<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File #1-10459
GENEVA STEEL COMPANY
(Exact name of registrant as specified in its charter)
UTAH 93-0942346
(State of Incorporation) (I.R.S. Employer Identification No.)
10 South Geneva Road
Vineyard, Utah
(Address of principal executive offices)
84058
(Zip Code)
Registrant's telephone number, including area code: (801) 227-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each class of the issuer's common
stock, as of the latest practicable date.
14,404,351 and 19,151,348 shares of Class A and Class B common stock,
respectively, outstanding as of July 31, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENEVA STEEL COMPANY
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 76,797 60,163
Inventories 120,731 100,081
Deferred income taxes 10,731 3,059
Prepaid expenses and other 3,546 5,291
Related party receivable 126 753
--------- ---------
Total current assets 211,931 169,347
--------- ---------
Property, plant and equipment:
Land 1,990 1,990
Buildings 16,119 16,109
Machinery and equipment 663,147 645,807
Mineral property and development costs 8,425 8,425
--------- ---------
689,681 672,331
Less accumulated depreciation (247,833) (214,016)
--------- ---------
Net property, plant and equipment 441,848 458,315
--------- ---------
Other assets 16,975 18,408
--------- ---------
$ 670,754 $ 646,070
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed balance sheets.
Page 2 of 21
<PAGE> 3
GENEVA STEEL COMPANY
CONDENSED BALANCE SHEETS (Continued)
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 36,569 $ 46,348
Accrued liabilities 27,216 23,671
Accrued payroll and related taxes 9,930 11,715
Accrued dividends payable 22,415 14,290
Accrued interest payable 13,046 4,559
Accrued pension and profit
sharing costs 2,155 1,701
--------- ---------
Total current liabilities 111,331 102,284
--------- ---------
Long-term debt 410,664 399,906
--------- ---------
Deferred income tax liabilities 14,436 5,108
--------- ---------
Redeemable preferred stock 56,728 56,169
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock:
Class A 87,979 87,979
Class B 10,110 10,110
Warrants to purchase Class A
common stock 5,360 5,360
Accumulated deficit (21,248) (11,399)
Class A common stock held in
treasury, at cost (4,606) (9,447)
--------- ---------
Total stockholders' equity 77,595 82,603
--------- ---------
$ 670,754 $ 646,070
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed balance sheets.
Page 3 of 21
<PAGE> 4
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 188,735 $ 194,089
Cost of sales 168,589 173,357
--------- ---------
Gross margin 20,146 20,732
Selling, general and administrative
expenses 6,179 5,467
--------- ---------
Income from operations 13,967 15,265
--------- ---------
Other income (expense):
Interest and other income 89 70
Interest expense (10,777) (10,355)
--------- ---------
(10,688) (10,285)
--------- ---------
Income before provision for income taxes 3,279 4,980
Provision for income taxes 1,266 1,018
--------- ---------
Net income 2,013 3,962
Less redeemable preferred stock dividends
and accretion for original issue discount 2,989 2,625
--------- ---------
Net income (loss) applicable to
common shares $ (976) $ 1,337
========= =========
Net income (loss) per common share
Basic $ (.06) $ .09
========= =========
Diluted (.06) .08
========= =========
Weighted average common shares outstanding
Basic 16,227 15,733
========= =========
Diluted 16,227 15,831
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 4 of 21
<PAGE> 5
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 562,653 $ 546,791
Cost of sales 508,712 505,208
--------- ---------
Gross margin 53,941 41,583
Selling, general and administrative
expenses 17,718 16,508
--------- ---------
Income from operations 36,223 25,075
--------- ---------
Other income (expense):
Interest and other income 240 299
Interest expense (31,859) (30,129)
--------- ---------
(31,619) (29,830)
--------- ---------
Income (loss) before provision (benefit)
for income taxes 4,604 (4,755)
Provision (benefit) for income taxes 1,914 (1,804)
--------- ---------
Net income (loss) 2,690 (2,951)
Less redeemable preferred stock
dividends and accretion for original
issue discount 8,684 7,628
--------- ---------
Net loss applicable to common shares $ (5,994) $ (10,579)
========= =========
Basic and diluted net loss per
common share $ (.37) $ (.68)
========= =========
Basic and diluted weighted average common
shares outstanding 16,088 15,598
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 5 of 21
<PAGE> 6
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,690 $ (2,951)
