<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>
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS
Net sales $ 564,233 $ 314,726 $ 720,453 $726,669 $712,657
Gross margin 3,782 (107,086) 61,321 60,691 50,350
Income (loss) from operations (9,916) (128,902) 21,394 38,204 25,729
Net loss (8,971) (185,107) (18,943) (1,268) (7,238)
Net loss applicable to common shares (9,727) (189,936) (30,715) (11,608) (16,327)
Diluted net loss per common share (.58) (11.33) (1.90) (.74) (1.07)
BALANCE SHEET STATISTICS
Cash $ -- $ -- $ -- $ -- $ 597
Working capital 2,276 (8,567) (298,416) 67,063 71,065
Current ratio 1.02 .91 .39 1.66 1.64
Net property, plant and equipment 343,227 373,017 411,174 458,315 454,523
Total assets 483,790 474,716 605,165 646,070 657,386
Long-term debt -- -- -- 399,906 388,431
Redeemable preferred stock 56,757 56,001 56,917 56,169 55,437
Stockholders' equity (deficit) (143,707) (133,979) 53,208 82,603 92,827
Long-term debt as a percentage
of stockholders' equity -- -- -- 484% 418%
ADDITIONAL STATISTICS
Operating income (loss) per ton shipped $ (5.19) $ (117.15) $ 10.68 $ 17.90 $ 12.00
Capital expenditures (1) 13,005 8,025 10,893 47,724 26,378
Depreciation and amortization 43,295 50,625 44,182 44,959 44,415
Cash flows from operating activities (25,155) 8,095 25,847 32,070 (19,520)
Cash flows from investing activities (2,907) (3,341) (10,859) (46,465) (37,526)
Cash flows from financing activities 28,062 (4,754) (14,988) 13,798 44,835
Raw steel production (tons in thousands) 2,084 1,101 2,390 2,460 2,428
Steel products shipped (tons in thousands) 1,912 1,100 2,003 2,135 2,145
</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
On completion of the reorganization plan, the common stock of Geneva Steel
Holdings Corp. (successor entity to the Company) was approved for listing on the
NASDAQ SmallCap(TM) System. Trading opened on January 4, 2001. The last reported
price for the stock on January 9, 2001 was $4.00 as reported by NASDAQ. As of
January 3, 2001 the Company had 6,760,659 shares of common stock outstanding,
held by approximately 660 stockholders of record.
Prior to the bankruptcy filing, the Class A common stock of the Company was
traded on the NYSE and the Pacific Exchange. Subsequently, the stock was traded
on the over-the-counter Bulletin Board maintained by the National Association of
Securities Dealers.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Class A common stock of the Company. Prices for 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 and fiscal year 2000
reflect Bulletin Board quotations. Such quotations reflect interdealer prices,
without retail markup, markdown, commissions or other adjustments and may not
necessarily represent actual transactions. During the Company's Chapter 11
bankruptcy proceedings, the market for the Class A common stock was 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. Under the plan of
reorganization of the Company, all interests represented by the Class A common
stock were extinguished.
<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
Fiscal Year Ended September 30, 2000 HIGH LOW
First Quarter ended December 31 $ 13/32 $ 3/16
Second Quarter ended March 31 1 13/64
Third Quarter ended June 30 17/32 1/4
Fourth Quarter ended September 30 11/32 1/32
</TABLE>
<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 U.S. and tonnage sold by domestic
producers. The intensity of foreign competition is significantly affected by
fluctuations in the value of the U.S. dollar against other currencies, the level
of demand for steel in the U.S. economy relative to steel demand in foreign
economies, the effect of trade cases, and world economic conditions generally.
The U.S. is one of the most open steel markets in the world, and even the
existing minimal customs duties on steel products will be eliminated by January
1, 2004. Most foreign markets are less open than the U.S. market, allowing
foreign producers to maintain higher prices in their own markets while dumping
excess production at lower prices into the U.S. market. In addition, certain
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. The Company competes in all its product
lines against foreign producers located throughout the world.
Historically, foreign steel producers have often engaged in extremely
aggressive, and often illegal, pricing policies. Foreign dumping and subsidies
have been chronic problems in the U.S. steel industry, resulting in numerous
rounds of trade cases.
