<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Amendment No. 2 to Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended September 30,
1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
COMMISSION FILE NO. 1-10459
GENEVA STEEL COMPANY
(Exact name of Registrant as specified in charter)
UTAH 93-0942346
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
10 SOUTH GENEVA ROAD
VINEYARD, UTAH 84058
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 227-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
CLASS A COMMON STOCK, NONE
NO PAR VALUE
WARRANTS TO PURCHASE NONE
CLASS A COMMON STOCK
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant is not presently determinable because of the
Registrant's filing of a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in February 1999 and the subsequent suspension of
trading and delisting of its securities on the exchanges where the securities
were previously listed. As of October 25, 1999, the Registrant had 15,008,767
and 18,451,348 shares of Class A and Class B Common Stock, respectively,
outstanding.
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<PAGE> 2
AMENDMENT NO. 2
The Registrant hereby amends its Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, previously filed with the Commission (the
"Annual Report") solely for the purpose of including missing notes to its
financial statements lost in the Registrant's filing of Form 10-K via EDGAR and
to include a typed signature on the audit opinion accompanying the financial
statements. The financial statements are included in their entirety with this
Amendment No. 2 for ease of reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment
No. 2 to Annual Report to be signed on its behalf by the undersigned, thereunder
duly authorized.
GENEVA STEEL COMPANY
By: \S\ DENNIS L. WANLASS
--------------------------------
Vice President, Treasurer and
Chief Financial Officer
Dated: November 12, 1999
1
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Exhbit Index
Exhibit
Number Description
- ------- -----------
13 Selected Portions of the Registrant's Annual
Report to Shareholders for the year ended
September 30, 1998.
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share and per ton data)
<TABLE>
<CAPTION>
OPERATING STATISTICS 1998 1997 1996 1995 1994
--------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 720,453 $ 726,669 $ 712,657 $665,699 $ 486,062
Gross margin 61,321 60,691 50,350 71,508 15,514
Income (loss) from operations 21,394 38,204 25,729 47,713 (6,791)
Income (loss) before extraordinary item (18,943) (1,268) (7,238) 11,604 (16,696)
Net income (loss) (18,943) (1,268) (7,238) 11,604 (26,230)
Net income (loss) applicable to
common shares (30,715) (11,608) (16,327) 3,606 (33,276)
Diluted net income (loss) per common share
before extraordinary item (1.90) (.74) (1.07) .24 (1.57)
Diluted net income (loss) per common share (1.90) (.74) (1.07) .24 (2.20)
BALANCE SHEET STATISTICS
Cash and cash equivalents $ -- $ -- $ 597 $ 12,808 $ --
Working capital (298,416) 67,063 71,065 33,045 46,797
Current ratio .39 1.66 1.64 1.29 1.49
Net property, plant and equipment 411,174 458,315 454,523 470,390 453,286
Total assets 605,165 646,070 657,386 628,797 606,815
Long-term debt -- 399,906 388,431 342,033 357,348
Redeemable preferred stock 56,917 56,169 55,437 51,031 43,032
Stockholders' equity 53,208 82,603 92,827 108,074 103,664
Long-term debt as a percentage
of stockholders' equity -- 484% 418% 316% 345%
ADDITIONAL STATISTICS
Operating income (loss) per ton shipped $ 10.68 $ 17.90 $ 12.00 $ 24.99 $ (4.63)
Capital expenditures (1) 10,893 47,724 26,378 68,025 164,918
Depreciation and amortization 44,182 44,959 44,415 39,308 29,870
Cash flows from operating activities 25,847 32,070 (19,520) 84,130 (28,018)
Raw steel production (tons in thousands) 2,390 2,460 2,428 2,145 1,890
Steel products shipped (tons in thousands) 2,003 2,135 2,145 1,909 1,467
</TABLE>
(1) Capital expenditures for the year ended September 30, 1998 included
an offset of $12.5 million relating to an insurance claim settlement.
Absent the offset, capital expenditures were $23.4 million for the
year ended September 30, 1998.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
sales prices for the Class A common stock as reported on the NYSE Composite
Tape.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1997 HIGH LOW
<S> <C> <C>
First Quarter ended December 31 $ 4 1/2 $ 2 3/4
Second Quarter ended March 31 3 5/8 2
Third Quarter ended June 30 3 1/2 2 1/4
Fourth Quarter ended September 30 4 1/4 2 5/8
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1998 HIGH LOW
<S> <C> <C>
First Quarter ended December 31 $ 3 7/8 $ 1 15/16
Second Quarter ended March 31 3 11/16 1 15/16
Third Quarter ended June 30 4 1/4 2 1/4
Fourth Quarter ended September 30 2 5/8 1 3/16
</TABLE>
<PAGE> 2
As of November 30, 1998, the Company had 14,700,478 shares of Class A common
stock outstanding, held by 654 stockholders of record, and 19,151,348 shares of
Class B common stock outstanding, held by five stockholders of record. The Class
B common stock is convertible into Class A common stock at ten shares of Class B
for one share of Class A.
<PAGE> 3
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 years indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 91.5 91.6 92.9
------ ------ ------
Gross margin 8.5 8.4 7.1
Selling, general and administrative expenses 3.0 3.1 3.5
Write-down of impaired assets 2.5 -- --
------ ------ ------
Income from operations 3.0 5.3 3.6
Other income (expense):
Interest and other income 0.0 0.0 0.1
Interest expense (5.9) (5.6) (5.1)
Other expense -- -- (0.2)
------ ------ ------
Loss before benefit for income taxes (2.9) (0.3) (1.6)
Benefit for income taxes (0.3) (0.1) (0.6)
------ ------ ------
Net loss (2.6) (0.2)% (1.0)%
====== ====== ======
</TABLE>
The following table sets forth the sales product mix as a percentage of net
sales for the years indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Plate 62.1% 45.4% 45.0%
Sheet 18.2 30.2 29.7
Pipe 10.5 9.6 6.6
Slab 7.0 11.9 15.9
Non-steel 2.2 2.9 2.8
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
<PAGE> 4
Fiscal Year Ended September 30, 1998 Compared
With Fiscal Year Ended September 30, 1997
Net sales decreased 0.9% due to decreased shipments of approximately 131,500
tons, mostly offset by an increase in overall average selling prices and a net
shift in product mix to higher-priced plate and pipe products from lower-priced
sheet and slab products for the year ended September 30, 1998 as compared to the
previous fiscal year. The weighted average sales price (net of transportation
costs) per ton of plate, pipe, sheet and slab products increased by 0.5%, 2.4%,
1.2% and 2.0%, respectively, in the year ended September 30, 1998 compared to
the previous fiscal year. The increases in prices were due primarily to strong
steel demand through the first three quarters of the 1998 fiscal year as well as
other market factors. Selling prices on all products declined significantly
during the fourth quarter of the 1998 fiscal year primarily as a result of
increased supply from imports as discussed below. Shipped tonnage of plate and
pipe products increased approximately 308,400 tons or 35.0%, and 9,300 tons or
5.5%, respectively, while shipped tonnage of sheet and slab products decreased
approximately 294,400 tons or 40.9%, and 154,800 tons or 42.4%, respectively,
between the two periods. Consistent with the Company's strategic objectives,
plate shipments 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 through June 30, 1998.
During the fourth quarter of 1998, order entry, shipments and pricing for all of
the Company's products were adversely affected by, among other things, increased
imports. As a result of the increased supply of imports and other market
conditions, the Company's overall price realization and shipments will continue
to decrease significantly in the first quarter of fiscal year 1999 and are
expected to remain at low levels at least through the second quarter of fiscal
1999 and negatively impact the financial performance of the Company during such
periods. As of November 30, 1998, the Company had estimated total orders on hand
of approximately 74,000 tons compared to approximately 309,000 tons as of
November 30, 1997.
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 driven
by fluctuations in the value of the United States dollar against several other
currencies as well as the strength of the United States economy relative to
foreign economies. 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.
Historically, coiled and flat plate imports have represented approximately 20%
of total U.S. consumption. In the summer of 1998, the steel industry began
experiencing an unprecedented surge in imports. Approximately 40% of recent
domestic plate and hot roll sheet consumption has been supplied by imports.
Imports have similarly increased in each of the Company's other product lines.
The surge in imports from various countries is in part the result of depressed
economies in various regions, which have greatly reduced steel consumption,
causing steel producers to dramatically increase exports to the United States,
one of the few strong markets for steel consumption. The Company, as well as
other domestic steel producers, believes that foreign producers are selling
product into the U.S. market at dumped prices and are adversely affecting
domestic shipments and pricing.
While a previous import surge in 1996 primarily involved only flat plate, the
current surge includes all of the Company's products. As a result, from May 1998
to November 1998, the Company's plate and sheet prices fell by 12.2% and 12.7%,
respectively. Concurrently, the Company has been forced to reduce production by
approximately 50%, resulting in higher costs per ton and production
inefficiencies, as well as a significant decline in operating results and cash
flow. During September 1998 through November 1998, the Company's total shipments
were approximately 302,000 tons as compared to 493,000 tons for the same period
in 1997.
