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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999, 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:
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Name of each exchange on
Title of each class which registered
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CLASS A COMMON STOCK, NONE
NO PAR VALUE
WARRANTS TO PURCHASE NONE
CLASS A COMMON STOCK
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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 the 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 November 30, 1999, the Registrant had 15,008,767
and 18,451,348 shares of Class A and Class B Common Stock, respectively,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report to Shareholders for the
fiscal year ended September 30, 1999 are incorporated by reference in Parts II
and IV of this report.
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PART I
ITEM 1. BUSINESS.
BACKGROUND
Geneva Steel Company (the "Company" or "Geneva") owns and operates
the only integrated steel mill in the western United States. The Company's mill
manufactures coiled and flat plate, sheet, pipe and slabs for sale primarily in
the western and central United States.
The steel mill is located 45 miles south of Salt Lake City, Utah on
approximately 1,400 acres. The steel mill's facilities include four coke oven
batteries, three blast furnaces, two basic oxygen process ("Q-BOP") furnaces, a
continuous casting facility, a combination continuous rolling mill and various
finishing facilities. The Company's coke ovens produce coke from a blend of
various grades of metallurgical coal. Coke is used as the principal fuel for the
Company's blast furnaces, which convert iron ore into liquid iron. Liquid iron,
scrap metal and metallic alloys are combined and further refined in the Q-BOP
furnaces to produce liquid steel. The liquid steel is then processed through the
continuous casting facility into steel slabs. Steel slabs are either hot-charged
into furnaces and then rolled, or they are allowed to cool and then reheated
prior to rolling. Slabs are rolled into hot-rolled steel products (coiled and
flat plate, hot-rolled sheet and pipe) in the Company's rolling and finishing
mills. The Company also sells a portion of its slabs to other steel processors.
The Company acquired the steel mill and related facilities from USX
Corporation ("USX") on August 31, 1987. USX operated the mill and related
facilities from 1944 until 1986, when it placed the mill on hot-idle status.
Pursuant to the acquisition agreement between USX and the Company, USX retained
liability for retiree life insurance, health care and pension benefits relating
to employee service prior to the acquisition. USX also indemnified the Company
for costs due to any environmental condition existing on the Company's real
property as of the acquisition date that is determined to be in violation of
environmental laws or otherwise results in the imposition of environmental
liability, subject to the Company's sharing the first $20 million of certain
cleanup costs on an equal basis. See "Environmental Matters." Since acquiring
the mill from USX, the Company has modernized most of its facilities. The mill
includes the widest combination continuous rolling mill and one of the widest
in-line casters in the world. Both the rolling mill and the caster are unique in
the industry and enable the Company to offer an expanded range of products;
shift its product mix according to market demand; and produce wide, light-gauge
plate products more efficiently than many of its competitors.
RECENT DEVELOPMENTS
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 years 1998 and 1999 were severely affected by, among other
things, the dramatic surge in steel imports beginning in 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. 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 (collectively, the "Senior Notes"), except
pursuant to a confirmed plan of reorganization. The Company is in possession of
its properties and assets and continues to manage its businesses as
debtor-in-possession subject to the supervision of the Bankruptcy Court. See
Item 7 "Management's Discussion and Analysis of Financial condition and Results
of Operations."
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
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by Citicorp USA, Inc. as agent. 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 established by the lender. Borrowing availability
under the Credit Facility is also subject to other covenants. As of November 30,
1999, the Company's eligible inventories, accounts receivable and eligible
equipment supported access to $57.4 million in borrowings under the Credit
Facility. As of November 30, 1999, the Company had $10.8 million available under
the Credit Facility, with $44.2 million in borrowings and $2.4 million in
letters of credit outstanding. There can be no assurance as to the amount of
availability that will be provided in the future or that the lender will not
require additional reserves. The terms of the Credit Facility include cross
default and other customary provisions.
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 year ended September 30, 1999 was $33.1
million, which is $22.0 million in excess of recorded interest expense included
in the accompanying financial statement. Contractual dividends on the redeemable
preferred stock as of September 30, 1999, was approximately $28.5 million, which
is $8.4 million in excess of dividends accrued in the accompanying balance
sheet.
Pursuant to the provisions of the Bankruptcy Code, all actions to
collect upon any of the Company's liabilities as of the petition date or to
enforce pre-petition date contractual obligations were automatically stayed.
Absent approval from the Bankruptcy Court, the Company is prohibited from paying
pre-petition obligations. However, the Bankruptcy Court has approved payment of
certain pre-petition liabilities such as employee wages and benefits and certain
other pre-petition obligations. Additionally, the Bankruptcy Court has approved
the retention of legal and financial professionals. As debtor-in-possession, the
Company has the right, subject to Bankruptcy Court approval and certain other
conditions, to assume or reject any pre-petition executory contracts and
unexpired leases. Parties affected by such rejections may file pre-petition
claims with the Bankruptcy Court in accordance with bankruptcy procedures.
The Company is currently developing a plan of reorganization (the
"Plan of Reorganization") through, among other things, discussions with the
official creditor committees appointed in the Chapter 11 proceedings. The
objective of the Plan of Reorganization is to restructure the Company's balance
sheet to (i) significantly strengthen the Company's financial flexibility
throughout the business cycle, (ii) fund required capital expenditures and
working capital needs, and (iii) fulfill those obligations necessary to
facilitate emergence from Chapter 11. In conjunction with the Plan of
Reorganization, the Company intends to file an application in January 2000 for a
government loan guarantee under the Emergency Steel Loan Guarantee Program (the
"Loan Guarantee Program"). The application will seek a government loan guarantee
for a portion of the financing required to consummate the Plan of
Reorganization, with the remaining financing being provided through other means.
In connection with preparing the loan guarantee application, the Company is in
the final phase of selecting and negotiating terms with a major bank to serve as
the primary lender under the Loan Guarantee Program. There can be no assurance
that the Company will be selected to participate in the Loan Guarantee Program
or that, with or without a guarantee, the Company can obtain the necessary
financing to consummate the Plan of Reorganization.
Although management expects to file the Plan of Reorganization,
there can be no assurance at this time that a Plan of Reorganization will be
proposed by the Company, approved or confirmed by the Bankruptcy Court, or that
such plan will be consummated. The Bankruptcy Court has granted the Company's
request to extend its exclusive right to file a Plan of Reorganization through
February 28, 2000. While the Company intends to request further extensions of
the exclusivity period if necessary, there can be no assurance that the
Bankruptcy Court will grant such further extensions. If the exclusivity period
were to expire or be terminated, other interested parties, such as creditors of
the Company, would have the right to propose alternative plans of
reorganization.
Although the Chapter 11 Bankruptcy filing raises substantial doubt
about the Company's ability to continue as a going concern, the accompanying
financial statements have been prepared on a going concern basis. This basis
contemplates the continuity of operations, realization of assets, and discharge
of liabilities in the ordinary course of business. The statements also present
the assets of the Company at historical cost and the current intention that they
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will be realized as a going concern and in the normal course of business. A plan
of reorganization could materially change the amounts currently disclosed in the
financial statements.
The Company's financial statements do not present the amount which
may ultimately be paid to settle liabilities and contingencies which may be
allowed in the Chapter 11 Bankruptcy case. Under Chapter 11, the right of, and
ultimate payment by the Company to pre-petition creditors may be substantially
altered. This could result in claims being paid in the Chapter 11 Bankruptcy
proceedings at less (and possibly substantially less) than 100 percent of their
face value. At this time, because of material uncertainties, pre-petition claims
are carried at the Company's face value in the accompanying financial
statements. Moreover, the interests of existing preferred and common
shareholders could, among other things, be very substantially diluted or even
eliminated. Further information about the financial impact of the Chapter 11
Bankruptcy filings is set forth in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and Notes to Financial
Statements.
Management expects that a Plan of Reorganization will be completed
and ready to file with the bankruptcy court during the first calendar quarter of
2000. The Plan of Reorganization will be conditioned on the Company being
approved for a guarantee under the Loan Guarantee Program. There can be no
assurance as to the actual timing for the filing of the Plan of Reorganization
or the approval thereof by the Bankruptcy Court, if at all.
As a result of various trade cases described below as well as
improving market conditions in several foreign economies, market conditions for
the Company's products have recently improved. Both the Company's order entry
and price realization have improved significantly in recent months. The
Company's shipment rate has increased from a low in February 1999 of 44,000 tons
to 146,000 tons in November 1999. Similarly, overall price realization has
increased by 5.7% during the same period, despite a product mix shift to
lower-priced sheet. The timing and magnitude of the recent volume and pricing
improvements are consistent with initial market recoveries following the success
of previously-filed trade cases. The Company expects in the near term that both
volume and pricing will continue to improve gradually. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CAPITAL PROJECTS
Overview
The Company has spent approximately $48 million, $11 million (net of
insurance claim settlement of $12.5 million) and $8 million on capital projects
during the fiscal years ended September 30, 1997, 1998 and 1999, respectively.
These expenditures were made primarily in connection with the Company's ongoing
modernization and capital maintenance efforts. Since fiscal year 1989, Geneva
has spent approximately $645 million on plant and equipment to modernize and
renovate its production facilities, as well as for ongoing capital maintenance.
Geneva believes its modernization efforts have significantly strengthened the
Company's capabilities by reducing costs, increasing operating flexibility,
broadening its product lines, improving product quality and increasing
throughput rates.
The Company's modernization program was designed to take advantage
of the unique features of the Company's rolling mill. Geneva's wide six stand
rolling mill is differentiated from competitors' mills by its ability to roll
both narrow and wide one inch entry bars into finished product in a single pass.
In contrast, other producers utilize either a single-stand reversing mill or a
single-stand steckel mill to roll entry bars, requiring multiple passes.
Reducing the number of passes increases throughput, operating efficiencies and
yields, particularly on thinner gauge product.
Geneva's in-line caster further enhances the Company's production
process by directly casting slabs to the required final width, up to 126 inches
wide, before the slabs are directly rolled. Wide casting and direct rolling
reduces heating and handling requirements and eliminates cross rolling to obtain
final product width. The Company further capitalized on its ability to cast and
roll wide plate products by completing a wide plate project which enables Geneva
to produce coiled plate up to 122 inches in width and subsequently cut the
coiled plate into flat plate. The combination of the caster, rolling mill and
wide plate project has created an efficient production process for wide
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products that most of Geneva's competitors do not possess. As a result, the
Company believes its plate production costs are lower than many of its
competitors.
Capital Projects
The key elements of the modernization are: (i) the replacement of
Geneva's open hearth furnaces with two state-of-the-art basic oxygen process
("Q-BOP") steelmaking furnaces, improving product quality and throughput and
reducing costs; (ii) the construction of one of the widest in-line casters in
the world, enabling the Company to cast slabs at the desired width without
cross-rolling; (iii) the completion of a wide-plate project, positioning Geneva
as the only North American producer currently offering coiled plate in widths
greater than 96 inches and improving plate production efficiencies; and (iv) the
modernization of Geneva's rolling mill, enhancing throughput rates, quality and
cost.
The Company has identified several large-scale capital improvement
projects that it believes would further increase the Company's production
capacity, expand product offerings, improve operating efficiencies and reduce
costs. With the exception of the walking beam furnace, these projects are not
currently included in the Company's future capital budgets. The Company' slab
heating facilities are relatively high cost operations and lack the capacity to
heat slabs at the same rate as can be cast and rolled. By utilizing a
combination of all the Company's slab heating facilities, the Company has
substantially, but not completely, removed its slab heating bottleneck at the
higher production levels achieved in the past. In the long term, the Company
requires a walking beam furnace (cost of approximately $45 million) that can
heat all its slabs. The walking beam furnace would reduce costs, increase prime
yields and improve quality by enabling the Company to shut down multiple heating
facilities and by significantly improving the temperature consistency of slabs.
In addition, the walking beam would increase the Company's capacity to produce
large coils, which are made from slabs longer than those that can be heated in
certain existing facilities. As a result of the increased heating capacity of
the walking beam furnace, the Company: (i) shifts production of slabs into a
near-equal amount of hot-bands (less yield loss) and (ii) converts approximately
21.6 tons and 59.0 tons of secondary and scrap steel, respectively, into a
near-equal amount of hot-bands.
The Company has identified several other projects costing lesser
amounts that would also significantly improve operations. Several of the
projects are in the advanced-planning stage and could likely be completed as a
part of future capital maintenance budgets. These include a new plate leveler,
solid state electrical drives for the rolling mill and upgrades to the Company's
small diameter pipe mill.
The Company's capital projects are under continuous review, and
depending on market, operational, liquidity and other factors, the Company may
elect to adjust the design, timing and budgeted expenditures of its capital
plan. There can be no assurance that the projected benefits of the capital
projects will be fully achieved, sufficient product demand will exist for the
Company's additional throughput capacity, or that the planned capital projects
can be completed in a timely manner or for the amounts budgeted. Notwithstanding
the completion of many capital projects, management believes that additional
capital projects will be critical to the Company's long-term ability to compete.
PRODUCTS
The Company's principal products are coiled and flat plate,
hot-rolled sheet, pipe and slabs. The Company also sells non-steel materials
that are by-products of its steelmaking operations.
The Company's 132-inch combination continuous rolling mill has the
flexibility to roll either sheet or plate in response to customer demands and
changing market conditions. This flexibility maximizes the Company's utilization
of its facilities. Generally, the Company manufactures products in response to
specific customer orders. The Company also operates a plate stocking program to
reduce lead times and improve customer service. Consistent with the Company's
strategic objectives, plate shipments have over time generally increased as the
modernization program has been completed and various upgrades to plate
processing and finishing equipment have been integrated into the production
process. The Company's product sales mix as a percent of net sales for fiscal
years 1995 through 1999 is shown below:
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----------------------------------------------------
1995 1996 1997 1998 1999
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Plate ................. 35% 45% 45% 62% 56%
Sheet ................. 41 30 30 18 25
Pipe .................. 6 6 10 11 10
Slab .................. 15 16 12 7 6
Non-steel ............. 3 3 3 2 3
--- --- --- --- ---
Total ..... 100% 100% 100% 100% 100%
=== === === === ===
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Coiled and Flat Plate. The Company produces plate products which
consist of hot rolled carbon and high-strength low alloy steel plate in coil
form, cut-to-length from coil and flat rolled in widths varying from 48 to 122
inches and in thicknesses varying from .1875 of an inch to 3.5 inches. Coiled
plate is produced and sold in coiled form in thickness of .1875 to .875 of an
inch and widths of 42 to 122 inches. Coiled plate, once cut-to-length and
leveled, can be used for cut-to-length plate applications such as spiral-welded
pipe, electric resistance welded pipe and steel tubing. Coiled and flat plate
can be used for heavy steel structures such as storage tanks, railroad cars,
ships and bridges.
Sheet. The Company produces hot-rolled sheet steel which is sold in
sheet or coil form in thicknesses of .097 to .230 of an inch and widths of 40 to
74 inches. Maximum widths vary according to thickness. Included in the sheet
products made by the Company are cut-to-length sheet and hot-rolled bands. Sheet
is used in a variety of applications such as storage tanks, light structural
components and supports and welded tubing.
Pipe. The Company produces electric resistance welded pipe ("ERW
pipe") ranging from approximately 6 5/8 to 16 inches in diameter. ERW pipe is
manufactured by heating and fusing the edges of the steel coil to form the pipe.
The Company's ERW pipe is used primarily in pipelines, including water, natural
gas and oil transmission and distribution systems, and in standard and
structural pipe applications.
Slab and Non-Steel. The Company has sold steel slabs when market
conditions were favorable and as a means of maximizing production through the
continuous caster. The Company also sells various by-products resulting from its
steelmaking activities.
MARKETING; PRINCIPAL CUSTOMERS
The Company sells its prime steel products through a sales agency
arrangement primarily to steel service centers and distributors, which in recent
years have become one of the largest customer groups in the domestic steel
industry. Service centers and distributors accounted for approximately 65% of
the Company's finished product sales (excluding slabs) during fiscal year 1999.
The Company also sells its products to steel processors and various end-users,
including manufacturers of welded tubing, highway guardrail, storage tanks,
railcars, ships and agricultural and industrial equipment. The Company has
developed a broad customer base of approximately 450 customers in 40 states, and
abroad through exporters to several customers in Canada and Mexico, with no
concentration in any particular industry.
The Company sells its ERW pipe to end-users and distributors
primarily in the Western and Central United States, where demand for pipe
fluctuates in partial response to oil and gas industry cycles, import levels and
other factors.
Export sales, which generally have lower margins than domestic
sales, accounted for approximately 1.4%, 2.6% and 0.4% of the Company's net
sales during fiscal years 1997, 1998 and 1999, respectively.
The Company's principal marketing efforts are in the Western and
Central United States. The Company believes that it holds a significant market
share of the plate, hot-rolled sheet and pipe sales in the eleven western
states.
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The Company has also focused on expanding its share of the market in other areas
of the United States. On November 2, 1998, the Company signed a new, three-year
agreement with Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement,
Mannesmann markets the Company's steel products throughout the continental
United States. Mannesmann previously marketed the Company's products in 15
midwestern states and to certain customers in the eastern United States. The
Company's existing sales force remains Geneva employees, but are directed by
Mannesmann. The Company also has made several other organization changes
designed to improve product distribution and on-time delivery.
The Company continues to evaluate its sales and marketing approach
and may make additional changes in the future. The Company's relationship with
Mannesmann began at the time the mill was acquired by the Company. At the
outset, Mannesmann provided a purchase guarantee for a portion of the Company's
output, which guarantee was instrumental to the Company's financing
arrangements. Since then, Mannesmann has provided various other means of
enhancing the Company's liquidity. The Company may in the future modify its
sales and marketing approach by extending its in-house marketing efforts or
expanding its approach to include additional downstream distribution functions.
The Company's strategy is to maintain its core market in the western
United States, where its market position is the strongest, and to increase
growth in the midwest, southeast and eastern regions. The Company believes that
service centers and distributors account for a substantially larger proportion
of its sales than of sales for the industry as a whole. Demand from this
customer group historically has fluctuated widely due to substantial swings in
the group's inventory levels. In view of these factors, the Company is targeting
selected steel processors and various end-users as sources for additional sales,
while retaining strong relationships with service center and distributor
customers. The Company believes its modernization program enables the Company to
produce higher quality products and to gain access to a wider range of
customers.
The Company's rolling mill can produce more wide, coiled plate than
the Company's processing facilities can cut and level into higher margin flat
plate. In addition, the Company's western location creates logistical challenges
in providing on-time delivery to its midwestern and southeastern customers.
Consequently, the Company has created a plate distribution and processing system
intended to increase plate processing capacity and improve customer service. The
facilities allow the Company to further maximize its sales of flat plate made
from coils. The system utilizes a hub-and-spoke concept in which products are
shipped in bulk primarily by rail from the Company to transloading centers or
plate processors and thereafter delivered in smaller quantities primarily by
truck to customers.
The Company has established transloading centers to which plate can
be shipped. These inventories are located in relative close proximity to the
Company's customer base to maximize availability and on-time delivery. In
addition, the Company has contracted with several processors to which coiled
plate can be shipped for processing into flat plate for specific customers.
Through these arrangements, the Company has significantly increased its capacity
to produce and sell plate made from coils at costs comparable to processing
plate on its own internal facilities.
The Company generally produces steel products in response to
specific orders. As of November 30, 1999, the Company had estimated total orders
on hand for approximately 148,000 tons compared to approximately 74,000 tons as
of November 30, 1998. See "Competition and Other Market Factors."
EMPLOYEES; LABOR AGREEMENT
As of November 30, 1999, the Company's workforce included
approximately 1,725 full-time employees, of whom approximately 285 are salaried
and approximately 1,440 are union-eligible. The Company's operating management
personnel generally have considerable experience in the steel industry. Almost
half have more than 20 years of industry experience, with most of the remaining
managers ranging in experience from 8 to 20 years. The Company's senior
operating managers have an average of approximately 20 years of industry
experience.
