<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File #1-10459
GENEVA STEEL COMPANY
(Exact name of registrant as specified in its charter)
UTAH 93-0942346
(State of Incorporation) (I.R.S. Employer Identification No.)
10 South Geneva Road
Vineyard, Utah
(Address of principal executive offices)
84058
(Zip Code)
Registrant's telephone number, including area code: (801) 227-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each class of the issuer's common
stock, as of the latest practicable date.
15,008,767 and 18,451,348 shares of Class A and Class B common stock,
respectively, outstanding as of May 5, 1999.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Current assets:
Cash $ 7,908 $ --
Accounts receivable, net 17,298 63,430
Inventories 85,103 113,724
Deferred income taxes 15,090 8,118
Prepaid expenses and other 3,892 2,964
Related party receivable -- 270
--------- ---------
Total current assets 129,291 188,506
--------- ---------
Property, plant and equipment:
Land 1,990 1,990
Buildings 16,119 16,119
Machinery and equipment 646,257 640,363
Mineral property and development costs 1,000 1,000
--------- ---------
665,366 659,472
Less accumulated depreciation (270,139) (248,298)
--------- ---------
Net property, plant and equipment 395,227 411,174
--------- ---------
Other assets 5,353 5,485
--------- ---------
$ 529,871 $ 605,165
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed balance sheets.
Page 2 of 26
<PAGE> 3
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
CONDENSED BALANCE SHEETS (Continued)
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- ------------
<S> <C> <C>
Liabilities not subject to compromise:
Senior notes $ -- $ 325,000
Revolving credit facility 68,962 60,769
Accounts payable 5,970 34,117
Accrued liabilities 11,050 25,005
Accrued payroll and related taxes 8,070 9,454
Accrued dividends payable -- 25,315
Accrued interest payable -- 5,080
Accrued pension and profit
sharing costs 2,197 2,182
--------- ---------
Total current liabilities 96,249 486,922
--------- ---------
Liabilities subject to compromise:
Senior notes 325,000 --
Accounts payable 30,324 --
Accrued dividends payable 28,492 --
Accrued interest payable 15,409 --
Accrued liabilities 4,275 --
--------- ---------
403,500 --
--------- ---------
Deferred income tax liabilities 15,090 8,118
--------- ---------
Redeemable preferred stock
(subject to compromise) 55,628 56,917
--------- ---------
Stockholders' equity (deficit):
Preferred stock -- --
Common stock:
Class A 92,022 87,979
Class B 9,741 10,110
Warrants to purchase Class A
common stock 4,255 5,360
Accumulated deficit (146,614) (47,749)
Class A common stock held in
treasury, at cost -- (2,492)
--------- ---------
Total stockholders' equity
(deficit) (40,596) 53,208
--------- ---------
$ 529,871 $ 605,165
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed balance sheets.
Page 3 of 26
<PAGE> 4
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 59,345 $ 192,405
Cost of sales 90,904 170,403
--------- ---------
Gross margin (31,559) 22,002
Selling, general and administrative
expenses 4,968 5,646
--------- ---------
Income (loss) from operations (36,527) 16,356
--------- ---------
Other income (expense):
Interest and other income 212 66
Interest expense
(total contractual interest of
$10,324 in the 1999 quarter) (4,814) (10,811)
--------- ---------
(4,602) (10,745)
--------- ---------
Income (loss) before reorganization item
and provision for income taxes (41,129) 5,611
Reorganization item:
Professional fees 1,150 --
--------- ---------
Income (loss) before provision for
income taxes (42,279) 5,611
Provision for income taxes -- 2,219
--------- ---------
Net income (loss) (42,279) 3,392
Less redeemable preferred stock dividends
and accretion for original issue discount 1,266 2,894
--------- ---------
Net income (loss) applicable to
common shares $ (43,545) $ 498
========= ==========
Basic and diluted net income (loss)
per common share $ (2.68) $ .03
========= ==========
Weighted average common shares outstanding
Basic 16,228 16,096
========= ==========
Diluted 16,228 16,131
========= ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these condensed statements.
Page 4 of 26
<PAGE> 5
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 138,045 $ 373,918
Cost of sales 199,142 340,123
--------- ---------
Gross margin (61,097) 33,795
Selling, general and administrative
expenses 14,671 11,539
--------- ---------
Income (loss) from operations (75,768) 22,256
--------- ---------
Other income (expense):
Interest and other income 357 151
Interest expense
(total contractual interest of
$21,085 in 1999) (15,535) (21,082)
--------- ---------
(15,178) (20,931)
--------- ---------
Income (loss) before reorganization item
and provision for income taxes (90,946) 1,325
Reorganization item:
Professional fees 1,150 --
--------- ---------
Income (loss) before provision for
income taxes (92,096) 1,325
Provision for income taxes -- 648
--------- ---------
Net income (loss) (92,096) 677
Less redeemable preferred stock dividends
and accretion for original issue discount 4,457 5,695
--------- ---------
Net loss applicable to common shares $ (96,553) $ (5,018)
========= =========
Basic and diluted net loss per common share $ (5.98) $ (.31)
========= =========
Weighted average basic and diluted common
shares outstanding 16,134 16,019
========= =========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these condensed statements.