On September 30, 1998, the Company and eleven other domestic steel producers
filed anti-dumping actions against hot- rolled coiled steel imports form Russia,
Japan and Brazil (the "Coiled Products Cases"). The group also filed a subsidy
(countervailing duty) case against Brazil. In mid November 1998, the
International Trade Commission (the "ITC") made a unanimous affirmative
preliminary determination. Preliminary dumping margins will be announced by the
Department of Commerce ("DOC") in February 1999, with final margins announced
between May-July 1999. The ITC is expected to make its final injury
determination between July-September 1999. If affirmative, the final
determinations by the ITC and
<PAGE> 5
DOC will result in duties against imported hot-rolled coil products from the
offending countries. Under applicable law, the U.S. Administration may settle
some or all of the cases if the settlement has the effect of removing the injury
or threat of injury caused by the imports. Settlements, called suspension
agreements, typically involve import volume and/or price limitations
Imports of hot-rolled coil products from the subject countries that arrive in
the U.S. after mid-November 1998 are at risk that duties eventually imposed in
the Coiled Products Cases could be applied retroactively to that date.
Consequently, the Company expects that such imports will likely decline. As a
result, the Company expects that its production levels, shipments and pricing of
those products will increase as imports decline and excess inventory levels are
reduced. There is, however, no assurance that the trade cases will be
successful, that duties will be imposed, that imports from countries not named
in the Coiled Products Cases will not increase or that domestic shipments or
prices will rise. The Company continues to monitor imports of all its products
and will very likely file additional trade cases or take other trade action in
the future. Existing trade laws and regulations may be inadequate to prevent the
adverse impact of such an unprecedented world financial crisis; consequently,
imports could pose continuing or increasing problems for the domestic steel
industry and the Company.
A five year sunset review of anti-dumping countervailing duty orders against the
countries on plate will begin November 1999 and should be concluded by the end
of 2000. The Company and other U.S. producers will participate in these reviews
in support of a five year extension of these orders. The outcome of these
reviews cannot currently be predicted.
Domestic competition remains intense and imported steel continues to adversely
affect the market. Moreover, additional production capacity is being added in
the domestic market. 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.
On November 2, 1998, the Company signed a new, three-year agreement with
Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann will
extend its responsibility for the marketing of the Company's steel products to
throughout the continental United States. Mannesmann previously marketed the
Company's products in fifteen midwestern states and to certain customers in the
eastern United States. The Company expects that this new arrangement will
strengthen its domestic sales efforts. The Company's existing sales force will
remain Company employees, but will be directed by Mannesmann. The Company has
also made several other organizational changes designed to improve product
distribution and on-time delivery.
The Mannesmann agreement requires Mannesmann to purchase and pay for the
Company's finished goods inventory as soon as it has been assigned to or
otherwise identified with a particular order. Mannesmann then sells the product
to end customers at the same sales price Mannesmann paid the Company plus a
variable commission. The Company remains responsible for customer credit and
product quality problems. The Company estimates that when fully implemented
successfully, the new arrangement will significantly reduce its working capital
balances and, as a result, improve the Company's liquidity by approximately $17
to $25 million. Although the Company estimates that full implementation of the
Mannesmann agreement will have the foregoing positive net liquidity effect, the
agreement will also reduce inventory and accounts receivable balances otherwise
included in the Company's borrowing base under the Revolving Credit Facility.
Full implementation of the Mannesmann agreement is expected to be completed
during the third quarter of fiscal 1999. There can be no assurance that the
Mannesmann agreement can be fully implemented quickly or that the new sales
approach will be successful.
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 relatively
constant at 91.5% for the year ended September 30, 1998 as compared to 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 ton shipped increased approximately $17 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 increased
operating costs. Operating costs increased as a result of reduced product
yields, lower overall production volume, increased depreciation expense,
increased wages and benefits and other increased operating costs. These higher
costs were partially offset by increased production throughput rates for most
products and reduced inbound freight rates.
In an effort to reduce labor costs, the Company implemented a voluntary
resignation program and an early retirement option during the fiscal year for
union-eligible employees. In return for voluntary resignations (excluding
retirements), the
<PAGE> 6
program provided each of up to 200 active union-eligible employees that
submitted their resignations on or prior to July 31, 1998 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. With respect to voluntary retirements, the program provided for a
one-time, lump-sum payment of $10,000 to each of up to 150 active union-eligible
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 recognized charges in the fourth fiscal quarter of 1998
to reflect the cost of the foregoing programs. Since implementing the programs,
the Company has achieved 209 permanent reductions of union-eligible employees
through the programs and normal attrition. In addition, the Company has laid off
453 union- eligible employees because of reduced production levels. Since
January 1, 1998, the Company has also reduced its non-union workforce by 149
employees through terminations, layoffs and normal attrition. 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.
Depreciation costs included in cost of sales decreased approximately $0.7
million for the year ended September 30, 1998 compared with the same period in
the previous fiscal year. This decrease was due to offsets for depreciation
expense previously taken on equipment reimbursed as part of the settlement of an
insurance claim relating to a January 1996 power outage (the "Insurance
Settlement"). This decrease was partially offset by 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.
Selling, general and administrative expenses for the year ended September 30,
1998 decreased approximately $0.4 million as compared to the same period in the
previous fiscal year. These lower expenses resulted primarily from selling,
general and administrative offsets of $2.1 million recorded as a result of the
Insurance Settlement and cost savings related to the staff and support personnel
reductions. These lower expenses were offset in part by increased outside
services associated with, among other things, training costs relating to
implementation of enterprise-wide business systems.
Interest expense increased approximately $1.8 million during the year ended
September 30, 1998 as compared to the same period in the previous fiscal year as
a result of higher average levels of borrowing.
For the years ended September 30, 1998 and 1997, the Company recognized a
benefit for income taxes by carrying back the loss against income from a prior
period. For the year ended September 30, 1998, the Company was only able to
carryback a portion of its loss. As of September 30, 1998, the Company has a net
operating loss carryforward for book purposes of approximately $6.1 million.
Fiscal Year Ended September 30, 1997 Compared
With Fiscal Year Ended September 30, 1996
Net sales increased 2.0% due to a shift in product mix to higher-priced pipe and
plate products from lower-priced slab products offset in part by a decrease in
shipments of approximately 10,200 tons and a decrease in overall average selling
prices for the year ended September 30, 1997 as compared to the previous fiscal
year. The weighted average sales price (net of transportation costs) per ton of
plate, pipe and slab products decreased by 2.4%, 1.6% and 0.6%, respectively,
while the weighted average sales price of sheet products increased by 3.5% in
the year ended September 30, 1997 compared to the previous fiscal year. The
decrease in plate prices was due to continued pricing pressure from unfairly
traded imports and other market factors. Shipped tonnage of plate and pipe
increased approximately 44,900 tons or 5.4% and 56,300 tons or 50.2%,
respectively, while shipped tonnage of sheet and slab products decreased
approximately 200 tons or 0.03% and 111,200 tons or 23.3%, respectively, between
the two periods. During the third and fourth quarters a shortage of railcars
increased costs and caused shipments to be slightly lower than expected.
Consistent with the Company's strategic objectives, plate shipments increased,
in part through utilization of outside processors to level and cut plate from
coils. The Company continued to sell slabs to maximize production from the
continuous caster while efforts to increase rolling mill throughput continued.
In November 1996, the Company, together with another domestic plate producer,
filed anti-dumping petitions with the Department of Commerce and the
International Trade Commission against imports of cut-to-length carbon plate
from the Russian Federation, Ukraine, the People's Republic of China and the
Republic of South Africa (the "Plate Trade Cases"). The petitions alleged large
dumping margins and also set forth the injury to the U.S. industry caused by
dumped imports from the
<PAGE> 7
subject countries. The United States Department of Commerce issued a final
affirmative determination of dumping for each country in October 1997, finding
substantial dumping margins on cut-to-length steel plate imports from those
countries. In December 1997, the International Trade Commission ( "ITC") voted
unanimously that the United States industry producing cut-to-length carbon steel
plate was injured due to imports of dumped cut-to-length plate from the People's
Republic of China, the Russian Federation, Ukraine and the Republic of South
Africa. The United States negotiated suspension agreements that became effective
upon the affirmative final conclusive determination in November 1997. Those
agreements limit imports of cut-to-length carbon steel plate from the four
countries to a total of approximately 440,000 tons per year for the next five
years, a reduction of about two-thirds from 1996 import levels, and provide
import price limits intended to remove the injurious impact of the imports. Any
violation or abrogation of the suspension agreements will result in immediate
imposition of the dumping duties found by the Commerce Department.
The Company's cost of sales, as a percentage of net sales, decreased to 91.6%
for the year ended September 30, 1997 from 92.9% for the previous fiscal year as
a result of an increase in net sales in fiscal year 1997. The overall average
cost of sales per ton shipped increased approximately $3 per ton between the two
periods primarily as a result of the shift in product mix to higher-cost plate
and pipe products from lower-cost slab products as well as an increase in
operating costs. Operating costs increased as a result of increased natural gas
and other fuel costs, increased hot metal costs associated with a blast furnace
reline and repairs, production disruptions associated with the rolling mill
finishing stand upgrades, higher wages and benefits and other increased costs.
The increases in costs were partially offset by significant improvements in
production yield and throughput rates, although these operating improvements
regressed late in the year.
Depreciation costs included in cost of sales increased approximately $1.0
million for the year ended September 30, 1997 compared with the previous fiscal
year. This increase was due to increases in the asset base resulting primarily
from the No. 1 blast furnace reline and repair.
Selling, general and administrative expenses for the year ended September 30,
1997 decreased approximately $2.1 million as compared to the previous fiscal
year. These lower expenses resulted primarily from Company efforts to reduce
administrative staff, to decrease outside services and to reduce other costs.