Substantially all of the Company's union-eligible employees are
represented by the United Steelworkers of America under a collective bargaining
agreement. In April 1998, the Company reached a new, three-year labor agreement
with the United Steelworkers of America. The negotiations were completed without
any work interruptions
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or labor disruption. The Company believes that its labor agreement is an
important competitive advantage. Although the Company's wage rates under the
agreement are high by local standards and comparable to regional competitors,
its total hourly labor costs are substantially below recent industry averages
compiled by the American Iron and Steel Institute. Unlike labor agreements
negotiated by many other domestic integrated steel producers, the Company's
labor agreement does not contain traditional work rules, significantly limits
the Company's pension obligations and entitles the Company to reduce its profit
sharing obligations by an amount equal to a portion of its capital expenditures.
The Company did not assume any pension obligations or retiree medical
obligations related to employment service while the plant was owned by USX.
As part of the Company's labor agreement, the Company and the Union
reached several new understandings intended to create a cooperative partnership.
The objectives of the partnership include, among others, (i) improving
productivity, quality and customer service, (ii) expanding employee involvement
in decision making, and (iii) creating a better work environment.
The Company has made significant progress in implementing its
strategy to reduce its employment costs through process redesign, workplace
restructuring, modernization and severance incentives. Since December 1997, the
Company's executive, administrative and operating staff has been reduced from
473 to 285. During the same period, the Company has also reduced its
union-eligible workforce by 30% to 1,440 employees.
The Company's labor agreement also contains a performance dividend
plan intended to reward employees for increased shipments of steel products.
Compensation under the plan includes a monthly guarantee of $.33 per hour for
all union represented workers. The guaranteed payment is based on an annualized
shipment rate of up to 1.5 million tons. As shipments increase above this level,
compensation under the plan also increases.
The Company also has a performance dividend plan for all non-union
employees that provides additional compensation as shipment levels increase.
Unlike the union plan, however, there are no guaranteed payments.
The Company's profit sharing obligations under the labor agreement
are based on earnings before taxes, extraordinary items and profit sharing. The
Company's profit sharing obligations are reduced by an amount equal to a portion
of its capital expenditures. The Company is required to contribute each year to
the profit sharing pool 10% of earnings before taxes, extraordinary items and
profit sharing after deducting 25% of the first $50 million of capital
expenditures and 30% of all additional capital expenditures in such year
(including, in each case, capital maintenance). All payments made to workers
under the union performance dividend plan are deducted from any profit sharing
obligations otherwise required.
Effective March 1, 1995, the Company established a union employee
defined contribution retiree medical plan. This plan is funded through a
voluntary employee beneficiary association trust ("VEBA Trust") and used to fund
post retirement medical benefits for future retirees covered by the collective
bargaining agreement. Company contributions to the plan are $.20 for each hour
of work performed by employees covered by the collective bargaining agreement.
No benefits were paid from the VEBA Trust until December 1998. Beginning in
December 1998, the plan began paying COBRA payments for eligible retired
participants. The Company and the Union are currently developing eligibility
requirements, benefit levels and other related terms with respect to the plan.
Recently, the Company discussed with the Union the possibility of
amending or replacing the existing labor agreement to among other things, extend
the period covered by the labor agreement. Those discussions have ended without
any agreement to amend or replace the existing agreement.
RAW MATERIALS AND RELATED SERVICES
The Company is located near major deposits of several of the
principal raw materials used to make steel, including iron ore, high volatile
coal, limestone and natural gas. The Company believes that, in certain
instances, this proximity, together with the Company's importance as a customer
to suppliers of these materials, enhances its ability to obtain competitive
terms for these raw materials. As the Company evaluates emerging technologies
for the production of iron and steel, it focuses on those technologies that
allow increased utilization of resources available in the western United States.
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Iron Ore. The Company's steelmaking process can use both iron ore
and iron ore pellets. In recent years, the Company has used iron ore pellets
exclusively in an effort to maximize the operating efficiencies of its blast
furnaces. Iron ore pellets are generally purchased from USX, as discussed below,
as well as on the spot market. The Company has iron ore deposits at mines in
Utah. When used, the ore is mined by an independent contractor under claims
owned by the Company and transported by railroad to the steel mill. The Company
expects future costs of recovery of this ore to increase gradually as the open
reserves are depleted.
The Company has historically purchased iron ore pellets from USX.
The Company's pellet agreement with USX expires on December 31, 1999. The
Company has begun discussions with USX and other potential vendors regarding a
new pellet supply contract and has reached an interim understanding with USX for
a short-term supply arrangement. Management believes that the Company will be
able to complete a new pellet supply contract with USX or a substitute vendor.
However, there can be no assurance that a new contract can be completed or that
USX will continue to supply pellets to the Company. If the Company is unable to
enter into a new pellet supply contract, the Company's operating results could
be adversely affected.
Coal and Coke. The coke batteries operated by the Company require a
blend of various grades of metallurgical coal. The Company currently obtains
high volatile coal from a mine in western Colorado operated by Oxbow Carbon and
Minerals, Inc. ("Oxbow") under a contract that expires in March 2004. The
Company also purchases various grades of coal under short-term contracts from
sources in the eastern United States. Although the Company believes that such
coal is available from several alternative eastern suppliers, the Company is
subject to price volatility resulting from fluctuations in the spot market.
There can be no assurance that the Company's blend of coal will not change or
that its overall cost of coal will not increase.
At times of full production, the Company purchases imported coke as
a result of its decreasing capacity to produce its own coke as the Company's
coke ovens decline in productive capacity. The ability of other domestic
integrated steel mills to produce coke is also generally decreasing, thereby
increasing the demand for purchased coke in the United States at times of strong
steel demand. The Company has purchased coke from sources originating in Japan
and China. As the Company's consumption of purchased coke increases, the
Company's average cost of coke used in the manufacturing process also increases.
Energy. The Company's steel operations consume large amounts of
oxygen, electricity and natural gas. The Company purchases oxygen, nitrogen and
argon from three facilities located on the Company's premises. Two of the
facilities were constructed by Air Liquide America Corporation ("Air Liquide")
and the third by Praxair, Inc. ("Praxair"). These facilities are capable of
providing approximately 275, 800 and 550 tons of oxygen per day under contracts
which expire in 2002, 2012 and 2006, respectively.
The Company generates a portion of its electrical requirements using
a 50 megawatt rated generator located at the steel mill and currently purchases
its remaining electrical requirements from Pacificorp under a 110 - 150 megawatt
interruptible power contract expiring in February 2002. The contract provides
for fixed annual price increases through the remainder of its term.
Natural gas is purchased at the wellhead in the Rocky Mountain
region and is transported to the steel mill by pipeline utilizing firm and
interruptible transportation contracts. The Rocky Mountain region has
substantial natural gas reserves.
Other. The Company's mill can be served by both the Burlington
Northern Santa Fe Railroad ("BNSF") and the Union Pacific Railroad Company
("UP"). The Company believes that it is one of the largest western customers of
the UP railroad. The Company's location in the western United States facilitates
backhauling, which can reduce freight costs. Subsequent to the merger of the UP
and Southern Pacific Transportation Company, the Company negotiated a long-term
transportation contract with the UP covering a large portion of the Company's
rail transportation needs and intended to provide a competitive rate structure.
The Company uses scrap metal obtained from its own operations and
external sources in its steelmaking process. As the Company increases its
production volume and improves yields, management anticipates that increased
amounts of scrap will be purchased.
8
<PAGE> 10
The cost of the Company's raw materials, including energy, has been
susceptible in the past to fluctuations in price and availability and is
expected to increase over time. Worldwide competition in the steel industry has
frequently limited the ability of steel producers to raise finished product
prices to recover higher raw material costs. The Company's future profitability
will be adversely affected to the extent it is unable to pass on higher raw
material costs to its customers.
COMPETITION AND OTHER MARKET FACTORS
The Company competes with domestic and foreign steel producers on
the basis of price, quality and service. Many of the Company's competitors are
larger companies and have greater capital resources. Intense worldwide
competition exists for all the Company's products. Both the industry and the
Company face increasing competition from producers of certain materials such as
aluminum, composites, plastics and concrete.
The Company believes that certain of its raw material arrangements,
particularly with respect to energy, and its current labor contract are
favorable in relation to those of the domestic steel industry as a whole.
However, the Company currently purchases iron ore pellets and a significant
portion of its coal requirements from locations in the midwest and eastern
United States, for which it has a transportation cost disadvantage. The Company
believes that its geographic location enhances its ability to compete in the
western United States, although it has a transportation disadvantage in
midwestern and eastern markets.
Product quality has improved significantly as a result of the
Company's modernization efforts. The Company believes that its modernization
efforts have enhanced the competitiveness of its products, particularly with
respect to plate products. Standards of quality in the steel industry are,
nevertheless, rising as buyers continually expect higher quality products.
Foreign and domestic producers continue to invest heavily to achieve increased
production efficiencies and product quality.
The steel industry is cyclical in nature and highly competitive.
Moreover, overall throughput capacity and competition are increasing due
primarily to construction of mini-mills and improvements in production
efficiencies at existing mills. The Company, like other steel producers, is
highly sensitive to price and production volume changes. Consequently, downward
movements have had and will continue to have an adverse effect on the Company's
results of operations.
Integrated steel producers are facing increasing competitive
pressures from mini-mills. Mini-mills use ferrous scrap metal as their basic raw
material and serve regional markets. A number of mini-mills produce plate, coil
and pipe products that compete directly with the Company's products. Several
domestic mini-mills have been completed that produce wide plate in coil form,
thereby competing with those products produced by the Company. In addition,
other mini-mills are planned.
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 significantly
affected by fluctuations in the value of the United States dollar against
several other currencies, the level of demand for steel in the United States
economy relative to steel demand in foreign economies and world economic
conditions generally. 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.
Imports of the Company's primary products have historically
represented approximately 16% to 25% of total U.S. consumption. Shortly after
completion of the Company's modernization in early 1998, the domestic steel
industry experienced an unprecedented surge in imports. During the surge, up to
approximately 40% of domestic plate consumption was at times supplied by
imports. Imports similarly increased in each of the Company's other product
lines. The surge in imports from various Asian, South American and Eastern
European countries was at least partially the result of depressed economies in
those regions, causing foreign steel producers to increase dramatically exports
to the United States. Many if not all of these foreign producers sold products
into the U.S. market at illegally dumped prices.
9
<PAGE> 11
While a previous import surge in 1996 primarily involved only flat
plate, the more recent surge included all of the Company's products. As a
result, during fiscal 1998 and early fiscal 1999 the Company's product prices
and order entry rates fell dramatically. From January 1, 1998 to February 1,
1999, overall price realization for plate, pipe and coil declined by $94, $95,
and $92 per ton, respectively. Even without the simultaneous reduction in
volume, the decline in pricing alone would have resulted in an annualized margin
loss of over $220 million. The Company was also forced to reduce production by
approximately 50%, resulting in margin losses, higher costs per ton and
production inefficiencies. During the year ended September 30, 1999, the
Company's total shipments were approximately 1,100,300 tons, as compared to
2,003,200 tons for the previous year. The combined impact of the pricing and
volume declines resulted in a significant reduction in operating results and
cash flow. Decreased cash flow and liquidity made it impossible for the Company
to service its debt and fund ongoing operations.
On September 30, 1998, the Company and eleven other domestic steel
producers filed antidumping actions against hot-rolled coiled steel imports from
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 April 1999, the Department of Commerce ("DOC")
issued a final determination that imports of hot-rolled coiled sheet from Japan
were dumped at margins ranging from 17% to 65%. In June 1999, the International
Trade Commission (the "ITC") reached a unanimous 6-0 final determination that
imports of hot-rolled sheet from Japan caused injury to the U.S. industry. As a
result, an antidumping duty order has now gone into effect against imports from
Japan and will last for a minimum duration of five years. During that time, the
amount of antidumping duty deposits due from U.S. importers of the products may
vary based upon the results of annual administrative reviews. The Company
believes that the imposition of these antidumping duties will almost completely
eliminate hot-rolled sheet imports from Japan, which totaled 2.7 million tons in
1998.
On July 6 and 12, 1999, respectively, the DOC simultaneously issued
both suspension agreements and final antidumping duty determinations as to
imports of hot-rolled sheet from Brazil and Russia, and a suspension agreement
and final countervailing duty determination as to imports of hot-rolled sheet
from Brazil. The Brazilian countervailing duty suspension agreement provides for
a quantitative limitation of no more than 290,000 metric tons annually of hot-
rolled sheet from Brazil and the Brazilian antidumping suspension agreement
provides that tonnage can be sold at prices no lower during the five-year period
than a reference price of $327 a metric ton, ex-dock duty paid in the U.S.
market. Based on the fact that these reference prices were above current
domestic prices, that the agreement provided that this price was a floor price
which would increase as domestic prices increased above $344 per metric ton, and
that the agreement shielded the U.S. industry from the devaluations of the
Brazilian currency during the five years of the agreement, the Company and
certain other petitioners supported this suspension agreement. The DOC announced
countervailing duty findings of approximately 7% and antidumping duties of
approximately 40% as to imports from Brazil. The ITC made a final affirmative
injury determination in August 1999. Therefore, if Brazilian producers violate
these suspension agreements, these duty amounts would be immediately imposed.
The suspension agreement on hot-rolled sheet from Russia provides
for no shipments for the remainder of 1999, 325,000 metric tons for 2000,
500,000 metric tons for 2001, 675,000 metric tons for 2002, and 725,000 metric
tons for 2003. It sets a minimum export price of $255 per metric ton F.O.B.
Russia, which is subject to quarterly changes based on a formula relating to
other import prices. All petitioners objected to this Russian suspension
agreement because of the allowed continuation of dumped prices at below U.S.
market prices from Russia. However, these quantitative restrictions represent a
significant decrease from the 3.8 million tons of hot-rolled sheet imports from
Russia in 1998. In addition to the hot-rolled sheet suspension agreement, the
DOC also entered into a general steel trade agreement with Russia which provides
for reduction in imports of other flat-rolled steel products. Simultaneous with
the announcement of these agreements, the DOC announced final antidumping duties
ranging from 57% to 157%, and the ITC made a final affirmative injury
determination in August 1999. Therefore, if the hot-rolled sheet suspension
agreement is violated during the next five years, these duty amounts would be
immediately imposed.
The success of the Coiled Products Cases will reduce imports from
these three countries from seven million tons in 1998, to between 500,000 and
1,000,000 tons per year from 2000 through 2003. The Coiled Products Cases have
already benefitted the Company and the domestic steel industry. The Company
expects that its production levels, shipments and pricing of hot-rolled sheet
products will continue to increase in the near term. This trend could, however,
reverse itself if other countries significantly increase imports or if domestic
demand for hot-rolled sheet declines.
10
<PAGE> 12
On February 22, 1999, five domestic steel producers filed
antidumping actions against cut-to-length plate imports from the Czech
Republic, France, India, Indonesia, Italy, Macedonia, Japan and South Korea.
Also, countervailing duty 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. On July 12 and 13, 1999, the DOC announced preliminary
margins in the cases ranging from 1% to 59%. Bonds in these amounts are now
required on imports. The DOC issued final margin determinations on December 13,
1999 ranging from 0% to 72%. The ITC will issue final injury determinations in
January 2000.
On June 30,1999, the Company and seven other petitioners filed for
Section 201 relief from welded line pipe imports (the "Section 201 Case"). The
ITC has made an affirmative injury determination by a margin of five to one. A
remedy hearing was held on November 10, 1999, and the ITC has recommended that
imports be reduced by approximately 45% from 1998 levels. The recommendation was
made to the President on December 22, 1999, and the President has 60 days to
render a decision.
There can be no assurance as to the ultimate effect of the Coiled
Products Cases, Cut-to-length Plate Cases or the Section 201 Case, that imports
from countries not named in previous cases will not increase or that domestic
shipments or prices will rise. The Company continues to monitor imports 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 began 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 antidumping duties could have a future material
adverse effect on the Company's operations and financial condition.
As a result of the trade cases described above as well as improving
market conditions in several foreign economies, market conditions for the
Company's products have recently improved. Both the Company's order entry and
price realization have improved significantly in recent months. The Company's
shipment rate has increased from a low in February 1999 of 44,000 tons to
146,000 tons in November 1999. Similarly, overall price realization has
increased by 5.7% over the same period, despite a product mix shift to
lower-priced sheet. The timing and magnitude of the recent volume and pricing
improvements are consistent with initial market recoveries following the success
of previously-filed trade cases. The Company expects in the near term that both
volume and pricing will continue to improve gradually.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant
factor in the Company's business. The Company is subject to federal, state and
local environmental laws and regulations concerning, among other things, air
emissions, wastewater discharge, and solid and hazardous waste disposal. The
Company believes that it is in compliance in all material respects with all
currently applicable environmental regulations.
The Company has incurred substantial capital expenditures for
environmental control facilities, including the Q-BOP furnaces, the wastewater
treatment facility, the benzene mitigation equipment, the coke oven gas
desulfurization facility and other projects. The Company has budgeted a total of
approximately $8.1 million for environmental capital improvements in fiscal
years 2000 and 2001. 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 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.
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and the amount of
associated costs is reasonable determinable. Accruals for estimated losses from
11
<PAGE> 13
environmental remediation obligations generally are recognized no later than
completion of the engineering or feasibility study or the commitment to a formal
plan of action. These accruals may be adjusted as further information becomes
available or circumstances change. If recoveries of remediation costs from third
parties are probable, a receivable is recorded. As of September 30, 1999, the
Company determined that there were no environmental compliance or remediation
obligations requiring accruals in the accompanying financial statements.
Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), the U.S. Environmental Protection
Agency and the states have authority to impose liability on waste generators,
site owners and operators and others regardless of fault or the legality of the
original disposal activity. Other environmental laws and regulations may also
impose liability on the Company for conditions existing prior to the Company's
acquisition of the steel mill.
At the time of the Company's acquisition of the steel mill, the
Company and USX identified certain hazardous and solid waste sites and other
environmental conditions which existed prior to the acquisition. USX has agreed
to indemnify the Company (subject to the sharing arrangements described below)
for any fines, penalties, costs (including costs of clean-up, required studies,
and reasonable attorneys' fees), or other liabilities for which the Company
becomes liable due to any environmental condition existing on the Company's real
property as of the acquisition date that is determined to be in violation of any
environmental law, is otherwise required by applicable judicial or
administrative action, or is determined to trigger civil liability (the
"Pre-existing Environmental Liabilities"). The Company has provided a similar
indemnity (but without the sharing arrangement described below) 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
Geneva'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 have 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 be subject
to litigation.
ITEM 2. PROPERTIES.
The Company's principal properties consist of the approximately
1,400-acre site on which the steel mill and related facilities are located and
the Company's iron ore mines in southern Utah. The Company also leases from the
State of Utah, under a lease expiring in 2016, a site which includes a retention
pond. The retention pond is a significant part of the Company's water pollution
control facilities. Although the Company's facilities are generally suitable to
its needs, the Company believes that such facilities will continue to require
future improvements and additional modernization projects in order to remain
competitive. See Item 1. "Business--Capital Projects" and "-- Competition and
Other Market Factors."
ITEM 3. LEGAL PROCEEDINGS.
For information concerning the Company's Chapter 11 bankruptcy
filing, see Item 1. "Business - Recent Developments."
In addition to the matters described under Item 1.
