30, 1993 and the three months ended December 31, 1993
was $(12.1) million and $0.03 million, respectively, as a result of
redeemable preferred stock dividends and accretion for original issue
discount. See Note 5 of the Notes to Financial Statements included
elsewhere herein.
(c) Includes direct variable and fixed costs of manufacturing, excluding
depreciation expense.
(d) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income (loss) before provision (benefit) for income
taxes plus interest expense. Fixed charges consist of interest expense plus
capitalized interest.
(e) For the fiscal years ended September 30, 1992 and 1993 and the three months
ended December 31, 1992 and 1993, earnings were inadequate to cover fixed
charges by $27.2 million, $21.8 million, $7.9 million and $0.6 million,
respectively.
(f) EBITDA is defined as earnings before interest and other income, interest
expense, provision (benefit) for income taxes, depreciation and
amortization.
(g) Excludes amortization of debt issuance costs.
(h) Includes capitalized interest.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain cost
and expense items to net sales for the periods indicated with respect to the
Company:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED DECEMBER
SEPTEMBER 30, 31,
------------------------- -----------------
1991 1992 1993 1992 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 88.2 96.7 95.3 98.3 90.9
----- ----- ----- ----- -----
Gross margin............................. 11.8 3.3 4.7 1.7 9.1
Selling, general and administrative
expenses............................... 4.9 5.3 4.4 4.6 4.5
----- ----- ----- ----- -----
Income (loss) from operations............ 6.9 (2.0) 0.3 (2.9) 4.6
Other income (expense):
Interest and other income.............. 0.8 0.2 0.4 0.1 0.3
Interest expense....................... (1.4) (3.3) (3.7) (3.6) (2.7)
----- ----- ----- ----- -----
Income (loss) before provision (benefit)
for income taxes....................... 6.3 (5.1) (3.0) (6.4) 2.2
Provision (benefit) for income taxes..... 2.4 (2.0) (1.2) (2.5) 0.8
----- ----- ----- ----- -----
Net income (loss)........................ 3.9% (3.1)% (1.8)% (3.9)% 1.4%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The following table sets forth the sales product mix as a percentage of net
sales for the periods indicated with respect to the Company:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS
SEPTEMBER 30, ENDED DECEMBER 31,
------------------------- ------------------
1991 1992 1993 1993
----- ----- ----- ------------------
<S> <C> <C> <C> <C>
Sheet...................................... 42.0% 44.8% 56.4% 64.3%
Plate...................................... 42.3 41.4 30.8 25.5
Pipe....................................... 12.0 11.2 9.7 6.9
Non-Steel.................................. 3.7 2.6 3.1 3.3
----- ----- ----- ------
Total............................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ------
----- ----- ----- ------
</TABLE>
Three Months Ended December 31, 1993 Compared with Three Months Ended December
31, 1992
The steel industry is cyclical in nature and generally characterized by
overcapacity. Beginning late in fiscal year 1989 and continuing through December
1992, the industry experienced declining prices due to, among other things,
reduced demand for steel products and significant price competition. Since early
calendar year 1993, the industry has experienced increasing steel prices
resulting from increased demand. In the first quarter of calendar year 1993, the
Company announced three separate price increases, each in the amount of $10 to
$20 per ton for various steel products. In addition, various producers have
recently announced price increases effective in 1994 which the Company intends
to follow as justified by market conditions. The Company sells substantially all
of its products in the spot market at prevailing market prices. Geneva believes
its percentage of such sales is significantly higher than that of most of the
other domestic integrated producers. Consequently, the Company may be affected
by price decreases and increases more quickly than many of its competitors.
Industry experience has shown, however, that announced price increases may not
be immediately realized, if at all, due to the competitive environment within
the industry.
The Company has phased in price increases as new orders have been accepted,
subject to adjustments as necessary in response to market conditions. Price
increases and other favorable developments, including reductions in steel
imports resulting from certain of the United States trade cases, increases in
customer
20
<PAGE> 21
orders, and reduced operating costs associated with completed modernization
projects, resulted in improved operating results for the past three fiscal
quarters. Notwithstanding these factors, there can be no assurance that the
Company will be able to maintain profitable operations. See "Risk
Factors -- Recent Losses and Future Outlook."
Net sales increased 25.7% on increased shipments of approximately 49,600
tons, or 14.7%, for the three months ended December 31, 1993 as compared to the
same quarter of the previous fiscal year. The increased sales resulted from
higher shipments and increased average selling prices. The weighted average
sales price (net of transportation costs) per ton of sheet, plate and pipe
products increased in the three months ended December 31, 1993 compared to the
same quarter of the previous fiscal year by 19.4%, 6.7% and 2.0%, respectively.
The overall average selling price realization per ton increased between the
periods; however, this increase was offset, in part, by a shift in product mix
to lower priced sheet products from higher priced plate and pipe products.
Shipped tonnage of sheet increased approximately 70,700 tons or 35.9%, while
shipped tonnage of plate and pipe decreased approximately 9,800 tons or 9.6% and
14,000 tons or 38.4%, respectively, between the two periods.
During the first quarter of fiscal year 1994, the Company increased its
percentage of sheet products sold. Although this shift in product mix involved
increased shipments of lower priced sheet products outside of the western market
at higher transportation costs, such shift improved the Company's operating
margin as a result of higher throughput efficiencies. In the second quarter of
fiscal year 1994, the Company will suspend production of certain plate products
for approximately two to three months while upgrades to various processing
equipment are implemented. During this period, the Company will further increase
production of sheet products.
Cost of sales includes raw materials, labor costs, energy costs (consisting
primarily of oxygen, electricity and natural gas), depreciation, and other
operating and support costs associated with the production process. The
Company's cost of sales, as a percentage of net sales, decreased to 90.9% for
the three months ended December 31, 1993 from 98.3% for the same quarter of the
previous fiscal year primarily as a result of higher average selling prices. The
average cost of sales per ton shipped increased approximately $4 per ton between
the two periods. Costs increased as a result of production disruptions
associated with modernization and other capital projects, an equipment failure
that temporarily interrupted operation of one of the Company's blast furnaces,
increased depreciation expense resulting from additional capital expenditures,
increased wages and benefits as required by the union labor agreement, increased
coke costs as a result of purchasing coke to supplement internal coke
production, increased costs of purchased scrap and increases in certain other
operating costs. These increased costs were offset, in part, by a shift in
product mix to lower cost sheet products.
The Company expects that certain operating costs will increase in future
periods. For example, the Company's consumption of purchased coke will be
higher, thereby increasing the Company's average cost of coke used in the
manufacturing process. The Company currently purchases its iron ore pellets and
a portion of its high volatile coal under long-term contracts that expire in
fiscal year 1994. As the Company renews or replaces these contracts, the cost of
these raw materials may increase. In addition, labor costs are expected to be
higher due to wage increases and, in certain periods, due to the implementation
of the Company's performance dividend plan. Notwithstanding these increases, the
Company expects to realize significant operating cost savings as remaining
projects included in the modernization program are implemented.
Depreciation costs included in cost of sales increased approximately $0.5
million in the three months ended December 31, 1993 compared with the same
quarter of the previous fiscal year. This increase was due to increases in the
asset base resulting from capital expenditures. Depreciation expense will
increase substantially as the various capital improvements contemplated by the
Company's capital maintenance and modernization program become operational.
Selling, general and administrative expenses for the three months ended
December 31, 1993 increased approximately $1.0 million as compared to the same
quarter of the previous fiscal year. The higher expenses resulted primarily from
increased wages and salaries and increased outside services. The Company expects
that wages and salaries will continue to increase in fiscal year 1994 primarily
due to the implementation of the Company's performance dividend plan.
21
<PAGE> 22
Interest expense decreased by approximately $0.1 million during the three
months ended December 31, 1993 as compared to the same quarter of the previous
fiscal year. This decrease was due to an increase in interest capitalized
offset, in part, by higher levels of borrowing during the first quarter of
fiscal year 1993.
Fiscal Year Ended September 30, 1993 Compared with Fiscal Year Ended September
30, 1992
Net sales increased 10.8% on increased shipments of approximately 188,000
tons, or 14.2%, for the year ended September 30, 1993 as compared to the
previous fiscal year. The increased sales from higher shipments were slightly
offset by lower average selling prices. Despite the price increases announced in
early calendar year 1993, the weighted average sales price (net of
transportation costs) per ton of plate and pipe products decreased in the year
ended September 30, 1993 compared to the previous fiscal year by 1.8% and 2.6%,
respectively, while the weighted average sales price per ton of sheet increased
by 0.4% between the two years. The general decline in weighted average sales
prices resulted from lower average selling prices and from higher transportation
costs due to a shift in sales volume from the western market to the midwestern
and eastern markets. The overall average selling price realization per ton was
also affected by a shift in product mix to lower priced sheet products from
higher priced plate products. Shipped tonnage of sheet increased approximately
271,000 tons or 39.1%, while shipped tonnage of plate and pipe decreased
approximately 82,000 tons or 16.1% and 1,000 tons or 1.3%, respectively, between
the two years.
During the third and fourth quarters of fiscal year 1993, the Company
increased its percentage of sheet products sold. Although this shift in product
mix involved increased shipments outside of the western market, higher
transportation costs and lower average selling prices as discussed above, such
shift improved the Company's operating margin as a result of higher throughput
efficiencies. This mix shift also allowed the Company to increase its annual
shipping rate to 1.6 million tons.
The Company's cost of sales, as a percentage of net sales, decreased to
95.3% for the year ended September 30, 1993 from 96.7% for the previous fiscal
year. The average cost of sales per ton shipped decreased approximately $13 per
ton between the two years. Costs declined primarily due to the shift in product
mix to lower cost sheet products coupled with production efficiencies associated
with the Company's completed modernization projects. These reduced costs were
partially offset by increased depreciation expense resulting from additional
capital expenditures, increased wages and benefits as required by the union
labor agreement, increased coke costs as a result of purchasing coke to
supplement internal coke production, higher costs of natural gas and increases
in certain other operating costs.
Depreciation costs included in cost of sales increased approximately $2.7
million in fiscal year 1993 compared with the previous fiscal year. This
increase was due to increases in the asset base resulting from capital
expenditures.
Selling, general and administrative expenses for the year ended September
30, 1993 decreased approximately $1.7 million as compared to the previous fiscal
year. The lower expenses resulted primarily from a write-off of approximately
$1.0 million in the first quarter of fiscal year 1992 made as a result of
replacing the Company's then existing revolving credit facility and reduced
usage of outside services.
Interest expense increased by approximately $3.4 million during the year
ended September 30, 1993 as compared to the previous fiscal year. This increase
was due to higher levels of borrowing offset, in part, by an increase in
interest capitalized in fiscal year 1993 and a noncash write-off of deferred
debt issuance costs of approximately $0.8 million resulting from the plan of
financing completed in March 1993 described below.
Fiscal Year Ended September 30, 1992 Compared with Fiscal Year Ended September
30, 1991
Net sales decreased 5.8% during the fiscal year ended September 30, 1992
compared to the previous fiscal year. This decrease was due primarily to a
reduction in average price realization of 9.4% partially offset by an increase
in shipments of approximately 50,000 tons or 3.8% as compared to fiscal 1991.
The weighted average sales price per ton of sheet, plate and pipe products
decreased in fiscal 1992 compared to fiscal 1991 by 5.9%, 9.7% and 10.2%,
respectively. Plate and sheet tonnage shipped increased approximately 10,000
tons or 2.0% and 43,000 tons or 6.7%, respectively, while pipe tonnage shipped
decreased approximately 3,000 tons or 2.5% between these periods. In addition to
reduced prices, this product mix shift to lower priced sheet products
contributed slightly to the overall reduction in price realization. The decrease
in price realization adversely affected the Company's results of operations for
fiscal 1992 resulting in a net loss of $13.1 million compared to
22
<PAGE> 23
net income of $17.5 million in fiscal 1991. Sheet sales increased to 44.8% of
net sales for fiscal 1992 as compared with 42.0% for the previous year, while
sales of plate and pipe products decreased to 41.4% and 11.2% during fiscal 1992
from 42.3% and 12.0%, respectively, of net sales during fiscal 1991.
The Company's cost of sales as a percentage of net sales increased to 96.7%
in fiscal 1992 from 88.2% for the previous fiscal year. This increase was
principally a result of lower average selling prices. The average cost of sales
per ton shipped decreased approximately $2 per ton between the two periods.
Costs declined due to a shift in product mix to lower cost sheet products from
higher cost plate and pipe products and to significantly lower costs as a result
of production efficiencies associated with the Company's Q-BOP furnaces. These
reduced costs were offset by increased costs and higher utilization of iron ore
pellets, higher labor costs due to increased wages and benefits as scheduled
under the union labor agreement, increased delivered coal costs from purchasing
medium volatile coal from eastern sources, increased depreciation expense as a
result of additional capital expenditures and transition costs (primarily in the
first quarter of fiscal year 1992) associated with integrating new equipment and
systems such as the Company's coilbox and Q-BOP facility.
Depreciation and amortization costs included in cost of sales increased
approximately $5.9 million to 4.5% of net sales in fiscal 1992 from 2.7% of net
sales during fiscal 1991. This increase was due primarily to increases in the
Company's asset base resulting from additional capital expenditures.
Selling, general and administrative expenses increased approximately $0.4
million for the year ended September 30, 1992 as compared to the previous fiscal
year. The higher expenses resulted primarily from a noncash write-off of
deferred debt issuance costs of approximately $1.0 million in the first quarter
of fiscal year 1992 made in anticipation of replacing the Company's then
existing revolving credit facility and increased consulting costs associated
with efforts to reduce costs, improve efficiency and otherwise enhance operating
results. These increases were offset in large part by reduced accruals for
profit sharing and reductions made in labor and outside services during the last
two quarters of fiscal 1992.
Interest and other income decreased by approximately $2.7 million in fiscal
1992 as compared to fiscal 1991 as a result of a decrease in available cash and
cash equivalents. Cash and cash equivalents were invested in high-grade
short-term securities until needed for the Company's capital maintenance and
modernization program. Interest expense for the fiscal year ended September 30,
1992 increased approximately $7.5 million from the previous fiscal year due to
higher levels of borrowing and a decrease in the amount of interest capitalized
as projects were completed or deferred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from capital expenditures and
working capital requirements, including interest payments. The Company has met
these requirements over the last three years principally from the incurrence of
additional long-term indebtedness and cash provided by operations.
In April 1992, the Company obtained the Revolving Credit Facility in the
amount of $50 million from a syndicate of banks led by Citicorp USA, Inc., as
agent, for the working capital and capital expenditure needs of the Company. The
Revolving Credit Facility is secured by the Company's inventories, accounts
receivable, certain general intangibles and proceeds thereof, and expires on
February 28, 1995. At such time, management believes it will be necessary to
obtain new or replacement credit arrangements. See "Risk Factors -- Leverage and
Certain Restrictions." The Private Debt includes restrictions that currently
limit borrowings under the Revolving Credit Facility to a total of $20 million.
The Company recently entered into an amendment with the lenders under the
Revolving Credit Facility pursuant to which the Company will have access to $25
million in borrowings under such facility upon consummation of this offering.
The Company's ability to borrow funds in excess of $25 million under the
Revolving Credit Facility is subject to certain conditions contained in the
amendment. Moreover, the Company's access to any borrowings under the Revolving
Credit Facility is subject to compliance with various other financial covenants
and tests contained therein. The indentures governing the 11 1/8% Senior Notes
and the Senior Notes also contain certain restrictions on the Company's ability
to borrow additional funds.
In March 1993, the Company completed a plan of financing which included,
among other things, (i) the public offering of $135 million principal amount of
11 1/8% Senior Notes; (ii) the private placement to certain institutional
investors of $40 million of 14% cumulative redeemable exchangeable preferred
stock which was
23
<PAGE> 24
subsequently exchanged in a registered offering (the "Redeemable Preferred
Stock") and related warrants to purchase an aggregate of 1,132,000 shares of
Class A Common Stock of the Company; and (iii) the purchase of approximately $70
million principal amount of the then $160 million principal amount of
privately-placed term debt. The 11 1/8% Senior Notes mature in 2001, are
unsecured and require interest payments semi-annually on March 15 and September
15. After March 1998, the 11 1/8% Senior Notes are redeemable, in whole or in
part, at the option of the Company, subject to certain redemption premiums. In
the event of a change in the control, the Company must offer to purchase all
11 1/8% Senior Notes then outstanding at a premium.
The Redeemable Preferred Stock consists of 400,000 shares, no par value,
with a liquidation preference of approximately $112 per share as of December 31,
1993. Dividends accrue at a rate equal to 14% per annum of the liquidation
preference and, except as provided below, are payable quarterly in cash from
funds legally available therefor. For dividend periods ending before April 1996,
the Company may, at its option, add dividends to the liquidation preference in
lieu of payment in cash. In fiscal year 1993 and for the three months ended
December 31, 1993, the Company elected to add the applicable quarterly dividends
to the liquidation preference. After March 1994, the Redeemable Preferred Stock
is exchangeable, at the Company's option, into subordinated debentures of the
Company due 2003 (the "Exchange Debentures"). The Company is obligated to redeem
all of the Redeemable Preferred Stock in March 2003 from funds legally available
therefor. The Company's ability to incur debt resulting from the exchange of the
Redeemable Preferred Stock for Exchange Debentures and to pay cash dividends on
the Redeemable Preferred Stock is subject to compliance with the covenants and
tests contained in the indenture governing the 11 1/8% Senior Notes and in the
Revolving Credit Facility. After March 1998, both the Redeemable Preferred Stock
and Exchange Debentures are redeemable, at the Company's option, subject to
certain redemption premiums. While not affecting net income (loss), dividends
and the accretion required over time to amortize the original issue discount
associated with the Redeemable Preferred Stock will negatively impact quarterly
earnings per share, which impact is currently $.11 per share per quarter. For
the fiscal year ended September 30, 1993, these dividends and accretion reduced
earnings by $.23 per share. The warrants to purchase Geneva's Class A Common
Stock are exercisable at $11 per share, subject to adjustment in certain
circumstances, and expire in March 2000.
The debt instruments governing the Revolving Credit Facility and the
11 1/8% Senior Notes contain cross default and other customary provisions.
Financial covenants contained in the Revolving Credit Facility and/or the
11 1/8% Senior Notes also include, among other things, a limitation on dividends
and distributions on capital stock of the Company, a tangible net worth
maintenance requirement, a leverage ratio maintenance requirement, an interest
coverage requirement, a cumulative cash flow requirement, a cumulative capital
expenditure limitation, a limitation on the incurrence of additional
indebtedness unless certain financial tests are satisfied, a limitation on
mergers, consolidations and dispositions of assets and a limitation on liens.
The Company has from time to time entered into amendments relaxing certain of
the covenants and tests contained in the Revolving Credit Facility and may be
required to seek additional amendments in the future. See "Risk
Factors -- Leverage and Certain Restrictions."
Besides these financing activities, the Company's major source of liquidity
has been cash provided by operations. Net cash provided by (used for) operating
activities was $47.8 million, $8.2 million, $64.4 million and $(1.7) million for
fiscal years 1991, 1992 and 1993 and for the first quarter of fiscal year 1994,
respectively. Of the $64.4 million provided by operations in fiscal year 1993,
approximately $29.0 million resulted from an increase in current liabilities
primarily associated with higher manufacturing volumes and increased purchases
related to the modernization program. In addition, during fiscal year 1993 the
Company received income tax refunds of approximately $24.5 million related to
the carryback of calendar year 1992 and 1991 losses to prior years. The $1.7
million used for operating activities during the three months ended December 31,
1993 included approximately $11.7 million resulting from an increase in current
assets substantially offset by net income and depreciation and amortization of
approximately $7.8 million.
