<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 March 31, 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.
14,293,864 and 19,151,348 shares of Class A and Class B common stock,
respectively, outstanding as of April 30, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENEVA STEEL COMPANY
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, September 30,
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 79,625 60,163
Inventories 113,839 100,081
Deferred income taxes 10,094 3,059
Prepaid expenses and other 3,856 5,291
Related party receivable 126 753
--------- ---------
Total current assets 207,540 169,347
--------- ---------
Property, plant and equipment:
Land 1,990 1,990
Buildings 16,119 16,109
Machinery and equipment 657,153 645,807
Mineral property and development costs 8,425 8,425
--------- ---------
683,687 672,331
Less accumulated depreciation (236,900) (214,016)
--------- ---------
Net property, plant and equipment 446,787 458,315
--------- ---------
Other assets 17,452 18,408
--------- ---------
$ 671,779 $ 646,070
========= =========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these condensed balance sheets.
Page 2 of 20
<PAGE> 3
GENEVA STEEL COMPANY
CONDENSED BALANCE SHEETS (Continued)
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 49,981 $ 46,348
Accrued liabilities 17,686 23,671
Accrued payroll and related taxes 11,403 11,715
Accrued dividends payable 19,613 14,290
Accrued interest payable 4,874 4,559
Accrued pension and profit
sharing costs 1,326 1,701
--------- ---------
Total current liabilities 104,883 102,284
--------- ---------
Long-term debt 419,616 399,906
--------- ---------
Deferred income tax liabilities 12,478 5,108
--------- ---------
Redeemable preferred stock 56,541 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 (19,293) (11,399)
Class A common stock held in
treasury, at cost (5,895) (9,447)
--------- ---------
Total stockholders' equity 78,261 82,603
--------- ---------
$ 671,779 $ 646,070
========= =========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these condensed balance sheets.
Page 3 of 20
<PAGE> 4
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 192,405 $ 182,961
Cost of sales 170,403 175,040
--------- ---------
Gross margin 22,002 7,921
Selling, general and administrative
expenses 5,646 5,405
--------- ---------
Income from operations 16,356 2,516
--------- ---------
Other income (expense):
Interest and other income 66 54
Interest expense (10,811) (10,072)
--------- ---------
(10,745) (10,018)
--------- ---------
Income (loss) before provision (benefit)
for income taxes 5,611 (7,502)
Provision (benefit) for income taxes 2,219 (1,998)
--------- ---------
Net income (loss) 3,392 (5,504)
Less redeemable preferred stock dividends
and accretion for original issue discount 2,894 2,542
--------- ---------
Net income (loss) applicable to
common shares $ 498 $ (8,046)
========= =========
Basic and diluted net income (loss) per
common share $ .03 $ (.52)
========= =========
Weighted average common shares outstanding
Basic 16,096 15,584
========= =========
Diluted 16,131 15,584
========= =========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these condensed statements.
Page 4 of 20
<PAGE> 5
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 373,918 $ 352,702
Cost of sales 340,123 331,851
--------- ---------
Gross margin 33,795 20,851
Selling, general and administrative
expenses 11,539 11,041
--------- ---------
Income from operations 22,256 9,810
--------- ---------
Other income (expense):
Interest and other income 151 229
Interest expense (21,082) (19,774)
--------- ---------
(20,931) (19,545)
--------- ---------
Income (loss) before provision (benefit)
for income taxes 1,325 (9,735)
Provision (benefit) for income taxes 648 (2,822)
--------- ---------
Net income (loss) 677 (6,913)
Less redeemable preferred stock
dividends and accretion for original
issue discount 5,695 5,003
--------- ---------
Net loss applicable to common shares $ (5,018) $ (11,916)
========= =========
Basic and diluted net loss per
common share $ (.31) $ (.77)
========= =========
Basic and diluted weighted average common
shares outstanding 16,019 15,531
========= =========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these condensed statements.