"Business--Environmental Matters", the Company is a party to routine legal
proceedings incidental to its business. In the opinion of management, after
consultation with its legal counsel, none of the proceedings to which the
Company is currently a party, with the exception of those
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<PAGE> 14
matters relating to the Company's Chapter 11 bankruptcy proceeding, are expected
to have a material adverse effect on the Company's financial condition or
results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, for the periods indicated, the high
and low sales prices for the Class A Common Stock. Prices for fiscal year 1998
and the first two quarters of fiscal year 1999 were as reported on the NYSE
Composite Tape. Prices for the last two quarters of fiscal year 1999 reflect
quotations in the over-the-counter market maintained by the National Association
of Securities Dealers, as reported by financialweb.com on the Internet. Such
quotations reflect interdealer prices, without retail markup, markdown,
commissions or other adjustments and may not necessarily represent actual
transactions. Since the commencement of the Company's Chapter 11 bankruptcy
proceedings, the market for the Class A Common has been limited and the
quotations reported may not be indicative or prices that could be obtained in
actual transactions. The Company makes no representation as to how reflective
Internet stock quotes are of actual trading values.
<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>
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1999 HIGH LOW
<S> <C> <C>
First Quarter ended December 31 $ 1 5/16 $ 15/32
Second Quarter ended March 31 5/8 7/16
Third Quarter ended June 30 5/8 3/16
Fourth Quarter ended September 30 13/32 7/32
</TABLE>
As of November 30, 1999, the Company had 15,008,767 shares of Class
A Common Stock outstanding, held by 698 stockholders of record, and 18,451,348
shares of Class B Common Stock outstanding, held by five stockholders of record.
Shares of Class B Common Stock are convertible into shares of Class A Common
Stock at the rate of ten shares of Class B Common Stock for one share of Class A
Common Stock. There is no public market for the Class B Common Stock. In
connection with the Company's voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code, the NYSE and the Pacific Exchange, Inc.
delisted the Company from their respective exchanges. The Company's Class A
common stock has been quoted under the symbol "GNVSQ" in the over-the-counter
market maintained by the National Association of Securities Dealers.
The Company currently anticipates that it will retain all available
funds to finance its capital expenditures and other business activities, and it
does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. In addition, the Company's credit facility and senior notes
restrict the amount of dividends that the Company may pay. Also, the Bankruptcy
Code generally prohibits the Company from making payments on unsecured,
pre-petition items. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 3 of Notes to Consolidated Financial Statements included in
this Report.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is incorporated by reference
to the Company's Annual Report to Shareholders for the fiscal year ended
September 30, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is incorporated by reference
to the Company's Annual Report to Shareholders for the fiscal year ended
September 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated by reference
to the Company's Annual Report to Shareholders for the fiscal year ended
September 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is incorporated by reference
to the Company's Annual Report to Shareholders for the fiscal year ended
September 30, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph A. Cannon ......... 50 Chairman of the Board and Chief Executive Officer
Ken C. Johnsen ........... 41 Executive Vice President, General Counsel and Director
Dennis L. Wanlass ........ 50 Vice President, Treasurer and Chief Financial Officer
Birchel S. Brown ......... 59 Senior Vice President of Operations
Timothy R. Clark ......... 35 Vice President of Customer Service
Carl E. Ramnitz .......... 52 Vice President of Human Resources
R. J. Shopf .............. 65 Director
Alan C. Ashton ........... 56 Director
K. Fred Skousen .......... 57 Director
Kevin S. Flannery ........ 55 Director
Gregory T. Hradsky ....... 39 Director
</TABLE>
The following sets forth the background of each of the Company's
executive officers and directors, including the principal occupation of those
individuals for the past five years:
JOSEPH A. CANNON has been a director of the Company since its
inception in February 1987, and has served as Chairman of the Board of Directors
from March 1987 to the present. Mr. Cannon served as President of the Company
from July 1987 to May 1991 and as Chief Executive Officer from July 1987 to July
1991. Following an absence from July 1991 to October 1992, Mr. Cannon returned
to the Company as Chief Executive Officer and has continued to serve in such
capacity. From February 1985 to September 1987, Mr. Cannon was engaged in the
private practice of law with Pillsbury, Madison & Sutro in its Washington, D.C.
office, specializing in environmental law. From May 1981 to February 1985, he
was employed in various capacities by and became Assistant Administrator of
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<PAGE> 16
the Environmental Protection Agency. As Assistant Administrator, Mr. Cannon was
responsible for the development, implementation and enforcement of federal air
quality and radiation regulations throughout the United States.
KEN C. JOHNSEN has been Executive Vice President and General Counsel
of the Company since November 1997 and has served as Secretary of the Company
since February 1992. He served as Vice President and General Counsel from
November 1991 to November 1997 and as Manager of Special Projects for the
Company from February 1991 through October 1991. From 1986 to 1991, Mr. Johnsen
was engaged in the private practice of law with Parr Waddoups Brown Gee &
Loveless, specializing in corporate counseling and civil litigation. Mr. Johnsen
received his law degree from Yale Law School and a B.A. degree in Finance from
Utah State University.
DENNIS L. WANLASS has been Vice President, Treasurer and Chief
Financial Officer of the Company since September 1989 and was Controller of the
Company from January 1988 to September 1989. Before joining the Company, Mr.
Wanlass was employed by Eastman Christensen, then a joint venture of Norton
Company and Texas Eastern, in various accounting and financial capacities. From
1970 to 1975, he was employed by KPMG, an international accounting and
consulting firm. Mr. Wanlass has a B.S. in Accounting from the University of
Utah and is a certified public accountant.
BIRCHEL S. BROWN has been Senior Vice President of Operations since
August 1999. Mr. Brown was Senior Vice President of Steel and Wire Operations at
Northwestern Steel and Wire from April 1997 to August 1999. He served in many
operating capacities at Inland Steel including Manager of several operating
departments as well as Manager of the sales products office, from 1966 to 1992.
Mr. Brown has a Bachelor of Science degree from Purdue University in Industrial
Management and a Master of Business Administration degree from the University of
Chicago.
TIMOTHY R. CLARK has been Vice President of Customer Service since
August 1999. From May 1997 to August 1999, he was Vice President of
Manufacturing. He has been employed by the Company since 1993 and has served in
several other positions, including Project Manager--Plate Finishing and
Shipping, Director of Corporate Communications, Director--Delta Project and
Assistant to the President. Mr. Clark obtained a B.A. from Brigham Young
University, an M.A. from the University of Utah and a Ph.D. from Oxford
University.
CARL E. RAMNITZ has been Vice President of Human Resources since
October 1988 and was Vice President of Human Resources and Public Affairs of the
Company from September 1987 to September 1988. Prior to joining the Company, he
was employed by USX for 18 years in various employment and labor related
capacities, most recently as Manager of Employee Relations for the Geneva Steel
plant before it was acquired by the Company and for USX's Pittsburgh, California
steel plant.
R. J. SHOPF has been a director of the Company since September 1989
and served as an independent advisor to the Company from March 1988 to September
1989. Mr. Shopf currently serves as the Chairman of the Board for companies
which own and operate two Ruth's Chris Steak Houses and the Montgomery Inn
Restaurant in Indianapolis. Mr. Shopf is a director of Qualitech Steel. He is
also the President of Southwest Business Associates, a consulting company (a
position which he previously held from 1984 to February 1988, and from January
1989 to October 1992), and has served in this capacity since August 1994. Mr.
Shopf served as President and Chief Executive Officer of Pioneer Chlor Alkali,
Inc. ("Pioneer") from August 1993 until August 1994. Mr. Shopf also served as
President of Imperial West Chemical Company, an affiliate of Pioneer, from
January 1992 until August 1994, and as President of All Pure Chemical Company,
also an affiliate of Pioneer, from October 1992 until August 1994. Mr. Shopf
obtained an MBA degree from the Harvard Graduate School of Business
Administration in 1959.
ALAN C. ASHTON has been a director of the Company since November
1996. Dr. Ashton co-founded the former WordPerfect Corporation ("WordPerfect"),
a software applications company. Dr. Ashton served as an executive officer and a
director of WordPerfect and its subsidiaries for over five years, including as
Co-Chairman of the Board of Directors of WordPerfect from January through June
1994, and as President and Chief Executive Officer of WordPerfect from January
1993 through December 1993. He served as a director of Novell, Inc. from June
1994 until he resigned in December 1996. Dr. Ashton and his wife, Karen, are
co-founders of Thanksgiving Point in Lehi, Utah. He is currently serving on the
Board of Directors for Infobases, Deseret Management for Deseret Book, Brigham
Young University's Lighting the Way Campaign, and the Division of Business and
Economic Development and several other boards.
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<PAGE> 17
K. FRED SKOUSEN is currently Advancement Vice President of Brigham
Young University. Formerly, he was the Dean of the Marriott School of Management
at BYU for nine years. Prior to that, Dr. Skousen held the Peat Marwick Mitchell
Professorship and, from 1974 to 1983, served as Director of the School of
Accountancy at BYU. Dr. Skousen is a certified public accountant.
KEVIN S. FLANNERY has been, since 1993, President of Whelan
Financial Corp., a New York company engaged in management of investments. He
previously served as Senior Managing Director of Bear Stearns, an investment
banking firm, for 16 years.
GREGORY T. HRADSKY is the President of Bellport Capital Corp., a
private investment company, which was founded in May 1998. Mr. Hradsky was
Managing Director of UBS Securities LLC, a New York based investment banking
firm from 1991 to 1998. Prior to that, Mr. Hradsky was a member of the
Distressed Securities Group and High Yield Research Department at The First
Boston Corporation from 1988 to 1991. He began his career at T. Rowe Price
Associates in 1983. Mr. Hradsky received an MBA in Finance from the Wharton
School in 1988 and a BA from Loyola College in 1982.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors to file initial reports of ownership and reports of
changes in ownership with the SEC. Executive officers and directors are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that all required forms were timely filed during
the past fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The compensation of Joseph A. Cannon, the Company's Chief Executive
Officer, and the four other most highly paid executive officers (collectively,
the "Named Executive Officers") is discussed in the following tables and in a
report from the Compensation Committee of the Board of Directors.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years ended September
30, 1999, 1998 and 1997, the compensation paid to the Named Executive Officers.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- -------------------------- ---------------------
RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) (#)(4) ($) ($)(5)
------------------ ---- ------ ------ ------------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Cannon 1999 482,748 -- 13,292 -- -- -- 19,563
Chief Executive 1998 487,724 44,201 12,430 -- 68,771 -- 17,980
Officer 1997 463,337 50,932 13,858 -- 100,000 -- 16,726
Ken C. Johnsen 1999 271,076 -- -- -- -- 19,453
Executive Vice President and 1998 275,010 24,455 8,859 -- 31,589 -- 16,724
General Counsel 1997 200,220 21,886 9,073 -- 50,000 -- 14,021
Dennis L. Wanlass 1999 194,505 -- 7,122 -- -- -- 18,716
Vice President and 1998 196,275 17,788 5,757 -- 29,627 -- 17,837
Chief Financial Officer 1997 186,461 20,497 9,073 -- 84,500 -- 15,650
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- -------------------------- ---------------------
RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) (#)(4) ($) ($)(5)
------------------ ---- ------ ------ ------------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl E. Ramnitz 1999 172,073 -- 3,466 -- -- -- 16,850
Vice President of 1998 173,838 15,615 474 -- 22,383 -- 20,391
Human Resources 1997 149,991 16,483 2,128 -- 36,600 -- 13,228
Timothy R. Clark 1999 137,598 -- -- -- -- -- 12,493
Vice President of Customer 1998 140,005 12,559 -- -- 22,000 -- 13,228
Service 1997 94,239 9,861 -- -- 20,000 -- 4,489
</TABLE>
- ----------
(1) Includes compensation deferred or accrued at the election of the
Named Executive Officer under the Company's Management Employee
Savings and Pension Plan (the "Management Plan").
(2) Represents payments under the Company's Performance Dividend Plan in
such years. Amounts for fiscal years 1998 and 1997 represent only
Performance Dividend Payments payable to all management and union
employees based upon the Company's volume of product shipments. No
discretionary bonuses were paid
(3) None of the Named Executive Officers received any restricted stock
awards during the three years presented, nor did any of them hold
any such stock as of September 30, 1999.
(4) 1997 option grants represent new options granted on February 20,
1997 and the repricing on March 26, 1997 of options granted to the
Named Executive Officers in fiscal year 1991. The number of
replacement options reflected as 1997 grants are as follows: Robert
J. Grow, 33,000; Dennis L. Wanlass, 39,500 and Carl E. Ramnitz,
6,600.
(5) Includes contributions made by the Company pursuant to the
Management Plan and the dollar value of premiums paid by the Company
pursuant to the Company's split dollar life insurance plan. For
fiscal year 1999, such amounts were as follows: Joseph A. Cannon,
$15,983 Company contributions, $3,580 insurance premiums; Ken C.
Johnsen, $17,129 Company contributions, $2,324 insurance premiums;
Dennis L. Wanlass, $15,279 Company contributions, $3,437 insurance
premiums; Carl E. Ramnitz, $12,909 Company contributions, $3,941
insurance premiums and Timothy R. Clark, $12,493 Company
contributions.
OPTION GRANTS IN LAST FISCAL YEAR
The Company made no grants of stock options to the Named Executive
Officers during the fiscal year ended September 30, 1999. The Company did not
grant any stock appreciation rights during the fiscal year ended September 30,
1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the
exercise of options to acquire shares of the Company's Class A Common Stock by
the Named Executive Officers during the fiscal year ended September 30, 1999, as
well as the aggregate number and value of unexercised options held by the Named
Executive Officers on September 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT SEPTEMBER 30, 1999(#) SEPTEMBER 30, 1999($)
ACQUIRED VALUE ---------------------------------- ----------------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Cannon -- -- 126,800 65,971 $ -- $ --
Ken C. Johnsen -- -- 117,000 31,589 -- --
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT SEPTEMBER 30, 1999(#) SEPTEMBER 30, 1999($)
ACQUIRED VALUE ---------------------------------- ----------------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Wanlass -- -- 120,300 28,827 -- --
Carl E. Ramnitz -- -- 64,300 22,183 -- --
Timothy R. Clark -- -- 25,000 19,500 -- --
</TABLE>
DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid a director's
fee of $22,000 per year for serving on the Board of Directors, $3,000 per year
for serving as chairman of any committee, $1,500 for each Board meeting
attended, $750 for each telephonic board meeting, and $1,000 for each committee
meeting attended. Directors may also receive a fee of between $750 and $1,000
per day for other significant service to the Company. Mr. Shopf serves as
outside "lead" director for which he receives an additional $12,000 per year.
All directors are also reimbursed by the Company for their out-of-pocket travel
and related expenses incurred in attending all Board and committee meetings.
Under the Geneva Steel Company 1996 Incentive Plan (the "Incentive
Plan"), each nonemployee director is granted an option to purchase 4,000 shares
of the Company's Class A Common Stock upon appointment or election and each
nonemployee director who is serving on the first business day on or after
January 1 of each calendar year is granted an option to purchase 2,000 shares.
Options are exercisable for ten years at the fair market value of the shares on
the date of grant and are subject to a vesting schedule.
In addition, each nonemployee director who serves for not less than
five years receives a deferred compensation payment in each of the five years
after termination of service in the amount of the retainer paid to such director
for services as a director during the year preceding termination of such
services. If a nonemployee director's service is terminated prior to five years
of service by reason of death or disability, deferred compensation is paid for a
period equal to the period for which the director served.
COMPENSATION COMMITTEE REPORT
This Report of the Compensation Committee (the "Committee") of the
Board of Directors describes the overall compensation goals and policies
applicable to the executive officers of Geneva, including the bases for
determination of the compensation of executive officers for fiscal year 1999.
The Report also discusses the setting of 1999 compensation of Mr. Cannon. The
term "Executive Officers" is used below to refer to the executive officers of
Geneva other than Mr. Cannon.
Composition and Functions of the Committee. The Compensation
Committee of the Board of Directors of Geneva is comprised entirely of
independent, nonemployee directors. Subject to any action which may be taken by
the full Board of Directors, the Board has delegated to the Committee the
authority:
- To determine the compensation of Joseph A. Cannon, Chairman of the
Board and Chief Executive Officer of Geneva, including discretionary bonuses;
18
<PAGE> 20
- To approve, upon recommendations by Mr. Cannon, the compensation
arrangements of Executive Officers of Geneva, including the Named Executive
Officers identified in the Summary Compensation Table above; and
- To carry out the duties and responsibilities of the Board of
Directors regarding Geneva's other compensation plans, including administering
and making awards under Geneva's option plans to Mr. Cannon, the Executive
Officers and other managers and key employees of Geneva.
Compensation Philosophy and Objectives. The Committee believes that
compensation of Geneva's executive officers should be set at a competitive level
and be based upon the Company's overall financial performance, achievement of
strategic goals, and individual performance, with a view toward increasing the
value of the Company. Within this overall philosophy, the following principles
guide Geneva's compensation policies for executive officers:
- Provide competitive levels of compensation that enable Geneva to
attract and retain experienced, talented executive officers;
- Compensate executive officers based on the Company's progress
toward achievement of its short and long-term strategic and financial goals;
- Compensate executive officers based on the performance of the
individual executive officer, and his contribution to the Company's performance;
and
- Maintain and strengthen the incentive for executive officers to
increase the value of the Company.
The Committee believes that adherence to these objectives is essential to
attracting and retaining highly-qualified officers whose contributions are
necessary for the growth and success of Geneva. The Compensation Committee has
also relied on compensation surveys of executives with comparable
responsibilities at peer companies. These surveys have been prepared at periodic
intervals by the compensation consulting firm of William E. Mercer. Information
concerning the specific implementation of these policies in the 1999
compensation arrangements of the Executive Officers and Mr. Cannon is provided
below. The Committee believes that the $1.0 million compensation deduction cap
promulgated under the Internal Revenue Code currently has no effect on the
Company's compensation policies.
Annual Salaries. Salaries of Executive Officers are generally
reviewed on an annual basis at the end of the fiscal year and adjustments made
based on the Committee's subjective evaluation of the individual's performance
and the Company's performance, taking into account both qualitative and
quantitative factors. Among the factors considered by the Committee have been
the recommendations of Mr. Cannon and the importance of retaining key Executive
Officers. Subject to Board approval, the Committee makes compensation decisions
concerning the Executive Officers. Salary levels for fiscal year 1999 were not
increased because, in the Committee's judgment, increases would not be
appropriate in light of the Company's financial situation. The Committee also
concluded that, in light of the Company's Chapter 11 filing and the need to
retain its Executive Officers through a critical period in the Company's
history, a decrease in salary levels would not be appropriate despite the
Company's recent financial performance.
Incentive Bonuses. In fiscal 1999, Geneva made no awards under the
Performance Dividend Plan (the "Performance Plan") established in June 1993. The
Performance Plan provides for the monthly payment of additional cash
compensation as a percentage of base compensation to all management employees
based upon the Company's product shipments. Cash payments made to Executive
Officers under the Performance Plan are determined according to the same formula
used to determine payments to all other management employees. No discretionary
bonuses were paid to any Executive Officers.
Stock Options. The Company's Incentive Plan and Key Employee Plan
permit the award of options to purchase Class A Common Stock to executive
officers, managers and key employees. The award of stock options is intended to
align the interests of Executive Officers with the shareholders by providing the
Executive Officers with an incentive to bring about increases in the price of
Class A Common Stock. Geneva's general policy is to award options to purchase
Class A Common Stock at a price that equals or exceeds market price on the date
of grant.
19
<PAGE> 21
Accordingly, the Executive Officers derive a financial benefit from an option
only if the price of Class A Common Stock increases. With one exception, options
grants have not had performance contingencies, but realization of the value
provided through the options has generally required the Executive Officer to
remain employed by Geneva until the options vest. Historically, options have
vested at the rate of 40 percent of the underlying shares at the end of two
years following the grant and an additional 20 percent each year thereafter. The
Committee modified the vesting schedule of options granted in fiscal 1997 and
1998 so that 50 percent become vested after one year and the balance after two
years. The modification to the vesting schedule was made in recognition of the
historical volatility of the Company's Common Stock and a desire to increase the
incentive represented by the grant of stock options to Executive Officers. The
options are generally exercisable for ten years from the date of grant at a
price equal to 100 percent of the fair market value of the underlying shares on
such date. Because Mr. Cannon beneficially owns more than 10 percent of the
voting power of the Company, applicable tax laws require that incentive stock
options granted to him must be exercisable for no more than five years at a
price equal to 110 percent of the fair market value on the date of grant.