The Company expects its modernization program and capital maintenance and
other expenditures to require significant cash resources over the next several
years. Modernization program expenditures were approximately $269 million from
the inception of the program through December 31, 1993. The modernization
program currently provides for capital expenditures totaling approximately $118
million during fiscal years
24
<PAGE> 25
1994 and 1995, including approximately $33 million spent during the first
quarter of fiscal year 1994. In addition, the Company has budgeted approximately
$60 million for capital maintenance and other projects during these years. As a
result of this offering and other factors, however, the Company may increase its
capital spending during these years as other capital projects are evaluated and
undertaken. See "The Modernization Program."
Upon completion of the Refinancing, the Company believes it will have
sufficient liquidity and financial flexibility to complete the remaining
modernization and planned capital maintenance and other projects. The
Refinancing has been undertaken by the Company to replace the Private Debt with
a portion of the Senior Notes having a lower interest rate and a longer
maturity. In addition, the Refinancing will improve the Company's liquidity and
financial flexibility by increasing cash on hand, by providing improved access
to borrowings under the Revolving Credit Facility and by eliminating near-term
principal sinking fund requirements contained in the Private Debt. See "The
Refinancing." The Company will continue to incur substantial capital
expenditures after completion of the modernization program. Moreover, there can
be no assurance that the costs of modernization or capital maintenance and other
projects will not exceed those currently anticipated by the Company. See "Risk
Factors -- Need to Modernize; Capital Expenditures."
The Company will be required to make substantial interest and dividend
payments on the 11 1/8% Senior Notes, the Redeemable Preferred Stock or the
Exchange Debentures, and outstanding balances under the Revolving Credit
Facility, together with interest on the Senior Notes and any additional funding
necessary for the expected and future capital expenditures and other working
capital needs. The Company anticipates that, following consummation of the
Refinancing, its annual debt interest expense will be approximately $33 million
and that its annual preferred stock dividends will be approximately $6 million.
Dividends not paid in cash before April 1996 will be added to the liquidation
preference of the Redeemable Preferred Stock as discussed above. As of December
31, 1993, the Company had $16.1 million in cash and cash equivalents. Although
the Company believes that the cash and cash equivalents on hand, together with
anticipated cash from future operations, net proceeds of this offering remaining
after the Refinancing and potential borrowings under the Revolving Credit
Facility, will provide sufficient liquidity for the Company to meet its debt
service requirements and to complete the remaining modernization and planned
capital maintenance and other projects, there can be no assurance that these
sources will be adequate to fund completion of these projects. The Company
continues to focus on cost control, revenue enhancement and cash flow
management.
The Company is nearing completion of the continuous casting facility and
related improvements. Although the Company has implemented measures designed to
minimize production interruptions and start-up difficulties, there can be no
assurance that such conditions will not occur as the continuous caster becomes
operational or that the start-up phase will not extend beyond the anticipated
six-month period. Moreover, the Company anticipates that in any event it will
temporarily incur significant start-up and transition costs as the remaining
projects included in the modernization program are completed and implemented.
The short-term and long-term liquidity of the Company is dependent upon
several factors, including the Company's ongoing operations, availability of
financing, foreign currency fluctuations, competitive and market forces,
modernization and environmental expenditures and general economic conditions.
Similarly, the United States steel market is subject to cyclical fluctuations
that may affect the amount of cash internally generated by the Company and the
ability of the Company to obtain external financing. Consequently, there can be
no assurance that the Company will have sufficient resources to fund all of its
planned and future modernization requirements and capital maintenance and other
projects or to satisfy other working capital and cash needs. See "Risk
Factors -- Need to Modernize; Capital Expenditures." In such event, the Company
intends to pursue alternative financing strategies, which may include additional
borrowings or the sale of equity securities. The Company has considered the
feasibility of creating a class of non-voting common stock that, among other
things, could be used in an equity offering. Should the Company determine to
proceed with any such financing strategies in the future, there can be no
assurance that the Company can obtain any consents or approvals that may be
required from existing lenders or stockholders or that such financings could be
consummated on terms favorable to the Company or at all.
Inflation can be expected to have an effect on many of the Company's
operating costs and expenses. Due to worldwide competition in the steel
industry, the Company may not be able to pass through such increased costs to
its customers. See "Risk Factors -- Cost of Raw Materials."
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BUSINESS
BACKGROUND
The Company owns and operates the only integrated steel mill operating west
of the Mississippi River. The Company's mill manufactures hot-rolled sheet,
plate and pipe products for sale primarily in the western and central United
States.
The steel mill is located 45 miles south of Salt Lake City, Utah on
approximately 1,400 acres. The steel mill's facilities include four batteries of
63 coke ovens each (approximately 185 of which are presently in service), three
blast furnaces and two Q-BOP furnaces. The Company's coke ovens produce coke
from a blend of various grades of metallurgical coal. Coke is used as the
principal fuel for the Company's blast furnaces, which reduce iron ore to iron.
The Company generally operates only two of its three blast furnaces at a time.
The iron is then further refined and mixed with scrap metal and metallic alloys
in the Q-BOP furnaces to produce liquid steel. The liquid steel is poured into
ingot molds, which are rolled into slabs that are conditioned and either direct
rolled or allowed to cool and then reheated when further processed. These slabs
are finished into hot-rolled steel products (sheet, plate and pipe) in the
Company's finishing mills. The Company currently direct rolls approximately 55%
of its finished steel products. The Company is substantially replacing its
existing ingot casting process with a continuous casting facility and related
improvements. Construction of the continuous caster project is expected to be
completed in March 1994 followed by a start-up period of approximately six
months. The continuous caster and wide plate coiler projects are expected to
realize an estimated 13% improvement in yield which, together with other process
benefits, are estimated to reduce operating costs (excluding depreciation) by
approximately $39 per ton (assuming a product mix containing a higher percentage
of plate products than the Company's current mix and an annual production rate
of 1.9 million tons). See "The Modernization Program."
The Company acquired the steel mill and related facilities from USX on
August 31, 1987 at a price of approximately $44.1 million plus the assumption of
certain liabilities. USX had operated the mill from 1944 until 1986, when it
placed the mill on hot-idle status. The Company began shipping finished steel
products 33 days after the acquisition even though the mill had been on hot-idle
status for over a year and initially had no finished goods, work-in-process or
major raw material inventories. The rapid start-up schedule was aided by the
hiring of selected USX operating management personnel familiar with the mill,
many of whom continue to be responsible for the mill's day-to-day operations.
Since the Company began operations, its strategy has been to be a low-cost
producer and to optimize its product quality and mix.
Pursuant to the acquisition agreement between USX and the Company, USX
retained liability for retiree life insurance, health care and pension benefits
relating to employee service prior to the acquisition. USX also indemnified the
Company for costs due to any environmental condition existing on the Company's
real property as of the acquisition date that is determined to be in violation
of environmental laws, subject to the Company's sharing the first $20 million of
certain clean-up costs on an equal basis. The Company believes it has paid all
amounts necessary to satisfy its obligations under the cost-sharing arrangement.
The USX indemnity is a continuing obligation and is not by its terms subject to
termination after any specified time. Except for the foregoing cost-sharing
arrangement, the Company generally assumed all obligations relating to the
operation of the steel mill after the acquisition.
PRODUCTS
The Company's principal product lines are hot-rolled sheet, plate and pipe
products. The Company also sells semi-finished slabs from time to time, as well
as non-steel materials that are by-products of its steel-making operations.
The Company has a 132-inch combination continuous rolling mill, the widest
of its type in the world, which gives the Company the flexibility to alter its
mix of sheet and plate products in response to customer demands and changing
market conditions and the opportunity to maximize utilization of the facilities.
Generally, the Company manufactures products in response to specific customer
orders. During fiscal year 1993 and the quarter ended December 31, 1993, the
Company increased its percentage of sheet products
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<PAGE> 27
(including large coils) sold pursuant to Geneva's product mix optimization
efforts. These efforts generally allow Geneva to focus on products with the
highest margin contribution based on throughput efficiency. The Company's
product sales mix for fiscal year 1989 through December 31, 1993 is shown below:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31,
---------------------------------------- ------------------
1989 1990 1991 1992 1993 1993
---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Sheet.................. 56 % 42 % 42 % 45 % 56 % 64%
Plate.................. 33 46 42 41 31 25
Pipe................... 8 9 12 11 10 7
Non-steel.............. 3 3 4 3 3 4
---- ---- ---- ---- ---- ---
Total........ 100 % 100 % 100 % 100 % 100 % 100%
---- ---- ---- ---- ---- ---
---- ---- ---- ---- ---- ---
</TABLE>
Sheet. The mill produces hot-rolled sheet steel which is sold in sheet or
coil form in thicknesses of .06 to .50 of an inch and widths of 24 to 72 inches.
Maximum widths vary according to thickness. Included in the sheet products made
by the Company are cut length sheet, hot-rolled bands and tempered coil. Sheet
is used in a variety of applications such as storage tanks, light structural
components and supports, and welded tubing.
Plate. The Company's plate products consist of hot rolled carbon and
high-strength low alloy steel plate cut to length and finished, in widths
varying from 48 to 120 inches and in thicknesses varying from .19 of an inch to
3 inches. The Company produces both strip mill plate and finished plate. Plate
can be used for flat work such as floor plate with anti-skid surfaces and for
heavy steel structures such as storage tanks, railroad cars, ships and bridges.
Pipe. The Company produces electric resistance welded pipe ("ERW pipe")
ranging from approximately 7 to 16 inches in diameter. ERW pipe is manufactured
by heating and fusing the edges of the steel to form the pipe. The Company's ERW
pipe is used primarily in pipelines, including water, natural gas and oil
transmission and distribution systems, and in standard and structural pipe
applications.
Non-Steel. The Company also sells products produced by its foundry
operation and various by-products resulting from its steel-making activities.
MARKETING; PRINCIPAL CUSTOMERS
The Company sells its sheet and plate products primarily to steel service
centers and distributors, which in recent years have become one of the largest
customer groups in the domestic steel industry. Service centers and distributors
accounted for approximately 80% of the Company's sales in fiscal 1993. The
Company also sells its products to steel processors and various end-users,
including manufacturers of welded tubing, highway guardrail, storage tanks,
railcars, ships and agricultural and industrial equipment. The Company believes
that sales of its products, either directly or through service centers or
distributors, to automotive or appliance manufacturers have been immaterial. The
Company has developed a broad customer base. In fiscal year 1993, the Company
sold its products domestically to approximately 280 customers in 42 states and
abroad through exporters to approximately 6 customers in Canada and Mexico.
The Company sells its ERW pipe to end-users and through distributors
primarily in the western and central United States where demand for pipe
fluctuates in partial response to oil and gas industry cycles. The Company also
sells products in the export market. Export sales, which generally have lower
margins than domestic sales, accounted for approximately 5.5%, 5.9% and 1.9%,
respectively, of the Company's net sales during fiscal years 1991, 1992 and
1993, respectively. Export sales have decreased as a result of the Company's
involvement in certain trade cases in Canada and Mexico. Sales in Canada and
Mexico for fiscal year 1993 and the three months ended December 31, 1993 were
immaterial.
In November 1993, the United States Congress approved the North American
Free Trade Agreement ("NAFTA") designed to create a free-trade zone among the
United States, Canada and Mexico. NAFTA is expected to gradually eliminate
general tariffs on steel products among these countries. Although the long-term
impact of NAFTA is uncertain, the Company believes that the effect of NAFTA will
likely be positive
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<PAGE> 28
by broadening the potential market for its products and stimulating general
economic growth. NAFTA will not eliminate domestic trade laws in each of the
three countries governing the imposition of anti-dumping and countervailing
duties or resolve any of the existing trade cases involving the Company and
other steel producers. See "-- Competition and Other Market Factors."
The Company's principal direct marketing efforts are in the western United
States. Its proximity to this market gives the Company a considerable cost
advantage over competitors located in the central and eastern United States
which must incur higher transportation costs than the Company to deliver
products to customers in this region. Five sales representatives are employed in
this market, two of whom are located in the greater Los Angeles area, the
largest single market for steel in the western United States. Based on industry
information and the Company's own estimates, the Company believes that it sold
approximately 36% and 33% of the hot-rolled sheet and plate, respectively,
purchased in the eleven western states during the nine months ended September
30, 1993.
The Company also sells its products in the central United States, where it
believes there are attractive growth opportunities for the Company. The Company
currently has a small share of this market. Substantially all its sales in this
region are made through a sales arrangement with Mannesmann, the United States
steel marketing subsidiary of Mannesmann A.G., a major German industrial
company. The sales arrangement entitles Mannesmann to sell the Company's
products in 15 central states and to certain of the Company's customers in the
eastern United States and to receive a variable commission on its sales.
Mannesmann has an exclusive right to sell the Company's products in these areas,
except that the Company is entitled to make direct sales subject to a commission
payable to Mannesmann on certain sales. Within the 15 central states mentioned
above, Mannesmann is prohibited from selling products that compete with the
Company's products. The payment terms provide that Mannesmann make a production
prepayment. The prepayment is recorded as a production prepayment until the
product is shipped, at which time the sale is recorded. The arrangement may be
terminated upon six month's notice by either Mannesmann or the Company in
December 1995 and at three-year intervals thereafter. Mannesmann accounted for
approximately 27% and 41% of the Company's net sales in fiscal years 1992 and
1993, respectively. Any termination or disruption of the Company's arrangements
with Mannesmann could have a material adverse effect on the Company's results of
operations and financial condition.
The Company's strategy is to maintain its core market in the western United
States, where its market position is the strongest, and to increase growth in
the central region, while focusing on profit maximization. The Company believes
that service centers and distributors account for a substantially larger
proportion of its sales than of sales for the industry as a whole. In addition,
demand from this customer group historically has experienced wide fluctuations
due to substantial changes in the group's inventory levels. In view of these
factors, the Company intends to develop a more diverse customer base, including
steel processors and various end-users, while retaining strong relationships
with service center and distributor customers. The Company expects its
modernization program to play a critical role in the implementation of these
strategies by enabling the Company to provide higher quality products and to
gain access to a wider range of customers than previously permitted.
The Company generally produces steel in response to specific orders. As of
December 31, 1993, the Company had estimated total orders on hand for
approximately 260,000 tons compared to approximately 167,000 tons as of December
31, 1992. The Company does not believe that its orders on hand are necessarily
indicative of future operating results.
EMPLOYEES; LABOR AGREEMENT
The Company has a workforce of approximately 2,600 full-time employees, of
whom approximately 510 are salaried and approximately 2,090 are hourly. The
Company's 178 operating management personnel generally have had considerable
experience in the steel industry. Almost half have more than 20 years of
industry experience, with most of the remaining managers ranging in experience
from 10 to 20 years. The Company's senior operating managers have an average of
over 25 years of industry experience.
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Substantially all of the Company's hourly employees are represented by the
United Steelworkers of America under a collective bargaining agreement that
expires in February 1995. The agreement replaced the prior contract which
terminated in August 1993. The new agreement resulted from extensive
negotiations and generally continued the provisions of the prior contract with
the exception of the economic terms discussed below. See "Risk Factors -- Labor
Agreement."
The new labor agreement implemented immediate wage increases of $.25 per
hour for all represented employees and an additional $.15 per hour increase
effective in September 1994. The agreement also contains a performance dividend
plan designed to reward employees for increased shipments of steel products.
Compensation under the plan includes a guaranteed $.33 per hour payment for all
represented workers in addition to the foregoing pay increases. The guaranteed
payment is based on an annual shipment rate of 1.5 million tons. As shipments
increase above this level, compensation under the plan will also increase.
The Company believes that its labor agreement is an important competitive
advantage. Although the Company's wage rates under the agreement are high by
local standards and comparable to regional competitors, its total hourly labor
costs are substantially below recent industry averages compiled by the American
Iron and Steel Institute. The Company's labor agreement has been a significant
factor in attracting a motivated workforce. Unlike labor agreements negotiated
by many other domestic integrated steel producers, the Company's labor agreement
does not contain traditional work rules, limits the Company's financial pension
obligations to a defined contribution plan, entitles the Company to reduce its
profit sharing obligations by an amount equal to a portion of its capital
expenditures, and does not require the Company to pay any retiree medical
expenses. The Company did not assume any pension obligations or retiree medical
obligations related to workers' service while the plant was owned by USX.
In addition to the wage increases described above, the Company has
increased salaries and wages for all non-union employees. Geneva has also
implemented a performance dividend plan for such employees that provides
additional compensation as increased shipment levels are met. Unlike the union
plan, however, there are no guaranteed payments.
The Company's profit sharing obligations under the labor agreement are
based on earnings before taxes and extraordinary items. Unlike the profit
sharing arrangements of many major domestic integrated steel producers, the
Company's profit sharing obligations are reduced by an amount equal to a portion
of its capital expenditures. The Company is required to contribute each year to
the profit sharing pool 10% of earnings before taxes and extraordinary items
after deducting 25% of the first $50 million of capital expenditures and 30% of
all additional capital expenditures in such year (including, in each case,
capital maintenance). Total profit sharing payments accrued in fiscal year 1991
was $0.7 million. No profit sharing amounts were accrued for fiscal years 1992
and 1993. All payments made to workers under the union performance dividend plan
are deducted from any profit sharing obligations otherwise required.
RAW MATERIALS AND RELATED SERVICES
The Company is strategically located near major deposits of many of the
principal raw materials used to make steel, including iron ore, high volatile
coal, limestone and natural gas. The Company believes that, in certain
instances, this proximity, together with its importance as a customer to
suppliers of these materials, enhances its ability to obtain competitive terms
for these raw materials. As the Company evaluates emerging technologies for the
production of iron and steel, it intends to focus on those technologies that
allow increased utilization of resources available in the western United States.
Iron Ore. The Company's steel-making process can use both iron ore and
iron ore pellets. In recent years, the Company has used an average mix of
approximately 30% iron ore and 70% iron ore pellets in its blast furnaces.
However, the Company is currently using a higher percentage of iron ore pellets
in an effort to maximize operating efficiencies of its blast furnaces in
response to increased production needs. The Company obtains its iron ore from
deposits at mines in Utah. The ore is mined by an independent contractor under
claims owned by the Company and transported by railroad to the steel mill. The
Company expects future costs of recovery of this ore to increase gradually as
the reserves are depleted.
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<PAGE> 30
The Company purchases iron ore pellets from USX pursuant to a contract
whereby USX is obligated to supply, and the Company is obligated to purchase, a
minimum of 58% of the Company's iron unit requirements through August 1994. The
contract provides for price adjustments on September 1 of each year, which
adjustments are tied to a published iron ore pellet price. As the Company
increases production levels, it may continue to use a higher percentage of iron
ore pellets. The Company has reached a preliminary agreement with USX concerning
a new contract that will contain higher pellet prices. Geneva is currently
negotiating with various railroads to obtain lower transportation costs in an
effort to offset the pellet price increases.