In 1993, antidumping orders were imposed against carbon steel plate from Taiwan
and cut-to-length carbon steel plate from Belgium, Brazil, Canada, Finland,
Germany, Mexico, Poland, Romania, Spain, Sweden, and the United Kingdom. These
cases recently underwent full sunset reviews at the U.S. International Trade
Commission (ITC), and in November 2000, the ITC continued all cases except
Canada for an additional five years.
In 1996, actions by steel producers in Russia, Ukraine, South Africa and China
prompted the Company and another domestic producer to file anti-dumping actions
with the U.S. Department of Commerce (DOC) and the ITC against those nations.
Those actions charged that steel plate was being dumped into the U.S. market. In
December 1997, those cases successfully resulted in suspension agreements on
steel plate imported into the U.S. from certain of those countries, which
reduced imports from those countries by approximately 70% and imposed minimum
price floors. These agreements will remain in effect until 2002 when they will
be subject to sunset review.
On September 30, 1998, the Company and eleven other domestic steel producers
filed anti-dumping 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 Product Cases."
In April 1999, the 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 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 order was issued against imports from Japan that will last for a
minimum duration of five years. During that time, the amount of antidumping
duties due from U.S. importers of such products can vary based upon the results
of annual administrative reviews. The Company believes that the imposition of
these antidumping duties will substantially eliminate hot-rolled sheet imports
from Japan, which totaled 2.7 million tons in 1998.
In July 1999, 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. Suspension
agreements generally impose price and/or quantity restrictions on imports from
the subject country for the purpose of removing the injurious impact of dumping
and/or subsidies. These agreements are entered in lieu of potentially imposing
antidumping or countervailing duties. If a suspension agreement is violated,
final antidumping or countervailing duties supported by a final affirmative
injury determination are immediately imposed.
<PAGE> 4
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 Brazilian hot-rolled sheet 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. Because the reference price was above then current
domestic prices, the agreement provided that this price would increase as
domestic prices increased above $344 per metric ton. Given that the agreement
protected the U.S. industry from the devaluation of the Brazilian currency
during the five years of the agreement, the Company and certain other
petitioners supported the suspension agreement. Also, the DOC announced
countervailing duties 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
the suspension agreements, these duty amounts would be immediately imposed.
The suspension agreement on hot-rolled sheet from Russia provided 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 also set 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 the Russian suspension agreement
because it permitted the continued importation of dumped steel from Russia.
However, the 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 reductions in imports of
other flat-rolled steel products. Simultaneously 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 with Russia is violated
during the next five years, these duty amounts would be immediately imposed.
The Coiled Product Cases have benefitted the Company and the domestic steel
industry. This benefit was, however, significantly thwarted by other countries
that have substantially increased exports to the U.S. market. These increased
imports into the U.S. adversely affected hot-rolled sheet prices and order
volumes and have resulted in the recent filing of additional hot-rolled sheet
cases as discussed below.
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.
The DOC issued final margin determinations on December 13, 1999, ranging from 0%
to 72%. On January 19, 2000, the ITC issued a final affirmative injury
determination. Consequently, antidumping duties have been imposed. The
imposition of antidumping and countervailing duties has significantly reduced
imports from these six countries.
On June 30, 1999, the Company and seven other petitioners filed for Section 201
relief from welded line pipe imports, referred to as the Section 201 Case.
Unlike conventional antidumping and countervailing duty cases, the relief
granted in a Section 201 case can apply to imports from all sources, rather than
only against countries named as respondents. In order for relief to be granted,
the ITC must make an affirmative injury determination, after which a remedy is
recommended by the ITC to the President. The President has the discretion to
accept the ITC's recommendation or take other action, if any. The ITC made an
affirmative injury determination by a margin of 5-1, and a remedy hearing was
held on November 10, 1999. The ITC subsequently recommended to the President
that imports be reduced by approximately 45% from 1998 levels. President
Clinton, effective March 1, 2000, instead adopted a remedy that provides that
imports to the U.S. of the subject product from any country (except Mexico and
Canada) in excess of 9,000 tons in any year will be subject to duties of 19%,
15%, and 11%, for the years 2000, 2001 and 2002, respectively. Since the
imposition of relief, imports in 2000 have been approximately 50% of 1998
levels. The 201 relief has benefitted the Company allowing it to increase
production and margins on line pipe sales.