Interest expense increased approximately $4.5 million during the year ended
September 30, 1997 as compared to the previous fiscal year, as a result of
significantly lower capitalized interest and higher levels of borrowing. The
higher levels of borrowing resulted, in part, from the termination of the
Company's receivables securitization facility and the termination of the
Company's previous prepayment arrangement with Mannesmann.
In May 1996, the Company terminated its receivables securitization facility in
connection with an amendment to and restatement of the Company's revolving
credit facility. As a result, other expense decreased approximately $1.7 million
for the year ended September 30, 1998, as compared with the previous fiscal
year.
Liquidity and Capital Resources
The Company's liquidity requirements arise from capital expenditures and working
capital requirements, including interest payments. In the past, 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.
In March 1993, the Company issued in a public offering $135 million principal
amount of 11 1/8% senior notes (the "11 1/8% Senior Notes" and, together with
the 9 1/2% Senior Notes discussed below, the "Senior Notes"). The 11 1/8% Senior
Notes mature in 2001, are unsecured and require interest payments semi-annually
on March 15 and September 15. Since 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. A portion of the proceeds from the 11 1/8% Senior
Notes offering was used to repurchase, at par value, approximately $70 million
aggregate principal amount of term debt.
In connection with the offering of the 11 1/8% Senior Notes, the Company issued
$40 million of 14% cumulative redeemable exchangeable preferred stock (the
"Redeemable Preferred Stock") at a price of $100 per share and warrants to
purchase an aggregate of 1,132,000 shares of Class A common stock. The
Redeemable Preferred Stock consists of 400,000 shares, no par
<PAGE> 8
value, with a liquidation preference of approximately $151 per share as of
September 30, 1998. 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 had the option to add dividends to the liquidation
preference in lieu of payment in cash. Prior to April 1996, the Company elected
to add the dividends to the liquidation preference. 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 pay cash dividends on 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 $25.3 million at
September 30, 1998. Based on the Company's current financial situation, the
Company does not expect to pay dividends on the Redeemable Preferred Stock in
the foreseeable future. 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. Both the
Redeemable Preferred Stock and/or the 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 by approximately $.20 per share.
The warrants to purchase the Company's Class A common stock are exercisable at
$11 per share, subject to adjustment in certain circumstances, and expire in
March 2000.
In February 1994, the Company completed a public offering of $190 million
principal amount of 9 1/2% senior notes (the "9 1/2% Senior Notes"). The 9 1/2%
Senior Notes mature in 2004, are unsecured and require interest payments
semi-annually on January 15 and July 15. After January 1999, the 9 1/2% Senior
Notes are redeemable, in whole or in part, at the option of the Company, subject
to certain redemption premiums. A portion of the proceeds from the 9 1/2% Senior
Notes offering was used to repay the Company's remaining outstanding term debt
of approximately $90 million aggregate principal amount and to pay contractual
prepayment premiums of approximately $12.3 million.
On May 14, 1996, the Company amended and restated its revolving credit facility
(the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA,
Inc., as agent. The Revolving Credit Facility is used primarily for the working
capital and capital expenditure needs of the Company. The Revolving Credit
Facility, in the amount of up to $125 million, is secured by the Company's
inventories, accounts receivable, general intangibles, and proceeds thereof, and
expires on May 14, 2000. Interest is payable monthly at the defined base rate
(8.50% at September 30, 1998) plus 1.50% or the defined LIBOR rate (5.00% at
September 30, 1997) plus 2.75%. 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. The amount available to the Company under
the Revolving Credit Facility has generally ranged between 50 to 60 percent, in
the aggregate, of eligible inventories plus 85 percent of eligible accounts
receivable. Borrowing availability under the Revolving Credit Facility is also
subject to other financial tests and covenants. As of September 30, 1998, the
Company's eligible inventories and accounts receivable supported access to
$117.1 million under the Revolving Credit Facility. As of September 30, 1998,
the Company had $60.8 million in borrowings and $10.8 million in letters of
credit outstanding under the Revolving Credit Facility, leaving $45.5 million in
additional borrowing availability. As a consequence of reduced production and
sales volumes, the Company's inventory and account receivable borrowing base has
declined since September 30, 1998. In addition, borrowings under the Revolving
Credit Facility have been used to fund operating losses and reductions in
accounts payable. Consequently, the Company's borrowing availability under the
Revolving Credit Facility has declined. As of December 18, 1998, borrowing
availability was $21.3 million, with $58.2 million in borrowings and $10.8
million in letters of credit outstanding. As the Mannesmann agreement described
above is fully implemented, it is expected to generate liquidity for the Company
but will also reduce the borrowing base under the Revolving Credit Facility.
As a result of the Company's recent financial performance, the Company recently
sought and received an amendment to the Revolving Credit Facility with respect
to both the tangible net worth and interest coverage covenants, among other
things. The Company will require additional modifications, waivers or
forbearances to those and other terms of the Revolving Credit Facility prior to
January 7, 1999. The Company has held several meetings with the banking group
for the Revolving Credit Facility. The Company anticipates that the banking
group will grant short-term covenant relief either by way of a waiver or a
<PAGE> 9
forbearance with respect to certain potential or actual defaults. The Company
believes that such waiver or forbearance would not be granted if the Company
intended to make the interest payment due January 15, 1999 on the 9 1/2% Senior
Notes, as discussed below. The banking group will, however, continue to closely
monitor the Company's liquidity and may withdraw its waiver or forbearance or
take other action with respect to, among other things, the terms upon which the
Company may borrow or the Company's continued access to borrowings. There can be
no assurance that the Company will receive the waiver or forbearance, that the
banking group will not require other changes in the terms upon which borrowings
under the Revolving Credit Facility are made, or that the banking group will
continue to permit the Company to incur borrowings thereunder, in which event
the Company's operations would be substantially curtailed and its financial
condition materially adversely affected.
The terms of the Revolving Credit Facility and of the Company's 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.
Besides the above-described 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 $25.8 million for the year ended September
30, 1998, as compared with net cash provided by operating activities of $32.1
million for the year ended September 30, 1997. The sources of cash for operating
activities during the year ended September 30, 1998, included depreciation and
amortization of $44.2 million, a decrease in prepaid expenses of $13.8 million,
an increase in accrued liabilities of $1.6 million and an increase in accrued
interest payable of $0.5 million. These sources of cash were offset in part by
an increase in inventories of $15.1 million, a decrease in accounts payable of
$12.2 million, an increase in accounts receivable of $3.3 million, a net loss
before the write-down of impaired assets of $3.2 million and a decrease in
accrued payroll and related taxes of $0.5 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 received $24.5 million in September 1998 ($11.0 million
is included above in the decrease in prepaid expenses).
The Company is required to make substantial interest payments on the Senior
Notes. Currently, the Company's annual cash interest expense, including the
Revolving Credit Facility, is approximately $40 million. As a result of reduced
shipments and price realization caused primarily by the recent surge in imports
of the Company's products, the Company's liquidity has declined significantly.
As stated earlier, the Company had approximately $21.3 million in borrowing
availability under its Revolving Credit Facility as of December 18, 1998. In
light of the uncertainties surrounding both near-term market conditions and
continued access to borrowings under the Revolving Credit Facility, the Company
has elected to preserve liquidity by not making the interest payment of
approximately $9.0 million due January 15, 1999 on the Company's 9 1/2% Senior
Notes, which will result in a default under the terms thereof. Such a default,
if not timely cured, gives right to the legal remedies available under the
relevant bond indenture, including the possibility of acceleration. Similarly,
under the terms of the Senior Notes, nonpayment of interest on one of the two
series results in a cross default with respect to the other and may violate
other terms thereof. The Revolving Credit Facility also contains a similar cross
default provision. The Company anticipates that, as a part of the waiver or
forbearance described above, the banking group for the Revolving Credit Facility
will temporarily waive or forbear from acting upon such a cross default. The
Company has retained financial and legal advisors, who are reviewing the
financial alternatives available to the Company, including without limitation a
possible debt restructuring.
On April 17, 1998, the United Steelworkers of America and the Company reached
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 an average of 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.
<PAGE> 10
Capital expenditures were $10.9 million, $47.7 million and $26.4 million for
fiscal years 1998, 1997 and 1996, respectively. Capital expenditures for 1998
were lower than expected primarily as a result of the Company reducing certain
capital expenditures in light of market conditions late in the fiscal year.
Capital expenditures for fiscal year 1999 are estimated at approximately $15 to
$20 million, which includes implementation of new business and financial
software and various other projects designed to reduce costs and increase
product quality and throughput. Given current market conditions and the
uncertainties created thereby, the Company is continuing to closely monitor its
capital spending levels. The Company is implementing 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 ($5.0 million of which has been spent as of September 30, 1998),
with implementation completed in 1999 (see year 2000 discussion below).
Depending on market, operational, liquidity and other factors, the Company may
elect to adjust the design, timing and budgeted expenditures of its capital
plan.
The Company is a member of a limited liability company which 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 September 30, 1998, the Company
had spent (net of DOE reimbursement) approximately $1.2 million in connection
with the project. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies.
Year 2000 Issues
The Company is actively assessing and correcting potential year 2000 information
system issues in the following areas: (i) the Company's information technology
systems; (ii) the Company's non-information technology systems (i.e., machinery,
equipment and devices which utilize built in or embedded technology); and (iii)
third party suppliers and customers. The Company is undertaking its year 2000
review in the following phases: awareness (education and sensitivity to the year
2000 issue), identification (identifying the equipment processes or systems
which are susceptible to the year 2000 issue), assessment (determining the
potential impact of year 2000 on the equipment, processes and systems identified
during the previous phase and assessing the need for testing and remediation),
testing/verification (testing to determine if an item is year 2000 ready or the
degree to which it is deficient), and implementation (carrying out necessary
remedial efforts to address year 2000 readiness, including validation of
upgrades, patches or other year 2000 fixes).