Coal and Coke. The coke batteries operated by the Company require a blend
of various grades of metallurgical coal. The Company currently obtains most of
its high volatile coal from a mine in central Utah owned by Sunnyside Coal
Company ("Sunnyside"). Shipments under the Company's contracts with Sunnyside
terminate in March 1994. Geneva does not presently anticipate renewing the
contracts with Sunnyside. The Company also currently purchases high volatile
coal from Pacific Basin Resources ("Pacific"), another western mine, under a
contract that expires in March 1997. The Company may in the future purchase
additional volumes of such coal from Pacific.
The Company currently purchases medium volatile coal under short-term
contracts from sources in the eastern United States. Although the Company
believes that medium volatile coal is available from several alternative eastern
suppliers, the Company is subject to price volatility resulting from
fluctuations in the spot market. In the future, the Company may, however,
purchase medium volatile coal under longer-term contracts and may also purchase
other grades of metallurgical coal from eastern sources. There can be no
assurance that the Company's blend of coal will not change or that its overall
cost of coal will not increase.
The Company is currently purchasing coke as a result of its increasing
steel production and decreasing capacity to produce its own coke. The ability of
other domestic integrated steel mills to produce coke is also decreasing,
thereby increasing the demand for purchased coke in the United States. The
Company purchases coke from Mitsubishi International Corporation pursuant to a
renewable agreement that expires in December 1995. The Company is currently
arranging additional sources of purchased coke. As the Company's consumption of
purchased coke increases, the Company's average cost of coke used in the
manufacturing process will be higher. See "Risk Factors -- Cost of Raw
Materials."
Energy. The Company's steel operations consume large amounts of oxygen,
electricity and natural gas. The Company purchases oxygen under a contract with
Big Three Industries, Inc. expiring in calendar year 1998. The oxygen is
delivered from an air separation plant located on the Company's premises but
owned by the supplier. In July 1990, the Company entered into an agreement with
Praxair, Inc. ("Praxair") to construct, own and operate a facility (the "Oxygen
Facility") at the steel mill for the production, compression, storage and
vaporization of additional oxygen, as well as nitrogen and argon. The contract
expires in 2006 and specifies that the cost associated with the construction and
operation of the Oxygen Facility be borne by Praxair. The Company is required to
pay a monthly charge for the right to receive 100% of the production of the
Oxygen Facility.
The Company generates a substantial portion of its electrical requirements
using a 50 megawatt rated generator located at the steel mill and currently
purchases the remainder of its electrical requirements from Utah Power & Light
Company ("UP&L") under a 90 megawatt interruptible power contract expiring in
1999. The contract provides for price increases tied to the cost of energy used
by the utility to produce electricity. The Company has recently executed a firm
power contract expiring in 1999 with UP&L under which the Company will be
entitled to purchase any additional electrical needs, up to 60 megawatts,
beginning in March 1994. The firm contract provides for energy charges and price
increases similar to the interruptible contract but also includes a
significantly higher capacity charge.
Natural gas is purchased at the wellhead in the Rocky Mountain region and
is transported to the steel mill by pipeline. The Rocky Mountain region has
substantial deposits of natural gas.
Other. The Company's mill is served by both the Southern Pacific
Transportation Company and the Union Pacific Railroad Company. The Company
believes that it is one of the largest western customers of each railroad. The
Company's location in the western United States facilitates backhauling, which
reduces
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freight costs. The Company also owns mining claims in a limestone quarry located
approximately 30 miles from the Company's plant. The limestone is mined by the
Company and transported by railroad to the mill.
The Company uses scrap metal obtained from its own operations and external
sources in its steel-making process. As the Company increases its production
volume, management anticipates that increased amounts of scrap will be
purchased.
The cost of the Company's raw materials, including energy, has been
susceptible in the past to fluctuations in price and availability. Worldwide
competition in the steel industry has frequently limited the ability of steel
producers to raise finished product prices to recover higher raw material costs.
The Company's future profitability will be adversely affected to the extent it
is unable to pass on higher raw material costs to its customers.
COMPETITION AND OTHER MARKET FACTORS
The Company competes with domestic and foreign steel producers on the basis
of price, quality and service. Many of the Company's competitors are larger,
have greater capital resources, more modern technology and larger sales
organizations than the Company. Intense worldwide sales competition exists for
all the Company's products. Both the industry and the Company face increasing
competition from producers of certain materials such as aluminum, composites,
plastics and concrete which compete with steel in many markets.
The Company believes that certain of its raw material arrangements,
particularly with respect to energy, and its current labor contract are
favorable in relation to those of the domestic steel industry as a whole. The
Company believes that its geographic location enhances its ability to compete in
the western United States, because its more distant domestic competitors in the
central and eastern United States must absorb considerable freight costs in
order to compete in the western region. The Company is, however, presently at a
competitive disadvantage with respect to product quality factors, particularly
with respect to sheet products. This disadvantage is due in large part to the
fact that the Company's steel mill was built during World War II and, before the
modernization program, incorporated only a few of the advances that have since
evolved in steel-making technology. The Company believes that its modernization
program will enhance the competitiveness of both its products and services.
However, standards of quality in the steel industry are rising as buyers
continually expect higher quality products. Foreign and domestic producers
continue to invest heavily to achieve increased production efficiencies and
product quality.
The steel industry is cyclical in nature and highly competitive. Although
domestic industry capacity has been substantially reduced in recent years,
overall throughput capacity and competition have begun to increase due to
construction of mini-mills, improvements in production efficiencies and the
restructuring of certain domestic integrated producers under federal bankruptcy
laws. See "Risk Factors -- Cyclicality, Competition and Other Industry Factors."
Foreign competition is a significant factor in the steel industry and has
adversely affected product prices in the United States and tonnage sold by
domestic producers. The intensity of foreign competition is substantially
affected by fluctuations in the value of the United States dollar against
several other currencies. The attractiveness of the United States steel markets
to foreign producers has been diminished during recent years by a substantial
decline in the value of the United States dollar relative to certain foreign
currencies. However, foreign exchange rates are subject to substantial
fluctuations, and there can be no assurance that this condition will continue to
exist. In addition, many foreign steel producers are controlled or subsidized by
foreign governments whose decisions concerning production and exports may be
influenced in part by political and social policy considerations as well as by
prevailing market conditions and profit opportunities. Existing trade laws and
regulations may be inadequate to prevent unfair trade practices whereby imports
could pose increasing problems for the domestic steel industry and the Company.
In June 1992, the Company joined with other domestic steel producers in
filing cases with the United States Department of Commerce and the ITC alleging
that producers in certain foreign countries had engaged in subsidization and
dumping practices in contravention of the United States trade laws and the
General
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<PAGE> 32
Agreement on Tariffs and Trade. On July 27, 1993, the ITC issued final injury
determinations in the flat-rolled cases. The ITC found injury in 97% of the
value of the subject imports in the cut-to-length plate product cases, 92% in
the higher-value-added corrosion resistant product cases, 37% in the cold-rolled
product cases and no injury in the hot-rolled products cases. Anti-dumping and
countervailing duties are being collected on all imports covered by the
affirmative ITC determinations. The domestic producers and many of the foreign
producers have appealed the ITC determinations to the United States Court of
International Trade. The failure to impose significant duties, or the lifting of
existing duties, could have an adverse effect on prevailing prices for the
Company's products affected thereby. As the modernization program nears
completion, the Company's product mix will likely shift toward plate products.
The ITC rulings pertaining to the plate cases have generally benefitted the
Company; however, the positive impact of such cases has been offset to the
extent other foreign plate producers have increased shipments into the domestic
market. The Company is concerned that the hot-rolled product market could come
under increased price and volume pressure from foreign imports. Certain domestic
steel producers, including Geneva, are monitoring this situation closely and may
bring additional cases if warranted by the circumstances. The Company and other
domestic plate producers are also considering the possibility of commencing
additional plate cases with respect to certain countries not covered by the
current cases.
During the past two years, steel producers in Canada and Mexico have filed
trade cases in their respective countries against domestic steel producers,
including the Company. Although the Canadian cases have been resolved in favor
of the Company and other domestic producers, such cases are subject to appeal
and other cases affecting the Company could be filed in the future. The Mexican
cases are at various stages of resolution. Sales by the Company and other
domestic producers to such countries could be adversely affected by trade
litigation, thereby increasing competition in domestic markets.
Integrated steel producers are facing increasing competitive pressures from
mini-mills. Mini-mills are generally smaller volume steel producers which use
ferrous scrap metal as their basic raw material and serve regional markets.
These operations generally produce lower margin, commodity type steel goods such
as bars, rods and structural products. A number of mini-mills also produce plate
and pipe products that compete directly with the Company's products. In
addition, several mini-mills have announced intentions to construct facilities
that will produce wide plate in coil form, thereby potentially competing with
products produced by the Company. Geneva believes, however, that such mills will
likely use technology with lower throughput efficiency, product yield and
surface quality. Geneva also believes that some of these mills will focus on
different grades of products and produce products with somewhat narrower widths.
Recently developed thin slab/direct rolling techniques have allowed mini-mills
to produce the types of sheet products that have traditionally been supplied by
integrated producers. Two mini-mills located in the midwestern United States
produce these types of sheet products. Moreover, several mini-mill operators
have announced or expressed an intention to construct new sheet product
facilities in the western United States and other regions that, if constructed,
are expected to further increase competition.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant factor
in the Company's business. The Company is subject to federal, state and local
environmental laws and regulations concerning, among other things, air
emissions, wastewater discharge, and solid and hazardous waste disposal. The
Company believes that it is in compliance in all material respects with all
currently applicable environmental regulations.
The Company has incurred substantial capital expenditures for environmental
control facilities, including the Q-BOP furnaces, the wastewater treatment
facility, the benzene mitigation equipment and the coke oven gas desulfurization
facility. The Company has budgeted a total of approximately $3.8 million for
environmental capital improvements in fiscal years 1994 and 1995. Of this
amount, approximately $3.5 million is included in the Company's capital
maintenance and other projects budget and the remaining $0.3 million is included
in the modernization program. Such improvements include the completion of a coke
oven gas desulfurization facility ($0.3 million), construction of a sinter plant
bag house ($2.7 million) and the installation of a coke flare system ($0.8
million). Environmental legislation and regulations have changed rapidly in
recent years and it is likely that the Company will be subject to increasingly
stringent environmental standards in the
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future. Although the Company has budgeted substantial expenditures for
environmental matters in connection with capital maintenance and other projects
and the modernization program, it is not possible at this time to predict the
amount of capital expenditures that may ultimately be required to comply with
all environmental laws and regulations.
In August 1993, the Company received notice that the Environmental
Protection Agency (the "EPA") was overfiling on certain notices of violation
that had previously been settled with the State of Utah for $21,000. The amount
of the claim that may be asserted by the EPA is unknown. The Company has met
informally with the EPA and believes that this matter may be resolved without
significant penalties being assessed. Because of the preliminary nature of the
proceedings, however, the Company is unable to predict the amount of any claim
or the eventual outcome of the proceedings.
Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), EPA and the states have authority to impose
liability on waste generators, site owners and operators and others regardless
of fault or the legality of the original disposal activity. Other environmental
laws and regulations may also impose liability on the Company for conditions
existing prior to the Company's acquisition of the steel mill.
At the time of the Company's acquisition of the steel mill, the Company and
USX identified certain hazardous and solid waste sites and other environmental
conditions which existed prior to the acquisition. USX has agreed to indemnify
the Company (subject to the sharing arrangements described below) for any fines,
penalties, costs (including costs of clean-up, required studies, and reasonable
attorneys' fees), or other liabilities for which the Company becomes liable due
to any environmental condition existing on the Company's real property as of the
acquisition date that is determined to be in violation of any environmental law,
is otherwise required by applicable judicial or administrative action, or is
determined to trigger civil liability (the "Pre-existing Environmental
Liabilities"). The Company has provided a similar indemnity (but without any
similar sharing arrangement) to USX for conditions that may arise after the
acquisition. Although the Company has not completed a comprehensive analysis of
the extent of the Pre-existing Environmental Liabilities, such liabilities could
be material.
Under the acquisition agreement between the two parties, the Company and
USX agreed to share on an equal basis the first $20 million of costs incurred by
either party to satisfy any government demand for studies, closure, monitoring,
or remediation at specified waste sites or facilities or for other claims under
CERCLA or the Resource Conservation and Recovery Act. The Company is not
obligated to contribute more than $10 million for the clean-up of wastes
generated prior to the acquisition. The Company believes that it has paid the
full $10 million necessary to satisfy its obligations under the cost-sharing
arrangement. The Company's ability to obtain indemnification from USX in the
future will depend on factors which may be beyond the Company's control and may
be subject to dispute.
PROPERTIES
The Company's principal properties consist of the approximately 1,400-acre
site on which the steel mill and related facilities are located, the Company's
iron ore mines in southern Utah and the limestone quarry near the steel mill.
The Company also leases from the State of Utah, under a lease expiring in 2016,
a 300-acre site which includes a retention pond. The retention pond is a
significant part of the Company's water pollution control facilities. Although
the Company's facilities are generally suitable to its needs, the Company
believes that it must make significant capital investments to achieve levels of
productivity and quality attained by its competitors. See "Risk Factors -- Need
to Modernize; Capital Expenditures," "The Modernization Program" and
"Business -- Competition and Other Market Factors."
LEGAL PROCEEDINGS
Other than the matters described under "-- Competition and Other Market
Factors" and "-- Environmental Matters," the Company is a party to routine legal
proceedings incident to its business. In the opinion of management, none of the
proceedings to which the Company is currently a party are expected to have a
material adverse effect on the Company's business or financial condition.
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<PAGE> 34
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------
<S> <C> <C>
Joseph A. Cannon....... 44 Chairman of the Board and Chief Executive Officer
Robert J. Grow......... 44 President, Chief Operating Officer and Director
Richard D. Clayton..... 37 Executive Vice President, Vice President of
Environment and Director
Max E. Sorenson........ 44 Senior Vice President of Engineering and
Technology
Dennis L. Wanlass...... 45 Vice President, Treasurer and Chief Financial
Officer
Carl E. Ramnitz........ 47 Vice President of Human Resources
Philip E. Jones........ 58 Vice President of Customer Service and Marketing
Ken C. Johnson......... 35 Vice President, Secretary and General Counsel
Ralph F. Powers........ 59 Vice President of Manufacturing
A. Blaine Huntsman..... 57 Director
A. Thurl Jacobson...... 74 Director
Arch L. Madsen......... 80 Director
R. J. Shopf............ 60 Director
</TABLE>
JOSEPH A. CANNON has been a director of the Company since its inception in
February 1987, and has served as Chairman of the Board of Directors from March
1987 to the present. Mr. Cannon served as President of the Company from July
1987 to May 1991 and as Chief Executive Officer from July 1987 to July 1991 when
he resigned in order to run for the U.S. Senate. Mr. Cannon returned to the
Company as Chief Executive Officer in October 1992. From February 1985 to
September 1987, Mr. Cannon was engaged in the private practice of law with
Pillsbury, Madison & Sutro in its Washington, D.C. office, specializing in
environmental law. From May 1981 to February 1985, he was employed in various
capacities by and became Assistant Administrator of the Environmental Protection
Agency. As Assistant Administrator, Mr. Cannon was responsible for the
development, implementation and enforcement of federal air quality and radiation
regulations throughout the United States.
ROBERT J. GROW has been Chief Operating Officer of the Company since
December 1989 and was elected as President in May 1991. From August 1988 to
December 1989, he was employed by the Company in various capacities, including
Vice President, Executive Vice President and General Counsel. He has served as a
director of the Company from its inception. From 1976 to September 1987, Mr.
Grow was engaged in the private practice of law with the Salt Lake City, Utah
law firm of Kimball, Parr, Waddoups, Brown & Gee specializing in real property
and general corporate law. Mr. Grow also holds a B.S. degree in Electrical
Engineering from the University of Utah.
RICHARD D. CLAYTON has been a director of the Company since February 1993
and has served as Executive Vice President and Vice President of Environment
since November 1991. He was Vice President of Environment and Special Projects
of the Company from December 1989 through October 1991 and Vice President of
Energy and Special Projects from July 1989 to December 1989. From 1981 to July
1989, Mr. Clayton was engaged in the private practice of law with Kimball, Parr,
Waddoups, Brown & Gee, specializing in corporate counseling, real property and
tax law.
MAX E. SORENSON has been Senior Vice President of Engineering and
Technology of the Company since November 1991. He was Vice President of
Engineering from December 1989 through October 1991. Before joining the Company,
Mr. Sorenson was employed by Inland Steel Company, most recently as Manager of
Research and Development for Raw Materials and Primary Processes. Mr. Sorenson
holds a B.S. degree in
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<PAGE> 35
Metallurgical Engineering from the University of Utah and a Masters degree in
Industrial Management from Purdue University.
DENNIS L. WANLASS has been Vice President, Treasurer and Chief Financial
Officer of the Company since September 1989 and was Controller of the Company
from January 1988 to September 1989. Before joining the Company, Mr. Wanlass was
employed by Eastman Christensen, then a joint venture of Norton Company and
Texas Eastern, in various accounting and financial capacities. Mr. Wanlass is a
certified public accountant.
CARL E. RAMNITZ has been Vice President of Human Resources since October
1988 and was Vice President of Human Resources and Public Affairs of the Company
from September 1987 to September 1988. Prior to joining the Company, he was
employed by USX Corporation ("USX") for 18 years in various employment and labor
related capacities, most recently as Manager of Employee Relations at the Geneva
Steel plant before it was acquired by the Company and at USX's Pittsburg,
California steel plant.
PHILIP E. JONES has been Vice President of Customer Service and Marketing
of the Company since September 1990. From October 1989 to September 1990, Mr.
Jones was Senior Director of Customer Service, Marketing and Sales of the
Company and was Manager of Customer Technical Services from October 1987 to
October 1989. Prior to joining the Company, he was a consultant to Lone Star
Steel and had been employed by USX for 30 years, primarily at the Geneva Works
where he held several positions, including Chief Metallurgist for eight years.
Mr. Jones is a graduate of the University of Utah with a B.S. degree in
Metallurgical Engineering.
KEN C. JOHNSEN has been Vice President and General Counsel of the Company
since November 1991 and has served as Secretary of the Company since February
1992. He was Manager of Special Projects for the Company from February 1991
through October 1991. From 1986 to 1991, Mr. Johnsen was engaged in the private
practice of law with Kimball, Parr, Waddoups, Brown & Gee, specializing in
corporate counseling and civil litigation. Mr. Johnsen received his law degree
from Yale Law School and a B.A. degree in Finance from Utah State University.
RALPH F. POWERS has been Vice President of Manufacturing of the Company
since May 1992. From December 1991 until May 1992, Mr. Powers was General
Manager of Operational Improvements for the Company. Prior to joining the
Company, Mr. Powers was employed by USX and its related entities for more than
30 years, most recently as Project Director with USX Engineers and Consultants,
Inc., where he managed the commissioning, testing and start-up of an $850
million cold rolling facility in West Java, Indonesia.