In fiscal 1999, the Company made no awards of options to purchase
Class A Common Stock to Executive Officers of the Company. Given the Company's
Chapter 11 filing, the Compensation Committee determined that the granting of
options would not be appropriate at that time.
In connection with the Company's Chapter 11 proceeding, the
Compensation Committee formulated and adopted a Key Employee Retention Program
(the "Program"), which was approved by the Company's board of directors. The
Program covers the Executive officers (which for purposes of the Program
includes the corporate controller) and approximately thirty other employees. The
purpose of the program is to encourage the covered employees to remain with the
Company through its emergence from Chapter 11. The Committee determined that the
Program is in the best interest of the Company because of the need to retain a
strong management team and continuity throughout the pendency of the proceeding.
The Program was designed to accomplish this purpose through payment of an
emergence bonus and the provision of certain severance protection. These
benefits are intended to encourage employees to remain with the Company despite
the personal and career uncertainties created by the bankruptcy filing. The
Program provides a severance benefit of 50% of annual salary to Executive
Officers terminated without cause prior to consummation of a plan of
reorganization and a benefit of 75% of annual salary if terminated within 90
days after consummation of a plan. Executive officers who remain with the
Company through consummation of the Plan of Reorganization will receive an
emergence bonus of 50% of annual salary, payable 50% in cash and 50% in stock of
the reorganized company. (Mr. Cannon's bonus is paid 100% in stock). Employees,
other than the Executive officers who remain with the Company, through
consummation of a plan of reorganization will receive an emergence bonus equal
to 25% of annual salary payable in cash, and are covered by the Company's
pre-existing severance program.
Compensation of Chief Executive Officer. For the reasons discussed
above with respect to the Executive Officers, there was no increase or decrease
in Mr. Cannon's base salary in fiscal 1999. During the 1999 fiscal year, Mr.
Cannon did not receive additional compensation pursuant to the Performance Plan,
based upon the formula applicable to all Executive Officers and management
employees. Mr. Cannon was not granted options for the purchase of shares of
Class A Common Stock for the reasons stated above with respect to the Executive
Officers. Mr. Cannon did not receive a discretionary bonus.
Other Compensation Plans. The Company maintains insurance and
retirement agreements with certain of its Executive Officers and managers,
including Mr. Cannon and the Named Executive Officers, which provide for payment
of a death benefit (net of premiums paid and recovered by the Company) to a
designated beneficiary or for payment of a retirement benefit upon reaching age
62. Geneva also has a number of other broad-based employee benefit plans in
which Executive Officers participate on the same terms as other employees
meeting the eligibility requirements, subject to any legal limitations on
amounts that may be contributed to or benefits payable under the plans.
Submitted by the Compensation Committee of the Board of Directors:
R.J. Shopf
K. Fred Skousen
Alan C. Ashton
20
<PAGE> 22
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total
shareholder return on the Company's Class A Common Stock, calculated on a
dividend reinvested basis, from September 30, 1994 through September 30, 1999,
compared with the S&P 500 Index and the S&P Steel Index.
[GRAPH]
<TABLE>
<CAPTION>
SEP-94 SEP-95 SEP-96 SEP-97 SEP-98 SEP-99
<S> <C> <C> <C> <C> <C> <C>
Geneva Steel $100 $ 44 $ 17 $ 20 $ 7 $ 1
S&P(R) 500 $100 $130 $156 $219 $239 $305
S&P(R) Iron & Steel Index $100 $ 70 $ 68 $ 78 $ 56 $ 60
</TABLE>
21
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 30, 1999
with respect to the beneficial ownership of shares of the Class A Common Stock
and Class B Common Stock by each person known by the Company to be the
beneficial owner of more than 5 percent of either of such classes of Common
Stock, by each director or nominee, by each of the Named Executive Officers, and
by all directors and officers as a group. The number of Class A Shares listed
below does not include Class A Shares issuable upon conversion of Class B
Shares. Unless otherwise noted, each person named has sole voting and investment
power with respect to the shares indicated. The percentages set forth below have
been computed based on the number of outstanding securities, excluding treasury
shares held by the Company, and are based on 15,008,767 shares of Class A Common
Stock and 18,451,348 shares of Class B Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AS OF NOVEMBER 30, 1999*
--------------------------------------
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS OUTSTANDING
------------ ----------------------
<S> <C> <C>
CLASS A COMMON STOCK:
Joseph A. Cannon.................................................... 129,956(3) **
Ken C. Johnsen...................................................... 117,000(1) **
Carl E. Ramnitz..................................................... 64,300(1) **
Timothy R. Clark.................................................... 25,000(1) **
Dennis L. Wanlass................................................... 120,300(1) **
Alan C. Ashton...................................................... 52,800 **
R. J. Shopf......................................................... 17,800(2) **
K. Fred Skousen..................................................... 5,300(2) **
Kevin S. Flannery................................................... 2,800(2) **
Gregory T. Hradsky.................................................. 2,800(2) **
All directors and officers as a group (11 persons).................. 535,556(4)
CLASS B COMMON STOCK(5):
Joseph A. Cannon.................................................... 9,442,204(6) 51.2
Robert J. Grow...................................................... 8,855,319 48.0
All directors and officers as a group (1 persons)................... 9,442,204 99.2
</TABLE>
- ----------
* Beneficial ownership as a percentage of the class for each person holding
options exercisable within 60 days has been calculated as though shares
subject to such options were outstanding, but such shares have not been
deemed outstanding for the purpose of calculating the percentage of the
class owned by any other person.
** Less than 1% of outstanding shares.
(1) Subject to presently exercisable options.
(2) Includes 2,800 shares subject to presently exercisable options.
(3) Includes 3,156 shares held by Riverwood Limited Partnership, of which
Joseph A. Cannon is general partner, and 126,800 shares subject to
presently exercisable options.
(4) Includes 467,400 shares subject to presently exercisable options.
(5) The Class B Common Stock is convertible into Class A Common Stock at a
rate of ten shares of Class B Common Stock for one share of Class A Common
Stock. If they were to convert their shares of Class B Common Stock into
shares of Class A Common Stock, Mr. Cannon would beneficially own
1,074,176 shares of Class A Common Stock (including shares owned by
Riverwood Limited Partnership). In the event of such conversions, Mr.
Cannon would own 5.9% of the outstanding Class A Common Stock.
(6) Includes 828,013 shares held by Riverwood Limited Partnership, of which
Joseph A. Cannon is general partner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 27, 1996, the Company entered into an agreement to loan
up to $500,000 to Joseph A. Cannon, its Chief Executive Officer. On September
27, 1996, October 4, 1996 and December 23, 1996, the Company loaned $250,000,
$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 loans were evidenced by promissory notes bearing interest at the rate of
8.53% and payable at the earlier of September 27, 1997 or demand
22
<PAGE> 24
for repayment by the Company. The loans were secured by interests in real and
personal property owned by the Chief Executive Officer and an affiliated entity.
On October 17, 1997, the Chief Executive Officer paid $240,000 on the loans and
the payment date of the loans was extended to April 30, 1998. On December 17,
1997, the Chief Executive Officer paid an additional $400,000 on the loans. On
November 24, 1998, the remaining balance was paid by the Chief Executive
Officer.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Documents Filed:
1. Financial Statements. The following Financial Statements
of the Company and Report of Independent Public
Accountants included in the Company's Annual Report to
Shareholders for the fiscal year ended September 30, 1999
are incorporated by reference in Item 8 of this Report:
- Report of Independent Public Accountants
- Balance Sheets at September 30, 1999 and
1998
- Statements of Operations for the years ended
September 30, 1999, 1998 and 1997
- Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 1999, 1998
and 1997
- Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997
- Notes to Financial Statements
2. Financial Statement Schedule. The following Financial
Statement Schedule of the Company for the years ended
September 30, 1999, 1998 and 1997 is filed as part of
this Report and should be read in conjunction with the
Company's Financial Statements and Notes thereto:
Schedule Page
II - Valuation and Qualifying Accounts 29
Financial statements and schedules other than those
listed are omitted for the reason that they are not
required or are not applicable, or the required
information is shown in the Financial Statements or Notes
thereto, or contained in this Report.
(b) Reports on Form 8-K
None.
23
<PAGE> 25
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Articles of Amendment dated February 17, 1993 to the (2)
Registrant's Revised Articles of Incorporation
3.3 Articles of Amendment dated March 12, 1993 to the Registrant's (3)
Revised Articles of Incorporation
3.4 Restated Bylaws of the Registrant (4)
4.1 Specimen Certificate of the Registrant's Class A Common Stock, (1)
no par value
4.2 Specimen Certificate of the Registrant's Series B Preferred Stock, (5)
no par value
4.3 Rights Agreement dated as of May 19, 1997, between Registrant (6)
and Rights Agent
10.1 Asset Sales Agreement between USX and the Registrant dated as (1)
of June 26, 1987, as Amended and Restated August 31, 1987
10.2 Registration Rights Agreement among the signatories listed on the (1)
signature pages thereof and the Registrant dated November 6,
1989
10.3 License Agreement between ENSR Corporation and the Registrant (1)
dated December 8, 1988
10.4 Amended and Restated Sales Representation Agreement between (4)
Mannesmann Pipe & Steel Corporation and the Registrant dated
October 30, 1998
10.5 Geneva Steel Key Employee Plan (7)
10.6 Amendment to Geneva Steel Key Employee Plan dated May 12, (8)
1991
10.7 Form of Non-Statutory Stock Option Agreement (1)
10.8 Management Employee Savings and Pension Plan, as Amended (9)
and Restated generally effective January 1, 1994, dated as of July
3, 1995
10.9 Amendment No. 1 to the Geneva Steel Management Employee (10)
Savings and Pension Plan, effective as of January 1, 1997, dated
June 25, 1997
10.10 Form of revised Executive Split Dollar Insurance Agreement (11)
10.11 Form of revised Executive Supplemental Retirement Agreement (11)
10.12 Union Employee Savings and Pension Plan, as Amended and (12)
Restated effective January 1, 1995, dated as of August 13, 1997
10.13 Collective Bargaining Agreement between United Steelworkers of (4)
America and the Registrant ("Collective Bargaining Agreement")
dated May 1, 1998
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
10.14 Agreement between Union Carbide Industrial Gases, Inc. and the (7)
Registrant dated July 12, 1990, as amended August 3, 1990
(the "Union Carbide Agreement")
10.15 Amendment to the Union Carbide Agreement dated December 1, (11)
1992
10.16 Oxygen Supply Agreement between Air Liquide America (12)
Corporation and the Registrant dated June 10, 1997
10.17 Coilbox License Agreement between Stelco Technical Services (1)
Limited and the Registrant dated August 23, 1989
10.18 License Agreement for the K-OBM Process between (1)
Klockner Contracting and Technologies GmbH and the Registrant
dated November 25, 1989
10.19 Special Use Lease Agreement No. 897 between the State of Utah (11)
and the Registrant dated January 13, 1992 and Amendment thereto
dated June 19, 1992
10.20 Indenture dated as of January 15, 1994 between the Registrant and (13)
Bankers Trust Company, as Trustee, including a form of 9 1/2%
Senior Note due 2004
10.21 Indenture dated as of March 15, 1993 between the Registrant and (3)
The Bank of New York, as Trustee, including a form of 11 1/8%
Senior Note due 2001
10.22 License Agreement relating to the desulfurization process between (1)
BS&B Engineering Company, Inc. and the Registrant dated March
1, 1990
10.23 Lo-Cat(R) Licensing Agreement between ARI Technologies, Inc. (7)
and the Registrant dated April 16, 1990
10.24 Agreement relating to the closure of hazardous waste surface (7)
impoundments between USX Corporation, the Registrant and
Duncan Lagnese Associates, Incorporated dated October 22, 1990
10.25 Agreement for Sale and Purchase of Coke between the Registrant (14)
and Pacific Basin Resources (a division of Oxbow Carbon and
Minerals, Inc.) dated April 29, 1994 (the "Oxbow Coke
Agreement")
10.26 First Amendment to the Oxbow Coke Agreement dated April 11, (15)
1996
10.27 Agreement for the Sale and Purchase of Coal between the (16)
Registrant and Oxbow Carbon and Minerals, Inc. dated February
19, 1996, effective as of April 1, 1994
10.28 Warrant Agreement dated as of March 16, 1993 between the (2)
Registrant and The Bank of New York, as Warrant Agent
10.29 Form of Indenture between the Registrant and the Trustee (3)
thereunder related to the Exchange Debentures, including a form
of Exchange Debenture
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
10.30 Industrial Gas Supply Agreement between Air Liquide America (17)
Corporation and Geneva Steel dated June 8, 1995
10.31 Geneva Steel Company 1996 Incentive Plan (18)
10.32 Form of Employment Agreement between Registrant and Certain (12)
Executive Officers
10.33 Loan and Security Agreement by and between Congress Financial (19)
Corporation and Geneva Steel Company as Debtor and Debtor-in-
Possession as Borrower, dated February 19, 1999
10.34 Amendment No. 1 to Loan and Security Agreement by and (20)
between Congress Financial Corporation and Geneva Steel
Company as Debtor and Debtor-in-Possession as Borrower, dated
July 31, 1999
10.35 Letter Agreement between USX Corporation and Registrant X
related to Taconite Pellet Supply, dated December 16, 1999
13 Selected portions of the Registrant's Annual Report to X
Shareholders for the year ended September 30, 1999 which are
incorporated by reference in Parts II and IV of this Report
23 Consent of Arthur Andersen LLP, independent public accountants X
27 Financial Data Schedule X
</TABLE>
----------
(1) Incorporated by reference to the Registration Statement
on Form S-1 dated March 27, 1990, File No. 33-33319.
(2) Incorporated by reference to the Registration Statement
on Form S-3 dated June 16, 1993, File No. 33-64548.
(3) Incorporated by reference to the Registration Statement
on Form S-4 dated April 15, 1993, File No. 33-61072.
(4) Incorporated by reference to the Annual Report on Form
10-K for the year ended September 30, 1998.
(5) Incorporated by reference to the Registration Statement
on Form S-4 dated August 9, 1993, File No. 33-61072.
(6) Incorporated by reference to Exhibit 99.1 of the
Registration Statement on Form 8-A filed on November 21,
1997.
(7) Incorporated by reference to the Registration Statement
on Form S-1 dated November 5, 1990, File No. 33-37238.
(8) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1991.
(9) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
26
<PAGE> 28
(10) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997.
(11) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1992.
(12) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1997.
(13) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31,
1993.
(14) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1994.
(15) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
(16) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(17) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1995.
(18) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997.
(19) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1998
(20) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1999
(d) Financial Statement Schedule
See page 29 herein.
27
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geneva Steel Company:
We have audited in accordance with generally accepted auditing
standards, the financial statements incorporated by reference in Item 8 of this
Form 10-K, and have issued our report thereon dated December 20, 1999. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14(a)2 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 20, 1999
28
<PAGE> 30
GENEVA STEEL COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions, Balance
Beginning Costs and Net of at End
Description of Year Expenses Recoveries of Year
- ----------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended September 30, 1999
Allowance for doubtful accounts ...... $ 6,411 $ 8,775 $(4,274) $10,912
======= ======= ======= =======
Year Ended September 30, 1998
Allowance for doubtful accounts ..... $ 4,564 $ 6,923 $(5,076) $ 6,411
======= ======= ======= =======
Year Ended September 30, 1997
Allowance for doubtful accounts .... $ 4,031 $ 6,558 $(6,025) $ 4,564
======= ======= ======= =======
</TABLE>
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
December 28, 1999.
GENEVA STEEL Company
By: /s/ Joseph A. Cannon
-------------------------------------
Joseph A. Cannon, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph A. Cannon Chairman of the Board and Chief December 28, 1999
- ---------------------------- Executive Officer (Principal executive officer)
Joseph A. Cannon
/s/ Ken C. Johnsen Executive Vice President, Secretary December 28, 1999
- ---------------------------- and General Counsel
Ken C. Johnsen
/s/ Dennis L. Wanlass Vice President, Treasurer and Chief December 28, 1999
- ---------------------------- Financial Officer
Dennis L. Wanlass (Principal financial and accounting officer)
/s/ Alan C. Ashton
- ----------------------------
Alan C. Ashton Director December 28, 1999
/s/ K. Fred Skousen
- ----------------------------
K. Fred Skousen Director December 28, 1999
/s/ R. J. Shopf
- ----------------------------
R. J. Shopf Director December 28, 1999
/s/ Kevin S. Flannery
- ----------------------------
Kevin S. Flannery Director December 28, 1999
/s/ Gregory T. Hradsky
- ----------------------------
Gregory T. Hradsky Director December 28, 1999
</TABLE>
24
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Articles of Amendment dated February 17, 1993 to the (2)
Registrant's Revised Articles of Incorporation
3.3 Articles of Amendment dated March 12, 1993 to the Registrant's (3)
Revised Articles of Incorporation
3.4 Restated Bylaws of the Registrant (4)
4.1 Specimen Certificate of the Registrant's Class A Common Stock, (1)
no par value
4.2 Specimen Certificate of the Registrant's Series B Preferred Stock, (5)
no par value
4.3 Rights Agreement dated as of May 19, 1997, between Registrant (6)
and Rights Agent
10.1 Asset Sales Agreement between USX and the Registrant dated as (1)
of June 26, 1987, as Amended and Restated August 31, 1987
10.2 Registration Rights Agreement among the signatories listed on the (1)
signature pages thereof and the Registrant dated November 6,
1989
10.3 License Agreement between ENSR Corporation and the Registrant (1)
dated December 8, 1988
10.4 Amended and Restated Sales Representation Agreement between (4)
Mannesmann Pipe & Steel Corporation and the Registrant dated
October 30, 1998
10.5 Geneva Steel Key Employee Plan (7)
10.6 Amendment to Geneva Steel Key Employee Plan dated May 12, (8)
1991
10.7 Form of Non-Statutory Stock Option Agreement (1)
10.8 Management Employee Savings and Pension Plan, as Amended (9)
and Restated generally effective January 1, 1994, dated as of July
3, 1995
10.9 Amendment No. 1 to the Geneva Steel Management Employee (10)
Savings and Pension Plan, effective as of January 1, 1997, dated
June 25, 1997
10.10 Form of revised Executive Split Dollar Insurance Agreement (11)
10.11 Form of revised Executive Supplemental Retirement Agreement (11)
10.12 Union Employee Savings and Pension Plan, as Amended and (12)
Restated effective January 1, 1995, dated as of August 13, 1997
10.13 Collective Bargaining Agreement between United Steelworkers of (4)
America and the Registrant ("Collective Bargaining Agreement")
dated May 1, 1998
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
10.14 Agreement between Union Carbide Industrial Gases, Inc. and the (7)
Registrant dated July 12, 1990, as amended August 3, 1990
(the "Union Carbide Agreement")
10.15 Amendment to the Union Carbide Agreement dated December 1, (11)
1992
10.16 Oxygen Supply Agreement between Air Liquide America (12)
Corporation and the Registrant dated June 10, 1997
10.17 Coilbox License Agreement between Stelco Technical Services (1)
Limited and the Registrant dated August 23, 1989
10.18 License Agreement for the K-OBM Process between (1)
Klockner Contracting and Technologies GmbH and the Registrant
dated November 25, 1989
10.19 Special Use Lease Agreement No. 897 between the State of Utah (11)
and the Registrant dated January 13, 1992 and Amendment thereto
dated June 19, 1992
10.20 Indenture dated as of January 15, 1994 between the Registrant and (13)
Bankers Trust Company, as Trustee, including a form of 9 1/2%
Senior Note due 2004
10.21 Indenture dated as of March 15, 1993 between the Registrant and (3)
The Bank of New York, as Trustee, including a form of 11 1/8%
Senior Note due 2001
10.22 License Agreement relating to the desulfurization process between (1)
BS&B Engineering Company, Inc. and the Registrant dated March
1, 1990
10.23 Lo-Cat(R)Licensing Agreement between ARI Technologies, Inc. (7)
and the Registrant dated April 16, 1990
10.24 Agreement relating to the closure of hazardous waste surface (7)
impoundments between USX Corporation, the Registrant and
Duncan Lagnese Associates, Incorporated dated October 22, 1990
10.25 Agreement for Sale and Purchase of Coke between the Registrant (14)
and Pacific Basin Resources (a division of Oxbow Carbon and
Minerals, Inc.) dated April 29, 1994 (the "Oxbow Coke
Agreement")
10.26 First Amendment to the Oxbow Coke Agreement dated April 11, (15)
1996
10.27 Agreement for the Sale and Purchase of Coal between the (16)
Registrant and Oxbow Carbon and Minerals, Inc. dated February
19, 1996, effective as of April 1, 1994
10.28 Warrant Agreement dated as of March 16, 1993 between the (2)
Registrant and The Bank of New York, as Warrant Agent
10.29 Form of Indenture between the Registrant and the Trustee (3)
thereunder related to the Exchange Debentures, including a form
of Exchange Debenture
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
------- ------- ------------ --------
<S> <C> <C> <C>
10.30 Industrial Gas Supply Agreement between Air Liquide America (17)
Corporation and Geneva Steel dated June 8, 1995
10.31 Geneva Steel Company 1996 Incentive Plan (18)
10.32 Form of Employment Agreement between Registrant and Certain (12)
Executive Officers
10.33 Loan and Security Agreement by and between Congress Financial (19)
Corporation and Geneva Steel Company as Debtor and Debtor-in-
Possession as Borrower, dated February 19, 1999
10.34 Amendment No. 1 to Loan and Security Agreement by and (20)
between Congress Financial Corporation and Geneva Steel
Company as Debtor and Debtor-in-Possession as Borrower, dated
July 31, 1999
10.35 Letter Agreement between USX Corporation and Registrant X
related to Taconite Pellet Supply, dated December 16, 1999
13 Selected portions of the Registrant's Annual Report to X
Shareholders for the year ended September 30, 1999 which are
incorporated by reference in Parts II and IV of this Report
23 Consent of Arthur Andersen LLP, independent public accountants X
27 Financial Data Schedule X
</TABLE>
----------
(1) Incorporated by reference to the Registration Statement
on Form S-1 dated March 27, 1990, File No. 33-33319.