During fiscal year 1997, the Company selected and started the implementation of
SAP software, an enterprise-wide business system. This system affects nearly
every aspect of the Company's operations. During fiscal year 1998, the Company
installed new year 2000 compliant HP computer hardware and SAP modules for
financial accounting, purchasing and accounts payable, raw materials inventory
control and accounts receivable. The Company is performing final integration
testing and validation on various other SAP modules. The human resource and
payroll module is expected to be implemented on January 1, 1999. In early 1999,
the Company will also implement other SAP modules, including sales and
distribution, materials management, production planning, and product costing and
other management information systems. The HP hardware, operating systems and
software installed are year 2000 ready. The Company expects to test these
hardware, operating systems and software applications in early 1999 to confirm
year 2000 readiness. The Company has identified other hardware, operating
systems and software applications used in its process control and other
information systems and is in the process of obtaining year 2000 compliance
information from the providers of such hardware, operating systems and
applications software. The Company expects to work with vendors to test the year
2000 readiness of such hardware, operating systems and software application
systems. The Company is also reviewing and testing internally developed software
applications for the year 2000 issue.
The Company has substantially completed inventorying its non-information
technology systems and is assessing the year 2000 issues to determine
appropriate testing and remediation. The Company anticipates completing the
assessment of its major non-information technology systems and to start any
necessary testing and implementation efforts for business critical
non-information technology systems in the second quarter of calendar 1999.
The Company has significant relationships with various third parties, and the
failure of any of these third paries to achieve year 2000 compliance could have
a material adverse impact on the Company's business, operating results and
financial condition. These third parties include energy and utility suppliers,
financial institutions, material and product suppliers,
<PAGE> 11
transportation providers, and the Company's significant customers. The Company
expects to audit/review each major third-party supplier to confirm their year
2000 readiness. The audit/review process will continue into the first and second
calendar quarters of 1999.
Through September 30, 1998, the Company has incurred approximately $5 million in
costs to improve the Company's information technology systems and for year 2000
readiness efforts. Of this amount, most represents the costs of implementing and
transitioning to new computer hardware and software for its SAP enterprise-wide
business systems. Approximately 90% of these costs have been capitalized.
Training and re-engineering efforts have been expensed. The Company anticipates
incurring an additional $3 to $5 million in connection with the year 2000
readiness efforts. The Company expects to have all year 2000 readiness efforts
completed by September 30, 1999.
The Company is in the process of preparing contingency plans for critical areas
to address year 2000 failures if remedial efforts are not fully successful. The
Company's contingency plans are expected to target the Company's most reasonably
likely worst case scenarios and to include items such as maintaining an
inventory buffer, providing for redundant information technology systems and
establishing alternative third-party logistics. The Company's contingency plans
will be based in part on the results of third-party supplier questionnaires, and
thus are not fully developed at this time. Completion of initial contingency
plans is targeted for the summer of 1999 (which plans will thereafter be revised
from time to time as deemed appropriate).
No assurance can be given that the Company will not be materially adversely
affected by year 2000 issues. The Company may experience material unanticipated
problems and costs caused by undetected errors or defects in its internal
information technology and non-information technology systems. In addition, the
failure of third-parties to timely address their year 2000 issues could have a
material adverse impact on the Company's business, operations and financial
condition. If, for example, third party suppliers become unable to deliver
necessary materials, parts or other supplies, the Company would be unable to
timely manufacture products. Similarly, if shipping and freight carriers were
unable to ship product, the Company would be unable to deliver product to
customers.
The foregoing discussion of the Company's year 2000 readiness includes
forward-looking statements, including estimates of the timeframes and costs for
addressing the known year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved, and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct or replace all relevant computer code and
the success of third parties with whom the Company does business in addressing
their year 2000 issues.
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 improve and optimize operations as well as ontime delivery and
customer service, 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 and trade cases on the domestic market, the outcome of trade cases, the
Company's expectation that prices and shipments will remain lower at least in
the first and second fiscal quarters of 1999, the potential commercial and
liquidity benefits of the Mannesmann agreement, the successful implementation of
the Mannesmann agreement, the Company's anticipated additional personnel
reductions among the management and union-eligible employees, the Company's
ability to maintain previous personnel reductions, continued access to the
Revolving Credit Facility and obtaining a waiver or forbearance with respect to
certain potential or actual defaults under the Revolving Credit Facility or the
Senior Notes, the future actions of the banking group for the Company's
Revolving Credit Facility, the Company's ability to restrict capital spending,
the effect of SAP implementation, the Company's plan to become year 2000
compliant, the effect of inflation 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.
<PAGE> 12
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 rates 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 throughput capacity. Pricing and
shipment levels in future periods are key variables to the Company's future
operating results that remain subject to significant uncertainty. These
variables will be affected by several factors including the level of imports,
future capacity additions, product demand and other market factors such as
increased domestic production capacity.
The short-term and long-term liquidity of the Company also is dependent upon
several other factors, including continued access to the Company's Revolving
Credit Facility, reaction to the Company's failure to make the January 15, 1999
interest payment under the 9 1/2% Senior Notes, 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. In
addition, because of the Company's current financial situation and covenant
compliance issues relating to its Revolving Credit Facility and its decision not
to pay the January 15 interest payment under the 9 1/2% Senior Notes, the
Company's financial flexibility is limited. During the months ahead, the Company
will be forced to make difficult decisions regarding, among other things, the
future direction and capital structure of the Company. Many of the foregoing
factors, of which the Company does not have complete control, may materially
affect the performance and financial condition of the Company.
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> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geneva Steel Company:
We have audited the accompanying consolidated balance sheets of Geneva Steel
Company (a Utah corporation) and subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1998.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Geneva Steel Company
and subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring net
losses applicable to common shares of $30.7 million, $11.6 million and $16.3
million during the years ended September 30, 1998, 1997 and 1996, respectively.
Restricted payment limitations under the Company's Senior Notes preclude payment
of preferred stock dividends. Additionally, as a result of lower shipments and
declining prices resulting from increases of imports into the Company's markets,
the Company may suffer a significant loss applicable to common shares and a
negative cash flow from operations for the year ending September 30, 1999. These
market conditions and their effect on the Company's liquidity may further
restrict the Company's use of cash which may result in the Company not making
interest payments related to its Senior Notes. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are partially described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Arthur Andersen LLP
Salt Lake City, Utah
December 4, 1998
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
-------------------------
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, less allowance for doubtful
accounts of $6,411 and $4,564, respectively 63,430 60,163
Inventories 113,724 100,081
Deferred income taxes 8,118 3,059
Prepaid expenses and other 2,964 5,291
Related party receivable 270 753
--------- ---------
Total current assets 188,506 169,347
--------- ---------
Property, Plant and Equipment:
Land 1,990 1,990
Buildings 16,119 16,109
Machinery and equipment 640,363 645,807
Mineral property and development costs 1,000 8,425
--------- ---------
659,472 672,331
Less accumulated depreciation (248,298) (214,016)
--------- ---------
Net property, plant and equipment 411,174 458,315
--------- ---------
Other Assets 5,485 18,408
--------- ---------
$ 605,165 $ 646,070
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<PAGE> 15
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- ---------
<S> <C> <C>
Current Liabilities:
Senior notes $ 325,000 $ --
Revolving credit facility 60,769 --
Accounts payable 34,117 46,348
Accrued liabilities 25,005 23,671
Accrued payroll and related taxes 9,454 11,715
Accrued dividends payable 25,315 14,290
Accrued interest payable 5,080 4,559
Accrued pension and profit sharing costs 2,182 1,701
--------- ---------
Total current liabilities 486,922 102,284
--------- ---------
Long-Term Debt -- 399,906
--------- ---------
Deferred Income Tax Liabilities 8,118 5,108
--------- ---------
Commitments and Contingencies (Note 6)
Redeemable Preferred Stock, Series B, no par value;
400,000 shares authorized, issued and outstanding,
with a liquidation value of $60,443 56,917 56,169
--------- ---------
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,
14,705,265 shares issued 87,979 87,979
Class B, no par value; 50,000,000 shares authorized,
19,151,348 shares issued and outstanding 10,110 10,110
Warrants to purchase Class A common stock 5,360 5,360
Accumulated deficit (47,749) (11,399)
Less 4,787 and 719,042 Class A common stock treasury shares,
respectively, at cost (2,492) (9,447)
--------- ---------
Total stockholders' equity 53,208 82,603
--------- ---------
$ 605,165 $ 646,070
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 720,453 $ 726,669 $ 712,657
Cost of sales 659,132 665,978 662,307
--------- --------- ---------
Gross margin 61,321 60,691 50,350
Selling, general and administrative expenses 22,116 22,487 24,621