A. BLAINE HUNTSMAN has been a director of the Company since December 1988.
Mr. Huntsman is currently Chairman of the Board and Chief Executive Officer of
Olympus Capital Corporation, a savings and loan holding company headquartered in
Salt Lake City, Utah, and has served in such capacities since December 1988 and
June 1988, respectively. Mr. Huntsman is also currently a director of Zion's
Cooperative Mercantile Institution, a retailing company located in Salt Lake
City, Utah, a position he has held since 1977. From 1971 to the present, he has
been employed by the University of Utah Graduate School of Business as a
Professor of Finance and, from 1975 to 1980, was Dean of the Graduate School of
Business and College of Business. He has served as a director of many private
and public companies including Huntsman Container Corporation, Huntsman Chemical
Corporation, Dean Witter Reynolds and Arcata Corporation.
A. THURL JACOBSON has been a director of the Company since November 1989
and served as a consultant to the Company from January 1989 to December 1991.
Mr. Jacobson was President and director of Amerada Hess Corporation when he
retired in 1972. Mr. Jacobson rejoined Amerada Hess Corporation as Group Vice
President of Exploration and Production from 1976 to 1986. He is currently an
independent petroleum operator and management consultant.
ARCH L. MADSEN has been a director of the Company since December 1988. Mr.
Madsen has been President Emeritus of Bonneville International Corporation, a
national communications company headquartered in Salt Lake City, Utah, since
July 1985 and served as founding President of such company from 1963 to
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<PAGE> 36
July 1985. He remains active in a number of national and international
broadcasting organizations, and is also active in various civic, educational and
charitable institutions.
R. J. SHOPF has been a director of the Company since September 1989 and
served as an independent advisor to the Company from March 1988 to September
1989. Mr. Shopf is currently the President and Chief Executive Officer of
Pioneer Chlor Alkali Investments, Inc. ("Pioneer"), a position he assumed in
August 1993. Mr. Shopf has also served as President of Imperial West Chemical
Company, an affiliate of Pioneer, since January 1992, and as President of All
Pure Chemical Company, also an affiliate of Pioneer, since October 1992. From
October 1992 to July 1993, Mr. Shopf was President of two companies affiliated
with Pioneer. From January 1989 to October 1992, he was President of Southwest
Business Associates, a consulting company (a position he previously held from
1984 to February 1988). From March 1988 to January 1989, Mr. Shopf was employed
by First Texas Merchant Banking Group, a division of Gibraltar Savings
Association, as Senior Vice President in charge of portfolio management.
DESCRIPTION OF THE SENIOR NOTES
The Senior Notes will be issued under an Indenture to be dated as of
January 15, 1994 (the "Indenture") between the Company and Bankers Trust
Company, as trustee (the "Trustee"). A copy of the form of the Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), and to all of the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the Indenture.
The definitions of certain capitalized terms used in the following summary are
set forth below under "Certain Definitions."
GENERAL
The Senior Notes will be issued only in registered form, without coupons,
in denominations of $1,000 and integral multiples of $1,000. Principal of,
premium, if any, and interest on the Senior Notes will be payable, and the
Senior Notes will be transferable, at the corporate trust office or agency of
the Trustee in the City of New York, New York. In addition, interest may be paid
by wire transfer (to holders who own at least $1,000,000 in principal amount of
Senior Notes) or check mailed to the person entitled thereto as shown on the
register for the Senior Notes. No service charge will be made for any
registration of transfer or exchange of the Senior Notes, except for any tax or
other governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Senior Notes will be unsecured obligations of the Company, limited to
$190,000,000 aggregate principal amount and will mature on January 15, 2004.
Interest on the Senior Notes will accrue at the rate of 9 1/2% per annum and
will be payable semi-annually on each January 15 and July 15, commencing July
15, 1994, to the holders of record of Senior Notes at the close of business on
January 1 and July 1 immediately preceding such interest payment date. Interest
on the Senior Notes will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from February 1, 1994 (the "Issue
Date"). Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Interest on overdue principal and (to the extent permitted
by law) on overdue installments of interest will accrue at a rate equal to
9 1/2% per annum.
REDEMPTION
Optional Redemption. The Senior Notes will be redeemable, in whole or in
part, at the option of the Company, at any time on or after January 15, 1999, at
the redemption prices (expressed as percentages of
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<PAGE> 37
principal amount) set forth below plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period beginning on January 15
of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------ ----------
<S> <C>
1999.................................................. 105.0%
2000.................................................. 103.3%
2001.................................................. 101.7%
2002 and thereafter................................... 100.0%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to $50,000,000 principal amount of Senior Notes at any time and from time to
time prior to January 15, 1997 at a redemption price equal to 109.5% of the
principal amount thereof plus accrued interest to the redemption date out of the
Net Proceeds of a Public Equity Offering, provided that such redemption occurs
within 90 days of such offering.
Selection and Notice. In the event that less than all of the Senior Notes
are to be redeemed at any time, selection of Senior Notes for redemption will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Senior Notes are listed or,
if the Senior Notes are not listed on a national securities exchange, by lot,
provided, however, that no Senior Notes of $1,000 or less shall be redeemed in
part. Notice of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of Senior Notes
to be redeemed at its registered address. If any Senior Note is to be redeemed
in part only, the notice of redemption that relates to such Senior Note shall
state the portion of the principal amount thereof to be redeemed. A new Senior
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Senior Note. On and after the redemption date, interest will cease to accrue on
Senior Notes or portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence being the
"Change of Control Date"), the Company shall notify the holders in writing of
such occurrence and shall make an offer to purchase free and clear of Liens (the
"Change of Control Offer"), on a business day (the "Change of Control Payment
Date") not later than 60 days following the Change of Control Date, all Senior
Notes then outstanding (and not currently being redeemed) at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the Change of Control Payment Date. Notice of a Change of Control
Offer shall be mailed by the Company to the holders not less than 30 days nor
more than 45 days before the Change of Control Payment Date. The Change of
Control Offer is required to remain open for at least 20 business days and until
the close of business on the day before the Change of Control Payment Date. For
the definition of Change of Control, see "Certain Definitions -- Change of
Control" below. The Board of Directors of the Company does not have the ability
to waive any of the provisions governing a Change of Control without the consent
of the requisite percentage of holders of the Senior Notes. The Change of
Control provisions will not be applicable to a leveraged buyout transaction by
Permitted Persons (see the definition of "Change of Control"), although the
Indenture contains other covenants which limit the ability to effect such a
transaction. See "Certain Covenants."
The indenture pursuant to which the 11 1/8% Senior Notes were issued
requires the Company to make a change of control offer to purchase the 11 1/8%
Senior Notes on terms similar to the above-described Change of Control Offer.
Under the Revolving Credit Facility, certain changes of control and business
combinations, including any Person or group, other than existing holders of the
Company's Class B Common Stock, obtaining majority voting control of the Company
or a merger or consolidation of the Company (other than with a Subsidiary) in
which any voting stock of the Company is exchanged, are events of default which
could result in remedies against the Company, including termination of the
Company's ability to borrow thereunder or the acceleration of payment of amounts
outstanding thereunder.
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<PAGE> 38
There can be no assurance that the Company will have sufficient resources
or access to funds, whether from additional borrowings or the sale of equity
securities, to purchase all Senior Notes tendered in a Change of Control Offer
or fund its other obligations, discussed above, that may arise in the event of a
Change of Control. The agreements governing the Senior Notes, the 11 1/8% Senior
Notes and the Revolving Credit Facility limit the Company's ability to borrow
additional funds and may limit the Company's ability to repurchase the Senior
Notes in a Change of Control Offer. In the event of a Change of Control, the
Company would likely be required to obtain consents from holders of its
indebtedness to incur additional borrowings to fund its obligations that may
arise upon a Change of Control and to repurchase the Senior Notes. There can be
no assurance that the Company could obtain consents from such holders or lenders
for any such financings or purchases or that such financings could be
consummated on terms favorable to the Company or at all. The failure of the
Company to purchase Senior Notes tendered in a Change of Control Offer within 30
days after the obligation to purchase arises constitutes an Event of Default
under the Indenture which permits 25% of the holders of the Senior Notes to
direct the Trustee to accelerate the maturity of the Senior Notes. The Company's
obligations with respect to a Change of Control are absolute and unconditional.
Neither the Company's inability to repay all indebtedness outstanding under the
Revolving Credit Facility nor to obtain the requisite consents, if any, under
the Revolving Credit Facility to permit the repurchase of Senior Notes tendered
in a Change of Control Offer would limit the Company's obligation to repurchase
such Senior Notes or otherwise affect whether an Event of Default under the
Indenture has occurred if such Senior Notes are not so repurchased.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable in connection with any Change of Control Offer
required to be made by the Company to repurchase the Senior Notes as a result of
a Change of Control.
RANKING
The Indebtedness of the Company evidenced by the Senior Notes will rank
pari passu in right of payment with the Working Capital Facility and all
existing and future senior Indebtedness of the Company. With respect to any
existing or future secured senior obligations of the Company, such senior
obligations will be senior in right of payment to the Senior Notes with respect
to the assets securing such senior obligations.
CERTAIN COVENANTS
The Indenture contains covenants, certain of which are set forth below,
which limit, among other things, the ability of the Company to engage in a
highly leveraged transaction whether such transaction is initiated or supported
by the Company, its management or Affiliates or an unrelated third party. These
include covenants which limit the amount of additional Indebtedness that may be
incurred by the Company or its Subsidiaries, which restrict the Company and its
Subsidiaries from creating Liens and which restrict mergers and consolidations
by the Company.
Limitation on Additional Indebtedness. The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries to, create, incur,
assume, guarantee or otherwise become liable for the payment of any Indebtedness
(including any Acquired Indebtedness), except for (each of which shall be given
independent effect):
(a) Indebtedness existing at the time the Senior Notes are issued;
(b) other Indebtedness not to exceed $20,000,000 in aggregate
principal amount at any one time outstanding;
(c) Indebtedness if, immediately after giving pro forma effect to the
incurrence thereof, the Consolidated Interest Coverage Ratio of the Company
would be greater than or equal to 1.5:1 on or prior to March 15, 1996 and
2.0:1 thereafter;
(d) Indebtedness outstanding from time to time under the Working
Capital Facility in aggregate principal amount not to exceed the sum of 85%
of the net book value of accounts receivable and proceeds
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<PAGE> 39
thereof and 65% of the net book value of inventory and proceeds thereof of
the Company and its Subsidiaries, in each case calculated on a consolidated
basis in accordance with GAAP;
(e) the Senior Notes;
(f) Indebtedness not to exceed $40,000,000 in aggregate principal
amount at any one time outstanding, the proceeds of which are applied
solely to expenditures made in the ordinary course of business, which are
accounted for as additions to property, plant and equipment in accordance
with GAAP and are useful in the type of business of the Company conducted
on the Issue Date;
(g) obligations arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guaranties or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any Subsidiary pursuant to such agreements,
in any case incurred or assumed in connection with the disposition of any
business, assets or Subsidiary of the Company or such Subsidiary, other
than guaranties of obligations incurred by any Person acquiring all or any
portion of such business, assets or Subsidiary for the purpose of financing
such acquisition;
(h) obligations in respect of performance bonds and surety bonds
entered into in the ordinary course of business;
(i) obligations under currency hedging agreements and interest rate
hedging or swap agreements;
(j) obligations under guaranties of liabilities of employees, not to
exceed $5,000,000 in aggregate principal amount at any one time
outstanding;
(k) obligations under guaranties of Indebtedness of suppliers,
licensees, franchisees or customers, incurred in the ordinary course of
business, not to exceed $10,000,000 in aggregate principal amount at any
one time outstanding;
(l) Indebtedness incurred to repurchase shares of, or options to
purchase shares of, the Company's Capital Stock from employees of the
Company or any of its Subsidiaries or guaranties of Indebtedness incurred
in connection with borrowings by such employees exclusively for the purpose
of exercising options to purchase the Company's Capital Stock in an
aggregate amount not to exceed $3,000,000 at any one time outstanding;
(m) Indebtedness of a Subsidiary to the Company or another Subsidiary;
(n) Indebtedness of the Company owed to any Subsidiary, provided that
any such Indebtedness is unsecured and subordinated in right of payment to
the Senior Notes;
(o) Indebtedness represented by the Exchange Debentures issued on or
after March 15, 1996 in exchange for the Redeemable Preferred Stock;
(p) Indebtedness evidenced by Repurchase Agreements; and
(q) Indebtedness constituting replacements, renewals, refinancings and
extensions of the Indebtedness in (a), (c), (e), and (o) above, provided
that any such replacement, renewal, refinancing and extension (i) shall not
provide for any mandatory redemption, amortization or sinking fund
requirement in an amount greater than or at a time prior to the amounts and
times specified in the Indebtedness being replaced, renewed, refinanced or
extended, (ii) shall not exceed the principal amount (plus accrued interest
and prepayment premium, if any) of the Indebtedness being replaced,
renewed, refinanced or extended, and (iii) shall not rank, in right of
payment with respect to the Senior Notes, prior to the Indebtedness being
replaced, renewed, refinanced or extended.
Limitation on Investments, Loans and Advances. The Indenture will provide
that the Company will not make and will not permit any of its Subsidiaries to
make any capital contributions, advances or loans to, or investments or
purchases of Capital Stock in, any other Person (collectively, "Investments"),
except (i) Investments by the Company in or to any Subsidiary and Investments in
or to the Company or a Subsidiary by any Subsidiary (provided, that such
Investments by the Company in or to any Subsidiary pursuant to this clause (i)
shall not exceed, individually or in the aggregate, 10% of the total assets of
the
39
<PAGE> 40
Company and its Subsidiaries determined on a consolidated basis at the time such
Investment is made), (ii) Investments represented by accounts receivable created
or acquired in the ordinary course of business and any evidence of Indebtedness
received with respect to such accounts, (iii) advances to employees in the
ordinary course of business, (iv) Investments under or pursuant to interest rate
protection agreements, (v) Permitted Investments, (vi) Investments made pursuant
to the "Limitation on Restricted Payments" covenant below, and (vii) other
Investments not to exceed $6,000,000 in the aggregate in Unrestricted
Subsidiaries, in other Persons in which the Company or a Subsidiary and one or
more third parties have an ownership interest or in any other Person whether the
Company or a Subsidiary has any such interest, provided that if the Consolidated
Interest Coverage Ratio of the Company at the time any such Investment is made
is at least 1.5:1, Investments made pursuant to this clause (vii) shall not
exceed $20,000,000 in aggregate principal amount.
Limitation on Restricted Payments. The Indenture will provide that the
Company will not make, and will not permit any of its Subsidiaries to, directly
or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment;
(b) at the time of such Restricted Payment the Company's Consolidated
Interest Coverage Ratio is at least 1.5:1 (provided, that this clause (b)
shall not apply to (A) the making or guaranteeing of any Investments
constituting Restricted Payments or (B) the payment of dividends on
Redeemable Preferred Stock); and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 50% of the Company's cumulative Consolidated
Net Income (or in the event such Consolidated Net Income shall be a
deficit, minus 100% of such deficit) after December 31, 1993, (2) 100% of
the aggregate Net Proceeds and the Fair Market Value of marketable
securities or other property received by the Company from the issue or
sale, after the Issue Date, of Capital Stock (other than Disqualified
Stock) of the Company or any Indebtedness or other securities of the
Company convertible into or exercisable or exchangeable for Capital Stock
(other than Disqualified Stock) of the Company which has been so converted
or exercised or exchanged, as the case may be, (3) in the case of the
disposition or repayment of any Investment constituting a Restricted
Payment made after the Issue Date, an amount equal to the lesser of the
return of capital invested for such Investment and the cost thereof, in
either case less the cost of such disposition, and (4) $20,000,000. For
purposes of determining under this clause (c) the amount expended for
Restricted Payments, cash distributed shall be valued at the face amount
thereof and property other than cash shall be valued at its Fair Market
Value.
The provisions of this covenant shall not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) the retirement of any shares of Capital Stock of the Company or
subordinated Indebtedness by conversion into, or by or in exchange for, shares
of Capital Stock (other than Disqualified Stock), or out of, the Net Proceeds of
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other shares of Capital Stock of the Company (other than Disqualified Stock) or
by the payment of cash not to exceed $1,000,000 for fractional shares, (iii) the
redemption or retirement of subordinated Indebtedness of the Company in exchange
for, by conversion into, or out of the Net Proceeds of, a substantially
concurrent sale or incurrence of subordinated Indebtedness (other than any
subordinated Indebtedness owed to a Subsidiary) of the Company that is
contractually subordinated in right of payment to the Senior Notes, (iv) the
retirement of any shares of Disqualified Stock by conversion into, or by
exchange for, shares of Disqualified Stock, or out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other shares of Disqualified Stock, (v) the retirement of the Redeemable
Preferred Stock in exchange for the Exchange Debentures, (vi) the repurchase of
the Redeemable Preferred Stock or Exchange Debentures at a price not to exceed
101% of liquidation value plus accrued dividends or principal amount plus
accrued interest, as the case may be, within 120 days after the occurrence of a
Change of Control (provided, that before repurchasing any such Redeemable
Preferred Stock, Exchange Debentures
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or the 11 1/8% Senior Notes, the Company shall have first or simultaneously made
a Change of Control Offer for all Senior Notes and repurchased all Senior Notes
tendered pursuant thereto), and (vii) the repurchase of shares of, or options to
purchase shares of, Capital Stock of the Company or any Subsidiary from the
employees of the Company or any Subsidiary pursuant to the terms of the form of
agreements under which employees purchase, or are granted the option to
purchase, shares of Capital Stock of the Company or any Subsidiary not to exceed
$2,000,000 in any fiscal year. In determining the amount of Restricted Payments
permissible under clause (c) above, amounts expended pursuant to clauses (i),
(ii), (vi) and (vii) above shall be included as Restricted Payments.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not permit any of its Material Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien of any kind upon any of its
property or assets now owned or hereafter acquired by it, unless the Senior
Notes also are equally and ratably secured by such Lien, except for:
(a) any Lien existing as of the Issue Date;
(b) any Lien on the accounts receivable, inventory, general
intangibles and proceeds therefrom of the Company and its Subsidiaries
securing Indebtedness (and related payment and performance obligations)
under the Working Capital Facility, currency hedging agreements and
interest rate hedging or swap agreements;
(c) any Lien arising by reason of (i) any judgment, decree or order of
any court, so long as such Lien is being contested in good faith and any
appropriate legal proceedings which may have been duly initiated for the
review of such judgment, decree or order shall not have been finally
terminated or the period within which such proceedings may be initiated
shall not have expired, (ii) taxes not yet delinquent or which are being
contested in good faith, (iii) security for payment of workers'
compensation or other insurance, (iv) security for the performance of
tenders, contracts (other than contracts for the payment of borrowed money)
or leases, (v) deposits to secure public or statutory obligations, or in
lieu of surety or appeal bonds entered into in the ordinary course of
business, (vi) operation of law in favor of carriers, warehousemen,
landlords, mechanics, materialmen, laborers, employees, suppliers or
similar Persons, incurred in the ordinary course of business for sums which
are not yet delinquent or are being contested in good faith by negotiations
or by appropriate proceedings which suspend the collection thereof, and
(vii) security for obligations of the Company or any Material Subsidiary
with respect to surety, appeal, reclamation, performance or other similar
bonds;
(d) purchase money mortgages or pledges or other purchase money Liens
upon any property acquired by the Company or any Subsidiary after the Issue
Date acquired or held by such entity in the ordinary course of business and
securing solely the purchase price of such property or Indebtedness
(including related performance or payment obligations) incurred solely for
the purpose of financing the acquisition of such property (but only to the
extent the Indebtedness secured by such Liens shall otherwise be permitted
under the covenants set forth herein), which Liens shall not secure
Indebtedness, in aggregate principal amount, in excess of $80,000,000;
(e) easements, reservations, licenses, rights-of-way, zoning
restrictions and covenants, conditions and restrictions and other similar
encumbrances or title defects which, in the aggregate, do not materially
detract from the use of the property subject thereto or materially
interfere with the ordinary conduct of the business of the Company or any
of its Subsidiaries;
(f) leases and subleases of property which do not interfere with the
ordinary conduct of the business of the Company or any of its Subsidiaries,
and which are made on customary and usual terms applicable to similar
properties;
(g) Liens for property taxes for property that the Company or any
Subsidiary has determined to abandon, provided that (i) if the book value
of such property shall at the date of determination exceed $500,000, the
Board of Directors of the Company or any Subsidiary, as the case may be,
shall have determined that the fair market value of such property as of the
date of determination does not exceed the
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then outstanding amount of the property tax for such property and (ii) the
sole recourse for such tax, assessment, charge or levy is to such property;
(h) Liens on the assets or property of a Subsidiary of the Company
existing at the time such Subsidiary became a Subsidiary of the Company and
not incurred as a result of (or in connection with or in anticipation of)
such Subsidiary becoming a Subsidiary of the Company, provided such Liens
do not extend to or cover any property or assets of the Company or any of
its other Subsidiaries (other than the property or assets so acquired);
(i) Liens securing Indebtedness (including related payment and
performance obligations) which is incurred to refinance Indebtedness which
has been secured by a Lien permitted under the Indenture and is permitted
to be refinanced under the Indenture, provided that such Liens do not
extend to or cover any property or assets of the Company or any of its
Subsidiaries not securing the Indebtedness so refinanced; and
(j) Liens securing Indebtedness or other obligations of the Company or
any Subsidiary not in excess of $10,000,000 in the aggregate.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company will not, and will
not permit any Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Subsidiary of the
Company to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock or any other interest or participation in its
profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary
of the Company, (b) make any loans or advances to the Company or any Subsidiary
of the Company or (c) transfer any of its properties or assets to the Company or
to any Subsidiary of the Company, except, in each case, for such encumbrances or
restrictions existing under, contemplated by or by reason of (or similar to
those existing in) (i) the Senior Notes and the Indenture, (ii) any restrictions
existing under or contemplated by agreements in effect on the Issue Date,
including, without limitation, restrictions under the Working Capital Facility
as in effect on the Issue Date, (iii) any restrictions, with respect to a
Subsidiary of the Company that is not a Subsidiary of the Company on the Issue
Date, in existence at the time such Person becomes a Subsidiary of the Company
(but not created in contemplation of such Person becoming a Subsidiary), (iv)
customary non-assignment provisions contained in contracts and agreements to
which a Subsidiary is or becomes a party, and (v) any restrictions existing
under any agreement that refinances or replaces an agreement containing a
restriction permitted by clause (i), (ii) or (iii) above; provided that the
terms and conditions of any such restrictions are not materially less favorable
to the holders of the Senior Notes than those under or pursuant to the agreement
being replaced or the agreement evidencing the Indebtedness refinanced.