(2) Incorporated by reference to the Registration Statement
on Form S-3 dated June 16, 1993, File No. 33-64548.
(3) Incorporated by reference to the Registration Statement
on Form S-4 dated April 15, 1993, File No. 33-61072.
(4) Incorporated by reference to the Annual Report on Form
10-K for the year ended September 30, 1998.
(5) Incorporated by reference to the Registration Statement
on Form S-4 dated August 9, 1993, File No. 33-61072.
(6) Incorporated by reference to Exhibit 99.1 of the
Registration Statement on Form 8-A filed on November 21,
1997.
(7) Incorporated by reference to the Registration Statement
on Form S-1 dated November 5, 1990, File No. 33-37238.
(8) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1991.
(9) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
<PAGE> 35
(10) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997.
(11) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1992.
(12) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1997.
(13) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31,
1993.
(14) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1994.
(15) Incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
(16) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(17) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1995.
(18) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997.
(19) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1998
(20) Incorporated by reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1999
<PAGE> 1
EXHIBIT 10.35
December 16, 1999
VIA FACSIMILE - 412-433-3624
Richard M. Efkeman
Director Raw Materials
USX Corporation
600 Grant Street
Pittsburgh, PA 15219-2749
Re: Geneva Steel Company ("Geneva"); Taconite Pellet Supply
Dear Mr. Efkeman:
As you know, December 31, 1999 is the stated expiration date of that
certain Taconite Pellet Sales Agreement effective September 1, 1994, as amended
July 25, 1997, and September 30, 1998 (the "Agreement"). This will confirm our
understanding that pursuant to this letter agreement, to be effective January 1,
2000 through March 31, 2000 (the "first quarter 2000"), and thereafter as
provided below, USX Corporation will continue to sell and Geneva will continue
to purchase fluxed taconite ("Fluxtac") pellets on the same terms and conditions
as are set forth in the Agreement in the event that a new supply agreement is
not completed prior to the expiration of the Agreement.
Geneva declares its Fluxtac pellet requirement for the first quarter
2000 will be between 700,000 and 750,000 net tons, which shall constitute the
respective purchase and sale obligation of the parties. Deliveries shall be
scheduled at as uniform a rate as practicable throughout the quarter. The
purchase price per net ton of Fluxtac pellets will be $0.4542 per natural net
ton iron unit (approximately $28.24 per net ton), FOB Minntac price as provided
in the Agreement for the last quarter of calendar year 1999.
This letter agreement shall remain in effect as herein provided while
the parties attempt to negotiate in good faith a new supply agreement to supply
all of Geneva's requirements for Fluxtac pellets and shall not constitute an
amendment or extension of the Agreement, reference to which is made solely for
the purpose of defining the terms and conditions of this letter agreement. The
new supply agreement may provide for superseding this letter agreement in any
manner as may be agreed upon by the parties.
Effective April 1, 2000, this letter agreement will automatically be
extended and shall remain in effect unless or until either party serves upon the
other written notice of
<PAGE> 2
Richard M. Efkeman
December 16, 1999
Page 2
termination no less than forty five (45) days prior to the effective termination
date specified in such notice. The respective purchase and sale obligations of
the parties during such an extension of this letter agreement shall be a pro
rata portion of the quantity range specified in the second paragraph above, and
all other terms of this of this letter agreement, including the price specified
above, shall remain in effect.
The parties acknowledge that Geneva is a debtor and
debtor-in-possession in a Chapter 11 bankruptcy proceeding in the United States
Bankruptcy Court of the District of Utah (the "Bankruptcy Court"). The fact that
Geneva is involved in such proceeding shall not excuse either USX Corporation or
Geneva from performing pursuant to the provisions of this letter agreement and
applicable provisions of bankruptcy law.
Geneva acknowledges and agrees that the current trade credit terms and
conditions as presently established and governing pellet shipments shall
continue to apply to this letter agreement. USX Corporation reserves the right
to withhold shipments of pellets and/or to revise said credit terms and
conditions without being in default of this letter agreement in the event Geneva
fails to comply with such credit terms and conditions.
Nothing set forth in this letter agreement is or is intended to be an
assumption of the Agreement, such assumption to be effected, if at all, through
applicable proceedings in the Bankruptcy Court.
GENEVA STEEL COMPANY,
Debtor and Debtor-in-Possession
/s/ Dale K. Poulson
---------------------------------------
Dale K. Poulson, Director Raw Materials
ACCEPTED AND AGREED TO
this 20th day of December, 1999.
USX CORPORATION
By: /s/ Richard M. Efkeman
--------------------------------
<PAGE> 3
Richard M. Efkeman
December 16, 1999
Page 3
Richard M. Efkeman
Its: Director, Raw Materials Planning,
Procurement, Distribution & Sales
<PAGE> 1
EXHIBIT 13
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share and per ton data)
<TABLE>
<CAPTION>
OPERATING STATISTICS 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 314,726 $ 720,453 $ 726,669 $ 712,657 $ 665,699
Gross margin (107,086) 61,321 60,691 50,350 71,508
Income (loss) from operations (128,902) 21,394 38,204 25,729 47,713
Net income (loss) (185,107) (18,943) (1,268) (7,238) 11,604
Net income (loss) applicable to
common shares (189,936) (30,715) (11,608) (16,327) 3,606
Diluted net income (loss) per common share (11.33) (1.90) (.74) (1.07) .24
BALANCE SHEET STATISTICS
Cash and cash equivalents $ -- $ -- $ -- $ 597 $ 12,808
Working capital (8,567) (298,416) 67,063 71,065 33,045
Current ratio .91 .39 1.66 1.64 1.29
Net property, plant and equipment 373,017 411,174 458,315 454,523 470,390
Total assets 474,716 605,165 646,070 657,386 628,797
Long-term debt -- -- 399,906 388,431 342,033
Redeemable preferred stock 56,001 56,917 56,169 55,437 51,031
Stockholders' equity (deficit) (133,979) 53,208 82,603 92,827 108,074
Long-term debt as a percentage
of stockholders' equity -- -- 484% 418% 316%
ADDITIONAL STATISTICS
Operating income (loss) per ton shipped $ (117.15) $ 10.68 $ 17.90 $ 12.00 $ 24.99
Capital expenditures (1) 8,025 10,893 47,724 26,378 68,025
Depreciation and amortization 50,625 44,182 44,959 44,415 39,308
Cash flows from operating activities 8,095 25,847 32,070 (19,520) 84,130
Cash flows from investing activities (3,341) (10,859) (46,465) (37,526) (52,948)
Cash flows from financing activities (4,754) (14,988) 13,798 44,835 (18,374)
Raw steel production (tons in thousands) 1,101 2,390 2,460 2,428 2,145
Steel products shipped (tons in thousands) 1,100 2,003 2,135 2,145 1,909
</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 approximately $23.4
million for the year ended September 30, 1998.
<PAGE> 2
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
SELECTED FINANCIAL DATA (continued)
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. Prices for fiscal year 1998 and the
first two quarters of fiscal year 1999 were as reported on the NYSE Composite
Tape. Prices for the last two quarters of fiscal year 1999 reflect quotations in
the over-the-counter market maintained by the National Association of Securities
Dealers, as reported by financialweb.com on the Internet. Such quotations
reflect interdealer prices, without retail markup, markdown, commissions or
other adjustments and may not necessarily represent actual transactions. Since
the commencement of the Company's Chapter 11 bankruptcy proceedings, the market
for the Class A common stock has been limited and the quotations reported may
not be indicative of prices that could be obtained in actual transactions. The
Company makes no representation as to how reflective Internet stock quotes are
of actual trading values.
<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>
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1999 HIGH LOW
<S> <C> <C>
First Quarter ended December 31 $1 5/16 $ 15/32
Second Quarter ended March 31 5/8 7/16
Third Quarter ended June 30 5/8 3/16
Fourth Quarter ended September 30 13/32 7/32
</TABLE>
As of November 30, 1999, the Company had 15,008,767 shares of Class A common
stock outstanding, held by 698 stockholders of record, and 18,451,348 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 a rate of ten shares
of Class B for one share of Class A. In connection with the Company's voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code, the
NYSE and the Pacific Exchange, Inc. delisted the Company from their respective
exchanges. The Company's Class A common stock has been quoted under the symbol
"GNVSQ" in the over-the-counter market maintained by the National Association of
Securities Dealers.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
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 significantly
affected by fluctuations in the value of the United States dollar against
several other currencies, the level of demand for steel in the United States
economy relative to steel demand in foreign economies and world economic
conditions generally. 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.
Imports of the Company's primary products have historically represented
approximately 15% to 25% of total U.S. consumption. Shortly after completion of
the Company's modernization in early 1998, the domestic steel industry
experienced an unprecedented surge in imports. During the surge, up to
approximately 40% of domestic plate consumption was at times supplied by
imports. Imports similarly increased in each of the Company's other product
lines. The surge in imports from various Asian, South American and Eastern
European countries was at least partially the result of depressed economies in
those regions, causing foreign steel producers to increase dramatically exports
to the United States. Many if not all of these foreign producers sold products
into the U.S. market at illegally dumped prices.
While a previous import surge in 1996 primarily involved only flat plate, the
more recent surge included all of the Company's products. As a result, during
fiscal 1998 and early fiscal 1999 the Company's product prices and order entry
rates fell dramatically. From January 1, 1998 to February 1, 1999, overall price
realization for plate, pipe and coil declined by $94, $95, and $92 per ton,
respectively. Even without the simultaneous reduction in volume, the decline in
pricing alone would have resulted in an annualized margin loss of over $220
million. The Company was also forced to reduce production by approximately 50%,
resulting in margin losses, higher costs per ton and production inefficiencies.
During the year ended September 30, 1999, the Company's total shipments were
approximately 1,100,300 tons, as compared to 2,003,200 tons for the previous
year. The combined impact of the pricing and volume declines resulted in a
significant reduction in operating results and cash flow. Decreased cash flow
and liquidity made it impossible for the Company to service its debt and fund
ongoing operations.
On September 30, 1998, the Company and eleven other domestic steel producers
filed antidumping actions against hot-rolled coiled steel imports from 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 April 1999, the Department of Commerce ("DOC")
issued a final determination that imports of hot-rolled coiled sheet from Japan
were dumped at margins ranging from 17% to 65%. In June 1999, the International
Trade Commission (the "ITC") reached a unanimous 6-0 final determination that
imports of hot-rolled sheet from Japan caused injury to the U.S. industry. As a
result, an antidumping duty order has now gone into effect against imports from
Japan and will last for a minimum duration of five years. During that time, the
amount of antidumping duty deposits due from U.S. importers of the products may
vary based upon the results of annual administrative reviews. The Company
believes that the imposition of these antidumping duties will almost completely
eliminate hot-rolled sheet imports from Japan, which totaled 2.7 million tons in
1998.
On July 6 and 12, 1999, respectively, the DOC simultaneously issued both
suspension agreements and final antidumping duty determinations as to imports of
hot-rolled sheet from Brazil and Russia, and a suspension agreement and final
countervailing duty determination as to imports of hot-rolled sheet from Brazil.
The Brazilian countervailing duty suspension agreement provides for a
quantitative limitation of no more than 290,000 metric tons annually of
hot-rolled sheet from Brazil and the Brazilian antidumping suspension agreement
provides that tonnage can be sold at prices no lower during the five-year period
than a reference price of $327 a metric ton, ex-dock duty paid in the U.S.
market. Based on the fact that these reference prices were above current
domestic prices, that the agreement provided that this price was a floor price
which would increase as domestic prices increased above $344 per metric ton and
that
<PAGE> 4
the agreement shielded the U.S. industry from the devaluations of the Brazilian
currency during the five years of the agreement, the Company and certain other
petitioners supported this suspension agreement. The DOC announced
countervailing duty findings of approximately 7% and antidumping duties of
approximately 40% as to imports from Brazil. The ITC made a final affirmative
injury determination in August 1999. Therefore, if Brazilian producers violate
these suspension agreements, these duty amounts would be immediately imposed.
The suspension agreement on hot-rolled sheet from Russia provides for no
shipments for the remainder of 1999, 325,000 metric tons for 2000, 500,000
metric tons for 2001, 675,000 metric tons for 2002, and 725,000 metric tons for
2003. It sets a minimum export price of $255 per metric ton F.O.B. Russia, which
is subject to quarterly changes based on a formula relating to other import
prices. All petitioners objected to this Russian suspension agreement because of
the allowed continuation of dumped prices at below U.S. market prices from
Russia. However, these quantitative restrictions represent a significant
decrease from the 3.8 million tons of hot-rolled sheet imports from Russia in
1998. In addition to the hot-rolled sheet suspension agreement, the DOC also
entered into a general steel trade agreement with Russia which provides for
reduction in imports of other flat-rolled steel products. Simultaneous with the
announcement of these agreements, the DOC announced final antidumping duties
ranging from 57% to 157%, and the ITC made a final affirmative injury
determination in August 1999. Therefore, if the hot-rolled sheet suspension
agreement is violated during the next five years, these duty amounts would be
immediately imposed.
The success of the Coiled Products Cases will reduce imports from these three
countries from seven million tons in 1998, to between 500,000 and 1,000,000 tons
per year from 2000 through 2003. The Coiled Product Cases have already
benefitted the Company and the domestic steel industry. The Company expects that
its production levels, shipments and pricing of hot-rolled sheet products will
continue to increase in the near-term. This trend could, however, reverse itself
if other countries significantly increase imports or if domestic demand for
hot-rolled sheet 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
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. On July 12 and 13, 1999, the DOC announced preliminary margins in the
cases ranging from 1% to 59%. Bonds in these amounts are now required on
imports. The DOC issued final margin determinations on December 13, 1999 ranging
from 0% to 72%. The ITC will issue final injury determinations in January 2000.
On June 30,1999, the Company and seven other petitioners filed for Section 201
relief from welded line pipe imports (the "Section 201 Case"). The ITC has made
an affirmative injury determination by a margin of five to one. A remedy hearing
was held on November 10, 1999, and the ITC has recommended that imports be
reduced by approximately 45% from 1998 levels. The recommendation was made to
the President on December 22, 1999, and the President has 60 days to render a
decision.
There can be no assurance as to the ultimate effect of the Coiled Products
Cases, Cut-to-length Plate Cases or the Section 201 Case, that imports from
countries not named in previous cases will not increase or that domestic
shipments or prices will rise. The Company continues to monitor imports 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
began 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 antidumping duties could have a future material adverse effect.
<PAGE> 5
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
years 1998 and 1999 were severely affected by, among other things, the dramatic
surge in steel imports beginning in 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. 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
(collectively, the "Senior Notes"), except pursuant to a confirmed plan of
reorganization. The Company is in possession of its properties and assets and
continues to manage its businesses as debtor-in-possession subject to the
supervision of the Bankruptcy Court. The Company has a $125 million debtor-in-
possession credit facility in place (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 year ended September 30, 1999 was $33.1 million, which
is $22.0 million in excess of recorded interest expense included in the
accompanying financial statements. Contractual dividends on the redeemable
preferred stock as of September 30, 1999, was approximately $28.5 million, which
is $8.4 million in excess of dividends accrued in the accompanying balance
sheet.
Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon
any of the Company's liabilities as of the petition date or to enforce
pre-petition contractual obligations were automatically stayed. Absent approval
from the Bankruptcy Court, the Company is prohibited from paying pre-petition
obligations. However, the Bankruptcy Court has approved payment of certain other
pre-petition liabilities such as employee wages and benefits and certain other
pre-petition obligations. Additionally, the Bankruptcy Court has approved for
the retention of legal and financial professionals. As a debtor-in-possession,
the Company has the right, subject to Bankruptcy Court approval and certain
other conditions, to assume or reject any pre-petition executory contracts and
unexpired leases. Parties affected by such rejections may file pre-petition
claims with the Bankruptcy Court in accordance with bankruptcy procedures.
The Company is currently developing a plan of reorganization (the "Plan of
Reorganization") through, among other things, discussions with the official
creditor committees appointed in the Chapter 11 proceeding. The objective of the
Plan of Reorganization is to restructure the Company's balance sheet to (i)
significantly strengthen the Company's financial flexibility throughout the
business cycle, (ii) fund required capital expenditures and working capital
needs, and (iii) fulfill those obligations necessary to facilitate emergence
from Chapter 11. In conjunction with the Plan of Reorganization, the Company
intends to file an application in January 2000 for a government loan guarantee
under the Emergency Steel Loan Guarantee Program (the "Loan Guarantee Program").
The application will seek a government loan guarantee for a portion of the
financing required to consummate the Plan of Reorganization, with the remaining
financing being provided through other means. In connection with preparing the
loan guarantee application, the Company is in the final phase of selecting and
negotiating terms with a major bank to serve as the primary lender under the
Loan Guarantee Program. There can be no assurance that the Company will be
selected to participate in the Loan Guarantee Program or that, with or without a
guarantee, the Company can obtain the necessary financing to consummate the Plan
of Reorganization.
Although management expects to file the Plan of Reorganization, there can be no
assurance at this time that a Plan of Reorganization will be proposed by the
Company, approved or confirmed by the Bankruptcy Court, or that such plan will
be consummated. The Bankruptcy Court has granted the Company's request to extend
its exclusive right to file a Plan of Reorganization through February 28, 2000.