Adjustments to reconcile net income
(loss)to net cash provided by
operating activities:
Depreciation 34,898 31,695
Amortization 1,433 1,433
Deferred income taxes 1,656 (1,791)
(Increase) decrease in current
assets--
Accounts receivable, net (16,634) (3,060)
Inventories (20,650) (5,878)
Prepaid expenses and other 2,372 711
Increase (decrease) in current
liabilities--
Accounts payable (9,779) (6,038)
Accrued liabilities 4,774 (385)
Accrued payroll and related taxes (800) 2,716
Production prepayments -- (9,763)
Accrued interest payable 8,487 7,982
Accrued pension and profit
sharing costs 454 (577)
-------- --------
Net cash provided by operating activities 8,901 14,094
-------- --------
Cash flows from investing activities:
Purchases of property, plant and
equipment $(17,882) $(33,584)
-------- --------
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 6 of 21
<PAGE> 7
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 25,648 $ 47,285
Payments on long-term debt (14,890) (31,421)
Change in bank overdraft (1,782) 2,948
Other 5 81
-------- --------
Net cash provided by financing activities 8,981 18,893
-------- --------
Net decrease in cash and cash
equivalents -- (597)
Cash and cash equivalents at beginning
of period -- 597
-------- --------
Cash and cash equivalents at end
of period $ -- $ --
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
interest (net of amount capitalized) $ 21,939 $ 20,714
</TABLE>
Supplemental schedule of noncash financing activities:
For the nine months ended June 30, 1998 and 1997, the Company increased the
redeemable preferred stock by $559 and $548, respectively, for the accretion
required over time to amortize the original issue discount on the redeemable
preferred stock incurred at the time of issuance. At June 30, 1998 and 1997,
the Company had accrued dividends payable of $22,415 and $11,763,
respectively.
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 7 of 21
<PAGE> 8
GENEVA STEEL COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements of Geneva Steel Company
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying unaudited condensed financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the Company.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K.
(2) INVENTORIES
Inventories were comprised of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 29,947 $ 26,783
Semi-finished and finished goods 82,958 65,406
Operating materials 7,826 7,892
-------- --------
$120,731 $100,081
======== ========
</TABLE>
(3) BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share" was issued. This statement specifies requirements for
computation, presentation and disclosure of earnings per share ("EPS"). SFAS No.
128 simplifies the standards for computing EPS and replaces the presentations of
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company
adopted SFAS No. 128 during the quarter ended December 31, 1997. The adoption of
SFAS No. 128 resulted in an adjustment to the basic net income per common share
for the three months ended June 30, 1997, presented in the accompanying
statements of operations.
Basic net income (loss) per common share is calculated based upon the
weighted average number of common shares outstanding during the periods. Diluted
net
Page 8 of 21
<PAGE> 9
income (loss) per common share is calculated based upon the weighted average
number of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method. For the three months ended June 30,
1997, the diluted weighted average common shares outstanding included 97,942
incremental shares from the assumed exercise of dilutive stock options using the
treasury stock method. For the three months ended June 30, 1998 and the nine
months ended June 30, 1998 and 1997, stock options and warrants prior to
conversion are not included in the calculation of diluted net loss per common
share because their inclusion would be antidilutive. For the three and
nine-months ended June 30, 1998, 3,103,149 common stock equivalents were not
included in the calculation of diluted weighted average common shares
outstanding because they were antidilutive. Class B common stock is included in
the weighted average number of common shares outstanding as one share for every
ten shares outstanding because the Class B common stock is convertible to Class
A common stock at this same rate.
The net income (loss) for the three and nine-month periods ended June 30,
1998 and 1997 was adjusted for redeemable preferred stock dividends and the
accretion required over time to amortize the original issue discount on the
redeemable preferred stock incurred at the time of issuance.