Limitation on Sale-Leaseback Transactions. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries to, enter into
any Sale-Leaseback Transaction, except with another Subsidiary of the Company,
unless (i) after giving effect to any such Sale-Leaseback Transaction at the
time such Transaction is entered into, the Company shall be in compliance with
the "Limitation on Additional Indebtedness" covenant described above (with the
Company's lease obligations being treated as Indebtedness for purposes of
ascertaining compliance with this covenant), (ii) the Net Proceeds of such
Sale-Leaseback Transaction are at least equal to the Fair Market Value of such
property (determined by the Company's Board of Directors), and (iii) the Company
or such Subsidiary shall apply the Net Cash Proceeds of such sale as provided
under the "Disposition of Proceeds of Asset Sales" covenant below.
Limitation on Issuance and Sale of Capital Stock of Subsidiaries. The
Indenture will provide that the Company will not permit any Subsidiary to issue
any Capital Stock (other than to the Company or to a Subsidiary) or permit any
Person (other than the Company or a Subsidiary) to own any Capital Stock of any
Subsidiary; provided, however, that the Company and any Subsidiary may, in any
single transaction, sell all, but not less than all, of the issued and
outstanding Capital Stock of any Subsidiary to any Person.
Disposition of Proceeds of Asset Sales. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, make any Asset Sale unless (i) such Asset Sale is
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for Fair Market Value, (ii) either (A) the Net Proceeds therefrom consist of at
least 80% cash or Permitted Investments, or Indebtedness of the Company or its
Subsidiary assumed by the purchaser and the Company or its Subsidiary is
released from such Indebtedness or (B) after giving effect to such Asset Sale
the Company and its Subsidiaries hold in the aggregate no more than $5,000,000
of Net Proceeds, other than cash and Permitted Investments received in Asset
Sales, and (iii) the Company or such Subsidiary, as the case may be, shall apply
such Net Cash Proceeds as follows:
(i) first, to the extent such Net Cash Proceeds are received from an
Asset Sale involving the sale, transfer or disposition of inventory,
accounts receivable or intangibles ("Working Capital Proceeds"), to satisfy
all mandatory repayment obligations under the Working Capital Facility
arising by reason of such Asset Sale, and
(ii) second, out of any Working Capital Proceeds remaining after
application pursuant to the preceding paragraph (i), together with any Net
Cash Proceeds received from an Asset Sale not involving the sale, transfer
or disposition of inventory, accounts receivable, intangibles, or proceeds
therefrom (the "Available Amount"), the Company shall make an offer to
purchase free and clear of Liens (the "Asset Sale Offer") from all holders,
ratably (based on the then outstanding principal amounts thereof), of
Senior Notes and any other senior Indebtedness of the Company then
outstanding which requires such purchase, up to a maximum principal amount
(expressed as a multiple of $1,000) of Senior Notes and such other senior
Indebtedness equal to the Available Amount at a purchase price equal to
100% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of purchase; provided, however, that the
Company will not be required to apply pursuant to this paragraph (ii) Net
Cash Proceeds received from any Asset Sale if, and only to the extent that,
such Net Cash Proceeds are committed in writing to be applied to acquire
property or assets (and costs related to such acquisition) in lines of
business related to the Company's and its Subsidiaries' business at such
time within 270 days of such Asset Sale, and are so applied within 360 days
of such Asset Sale; and provided, further, that the Company may defer the
Asset Sale Offer until there is an aggregate unutilized Available Amount
equal to or in excess of $2,500,000 resulting from one or more Asset Sales
(at which time, the entire unutilized Available Amount, and not just the
amount in excess of $2,500,000, shall be applied as required pursuant to
this paragraph). The Asset Sale Offer shall remain open for a period of at
least 20 business days. To the extent the Asset Sale Offer is not fully
subscribed to by the Senior Noteholders and holders of such other senior
Indebtedness, the Company may use such unutilized portion of the Available
Amount for any purpose consistent with the other terms of the Indenture.
Limitation on Transactions with Affiliates. The Indenture will provide
that the Company will not, and the Company will not permit, cause, or suffer any
Subsidiary of the Company to, conduct any business or enter into any transaction
or series of transactions with or for the benefit of any of their respective
Affiliates (each, an "Affiliate Transaction"), except in good faith and on terms
that are fair to the Company or such Subsidiary, as the case may be, and except
distributions permitted by the "Limitation on Restricted Payments" covenant. All
Affiliate Transactions (and each series of related Affiliate Transactions which
are similar or part of a common plan) involving aggregate payments or other
market value in excess of $2,000,000 shall be approved by the Board of Directors
of the Company or any such Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that the Board of Directors have in good
faith determined that such transaction complies with the foregoing provisions.
The foregoing covenant shall not apply to transactions between the Company and
its Subsidiaries or among such Subsidiaries.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Indenture will provide that the Company shall not consolidate with or
merge with or into or sell, assign, convey, lease, transfer or otherwise dispose
of all or substantially all of its properties and assets as an entirety to any
Person or group of Affiliated Persons in a single transaction or through a
series of transactions, unless: (a) either (i) the Company shall be the
continuing or surviving Person, or (ii) the resulting, surviving or transferee
Person (the "surviving entity") shall be a corporation organized and existing
under the laws of the United States or any State thereof or the District of
Columbia; (b) the surviving entity shall expressly assume, by a supplemental
indenture executed and delivered to the Trustee, in form and substance
reasonably
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satisfactory to the Trustee, all of the obligations of the Company under the
Senior Notes and the Indenture; (c) immediately before and immediately after
giving effect to such transaction, or series of transactions (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default or Event of Default shall have occurred and be continuing; and (d)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis, the Company could incur $1.00 of Indebtedness under the
"Limitation on Additional Indebtedness" covenant.
There is no precise established meaning of the phrase "all or substantially
all of its properties and assets" as set forth in the foregoing discussion (or
in the definition of "Change of Control"). Accordingly, the ability of a holder
of the Senior Notes to enforce this provision of the Indenture following a sale,
assignment, conveyance, lease, transfer or other disposition of less than all of
the Company's properties and assets to another person may, to some extent, be
uncertain.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(i) the default in the payment of any interest on the Senior Notes
when it becomes due and payable or of the principal of the Senior Notes
pursuant to an offer to purchase required by the Indenture and the
continuance of such default for a period of 30 days;
(ii) the default in the payment of the principal of, or premium, if
any, on the Senior Notes when due;
(iii) default in the performance of or breach of any covenant in the
Indenture (other than defaults specified in clause (i) or (ii) above), and
continuance of such default or breach for a period of 30 days after written
notice to the Company by the Trustee or to the Company and the Trustee by
the holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes;
(iv) failure by the Company or any Material Subsidiary (a) to make any
payment when due (after giving effect to any applicable grace period) with
respect to one or more classes or issues of other Indebtedness in an
aggregate principal amount of $10,000,000 or more at the date of
determination; or (b) to perform any term, covenant, condition, or
provision of one or more classes or issues of other Indebtedness in an
aggregate principal amount of $10,000,000 or more at the date of
determination, which failure, in the case of either clause (a) or clause
(b), results in an acceleration of the maturity thereof;
(v) one or more final judgments, orders or decrees for the payment of
money in excess of $10,000,000, either individually or in an aggregate
amount, shall be entered against the Company or any of its Material
Subsidiaries or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days during which a
stay of enforcement of such judgment or order, by reason of pending appeal
or otherwise, shall not be in effect; or
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any Material Subsidiary shall have occurred.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then the
holders of at least 25% in principal amount of the outstanding Senior Notes may,
by written notice, and the Trustee upon the request of the holders of not less
than 25% in principal amount of the outstanding Senior Notes shall, declare the
principal of, premium, if any, and accrued interest on all the Senior Notes to
be due and payable immediately. Upon any such declaration such principal shall
become due and payable immediately. If an Event of Default specified in (vi)
occurs with respect to the Company and is continuing, then the principal of,
premium, if any, and accrued interest on, all the Senior Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder.
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After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Senior Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived,
other than nonpayment of principal of, premium, if any, and accrued interest on
the Senior Notes that has become due solely as a result of such acceleration and
if the rescission of acceleration would not conflict with any judgment or
decree. The holders of a majority in principal amount of the outstanding Senior
Notes also have the right to waive past defaults under the Indenture, except a
default in the payment of the principal of, premium, if any, or interest on any
Senior Note, or in respect of a covenant or a provision which cannot be modified
or amended without the consent of all holders.
No holder of any of the Senior Notes has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless the
holders of at least 25% in principal amount of the outstanding Senior Notes have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 60 days after receipt of such notice and the Trustee has not
within such 60-day period received directions inconsistent with such written
request by holders of a majority in principal amount of the outstanding Senior
Notes. Such limitations do not apply, however, to a suit instituted by a holder
of a Senior Note for the enforcement of the payment of the principal of,
premium, if any, or accrued interest on such Senior Note on or after the
respective due dates expressed in such Senior Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Senior Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect
to the Senior Notes ("defeasance"), except for certain obligations, including
those regarding any trust established for a defeasance and obligations to
register the transfer or exchange of the Senior Notes, to replace mutilated,
destroyed, lost or stolen Senior Notes and to maintain agencies in respect of
Senior Notes. The Company may at any time terminate its obligations under
certain covenants set forth in the Indenture, some of which are described under
"Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Senior
Notes issued under the Indenture ("covenant defeasance"). In order to exercise
either defeasance or covenant defeasance, the Company must irrevocably deposit
in trust, for the benefit of the holders of the Senior Notes, with the Trustee
money or U.S. government obligations, or a combination thereof, in such amounts
as will be sufficient to pay the principal of, and premium, if any, and interest
on the Senior Notes to redemption or maturity and comply with certain other
conditions, including the delivery of an opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of Senior
Notes) as to all outstanding Senior Notes when either (a) all such Senior Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Senior
Notes which have been replaced or paid and Senior Notes for whose payment money
has theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust) have
been delivered to the Trustee for cancellation; or (b) (i) all such Senior Notes
not theretofore delivered to the Trustee for cancellation have become due and
payable and the Company has
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irrevocably deposited or caused to be deposited with the Trustee as trust funds
in the trust for such purpose an amount of money sufficient to pay and discharge
the entire indebtedness on the Senior Notes not theretofore delivered to the
Trustee for cancellation, for principal, premium, if any, and accrued interest
to the date of such deposit, (ii) the Company has paid all sums payable by it
under the Indenture, and (iii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money toward the payment of
the Senior Notes at maturity or the redemption date, as the case may be. In
addition, the Company must deliver an Officers' Certificate and an Opinion of
Counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company, when authorized by resolutions of its Board
of Directors, and the Trustee may, without the consent of the holders of the
Senior Notes, amend, waive or supplement the Indenture or the Senior Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, maintaining the qualification of the Indenture under
the Trust Indenture Act, and making any change that does not adversely affect
the rights of any holder. Other amendments and modifications of the Indenture or
the Senior Notes may be made by the Company and the Trustee with the consent of
the holders of not less than a majority of the aggregate principal amount of the
outstanding Senior Notes; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Senior Note
affected thereby, (i) reduce the principal amount outstanding, extend the fixed
maturity, or alter the redemption provisions of the Senior Notes, (ii) reduce
the percentage in principal amount outstanding of Senior Notes, who must consent
to an amendment, supplement or waiver under the Indenture or the Senior Notes,
(iii) waive a default in payment with respect to the Senior Notes, (iv) reduce
the rate or extend the time for payment of interest on the Senior Notes, (v)
change the currency in which the Senior Notes or any premium or the accrued
interest thereon is payable, (vi) impair the right to institute suit for the
enforcement of any payment on or with respect to the Senior Notes, or (vii)
adversely affect the ranking of the Senior Notes.
REGARDING THE TRUSTEE
Bankers Trust Company will serve as Trustee under the Indenture.
GOVERNING LAW
The Indenture will provide that the Indenture and the Senior Notes will be
governed by and construed in accordance with the internal laws of the State of
New York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company or assumed in connection with an
Asset Acquisition by such Person, including, without limitation, Indebtedness
incurred in connection with, or in anticipation of, such Person becoming a
Subsidiary of the Company or such acquisition.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
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"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Capital Stock, by the Company or any of its Subsidiaries in any
other Person, or acquisition or purchase of Capital Stock by the Company or any
of its Subsidiaries in any other Person, in either case pursuant to which such
Person shall become a Subsidiary of the Company or any of its Subsidiaries or
shall be merged with or into the Company or any of its Subsidiaries or (ii) any
acquisition by the Company or any of its Subsidiaries of the assets of any
Person which constitute substantially all of an operating unit or business of
such Person.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
or other disposition to any Person other than the Company or a Subsidiary of the
Company, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Subsidiary of the Company or (ii) any other property or
asset of the Company or any Subsidiary of the Company, in each case, other than
inventory in the ordinary course of business and other than such isolated
transactions which do not involve aggregate consideration in excess of $500,000
individually. For the purposes of this definition, the term "Asset Sale" shall
not include (x) sales of receivables not a part of a sale of the business from
which they arose, (y) any disposition of properties and assets of the Company or
any Subsidiary that is governed under and complies with the "Consolidation,
Merger, Conveyance, Transfer or Lease" or the "Limitation on Sale-Leaseback
Transactions" covenants or (z) transfers of assets to any Person solely in
exchange for assets which are related to the Company's business and which have a
Fair Market Value at least equal to the Fair Market Value of the assets
transferred.
"Board Resolution" means a copy of a resolution certified by the Secretary,
an Assistant Secretary or any Vice President of the Company, as appropriate, to
have been duly adopted by the Board of Directors of the Company, as appropriate,
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights, warrants or options exchangeable for or convertible into such capital
stock.
"Change of Control" means (i) the direct or indirect sale, lease, exchange
or other transfer of all or substantially all of the assets of the Company to
any Person or entity or group of Persons or entities acting in concert as a
partnership or other group (a "Group of Persons") other than an Affiliate of the
Company or a Permitted Person, (ii) the merger or consolidation of the Company
with or into another corporation with the effect that the then existing
shareholders of the Company hold less than 50% of the combined voting power of
the then outstanding securities of the surviving corporation of such merger or
the corporation resulting from such consolidation ordinarily (and apart from
rights arising under special circumstances) having the right to vote in the
election of directors, or (iii) a Person or Group of Persons (other than a
Permitted Person) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing more than 50% of the combined voting
power of the then outstanding securities of the Company ordinarily (and apart
from rights accruing under special circumstances) having the right to vote in
the election of directors. For purposes of the foregoing, a "Permitted Person"
shall mean any holder or a group consisting solely of holders of the Class B
Common Stock of the Company on the Issue Date, any spouse or child of such
holder or any Person who is an Affiliate of such holder or such spouse or child.
The definition of "Change of Control" does not include (x) a Person or Group of
Persons receiving proxies entitling it to vote more than 50% of voting power of
securities having the right to vote in the election of directors unless such
Person or Group of Persons also beneficially owns such securities or (y) a
change of control in the Board of Directors occurring as a result of a proxy
contest. For the avoidance of doubt, in construing the foregoing provisions,
indirect ownership of an entity and indirect holding of interests or voting
power of an entity, such as through a holding company or otherwise, shall
constitute ownership of such entity and holding of interests or voting power of
such entity within the meaning of the foregoing.
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"Consolidated Cash Flow" means, with respect to any Person (including its
Subsidiaries) for any period, the Consolidated Net Income of such Person for
such period increased (to the extent deducted in determining Consolidated Net
Income) by the sum of (i) all income taxes of such Person paid or accrued in
accordance with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or non-recurring gains or losses), (ii) all interest
expense of such Person paid or accrued in accordance with GAAP (net of any
interest income) for such period (including amortization of original issue
discount and the interest portion of deferred payment obligations), (iii)
depreciation, and (iv) amortization, including, without limitation, amortization
of capitalized debt issuance costs.