On November 13, 2000, several U.S. steel producers filed antidumping cases
against imports of hot-rolled sheet (which includes coiled plate) from eleven
countries: Argentina, China, India, Indonesia, Kazakhstan, Netherlands, Romania,
South Africa, Taiwan, Thailand and Ukraine. Countervailing duty (subsidy) cases
were also filed against imports from
<PAGE> 5
Argentina, India, Indonesia, South Africa and Thailand. The International Trade
Commission made unanimous affirmative preliminary determinations of a reasonable
indication of injury on December 28, 2000. Petitioners intend to file critical
circumstance allegations if imports from the respondent counties surge, which
could result in the imposition of duties as early as January 2001. The Company
expects that these cases will ultimately have a significant beneficial effect on
the market, although there can be no assurance as to the outcome or effect.
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,
however, be inadequate to prevent the adverse impact of dumped and/or subsidized
steel imports. Moreover, the preparation and prosecution of trade cases requires
several months during which the Company and other domestic producers must
continue to suffer the adverse impact of unfairly traded imports. There is no
guarantee that domestic markets will not in the future be flooded illegally with
foreign imports of products in competition with the Company's products. While
the Company intends to oppose all such imports vigorously, there is no guarantee
that it will be successful. Consequently, such imports could pose continuing
problems for the domestic steel industry and the Company.
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 "Bankruptcy Court"). The
filing was made necessary by a lack of sufficient liquidity. Beginning in fiscal
year 1998, the Company's operating results were severely affected by, among
other things, a dramatic surge in steel imports. 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 a $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
prohibited 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"). While in Chapter 11 bankruptcy, the Company
remained in possession of its properties and assets and continued to manage its
businesses as a debtor-in-possession, subject to the supervision of the
Bankruptcy Court. The Company had 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 both the years ended September 30, 2000 and 1999 was $33.1
million, which is $33.1 million and $22.0 million, respectively, in excess of
recorded interest expense included in the Company's financial statements.
Contractual dividends on the redeemable preferred stock as of September 30, 2000
were approximately $51.0 million and $36.9 million, respectively, which are
$22.5 million and $8.4 million, respectively, in excess of dividends accrued in
the Company's 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 was prohibited from paying pre-petition
obligations. The Bankruptcy Court approved payment of certain pre-petition
obligations such as employee wages and benefits and customer claims and rebates.
Additionally, the Bankruptcy Court approved the retention of various legal,
financial and other professionals. As a debtor-in-possession, the Company had
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 had the right to file pre-petition claims
with the Bankruptcy Court.
On July 20, 2000, the Company and the Official Committee of Bondholders in the
Company's Chapter 11 case filed a proposed plan of reorganization (the "Plan")
and disclosure statement with the Bankruptcy Court. On December 8, 2000, the
Bankruptcy Court entered an order confirming the Plan, as amended and modified
(the "Confirmation Order"). The Plan was consummated on January 3, 2001,
together with the closing of the post-bankruptcy credit facilities.
Implementation of the Plan significantly reduced the Company's debt burden and
provided additional liquidity in the form of a $110 million term loan that is
eighty-five percent guaranteed by the United States Government under the
Emergency Steel Loan Guaranty Act of 1999, and a $125 million revolving line of
credit.
<PAGE> 6
Under the terms of the Plan, the Company changed its state of domicile from Utah
to Delaware, changed its form of organization from a corporation to a limited
liability company, and became a wholly-owned subsidiary of Geneva Steel Holdings
Corp. The Company transferred certain real property not used in the steel mill
operations to Williams Farm Property, LLC and its iron ore mines located in
southern Utah to Iron Ore Mines, LLC, both of which are also wholly-owned
subsidiaries of Geneva Steel Holdings Corp. The Company also transferred
ownership of Vineyard Iron Company and Vineyard Management Company to Geneva
Steel Holdings Corp., which made those entities wholly-owned subsidiaries of
Geneva Steel Holdings Corp.