Page 5 of 26
<PAGE> 6
GENEVA STEEL COMPANY
(DEBTOR-IN POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(92,096) $ 677
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 22,216 23,357
Amortization 1,464 956
Deferred income taxes -- 335
Gain on asset disposal (119) --
(Increase) decrease in current
assets--
Accounts receivable, net 46,132 (19,462)
Inventories 28,621 (13,758)
Prepaid expenses and other (658) 2,062
Increase (decrease) in current
liabilities--
Accounts payable 2,177 3,633
Accrued liabilities (8,204) (4,870)
Accrued payroll and related taxes (1,204) 364
Accrued interest payable 10,329 315
Accrued pension and profit
sharing costs 15 (375)
-------- --------
Net cash provided by (used for) operating
activities 8,673 (6,766)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (6,288) (11,834)
Proceeds from sale of property, plant and
equipment 137 --
-------- --------
Net cash used for investing activities $ (6,151) $(11,834)
-------- --------
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 6 of 26
<PAGE> 7
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from revolving credit facility $ 13,010 $ 24,984
Payments on revolving credit facility (4,817) (5,274)
Payments of deferred loan fees (1,331) --
Change in bank overdraft (1,476) (1,114)
Other -- 4
-------- --------
Net cash provided by financing activities 5,386 18,600
-------- --------
Net change in cash 7,908 --
Cash at beginning of period -- --
-------- --------
Cash at end of period $ 7,908 $ --
======== ========
Supplemental disclosures of cash flow
information: Cash paid during
the period for:
Interest (net of amount capitalized) $ 3,742 $ 19,811
</TABLE>
Supplemental schedule of noncash financing activities:
For the six months ended March 31, 1999 and 1998, the Company increased the
redeemable preferred stock by $282 and $372, respectively, for the
accretion required over time to amortize the original issue discount on the
redeemable preferred stock incurred at the time of issuance. At March 31,
1999, the Company had accrued dividends payable of $28,492 (total
contractual dividends of $30,509)
During the six months ended March 31, 1999, warrants to purchase 233,502
shares of Class A common stock were exercised at $11 per share. The
exercise price was paid to the Company with 11,642 shares of redeemable
preferred stock as provided for in the redeemable preferred stock
agreement.
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
Page 7 of 26
<PAGE> 8
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) VOLUNTARY FILING FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES
BANKRUPTCY CODE
On February 1, 1999, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Utah, Central Division. The filing was made
necessary by a lack of sufficient liquidity. The Company's operating results for
fiscal 1998 and for the first two fiscal quarters of 1999 were severely affected
by, among other things, a dramatic surge in steel imports beginning in the
summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
price realization and shipments declined precipitously. Decreased liquidity made
it impossible for the Company to service its debt and fund ongoing operations.
Therefore, the Company sought protection under Chapter 11 of the Bankruptcy
Code. The Company has responded to the surge in imports by significantly
decreasing production, reducing costs and pursuing trade cases against dumped
and/or subsidized steel imports. Prior to the bankruptcy filing, the Company did
not make the $9 million interest payment due January 15, 1999 under the terms of
the Company's 9 1/2% Senior Notes due 2004. The Bankruptcy Code generally
prohibits the Company from making payments on unsecured, pre-petition debt,
including the 9 1/2% Senior Notes due 2004 and the 11 1/8% Senior Notes due
2001, except as provided in a confirmed plan of reorganization. The Company is
continuing operations in Chapter 11 and has procured a $125 million
debtor-in-possession credit facility (see Note 5).
As of February 1, 1999, the Company discontinued accruing interest on
the senior notes and dividends on its redeemable preferred stock. Contractual
interest on the senior notes for the three months ended March 31, 1999 was $8.3
million, which is $5.5 million in excess of interest expense included in the
accompanying financial statements. Contractual dividends on the redeemable
preferred stock as of March 31, 1999, was approximately $30.5 million, which is
$2.0 million in excess of dividends accrued in the accompanying balance sheet.
(2) INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements of Geneva Steel Company
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying unaudited condensed financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the Company.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K.