"Consolidated Interest Coverage Ratio" means, with respect to any Person,
the ratio of (i) Consolidated Cash Flow of such Person for the two full fiscal
quarters for which financial statements are available that immediately precede
the date of the proposed transaction or other circumstances giving rise to the
need to calculate the Consolidated Interest Coverage Ratio (the "Transaction
Date") to (ii) all cash and non-cash interest expense of such Person and its
Subsidiaries determined in accordance with GAAP (net of any interest income of
such Person and its Subsidiaries and excluding deferred financing fees of such
Person and its Subsidiaries) for such two full fiscal quarter period plus all
cash and non-cash interest capitalized by such Person and its Subsidiaries in
accordance with GAAP for such two full fiscal quarter period. For purposes of
this definition, if the Transaction Date is to occur prior to the date on which
the Company's consolidated financial statements for the two full fiscal quarters
subsequent to the Issue Date are first available, "Consolidated Cash Flow" and
the items referred to in the preceding clause (ii) shall be calculated, in the
case of the Company, after giving effect on a pro forma basis as if the Senior
Notes outstanding on the Transaction Date were issued on the first day of such
two full fiscal quarter period. In addition to and without limitation of the
foregoing, for purposes of this definition, "Consolidated Cash Flow" and the
items referred to in the preceding clause (ii) shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence and/or retirement of any Indebtedness of such Person or any of its
Subsidiaries at any time during the period (the "Reference Period") (A)
commencing on the first day of the two full fiscal quarter period for which
financial statements are available that precedes the Transaction Date and (B)
ending on and including the Transaction Date, including, without limitation, the
incurrence and/or retirement of the Indebtedness giving rise to the need to make
such calculation, as if such incurrence and/or retirement occurred on the first
day of the Reference Period (for the avoidance of doubt, in construing the
foregoing provision, Indebtedness otherwise permitted and incurred
simultaneously with the incurrence of Indebtedness giving rise to the need to
make the pro forma calculation shall be excluded from such calculation);
provided that if such person or any of its Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the above clause shall give effect to
the incurrence of such guaranteed Indebtedness as if such Person or Subsidiary
had directly incurred such guaranteed Indebtedness and (ii) any Asset Sales or
Asset Acquisitions (including, without limitation, any Asset Acquisition giving
rise to the need to make such calculation as a result of the Company or any of
its Subsidiaries (including any Person who becomes a Subsidiary as a result of
the Asset Acquisition) incurring Acquired Indebtedness) occurring during the
Reference Period and any retirement of Indebtedness in connection with such
Asset Acquisitions, as if such Asset Sale or Asset Acquisition and/or retirement
occurred on the first day of the Reference Period. Furthermore, in calculating
the denominator (but not the numerator) of this "Consolidated Interest Coverage
Ratio," (1) interest on Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to accrue at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the date Consolidated Interest Coverage Ratio is
calculated; (2) if interest on any Indebtedness to be incurred on the
Transaction Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered rate, or
other rates, then the interest rate based upon a factor of a prime or similar
rate shall be deemed to have been in effect; and (3) notwithstanding clause (1)
above, interest on Indebtedness determined on a fluctuating basis, to the extent
such interest is to be covered by agreements relating to interest rate
protection obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person") in
which the
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Person in question or any of its Subsidiaries has less than a 100% interest
(which interest does not cause the net income of such other Person to be
consolidated into the net income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions shall be excluded to the extent of such restriction or limitation,
(c) (i) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition and (ii) any
net gain (but not loss) resulting from an Asset Sale by the Person in question
or any of its Subsidiaries other than in the ordinary course of business shall
be excluded, and (d) extraordinary gains and losses shall be excluded.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Senior Notes.
"Fair Market Value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. Fair
Market Value shall be determined by the Board of Directors acting in good faith
and shall be evidenced by a Board Resolution delivered to the Trustee with
respect to all assets or property having a Fair Market Value in excess of
$1,000,000.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination.
"holder" or "Noteholder" means the Person in whose name a Senior Note is
registered on the books of the Senior Note registrar.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any liability, contingent or otherwise, of such Person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (B) evidenced by a note, debenture or
similar debt instrument or letter of credit (including a purchase money
obligation), or (C) for the payment of money relating to a capitalized lease
obligation or other obligation relating to the payment of the deferred purchase
price of property; (ii) any liability of others of the kind described in the
preceding clause (i) which the Person has guaranteed or which is otherwise its
contractual liability; (iii) any obligation secured by a Lien to which the
property or assets of such Person are subject, whether or not the obligations
secured thereby shall have been assumed by or shall otherwise be such Person's
legal liability; and (iv) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (i), (ii) or (iii).
Notwithstanding the foregoing, the liability or obligation of a Person under any
appeal or reimbursement obligation entered into with respect to any judgment
shall not constitute Indebtedness. For the avoidance of doubt, in construing the
foregoing definition, guaranties by the Company or any of its Subsidiaries of
Indebtedness, which Indebtedness is incurred by the Company or any of its
Subsidiaries pursuant to, and in compliance with, the "Limitation on Additional
Indebtedness" covenant, shall not constitute Indebtedness within the meaning of
the foregoing definition.
"Indenture" means the instrument underlying the Senior Notes as originally
executed and delivered or, if amended or supplemented as herein provided, as so
amended or supplemented or both.
"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, claim, hypothecation, assignment for security, or other
security agreement of any kind or nature whatsoever. For purposes of the
Indenture, a Person shall be deemed to own subject to a Lien any property which
it has
49
<PAGE> 50
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property.
"Material Subsidiary" means, at any particular time, any Subsidiary of any
Person that (a) accounted for more than 10% of the consolidated revenues of such
Person and its Subsidiaries on a consolidated basis for the most recently
completed fiscal year of such Person or (b) was the owner of more than 10% of
the assets of such Person and its Subsidiaries on a consolidated basis as at the
end of such fiscal year, all as shown on the consolidated financial statements
of such Person and its Subsidiaries for such fiscal year.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of cash or cash
equivalents (except to the extent that such obligations with respect to
Indebtedness are financed or sold with recourse to the Company or any of its
Subsidiaries) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale; (ii) provisions for all taxes payable as a result of such
Asset Sale; (iii) payments made to retire Indebtedness secured by the assets
subject to such Asset Sale (including retirements of Indebtedness under the
Working Capital Facility) to the extent required pursuant to the terms of such
Indebtedness; and (iv) appropriate amounts to be provided by the Company or any
of its Subsidiaries, as the case may be, as a reserve, in accordance with GAAP
against any liabilities associated with such Asset Sale and retained by the
Company or any of its Subsidiaries, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the board of directors, at the time of
receipt) and (b) in the case of any exchange, exercise, conversion or surrender
of outstanding securities of any kind for or into shares of Capital Stock of the
Company which is not Disqualified Stock, the net book value of such outstanding
securities on the date of such exchange, exercise, conversion or surrender (plus
any additional amount required to be paid by the holder to the Company upon such
exchange, exercise, conversion or surrender, less any and all payments made to
the holders, e.g., on account of fractional shares and less all expenses
incurred by the Company in connection therewith).
"Permitted Investments" means (i) obligations of or guaranteed by the U.S.
government due within one year; (ii) certificates of deposit or eurodollar
deposits due within one year with a commercial bank having capital funds of at
least $100,000,000 or more; (iii) commercial paper rated A-2, P-2 or better by
Standard & Poor's Corporation or Moodys Investor Services, Inc.; (iv) money
market preferred stocks which, at the date of acquisition and at all times
thereafter, are accorded either of the two highest ratings by Standard & Poor's
Corporation or Moodys Investor Services, Inc.; (v) debt of or guaranteed by any
state or political subdivision that is rated A or better and (vi) Repurchase
Agreements.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Public Equity Offering" means a public offering by the Company of shares
of its common stock (however designated and whether voting or non-voting) and
any and all rights, warrants or options to acquire such common stock.
"Repurchase Agreements" means repurchase agreements, reverse repurchase
agreements or similar agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one year from the date of acquisition;
provided that the terms of such agreements
50
<PAGE> 51
comply with the guidelines set forth in Federal Financial Agreements of
Depository Institutions with Securities and Others (or any successor
guidelines), as adopted by the Controller of the Currency.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Subsidiary of the Company or any payment made to the direct
or indirect holders (in their capacities as such) of Capital Stock of the
Company or any Subsidiary of the Company (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) or
in options, warrants or other rights to purchase Capital Stock (other than
Disqualified Stock), and (y) in the case of Subsidiaries of the Company,
dividends or distributions payable to the Company or to a Subsidiary of the
Company), (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Subsidiaries (other than
Capital Stock owned by the Company or a Wholly-Owned Subsidiary of the Company,
excluding Disqualified Stock), (iii) the making of any principal payment on, or
the purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of any Indebtedness which is subordinated in
right of payment to the Senior Notes (other than subordinated Indebtedness of
the Company outstanding as of the Issue Date and other than subordinated
Indebtedness acquired in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition), and (iv) the making of any Investment or guarantee of any
Investment in any Person other than as is permitted under clauses (i)-(v) and
(vii) in the "Limitation on Investments, Loans and Advances" covenant.
"Sale-Leaseback Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Subsidiary to such Person in contemplation of
such leasing.
"Subsidiary" means (i) a corporation a majority of whose Capital Stock with
voting power, under ordinary circumstances, to elect directors is at the time,
directly or indirectly, owned by the Company, by a Subsidiary of the Company or
by the Company and a Subsidiary of the Company or (ii) any other Person (other
than a corporation) in which the Company, a Subsidiary of the Company or the
Company and a Subsidiary of the Company, directly or indirectly, at the date of
determination thereof, have at least a majority ownership interest.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be deemed a
Subsidiary of the Company other than for purposes of the definition of
Unrestricted Subsidiary, unless the Company shall have designated an
Unrestricted Subsidiary as a "Subsidiary" by written notice to the Trustee. An
Unrestricted Subsidiary may be designated as a Subsidiary at any time by the
Company by written notice to the Trustee, provided, that, if such Unrestricted
Subsidiary is an obligor of any Indebtedness, immediately after giving effect to
such designation, the Company could incur $1.00 of Indebtedness under the
"Limitation on Additional Indebtedness" covenant.
"Unrestricted Subsidiary" means, any Subsidiary of the Company which at the
time of creation or acquisition thereof (and at no other time) by the Company is
designated by written notice to the Trustee as an Unrestricted Subsidiary. An
Unrestricted Subsidiary may be designated as a Subsidiary at a later date as
provided above.
"Working Capital Facility" means the Revolving Credit Agreement, dated as
of April 29, 1992, among the Company, the financial institutions party thereto,
Citibank, N.A., as Issuer, and Citicorp USA, Inc., as Agent, and under any other
agreement, instrument, facility or arrangement intended to provide working
capital (including any asset securitization facility involving the sale of
accounts receivable) as the same may at any time be amended, amended and
restated, supplemented or otherwise modified, including any refinancing,
refunding, replacement or extension thereof and whether by the same or any other
lender or groups of lenders.
51
<PAGE> 52
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company and Citicorp Securities, Inc., Citibank Canada Securities
Limited, Citibank International plc and Salomon Brothers Inc (collectively, the
"Underwriters"), the Company has agreed to sell to each of the Underwriters, and
the Underwriters have severally agreed to purchase from the Company, the
aggregate principal amount of Senior Notes set forth opposite their respective
names below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF SENIOR NOTES
--------------------------------------------------------------------- ----------------
<S> <C>
Citicorp Securities, Inc. ........................................... $ 31,666,667
Citibank Canada Securities Limited................................... 31,666,667
Citibank International plc........................................... 31,666,666
Salomon Brothers Inc................................................. 95,000,000
----------------
Total...................................................... $190,000,000
----------------
----------------
</TABLE>
The nature of the Underwriters' obligations are such that they are
committed to purchase all of the Senior Notes if any are purchased. The
Underwriters propose to offer the Senior Notes directly to the public at the
public offering price set forth on the cover page of this Prospectus. The
Underwriters have advised the Company that sales of the Senior Notes may be made
to certain selected dealers at a concession not in excess of 1.5% per Senior
Note. After the initial public offering of the Senior Notes, the public offering
price and concession with respect to the Senior Notes may be changed by the
Underwriters.
The Company has been advised by Citicorp Securities, Inc. and Salomon
Brothers Inc that they presently intend to make a market in the Senior Notes,
subject to applicable laws and regulations; however, they are not obligated to
do so and any market-making activities with respect to the Senior Notes may be
discontinued at any time without notice. There can be no assurance that an
active public market for the Senior Notes will develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect of such
liabilities.
Citibank International plc, a United Kingdom broker-dealer, and Citibank
Canada Securities Limited have each agreed that, as part of the distribution of
the Senior Notes offered hereby and subject to certain exceptions, they will not
offer or sell any Senior Notes within the United States, its territories or
possessions or to persons who are residents therein.
Each Underwriter has represented and agreed that (i) it has not offered or
sold and will not offer or sell in the United Kingdom, by means of any document,
any Senior Notes other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent (except in circumstances
which do not constitute an offer to the public within the meaning of the Company
Act 1985, as amended), (ii) it has complied with and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Senior Notes in, from, or otherwise
involving, the United Kingdom and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue of the Senior Notes to a person who is of a kind
described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Citicorp Securities, Inc., its affiliates and Salomon Brothers Inc have
performed financial advisory and other services for the Company in the past, for
which they received customary compensation. Citicorp USA, Inc., an affiliate of
Citicorp Securities, Inc., is the agent under the Revolving Credit Facility.
52
<PAGE> 53
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Senior Notes
offered hereby will be passed upon for the Company by Ken C. Johnsen, Vice
President, Secretary and General Counsel of the Company, and Kimball, Parr,
Waddoups, Brown & Gee, a professional corporation, Salt Lake City, Utah. Ken C.
Johnsen was engaged in the private practice of law with Kimball, Parr, Waddoups,
Brown & Gee until February 1991. Certain legal matters in connection with the
Senior Notes offered hereby will be passed upon for the Underwriters by Cahill
Gordon & Reindel (a partnership including a professional corporation), New York,
New York.