Under the terms of the Plan approved by the Bankruptcy Court, all rights with
respect to the previous outstanding common and preferred stock of the Company
were terminated. Shares of common stock of Geneva Steel Holdings Corp. were
issued to the holders of unsecured claims, which primarily consisted of holders
of an aggregate $340.6 million of Senior Notes, including unpaid interest
accrued prior to the bankruptcy, and approximately $47 million of general
unsecured debt, which includes disputed claims. Creditors who were owed $5,000
or less will receive a cash payment equal to 40% of their claim, and trade
creditors who were owed in excess of $5,000 could elect to receive $2,000,
rather than shares of common stock in Geneva Steel Holdings Corp. Secured
creditors of the Company will be paid in full with the proceeds of the term
loan.
Under the terms of an employee retention program approved by the Bankruptcy
Court, the executive officers and a manager of the Company received options to
purchase an aggregate of 5% of the shares of common stock of Geneva Steel
Holdings Corp. on a fully diluted basis.
The Plan also provides each holder of unsecured debt a right to participate in a
$25 million preferred stock rights offering by Geneva Steel Holdings Corp. In
the event that prebankruptcy holders of unsecured debt do not purchase all of
the new preferred stock, Geneva Steel Holdings Corp. will not receive the full
$25 million sought. Consequently, there can be no assurance that any of the $25
million capital infusion sought by the Plan will be available. The Company
previously entered into two standby purchase agreements for the purchase of up
to $25 million of the new preferred stock. The standby purchaser that would have
purchased up to $10 million of the preferred stock funded a portion of the $110
million term loan and was released from its standby purchase agreement. The
other standby purchaser has taken the position that for a number of reasons,
including the assertion of a material adverse change, it is no longer bound by
its standby commitment to purchase up to $15 million of the preferred stock and
has filed a lawsuit seeking a declaratory judgment that it is no longer bound.
The Company disputes this position.
Although the Chapter 11 bankruptcy procedures and significant recurring net
losses raised substantial doubt about the Company's ability to continue as a
going concern, the Company's financial statements have been prepared on a going
concern basis. This basis contemplates the continuation of operations,
realization of assets, and discharge of liabilities in the ordinary course of
business. The financial statements also present the assets of the Company at
historical cost and reflect the intention that they will be realized as a going
concern and in the normal course of business. The implementation of the Plan
will materially change certain amounts currently disclosed in the Company's
financial statements. As of September 30, 2000 and 1999, pre-petition claims are
carried at face value in the financial statements. The financial statements do
not present the amounts which will ultimately be assigned to assets and amounts
paid to settle liabilities and contingencies in accordance with the Plan.
<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,
----------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 99.3 134.0 91.5
----- ----- -----
Gross margin 0.7 (34.0) 8.5
Selling, general and administrative expenses 2.5 6.9 3.0
Write-down of impaired assets -- -- 2.5
----- ----- -----
Income (loss) from operations (1.8) (40.9) 3.0
Other income (expense):
Interest and other income 0.1 0.3 --
Interest expense (1.1) (6.2) (5.9)
Gain on sale of assets 1.7 1.5 --
----- ----- -----
Loss before reorganization items and benefit for income taxes (1.1) (45.3) (2.9)
Reorganization items 0.5 13.5 --
----- ----- -----
Loss before benefit for income taxes (1.6) (58.8) (2.9)
Benefit for income taxes -- -- (0.3)
----- ----- -----
Net loss (1.6)% (58.8)% (2.6)%
===== ===== =====
</TABLE>
The following table sets forth the product sales mix (including secondary
products) in tons shipped for the fiscal years indicated (tons in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Cut-to-Length Plate 568 591 1,189
Sheet 992 306 425
Pipe 160 94 178
Slab 192 109 211
----- ----- -----
1,912 1,100 2,003
===== ===== =====
</TABLE>
<PAGE> 8
Fiscal Year Ended September 30, 2000 Compared
with Fiscal Year Ended September 30, 1999
Net sales increased 79.3% primarily due to increased shipments of approximately
811,700 tons and higher average selling prices for the year ended September 30,
2000 as compared to the previous fiscal year. The weighted average sales price
(net of transportation costs) per ton of sheet, plate, pipe and slab products
increased by 12.5%, 2.7%, 12.5% and 20.2%, respectively, in the year ended
September 30, 2000 as compared to the previous fiscal year. Shipped tonnage of
sheet, pipe and slab products increased approximately 685,300 tons or 223.7%,
66,900 tons or 71.5% and 82,100 tons or 75.0%, respectively, while shipped
tonnage of plate products decreased approximately 22,600 tons or 3.8% between
the two years. The changes in price, volume and product mix were primarily the
result of significantly improved market conditions. As a result of various trade
cases, as well as improved steel markets in several foreign economies, market
conditions for the Company's products significantly improved in the year ended
September 30, 2000 as compared to the previous fiscal year, although well below
levels existing prior to the influx of imports. Average price realization
increased despite a product mix shift to lower-priced sheet.