Page 8 of 26
<PAGE> 9
(3) INVENTORIES
Inventories were comprised of the following components (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
-------- -------------
<S> <C> <C>
Raw materials $ 17,903 $ 29,250
Semi-finished and finished goods 61,468 78,746
Operating materials 5,732 5,728
-------- --------
$ 85,103 $113,724
======== ========
</TABLE>
(4) BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated based upon the
weighted average number of common shares outstanding during the periods. Diluted
net income (loss) per common share is calculated based upon the weighted average
number of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method. For the three months ended March 31,
1999 and the six months ended March 31, 1999 and 1998, 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. Class B
common stock is included in the weighted average number of common shares
outstanding at one share for every ten shares outstanding because the Class B
common stock is convertible to Class A common stock at this same rate.
The net income (loss) for the three and six months ended March 31, 1999
and 1998 was adjusted for redeemable preferred stock dividends through January
31, 1999 and the accretion required over time to amortize the original issue
discount on the redeemable preferred stock incurred at the time of issuance.
(5) $125 MILLION DEBTOR-IN-POSSESSION CREDIT FACILITY
On February 19, 1999, the U.S. District Court for the District of Utah
granted the Company's motion to approve a new $125 million debtor-in-possession
credit facility with Congress Financial Corporation (the "Credit Facility"). The
Credit Facility expires on the earlier of the consummation of a plan of
reorganization or February 19, 2001. The Credit Facility replaced the Company's
previous revolving credit facility with a syndicate of banks led by Citicorp
USA, Inc. as agent, and, by including the property, plant and equipment in the
collateral base, is intended to provide additional liquidity. The Credit
Facility is secured by, among other things, accounts receivable; inventory; and
property, plant and equipment. Actual borrowing availability is subject to a
borrowing base calculation and the right of the lender to establish various
reserves, which it has done. The amount available to the Company under the
Credit Facility is approximately 60%, in the aggregate, of eligible inventories,
plus 85% of eligible accounts receivable, plus 80% of the orderly liquidation
value of eligible equipment up to a maximum of $40 million, less reserves on the
various collateral established by the lender. Borrowing availability under the
Credit Facility is also subject to other covenants. As of May 10, 1999, the
Company's eligible inventories, accounts receivable and eligible equipment
supported access to $65.6 million under the Credit Facility. As of May 10, 1999,
the Company had $9.4
Page 9 of 26
<PAGE> 10
million available under the Credit Facility, with $56.2 million in borrowings.
During May 1999, the Company expects to attain additional borrowing availability
through the reduction of certain reserves. There can, however, be no assurance
as to the amount of additional availability that will be provided or that the
lender will not take additional reserves in the future.
(6) MANNESMANN MARKETING AGREEMENT
On November 2, 1998, the Company signed a new, three-year agreement with
Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann will
be responsible for marketing of the Company's steel products 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's existing sales force will remain Company employees, but
will be directed by Mannesmann. The Company 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 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. Termination of the Mannesmann agreement would have a negative
impact on the cash flow and liquidity of the Company.
(7) CASH
At March 31, 1999, cash was restricted cash on deposit as collateral for
letters of credit. Subsequent to March 31, 1999, these letters of credit were
drawn upon.
Page 10 of 26
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
On February 1, 1999, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Utah, Central Division. The filing was made
necessary by a lack of sufficient liquidity. The Company's operating results for
fiscal 1998 and for the first two fiscal quarters of 1999 were severely affected
by, among other things, a dramatic surge in steel imports beginning in the
summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
price realization and shipments declined precipitously. Decreased liquidity made
it impossible for the Company to service its debt and fund ongoing operations.
Therefore, the Company sought protection under Chapter 11 of the Bankruptcy
Code. The Company has responded to the surge in imports by significantly
decreasing production, reducing costs and pursuing trade cases against dumped
and/or subsidized steel imports (See Results of Operations). Prior to the
bankruptcy filing, the Company did not make the $9 million interest payment due
January 15, 1999 under the terms of the Company's 9 1/2% Senior Notes due 2004.
The Bankruptcy Code generally prohibits the Company from making payments on
unsecured, pre-petition debt, including the 9 1/2% Senior Notes due 2004 and the
11 1/8% Senior Notes due 2001, except as provided in a confirmed plan of
reorganization. The Company is continuing operations in Chapter 11 and has
procured a $125 million debtor-in-possession credit facility (See Liquidity and
Capital Resources).
As of February 1, 1999, the Company discontinued accruing interest on
the senior notes and dividends on its redeemable preferred stock. Contractual
interest on the senior notes for the three months ended March 31, 1999 was $8.3
million, which is $5.5 million in excess of interest expense included in the
accompanying financial statement. Contractual dividends on the redeemable
preferred stock as of March 31, 1999, was approximately $30.5 million, which is
$2.0 million in excess of dividends accrued in the accompanying balance sheet.