Write-down of impaired assets 17,811 -- --
--------- --------- ---------
Income from operations 21,394 38,204 25,729
--------- --------- ---------
Other income (expense):
Interest and other income 356 412 552
Interest expense (42,483) (40,657) (36,199)
Other expense -- -- (1,749)
--------- --------- ---------
(42,127) (40,245) (37,396)
--------- --------- ---------
Loss before benefit for income taxes (20,733) (2,041) (11,667)
Benefit for income taxes (1,790) (773) (4,429)
--------- --------- ---------
Net loss (18,943) (1,268) (7,238)
Less redeemable preferred stock dividends and
accretion for original issue discount 11,772 10,340 9,089
--------- --------- ---------
Basic and diluted net loss applicable to common shares $ (30,715) $ (11,608) $ (16,327)
========= ========= =========
Basic and diluted net loss per common share $ (1.90) $ (.74) $ (1.07)
========= ========= =========
Weighted average common shares outstanding 16,155 15,660 15,309
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Shares Issued Amount
-------------------------- -----------------------
WARRANTS
TO PURCHASE RETAINED
COMMON COMMON COMMON COMMON COMMON EARNINGS
CLASS A CLASS B CLASS A CLASS B CLASS A (DEFICIT)
---------- ----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 14,695,265 19,251,348 $ 87,926 $ 10,163 $ 5,360 $ 22,754
Conversion of Class B common stock
into Class A common stock 10,000 (100,000) 53 (53) -- --
Issuance of Class A common stock to
employee savings plan -- -- -- -- -- (1,350)
Redeemable preferred stock dividends -- -- -- -- -- (8,372)
Redeemable preferred stock accretion
for original issue discount -- -- -- -- -- (717)
Net loss -- -- -- -- -- (7,238)
---------- ----------- --------- --------- --------- ---------
Balance at September 30, 1996 14,705,265 19,151,348 87,979 10,110 5,360 5,077
Issuance of Class A common stock to
employee savings plan -- -- -- -- -- (4,868)
Redeemable preferred stock dividends -- -- -- -- -- (9,608)
Redeemable preferred stock accretion
for original issue discount -- -- -- -- -- (732)
Net loss -- -- -- -- -- (1,268)
---------- ----------- --------- --------- --------- ---------
Balance at September 30, 1997 14,705,265 19,151,348 87,979 10,110 5,360 (11,399)
Issuance of Class A common stock to
employee savings plan -- -- -- -- -- (5,635)
Redeemable preferred stock dividends -- -- -- -- -- (11,025)
Redeemable preferred stock accretion
for original issue discount -- -- -- -- -- (747)
Net loss -- -- -- -- -- (18,943)
---------- ----------- --------- --------- --------- ---------
Balance at September 30, 1998 14,705,265 19,151,348 $ 87,979 $ 10,110 $ 5,360 $ (47,749)
========== =========== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
--------- ---------
<S> <C> <C>
Balance at September 30, 1995 $ (18,129) $ 108,074
Conversion of Class B common stock
into Class A common stock -- --
Issuance of Class A common stock to
employee savings plan 2,430 1,080
Redeemable preferred stock dividends -- (8,372)
Redeemable preferred stock accretion
for original issue discount -- (717)
Net loss -- (7,238)
--------- ---------
Balance at September 30, 1996 (15,699) 92,827
Issuance of Class A common stock to
employee savings plan 6,252 1,384
Redeemable preferred stock dividends -- (9,608)
Redeemable preferred stock accretion
for original issue discount -- (732)
Net loss -- (1,268)
--------- ---------
Balance at September 30, 1997 (9,447) 82,603
Issuance of Class A common stock to
employee savings plan 6,955 1,320
Redeemable preferred stock dividends -- (11,025)
Redeemable preferred stock accretion
for original issue discount -- (747)
Net loss -- (18,943)
--------- ---------
Balance at September 30, 1998 $ (2,492) $ 53,208
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(18,943) $ (1,268) $ (7,238)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation 42,272 43,048 42,077
Amortization of loan fees 1,910 1,911 2,338
Deferred income tax benefit (2,049) (760) (3,569)
(Gain) loss on asset disposal (30) 863 (46)
Write-down of impaired assets 17,811 -- --
(Increase) decrease in current assets -
Accounts receivable, net (3,267) 16,364 (41,349)
Inventories (15,143) (6,942) (3,230)
Prepaid expenses and other 13,821 (2,634) (749)
Increase (decrease) in current liabilities -
Accounts payable (12,231) (13,227) (8,364)
Accrued liabilities 1,635 2,991 (692)
Accrued payroll and related taxes (941) 2,232 1,279
Production prepayments -- (9,763) (237)
Accrued interest payable 521 (187) 136
Accrued pension and profit sharing costs 481 (558) 124
-------- -------- --------
Net cash provided by (used for) operating activities 25,847 32,070 (19,520)
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (10,893) (47,724) (26,378)
Proceeds from sale of property, plant and equipment 34 21 213
Change in other assets -- 1,238 (11,361)
-------- -------- --------
Net cash used for investing activities $(10,859) $(46,465) $(37,526)
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 25,649 $ 51,987 $ 59,752
Payments on long-term debt (39,785) (40,513) (13,354)
Payments for deferred loan costs and other assets -- (4) (1,563)
Change in bank overdraft (852) 2,328 --
-------- -------- --------
Net cash provided by (used for) financing activities (14,988) 13,798 44,835
-------- -------- --------
Net decrease in cash and cash equivalents -- (597) (12,211)
Cash and cash equivalents at beginning of year -- 597 12,808
-------- -------- --------
Cash and cash equivalents at end of year $ -- $ -- $ 597
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 40,052 $ 38,934 $ 34,386
Income taxes -- -- 367
</TABLE>
Supplemental schedule of noncash financing activities:
For the year ended September 30, 1996, the Company increased the
redeemable preferred stock liquidation preference by $3,690 in lieu of
paying cash dividends. For the years ended September 30, 1998, 1997 and
1996, redeemable preferred stock was increased by $747, $732 and $717,
respectively, for the accretion required over time to amortize the
original issue discount on the redeemable preferred stock incurred at the
time of issuance. As of September 30, 1998, accrued dividends of $25,315
were unpaid.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 NATURE OF OPERATIONS AND BUSINESS CONDITIONS
The Company's steel mill manufactures a wide range of coiled and flat plate,
sheet, pipe and slabs for sale to various distributors, steel processors or
end-users primarily in the western and central United States.
The Company has experienced recurring net losses applicable to common shares of
$30.7 million, $11.6 million and $16.3 million during the years ended September
30, 1998, 1997 and 1996, respectively. Restricted payment limitations under the
Company's Senior Notes preclude payment of preferred stock dividends.
Additionally, as a result of lower shipments and declining prices resulting from
increases of imports into the Company's markets, the Company may suffer a
significant net loss applicable to common shares and a negative cash flow from
operations for the year ending September 30, 1999. These market conditions and
their effect on the Company's liquidity may further restrict the Company's use
of cash which may result in the Company not making interest payments related to
its senior notes. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence is
dependent upon several factors including the Company's ability to return to
normal production and shipment levels.
The Company's near and long-term operating strategies focus on exploiting
existing and potential competitive advantages while eliminating or mitigating
competitive disadvantages. In response to current market conditions and as a
part of its ongoing corporate strategy, the Company is pursuing several
initiatives intended to increase liquidity and better position the Company to
compete under current market conditions. Several completed and ongoing
initiatives are as follows:
Since September 30, 1997, the Company has reduced administrative staff by
approximately 36 percent, operating management by 50 percent, and production
employees by 16 percent. These headcount reductions are expected to
significantly reduce overall operating expense on an annualized basis. The
Company has also placed 460 employees on layoff status. The Company must offer
employment to laid-off employees when production volume increases. Nevertheless,
to the extent these employees do not desire to return, the Company intends to
capture the attrition created thereby to the maximum extent possible. The
Company is also successfully implementing an union-management partnership
designed to reduce costs and increase efficiency.
The Company has and is pursuing aggressive cost cutting programs. As compared to
November 1997, the Company's monthly spending for administrative costs
(including employment costs) in November 1998 declined by $1.1 million, or 22
percent. Similarly, the Company's monthly spending on products and services for
operations has declined significantly. This reduction is, in part, due to lower
production levels. Nevertheless, operations spending generally increases as
production declines. The Company is currently completing installation of an
enterprise-wide business system that it expects will further reduce employment
costs and result in other significant cost savings.
On November 2, 1998, the Company signed a new, three-year agreement with
Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann will
market the Company's steel products throughout the continental United States.
Mannesmann previously marketed the Company's products in multiple midwestern
states and to certain customers in the eastern United States. The Company's
existing sales force will remain Geneva Steel employees, but will be directed by
Mannesmann. The Company has also made several other organizational changes
designed to improve product distribution and on-time delivery.
The Mannesmann agreement requires Mannesmann to purchase and pay for the
Company's finished inventory as soon as it has been assigned to or otherwise
identified with a particular order. Mannesmann then sells the products to end
customers at the same sales price Mannesmann paid the Company plus a variable
commission. The Company remains responsible for customer credit and product
quality problems. The Company estimates that, when fully implemented, the new
arrangement will significantly reduce its working capital balances and, as a
result, will improve the Company's liquidity by approximately $17 to $25
million.
<PAGE> 21
Current market conditions have forced the Company to operate only one of its
three blast furnaces and to similarly reduce production throughout the mill.
Reduced production levels adversely affect production efficiencies,
significantly increasing product cost per ton. The Company is attempting to
optimize production efficiency at these lower volume levels by, among other
things, reducing shifts, idling certain facilities and altering production
scheduling.
Current market conditions have and are significantly affecting the Company's
operating results and liquidity. During the months ahead, the Company will be
forced to make difficult decisions regarding, among other things, the future
direction and capital structure of the Company. The Company has retained
financial and legal advisors, who are reviewing the financial alternatives
available to the Company, including without limitation a possible debt
restructuring.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Geneva Steel Company and its wholly-owned subsidiaries (collectively, the
"Company"). Intercompany balances and transactions have been eliminated in
consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 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 (see Note
3).