EXPERTS
The financial statements and schedules included (or incorporated by
reference) in this Prospectus and elsewhere in the Registration Statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen & Co., independent public accountants, and are included (or
incorporated by reference) herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
53
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-3
Balance Sheets at September 30, 1992 and 1993 and at December 31, 1993 (unaudited).... F-4
Statements of Income for the years ended September 30, 1991, 1992 and 1993 and for the
(unaudited) three months ended December 31, 1992 and 1993........................... F-6
Statements of Stockholders' Equity for the years ended September 30, 1991, 1992 and
1993 and for the (unaudited) three months ended December 31, 1993................... F-7
Statements of Cash Flows for the years ended September 30, 1991, 1992 and 1993 and for
the (unaudited) three months ended December 31, 1992 and 1993....................... F-8
Notes to Financial Statements......................................................... F-10
</TABLE>
F-1
<PAGE> 55
(This page intentionally left blank)
F-2
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geneva Steel Company:
We have audited the accompanying balance sheets of Geneva Steel Company (a
Utah corporation) as of September 30, 1992 and 1993, and the related statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Geneva Steel Company as of
September 30, 1992 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1993 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Salt Lake City, Utah
November 1, 1993 (except with
respect to the matter discussed in Note 2,
as to which the date is January 24, 1994)
F-3
<PAGE> 57
GENEVA STEEL COMPANY
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- DECEMBER 31,
1992 1993 1993
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 3,122 $ 64,267 $ 16,130
Accounts receivable, less allowance for doubtful
accounts of $3,413, $2,983 and $2,510,
respectively........................................ 50,405 46,257 52,114
Inventories............................................ 59,272 63,230 65,346
Income taxes receivable................................ 15,239 -- --
Prepaid expenses and other............................. 4,663 1,426 5,177
Deferred income taxes.................................. -- -- 5,823
-------- -------- ------------
Total current assets........................... 132,701 175,180 144,590
-------- -------- ------------
Property, Plant and Equipment:
Land................................................... 1,931 1,931 1,931
Buildings.............................................. 3,725 3,725 3,725
Machinery and equipment................................ 288,253 369,490 416,073
Mineral property and development costs................. 7,142 8,425 8,425
-------- -------- ------------
301,051 383,571 430,154
Less accumulated depreciation.......................... (48,254) (68,981) (74,623)
-------- -------- ------------
Net property, plant and equipment.............. 252,797 314,590 355,531
-------- -------- ------------
Other Assets............................................. 4,964 8,614 8,215
-------- -------- ------------
$390,462 $498,384 $508,336
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE> 58
GENEVA STEEL COMPANY
BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- DECEMBER 31,
1992 1993 1993
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 33,878 $ 52,982 $ 45,056
Accrued payroll and related taxes...................... 7,924 8,578 11,127
Accrued liabilities.................................... 7,067 11,810 12,831
Production prepayments................................. 5,999 10,000 10,000
Accrued interest payable............................... 1,504 1,533 7,816
Accrued pension and profit sharing costs............... 675 1,110 1,322
-------- -------- ------------
Total current liabilities...................... 57,047 86,013 88,152
-------- -------- ------------
Long-Term Debt........................................... 178,182 224,991 224,991
-------- -------- ------------
Deferred Income Taxes.................................... 13,401 15,619 21,528
-------- -------- ------------
Commitments and Contingencies (Note 4)
Redeemable Preferred Stock, Series B, no par value,
400,000 shares authorized, issued and outstanding, with
an aggregate liquidation value of $43,099 and $44,607,
respectively........................................... -- 35,986 37,665
-------- -------- ------------
Stockholders' Equity:
Preferred stock, no par value, 3,600,000 shares
authorized for all series, excluding Series B, none
issued.............................................. -- -- --
Common stock:
Class A, no par value, 60,000,000 shares authorized,
14,189,871, 14,360,886 and 14,390,886 shares
issued, respectively.............................. 85,180 86,094 86,264
Class B, no par value, 50,000,000 shares authorized,
24,305,288, 22,595,138 and 22,295,138 shares
issued and outstanding, respectively.............. 12,830 11,929 11,770
Warrants to purchase Class A common stock.............. -- 5,360 5,360
Retained earnings...................................... 64,676 52,542 52,573
Less 1,587,300, 1,533,719 and 1,519,741 Class A common
stock treasury shares, respectively, at cost........ (20,854) (20,150) (19,967)
-------- -------- ------------
Total stockholders' equity..................... 141,832 135,775 136,000
-------- -------- ------------
$390,462 $498,384 $508,336
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-5
<PAGE> 59
GENEVA STEEL COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------
1991 1992 1993 1992 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $445,981 $420,026 $465,181 $101,149 $127,099
Cost of sales................................. 393,180 406,291 443,458 99,468 115,626
-------- -------- -------- -------- --------
Gross margin................................ 52,801 13,735 21,723 1,681 11,473
Selling, general and administrative
expenses.................................... 21,881 22,322 20,621 4,635 5,682
-------- -------- -------- -------- --------
Income (loss) from operations............... 30,920 (8,587) 1,102 (2,954) 5,791
-------- -------- -------- -------- --------
Other income (expense):
Interest and other income................... 3,464 807 1,885 70 433
Interest expense............................ (6,165) (13,695) (17,096) (3,570) (3,472)
-------- -------- -------- -------- --------
(2,701) (12,888) (15,211) (3,500) (3,039)
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for
income taxes................................ 28,219 (21,475) (14,109) (6,454) 2,752
Provision (benefit) for income taxes.......... 10,665 (8,383) (5,503) (2,517) 1,042
-------- -------- -------- -------- --------
Net income (loss)............................. 17,554 (13,092) (8,606) (3,937) 1,710
Less redeemable preferred stock dividends and
accretion for original issue discount....... -- -- 3,466 -- 1,679
-------- -------- -------- -------- --------
Net income (loss) applicable to common
shares...................................... $ 17,554 $(13,092) $(12,072) $ (3,937) $ 31
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per common share............ $ 1.17 $ (.87) $ (.80) $ (.26) $ .002
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average shares outstanding........... 15,034 15,021 15,059 15,036 15,095
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 60
GENEVA STEEL COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES ISSUED AMOUNT WARRANTS
----------------------- ----------------- TO PURCHASE
COMMON COMMON COMMON COMMON COMMON RETAINED TREASURY
CLASS A CLASS B CLASS A CLASS B CLASS A EARNINGS STOCK TOTAL
---------- ---------- ------- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1990.... 13,954,871 26,655,288 $81,646 $13,367 $ -- $60,390 $(21,895) $133,508
Capitalization to common stock
of S Corporation stockholders
distributions for income
taxes returned to Company.... -- -- 2,829 696 -- -- -- 3,525
Conversion of Class B common
stock into Class A common
stock........................ 125,000 (1,250,000) 653 (653 ) -- -- -- --
Costs in connection with
secondary offering of Class A
common stock................. -- -- (531 ) -- -- -- -- (531)
Exercise of options to purchase
Class A common stock......... -- -- -- -- -- (74 ) 434 360
Net income..................... -- -- -- -- -- 17,554 -- 17,554
---------- ---------- ------- ------- ----------- -------- -------- --------
Balance at September 30, 1991.... 14,079,871 25,405,288 84,597 13,410 -- 77,870 (21,461) 154,416
Exercise of options to purchase
Class A common stock......... -- -- -- -- -- (102 ) 607 505
Capitalization to common stock
of S Corporation stockholders
distributions for income
taxes returned to Company.... -- -- 2 1 -- -- -- 3
Conversion of Class B common
stock into Class A common
stock........................ 110,000 (1,100,000) 581 (581 ) -- -- -- --
Net loss....................... -- -- -- -- -- (13,092 ) -- (13,092)
---------- ---------- ------- ------- ----------- -------- -------- --------
Balance at September 30, 1992.... 14,189,871 24,305,288 85,180 12,830 -- 64,676 (20,854) 141,832
Capitalization to common stock
of S Corporation stockholders
distributions for income
taxes returned to Company.... -- -- 9 2 -- -- -- 11
Conversion of Class B common
stock into Class A common
stock........................ 171,015 (1,710,150) 903 (903 ) -- -- -- --
Issuance of Class A common
stock to employee savings
plan......................... -- -- 2 -- -- (62 ) 704 644
Redeemable preferred stock
dividends.................... -- -- -- -- -- (3,099 ) -- (3,099)
Redeemable preferred stock
accretion for original issue
discount..................... -- -- -- -- -- (367 ) -- (367)
Issuance of 1,132,000 warrants
to purchase Class A common
stock in connection with
issuance of redeemable
preferred stock.............. -- -- -- -- 5,360 -- -- 5,360
Net loss....................... -- -- -- -- -- (8,606 ) -- (8,606)
---------- ---------- ------- ------- ----------- -------- -------- --------
Balance at September 30, 1993.... 14,360,886 22,595,138 86,094 11,929 5,360 52,542 (20,150) 135,775
Unaudited
Conversion of Class B common
stock into Class A common
stock........................ 30,000 (300,000) 159 (159 ) -- -- -- --
Issuance of Class A common
stock to employee savings
plan......................... -- -- 11 -- -- -- 183 194
Redeemable preferred stock
dividends.................... -- -- -- -- -- (1,508 ) -- (1,508)
Redeemable preferred stock
accretion for original issue
discount..................... -- -- -- -- -- (171 ) -- (171)
Net income..................... -- -- -- -- -- 1,710 -- 1,710
---------- ---------- ------- ------- ----------- -------- -------- --------
Balance at December 31, 1993
(Unaudited).................... 14,390,386 22,295,138 $86,264 $11,770 $ 5,360 $52,573 $(19,967) $136,000
---------- ---------- ------- ------- ----------- -------- -------- --------
---------- ---------- ------- ------- ----------- -------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 61
GENEVA STEEL COMPANY
STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31,
----------------------------------- ---------------------
1991 1992 1993 1992 1993
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net income (loss).......................... $ 17,554 $(13,092) $ (8,606) $ (3,937) $ 1,710
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 14,728 21,136 23,150 5,408 6,128
Deferred income tax provision............ 2,728 11,899 2,218 2,634 86
(Increase) decrease in current assets --
Accounts receivable, net............... 21,379 (4,575) 4,148 2,842 (5,857)
Inventories............................ (5,365) 10,085 (3,958) (3,020) (2,116)
Income taxes receivable................ -- (15,239) 15,239 (953) --
Prepaid expenses and other............. (832) 449 3,237 933 (3,751)
Increase (decrease) in current
liabilities --
Accounts payable....................... 6,563 (1,298) 19,104 (1,501) (7,926)
Accrued payroll and related taxes...... (226) (4,027) 654 1,940 2,549
Accrued liabilities.................... (2,486) (501) 4,743 (1,075) 1,021
Production prepayments................. -- 5,999 4,001 2,389 --
Accrued interest payable............... 489 (15) 29 4,514 6,283
Accrued pension and profit sharing
costs............................... (9,194) (177) 435 14 212
Income taxes payable................... 2,444 (2,444) -- -- --
--------- -------- -------- -------- --------
Net cash provided by (used for) operating
activities............................... 47,782 8,200 64,394 10,188 (1,661)
--------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of marketable
securities............................. 3,212 -- -- -- --
Purchase of property, plant and
equipment.............................. (113,410) (66,617) (82,534) (10,356) (46,583)
--------- -------- -------- -------- --------
Net cash used for investing activities..... (110,198) (66,617) (82,534) (10,356) (46,583)
--------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt............... 50,000 163,382 325,313 109,469 --
Payments on long-term debt................. (2,514) (145,660) (278,504) (118,127) --
Proceeds from issuance of redeemable
preferred stock, net of offering costs... -- -- 32,521 -- --
Proceeds from issuance of warrants to
purchase Class A common stock, net of
offering costs........................... -- -- 5,360 -- --
Payments for deferred loan costs........... (2,500) (2,318) (6,062) (57) (88)
Bank overdraft............................. -- -- -- 5,647 --
S Corporation stockholders distributions
for income taxes returned to Company..... 3,525 3 11 -- --
Proceeds from exercise of options to
purchase Class A common stock............ 360 505 -- -- --
Class A common stock secondary offering
costs.................................... (531) -- -- -- --
Issuance of Class A common stock to
employee savings plan.................... -- -- 644 114 195
Other...................................... 3 30 2 -- --
--------- -------- -------- -------- --------
Net cash provided by (used for) financing
activities............................... 48,343 15,942 79,285 (2,954) 107
--------- -------- -------- -------- --------
</TABLE>
F-8
<PAGE> 62
GENEVA STEEL COMPANY
STATEMENTS OF CASH FLOW -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31,
----------------------------------- ---------------------
1991 1992 1993 1992 1993
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents.............................. $ (14,073) $(42,475) $ 61,145 $ (3,122) $(48,137)
Cash and cash equivalents at beginning of
period..................................... 59,670 45,597 3,122 3,122 64,267
--------- -------- -------- -------- --------
Cash and cash equivalents at end of period... $ 45,597 $ 3,122 $ 64,267 $ -- $ 16,130
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest (net of amount capitalized)..... $ 5,677 $ 12,787 $ 14,655 $ -- $ --
Income taxes............................. 5,465 -- -- -- --
</TABLE>
Supplemental schedule of noncash financing activities:
For the year ended September 30, 1993 and the three months ended December 31,
1993, the Company increased the redeemable preferred stock liquidation
preference by $3,099 and $1,508 respectively, in lieu of paying a cash
dividend. In addition, for the same periods, redeemable preferred stock was
increased by $367 and $171, respectively, for the accretion required over
time to amortize the original issue discount on the redeemable preferred
stock incurred at the time of issuance.
The accompanying notes to financial statements are an integral part of these
statements.
F-9
<PAGE> 63
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid income-earning securities with an initial maturity, at time of
purchase, of ninety days or less to be cash equivalents. Cash equivalents are
stated at cost plus accrued interest, which approximates fair market value.
The Company's cash management system utilizes a revolving credit facility
with a syndicate of banks. During periods when amounts are outstanding on the
revolving credit facility, the syndicate of banks requires that cash receipts be
remitted directly to the lead bank in payment of such outstanding amounts
through a lockbox account and, as disbursements are made, the Company borrows
against the revolving credit facility (See Note 2).
Inventories
Inventories include costs of material, labor and manufacturing overhead.
Inventories are stated at the lower of cost (using a weighted-average method) or
market value. The composition of inventories was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- DECEMBER 31,
1992 1993 1993
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................... $16,711 $20,138 $ 26,918
Semi-finished and finished goods... 32,835 34,462 29,783
Operating materials................ 9,726 8,630 8,645
------- ------- ------------
$59,272 $63,230 $ 65,346
------- ------- ------------
------- ------- ------------
</TABLE>
Operating materials consist primarily of production molds, platforms for
the production molds and furnace lining refractories. Operating materials are
normally consumed within one year and are accounted for as inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings............................................. 31.5 years
Machinery and Equipment............................... 3-30 years
</TABLE>
Interest related to the construction or major rebuild of facilities is
capitalized and amortized over the estimated life of the related asset.
Capitalization of interest ceases when the asset is placed in service. The
Company capitalized approximately $8,342, $5,774, and $7,696 of interest during
the years ended September 30, 1991, 1992 and 1993, respectively.
Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal, related costs and
accumulated depreciation are removed from the accounts and resulting gains or
losses are reflected in income.
Major spare parts for machinery and equipment are capitalized and included
in machinery and equipment in the accompanying financial statements. Spare parts
are depreciated using the straight-line method over the useful lives of the
related machinery and equipment.
F-10
<PAGE> 64
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred in connection with the construction or major rebuild of
facilities are capitalized as construction in progress. No depreciation is
recognized on these assets until placed in service. As of September 30, 1992 and
1993 and December 31, 1993, approximately $60,996, $130,567 and $154,780,
respectively, of construction in progress was included in machinery and
equipment in the accompanying financial statements.
Mineral property and development costs are depleted using the units of
production method based upon estimated recoverable reserves. Accumulated
depletion is included in accumulated depreciation in the accompanying financial
statements.
Other Assets
Other assets consist of deferred loan costs incurred in connection with
obtaining long-term financing. These costs are being amortized on a
straight-line basis over the term of the applicable financing agreement.
Accumulated amortization totaled $1,201, $2,582 and $3,069 at September 30, 1992
and 1993 and at December 31, 1993, respectively.
Production Prepayments
The Company has production prepayment terms with a major customer. The
prepayment is recorded as a production prepayment until the product is shipped,
at which time the sale is recorded.
Revenue Recognition
Sales are recognized when the product is shipped to the customer. Sales are
reduced by the amount of customer claims. At September 30, 1992 and 1993 and at
December 31, 1993, reserves for customer claims of $1,769, $1,811 and $1,811,
respectively, are included in the allowance for doubtful accounts in the
accompanying financial statements.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes."
SFAS No. 109 supersedes SFAS No. 96. Effective October 1, 1993, the Company
adopted SFAS No. 109. The Company previously adopted SFAS No. 96, and therefore,
the impact of adopting SFAS No. 109 did not have a significant impact on the
Company's financial statements. In accordance with the provisions of SFAS No.
109, as of December 31, 1993, the Company reclassified current deferred tax
items (as defined by SFAS No. 109) of $5,823 to a current deferred tax asset in
the accompanying financial statements. These items were netted in the deferred
income tax liabilities in previous periods. As of December 31, 1993, the
realizability of the deferred tax assets requires no valuation allowance. The
Company recognizes a liability or asset for the deferred tax consequences of all
temporary differences between the tax basis of assets or liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years when the reported amounts of the assets or
liabilities are recovered or settled.
Net Income (Loss) Per Common Share
Net income (loss) per common share is based upon the weighted average
number of common and common equivalent shares outstanding during the periods
presented. Common equivalent shares consist of warrants and options to purchase
Class A common stock which have a dilutive effect when applying the treasury
stock method. Class B common stock is included in the weighted average number of
common shares outstanding at one share for every ten shares outstanding as the
Class B common stock can be converted into Class A common stock at this same
rate. Also, the Class B common stock is entitled to one-tenth of the
F-11
<PAGE> 65
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dividends and other distributions paid to Class A common stockholders. The
holders of both classes of common stock are entitled to one vote per share.
The net income (loss) for the year ended September 30, 1993 and the three
months ended December 31, 1993 was adjusted for redeemable preferred stock
dividends and accretion required over time to amortize the original issue
discount on the redeemable preferred stock incurred at the time of issuance.
Unaudited Information
The accompanying unaudited financial data as of December 31, 1993 and for
the three-month periods ended December 31, 1992 and 1993 have been prepared on
substantially the same basis as the annual financial statements. In the opinion
of management, the unaudited information contains all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations as of such date and for such periods.
Reclassifications
Certain reclassifications have been made in the prior periods' financial
statements to conform to the current period presentation.
2. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1992 1993 1993
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Senior term notes issued publicly, interest payable
semi-annually at 11.125%, principal due March 15, 2001,
unsecured.............................................. $ -- $135,000 $ 135,000
Senior term notes issued to a group of institutional
investors, interest payable semi-annually at 11.40%,
principal payable in either five equal annual
installments or $19,000 annually until paid, at the
option of the investors, beginning March 1, 1995,
unsecured.............................................. 95,000 64,410 64,410
Senior term notes issued to a group of institutional
investors, interest payable semi-annually at 10.55%,
principal payable in either five equal annual
installments or $10,000 annually until paid, at the
option of the investors, beginning September 1, 1995,
unsecured.............................................. 50,000 22,623 22,623
Subordinated term notes issued to institutional
investors, interest
payable semi-annually at 13.00%, principal payable in
either five annual installments or $1,500 annually
until paid, at the option of the investors, beginning
March 1, 1995, unsecured............................... 15,000 2,958 2,958
Revolving credit facility from a syndicate of banks,
interest payable as described below, due February 28,
1995, secured by accounts receivable and inventories... 18,182 -- --
-------- -------- -----------
$178,182 $224,991 $ 224,991
-------- -------- -----------
-------- -------- -----------
</TABLE>
F-12
<PAGE> 66
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate amounts of principal maturities of long-term debt as of
September 30, 1993 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
--------------------------------------------------------
<S> <C>
1994.................................................... $ --
1995.................................................... 30,500
1996.................................................... 30,458
1997.................................................... 21,623
1998.................................................... 7,410
Thereafter.............................................. 135,000
--------
$224,991
--------
--------
</TABLE>
The Company has a $50,000 three year revolving credit facility from a
syndicate of banks led by Citicorp USA, Inc., as agent (the "Revolving Credit
Facility"). As of September 30, 1993 and December 31, 1993, no amount was
outstanding on the Revolving Credit Facility. Interest is payable, at the
Company's option, at either the base rate plus 1.50% (7.5% at December 31, 1993)
or one, three or six month LIBOR plus 3%. Interest is payable monthly on base
rate, one month LIBOR and six month LIBOR advances and at the end of the
interest rate period on three month LIBOR advances. The amount available to the
Company under the Revolving Credit Facility is the lesser of the borrowing limit
or the sum of (i) 85% of acceptable accounts receivable plus (ii) the lesser of
approximately 50 to 55%, in the aggregate, of acceptable inventories not to
exceed 50% of the borrowing limit. The Company pays a monthly commitment fee
based on an annual rate of .50% of the average unused portion of the borrowing
limit under the Revolving Credit Facility. This Revolving Credit Facility is
collateralized by the Company's accounts receivable, inventories, certain
general intangibles and proceeds thereof. The Revolving Credit Facility expires
in February 1995. Management believes it will be necessary to replace or extend
such facility at that time.
On March 16, 1993, the Company issued publicly $135,000 of 11 1/8% Senior
Notes (the "11 1/8% Senior Notes"). In connection with the issuance of the
11 1/8% Senior Notes, the Company repurchased $70,009 principal amount of senior
and subordinated privately-placed term debt at par. The 11 1/8% Senior Notes
mature in 2001, are unsecured and require interest payments semi-annually on
March 15 and September 15. After March 1998, the 11 1/8% Senior Notes are
redeemable, in whole or in part, at the option of the Company, subject to
certain redemption premiums.
In January 1994, the Company filed an amended registration statement with
the Securities and Exchange Commission relating to a proposed public offering of
$190,000 aggregate principal amount of Senior Notes Due 2004 (the "New Senior
Notes"). Assuming the successful completion of the proposed offering, the
estimated net proceeds will be used primarily to repay an aggregate of $89,991
principal amount of senior and subordinated privately-placed term debt bearing a
weighted average interest rate of 11.24% (the "Private Debt"), plus contractual
prepayment premiums currently estimated at approximately $16,000 and accrued
interest of approximately $5,000 (the "Refinancing"). The prepayment premiums
will be expensed as an extraordinary item, net of related income tax effect, at
the time the offering is consummated. A portion of the New Senior Notes is
intended to replace the Private Debt with indebtedness having a lower interest
rate and a longer maturity. The Refinancing is also expected to improve the
Company's liquidity and financial flexibility by increasing the amount of cash
on hand by approximately $74,000, by increasing access under the Company's
existing $50,000 Revolving Credit Facility to a total of $25,000 in borrowings
thereunder and by eliminating near-term principal sinking fund requirements
contained in the Private Debt. The Private Debt includes restrictions that
currently limit borrowings under the Revolving Credit Facility to a total of
$20,000.
F-13
<PAGE> 67
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended September 30, 1991, 1992 and 1993, the Company
retired certain term loans and revolving credit facilities. Deferred loan costs
applicable to debt retired were written-off by the Company and are included in
the accompanying financial statements.
The debt instruments governing the Revolving Credit Facility, the Private
Debt and the 11 1/8% Senior Notes contain cross default and other customary
provisions. Financial covenants contained in one or more of these instruments
include, among other things, a limitation on dividends and distributions on
capital stock of the Company, a tangible net worth maintenance requirement, a
current ratio maintenance requirement, a leverage ratio maintenance requirement,
an interest coverage requirement, a cumulative cash flow requirement, a
cumulative capital expenditure limitation, a limitation on the incurrence of
additional indebtedness unless certain financial tests are satisfied, a
limitation on mergers, consolidations and dispositions of assets and a
limitation on liens. Based on such covenants, as of September 30, 1993 and
December 31, 1993, approximately $50,542 and $50,572, respectively, of the
Company's retained earnings balance was restricted from payment of cash
dividends. As of September 30, 1993, the Company was in compliance with the
covenants and tests contained in these debt instruments.
The Company estimates that the aggregate fair market value of its debt and
related obligations was approximately $231,372 as of September 30, 1993. These
estimates were based on quoted market prices or current rates offered for debt
with similar terms and maturities.