Page 11 of 26
<PAGE> 12
Results of Operations
The following table sets forth the percentage relationship of certain
cost and expense items to net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 153.2 88.6 144.3 91.0
------ ------ ------ ------
Gross margin (53.2) 11.4 (44.3) 9.0
Selling, general and
administrative expenses 8.4 2.9 10.6 3.0
------ ------ ------ ------
Income (loss) from operations (61.6) 8.5 (54.9) 6.0
------ ------ ------ ------
Other income (expense):
Interest and other income 0.4 0.1 0.3 0.1
Interest expense (8.1) (5.6) (11.3) (5.7)
------ ------ ------ ------
(7.7) (5.5) (11.0) (5.6)
Income (loss) before reorganization
item and provision for income taxes (69.3) 3.0 (65.9) 0.4
Reorganization item 1.9 -- 0.8 --
------ ------ ------ ------
Income (loss) before provision
for income taxes (71.2) 3.0 (66.7) 0.4
Provision for income taxes -- 1.2 -- 0.2
------ ------ ------ ------
Net income (loss) (71.2)% 1.8% (66.7)% 0.2%
====== ====== ====== ======
</TABLE>
The following table sets forth the sales product mix as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Plate 63.2% 58.8% 63.3% 56.1%
Sheet 13.8 18.4 13.6 19.4
Pipe 10.0 12.9 9.4 12.9
Slab 9.9 7.5 10.6 9.3
Non-Steel 3.1 2.4 3.1 2.3
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
Page 12 of 26
<PAGE> 13
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Net sales decreased 69.2% due to decreased shipments of approximately
312,900 tons and decreased overall average selling prices for the three months
ended March 31, 1999 as compared to the same period in the previous fiscal year.
The weighted average sales price (net of transportation costs) per ton of plate,
pipe, sheet and slab products decreased by 20.7%, 24.8%, 26.1% and 29.8%,
respectively, in the three months ended March 31, 1999 compared to the same
period in the previous fiscal year. Shipped tonnage of plate, pipe, sheet and
slab products decreased approximately 174,700 tons or 58.2%, 39,000 tons or
68.3%, 75,000 tons or 68.7%, and 24,200 tons or 42.3%, respectively, between the
two periods. The decreases in prices and volumes were primarily a result of
increased supply from imports as discussed below, as well as other market
factors.
During the fourth quarter of fiscal year 1998 and the first and second
quarters of fiscal year 1999, 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 trade cases described below, the Company's overall
price realization and shipments are expected to increase slightly during the
third quarter of fiscal year 1999, but the negative impact of high import levels
and the resultant inventories will continue to adversely affect the financial
performance of the Company during such period. The high inventories of imported
steel products have created a short order delivery time, resulting in a low
backlog of orders. As of April 30, 1999, the Company had estimated total orders
on hand of approximately 115,800 tons compared to approximately 327,700 tons as
of April 30, 1998.
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 level of demand for steel in the United States economy
relative to steel demand in 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 resulting in a
loss of market share for domestic steel producers as well as a significant
increase in inventories held for sale. During such surge, as much as 40% of
domestic plate and hot rolled sheet consumption was supplied by imports. 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 and/or subsidized prices and are
adversely affecting domestic shipments and pricing.
While a previous import surge in 1996 primarily involved cut-to-length
plate, the current surge has included all of the Company's products. As a
result, from May 1998 to March 1999, the Company's plate and sheet prices fell
by 28.6% and 24.7%, respectively. Concurrently, the Company has been forced to
reduce
Page 13 of 26
<PAGE> 14
production by as much as 50%, resulting in higher costs per ton and production
inefficiencies, as well as a significant decline in operating results and cash
flow. During the three months ended March 31, 1999, the Company's total
shipments were approximately 210,900 tons, as compared to 523,800 tons for the
same period in the previous year. As a result of the partial import relief
described below, production and order entry rates have increased modestly. In
April 1999, the Company shipped 109,000 tons. In addition, the Company has
announced price increases of $10 to $20 per ton for its plate and sheet
products. The announced price increases are expected to gradually improve price
realization. There can, however be no assurance that market conditions will
allow the Company to attain the announced increases.
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 group also filed a subsidy (countervailing
duty) case against Brazil (all cases described in this paragraph are referred to
as the "Coiled Products Cases"). In mid November 1998, the International Trade
Commission (the "ITC") made a unanimous affirmative preliminary injury
determination. Preliminary dumping margins ranging from 25% to 71% for various
producers in Japan and Brazil were announced by the Department of Commerce
("DOC") on February 12, 1999, and preliminary margins ranging from 71% to 218%
for various producers in Russia were announced on February 22, 1999, with final
margins to be announced between May-July 1999. Countervailing duties ranging
from 7% to 9% were also announced with respect to Brazil. On April 29, 1999, the
DOC announced final anti-dumping duties on imports of hot-rolled coil products
from Japan of 17-67%. Final anti-dumping margins for Brazil and Russia will be
subsequently announced. The ITC is expected to make its final injury
determinations between June-September 1999. If affirmative, the final
determinations by the ITC and DOC will result in duties being imposed against
imported hot-rolled coil products from the offending countries that are not the
subject of a suspension agreement. 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.