While the Company intends to request further extensions of the exclusivity
period if necessary, there can be no assurance that the Bankruptcy Court will
grant such further extensions. If the exclusivity period were to expire or be
terminated, other interested parties, such as creditors of the Company, would
have the right to propose alternative plans of reorganization.
<PAGE> 6
Although the Chapter 11 Bankruptcy filing raises substantial doubt about the
Company's ability to continue as a going concern, the accompanying financial
statements have been prepared on a going concern basis. This basis contemplates
the continuity of operations, realization of assets, and discharge of
liabilities in the ordinary course of business. The statements also present the
assets of the Company at historical cost and the current intention that they
will be realized as a going concern and in the normal course of business. A plan
of reorganization could materially change the amounts currently disclosed in the
financial statements.
The statements do not present the amount which may ultimately be paid to settle
liabilities and contingencies which may be allowed in the Chapter 11 bankruptcy
cases. Under Chapter 11 bankruptcy, the right of, and ultimate payment by the
Company to pre-petition creditors may be substantially altered. This could
result in claims being paid in the Chapter 11 bankruptcy proceedings at less
(and possibly substantially less) than 100 percent of their face value. At this
time, because of material uncertainties, pre-petition claims are carried at the
Company's face value in the accompanying financial statements. Moreover, the
interests of existing preferred and common shareholders could, among other
things, be very substantially diluted or even eliminated. Further information
about the financial impact of the Chapter 11 bankruptcy filings is set forth in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Notes to Financial Statements. Management expects that a Plan
of Reorganization will be completed and ready to file with the bankruptcy court
during the first calendar quarter of 2000. The Plan of Reorganization will be
conditioned on the Company being approved for a guarantee under the Loan
Guarantee Program. There can be no assurance as to the actual timing for the
filing of the Plan of Reorganization or the approval thereof by the Bankruptcy
Court, if at all.
As a result of the various trade cases described above as well as improving
market conditions in several foreign economies, market conditions for the
Company's products have recently improved. Both the Company's order entry and
price realization have improved significantly in recent months. The Company's
shipment rate has increased from a low in February 1999 of 44,000 tons to
146,000 tons in November 1999. Similarly, overall price realization has
increased by 5.7% during the same period, despite a product mix shift to
lower-priced sheet. The timing and magnitude of the recent volume and pricing
improvements are consistent with initial market recoveries following the success
of previously-filed trade cases. The Company expects in the near term that both
volume and pricing will continue to improve gradually.
<PAGE> 7
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,
------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 134.0 91.5 91.6
------ ------ ------
Gross margin (34.0) 8.5 8.4
Selling, general and administrative expenses 6.9 3.0 3.1
Write-down of impaired assets -- 2.5 --
------ ------ ------
Income (loss) from operations (40.9) 3.0 5.3
Other income (expense):
Interest and other income 0.3 -- --
Interest expense (6.2) (5.9) (5.6)
Gain on sale of assets 1.5 -- --
------ ------ ------
Loss before reorganization items and benefit for income taxes (45.3) (2.9) (0.3)
Reorganization items 13.5 -- --
------ ------ ------
Loss before benefit for income taxes (58.8) (2.9) (0.3)
Benefit for income taxes -- (0.3) (0.1)
------ ------ ------
Net loss (58.8)% (2.6)% (0.2)%
====== ====== ======
</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,
---------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Plate 55.9% 62.1% 45.4%
Sheet 24.4 18.2 30.2
Pipe 10.4 10.5 9.6
Slab 6.4 7.0 11.9
Non-steel 2.9 2.2 2.9
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
<PAGE> 8
Fiscal Year Ended September 30, 1999 Compared With Fiscal Year Ended
September 30, 1998
Net sales decreased 56.3% primarily due to decreased shipments of approximately
902,900 tons and significantly lower average selling prices for the year ended
September 30, 1999 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 decreased by 20.8%, 17.6%, 18.9% and 23.7%, respectively, in the year
ended September 30, 1999 compared to the previous fiscal year. Shipped tonnage
of plate, pipe, sheet and slab products decreased approximately 598,900 tons or
50.3%, 84,300 tons or 47.4%, 118,600 tons or 27.9% and 101,100 tons or 48.0%,
respectively, between the two years The decreases in prices and volumes were
primarily a result of increased supply from imports as discussed above, as well
as other market factors.
As discussed above, the Company's overall price realization and shipments have
recently begun to increase. The Company has recently either implemented or
announced several price increases. As of November 30, 1999, the Company had
estimated total orders on hand of approximately 148,000 tons compared to
approximately 74,000 tons as of November 30, 1998. Domestic competition,
however, 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.
There can be no assurance that the Company will achieve price increases it
announced.
In response to improving market conditions, the Company started a second blast
furnace in September 1999, and expects to return to more normal operating levels
in the second quarter of fiscal year 2000. Higher operating levels associated
with a two-blast furnace operation have created additional working capital needs
for the Company. These working capital needs will increase over the first and
second quarters of fiscal year 2000 as production and inventory levels increase.
There can be no assurance that market conditions will continue to justify a
two-blast furnace operation, that pricing and order volumes will continue to
improve, that the Company will be able to obtain the requisite working capital
from vendor credit, expanded borrowing capacity, or other sources to support
increased production levels.
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 134.0%
for the year ended September 30, 1999, as compared to 91.5% for the previous
fiscal year. The overall average cost of sales per ton shipped increased
approximately $53 per ton between the two years, primarily as a result of
production inefficiencies associated with operating at production levels
significantly less than full capacity. As described above, the recent surge in
steel imports and resulting low level of orders, together with other market
factors, caused production levels to decline. Operating costs per ton increased
in part because fixed costs were allocated over fewer tons. In addition, the
Company, in response to falling prices and higher costs, wrote-down the cost of
its inventories to market prices, resulting in an adjustment of approximately
$3.5 million, which increased cost of sales in the year ended September 30,
1999, as compared to the previous year. 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. The Company's total
headcount as of November 30, 1999 is approximately 1,725, as compared to
approximately 2,530 as of the same date two years ago. During most of fiscal
year 1999, the Company also attempted to minimize production inefficiencies by
limiting its production to a full, one-blast furnace level.
The Company's pellet agreement with USX expires on December 31, 1999. The
Company has begun discussions with USX and other potential vendors regarding a
new pellet supply contract and has reached an interim understanding with USX for
a short-term supply arrangement. Management believes that the Company will be
able to complete a new pellet supply contract with USX or a substitute vendor.
However, there can be no assurance that a new contract can
<PAGE> 9
be completed or that USX will continue to supply pellets to the Company. If the
Company is unable to enter into a new pellet supply contract, the Company's
operating results could be adversely affected.
Depreciation costs included in cost of sales decreased approximately $1.7
million for the year ended September 30, 1999, compared with the previous fiscal
year. This decrease was due to a lower 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 year ended September 30,
1999 decreased approximately $0.3 million as compared to the same period in the
previous fiscal year. These lower expenses were due in part to cost savings
related to staff and support personnel reductions. These reductions were offset
by an increase in the allowance for doubtful accounts of approximately $4.0
million associated with the depressed steel market that is negatively affecting
certain of the Company's customers.
Interest expense decreased approximately $22.9 million during the year ended
September 30, 1999 as compared to 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 year ended September 30, 1999
was $33.1 million, which is $22.0 million in excess of recorded interest expense
on the Senior Notes. In addition, lower production volumes resulting in lower
working capital needs decreased the average borrowings outstanding under the
Company's revolving credit facility as compared to the previous fiscal year.
Subsequent to the Company's filing of its voluntary petition for relief under
Chapter 11 of the Bankruptcy Code on February 1, 1999, the Company has recorded
approximately $6.0 million in professional fees and expenses related to its
Chapter 11 reorganization efforts. These include the professional fees and
expenses of the bondholders' and unsecured creditors' committees. These expenses
have not been included in selling, general and administrative expenses, but are
set out separately in the statement of operations. In addition, the Company also
recorded other reorganization expenses of approximately $36.3 million for the
write-off of deferred loan fees on the Senior Notes and a provision for certain
executory contracts expected to be rejected.
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 above. 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.
Customer claims generally involve quality issues such as metallurgical
composition, flatness, dimension, surface quality, rust and damage during
shipment. At September 30, 1998, the reserves for estimated customer claims
increased by approximately $1.9 million as compared to the previous year,
primarily as a result of the Company's customers becoming more aggressive in
pursuing claims during a soft steel market. As the steel market weakened in
late fiscal year 1998, the Company's customers became more demanding of steel
quality resulting in an increase in claims.
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 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.
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
<PAGE> 10
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 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 retired prior to December 31, 1998.
This benefit was 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.
Depreciation costs included in cost of sales decreased approximately $0.7
million for the year ended September 30, 1998 compared with 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 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 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 an enterprise-wide business system.
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 had a net
operating loss carryforward for financial reporting purposes of approximately
$6.1 million.
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's principal sources of capital have been from the sale of
equity; the incurrence of long-term indebtedness, including borrowings under the
Company's credit facilities; equipment lease financing; asset sales and cash
provided by operations.
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. 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 established by the lender. Borrowing availability under the Credit
Facility is also subject to other covenants. As of
<PAGE> 11
November 30, 1999, the Company's eligible inventories, accounts receivable and
eligible equipment supported access to $57.4 million in borrowings under the
Credit Facility. As of November 30, 1999, the Company had $10.8 million
available under the Credit Facility, with $44.2 million in borrowings and $2.4
million in letters of credit outstanding. There can be no assurance as to the
amount of availability that will be provided in the future or that the lender
will not require additional reserves. The terms of the Credit Facility include
cross default and other customary provisions.
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. In January 1999, the Company did not
make a $9.0 million interest payment due on the 9 1/2% Senior Notes.
In March 1993, the Company completed a public offering of $135 million principal
amount of 11 1/8% senior notes (the "11 1/8% 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. The Bankruptcy Code generally prohibits the
Company from making payments on unsecured, pre-petition debt, including the
Senior Notes, except pursuant to a confirmed plan of reorganization. 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
Bankruptcy Code.
In connection with the offering of the 11 1/8% Senior Notes issued in March
1993, 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 September 30, 1999, the Redeemable Preferred Stock consisted of
388,358 shares, no par value, with a liquidation preference of approximately
$151 per share. Pursuant to the Redeemable Preferred Stock Agreement, 11,642
shares of Redeemable Preferred Stock have been used by the holders thereof to
pay for the exercise of warrants to purchase 233,502 shares of Class A common
stock. 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 September 30, 1999, warrants to purchase 898,498
shares of Class A common stock were outstanding. Dividends on the redeemable
preferred stock accrue at a rate equal to 14% per annum of the liquidation
preference and are payable quarterly in cash from funds legally available
therefor. The Company is obligated to redeem all of the Redeemable Preferred
Stock in March 2003 from funds legally available therefor. Restricted payment
limitations under the Senior Notes precluded payment of the quarterly preferred
stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends
accumulate until paid and accrue additional dividends at a rate of 14% per
annum. As of February 1, 1999, the Company discontinued recording dividends on
the Redeemable Preferred Stock. Unpaid contractual dividends as of September 30,
1999, were approximately $36.8 million, which is $8.4 million in excess of
dividends accrued on the Company's balance sheet. The Company will not pay
dividends on the Redeemable Preferred Stock during the pendency of its Chapter
11 proceeding and any payments will be subject to a confirmed plan of
reorganization.
Besides the above-described financing activities, the Company's major source of
liquidity over time has been cash provided by operating activities, the
Mannesmann agreement described below, and asset sales. Net cash provided by
operating activities was $8.1 million for the year ended September 30, 1999, as
compared with net cash provided by operating activities of $25.8 million for the
year ended September 30, 1998. The sources of cash for operating activities
during the year ended September 30, 1999 included depreciation and amortization
of $50.6 million, a decrease in accounts receivable of $48.2 million associated
primarily with reduced sales volume and the implementation of the Mannesmann
agreement, a decrease in inventories of $58.3 million primarily as a result of
lower production levels and the implementation of the Mannesmann agreement, an
increase in accrued interest payable of $10.3 million and an increase in
accounts payable of $35.2 million. These sources of cash were substantially
offset by a net loss of $185.1 million, an increase in prepaid expenses of $1.4
million, a decrease in accrued liabilities of $1.9 million and a decrease in
accrued payroll and related taxes of $1.8 million.
On November 2, 1998, the Company signed a three-year agreement with Mannesmann
Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann markets the
Company's prime steel products throughout the continental United States.
Mannesmann previously marketed the Company's steel products in fifteen
midwestern states and to certain customers in the eastern United States. The
Company's existing sales force remains Company
<PAGE> 12
employees, but are 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. This requirement was implemented
beginning in April 1999. Mannesmann sells the Company's products to end
customers at the same sales price Mannesmann pays the Company plus a variable
commission. As of September 30, 1999, the Company had received $9.5 million from
Mannesmann for the purchase of finished goods inventory assigned to discrete
orders. When the funds are received for inventory prior to shipment, the Company
defers the revenue recognition until the inventory is shipped. Therefore, until
shipment occurs the Company records the receipt of funds and the corresponding
deferred revenue liability and/or inventory reduction for the cost of the
inventory in its financial statements. The Company remains responsible for
customer credit and product quality.
Since the bankruptcy filing, the Company has supplemented its liquidity by the
sale of certain non-core assets. During the fourth quarter of fiscal year 1999,
the Company completed the sale of its large diameter pipe mill for $4.5 million.
The large diameter pipe mill equipment has been idled for many years. Subsequent
to September 30, 1999, the Company finalized an agreement to sell its quarry for
$10.0 million ($1.5 million of which is contingent upon the future issuance, by
the relevant governmental entity, of a conditional use permit) and received $8.5
million in October 1999. There can be no assurance that the conditional use
permit will be issued or that the Company will receive the additional $1.5
million of the sale price. Pursuant to the sale, the Company entered into a
contract with the buyer of the quarry for the purchase of limestone to meet its
production requirements at a per ton price that is lower than the Company's
historical production cost.
Capital expenditures were $8.0 million, $10.9 million (net of $12.5 million
insurance claim settlement), and $47.7 million for fiscal years 1999, 1998 and
1997, respectively. Capital expenditures for 1999 and 1998 were lower than
previously expected because the Company reduced its capital expenditures to
preserve liquidity in light of market conditions. Capital expenditures for
fiscal year 2000 are estimated at approximately $30 million, which includes a
blast furnace reline, maintenance items and various projects designed to reduce
costs and increase product quality and throughput. Additional spending on
capital could be incurred as part of the plan of reorganization. Given the
Company's Chapter 11 bankruptcy proceedings, current market conditions and the
uncertainties created thereby, the Company is continuing to closely monitor its
capital spending levels. Depending on market, operational, liquidity and other
factors, the Company may elect to adjust the design, timing and budgeted
expenditures of its capital plan.
Year 2000 Issues
The Company believes it has substantially addressed its 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 has completed its year 2000
project in all of 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).
In September 1997, the Company started the implementation of SAP software, a
year 2000 compliant enterprise-wide business system. This system affects nearly
every aspect of the Company's business processes and operations. On February 1,
1999, the Company completed the last phase of the SAP implementation. The SAP
implementation includes software applications for financial accounting,
purchasing, accounts payable, human resources, payroll, sales distribution,
materials management, production planning, quality assurance, product costing,
and other management information. In conjunction with the implementation, new
Hewlett Packard hardware and operating systems that are year 2000 compliant were
installed.
<PAGE> 13
The Company has identified other hardware, operating systems and applications
software used in its process control and other information systems and has
obtained year 2000 compliance information from the providers of such hardware,
operating systems and applications software. The Company has completed the
review and remediation with vendors to ensure readiness of such hardware,
operating systems and software application systems. In the areas where dates are
critical in the process control and other information systems, these systems
have been made year 2000 compliant. In a few situations in which dates are not
critical in the process control or other information systems, other remediation
efforts have been completed. The Company has also reviewed, tested and corrected
internally developed software applications to facilitate year 2000 compliance.
Although the Company believes that all year 2000 issues have been addressed and
determined to be compliant, the Company is continuing to review and test the
systems to assure year 2000 compliance.
The Company has contingency plans for critical areas to address any unexpected
year 2000 failures. The Company's contingency plans target worse case scenarios
and include items such as maintaining an inventory buffer, providing for manual
operations of information technology systems and establishing alternative,
third-party logistics. The Company's contingency plans are based in part on the
results of third-party supplier questionnaires. The Company has prepared a
production schedule for several days before and after January 1, 2000, which
contemplates suspending certain operations shortly before calendar year-end with
a sequenced, transitioned start-up of such operations subsequent to year end.
The Company believes this approach will reduce the risk of potential damage to
equipment from any unexpected year 2000 problems.
The Company has significant relationships with various third parties, and the
failure of any of these third parties 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 has reviewed
major third-party relationships to assess year 2000 readiness and, where
necessary and possible, is attempting to have contingency plans in place to
mitigate any adverse consequences.
Through September 30, 1999, the Company had capitalized approximately $9.0
million in costs to improve the Company's information technology systems and for
year 2000 readiness efforts. The costs include consulting, implementing and
transitioning to new computer hardware and software for the SAP enterprise-wide
business systems. Costs for training and re-engineering efforts have been
expensed.
The foregoing discussion of the Company's year 2000 readiness includes
forward-looking statements. No assurance can be given that the Company will not
be materially adversely affected by year 2000 issues. There can be no assurance
that actual events and results could differ materially from those anticipated.
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 or successfully complete 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 are unable to deliver
necessary materials, parts or other supplies, the Company would be unable to
timely manufacture products. Similarly, if shipping and freight carriers are
unable to ship product, the Company would be unable to deliver product to
customers.
Quantitative And Qualitative Disclosures About Market Risk
The Company's earnings are affected by changes in interest rates related to the
Company's credit facility. Variable interest rates may rise and increase the
amount of interest expense. At September 30, 1999 and 1998, the Company had
variable rate credit facilities totaling $55.5 million and $60.8 million,
respectively. The impact of market risk is estimated using a hypothetical
increase in interest rates of one percentage point for the Company's variable
rate credit facility. Based on this hypothetical assumption, the Company would
have incurred approximately an additional $600,000 in interest expense for the
year ended September 30, 1999.
Factors Affecting Future Results
The Company's future operations will be impacted by, among other factors,
pricing, product mix, throughput levels and production efficiencies. The Company
has efforts underway to increase prices, shift its product mix and improve
throughput rates and production efficiencies. There can be no assurance that the
Company's efforts will be successful or that sufficient demand will exist to
support the Company's efforts. 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 competitive and market conditions. Furthermore, the Chapter 11 bankruptcy
filing introduces numerous uncertainties which may affect the Company's
businesses, results of operations and prospects. Because of the Company's
bankruptcy filing and liquidity position, the Company's financial flexibility is
limited. Many of the
<PAGE> 14
foregoing factors, of which the Company does not have complete control, may
materially affect the performance and financial condition of the Company. Until
recently, the Company's production activities were consuming cash. During the
two months of October and November 1999, the Company's operations generated
slight positive cash flow. Further improvement in market conditions will likely
be necessary for the Company's production activities to become significantly
cash flow positive. A reversal in the current market trend or a disruption in
the Company's operations would likely cause the Company to return to negative
cash flow.
The short-term and long-term liquidity of the Company also is dependent upon
several other factors, including continued access to the Credit Facility; vendor
credit support; cash needs to fund working capital as volume increases;
availability of capital; foreign currency fluctuations; capital expenditure
requirements 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.
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.
This report contains a number of forward-looking statements, including, without
limitation, statements contained in this report relating to 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 ability to
improve and optimize operations as well as on-time delivery and customer
service, the Company's ability to compete with the additional production
capacity being added in the domestic market, the Company's ability to
successfully reorganize under Chapter 11 of the Bankruptcy Code (including the
development of the Plan of Reorganization), the outcome of the Company's
application under the Loan Guarantee Program, the Company's expectation that
prices and shipments will improve, the production efficiencies to be gained by a
two-blast furnace operation, the Company's ability to obtain a new pellet supply
contract, the Company's objective to increase higher-margin sales, the Company's
continued access to and adequacy of the Credit Facility, the commercial and
liquidity benefits of the Mannesmann agreement, the effect of SAP
implementation, the Company's level of preparedness with respect to year 2000
issues and the likely impact on the Company of such issues, the level of future
required capital expenditures, 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 described herein.