The Company expects in the near term that both volume and pricing will continue
to decline below fiscal year 2000 fourth quarter levels. Steel imports into the
U.S. and domestic steel inventory levels have been relatively high and are
adversely affecting the Company's order entry and pricing. Additionally, new
plate production capacity is being added in the domestic market. As a result of
the increased supply of imports and other market conditions, the Company expects
that its overall price realization and shipments will decrease significantly in
the first two quarters of fiscal 2001 and negatively impact the financial
performance of the Company during the quarters and potentially beyond that
period. Given the recent filing of additional trade cases with respect to coiled
sheet and plate, the Company expects the market for those products will improve
during fiscal year 2000, although there can be no assurance that such will be
the case. As of December 31, 2000, the Company had estimated total orders on
hand of approximately 52,000 tons compared to approximately 166,800 tons as of
December 31, 1999.
Domestic competition remains intense and imported steel continues to adversely
affect the 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 other domestic integrated producers.
Consequently, the Company may be affected by price increases or decreases more
quickly than many of its competitors. The Company intends to react to price
increases or decreases in the market as required by competitive conditions.
Cost of sales includes raw materials, labor costs, energy costs, depreciation
and other operating and support costs associated with the production process.
The Company's cost of sales, as a percentage of net sales, decreased to 99.3%
for the year ended September 30, 2000, as compared to 134.0% for the previous
fiscal year. The overall average cost of sales per ton shipped decreased
approximately $90 per ton between the two years, primarily as a result of
production efficiencies associated with returning to a two-blast furnace
operating level and a shift in product mix to lower-cost coiled products, offset
in part by significantly higher natural gas costs. Operating costs per ton
decreased as production volume increased in part because fixed costs were
allocated over more tons.
As a result of weaker market conditions, as discussed above, the Company has
been operating two blast furnaces at a reduced pace. The Company expects that
order entry will remain at relatively low levels in the near term. Consequently,
the Company intends to idle one blast furnace temporarily during which time
repairs will be made which will significantly defer its next reline. During its
fourth fiscal quarter and continuing into fiscal year 2001, natural gas prices
have significantly increased. The lower production volumes and higher natural
gas costs are having an adverse impact on the Company's results of operations.
The Company's union contract expires on April 30, 2001. In late 1999, the
Company participated in informal discussions with the union regarding a possible
extension of the union contract, but was unable to reach agreement on terms and
conditions for such an extension. Several issues could not be resolved at that
time in a manner acceptable to the parties. The Company intends to commence
formal discussions with the union in advance of the current expiration date of
the union contract. There can be no assurance, however, that a new labor
agreement satisfactory to the Company can be reached. The Company's operations
and future profitability will be adversely affected to the extent that it is
unable to reach a new labor agreement with the union on terms and conditions
satisfactory to the Company.
<PAGE> 9
Depreciation costs included in cost of sales decreased approximately $2.1
million for the year ended September 30, 2000, compared with the same period in
the previous fiscal year. This decrease was due to a slightly lower asset base.
Selling, general and administrative expenses for the year ended September 30,
2000 decreased approximately $8.1 million as compared to the same period in the
previous fiscal year. These lower expenses were due primarily to a higher than
usual provision for the allowance for doubtful accounts of approximately $4.0
million expensed during the year ended September 30, 1999. In addition, cost
savings related to staff and support personnel reductions reduced expenses
during the current period.
Interest expense decreased approximately $13.2 million during the year ended
September 30, 2000 as compared to the previous fiscal year. As of February 1,
1999, the Company discontinued accruing interest on the Senior Notes. Interest
expense on the Senior Notes of approximately $11.1 million was included in the
year ended September 30, 1999, which reflected accrued interest prior to
February 1, 1999. In addition, lower average borrowings outstanding under the
Company's revolving credit facility in the year ended September 30, 2000 reduced
interest expense by approximately $2.1 million as compared to the previous
fiscal year.