The U.S. Administration has reached a tentative suspension agreement with Russia
that will allow imports of the subject product in the amount of 343,750 metric
tons in 1999 and 750,000 metric tons in each year thereafter through 2004.
Hot-rolled imports from Russia in 1998 were 3.4 million metric tons. The
agreement also includes price floors. The Russian government has not yet
confirmed the suspension agreement.
Imports of hot-rolled coil products from Japan and Brazil 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 remain at lower levels
at least until the Coiled Product Cases are resolved. Russian imports are
similarly expected to remain at lower levels pursuant to the above-described
suspension agreement. As a result, the Company expects that its production
levels, shipments and pricing of hot-rolled products will continue to increase
modestly as imports decline and excess inventory levels are reduced. This trend
could, however, reverse itself if other countries significantly increase imports
or if domestic demand for hot-rolled coils declines.
On February 22, 1999, five domestic steel producers filed anti-dumping
actions against cut-to-length plate imports from the Czech Republic, France,
India, Indonesia, Italy, Macedonia, Japan and South Korea. Also, countervailing
duty
Page 14 of 26
<PAGE> 15
cases were filed against France, India, Indonesia, Italy, Macedonia and South
Korea (all cases described in this paragraph are referred to as the
"Cut-to-length Plate Cases"). In April 1999, the ITC made a unanimous
affirmative preliminary injury determination with respect to all the respondent
countries except the Czech Republic and Macedonia, which were dismissed from the
cases. After April 1999, imports arriving in the United States could potentially
be at risk that duties eventually imposed in the future could be applied
retroactively to that date. Consequently, such imports may decline. The Company
anticipates that preliminary dumping margins will be announced by the DOC
between July-August 1999 with final margins announced between October
1999-January 2000. A final injury determination by the ITC is expected 45 days
after announcement of final dumping margins.
With respect to both the Coiled Products Cases and the Cut-to-length
Plate Cases, there can be 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 or the Cut-to-length Plate Cases will not increase or that
domestic shipments or prices will rise. The Company continues to monitor imports
of all its products and may 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 dumped and/or subsidized steel imports;
consequently, such imports could pose continuing or increasing problems for the
domestic steel industry and the Company.
Five-year sunset reviews of various cut-to-length plate cases decided in
1994 will begin in September 1999. The Company and other U.S. producers are
allowed to participate in those reviews in support of a five year extension of
the orders. The outcome of these reviews cannot currently be predicted, but the
failure to extend such dumping duties could have a material adverse effect.
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 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
be responsible for marketing of the Company's steel products 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's existing sales force will remain Company employees, but
will be directed by Mannesmann. The Company 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 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. Termination of the Mannesmann agreement would have a negative
impact on the cash flow and liquidity of the Company.
Page 15 of 26
<PAGE> 16
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,
increased to 153.2% for the three months ended March 31, 1999 as compared to
88.6% for the same period in the previous fiscal year. The overall average cost
of sales per ton shipped increased approximately $106 per ton between the two
periods, primarily as a result of production inefficiencies associated with
operating at less than 50% of capacity. As described above, the significant
surge in foreign imports and resulting low level of orders caused production
levels to be less than 50% of capacity. Operating costs per ton increased in
part because fixed costs were allocated over fewer tons. In addition, a lower of
cost or market inventory adjustment of approximately $1.7 million increased cost
of sales in the three months ended March 31, 1999. The Company has undergone
several rounds of personnel reductions and other cost cuts in an attempt to at
least partially offset the adverse cost effects of lower production rates. In
addition, the Company is currently attempting to minimize production
inefficiencies by limiting its production to a full, one-blast furnace level.
The Company will resume a two-blast furnace operation when order entry rates and
pricing indicate that the Company can attain an operations level superior to a
full, one-blast furnace operation. A two-blast furnace operation would create
additional working capital needs for the Company.
Depreciation costs included in cost of sales decreased approximately
$0.4 million for the three months ended March 31, 1999, compared with the same
period in the previous fiscal year. This decrease was due to decreases in the
asset base as a result of a write down at the end of fiscal year 1998 of
approximately $16.3 million for impaired, fixed assets.
Selling, general and administrative expenses for the three months ended
March 31, 1999 decreased approximately $0.7 million as compared to the same
period in the previous fiscal year. These lower expenses were due to cost
savings from staff and support personnel reductions.
During the three months ended March 31, 1999, the Company recorded
approximately $1.2 million of professional fees related to the reorganization.
These fees were not included in selling, general and administrative expenses.