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geneva Steel Company:
We have audited the accompanying balance sheets of Geneva Steel Company (a Utah
corporation) as of September 30, 1999 and 1998, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Geneva Steel Company as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, 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 has
experienced recurring net losses applicable to common shares of $189.9 million,
$30.7 million and $11.6 million during the years ended September 30, 1999, 1998
and 1997, respectively. Additionally, as of September 30, 1999, the Company had
a stockholders' deficit of $134.0 million. 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
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 20, 1999
<PAGE> 16
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
---------------------------
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current Assets:
Cash $ -- $ --
Accounts receivable, less allowance for doubtful
accounts of $10,912 and $6,411, respectively 15,196 63,430
Inventories 55,460 113,724
Deferred income taxes 14,609 8,118
Prepaid expenses and other 4,584 2,964
Related party receivable -- 270
--------- ---------
Total current assets 89,849 188,506
--------- ---------
Property, Plant and Equipment:
Land 1,990 1,990
Buildings 16,119 16,119
Machinery and equipment 645,943 640,363
Mineral property and development costs 1,000 1,000
--------- ---------
665,052 659,472
Less accumulated depreciation (292,035) (248,298)
--------- ---------
Net property, plant and equipment 373,017 411,174
--------- ---------
Other Assets 11,850 5,485
--------- ---------
$ 474,716 $ 605,165
========= =========
</TABLE>
The accompanying notes to financial statements are an integral
part of these balance sheets.
<PAGE> 17
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
--------- ---------
<S> <C> <C>
Liabilities Not Subject to Compromise:
Senior notes $ -- $ 325,000
Revolving credit facility 55,466 60,769
Accounts payable 16,334 34,117
Accrued liabilities 18,209 25,005
Accrued payroll and related taxes 7,444 9,454
Accrued dividends payable -- 25,315
Accrued interest payable -- 5,080
Accrued pension and profit sharing costs 963 2,182
--------- ---------
Total current liabilities 98,416 486,922
--------- ---------
Liabilities Subject to Compromise:
Senior notes 325,000 --
Accounts payable 56,633 --
Accrued dividends payable 28,492 --
Accrued interest payable 15,409 --
Accrued liabilities 3,404 --
--------- ---------
428,938 --
--------- ---------
Long-Term Employee Defined Benefits 10,731 --
--------- ---------
Deferred Income Tax Liabilities 14,609 8,118
--------- ---------
Commitments and Contingencies (Notes 1 and 6)
Redeemable Preferred Stock, Series B, no par value;
388,358 shares and 400,000 shares authorized, issued and outstanding,
respectively, with a liquidation value of $58,684 and $60,443, respectively 56,001 56,917
--------- ---------
Stockholders' Equity (Deficit):
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, 15,008,767
and 14,705,265 shares issued, respectively 92,022 87,979
Class B, no par value; 50,000,000 shares authorized, 18,451,348
and 19,151,348 shares issued and outstanding, respectively 9,741 10,110
Warrants to purchase Class A common stock 4,255 5,360
Accumulated deficit (239,997) (47,749)
Less 189,667 Class A common stock treasury shares at September 30,
1998, at cost -- (2,492)
--------- ---------
Total stockholders' equity (deficit) (133,979) 53,208
--------- ---------
$ 474,716 $ 605,165
========= =========
</TABLE>
The accompanying notes to financial statements are an integral
part of these balance sheets.
<PAGE> 18
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 314,726 $ 720,453 $ 726,669
Cost of sales 421,812 659,132 665,978
--------- --------- ---------
Gross margin (107,086) 61,321 60,691
Selling, general and administrative expenses 21,816 22,116 22,487
Write-down of impaired assets -- 17,811 --
--------- --------- ---------
Income (loss) from operations (128,902) 21,394 38,204
--------- --------- ---------
Other income (expense):
Interest and other income 996 326 1,275
Interest expense (total contractual interest of $41,643 in 1999) (19,597) (42,483) (40,657)
Gain (loss) on asset sales 4,666 30 (863)
--------- --------- ---------
(13,935) (42,127) (40,245)
--------- --------- ---------
Loss before reorganization items and benefit for income taxes (142,837) (20,733) (2,041)
--------- --------- ---------
Reorganization items:
Provision for rejected executory contracts 32,815 -- --
Professional fees 6,025 -- --
Write-off of deferred loan fees 3,430 -- --
--------- --------- ---------
42,270 -- --
--------- --------- ---------
Loss before benefit for income taxes (185,107) (20,733) (2,041)
Benefit for income taxes -- (1,790) (773)
--------- --------- ---------
Net loss (185,107) (18,943) (1,268)
Less redeemable preferred stock dividends and
accretion for original issue discount 4,829 11,772 10,340
--------- --------- ---------
Net loss applicable to common shares $(189,936) $ (30,715) $ (11,608)
========= ========= =========
Basic and diluted net loss per common share $ (11.33) $ (1.90) $ (.74)
========= ========= =========
Weighted average common shares outstanding 16,759 16,155 15,660
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
<PAGE> 19
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
SHARES ISSUED AMOUNT
--------------------------- ----------------------------
WARRANTS
TO PURCHASE
COMMON COMMON COMMON COMMON COMMON
CLASS A CLASS B CLASS A CLASS B CLASS A
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 14,705,265 19,151,348 $ 87,979 $ 10,110 $ 5,360
Issuance of Class A common stock to
employee savings plan -- -- -- -- --
Redeemable preferred stock dividends -- -- -- -- --
Redeemable preferred stock accretion
for original issue discount -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 14,705,265 19,151,348 87,979 10,110 5,360
Issuance of Class A common stock to
employee savings plan -- -- -- -- --
Redeemable preferred stock dividends -- -- -- -- --
Redeemable preferred stock accretion
for original issue discount -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 14,705,265 19,151,348 87,979 10,110 5,360
Issuance of Class A common stock to
employee savings plan -- -- -- -- --
Exercise of Warrants to purchase
Class A common stock 233,502 -- 3,674 -- (1,105)
Conversion of Class B common stock
to Class A common stock 70,000 (700,000) 369 (369) --
Redeemable preferred stock dividends -- -- -- -- --
Redeemable preferred stock accretion
for original issue discount -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 15,008,767 18,451,348 $ 92,022 $ 9,741 $ 4,255
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS TREASURY
(DEFICIT) STOCK TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance at September 30, 1996 $ 5,077 $ (15,699) $ 92,827
Issuance of Class A common stock to
employee savings plan (4,868) 6,252 1,384
Redeemable preferred stock dividends (9,608) -- (9,608)
Redeemable preferred stock accretion
for original issue discount (732) -- (732)
Net loss (1,268) -- (1,268)
----------- ----------- -----------
Balance at September 30, 1997 (11,399) (9,447) 82,603
Issuance of Class A common stock to
employee savings plan (5,635) 6,955 1,320
Redeemable preferred stock dividends (11,025) -- (11,025)
Redeemable preferred stock accretion
for original issue discount (747) -- (747)
Net loss (18,943) -- (18,943)
----------- ----------- -----------
Balance at September 30, 1998 (47,749) (2,492) 53,208
Issuance of Class A common stock to
employee savings plan (2,312) 2,492 180
Exercise of Warrants to purchase
Class A common stock -- -- 2,569
Conversion of Class B common stock
to Class A common stock -- -- --
Redeemable preferred stock dividends (3,986) -- (3,986)
Redeemable preferred stock accretion
for original issue discount (843) -- (843)
Net loss (185,107) -- (185,107)
----------- ----------- -----------
Balance at September 30, 1999 $ (239,997) $ -- $ (133,979)
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
<PAGE> 20
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(185,107) $ (18,943) $ (1,268)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 44,679 42,272 43,048
Amortization and write-off of deferred loan fees 5,946 1,910 1,911
Deferred income tax benefit -- (2,049) (760)
(Gain) loss on asset sales (4,666) (30) 863
Write-down of impaired assets -- 17,811 --
Provision for write-off of leasehold improvements
related to rejected executory contracts 1,485 -- --
(Increase) decrease in current assets -
Accounts receivable, net 48,234 (3,267) 16,364
Inventories 58,264 (15,143) (6,942)
Prepaid expenses and other (1,350) 13,821 (2,634)
Increase (decrease) in current liabilities -
Accounts payable 35,243 (12,231) (13,227)
Accrued liabilities (1,914) 1,635 2,991
Accrued payroll and related taxes (1,829) (941) 2,232
Production prepayments -- -- (9,763)
Accrued interest payable 10,329 521 (187)
Accrued pension and profit sharing costs (1,219) 481 (558)
--------- --------- ---------
Net cash provided by operating activities 8,095 25,847 32,070
--------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (8,025) (10,893) (47,724)
Proceeds from sale of property, plant and equipment 4,684 34 21
Change in other assets -- -- 1,238
--------- --------- ---------
Net cash used for investing activities $ (3,341) $ (10,859) $ (46,465)
--------- --------- ---------
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
<PAGE> 21
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands, except per share amounts)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings from credit facilities $ 19,794 $ 25,649 $ 51,987
Payments on credit facilities (25,097) (39,785) (40,513)
Payments for deferred loan fees and other assets (1,580) -- (4)
Change in bank overdraft 2,129 (852) 2,328
-------- -------- --------
Net cash provided by (used for) financing activities (4,754) (14,988) 13,798
-------- -------- --------
Net decrease in cash -- -- (597)
Cash at beginning of year -- -- 597
-------- -------- --------
Cash at end of year $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 9,268 $ 40,052 $ 38,934
Income taxes -- -- --
</TABLE>
Supplemental schedule of noncash financing activities:
For the years ended September 30, 1999, 1998 and 1997, the Company
increased the redeemable preferred stock by $843, $747, and $732,
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 September 30, 1999, the Company had accrued dividends payable
of $28,492 (total contractual dividends of $36,861).
During the year ended September 30, 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 financial statements are an integral
part of these statements.
<PAGE> 22
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
NOTES TO 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.
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
years 1998 and 1999 were severely affected by, among other things, the dramatic
surge in steel imports beginning in 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. 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
(collectively, the "Senior Notes"), except pursuant to a confirmed plan of
reorganization. The Company is in possession of its properties and assets and
continues to manage its businesses as debtor-in-possession subject to the
supervision of the Bankruptcy Court. The Company has a $125 million debtor-in-
possession credit facility in place (See Note 3).
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 year ended September 30, 1999 was $33.1 million, which
is $22.0 million in excess of recorded interest expense included in the
accompanying financial statement. Contractual dividends on the redeemable
preferred stock as of September 30, 1999, was approximately $36.9 million, which
is $8.4 million in excess of dividends accrued in the accompanying balance
sheet.
Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon
any of the Company's liabilities as of the petition date or to enforce
pre-petition date contractual obligations were automatically stayed. Absent
approval from the Bankruptcy Court, the Company is prohibited from paying
pre-petition obligations. However, the Bankruptcy Court has approved payment of
certain pre-petition liabilities such as employee wages and benefits and certain
other pre-petition obligations. Additionally, the Bankruptcy Court has approved
for the retention of legal and financial professionals. As debtor-in-possession,
the Company has the right, subject to Bankruptcy Court approval and certain
other conditions, to assume or reject any pre-petition executory contracts and
unexpired leases. Parties affected by such rejections may file pre-petition
claims with the Bankruptcy Court in accordance with bankruptcy procedures.
The Company is currently developing a plan of reorganization (the "Plan of
Reorganization") through, among other things, discussions with the official
creditor committees appointed in the Chapter 11 proceeding. The objective of the
Plan of Reorganization is to restructure the Company's balance sheet to (i)
significantly strengthen the Company's financial flexibility throughout the
business cycle, (ii) fund required capital expenditures and working capital
needs, and (iii) fulfill those obligations necessary to facilitate emergence
from Chapter 11. In conjunction with the Plan of Reorganization, the Company
intends to apply in January 2000 for a government loan guarantee under the
Emergency Steel Loan Guarantee Program (the "Loan Guarantee Program"). The
application will seek a government loan guarantee for a portion of the financing
required to consummate the Plan of Reorganization with the remaining financing
being provided through other means. In connection with preparing the loan
guarantee application, the Company is in the final phase of selecting and
negotiating terms with a major bank to serve as the primary lender under the
Loan Guarantee Program. There can be no assurance that the Company will be
accepted to participate in the Loan Guarantee Program or that, with or without a
guarantee, the Company can obtain the necessary financing to consummate the Plan
of Reorganization.
<PAGE> 23
Although management expects to file the Plan of Reorganization, there can be no
assurance at this time that a Plan of Reorganization will be proposed by the
Company, approved or confirmed by the Bankruptcy Court, or that such plan will
be consummated. The Bankruptcy Court has granted the Company's request to extend
its exclusive right to file a Plan of Reorganization through February 28, 2000.
While the Company intends to request further extensions of the exclusivity
period if necessary, there can be no assurance that the Bankruptcy Court will
grant such further extensions. If the exclusivity period were to expire or be
terminated, other interested parties, such as creditors of the Company, would
have the right to propose alternative plans of reorganization.
Although the Chapter 11 Bankruptcy filing raises substantial doubt about the
Company's ability to continue as a going-concern, the accompanying financial
statements have been prepared on a going concern basis. This basis contemplates
the continuity of operations, realization of assets, and discharge of
liabilities in the ordinary course of business. The statements also present the
assets of the Company at historical cost and the current intention that they
will be realized as a going concern and in the normal course of business. A plan
of reorganization could materially change the amounts currently disclosed in the
financial statements.
The accompanying financial statements do not present the amount which may
ultimately be paid to settle liabilities and contingencies which may be allowed
in the Chapter 11 Bankruptcy cases. Under Chapter 11 Bankruptcy, the right of,
and ultimate payment by the Company to pre-petition creditors may be
substantially altered. This could result in claims being paid in the Chapter 11
Bankruptcy proceedings at less (and possibly substantially less) than 100
percent of their face value. At this time, because of material uncertainties,
pre-petition claims are carried at the Company's face value in the accompanying
financial statements. Moreover, the interests of existing preferred and common
shareholders could, among other things, be very substantially diluted or even
eliminated. Further information about the financial impact of the Chapter 11
Bankruptcy filings is set forth in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations. Management expects that a Plan
of Reorganization will be completed and ready to file with the bankruptcy court
during the first calendar quarter of 2000. The Plan of Reorganization will be
conditioned on the Company being approved for a guarantee under the Loan
Guarantee Program. There can be no assurance as to the actual timing for the
filing of the Plan of Reorganization or the approval thereof by the Bankruptcy
Court, if at all.
As a result of favorable outcomes to various trade cases as well as improving
market conditions in several foreign economies, market conditions for the
Company's products have recently improved. Both the Company's order entry and
price realization have improved significantly in recent months. The Company's
shipment rate has increased from a low in February 1999 of 44,000 tons to
146,000 tons in November 1999. Similarly, overall price realization has
increased by 5.7% during the same period, despite a product mix shift to
lower-priced sheet. The timing and magnitude of the recent volume and pricing
improvements are consistent with initial market recoveries following the success
of previously-filed trade cases. The Company expects in the near term that both
volume and pricing will continue to improve gradually.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bankruptcy Accounting
Since the Chapter 11 bankruptcy filing, the Company has applied the provisions
in Statement of Position ("SOP") 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
SOP 90-7 does not change the application of generally accepted accounting
principles in the preparation of financial statements. However, it does require
that the financial statements for periods including and subsequent to filing the
Chapter 11 petition distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business.
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.
<PAGE> 24
Inventories
Inventories include costs of material, labor and manufacturing overhead.
Inventories are stated at the lower of cost (using a standard costing method) or
market value. The composition of inventories as of September 30, 1999 and 1998
was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials $ 17,081 $ 29,250
Semi-finished and finished goods 33,762 78,746
Operating materials 4,617 5,728
-------- --------
$ 55,460 $113,724
======== ========
</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 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 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 $0.1 million, $0.3 million and $0.5 million of
interest during the years ended September 30, 1999, 1998 and 1997, respectively.
Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal, related costs and
accumulated depreciation are removed from the accounts and resulting gains or
losses are reflected in income.
Major spare parts for machinery and equipment are capitalized and included in
machinery and equipment in the accompanying financial statements. 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, 1999 and
1998, approximately $6.2 million and $13.6 million, respectively, of
construction in progress was included in machinery and equipment in the
accompanying financial statements.
<PAGE> 25
Mineral property and development costs are depleted using the units of
production method based upon estimated recoverable reserves. Accumulated
depletion is included in accumulated depreciation in the accompanying financial
statements. The Company wrote-down certain impaired mineral property development
costs during fiscal year 1998 by approximately $6.6 million (see discussion
below).
Other Assets
Other assets consist primarily of a long-term defined benefit plan intangible
asset of $10.7 million, at September 30, 1999. Other assets also include
deferred loan fees incurred in connection with obtaining long-term financing.
The deferred loan fees are being amortized on a straight-line basis over the
term of the applicable financing agreement. As a result of the bankruptcy
filing, the Company wrote-off approximately $3.4 million of unamortized deferred
loan fees on its Senior Notes during fiscal year 1999. Accumulated amortization
of deferred loan fees totaled $0.5 million and $8.5 million at September 30,
1999 and 1998, respectively.
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, 1999 and
1998, reserves for estimated customer claims of $4.2 million and $4.8 million,
respectively, were included in the allowance for doubtful accounts in the
accompanying financial statements.
In April 1999, the Company implemented the practice allowed by its contract with
Mannesmann Pipe and Steel ("Mannesmann") to bill Mannesmann and receive payment
for inventory that could be assigned to Mannesmann orders prior to actually
shipping the product. When the funds are received for such inventory prior to
shipment, the Company defers the revenue recognition until the inventory is
shipped. Until the product is shipped, the amount of the payment is reflected as
a deferred revenue liability and/or inventory reserve. At September 30, 1999,
the Company had received approximately $9.5 million from Mannesmann for
inventory assigned to Mannesmann orders prior to shipment of the product. This
$9.5 million was deferred revenue included in the inventory reserve in the
accompanying financial statements as of September 30, 1999.
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 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
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. The in-line scarfing equipment was
originally built to continuously condition the surface of slabs which allowed
the Company to direct roll slabs through its manufacturing
<PAGE> 26
process. Prior to the implementation of the Company's slab caster, it was
anticipated that 10% to 15% of the Company's slabs would have to be conditioned.
Based on the continued operating performance of the Company's continuous caster,
the Company determined that sustained use of the in-line scarfing equipment is
not necessary. Because of its specialized nature and limited utility, this
equipment has nominal resale value or alternative use. Accordingly, the
equipment was written-down to a zero carrying value and will be retained by the
Company as an idled facility.
In order to improve blast furnace productivity and maximize production of hot
metal, the Company shifted to the utilization of 100 percent iron ore pellets,
rather than using a blend of pellets and lump ore from its mines in Southern
Utah. Because the Company has determined to maintain this practice into the
future, the Company decreased the estimated value of the mineral development
costs associated with mining its Southern Utah ore to $1 million. The estimated
value was based on fair value of the mineral property less estimated costs to
sell. The Company will hold the mining properties and their remaining
development costs with the objective to use lump ore as new technologies are
developed that allow the Company in future years to utilize the iron ore
reserves from these mines or in the event that the productivity needs from its
blast furnaces change. The Company is uncertain as to when the reserves will be
utilized, if ever. However, the mineral property is carried at fair market
value.
The $2.7 million of other machinery and equipment included iron ingot molds and
engineering costs related to a COREX cokeless ironmaking development project.