3. INCOME TAXES
The provision (benefit) for income taxes as of September 30, 1991, 1992 and
1993 consisted of the following:
<TABLE>
<CAPTION>
1991 1992 1993
------- -------- -------
<S> <C> <C> <C>
Current tax provision (benefit)
Federal............................................ $ 6,755 $(17,634) $(6,201)
State.............................................. 1,182 (2,648) (1,520)
------- -------- -------
7,937 (20,282) (7,721)
------- -------- -------
Deferred tax provision
Federal............................................ 2,378 10,374 1,424
State.............................................. 350 1,525 794
------- -------- -------
2,728 11,899 2,218
------- -------- -------
Provision (benefit) for income taxes................. $10,665 $ (8,383) $(5,503)
------- -------- -------
------- -------- -------
</TABLE>
F-14
<PAGE> 68
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax provision results from temporary differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes including the effect of enacted tax rate changes. The components of the
deferred tax provision as of September 30, 1991, 1992 and 1993 were as follows:
<TABLE>
<CAPTION>
1991 1992 1993
------ ------- -------
<S> <C> <C> <C>
Tax depreciation in excess of financial reporting
depreciation......................................... $2,548 $ 9,862 $ 8,338
Alternative minimum tax credit carryforward............ -- -- (4,134)
Accrued insurance costs not currently deductible for
tax.................................................. -- -- (1,171)
Mineral property development costs capitalized for
financial
reporting and expensed for tax....................... -- 1,736 10
Inventory costs capitalized for tax and expensed for
financial reporting.................................. (795) 39 (721)
Accrued vacation expense not currently deductible for
tax.................................................. (23) (259) (109)
Operating materials capitalized for financial reporting
and
expensed for tax..................................... 103 544 (420)
Allowance for doubtful accounts expensed but not
currently
deductible for tax until realized.................... 551 (184) 134
Federal income tax rate changes........................ -- -- 372
Other.................................................. 344 161 (81)
------ ------- -------
$2,728 $11,899 $ 2,218
------ ------- -------
------ ------- -------
</TABLE>
The provision (benefit) for income taxes as a percentage of income (loss)
for the years ended September 30, 1991, 1992 and 1993 differs from the statutory
federal income tax rate due to the following:
<TABLE>
<CAPTION>
1991 1992 1993
---- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% (34.0)% (34.8)%
State income taxes, net of federal income tax benefit.... 3.3 (3.3) (3.3)
Other.................................................... .5 (1.7) (0.9)
---- ----- -----
Effective tax rate....................................... 37.8% (39.0)% (39.0)%
---- ----- -----
---- ----- -----
</TABLE>
The Company has an alternative minimum tax credit carryforward for tax
reporting purposes of approximately $4,134.
4. COMMITMENTS AND CONTINGENCIES
Modernization Program
The Company has initiated substantial capital expenditures to modernize its
steelmaking, casting, rolling and finishing facilities, thereby reducing overall
operating costs, broadening the Company's product line, improving product
quality and increasing throughput capacity. Modernization program expenditures
were approximately $56,000, $61,000 and $33,000 for the years ended September
30, 1992 and 1993 and for the three months ended December 31, 1993,
respectively. The Company currently plans to make modernization program
expenditures aggregating approximately $118,000 during fiscal years 1994 and
1995. In addition, the Company intends to spend approximately $60,000 for
continuing capital maintenance and other projects during these periods.
Legal Matters
The Company is subject to various legal matters, which it considers normal
for its business activities. Management believes that these matters will not
have a material impact on the financial condition of the Company.
F-15
<PAGE> 69
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Matters
Compliance with environmental laws and regulations is a significant factor
in the Company's business. The Company is subject to federal, state and local
environmental laws and regulations concerning, among other things, air
emissions, wastewater discharge, and solid and hazardous waste disposal. The
Company believes that it is in compliance in all material respects with all
currently applicable environmental regulations.
The Company has incurred substantial capital expenditures for environmental
control facilities, including the Q-BOP furnaces, the wastewater treatment
facility, the benzene mitigation equipment and the coke oven gas desulfurization
facility. The Company has budgeted a total of approximately $3,800 for
environmental capital improvements in fiscal years 1994 and 1995. Of this
amount, approximately $3,500 is included in the Company's capital maintenance
and other projects budget and the remaining $300 is included in the
modernization program budget. Such improvements include the completion of a coke
oven gas desulfurization facility, construction of a sinter plant baghouse, and
the installation of a flare coke system. Environmental legislation and
regulations have changed rapidly in recent years and it is likely that the
Company will be subject to increasingly stringent environmental standards in the
future. Although the Company has budgeted substantial expenditures for
environmental matters in connection with capital maintenance and other projects
and the modernization program, it is not possible at this time to predict the
amount of capital expenditures that may ultimately be required to comply with
all environmental laws and regulations.
In August 1993, the Company received notice that the Environmental
Protection Agency (the "EPA") was overfiling on certain notices of violation
that had previously been settled with the State of Utah for $21. The amount of
the claim that may be asserted by the EPA is unknown. The Company has met
informally with the EPA and believes that this matter may be resolved without
significant penalties being assessed. Because of the preliminary nature of the
proceedings, however, the Company is unable to predict the amount of any claim
or the eventual outcome of the proceedings.
Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), EPA and the states have authority to impose
liability on waste generators, site owners and operators and others regardless
of fault or the legality of the original disposal activity. Other environmental
laws and regulations may also impose liability on the Company for conditions
existing prior to the Company's acquisition of the steel mill.
At the time of the Company's acquisition of the steel mill, the Company and
USX Corporation ("USX") identified certain hazardous and solid waste sites and
other environmental conditions which existed prior to the acquisition. USX has
agreed to indemnify the Company (subject to the sharing arrangements described
below) for any fines, penalties, costs (including costs of clean-up, required
studies and reasonable attorney's fees), or other liabilities for which the
Company becomes liable due to any environmental condition existing on the
Company's real property as of the acquisition date that is determined to be in
violation of any environmental law, is otherwise required by applicable judicial
or administrative action, or is determined to trigger civil liability (the
"Pre-existing Environmental Liabilities"). The Company has provided a similar
indemnity (but without any similar sharing arrangement) to USX for conditions
that may arise after the acquisition. Although the Company has not completed a
comprehensive analysis of the extent of the Pre-existing Environmental
Liabilities, such liabilities could be material.
Under the acquisition agreement between the two parties, the Company and
USX agreed to share on an equal basis the first $20,000 of costs incurred by
either party to satisfy any government demand for studies, closure, monitoring,
or remediation at specified waste sites or facilities or for other claims under
CERCLA or the Resource Conservation and Recovery Act. The Company is not
obligated to contribute more than $10,000 for the clean-up of wastes generated
prior to the acquisition. The Company believes that it has paid the full $10,000
necessary to satisfy its obligations under the cost-sharing arrangement. The
Company's ability to
F-16
<PAGE> 70
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
obtain indemnification from USX in the future will depend on factors which may
be beyond the Company's control and may be subject to dispute.
Purchase Commitments
Effective September 27, 1988, the Company entered into an agreement, which
was subsequently amended on June 8, 1990, to purchase a minimum of approximately
207 million standard cubic feet of oxygen each month at an average price of nine
hundred eighty seven dollars per million cubic feet. The contract expires on
April 1, 1998. The contract price is adjusted semi-annually based on the change
in the Producer Price Index for Industrial Commodities ("PPI"). The Company has
agreed to pay all sales and excise taxes levied against the supplier.
Effective September 1, 1989, the Company entered into an agreement to
purchase electrical power through January 31, 1999. The contract specifies that
the Company will pay a monthly demand and back-up facilities charge based on
stated minimum monthly kilowatts and rate per kilowatt. The rate for the demand
charge is adjusted annually based on the change in the supplier's per megawatt
fixed transmission investment. The rate for the facilities charge will remain
constant over the term of the contract. Under this contract, the Company is
committed to pay approximately $2,057 in each fiscal year 1994 through 1998 and
approximately $686 in fiscal year 1999.
Effective March 1, 1991, the Company entered into a three-year agreement to
purchase 550,000 tons of high-volatile metallurgical-grade coking coal in each
contract year (March 1 to February 28). During the third contract year, the
Company is paying thirty six dollars and thirty eight cents per ton.
Effective April 1, 1991, the Company entered into a six-year agreement to
purchase a minimum of 120,000 tons of high-volatile metallurgical-grade coking
coal in the first contract year (April 1 to March 31) and 180,000 tons in each
subsequent contract year. The contract specifies that the Company will pay
nineteen dollars and fifty cents per ton for the first contract year. This
purchase price is adjusted annually in each subsequent contract year based on
the change in the PPI. During the third contract year, the Company is paying
nineteen dollars and seventy three cents per ton.
Effective July 12, 1990, the Company entered into an agreement, which was
subsequently amended in December 1992, to purchase 100% of the oxygen, nitrogen
and argon produced at a facility located at the Company's steel mill which is
owned and operated by an independent party. The contract expires in September
2006 and specifies that the Company will pay a base monthly charge that is
adjusted semi-annually each January 1 and July 1 based upon a percentage of the
change in the PPI ($416 at September 30, 1993).
Effective January 12, 1993, the Company entered into a three year agreement
to purchase a minimum of 152,000 tons of metallurgical coke per year. The
contract expires on December 31, 1995. The parties have agreed that the purchase
price for each ton of coke during the second and third contract years will be
ninety dollars fifty cents and ninety two dollars, respectively.
Letters of Credit
As of September 30, 1993 and December 31, 1993, the Company had an
outstanding letter of credit pursuant to the Revolving Credit Facility of
approximately $2,700.
5. REDEEMABLE PREFERRED STOCK
On March 16, 1993, the Company issued $40,000 of 14% Cumulative Redeemable
Exchangeable Preferred Stock (the "Redeemable Preferred Stock") and related
warrants to purchase an aggregate of 1,132,000 shares of Class A common stock.
F-17
<PAGE> 71
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Redeemable Preferred Stock consists of 400,000 shares, no par value,
with a liquidation preference of approximately one hundred eight dollars per
share as of September 30, 1993. Dividends accrue at a rate equal to 14% per
annum of the liquidation preference and, except as provided below, are payable
quarterly in cash from funds legally available therefor. For dividend periods
ending before April 1996, the Company may, at its option, add dividends to the
liquidation preference in lieu of payment in cash. During the year ended
September 30, 1993 and the three months ended December 31, 1993, the Company
increased the liquidation value of the Redeemable Preferred Stock to $43,099 and
$44,607, respectively, by adding dividends to the liquidation preference. After
March 1994, the Redeemable Preferred Stock is exchangeable, at the Company's
option, into subordinated debentures of the Company due 2003 (the "Exchange
Debentures"). The Company is obligated to redeem all of the Redeemable Preferred
Stock in March 2003 from funds legally available therefor. The Company's ability
to incur debt resulting from the exchange of the Redeemable Preferred Stock for
Exchange Debentures and to pay cash dividends on the Redeemable Preferred Stock
is subject to compliance with the covenants and tests contained in the indenture
governing the 11 1/8% Senior Notes, the Private Debt and in the Revolving Credit
Facility, including a prohibition under the Revolving Credit Facility on issuing
the Exchange Debentures prior to March 1995. After March 1998, both the
Redeemable Preferred Stock and Exchange Debentures will be redeemable, at the
Company's option, subject to certain redemption premiums. The warrants to
purchase Class A common stock are exercisable at eleven dollars per share,
subject to adjustment in certain circumstances, and expire in March 2000.
The Company estimates that the aggregate fair market value of its
Redeemable Preferred Stock was approximately $45,600 at September 30, 1993 based
on limited trading data. The Company estimates that the aggregate fair market
value of its warrants to purchase Class A common stock was approximately $5,360
at September 30, 1993 based on various option models.
6. STOCK OPTIONS
Effective January 2, 1990, the Company granted options to purchase 330,000
shares of Class A common stock to key employees at an exercise price of ten
dollars and ninety-one cents per share. On January 2, 1992, 40% of the stock
options became exercisable and an additional 20% become exercisable each January
2 thereafter through 1995. The stock options remain exercisable until the
earlier of 90 days after the employee's termination of employment or ten years
from the date such stock options were granted.
During the years ended September 30, 1991 and 1992, the Company amended its
stock option agreements with two former employees of the Company. Pursuant to
these amendments, the Company agreed to vest all of the former employees options
to purchase an aggregate of 99,000 shares of Class A common stock and permit
exercise of such options at any time through the tenth anniversary of the date
the options were granted. As of September 30, 1993, 33,000 of these options to
purchase Class A common stock had been exercised.
Effective July 20, 1990, the Company's Board of Directors adopted a Key
Employee Plan (the "Employee Plan") which was approved by the Company's
stockholders in January 1991. The Employee Plan provides that incentive and
nonstatutory stock options to purchase Class A common stock and corresponding
stock appreciation rights may be granted. The Employee Plan provides for
issuance of up to 1,000,000 shares of Class A common stock, with no more than
750,000 shares of Class A common stock cumulatively available upon exercise of
incentive stock options. Effective August 6, 1992 and March 3, 1993, the Company
granted incentive stock options to purchase an aggregate of 125,000 and 155,900
shares of Class A common stock, respectively, under the Employee Plan.
The Employee Plan Committee (the "Committee") shall determine the time or
times when each incentive or nonstatutory stock option vests and becomes
exercisable; provided no stock option shall be exercisable within six months of
the date of grant (except in the event of death or disability) and no incentive
stock option shall be exercisable after the expiration of ten years from the
date of grant. The exercise price of
F-18
<PAGE> 72
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incentive stock options to purchase Class A common stock shall be at least the
fair market value of the Class A common stock on the date of grant. The exercise
price of nonstatutory options to purchase Class A common stock is determined by
the Committee.
Stock option activity for the years ended September 30, 1991, 1992 and 1993
consisted of the following:
<TABLE>
<CAPTION>
NUMBER
OF PRICE PER
SHARES SHARE RANGE
------- ------------
<S> <C> <C>
Outstanding at September 30, 1990................... 330,000 $ 10.91
Exercised........................................... (33,000) 10.91
------- ------------
Outstanding at September 30, 1991................... 297,000 10.91
Granted............................................. 125,000 7.88-8.66
Exercised........................................... (46,200) 10.91
------- ------------
Outstanding at September 30, 1992................... 375,800 7.88-10.91
Granted............................................. 155,900 11.75-12.93
Cancelled........................................... (1,700) 7.88-11.75
------- ------------
Outstanding at September 30, 1993................... 530,000 $ 7.88-12.93
------- ------------
------- ------------
</TABLE>
Options to purchase 33,000, 132,000 and 177,600 shares of Class A common
stock were exercisable on September 30, 1991, 1992 and 1993, respectively.
7. EMPLOYEE BENEFIT PLANS
Union Pension Plan
Effective September 1, 1987, and as amended and restated, the Company
adopted a qualified noncontributory defined contribution pension plan which
provides benefits for all eligible employees covered by a collective bargaining
agreement. The Company contributed 4% of each participant's compensation to this
plan during the years ended September 30, 1991, 1992 and 1993. Total
contributions by the Company for the years ended September 30, 1991, 1992 and
1993 were $2,951, $2,900 and $2,675, respectively. The participants vest in
these contributions at 20% for each year of service and become fully vested
after five years. Credit for service with United States Steel Corporation is
included in determining the vesting service requirement.
Management Employee Savings and Pension Plan
Effective September 1, 1987, and as amended and restated, the Company
adopted a savings and pension plan which provides benefits for all eligible
employees not covered by a collective bargaining agreement. This plan is
comprised of two qualified plans: (1) a management employee savings 401(k) plan
with a cash or deferred compensation arrangement and discretionary matching
contributions and (2) a noncontributory defined contribution pension plan.
Participants may direct the investment of funds related to their deferred
compensation in this plan. The employee savings plan provides for discretionary
matching contributions as determined each plan year by the Company's Board of
Directors. The Board of Directors elected to match each participant's
contribution to the employee savings plan up to 4% of their compensation for
fiscal years 1991, 1992 and 1993. In addition, the pension plan provided for
contributions by the Company of 4% of each participant's compensation for fiscal
years 1991, 1992 and 1993. During fiscal years 1991, 1992 and 1993, total
contributions by the Company were $1,402, $1,467 and $1,567, respectively. The
participants vest in the Company's contributions at 20% for each year of service
and become fully vested after five years. Participants with service prior to
January 1, 1988 are fully vested.
F-19
<PAGE> 73
GENEVA STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Profit Sharing and Bonus Programs
The Company has a profit sharing program for full-time union represented
employees. Participants receive payments based upon operating income reduced by
an amount equal to a portion of the Company's capital expenditures. Also, the
Board of Directors approved the payment of management bonuses during fiscal year
1991. Total profit sharing and bonus payments accrued during the year ended
September 30, 1991 was approximately $670. No profit sharing and bonus payments
were accrued in the years ended September 30, 1992 and 1993.
During the year ended September 30, 1993, the Company implemented a
performance dividend plan designed to reward full-time union represented
employees for increased shipments. As shipments increase above an annualized
rate of 1.5 million tons, compensation under this plan increases. Payments made
under the performance dividend plan are deducted from any profit sharing
obligations to the extent such obligations exceed the performance plan payments
in any given fiscal year. During the year ended September 30, 1993, the Company
also implemented a similar performance dividend plan for non-union employees.
Supplemental Executive Plans
The Company maintains insurance and retirement agreements with certain of
the management employees and executive officers. Pursuant to the insurance
agreements, the Company pays the annual premiums and receives certain policy
proceeds upon the death of the retired management employee or executive officer.
Pursuant to the retirement agreements, the Company provides for the payment of
supplemental benefits to certain management employees and executive officers
upon retirement.
8. MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES
During the years ended September 30, 1991, 1992, and 1993, the Company
derived approximately 25%, 27% and 41% percent, respectively, of its net sales
through one customer, who is a distributor to other companies. International
sales during the years ended September 30, 1991, 1992 and 1993 did not exceed
10%.
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial information for the years ended September
30, 1992 and 1993 is as follows:
<TABLE>
<CAPTION>
1992 QUARTERS FIRST SECOND THIRD FOURTH
---------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................... $ 97,231 $107,879 $113,526 $101,390
Gross margin............................ 951 4,113 5,592 3,079
Net loss................................ (4,807) (2,979) (1,980) (3,326)
Net loss per common share............... (.32) (.20) (.13) (.22)
</TABLE>
<TABLE>
<CAPTION>
1993 QUARTERS FIRST SECOND THIRD FOURTH
---------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................... $101,149 $115,542 $124,954 $123,536
Gross margin............................ 1,681 1,702 7,595 10,745
Net income (loss)....................... (3,937) (4,568) (1,029) 928
Net loss applicable to common shares.... (3,937) (4,829) (2,607) (699)
Net loss per common share............... (.26) (.32) (.17) (.05)
</TABLE>
F-20
<PAGE> 74
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SENIOR NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SENIOR NOTES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................ 2
Incorporation of Certain Information
By Reference....................... 2
Prospectus Summary................... 3
Risk Factors......................... 7
The Refinancing...................... 11
The Modernization Program............ 11
Use of Proceeds...................... 16
Capitalization....................... 17
Selected Financial Data.............. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................. 26
Management........................... 34
Description of the Senior Notes...... 36
Underwriting......................... 52
Legal Matters........................ 53
Experts.............................. 53
Index to Financial Statements........ F-1
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
$190,000,000
[GENEVA STEEL LOGO]
9 1/2% SENIOR NOTES DUE 2004
------------------------
PROSPECTUS
------------------------
CITICORP SECURITIES, INC.
SALOMON BROTHERS INC
JANUARY 24, 1994
- ------------------------------------------------------
- ------------------------------------------------------