The Company's reorganization expenses in future periods will likely increase
because of professional fees and other expenses associated with the Bankruptcy.
Interest expense decreased approximately $6.0 million during the three
months ended March 31, 1999 as compared to the same period in the previous
fiscal year. As of February 1, 1999, the Company discontinued accruing interest
on the senior notes. Contractual interest on the senior notes for the three
months ended March 31, 1999 was $8.3 million, which is $5.5 million in excess of
recorded interest expense on the senior notes.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1998
Net sales decreased 55.6% due primarily to decreased shipments of
approximately 585,100 tons and decreased overall average selling prices for the
six months ended March 31, 1999 compared to the same period in the previous
fiscal year. The weighted average sales price (net of transportation costs) per
ton of plate, pipe, sheet and slab products decreased by 14.9%, 17.1%, 18.8% and
24.4%, respectively, for the six months ended March 31, 1999 compared to the
same period in the previous fiscal year. Shipped tonnage of plate, pipe, sheet
and slab products decreased approximately 289,000 tons or 51.1%, 74,900 tons or
67.5%,
Page 16 of 26
<PAGE> 17
157,900 tons or 68.2% and 63,300 tons or 44.2%, respectively, between the two
periods. The decreases in prices and volumes were primarily a result of
increased supply from imports as discussed above, as well as other market
factors.
The Company's cost of sales, as a percentage of net sales, increased to
144.3% for the six months ended March 31, 1999 as compared to 91.0% for the same
period in the previous fiscal year. The overall average cost of sales per ton
shipped increased approximately $103 per ton between the two periods, primarily
as a result of production inefficiencies associated with operating at less than
50% of capacity. As described above, the significant surge in foreign imports
and resulting low level of orders caused production levels to be less than 50%
of capacity. Operating costs per ton have increased in part because fixed costs
were allocated over fewer tons. In addition, a lower of cost or market inventory
adjustment of approximately $1.7 million increased cost of sales in the six
months ended March 31, 1999.
Depreciation costs included in cost of sales decreased approximately
$1.1 million for the six months ended March 31, 1999 compared with the same
period in the previous fiscal year. This decrease was due to decreases in the
asset base as a result of approximately $16.3 million of impaired fixed assets
being written-down at the end of fiscal year 1998.
Selling, general and administrative expense for the six months ended
March 31, 1999 increased approximately $3.1 million as compared to the same
period in the previous fiscal year. These higher expenses were due to increased
expenses of approximately $4 million for allowance of doubtful accounts
associated with the depressed steel market that is affecting certain of the
Company's customers. These higher expenses were offset in part by cost savings
from staff and support personnel reductions.
Subsequent to the Company's filing of a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code on February 1, 1999, the
Company recorded approximately $1.2 million of professional fees related to the
reorganization, which were not included in selling, general and administrative
expenses.
Interest expense decreased approximately $5.5 million during the six
months ended March 31, 1999 as compared to the same period in the previous
fiscal year. As of February 1, 1999, the Company discontinued accruing interest
on the senior notes. Contractual interest on the senior notes for the six months
ended March 31, 1999 was $16.7 million, which is $5.5 million in excess of
recorded interest expense on the senior notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from operating expenses,
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
Page 17 of 26
<PAGE> 18
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. The Bankruptcy Code generally prohibits the Company
from making payments on unsecured, pre-petition debt, including the 9 1/2%
Senior Notes due in January 2004 and the 11 1/8% Senior Notes due in March 2001,
except as provided in a confirmed plan of reorganization. As discussed above,
the Company has not been accruing interest on the Senior Notes since February 1,
1999, the date the Company filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code.
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. As of March
31, 1999, the Redeemable Preferred Stock consisted of 388,358 shares, no par
value, with a liquidation preference of approximately $151 per share. As
provided for in the Redeemable Preferred Stock Agreement, 11,642 shares of
Redeemable Preferred Stock were used to pay for the exercise of warrants to
purchase 233,502 shares of Class A common stock. 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 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 $28.5 million at March 31, 1999. The Company will not pay
dividends on the Redeemable Preferred Stock during the pendency of its Chapter
11 proceeding. As of February 1, 1999, the company discontinued recording
dividends on the Redeemable Preferred Stock. Contractual dividends on the
Redeemable Preferred Stock as of March 31, 1999, were approximately $30.5
million, which is $2.0 million in excess of dividends accrued. 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. 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. At March 31, 1999, warrants to purchase
898,498 shares of Class A common stock were outstanding.