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 as of September 30, 1998 and 1997
was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 29,250 $ 26,783
Semi-finished and finished goods 78,746 65,406
Operating materials 5,728 7,892
-------- --------
$113,724 $100,081
======== ========
</TABLE>
Operating materials consist primarily of production molds, platforms for the
production molds and furnace lining refractories.
Insurance Claim Receivable
In August 1998, the Company settled its insurance claim related to a January
1996 plant-wide power outage associated with unusual weather conditions and an
operator error. The Company received $24.5 million in September 1998 to resolve
the claim. The Company's carrier under the primary layer of insurance previously
paid the Company $5.0 million in the fall of 1996. During fiscal years 1997 and
1996, the Company recorded $3.7 million and $12.3 million, respectively, as an
offset to cost of goods sold in the accompanying consolidated financial
statements. Upon settlement of the claim, the Company recorded a $2.1 million
offset to selling, general, and administrative expense, a reduction in property,
plant and equipment of approximately $12.5 million and operating cost offsets of
approximately $3.0 million primarily for depreciation expense previously taken
on the reimbursed equipment in the accompanying consolidated financial
statements.
<PAGE> 22
As of September 30, 1997, the Company had an insurance claim receivable of $11.0
million included in other assets in the accompanying consolidated financial
statements.
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:
Buildings 31.5 years
Machinery and Equipment 2-30 years
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 $0.3 million, $0.5 million and $2.1 million of
interest during the years ended September 30, 1998, 1997 and 1996, 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 and back-up facilities for machinery and equipment are
capitalized and included in machinery and equipment in the accompanying
consolidated financial statements. Major spare parts are depreciated using the
straight-line method over the useful lives of the related machinery and
equipment.
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, 1998 and
1997, approximately $13.6 million and $43.7 million, respectively, of
construction in progress was included in machinery and equipment in the
accompanying consolidated 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
consolidated financial statements. The Company wrote-down certain impaired
mineral property development costs during 1998 by approximately $6.6 million
(see discussion below).
Other Assets
Other assets consist primarily of deferred loan costs incurred in connection
with obtaining long-term financing. The deferred loan costs are being amortized
on a straight-line basis over the term of the applicable financing agreement.
Accumulated amortization of deferred loan costs totaled $8.5 million and $6.6
million at September 30, 1998 and 1997, respectively. At September 30, 1997,
other assets also included the insurance claim receivable described above of
approximately $11.0 million.
Revenue Recognition
Sales are recognized when the product is shipped to the customer. Sales are
reduced by the amount of estimated customer claims. As of September 30, 1998 and
1997, reserves for estimated customer claims of $4.8 million and $2.9 million,
were included in the allowance for doubtful accounts in the accompanying
consolidated financial statements.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
<PAGE> 23
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable. The Company evaluates
at each balance sheet date whether events and circumstances have occurred that
indicate possible impairment. In accordance with SFAS No. 121, the Company uses
an estimate of the future undiscounted net cash flows of the related asset or
asset grouping over the remaining life in measuring whether the assets are
recoverable. During fiscal year 1998, the Company wrote down approximately $17.8
million of impaired long-lived assets. The write-down included $8.5 million of
in-line scarfing equipment, $6.6 million of mineral property development costs
and $2.7 million of other machinery and equipment. Based on the operating record
of the Company's continuous caster and recent reduced production levels, the
Company believes that sustained use of the in-line scarfing equipment is
unlikely. In addition, the use by the Company of iron-ore pellets purchased from
third parties and recent reduced production levels has caused the Company to
decrease the estimated value to it of the mineral development costs. Based on
the Company's expectation of future undiscounted net cash flow, these assets
have been written-down to their realizable value.
Basic and Diluted Net Income (Loss) Per Common Share
In February 1997, 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 basic net loss per common share for the years ended September 30, 1998,
1997 and 1996, presented in the accompanying consolidated 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
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 years ended September 30,
1998, 1997 and 1996, 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 year ended September 30, 1998,
2,075,322 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 loss for the years ended September 30, 1998, 1997 and 1996 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components. This
statement requires an "all-inclusive" approach which specifies that all
revenues, expenses, gains and losses recognized during the period be reported in
income, regardless of whether they are considered to be results of operations of
the period. The statement is effective for fiscal years beginning after December
15, 1997, and accordingly, the Company will adopt SFAS No. 130 in fiscal year
1999. The Company believes that adoption of SFAS No. 130 will not have a
material impact on its consolidated financial statements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that public
enterprises report certain information about operating segments. The statement
specifies disclosure requirements about the products and services of a company,
the geographic areas in which it operates, and its major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and
accordingly, the Company will adopt this statement in fiscal year 1999.
<PAGE> 24
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999,
and is not expected to have a material impact on the Company's consolidated
financial statements.
3 LONG-TERM DEBT
The aggregate amounts of principal maturities of long-term debt as of September
30, 1998 and 1997 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Senior term notes issued publicly, interest payable January 15 and July 15 at 9.5%,
principal due January 15, 2004, unsecured $190,000 $190,000
Senior term notes issued publicly, interest payable March 15 and September 15 at
11.125 %, principal due March 15, 2001, unsecured 135,000 135,000
Revolving credit facility from a syndicate of banks, interest payable
monthly at the defined base rate (8.50% at September 30, 1998, plus
1.50% or the defined LIBOR rate (5.00% at September 30, 1998) plus
2.75%, due May 14, 2000 (see discussion below), secured by inventories
and accounts receivable 60,769 74,906
-------- --------
385,769 399,906
Less current portion of Senior Notes and Revolving Credit Facility 385,769 --
-------- --------
$ -- $399,906
======== ========
</TABLE>
On May 14, 1996, the Company amended and restated its revolving credit facility
(the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA,
Inc., as agent. The Revolving Credit Facility is used primarily for the working
capital and capital expenditure needs of the Company. The Revolving Credit
Facility, in the amount of up to $125 million, is secured by the Company's
inventories, accounts receivable, general intangibles, and proceeds thereof, and
expires on May 14, 2000. Interest is payable monthly at the defined base rate
(8.50% at September 30, 1998) plus 1.50%, or the defined LIBOR rate (5.00% at
September 30, 1998) plus 2.75%. 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. The amount available to the Company under
the Revolving Credit Facility has generally ranged between 50 and 60 percent, in
the aggregate, of eligible inventories plus 85 percent of eligible accounts
receivable. Borrowing availability under the Revolving Credit Facility is also
subject to other financial tests and covenants. As of September 30, 1998, the
Company's eligible inventories and accounts receivable supported access to
$117.1 million under the Revolving Credit Facility. As of September 30, 1998,
the Company had $60.8 million in borrowings and $10.8 million in letters of
credit outstanding under the Revolving Credit Facility, leaving $45.5 million in
additional borrowing availability. Certain deferred fees associated with
establishing the Company's receivables securitization facility were expensed
during the year ended September 30, 1996.
As a result of the Company's recent financial performance, the Company recently
sought and received an amendment to the Revolving Credit Facility with respect
to both the tangible net worth and interest coverage covenants, among other
things. The Company will require additional modifications, waivers or
forbearances to those and other terms of the Revolving Credit Facility prior to
January 7, 1999. The Company has held several meetings with the banking group
for the Revolving Credit Facility. The Company anticipates that the banking
group will grant short-term covenant relief either by way of a waiver or a
forbearance with respect to certain potential or actual defaults. The Company
believes that such waiver or forbearance would not be granted under the terms of
the existing agreement if the Company intended to make the interest payment due
January 15, 1999 on the 9 1/2% Senior Notes. The banking group will, however,
continue to closely monitor the Company's liquidity and
<PAGE> 25
may withdraw its waiver or forbearance or take other action with respect to,
among other things, the terms upon which the Company may borrow or the Company's
continued access to borrowings. There can be no assurance that the Company will
receive the waiver or forbearance, that the banking group will not require other
changes in the terms upon which borrowings under the Revolving Credit Facility
are made, or that the banking group will continue to permit the Company to incur
borrowings thereunder, in which event the Company's operations would be
substantially curtailed and its financial condition materially adversely
affected.
The terms of the Revolving Credit Facility and the Company's $190 million 9 1/2%
Senior Notes issued in January 1994 (the "9 1/2% Senior Notes") and $135 million
11 1/8% Senior Notes issued in March 1993 (the "11 1/8% Senior Notes" and
together with the 9 1/2% Senior Notes 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, a limitation 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.
Based on such covenants, as of September 30, 1998, the Company was restricted
from payment of cash dividends. In the event of a change in control, the Company
must offer to purchase all Senior Notes then outstanding at a premium.
In light of the uncertainties surrounding both near-term market conditions and
continued access to borrowings under the Revolving Credit Facility, the Company
has elected to preserve liquidity by not making the interest payment of
approximately $9.0 million due January 15, 1999 on the Company's 9 1/2% Senior
Notes, which will result in a default under the terms thereof. Such a default,
if not timely cured, gives right to the legal remedies available under the
relevant bond indenture, including the possibility of acceleration. Similarly,
under the terms of the Senior Notes, nonpayment of interest on one of the two
series results in a cross default with respect to the other and may violate
other terms thereof. The Revolving Credit Facility also contains a similar cross
default provision. The Company anticipates that, as a part of the waiver or
forbearance described above, the banking group for the Revolving Credit Facility
will temporarily waive or forbear from acting upon such a cross default.