Page 9 of 21
<PAGE> 10
ITEM 2. 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:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.3 89.3 90.4 92.4
------ ------ ------ ------
Gross margin 10.7 10.7 9.6 7.6
Selling, general and
administrative expenses 3.3 2.8 3.2 3.0
------ ------ ------ ------
Income from operations 7.4 7.9 6.4 4.6
------ ------ ------ ------
Other income (expense):
Interest and other income 0.1 -- -- 0.1
Interest expense (5.7) (5.4) (5.6) (5.5)
------ ------ ------ ------
(5.6) (5.4) (5.6) (5.4)
------ ------ ------ ------
Income (loss) before provision
(benefit) for income taxes 1.8 2.5 0.8 (0.8)
Provision (benefit) for income
taxes 0.7 0.5 0.3 (0.3)
------ ------ ------ ------
Net income (loss) 1.1% 2.0% 0.5% (0.5)%
====== ====== ====== ======
</TABLE>
The following table sets forth the sales product mix as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Plate 67.1% 46.7% 59.8% 42.7%
Sheet 17.1 27.9 18.7 33.3
Pipe 8.8 11.3 11.5 9.2
Slab 5.2 11.0 7.9 11.7
Non-Steel 1.8 3.1 2.1 3.1
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
Page 10 of 21
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Net sales decreased 2.8% due to decreased shipments of approximately 51,400
tons, mostly offset by an increase in overall average selling prices, and a net
shift in product mix to higher-priced plate products from lower-priced sheet and
slab products for the three months ended June 30, 1998 as compared to the same
period in the previous fiscal year. The weighted average sales price (net of
transportation costs) per ton of plate, pipe, sheet and slab products increased
by 3.3%, 1.0%, 1.6% and 4.8%, respectively, in the three months ended June 30,
1998 compared to the same period in the previous fiscal year. The increases in
prices were due primarily to strong steel demand as well as other market
factors. Shipped tonnage of plate products increased approximately 85,100 tons
or 35.4%, while shipped tonnage of pipe, sheet and slab products decreased
approximately 13,400 tons or 25.4%, 72,600 tons or 41.3%, and 50,500 tons or
56.0%, respectively, between the two periods. Consistent with the Company's
strategic objectives, plate shipments have increased as a result of expanded
utilization of outside processors to level and cut plate from coils, improved
operations of the Company's cut-to-length facilities and strong demand. The
Company continues to sell slabs to fulfill customer obligations and to maximize
production from the continuous caster.
Demand for the Company's plate, hot rolled bands, including coiled plate,
and pipe products is being adversely affected by, among other things, increased
imports. Based on increased supply from imports and on current orders, the
Company anticipates that overall price realization and order entry rates will
decrease in the fourth quarter of fiscal year 1998. Future demand for the
Company's products could be adversely affected by, among other things, further
increased imports, additions to domestic production capacity or a slowing in the
U.S. economy. The Company continues to monitor cut-to-length and coiled plate
imports from other countries as well as imports of other of the Company's
products and may file additional trade cases in the future.
Domestic competition remains intense, and imported steel continues to
adversely affect the market. Moreover, additional production capacity is being
added in the domestic plate and sheet markets. The Company sells substantially
all of its products in the spot market at prevailing market prices. The Company
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 increases or decreases more quickly than many of its
competitors. The Company intends to react to price increases or decreases in the
market as required by competitive conditions.
Cost of sales includes raw materials, labor costs, energy costs,
depreciation and other operating and support costs associated with the
production process. The Company's cost of sales, as a percentage of net sales,
remained constant at 89.3% for the three months ended June 30, 1998 as compared
to the same period in the previous fiscal year as a result of an increase in
average selling prices per ton offset by increased product costs per ton. The
overall average cost of sales per
Page 11 of 21
<PAGE> 12
ton shipped increased approximately $22 per ton between the two periods,
primarily as a result of a significant shift in product mix to higher-cost plate
products from lower-cost sheet and slab products and increased operating costs.
Operating costs increased as a result of reduced product yields, increased
depreciation expense, increased wages and benefits and other increased operating
costs. These higher costs were partially offset by increased production
throughput rates on most products and reduced inbound freight rates.
Depreciation costs included in cost of sales increased approximately $0.5
million for the three months ended June 30, 1998 compared with the same period
in the previous fiscal year. This increase was due to increases in the asset
base as a result of completion of the rolling mill finishing stand upgrades and
a reline and repairs to a blast furnace.