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
Page 18 of 26
<PAGE> 19
Notes are redeemable, in whole or in part, at the option of the Company, subject
to certain redemption premiums. In January 1999, the Company did not make a $9.5
million interest payment due on the 9 1/2% Senior Notes. The Bankruptcy Code
generally prohibits the Company from making payments on unsecured pre-petition
debt, including the 9 1/2% Senior Notes due in January 2004 and the 11 1/8%
Senior Notes due in March 2001, except as provided in a confirmed
reorganization. As discussed above, the Company has not been accruing interest
on the Senior Notes since February 1, 1999, the date the Company filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code.
On February 19, 1999, the U.S. District Court for the District of Utah
granted the Company's motion to approve a new, $125 million debtor-in-possession
credit facility with Congress Financial Corporation (the "Credit Facility"). The
Credit Facility expires on the earlier of the consummation of a plan of
reorganization or February 19, 2001. The Credit Facility replaced the Company's
previous revolving credit facility with a syndicate of banks led by Citicorp
USA, Inc. as agent, and, by including the property, plant and equipment in the
collateral base, is intended to provide additional liquidity. The Credit
Facility is secured by, among other things, accounts receivable; inventory; and
property, plant and equipment. Actual borrowing availability is subject to a
borrowing base calculation and the right of the lender to establish various
reserves, which it has done. The amount available to the Company under the
Credit Facility is expected to be approximately 60%, in the aggregate, of
eligible inventories, plus 85% of eligible accounts receivable, plus 80% of the
orderly liquidation value of eligible equipment up to a maximum of $40 million,
less reserves on the various collateral established by the lender. Borrowing
availability under the Credit Facility is also subject to other covenants. As of
May 10, 1999, the Company's eligible inventories, accounts receivable and
eligible equipment supported access to $65.6 million under the Credit Facility.
As of May 10, 1999, the Company had $9.4 million available under the Credit
Facility, with $56.2 million in borrowings. During May 1999, the Company expects
to attain additional borrowing availability through the reduction of certain
reserves. There can, however, be no assurance as to the amount of additional
availability that will be provided or that the lender will not take additional
reserves in the future. The terms of the Credit Facility include cross default
and other customary provisions.
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 $8.7 million for the six months
ended March 31, 1999, as compared with net cash used for operating activities of
$6.8 million for the six months ended March 31, 1998. The sources of cash for
operating activities during the six months ended March 31, 1999, included
depreciation and amortization of $23.7 million, a decrease in accounts
receivable of $46.1 million associated primarily with the implementation of the
Mannesmann agreement and reduced sales volume, a decrease in inventories of
$28.6 million as a result of lower production levels, an increase in accrued
interest payable of $10.3 million and an increase in accounts payable of $2.2
million. These sources of cash were offset in part by a net loss of $92.1
million, a decrease in accrued liabilities of $9.6 million and a decrease in
accrued payroll and related taxes of $1.4 million. At current production and
pricing levels, the Company's production activities continue to consume cash.
The Company continues to pursue activities to minimize the liquidity impact
thereof. Nevertheless, an improvement in market conditions is likely necessary
for the Company's production activities to become cash flow positive.
Page 19 of 26
<PAGE> 20
The Company is attempting to improve its liquidity by offering certain
noncore assets for sale. The Company is finalizing an agreement to sell its
large diameter pipe mill equipment for $4.5 million and continues to offer other
noncore assets for sale. The large diameter pipe mill equipment has been idled
for many years. Payment for the large diameter pipe mill equipment is expected
to be received by the end of July 1999. The sale of the large diameter pipe mill
equipment is subject to bankruptcy court approval, which cannot be assured.
Capital expenditures were $6.3 million and $11.8 million for the six
months ended March 31, 1999 and 1998, respectively. Capital expenditures for
fiscal year 1999 are estimated at approximately $10 to $12 million, which
includes implementation of new business and financial software and various other
projects. Given current market conditions and the uncertainties created thereby,
the Company is continuing to limit its capital spending. 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 ($7.7 million of which had
been spent as of March 31, 1999), with implementation completed in 1999 (see
Year 2000 discussion below). The company is, however, currently experiencing
various operations disruptions associated with implementation of the SAP
software, which are expected to continue in the near future. There can be no
assurance that in the near term the Company will realize the expected benefits
of SAP or that the disruptions will not continue for a longer than expected
time. 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 March 31, 1999, the Company had
spent (net of DOE reimbursement) approximately $1.3 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
Page 20 of 26
<PAGE> 21
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 human resource and payroll module was
implemented on January 1, 1999. On February 1, 1999, the Company completed the
last phase of the SAP implementation, which includes sales distribution
materials management, production planning, product costing, and other management
information systems. This completes the year 2000 compliance of all of the
Company's business systems. The HP hardware, operating systems and software
installed are year 2000 ready. 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 is working with vendors to test the year
2000 readiness of such hardware, operating systems and software application
systems. The Company is also reviewing, testing and correcting 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 third 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,
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 second and third
calendar quarters of 1999.