During the years ended September 30, 2000 and 1999, the Company recorded
approximately $4.6 million and $6.0 million, respectively, in professional fees
and expenses related to its Chapter 11 reorganization efforts. These include the
professional fees and expenses of the two official committees established in the
bankruptcy proceeding. These expenses have been included in the reorganization
item in the statements of operations.
The Company will adopt, as of the effective date of the Plan, fresh-start
accounting. Under fresh-start accounting, the reorganization fair value of the
Company is allocated to the entity's assets, the Company's accumulated deficit
is eliminated, and the equity in the new company is issued according to the
Plan. As a result of adopting fresh-start accounting and emerging from Chapter
11 status, the Company's financial statements will not be comparable with those
prepared before the Plan was consummated, including the September 30, 2000
financial statements.
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.
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 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 underwent 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 was approximately 1,725, as compared to approximately 2,530
as of November 30, 1998. During most of fiscal year 1999, the Company attempted
to minimize production inefficiencies by limiting its production to a full,
one-blast furnace level.
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 provision
<PAGE> 10
for doubtful accounts of approximately $4.0 million due in part to the depressed
steel market that negatively affected 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, 2000
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 recorded
approximately $6.0 million in professional fees and expenses related to its
Chapter 11 reorganization efforts during fiscal year 1999. 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 rejected.
Liquidity and Capital Resources
In the past, the Company's principal sources of capital included the sale of
equity; the incurrence of long-term indebtedness, including borrowings under the
Company's credit facilities; equipment lease financings; asset sales and cash
provided by operations.
On January 3, 2001, Geneva Steel LLC entered into an agreement with Citicorp
USA, Inc., as agent, which provided Geneva Steel LLC with a $110 million term
loan ("Term Loan"). The Term Loan is 85% guaranteed by the United States
Government under the Emergency Steel Loan Guaranty Act of 1999 and secured by a
first lien on the real property and equipment of Geneva Steel LLC and by a
subordinated lien on its accounts receivable, inventory and certain other assets
and proceeds thereof. The Term Loan agreement requires relatively small
quarterly principal amortization payments beginning in June 2001 and is due and
payable on September 30, 2005. The loan structure contains various tranches
requiring different interest rates. The overall blended rate was approximately
LIBOR (6.7% at January 3, 2001), plus 2.6%. The agreement contains certain
reporting, notice and affirmative and negative covenants.
On January 3, 2001, Geneva Steel LLC entered into a revolving credit facility
with a syndicate of banks led by Citicorp USA, Inc., as agent (the "Revolving
Credit Facility"). The Revolving Credit Facility, in the amount of up to $125
million, is secured by Geneva Steel LLC's inventories, accounts receivable and
certain other assets, and proceeds thereof, and expires on March 31, 2005.
Interest is payable at the defined base rate (9.0% at January 3, 2001) plus
1.75% or the defined LIBOR rate (6.3% at January 3, 2001) plus 2.75%. The
Company pays a monthly commitment fee based on an annual rate of .50% of the
average unused portion of the borrowing limit under the Revolving Credit
Facility. The amount available to the Company under the Revolving Credit
Facility currently ranges between 50 and 60%, in the aggregate, of eligible
inventories plus 85% of eligible accounts receivable. Borrowing availability
under the Revolving Credit Facility is also subject to other financial tests and
covenants. As of January 4, 2001, the Company's eligible inventories, accounts
receivable and other assets supported access to $85.5 million under the
Revolving Credit Facility. As of January 4, 2001, the Company had $81.6 million
available under the Revolving Credit Facility, with $3.9 million in borrowings.
The terms of the Revolving Credit Facility and the Term Loan include cross
default and other customary provisions. Financial covenants contained in the
Revolving Credit Facility and/or the Term Loan also include, among others, a
limitation on dividends and distributions on capital stock of the Company, a
tangible net worth requirement, a cash interest coverage requirement, a
cumulative capital expenditure limitation, a limitation on the incurrence of
additional indebtedness unless certain financial tests are satisfied, a
limitation on mergers, consolidations and dispositions of assets and limitations
on liens.