On July 15, 1998, the Company announced a voluntary resignation program and
an early retirement option for union employees. In return for voluntary
resignations (excluding retirements), the Company will provide each of up to 200
active bargaining unit employees a one-time, lump-sum payment of $10,000, full
vesting in the Company's 401-K and defined contribution pension plans and
two-months of additional medical and dental insurance benefits. Employees must
submit their resignations on or prior to July 31, 1998. Acceptance of
resignations is contingent upon the Company finding a means to capture the
attrition created thereby. With respect to voluntary retirements, the Company
will pay a one-time, lump-sum payment of $10,000 to each of up to 150 active
bargaining unit employees who voluntarily retire prior to December 31, 1998.
This benefit is in addition to any other benefits payable under the collective
bargaining agreement. The Company will recognize charges in the fourth fiscal
quarter of 1998 to reflect the cost of the foregoing programs. There can be no
assurance that the number of employees enrolled in the programs will actually
leave the Company or that the Company will capture all the attrition created
thereby. As of July 31, 1998, 153 and 80 employees had signed up for the
resignation program and the early retirement program, respectively. Employees
may withdraw from the program prior to actual employment separation from the
Company. The reductions are one of several steps being taken by the Company to
improve short and long-term operating results. The Company anticipates further
staff and workforce restructuring as it streamlines business and production
processes.
Selling, general and administrative expenses for the three months ended
June 30, 1998 increased approximately $0.7 million as compared to the same
period in the previous fiscal year. These higher expenses resulted primarily
from increased outside services associated with, among other things, certain
legal proceedings and training costs relating to implementation of
enterprise-wide business systems. These higher expenses were offset in part by
cost savings related to the staff and support personnel reductions.
Interest expense increased approximately $0.4 million during the three
months ended June 30, 1998 as compared to the same period in the previous fiscal
year as a result of higher levels of borrowing.
Page 12 of 21
<PAGE> 13
NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1997
Net sales increased 2.9% due to a shift in product mix to higher-priced
plate and pipe products from lower-priced sheet and slab products and an
increase in overall average selling prices, offset in part by decreased
shipments of approximately 55,700 tons for the nine months ended June 30, 1998
as compared to the same period in the previous fiscal year. The weighted average
sales price (net of transportation costs) per ton of plate, pipe, sheet and slab
products increased by 1.0%, 4.2%, 2.8% and 3.1%, respectively, in the nine
months ended June 30, 1998 compared to the same period in the previous fiscal
year. The increases in prices were due primarily to strong steel demand as well
as other market factors. Shipped tonnage of plate and pipe products increased
approximately 265,700 tons or 42.5% and 29,000 tons or 23.9%, respectively,
while shipped tonnage of sheet and slab products decreased approximately 262,500
tons or 44.0% and 87,900 tons or 32.4%, respectively, between the two periods.
The Company's cost of sales, as a percentage of net sales, decreased to
90.4% for the nine months ended June 30, 1998 from 92.4% for the same period in
the previous fiscal year as a result of an increase in average selling prices
per ton, offset in part by increased product costs per ton. The overall average
cost of sales per ton shipped increased approximately $13 per ton between the
two periods, primarily as a result of a significant shift in product mix to
higher-cost plate and pipe products from lower-cost sheet and slab products and
slightly higher operating costs. Operating costs increased as a result of
increased depreciation expense, reduced product yields, higher wages and
benefits and other increased costs. These higher costs were mostly offset by
lower natural gas costs, reduced in-bound freight rates and significantly
improved production rates.
Depreciation costs included in cost of sales increased approximately $3.2
million for the nine months ended June 30, 1998 compared with the same period in
the previous fiscal year. This increase was due to increases in the asset base
as a result of completions of the rolling mill finishing stand upgrades and the
relines and repairs to two blast furnaces.
Selling, general and administrative expenses for the nine months ended June
30, 1998 increased approximately $1.2 million as compared to the same period in
the previous fiscal year. These higher expenses resulted primarily from
severance and health insurance costs associated with the Company's recent
personnel reductions, training costs relating to implementation of
enterprise-wide business systems and increased outside services. These higher
expenses were offset in part by cost savings related to the staff and support
personnel reductions.