Page 5 of 20
<PAGE> 6
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 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) $ 677 $ (6,913)
Adjustments to reconcile net income
(loss)to net cash provided by
(used for)operating activities:
Depreciation 23,357 20,690
Amortization 956 956
Deferred income taxes 335 (2,809)
(Increase) decrease in current
assets--
Accounts receivable, net (19,462) (4,184)
Inventories (13,758) (4,339)
Prepaid expenses and other 2,062 (457)
Increase (decrease) in current
liabilities--
Accounts payable 3,633 2,049
Accrued liabilities (4,870) 120
Accrued payroll and related taxes 364 1,746
Production prepayments -- 5,237
Accrued interest payable 315 (118)
Accrued pension and profit
sharing costs (375) (619)
-------- --------
Net cash provided by (used for)
operating activities (6,766) 11,359
-------- --------
Cash flows from investing activities:
Purchases of property, plant and
equipment $(11,834) $(26,782)
-------- --------
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these condensed statements.
Page 6 of 20
<PAGE> 7
GENEVA STEEL COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
SIX MONTHS ENDED MARCH 31, 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 $ 24,984 $ 37,841
Payments on long-term debt (5,274) (23,865)
Change in bank overdraft (1,114) 789
Other 4 61
-------- --------
Net cash provided by financing activities 18,600 14,826
-------- --------
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) $ 19,811 $ 18,937
</TABLE>
Supplemental schedule of noncash financing activities:
For the six months ended March 31, 1998 and 1997, the Company increased the
redeemable preferred stock by $372 and $364, 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 March 31,
1998 and 1997, the Company had accrued dividends payable of $19,613 and
$9,321, respectively.
The accompanying notes to condensed financial statements are
an integral part of these condensed statements.
Page 7 of 20
<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>
March 31, September 30,
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 27,399 $ 26,783
Semi-finished and finished goods 78,754 65,406
Operating materials 7,686 7,892
-------- --------
$113,839 $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 did not result in an adjustment to the
prior period EPS data presented in the accompanying statements of operations.
Page 8 of 20
<PAGE> 9
Basic net income (loss) per common share is calculated based upon the
weighted average number of common shares outstanding during the periods. Diluted
net 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 March 31,
1998, the diluted weight average common shares outstanding included 34,150
incremental shares from the assumed exercise of dilutive stock options using the
treasury stock method. For the three months ended March 31, 1997 and the six
months ended March 31, 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
six-months ended March 31, 1998, 2,236,149 and 3,063,149 common stock
equivalents, respectively, 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 six-month periods ended March 31,
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 20
<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 Six Months Ended
March 31, March 31,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.6 95.7 91.0 94.1
-------- -------- -------- --------
Gross margin 11.4 4.3 9.0 5.9
Selling, general and
administrative expenses 2.9 2.9 3.0 3.1
-------- -------- -------- --------
Income from operations 8.5 1.4 6.0 2.8
-------- -------- -------- --------
Other income (expense):
Interest and other income 0.1 -- 0.1 --
Interest expense (5.6) (5.5) (5.7) (5.6)
-------- -------- -------- --------
(5.5) (5.5) (5.6) (5.6)
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes 3.0 (4.1) 0.4 (2.8)
Provision (benefit) for income
taxes 1.2 (1.1) 0.2 (0.8)
-------- -------- -------- --------
Net income (loss) 1.8% (3.0)% 0.2% (2.0)%
======== ======== ======== ========
</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 Six Months Ended
March 31, March 31,
------------------------- ------------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Plate 58.8% 41.5% 56.1% 40.6%
Sheet 18.4 34.2 19.4 36.3
Pipe 12.9 7.5 12.9 8.0
Slab 7.5 13.5 9.3 12.1
Non-Steel 2.4 3.3 2.3 3.0
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Page 10 of 20
<PAGE> 11
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Net sales increased 5.2% 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 28,300 tons for the three months ended March 31, 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 2.1%, 5.1%, 7.6% and 8.5%, respectively, in the three
months ended March 31, 1998 compared to the same period in the previous fiscal
year. The overall increase in prices was due primarily to strong steel demand
and reduced flat plate imports from certain countries as well as other market
factors. Shipped tonnage of plate and pipe products increased approximately
94,500 tons or 45.9% and 23,900 tons or 71.9%, respectively, while shipped
tonnage of sheet and slab products decreased approximately 98,700 tons or 47.5%
and 48,000 tons or 45.6%, 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 and reduced flat plate imports from certain countries. The
Company's increased pipe production was in response to strong demand. The
Company continues to sell slabs to fulfill customer obligations and to maximize
production from the continuous caster while efforts to increase rolling mill
throughput continue.