The Company estimates that the aggregate fair market value of its debt and
related obligations was approximately $137.4 million as of September 30, 1998.
These estimates were based on quoted market prices or current rates offered for
debt with similar terms and maturities.
4 MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES
During the years ended September 30, 1998, 1997, and 1996, the Company derived
approximately 33%, 33% and 31%, respectively, of its net sales through one
customer, which is a distributor to other companies. International sales during
the years ended September 30, 1998, 1997 and 1996 did not exceed 10%.
<PAGE> 26
5 INCOME TAXES
The provision (benefit) for income taxes as of September 30, 1998, 1997 and 1996
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current income tax provision
Federal $ 227 $ (11) $ (752)
State 32 (2) (108)
------------- ------------- -------------
259 (13) (860)
------------- ------------- -------------
Deferred income tax provision (benefit)
Federal 3,461 (665) (3,123)
State 495 (95) (446)
Change in valuation allowance (6,005) -- --
------------- ------------- -------------
(2,049) (760) (3,569)
------------- ------------- -------------
Benefit for income taxes $ (1,790) $ (773) $ (4,429)
============= ============= =============
</TABLE>
The benefit for income taxes as a percentage of loss for the years ended
September 30, 1998, 1997 and 1996 differs from the statutory federal income tax
rate due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal income tax rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal income tax impact (3.3) (3.3) (3.3)
Change in valuation allowance 29.7 -- --
Other -- 0.4 0.3
------------- ------------- -------------
Effective income tax rate (8.6)% (37.9)% (38.0)%
============= ============= =============
</TABLE>
As of September 30, 1998, the Company had deferred income tax assets of $60.7
million. The deferred income tax assets have been reduced by a $6.0 million
valuation allowance. This valuation allowance was established during the year
ended September 30, 1998, for a portion of the Company's net operating loss
carryforward. The components of the net deferred income tax assets and
liabilities as of September 30, 1998 and 1997 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 36,439 $ 35,257
Write-down of impaired assets 6,144 --
Inventory costs capitalized 4,987 5,442
Alternative minimum tax credit carryforward 6,464 6,464
Accrued vacation 1,543 1,847
Allowance for doubtful accounts 2,333 1,023
General business credits 2,440 2,754
Other 326 328
------------- -------------
Total deferred income tax assets 60,676 53,115
Valuation allowance (6,005) --
------------- -------------
54,671 53,115
</TABLE>
1
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
------------- -------------
Deferred income tax liabilities:
Accelerated depreciation (49,427) (45,237)
Insurance claim receivable -- (4,217)
Mineral property development costs (2,476) (2,465)
Operating supplies (2,768) (3,245)
------------- -------------
Total deferred income tax liabilities (54,671) (55,164)
------------- -------------
Net deferred income tax liabilities $ -- $ (2,049)
============= =============
</TABLE>
As of September 30, 1998, the Company had a net operating loss carryforward for
book reporting purposes of approximately $6.0 million. As of September 30, 1998,
the Company had a net operating loss carryforward and an alternative minimum tax
credit carryforward for tax reporting purposes of approximately $95.3 million
and $6.5 million, respectively. The net operating loss carryforward begins
expiring in 2009.
6 COMMITMENTS AND CONTINGENCIES
Capital Projects
The Company has incurred 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 rates. The Company spent $10.9 million (net of
the $12.5 million insurance reimbursement for capital expenditures covered by
the January 1996 power outage insurance claim settlement described in Note 2)
and $47.7 million on capital projects during the fiscal years ended September
30, 1998 and 1997, respectively. These expenditures were made primarily in
connection with the Company's ongoing modernization and capital maintenance
efforts. Capital expenditures for fiscal year 1999 are estimated at $15 to $20
million, which includes completing the implementation of new business and
financial software and completion of other projects that either are already in
progress or are believed essential to maintaining ongoing operations. The
Company is implementing SAP software, an enterprise-wide business system. The
Company expects to benefit significantly from such implementation, including
addressing the year 2000 issue inherent in its legacy systems. The
implementation is estimated to cost $8 to $10 million with the implementation
substantially completed by the fall of 1999. Depending on liquidity needs,
market conditions, operational requirements, and other factors, the Company may
elect to adjust the design, timing and budgeted expenditures of its capital
plan.
The Company is a member of a limited liability company which 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 September 30, 1998, the Company
had spent (net of DOE reimbursement) approximately $1.2 million in connection
with the project. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies.
Legal Matters
The Company is subject to various legal matters, which it considers normal for
its business activities. Management, after consultation with the Company's legal
counsel, believes that these matters will not have a material impact on the
financial condition or results of operations of the Company.
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.
2
<PAGE> 28
The Company has incurred substantial capital expenditures for environmental
control facilities, including the Q-BOP furnaces, the wastewater treatment
facility, the benzene mitigation equipment, the coke oven gas desulfurization
facility and other projects. The Company has budgeted a total of approximately
$2.0 million for environmental capital improvements in fiscal years 1999 and
2000. 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 for capital expenditures for environmental
matters, 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.
Under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), the 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 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. USX has advised the Company, however, of its position that a
portion of the amount paid by the Company may not be properly credited against
the Company's obligations. Although the Company believes that USX's position is
without merit, there can be no assurance that this matter will be resolved
without litigation. The Company and USX has similarly had several disagreements
regarding the scope and actual application of USX's indemnification obligations.
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 also be
subject to litigation.
Purchase Commitments
On February 10, 1989, the Company entered into an agreement which was
subsequently amended on July 1, 1997, to purchase interruptible and firm back-up
power through February 28, 2002. For interruptible power, the Company pays an
energy charge adjusted annually to reflect changes in the supplier's average
energy costs and facilities charge, based on 110,000 kilowatts, adjusted
annually to reflect changes in the supplier's per megawatt fixed transmission
investment.
Effective July 12, 1990, the Company entered into an agreement, which was
subsequently amended in April 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.
3
<PAGE> 29
Effective September 1, 1994, the Company entered into a five year agreement,
which was amended on July 25, 1997 and September 30, 1998, to purchase taconite
pellets. The Company has commitments to purchase 2,700,000 net tons in the fifth
year of the contract, which is defined as a five-quarter period ending December
31, 1999. Prices are adjusted each year based on an index related to the
"Cartier Pellets Price." Given current market conditions, the Company may not
have a need for the minimum volume requirements under the USX agreement.
Effective June 6, 1995, the Company entered into an agreement to purchase 800
tons a day of oxygen from a new plant constructed at the Company's steel mill
which will be owned and operated by an independent party. The new plant was
completed June 20, 1997. The Company pays a monthly facility charge which is
adjusted semi-annually each January 1 and July 1 based on an index. The contract
continues through July 2012.
Effective June 10, 1997, the Company entered into an agreement to purchase 100%
of the oxygen, nitrogen and argon produced at a facility that is owned and
operated by an independent party. The contract expires in September 2002 an
specifies that the Company will pay a monthly facility charge that is adjusted
semi-annually each January 1 and July 1 based upon a percentage of the change in
PPI.
Effective September 1, 1998, the Company entered into an agreement to purchase
26,000 MMBtu per day of firm natural gas to offset other agreements with the
expiration dates of August 31, 1998 to October 31, 1998. Effective November 1,
1998 and continuing through June 30, 2000 the commitment increases to 35,000
MMBtu per day of firm natural gas with provisions to offsell any unusable
volumes. The price is adjusted monthly based on the index price as reported by
"Inside FERC Gas Market Report."
On September 12, 1997, the Company entered into an agreement to purchase natural
gas transportation service for 35,000 decatherms per day commencing October 1,
1998 and continuing through September 30, 2003.
Lease Obligations
The Company leases certain facilities and equipment used in its operations.
Management expects that, in the normal course of business, leases that expire
will be renewed or replaced by other leases. The aggregate commitments under
non-cancelable operating leases at September 30, 1998, were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ending September 30,
-------------------------
<S> <C>
1999 $ 8,876
2000 7,885
2001 7,646
2002 5,414
2003 4,744
Thereafter 21,969
-------
$56,534
=======
</TABLE>
Total rental expense for non-cancelable operating leases was approximately $9.2
million, $9.9 million and $6.0 million for the years ended September 30, 1998,
1997 and 1996, respectively.
Letters of Credit
As of September 30, 1998, the Company had outstanding letters of credit totaling
approximately $10.8 million.
7 REDEEMABLE PREFERRED STOCK
In March 1993, the Company issued $40 million 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.
4
<PAGE> 30
The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a
liquidation preference of approximately $151 per share as of September 30, 1998.
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
had the option to add dividends to the liquidation preference in lieu of payment
in cash. Prior to April 1996, the Company elected to add the dividends to the
liquidation preference. As of September 30, 1998 and 1997, the liquidation value
of the Redeemable Preferred Stock was $60.4 million. 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 pay cash dividends on the
Redeemable Preferred Stock is subject to the covenants and tests contained in
the indentures governing the Senior Notes and in the 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 $25.3 million at
September 30, 1998. Based on the Company's current financial situation, the
Company does not expect to pay dividends on the Redeemable Preferred Stock in
the foreseeable future. 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. After
March 1998, both the Redeemable Preferred Stock and/or the Exchange Debentures
are redeemable, at the Company's option, subject to certain redemption premiums.
The warrants to purchase the Company's Class A common stock are exercisable at
$11 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 $18.1 million at September 30, 1998. The
Company estimates that the aggregate fair market value of its warrants to
purchase Class A common stock was at a nominal value at September 30, 1998. The
Company's estimates for the Redeemable Preferred Stock and warrants to purchase
Class A common stock were based on management's estimates.