Interest expense increased approximately $1.7 million during the nine
months ended June 30, 1998 as compared to the same period in the previous fiscal
year as a result of higher levels of borrowing. As a result of higher levels of
borrowing related to increases in the Company's working capital needs.
Page 13 of 21
<PAGE> 14
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 principally from the sale of equity, the incurrence of
long-term indebtedness, including borrowings under the Company's credit
facilities, equipment lease financing and cash provided by operations. As of
June 30, 1998, the Company's eligible inventories and accounts receivable
supported borrowings of up to $125.0 million under the revolving credit facility
(the "Revolving Credit Facility"). As of June 30, 1998, the Company had $85.7
million in borrowings and $8.9 million in letters of credit outstanding under
the Revolving Credit Facility, leaving $30.4 million in additional borrowing
availability.
The terms of the Revolving Credit Facility and of the Company's 11 1/8%
senior notes issued in March 1993 and 9 1/2% senior notes issued in February,
1994 (collectively the "Senior Notes") include cross default and other customary
provisions. Financial covenants contained in the Revolving Credit Facility
and/or the Senior Notes also include, among others, a limitation on dividends
and distributions on capital stock of the Company, a tangible net worth
requirement, a cash interest coverage requirement, a cumulative capital
expenditure limitation, limitations on the incurrence of additional indebtedness
unless certain financial tests are satisfied, a limitation on mergers,
consolidations and dispositions of assets and limitations on liens. In the event
of a change in control, the Company must offer to purchase all Senior Notes then
outstanding at a premium.
The Company's ability to pay cash dividends on its 14% cumulative
redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") is
subject to the covenants and tests contained in the indentures governing the
Senior Notes and in the Company's Revolving Credit Facility. Restricted payment
limitations under the Company's Senior Notes precluded payment of the quarterly
preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid
dividends were approximately $22.4 million at June 30, 1998. Unpaid dividends
accumulate until paid and accrue additional dividends at a rate of 14% per
annum. As a result of the Company's inability to pay four full quarterly
dividends, the holders of the Redeemable Preferred Stock elected two directors
on May 30, 1997. The right of such holders to elect directors continues until
the Company has paid all dividends in arrears and has paid the dividends due for
two consecutive quarters thereafter. 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 by approximately $.19 per share.
Besides these financing activities, the Company's major source of liquidity
over time has been cash provided by operating activities. Net cash provided by
operating activities was $8.9 million for the nine months ended June 30, 1998,
as compared with net cash provided by operating activities of $14.1 million for
the nine months ended June 30, 1997. The sources of cash for operating
activities
Page 14 of 21
<PAGE> 15
during the nine months ended June 30, 1998, included depreciation and
amortization of $36.3 million, an increase in accrued interest payable of $8.5
million, an increase in accrued liabilities of $4.8 million, a decrease in
prepaid expenses of $2.4 million and net income of $2.7 million and an increase
in deferred income taxes of $1.6 million. These sources of cash were offset in
part by an increase in inventories of $20.6 million, an increase in accounts
receivable of $16.6 million, and a decrease in accounts payable of $9.8 million.
Finished goods inventories have increased as a result of, among other things,
use of outside processors and transloading centers and increased volumes. On
August 11, 1998, the Company settled a lawsuit against Commerce and Industry
Insurance Company relating to an insurance claim arising from a January 1996
power outage. Under the terms of the settlement, the Company will receive $24.5
million.
Capital expenditures were $17.9 million for the nine months ended June 30,
1998. Capital expenditures for fiscal year 1998 are estimated at approximately
$27.0 million, which includes completion of the rolling mill finishing stand
modernization project, implementation of new business and financial software and
various other projects designed to reduce costs and increase product quality and
throughput. Given the uncertainty of the increases in imported tons and the
effect it may have, the Company is continuing to closely monitor its capital
spending levels. The Company has selected and started the implementation of SAP
software, an enterprise-wide business system. The Company expects to benefit
significantly from such implementation, including addressing the year 2000
issues inherent in its mainframe legacy systems. The project is currently
estimated to cost $8.0 to $10.0 million with implementation completed in 1999.