During the quarter ended March 31, 1998, the Company completed
installation of the rolling mill finishing stand upgrades, which are expected to
increase rolling mill throughput capability and product quality. The Company
completed the final three stands during the quarter ended March 31, 1998 without
significant production disruptions; in fact, the Company achieved record
quarterly production for hot-rolled tons. Nevertheless, the Company may
experience operational disruptions as the project is fully integrated.
Demand for the Company's plate products remains strong, although the
Company's order entry rate has declined somewhat. Overall demand for pipe is
being adversely affected by higher customer inventories and increased imports.
Given the Company's selective approach to coiled sheet sales, price realization
for coiled sheet has remained relatively firm despite recent industry price
reductions caused in part by imports. Based on current orders, the Company
anticipates that overall price realization will increase in the third quarter of
fiscal year 1998. Future demand for the Company's products could be adversely
affected by, among other things, increased imports, additions to domestic
production capacity or a slowing in the U.S. economy. Imports from other
countries continue to adversely affect operating results. The Company continues
to monitor cut-to-length plate imports from other countries as well as imports
of other of its products and may file additional trade cases in the future.
Page 11 of 20
<PAGE> 12
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,
decreased to 88.6% for the three months ended March 31, 1998 from 95.7% for the
same period in the previous fiscal year as a result of an increase in average
selling prices per ton as well as decreased product costs per ton. The overall
average cost of sales per ton shipped increased approximately $8 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,
offset in part by decreased operating costs. Operating costs decreased as a
result of lower natural gas costs, reduced in-bound freight rates, lower costs
associated with support personnel reductions and significantly improved
production throughput rates. These lower costs were partially offset by
increased depreciation expense, reduced product yields and other increased
operating costs.
Depreciation costs included in cost of sales increased approximately $0.9
million for the three months ended March 31, 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 relines and repairs to two blast furnaces.
On January 15, 1998, the Company announced layoffs of 100 staff and
support personnel, approximately one-third of such employees. In connection with
the layoffs, the Company offered severance packages, which resulted in an
accrued liability of approximately $900,000 during the first quarter of fiscal
year 1998. The reduction in costs associated with the reduction in staff
personnel is partially offset by increased outsourcing of services. The Company
anticipates additional personnel reductions among its management and hourly
employees.
Selling, general and administrative expenses for the three months ended
March 31, 1998 increased approximately $0.2 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 personnel reductions.
Page 12 of 20
<PAGE> 13
Interest expense increased approximately $0.7 million during the three
months ended March 31, 1998 as compared to the same period in the previous
fiscal year as a result of higher levels of borrowing.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1997
Net Sales increased 6.0% 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 4,300 tons for the six months ended March 31, 1998 as
compared to the same period in the previous fiscal year. The weighted average
sales price (net of transportation costs) per ton of sheet, pipe and slab
products increased by 3.3%, 5.6% and 2.7%, respectively, while the weighted
average sales price of plate decreased by 0.2% in the six months ended March 31,
1998 compared to the same period in the previous fiscal year. The overall
increase in prices was due primarily to strong steel demand as well as other
market factors. Shipped tonnage of plate and pipe products increased
approximately 180,600 tons or 46.9% and 42,400 tons or 62.0%, respectively,
while shipped tonnage of sheet and slab products decreased approximately 189,900
tons or 45.1% and 37,400 tons or 20.7%, respectively, between the two periods.
The Company's cost of sales, as a percentage of net sales, decreased to
91.0% for the six months ended March 31, 1998 from 94.1% for the same period in
the previous fiscal year as a result of an increase in average selling prices
per ton as well as decreased product costs per ton. The overall average cost of
sales per ton shipped increased approximately $33 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,
offset in part by decreased operating costs. Operating costs decreased as a
result of lower natural gas costs, reduced in-bound freight rates and
significantly improved production rates. These lower costs were partially offset
by increased depreciation expense, reduced product yields, higher wages and
benefits and other increased costs.
Depreciation costs included in cost of sales increased approximately $2.7
million for the six months ended March 31, 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 relines and repairs to two blast furnaces.
Selling, general and administrative expenses for the six months ended
March 31, 1998 increased approximately $0.5 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
Page 13 of 20
<PAGE> 14
were offset in part by cost savings related to the staff and support personnel
reductions.
Interest expense increased approximately $1.3 million during the six
months ended March 31, 1998 as compared to the same period in the previous
fiscal year as a result of higher levels of borrowing.