8 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 $10.91
per share. On March 26, 1997, certain of these stock options were repriced at
$7.75 per share. The stock options became fully exercisable on January 2, 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.
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.
The Employee Plan Committee (the "Committee"), consisting of outside directors,
determines 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 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.
5
<PAGE> 31
Effective December 18, 1996, the Company's Board of Directors adopted the Geneva
Steel Company 1996 Incentive Plan (the "Incentive Plan") which was approved by
the Company's shareholders in February 1997. The Incentive Plan provides that
1,500,000 shares of class A common stock will be available for the grant of
options or awards.
The Incentive Plan is administered by a committee consisting of at least two
non-employee directors of the company (the "Committee"). The Committee
determines, among other things, the eligible employees, the number of options
granted and the purchase price, terms and conditions of each award, provided
that the term does not exceed ten years. The per share purchase price may not be
less than 80 percent of the fair market value on the date of grant.
The Incentive Plan also provides for the non-discretionary grant of options to
each of its non-employee directors ("Director Options"). Each non-employee
director who becomes a director after January 1, 1997 shall be granted a
Director Option of 4,000 shares upon election or appointment. In addition,
annually on the first business day on or after January 1 of each calendar year
that the Incentive Plan is in effect, all non-employee directors who are members
of the Board at that time shall be granted a Director Option of 2,000 shares;
provided, however, that a director shall not be entitled to receive an annual
grant during the year elected or appointed. Director Options will be granted at
a purchase price equal to the fair market value of the shares on the date of
grant. Director Options vest at 40 percent on the second anniversary of the date
of grant and an additional 20 percent on the third, fourth and fifth
anniversaries of the date of grant, provided that the director remains in
service as a director on each date. The Director Options generally have a ten
year term.
Stock option activity for the years ended September 30, 1998, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
Weighted
Number of Price per Average Price
Shares Share Range Per Share
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding at September 30, 1995 749,900 $7.75 - 10.91 $ 8.15
Granted 173,438 3.75 - 4.125 3.80
Cancelled (15,825) 7.75 - 7.88 7.80
------------- ------------- -------------
Outstanding at September 30, 1996 907,513 $3.75 - 10.91 7.33
Granted 810,000 2.25 2.25
Cancelled (90,850) 2.25 - 8.66 4.97
------------- ------------- -------------
Outstanding at September 30, 1997 1,626,663 $2.25 - 10.91 4.93
Granted 304,486 2.06 - 2.44 2.76
Cancelled (40,010) 2.25 - 8.66 7.19
------------- ------------- -------------
Outstanding at September 30, 1998 1,891,139 $2.06 - 10.91 4.54
============= ============= =============
</TABLE>
Options to purchase 1,032,606, 565,275 and 459,320 shares of Class A common
stock were exercisable on September 30, 1998, 1997 and 1996, respectively. As of
September 30, 1998, 671,776 shares of Class A common stock are available for
grant under the plans.
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock option plans. Had compensation expense
for the Company's stock option plans been determined in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based compensation," the
Company's net loss and diluted net loss per common share would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported $ (18,943) $ (1,268) $ (7,238)
Net loss pro forma (19,166) (1,650) (7,292)
</TABLE>
6
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Diluted net loss per common share as reported $ (1.90) $ (.74) $ (1.07)
Diluted net loss per common share pro forma (1.92) (.77) (1.07)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.
The fair value of each option grant has been estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1998, 1997 and 1996, in calculating compensation cost: expected stock
price volatility of 71.6%, 60.8% and 60.8% for 1998, 1997 and 1996,
respectively, an average risk free interest rate of approximately 5.75 percent,
6.25 percent and 6.25 percent for 1998, 1997 and 1996, respectively, and
expected lives ranging between three years to seven years for 1998 and 1997 and
for seven years for 1996.
The weighted average fair value of options granted during fiscal years 1998,
1997 and 1996 was $2.77, $2.25 and $3.80 per share, respectively. At September
30, 1998, the 1,891,139 options outstanding have exercise prices between $2.06
and $10.91 per share with a weighted average exercise price of $4.54 and a
weighted average remaining contractual life of 6.9 years. 1,032,606 of these
options are exercisable with a weighted average exercise price of $5.79.
9 EMPLOYEE BENEFIT PLANS
Union Savings and Pension Plan
The Company has a savings and pension plan which provides benefits for all
eligible employees covered by the collective bargaining agreement. This plan is
comprised of two qualified plans: (1) a union employee savings 401(k) plan with
a cash or deferred compensation arrangement and 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. On March 1, 1996, the Company began to match 25% of
participants' contributions to the savings plan in shares of class A common
stock not to exceed 1% of their compensation. For the pension plan, the Company
contributed 5% of each participant's compensation to this plan from March 1,
1996 through September 30, 1998 and contributed 4 1/2% of each participant's
compensation to this plan from March 1, 1995 through February 29, 1996. Total
contributions by the Company for both plans for the years ended September 30,
1998, 1997 and 1996 were $5.1 million, $5.1 million and $4.5 million,
respectively. The participants vest in these contributions at 20% for each year
of service until fully vested after five years.
Union Employee Defined Benefit Plan
The Company is in the process of establishing a separate collectively bargained
defined benefit plan. The plan will cover union employees who are at least age
21 with at least one year of service. All benefit amounts payable under this
plan will be offset by all other pension benefits available to the retiring
employee from the Company's defined contribution savings and pension plan
discussed above and the USX retirement plan. The effective date of the plan has
not been determined. No amounts have been funded as of September 30, 1998.
Voluntary Employee Beneficiary Association Trust
Effective March 1, 1995, the Company established a voluntary employee
beneficiary association trust ("VEBA Trust") to fund post-retirement medical
benefits for future retirees covered by the collective bargaining agreement.
Company cash contributions to the VEBA Trust are fifteen cents for each hour of
work performed by employees covered by the collective bargaining agreement
beginning May 1, 1998. From the plan inception through April 30, 1998,
contributions were ten cents for each hour of work performed by employees
covered by the collective bargaining agreement. In addition, union employees
provided a contribution to the VEBA Trust based on a reduction from their
performance dividend plan payment until April 30, 1998. No benefits were paid
from the VEBA Trust prior to September 30, 1998. Eligibility requirements and
related matters will be determined in early fiscal year 1999.
7
<PAGE> 33
Management Employee Savings and Pension Plan
The Company has a savings and pension plan which provides benefits for all
eligible employees not covered by the 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 participants' contributions
to the employee savings plan in shares of Class A common stock up to 4% of their
compensation during fiscal years 1998, 1997 and 1996. For the pension plan, the
Company contributed 5% of each participant's compensation to this plan from
March 1, 1996 through September 30, 1998 and contributed 4 1/2% of each
participant's compensation to this plan from March 1, 1995 through February 29,
1996. During the years ended September 30, 1998, 1997 and 1996, total
contributions by the Company were $1.9 million, $2.2 million and $2.1 million,
respectively. The participants vest in the Company's contributions at 20% for
each year of service until fully vested after five years.
Profit Sharing and Bonus Programs
The Company has a profit sharing program for full-time union eligible employees.
Participants receive payments based upon operating income reduced by an amount
equal to a portion of the Company's capital expenditures. No profit sharing was
accrued or paid in the years ended September 30, 1998, 1997 and 1996.
The Company also has implemented a performance dividend plan designed to reward
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 dividend plan
payments in any given fiscal year. During the years ended September 30, 1998,
1997 and 1996, performance dividend plan expenses were $8.5 million, $9.6
million and $9.2 million, respectively.
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.
10 RELATED PARTY TRANSACTIONS
On September 27, 1996, the Company entered into an agreement to loan up to
$500,000 to its Chief Executive Officer. On September 27, 1996, October 4, 1996
and December 23, 1996 the Company loaned $250,000 and $210,000 and $40,000,
respectively. On February 13, 1997, the Company authorized an increase in the
loan amount to $700,000 and advanced an additional $200,000. The loan was
evidenced by a promissory note bearing interest at the rate of 8.53% and was
payable at the earlier of September 27, 1997 or demand for repayment by the
Company. On October 17, 1997, the Chief Executive Officer paid $240,000 on the
note and the payment date of the note was extended to April 30, 1998. On
December 17, 1997, the Chief Executive Officer paid an additional $400,000 on
the note. On November 24, 1998, the remaining balance was paid by the Chief
Executive Officer.
8
<PAGE> 34
11 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial information for the years ended
September 30, 1998 and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 Quarters First Second Third Fourth
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 181,513 $ 192,405 $ 188,735 $ 157,800
Gross margin 11,793 22,002 20,146 7,380
Net income (loss) (2,715) 3,392 2,013 (21,633)
Net income (loss) applicable to common shares (5,516) 498 (976) (24,721)
Basic and diluted net income (loss) per common share (.35) .03 (.06) (1.51)
1997 Quarters First Second Third Fourth
------------- ------------- ------------- -------------
Net sales $ 169,741 $ 182,961 $ 194,089 $ 179,878
Gross margin 12,930 7,921 20,732 19,108
Net income (loss) (1,410) (5,504) 3,962 1,682
Net income (loss) applicable to common shares (3,871) (8,046) 1,337 (1,028)
Basic net income (loss) per common share (.25) (.52) .09 (.06)
Diluted net income (loss) per common share (.25) (.52) .08 (.06)
</TABLE>
9