<PAGE> 11
Besides the above-described financing activities, the Company's other source of
potential liquidity is cash provided by operating activities. Net cash used for
operating activities was $25.2 million for the year ended September 30, 2000, as
compared with net cash provided by operating activities of $8.1 million for the
year ended September 30, 1999. The uses of cash for operating activities during
the year ended September 30, 2000 included a net loss of $9.0 million, a gain on
asset sales of $9.8 million, an increase in accounts receivable of $42.0
million, an increase in inventories of $3.2 million, an increase in accounts
payable of $1.5 million and an increase in accrued liabilities of $4.0 million.
These uses of cash were offset by depreciation and amortization of $43.3 million
and a decrease in accrued payroll and related taxes of $1.9 million.
In March 2000, the Company entered into an agreement with Mannesmann Pipe and
Steel ("Mannesmann") to terminate its existing sales representation agreement.
Prior to termination, Mannesmann sold the Company's products to end customers at
the same sales price Mannesmann paid the Company plus a variable commission.
Mannesmann paid the Company in approximately three days. In addition, the
agreement required Mannesmann to purchase and pay for the Company's finished
goods inventory as soon as it was assigned to or was otherwise identified with a
particular order. When funds were received for inventory prior to shipment, the
Company deferred revenue recognition until the inventory was shipped. Therefore,
until shipment occurred the Company recorded the receipt of funds and a
corresponding liability representing the deferred revenue and/or inventory
reduction for the cost of the inventory in its financial statements. The Company
was responsible for customer credit and product quality for all steel sold
through Mannesmann. The arrangement with Mannesmann was terminated beginning
July 1, 2000, with a 180 day phase out of its liquidity arrangement with
Mannesmann. The Company estimates that termination of the liquidity arrangement
reduced the liquidity otherwise available to the Company by approximately $12
million.
During the bankruptcy, the Company supplemented its liquidity by the sale of
certain non-core assets. During the first quarter of fiscal year 2000, the
Company completed the sale of its quarry for $10.0 million and received $8.5
million and $1.5 million in October 1999 and September 2000, respectively.
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 $13.0 million and $8.0 million for the year ended
September 30, 2000 and 1999, respectively. These expenditures were made
primarily in connection with the Company's ongoing modernization and capital
maintenance efforts. Capital expenditures for fiscal year 2001 are budgeted at
approximately $85 million, which includes a blast furnace reline, spending on a
walking beam furnace ($24.5 million, which is subject to obtaining appropriate
financing), maintenance items and various projects designed to reduce costs and
increase product quality and throughput. Given the Company's recent emergence
from Chapter 11, current market conditions, and the uncertainties created
thereby, the Company is continuing to closely monitor and control its capital
spending levels and will likely significantly reduce its budgeted capital
expenditures for fiscal year 2001. Depending on market, operational, liquidity
and other factors, the Company may elect to adjust the design, timing and
budgeted expenditures of its capital plan.
Quantative and Qualitative Disclosures About Market Risk
The Company's earnings are affected by changes in interest rates related to the
Company's credit facility and Term Loan. Variable interest rates may rise, which
could increase the amount of interest expense. At September 30, 2000, the
Company had variable rate debt outstanding from its credit facilities totaling
$82.7 million. 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 $827,000 in interest expense for the
year ended September 30, 2000.
Factors Affecting Future Results
The Company's future operations and liquidity will be impacted by, among other
factors, pricing, product mix, throughput levels and production efficiencies.
The Company has efforts underway to increase sales volumes, 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
<PAGE> 12
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, including
the outcome and effect of the trade cases. Furthermore, the Chapter 11
bankruptcy filing introduced numerous uncertainties which may affect the
Company's business, asset values, results of operations and prospects. Because
of current market conditions, the Company's financial flexibility is limited.
Many of the foregoing factors, of which the Company does not have complete
control, may materially affect the performance, financial condition and future
results of the Company. Furthermore, continued weak market conditions or a
disruption in the Company's operations would likely cause the Company to
experience negative cash flow.