Review is underway to assess and subsequently address any other impact of year
2000 issues on process control programs and hardware. Depending on market,
operational, liquidity and other factors, the Company may elect to adjust the
design, timing and budgeted expenditures of its capital plan. In addition, the
Revolving Credit Facility contains certain limitations on capital expenditures.
The Company has formed a limited liability company with certain unrelated
parties, which in turn has entered into a cooperative agreement with the United
States Department of Energy ("DOE") for the demonstration of a cokeless
ironmaking facility and associated power generation and air separation
facilities. As of June 30, 1998, the Company had spent (net of DOE
reimbursement) approximately $1.4 million in connection with the project, which
has been included in construction in progress in the accompanying consolidated
financial statements. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies. Under certain circumstances, the Company will be required to
repay some or all of the government cost share funds and will be required to
expense other funds included in construction in progress in the event the
project is terminated.
Page 15 of 21
<PAGE> 16
The Company is required to make substantial interest and dividend payments
on the Senior Notes, its Redeemable Preferred Stock and outstanding balances
under the Revolving Credit Facility. Currently, the Company's annual cash
interest expense is approximately $40 million and its annual preferred stock
dividends are approximately $12.0 million.
On April 17, 1998, the United Steelworkers of America and the Company
reached tentative agreement on a new, three year labor contract. The labor
agreement includes increases in wages, pensions, and other benefits that are
expected to increase the Company's labor costs by slightly more than three
percent a year. As a part of the contract, the parties also agreed upon several
initiatives intended to improve profitability and assist the Company in
restructuring its workforce. The agreement was ratified by the local bargaining
unit in May 1998.
FACTORS AFFECTING FUTURE RESULTS
This report contains a number of forward-looking statements, including,
without limitation, statements contained in this report relating to the
Company's ability to increase and improve production shipments to the expected
levels, the Company's objective to increase higher-margin sales while reducing
lower-margin sales, the Company's ability to compete with the additional
production capacity being added in the domestic plate and sheet markets, the
Company's ability to compete against imports and the effect of imports on the
domestic market, monitor and control the level of unfairly traded imports and
the effect on the domestic market, the Company's expectation that prices and
order entry rates will be lower in the fourth fiscal quarter of 1998, the
Company's anticipated additional personnel reductions among the management and
hourly employees, the Company's ability to reduce finished goods inventories,
the expected adequacy of cash resources including additional borrowing
availability, the Company's plan to become year 2000 compliant, and any other
statements contained herein to the effect that the Company or its management
"believes", "expects", "anticipates", "plans" or other similar expressions.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth herein.
The Company's future operations will be impacted by, among other factors,
pricing, product mix, throughput levels and production efficiencies. The Company
has efforts underway to improve throughput and production efficiencies and to
continue shifting its product mix to higher-margin products. There can be no
assurance that the Company's efforts will be successful or that sufficient
demand will exist to support the Company's additional throughput capacity.
Pricing in future periods is a key variable to the Company's future operating
results that remains subject to significant uncertainty. Future pricing will be
affected by several factors including the level of imports, future capacity
additions, product demand and other market factors such as the increased
domestic plate production capacity currently coming on line.
Page 16 of 21
<PAGE> 17
The short-term and long-term liquidity of the Company also is dependent
upon several other factors, including availability of capital, foreign currency
fluctuations, competitive and market forces, capital expenditures and general
economic conditions. Moreover, 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.
Although the Company believes that the anticipated cash from future operations
and borrowings under the Revolving Credit Facility will provide sufficient
liquidity for the Company to meet its debt service requirements and to fund
ongoing operations, including required capital expenditures, there can be no
assurance that these or other possible sources will be adequate. Moreover,
because of the Company's current leverage situation, its financial flexibility
is limited.
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.