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
March 31, 1998, the Company's eligible inventories and accounts receivable
supported access to $125.0 million under the revolving credit facility (the
"Revolving Credit Facility"). As of March 31, 1998, the Company had $94.6
million in borrowings and $9.4 million in letters of credit outstanding under
the Revolving Credit Facility, leaving $21.0 million in additional borrowing
availability.
The terms of the Revolving Credit Facility and of the Company's 111/8%
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 $19.6 million at March 31, 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
Page 14 of 20
<PAGE> 15
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 $.18 per share.
Besides these financing activities, the Company's major source of
liquidity over time has been cash provided by operating activities. Net cash
used for operating activities was $6.8 million for the six months ended March
31, 1998, as compared with net cash provided by operating activities of $11.4
million for the six months ended March 31, 1997. The uses of cash for operating
activities during the six months ended March 31, 1998, included an increase in
inventories of $13.8 million, an increase in accounts receivable of $19.5
million, and a decrease in accrued liabilities of $4.6 million. These uses of
cash were offset in part by depreciation and amortization of $24.3 million, an
increase in accounts payable of $3.6 million, a decrease in prepaid expenses of
$2.1 million and net income of $0.7 million. Finished goods inventories have
increased as a result of increased rail transit times, use of outside processors
and transloading centers and increased volumes. The Company is attempting to
reduce the finished goods inventory levels by addressing production scheduling,
shipping and distribution processes.
Capital expenditures were $11.8 million for the six months ended March 31,
1998. Capital expenditures for fiscal year 1998 are estimated at approximately
$39.0 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. The Company anticipates that it may incur start-up and transition
costs as the rolling mill finishing stand equipment is integrated. 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 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 March 31, 1998, the Company had spent (net of DOE
reimbursement) approximately $1.1 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
Page 15 of 20
<PAGE> 16
several contingencies. Under certain circumstances, the Company will be required
to repay some or all of the government cost share funds and expense other funds
included in construction in progress in the event the project is terminated.
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 $41.4 million and its annual preferred stock
dividends are approximately $10.8 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 improvements 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 shipments to the expected levels, the Company's
objective to increase higher-margin plate and pipe product sales while reducing
lower-margin slab sales, the successful integration of the rolling mill
finishing stands upgrade which is expected to increase production throughput and
product quality, 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 monitor and control the level of unfairly traded imports and their
effect on the domestic market, the Company's ability to realize higher prices in
the third 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
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 increase throughput and production efficiencies and to
continue shifting its product mix to higher-margin products. There can
Page 16 of 20
<PAGE> 17
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.
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 20
<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 six 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
Page 18 of 20
<PAGE> 19
July 1, 1998. All other dates on the trial schedule remain unchanged. The
parties are presently involved in resolving discovery issues and proceeding with
discovery. The Company intends vigorously to pursue its claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held its Annual Meeting of Shareholders on February 25,
1998. The shareholders elected the following Directors to serve until the next
annual meeting of shareholders: Joseph A. Cannon, Robert J. Grow, Ken C.
Johnsen, R. J. Shopf, Alan C. Ashton, and K. Fred Skousen.
The shareholders also ratified the appointment of Arthur Andersen LLP as
independent auditors for fiscal year 1998 by a vote of 31,301,805 shares for,
196,939 shares against, 122,528 shares abstained and 0 broker non-votes.
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 March 31, 1998.
Page 19 of 20
<PAGE> 20
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: May 15, 1998
Page 20 of 20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule 19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S
BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE SIX MONTHS ENDED
MARCH 31, 1988 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 79,625
<ALLOWANCES> 4,733
<INVENTORY> 113,839
<CURRENT-ASSETS> 207,540
<PP&E> 683,687
<DEPRECIATION> (236,900)
<TOTAL-ASSETS> 671,779
<CURRENT-LIABILITIES> 104,883
<BONDS> 419,616
56,541
0
<COMMON> 92,194
<OTHER-SE> (13,933)
<TOTAL-LIABILITY-AND-EQUITY> 671,779
<SALES> 373,918
<TOTAL-REVENUES> 373,918
<CGS> 340,123
<TOTAL-COSTS> 340,123
<OTHER-EXPENSES> 11,539
<LOSS-PROVISION> 3,451
<INTEREST-EXPENSE> 20,931
<INCOME-PRETAX> 1,325
<INCOME-TAX> 648
<INCOME-CONTINUING> 677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