The iron ingot molds are no longer used by the Company in the steelmaking
process. The iron ingot molds have been valued at the iron scrap price less
costs to break the iron molds into a size to be melted in the steelmaking
furnace. When the price of iron scrap dropped with weaker steel demand in 1998,
the Company concluded that the value of the iron ingot molds had been impaired
for the foreseeable future. The engineering costs related specifically to the
COREX cokeless ironmaking project have been written-off because the Company has
elected to pursue a different cokeless ironmaking technology.
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
and 1997, presented in the accompanying statements of operations.
Basic net income (loss) per common share is calculated based upon the weighted
average number of common shares outstanding during the periods. Diluted net
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,
1999, 1998 and 1997, stock options and warrants prior to conversion are not
included in the calculation of diluted net loss per common share because their
inclusion would be antidilutive. For the year ended September 30, 1999,
1,240,973 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, 1999, 1998 and 1997 was adjusted
for redeemable preferred stock dividends through February 1, 1999 and the
accretion required over time to amortize the original issue discount on the
redeemable preferred stock incurred at the time of issuance.
Defined Benefit Pension Plan
The Company has a defined benefit pension plan covering all of its union
employees, effective January 1, 1999. The plan provides benefits that are based
on average monthly earnings of the participants. The Company's funding policy
provides that payments to the plan shall be at least equal to the minimum
funding requirements as actuarially determined by an independent consulting
firm. As required, the Company has adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits."
<PAGE> 27
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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 adopted this statement in
fiscal year 1999. Adoption of SFAS No. 131 did not have a material impact on the
Company's financial statements. Management believes that the company consists of
a single operating segment engaged in the production and sale of steel products.
In June 1998, the Financial Accounting Standards Board ("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 financial statements.
Reclassifications
Certain reclassifications were made to the fiscal years 1998 and 1997
presentation to conform to the fiscal year 1999 presentation.
3 LONG-TERM DEBT
The aggregate amounts of principal maturities of long-term debt as of September
30, 1999 and 1998 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<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
Debtor-in-possession credit facility from a syndicate of lenders, interest
payable monthly at LIBOR (5.383% at September 30, 1999), plus 2.25%,
due on the earlier of the consummation of a plan of reorganization or
February 19, 2001 (see discussion below), secured by inventories,
accounts receivable
and property, plant and equipment 55,466 --
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%, paid in February 1999 from proceeds from the debtor-in-possession
credit facility -- 60,769
--------- ---------
380,466 385,769
Less current portion (380,466) (385,769)
--------- ---------
$ -- $ --
========= =========
</TABLE>
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
<PAGE> 28
USA, Inc. as agent. 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 September 30, 1999, the Company's eligible inventories,
accounts receivable and eligible equipment supported access to $66.5 million
under the Credit Facility. As of September 30, 1999, the Company had $8.6
million available under the Credit Facility, with $55.5 million in borrowings
and $2.4 million in letters of credit outstanding. There can be no assurance as
to the amount of availability that will be provided in the future or that the
lender will not require additional reserves in the future. The terms of the
Credit Facility include cross default and other customary provisions.
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 "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 2004 and the 11 1/8% senior notes due 2001
(the "11 1/8% Senior Notes and together with the 9 1/2% Senior Notes, the
"Senior Notes"), except pursuant to a confirmed plan of reorganization. As of
February 1, 1999, the Company discontinued accruing interest on the Senior
Notes. Contractual interest on the Senior Notes for the year ended September 30,
1999 was $33.1 million, which is $22.0 million in excess of recorded interest
expense included in the accompanying financial statement.
In connection with the Company's filing of its voluntary petition for relief
under Chapter 11 of the Bankruptcy Code on February 1, 1999, the Company
wrote-off approximately $3.4 million of unamortized deferred loan fees on its
Senior Notes during fiscal year 1999.
The Company estimates that the aggregate fair market value of its Senior Notes
was approximately $42.3 million as of September 30, 1999. 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, 1999, 1998, and 1997, the Company derived
approximately 72%, 33% and 33%, respectively, of its net sales through one
customer, which is a distributor to other companies. International sales during
the years ended September 30, 1999, 1998 and 1997 did not exceed 10%.
<PAGE> 29
5 INCOME TAXES
The provision (benefit) for income taxes as of September 30, 1999, 1998 and 1997
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current income tax provision (benefit)
Federal $ -- $ 227 $ (11)
State -- 32 (2)
-------- -------- --------
-- 259 (13)
-------- -------- --------
Deferred income tax provision (benefit)
Federal 51,418 3,461 (665)
State 7,345 495 (95)
Change in valuation allowance (58,763) (6,005) --
-------- -------- --------
-- (2,049) (760)
-------- -------- --------
Benefit for income taxes $ -- $ (1,790) $ (773)
======== ======== ========
</TABLE>
The benefit for income taxes as a percentage of loss for the years ended
September 30, 1999, 1998 and 1997 differs from the statutory federal income tax
rate due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<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 38.3 29.7 --
Other -- -- 0.4
------ ------ ------
Effective income tax rate -- % (8.6)% (37.9)%
====== ====== ======
</TABLE>
<PAGE> 30
As of September 30, 1999, the Company had deferred income tax assets of $112.9
million. The deferred income tax assets have been reduced by a $64.8 million
valuation allowance. This valuation allowance was established during the years
ended September 30, 1999 and 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, 1999 and 1998 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 89,214 $ 36,439
Write-down of impaired assets -- 6,144
Inventory costs capitalized 9,481 4,987
Alternative minimum tax credit carryforward 6,464 6,464
Accrued vacation 1,168 1,543
Allowance for doubtful accounts 4,179 2,333
General business credits 2,064 2,440
Other 374 326
--------- ---------
Total deferred income tax assets 112,944 60,676
Valuation allowance (64,768) (6,005)
--------- ---------
48,176 54,671
--------- ---------
Deferred income tax liabilities:
Accelerated depreciation (46,181) (49,427)
Mineral property development costs -- (2,476)
Operating supplies (1,995) (2,768)
--------- ---------
Total deferred income tax liabilities (48,176) (54,671)
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of September 30, 1999, the Company had a net operating loss carryforward for
financial reporting purposes of approximately $201.1 million. As of September
30, 1999, the Company had a net operating loss carryforward and an alternative
minimum tax credit carryforward for tax reporting purposes of approximately
$233.2 million and $6.5 million, respectively. Net operating loss carryforwards
of $45.7 million, $36.7 million, $16.4 million, $39.0 million and $95.4 million
expire on December 31, 2009, 2011, 2012, 2018 and 2019, respectively. The
alternative minimum tax credit carryforward of $6.5 million at September 30,
1999 currently does not expire.
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 lines, improving product
quality and increasing throughput rates. The Company spent $8.0 million and
$10.9 million (net of a $12.5 million insurance claim settlement for capital
expenditures covered by the January 1996 power outage insurance claim settlement
described in Note 2) on capital projects during the fiscal years ended September
30, 1999 and 1998, respectively. These expenditures were made primarily in
connection with the Company's ongoing modernization and capital maintenance
efforts. Capital expenditures for fiscal year 2000 are estimated at
approximately $30 million, which includes a blast furnace reline, maintenance
items and various projects designed to reduce costs and increase product quality
and throughput. Given the Company's Chapter 11 bankruptcy proceedings, current
market conditions and the uncertainties created thereby, the Company is
continuing to closely monitor its capital spending levels. Depending on market,
operational, liquidity and other factors, the Company may elect to adjust the
design, timing and budgeted expenditures of its capital plan.
<PAGE> 31
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, with the exception of matters relating to the Chapter 11
proceeding, 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.
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
$8.1 million for environmental capital improvements in fiscal years 2000 and
2001. 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.
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and the amount of associated costs is
reasonably determinable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
engineering or feasibility study or the commitment to a formal plan of action.
These accruals may be adjusted as further information becomes available or
circumstances change. If recoveries of remediation costs from third parties are
probable, a receivable is recorded. As of September 30, 1999, the Company
determined that there were no environmental compliance or remediation
obligations requiring accruals in the accompanying financial statements.
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 the sharing arrangement described below) 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
<PAGE> 32
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 has
subsequently been amended, 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.
The Company's minimum purchase commitment is $2.5 million, $2.6 million and $1.1
million for fiscal years 2000, 2001 and 2002, respectively. The Company recently
reached an agreement (subject to Public Service Commission approval) to fix the
price escalation rate under the agreement at 3 3/4%, 4% and 5%, respectively,
for the final three years of the agreement.
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. The annual base charge is approximately $5.1 million.
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 is 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 and includes a minimum annual facility charge of
approximately $5.3 million.
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 and
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. The minimum annual facility charge is approximately $1.0 million.
Effective September 1, 1998, the Company entered into an agreement to purchase
35,000 MMBtu per day of firm natural gas with provisions to offsell any unusable
volumes to offset other agreements with the expiration date of June 30, 2000.
The price is adjusted monthly based on the index price as reported by "Inside
FERC Gas Market Report." The Company's minimum purchase commitment is
approximately $22.6 million for fiscal year 2000.
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. The Company's minimum purchase
commitment is approximately $1.48 million per year.
The Company has historically purchased iron ore pellets from USX. The Company's
pellet agreement with USX expires on December 31, 1999. The Company has begun
discussions with USX and other potential vendors regarding a new pellet supply
contract and has reached an interim understanding with USX for a short-term
supply arrangement. Management believes that the Company will be able to
complete a new pellet supply contract with USX or a substitute vendor. However,
there can be no assurance that a new contract can be completed or that USX will
continue to supply pellets to the Company. If the Company is unable to enter
into a new pellet supply contract, the Company's operating results could be
adversely affected.
<PAGE> 33
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 exclude executory lease contracts expected to be
rejected as part of the Chapter 11 proceedings. The aggregate commitments under
non-cancelable operating leases at September 30, 1999, were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ending September 30,
-------------------------
<S> <C>
2000 $ 3,405
2001 3,125
2002 809
2003 139
2004 7
Thereafter 86
-------
$ 7,571
=======
</TABLE>
Total rental expense for non-cancelable operating leases was approximately $8.7
million, $9.2 million and $9.9 million for the years ended September 30, 1999,
1998 and 1997, respectively.
Letters of Credit
As of September 30, 1999, the Company had outstanding letters of credit totaling
approximately $2.4 million.
7 REDEEMABLE PREFERRED STOCK
In March 1993, the Company issued $40 million of 14% cumulative redeemable
exchangeable preferred stock (the "Redeemable Preferred Stock") at a price of
$100 per share and related warrants to purchase an aggregate of 1,132,000 shares
of Class A common stock. As of September 30, 1999, the Redeemable Preferred
Stock consisted of 388,358 shares, no par value, with a liquidation preference
of approximately $151 per share. Pursuant to the Redeemable Preferred Stock
Agreement, 11,642 shares of Redeemable Preferred Stock have been used by the
holders thereof to pay for the exercise of warrants to purchase 233,502 shares
of Class A common stock. 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 September 30, 1999, warrants to
purchase 898,498 shares of Class A common stock were outstanding. Dividends on
the Redeemable Preferred Stock accrue at a rate equal to 14% per annum of the
liquidation preference and are payable quarterly in cash from funds legally
available therefor. The Company is obligated to redeem all of the Redeemable
Preferred Stock in March 2003 from funds legally available therefor. Restricted
payment limitations under the Senior Notes precluded payment of the quarterly
preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid
dividends accumulate until paid and accrue additional dividends at a rate of 14%
per annum. As of February 1, 1999, the Company discontinued recording dividends
on the Redeemable Preferred Stock. Unpaid contractual dividends as of September
30, 1999, were approximately $36.8 million, which is $8.4 million in excess of
dividends accrued in the Company's balance sheet. The Company will not pay
dividends on the Redeemable Preferred Stock during the pendency of its Chapter
11 proceeding and any payments will be subject to a confirmed plan of
reorganization. Both the Redeemable Preferred Stock and/or the Exchange
Debentures are redeemable, at the Company's option, subject to certain
redemption premiums.
The Company estimates that its Redeemable Preferred Stock had nominal fair
market value at September 30, 1999. The Company estimates that the aggregate
fair market value of its warrants to purchase Class A common stock had no value
at September 30, 1999. The Company's estimates for the Redeemable Preferred
Stock and warrants to purchase Class A common stock were based on management's
estimates.
<PAGE> 34
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.
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.
<PAGE> 35
Stock option activity for the years ended September 30, 1999, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
Exercise Weighted
Number of Price per Average Exercise
Shares Share Range Price Per Share
---------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at September 30, 1996 907,513 $3.75 - 10.91 $ 7.33
Granted 810,000 2.25 2.25
Canceled (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
Canceled (40,010) 2.25 - 8.66 7.19
---------- ------------- -------
Outstanding at September 30, 1998 1,891,139 2.06 - 10.91 4.54
Granted 10,000 0.56 0.56
Canceled (660,166) 2.25 - 7.75 4.30
---------- ------------- -------
Outstanding at September 30, 1999 1,240,973 $0.56 - 10.91 $ 4.63
========== ============= =======
</TABLE>
Options to purchase 1,003,772, 1,032,606 and 565,275 shares of Class A common
stock were exercisable on September 30, 1999, 1998 and 1997, respectively. As of
September 30, 1999, 661,776 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,
------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported $ (185,107) $ (18,943) $ (1,268)
Net loss pro forma (185,254) (19,166) (1,650)
Diluted net loss per common share as reported $ (11.33) $ (1.90) $ (.74)
Diluted net loss per common share pro forma (11.34) (1.92) (.77)
</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 such expenses 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 1999, 1998 and 1997, in calculating compensation cost: expected stock
price volatility of 89.6%, 71.6% and 60.8% for 1999, 1998 and 1997,
respectively, an average risk free interest rate of approximately 5.30%, 5.75%
and 6.25% for 1999, 1998 and 1997, respectively, and expected lives ranging
between three years to seven years for 1999 and 1998 and for seven years for
1997.
The weighted average fair value of options granted during fiscal years 1999,
1998 and 1997 was $0.29, $1.65 and $1.24 per share, respectively. At September
30, 1999, the 1,240,973 options outstanding have exercise prices between $0.56
and $10.91 per share with a weighted average exercise price of $4.63 and a
weighted average remaining contractual life of 4.9 years. 1,003,772 of these
options are exercisable with a weighted average exercise price of $4.97.
<PAGE> 36
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. The Company matches participants' contributions not
to exceed 1% of their compensation. Beginning in December 1999, the Company
match is made in cash. Prior to December 1999, the Company matched participants'
contributions to the savings plan in shares of class A common stock. For the
pension plan, the Company contributed 5% of each participant's compensation to
this plan for the years ended September 30, 1999, 1998 and 1997. Total
contributions by the Company for both plans for the years ended September 30,
1999, 1998 and 1997 were $2.9 million, $5.1 million and $5.1 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 Pension Plan
The Company provides a union employee defined benefit pension plan. The plan
covers all of the Company's union employees and is effective January 1, 1999.
The plan provides benefits that are based on average monthly earnings of the
participants. At the retirement date, the calculated defined benefit is reduced
by the amount of pension benefits provided by the USX pension plan and amounts
included in the retirees defined contribution pension and 401k plans. The
following provides a reconciliation of the change in benefit obligation for
fiscal year 1999 (dollars in thousands):
<TABLE>
<S> <C>
Benefit obligation as of January 1, 1999 $ 12,047
Service cost 201
Interest cost 621
Actual distributions (486)
Actuarial gains (701)
--------
Benefit obligation as of September 30, 1999 $ 11,682
========
</TABLE>
The following provides a reconciliation for plan assets for the fiscal year 1999
(dollars in thousands):
<TABLE>
<S> <C>
Fair value of plan assets as of January 1, 1999 $ --
Company contributions 600
Benefits paid from plan assets (486)
Actual return on plan assets 2
-----
Fair value of plan assets as of September 30, 1999 $ 116
=====
</TABLE>
<PAGE> 37
The following provides the funded status of the plan as of September 30, 1999
(dollars in thousands):
<TABLE>
<S> <C>
Funded status $(11,566)
Unrecognized prior service cost 11,434
Unrecognized net actuarial loss (703)
--------
Preliminary accrued benefit liability (835)
Additional liability (10,731)
--------
Funded Status of plan as of September 30, 1999 $ 11,566
========
</TABLE>
Net periodic pension cost includes the following components for the year ended
September 30, 1999 (dollars in thousands):
<TABLE>
<S> <C>
Service cost $ 201
Interest cost 621
Amortization of prior service cost 613
------
$1,435
======
</TABLE>
The assumptions as of September 30, 1999 are as follows:
<TABLE>
<S> <C>
Discount rate 8.00%
Long-term rate of return on plan assets 8.00%
Rate of compensation increase 3.00%
</TABLE>
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 $.20 from May 1, 1999 through
May 1, 2000, $.15 from May 1, 1998 through May 1, 1999 and $.10 prior to May 1,
1998 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. Beginning January 1, 1999, the Plan began paying a portion
of the COBRA payments for eligible retired participants. Eligibility
requirements and related matters currently are being determined based on the
current plan assets and level of Company contribution.
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. Beginning in December 1999, the Company began matching
participants' contributions in cash. Prior to December 1999, the Company matched
participants' contributions to the savings plan in shares of Class A common
stock. For the pension plan, the Company contributed 5% of each participant's
compensation to this plan for the years ended September 30, 1999, 1998 and 1997.
During the years ended September 30, 1999, 1998 and 1997, total contributions by
the Company were $1.4 million, $1.9 million and $2.2 million, respectively. The
participants vest in the Company's contributions at 20% for each year of service
until fully vested after five years.
<PAGE> 38
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, 1999, 1998 and 1997.
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 year ended September 30, 1999,
there were no performance dividend plan expenses. During the years ended
September 30, 1998 and 1997, performance dividend plan expenses were $8.5
million and $9.6 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, $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.
11 SUBSEQUENT EVENT
Subsequent to September 30, 1999, the Company finalized an agreement to sell its
quarry for $10.0 million ($1.5 million of which is contingent upon the future
issuance, by the relevant governmental entity, of a conditional use permit) and
received $8.5 million in October 1999. There can be no assurance that the
conditional use permit will be issued or that the Company will receive the
additional $1.5 million of the sale price. Pursuant to the sale, the Company
entered into a contract with the buyer of the quarry for the purchase of
limestone to meet its production requirements at a per ton price that is lower
than the Company's historical production cost.
<PAGE> 39
12 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial information for the years ended
September 30, 1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 Quarters First Second Third Fourth
- ------------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 78,699 $ 59,345 $ 87,000 $ 89,682
Gross margin (29,538) (31,559) (21,535) (24,454)
Net loss (49,818) (42,279) (29,491) (63,519)
Net loss applicable to common shares (53,008) (43,545) (29,677) (63,706)
Basic and diluted net loss per common share (3.30) (2.68) (1.76) (3.78)
</TABLE>
<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)
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statement on Form S-8, File No. 33-
40867 and the Company's previously filed Registration Statement on Form S-3,
File No. 33-64548.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
REGISTRANT'S BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE YEAR
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,196
<ALLOWANCES> 10,912
<INVENTORY> 55,460
<CURRENT-ASSETS> 89,849
<PP&E> 665,052
<DEPRECIATION> (292,035)
<TOTAL-ASSETS> 474,716
<CURRENT-LIABILITIES> 98,416
<BONDS> 325,000
56,001
0
<COMMON> 106,018
<OTHER-SE> (239,997)
<TOTAL-LIABILITY-AND-EQUITY> 474,716
<SALES> 314,726
<TOTAL-REVENUES> 314,726
<CGS> 421,812
<TOTAL-COSTS> 421,812
<OTHER-EXPENSES> 64,086
<LOSS-PROVISION> 8,775
<INTEREST-EXPENSE> (19,597)
<INCOME-PRETAX> (185,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (185,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,107)
<EPS-BASIC> (11.33)
<EPS-DILUTED> (11.33)
</TABLE>