Page 17 of 21
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 25, 1997, the Company filed a complaint in the Fourth Judicial
District Court for Utah County, State of Utah, against Commerce & Industry
Insurance Co. ("C&I"), a New York Corporation. A First Amended Complaint was
filed and served on April 9, 1997, alleging that C&I had breached its insurance
contract with Geneva by failing to pay on Geneva's claim for the losses it
incurred on January 25 and 26, 1996 and subsequent thereof when it lost it's
internal generator. C&I removed the case to the United States District Court for
the District of Utah on May 1, 1997. Upon C&I's formal request for additional
investigation, Geneva stipulated with C&I on June 6, 1997, to stay the
litigation until October 31, 1997, to provide C&I additional time to review
documents and interrogate witnesses. That investigation continued until
September, 1997. During early October, Geneva had several meetings with C&I in
an attempt to resolve the case and assess the strength of the case.
On October 15, 1997, C&I provided a formal response to the claim in which
it declined coverage as an excluded peril under the policy, relying on, among
other defenses, an exclusion for "power, heating or cooling failure."
Pursuant to the June 1997 stipulation, C&I answered the First Amended
Complaint on October 31, 1997, denying most of the substantive factual
allegations in the First Amended Complaint and asserting as an affirmative
defense, among others, that Geneva's loss was excluded from coverage. On
November 24, 1997, Geneva filed a Second Amended Complaint against C&I, adding
claims seeking relief for breach of contractual implied covenant of good faith
and fair dealing, and bad faith--intentional and outrageous tortious conduct and
oppression. On December 24, 1997, C&I moved to dismiss the entire Second Amended
Complaint for failure to state a claim because the loss was caused by a power
failure which is excluded from coverage and to dismiss the claim for bad faith
tortious conduct on the ground that such a claim is not recognized under Utah
law. On March 19, 1998, the Court denied the motion to dismiss the complaint,
but granted the motion to dismiss only the count for bad faith tortious conduct.
Geneva requested the Court to require that discovery be completed within
approximately nine months and the trial be held as soon thereafter as the
Court's schedule would allow. C&I requested the Court to allow discovery until
June 1, 1999 and require that the case be ready for trial after October 1, 1999.
At a Scheduling Conference held on November 21, 1997, the Court set trial
beginning June 2, 1999. The Court set May 1, 1998 as a deadline for dispositive
motions on initial coverage issues and required that all discovery be completed
by January 15, 1999. Upon C&I's request that it needed additional time to
conduct its factual investigation, the Court, on April 29, 1998, extended the
deadline for dispositive motions on initial coverage issues until July 1, 1998.
No dispositive motions were filed prior to the July deadline. C&I, thereafter,
filed a motion seeking an extension of the trial date, which was denied by the
court.
Page 18 of 21
<PAGE> 19
On August 11, 1998, the Company and C&I reached a settlement of the
litigation. Under the terms of the settlement, C&I has agreed to pay the Company
$24.5 million to resolve all outstanding issues. The Company's insurance carrier
under the primary layer of insurance paid the Company $5 million in the fall of
1996. Including the Company's $1 million deductible, the settlement does reflect
an overall resolution of the claim in the amount of $30.5 million. The
settlement was achieved through third party mediation.
Page 19 of 21
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Filed
Number Exhibit Herewith
------ ------- --------
<S> <C> <C>
27 Financial Data Schedule X
</TABLE>
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1998.
Page 20 of 21
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEVA STEEL COMPANY
By: /s/ Dennis L. Wanlass
-----------------------------------------
Vice President, Treasurer and
Chief Financial Officer
Dated: August 14, 1998
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AS OF AND FOR THE NINE MONTHS ENDED JUNE 30,1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 76,797
<ALLOWANCES> 4,499
<INVENTORY> 120,731
<CURRENT-ASSETS> 211,931
<PP&E> 689,681
<DEPRECIATION> (247,833)
<TOTAL-ASSETS> 670,754
<CURRENT-LIABILITIES> 111,331
<BONDS> 410,664
56,728
0
<COMMON> 93,483
<OTHER-SE> (15,888)
<TOTAL-LIABILITY-AND-EQUITY> 670,754
<SALES> 562,653
<TOTAL-REVENUES> 562,653
<CGS> 508,712
<TOTAL-COSTS> 508,712
<OTHER-EXPENSES> 17,718
<LOSS-PROVISION> 4,224
<INTEREST-EXPENSE> 31,619
<INCOME-PRETAX> 4,604
<INCOME-TAX> 1,914
<INCOME-CONTINUING> 2,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,690
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