Through March 31, 1999, the Company had incurred approximately $7.7
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
consulting, implementing and transitioning to new computer hardware and software
for the SAP enterprise-wide business systems. More than 90% of these costs have
been capitalized. Training and re-engineering efforts have been expensed. The
Company anticipates incurring an additional $0.3 to $2.3 million in connection
with its 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
Page 21 of 26
<PAGE> 22
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 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 market, 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 gradually improve, the commercial and liquidity
benefits of the Mannesmann agreement, the successful implementation of the
Mannesmann agreement, the Company's ability to successfully reorganize under
Chapter 11 of the United States Bankruptcy Code, continued access to and
adequacy of the Credit Facility, the Company's ability to restrict capital
spending, the Company's ability to sell certain non-core assets, the effect of
SAP implementation, the Company's plans 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.
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.
Page 22 of 26
<PAGE> 23
The short-term and long-term liquidity of the Company also is dependent upon
several other factors, including continued access to the Company's Credit
Facility; reaction by vendors, customers and others to the Company's bankruptcy
filing; cash needs to fund working capital as volume increases; 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 recent bankruptcy
filing and liquidity position, the Company's financial flexibility is limited.
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 23 of 26
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 1, 1999, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Utah, Central Division. The filing was made
necessary by a lack of sufficient liquidity. The Company's operating results for
fiscal 1998 and for the first two fiscal quarters of 1999 were severely affected
by, among other things, a dramatic surge in steel imports beginning in the
summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
price realization and shipments declined precipitously. Decreased liquidity made
it impossible for the Company to service its debt and fund ongoing operations.
Therefore, the Company sought protection under Chapter 11 of the Bankruptcy
Code. The Company has responded to the surge in imports by significantly
decreasing production, reducing costs and pursuing trade cases against dumped
and/or subsidized steel imports. The Bankruptcy Code generally prohibits the
Company from making payments on unsecured, pre-petition debt, including the 9
1/2% Senior Notes due 2004 and the 11 1/8% Senior Notes due 2001, except as
provided in a confirmed plan of reorganization. The Company is continuing
operations in Chapter 11 and has procured a $125 million debtor-in-possession
credit facility.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company did not make its interest payment of approximately $9.0
million due January 15, 1999 on the Company's 9 1/2% Senior Notes and its
interest payment of approximately $7.5 million due March 15, 1999 on the
Company's 11 1/8% Senior Notes, which resulted in a default under the terms
thereof. The defaults were not cured by the Company. As described above, the
Company filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code on February 1, 1999. The Bankruptcy Code generally
prohibits the Company from making payments on unsecured, pre-petition debt,
including the Senior Notes, except as provided in a confirmed plan of
reorganization. Interest payment defaults under the Senior Notes are excluded as
a cross default under the terms of the Credit Facility.
As of February 1, 1999, the Company discontinued accruing interest on
the Senior Notes and dividends on its Redeemable Preferred Stock. Contractual
interest on the Senior Notes for the three months ended March 31, 1999 was $8.3
million, which is $5.5 million in excess of interest expense included in the
accompanying financial statements. Contractual dividends on the Redeemable
Preferred Stock as of March 31, 1999, was approximately $30.5 million, which is
$2.0 million in excess of dividends accrued in the accompanying balance sheet.
Page 24 of 26
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Filed
Number Exhibit Herewith
<S> <C> <C>
27 Financial Data Schedule X
</TABLE>
(b) Reports on Form 8-K.
On February 17, 1999, the Company filed a current report on Form 8-K to
report the Company's voluntary filing for relief under Chapter 11 of the United
States Bankruptcy Code.
Page 25 of 26
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEVA STEEL COMPANY
By: /s/ Dennis L. Wanlass
-------------------------------
Vice President, Treasurer and
Chief Financial Officer
Dated: May 17, 1999
Page 26 of 26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,908
<SECURITIES> 0
<RECEIVABLES> 17,298
<ALLOWANCES> 10,754
<INVENTORY> 85,103
<CURRENT-ASSETS> 129,291
<PP&E> 665,366
<DEPRECIATION> (270,139)
<TOTAL-ASSETS> 529,871
<CURRENT-LIABILITIES> 174,749
<BONDS> 325,000
55,628
0
<COMMON> 106,018
<OTHER-SE> (146,614)
<TOTAL-LIABILITY-AND-EQUITY> 529,871
<SALES> 138,045
<TOTAL-REVENUES> 138,045
<CGS> 199,142
<TOTAL-COSTS> 199,142
<OTHER-EXPENSES> 15,821
<LOSS-PROVISION> (2,940)
<INTEREST-EXPENSE> (15,178)
<INCOME-PRETAX> (92,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (92,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (92,096)
<EPS-PRIMARY> (5.98)
<EPS-DILUTED> (5.98)
</TABLE>