The short-term and long-term liquidity of the Company is also dependent upon
other factors including vendor credit support; availability of capital; foreign
currency fluctuations; competitive and market forces; 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. Although the Company believes that the anticipated cash from
future operations and borrowings under the Revolving Credit Facility will
provided sufficient liquidity for the Company to meet its debt service
requirements and to fund ongoing operations, including required capital
expenditures, there can be no assurance that these or other possible sources
will be adequate. The Company also faces labor negotiations with the expiration
of its union labor agreement on April 30, 2001. The Company is currently unable
to predict the effect such negotiations will have on the Company's operations
and financial condition.
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 Company's ability to improve and optimize operations,
the Company's ability to compete with the additional production capacity being
added in the domestic market, resolution of certain pending claims and of other
issues in the Company's Chapter 11 proceedings, the Company's expectation that
prices and shipments will improve, production efficiencies, the effect of higher
natural gas prices, the commercial and liquidity impact of terminating the
Mannesmann agreement, the level of future required capital expenditures, that
the anticipated cash from operations and borrowings on the Revolving Credit
Facility will provided sufficient liquidity, the effect of the labor contract
expiration and related labor negotiations, 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 and in the Company's press releases and other filings with the
Securities and Exchange Commission.
<PAGE> 13
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, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended September 30, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States.
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. The filing was made necessary by a lack of sufficient liquidity. On
December 8, 2000, the Bankruptcy Court entered an order confirming the Company's
plan of reorganization (the "Plan"), as amended and modified. The Plan was
consummated on January 3, 2001, together with the closing of the post-bankruptcy
credit facilities. The Company will adopt, as of the effective date of the Plan,
fresh-start accounting. As a result of adopting fresh-start accounting, the
Company's financial statements will not be comparable with those prepared before
the Plan was consummated, including the accompanying financial statements.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 4, 2001
<PAGE> 14
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------------------
ASSETS 2000 1999
--------- ---------
<S> <C> <C>
Current Assets:
Cash $ -- $ --
Accounts receivable, less allowance for doubtful
accounts of $8,579 and $10,912, respectively 57,212 15,196
Inventories 58,691 55,460
Deferred income taxes 8,373 14,609
Prepaid expenses and other 5,066 4,584
--------- ---------
Total current assets 129,342 89,849
--------- ---------
Property, Plant and Equipment:
Land 2,792 2,990
Buildings 16,094 16,119
Machinery and equipment 643,484 645,943
--------- ---------
662,370 665,052
Less accumulated depreciation (319,143) (292,035)
--------- ---------
Net property, plant and equipment 343,227 373,017
--------- ---------
Other Assets 11,221 11,850
--------- ---------
$ 483,790 $ 474,716
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE> 15
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS (Continued)
(Dollars in thousands)
September 30,
<TABLE>
<CAPTION>
September 30,
-----------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT 2000 1999
--------- ---------
<S> <C> <C>
Liabilities Not Subject to Compromise:
Revolving credit facility $ 82,675 $ 55,466
Accounts payable 19,923 16,334
Accrued liabilities 14,528 18,209
Accrued payroll and related taxes 9,355 7,444
Accrued pension and profit sharing costs 585 963
--------- ---------
Total current liabilities 127,066 98,416
--------- ---------
Liabilities Subject to Compromise:
Senior notes 325,000 325,000
Accounts payable 52,658 56,632
Accrued dividends payable 28,492 28,494
Accrued interest payable 15,409 15,409
Accrued liabilities 3,125 3,404
--------- ---------
424,684 428,939
--------- ---------
Long-Term Employee Defined Benefits 10,617 10,731
--------- ---------
Deferred Income Tax Liabilities 8,373 14,609
--------- ---------
Commitments and Contingencies (Notes 1 and 6)
Redeemable Preferred Stock, Series B, no par value;
388,358 shares authorized, issued and outstanding,
with a liquidation value of $58,684 56,757 56,001
--------- ---------
Stockholders' 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,
15,878,686 and 15,008,767 shares issued, respectively 100,870 92,022
Class B, no par value; 50,000,000 shares authorized,
9,752,158 and 18,451,348 shares issued and outstanding,
respectively 5,148 9,741
Warrants to purchase Class A common stock -- 4,255
Accumulated deficit (249,725) (239,998)
--------- ---------
Total stockholders' deficit (143,707) (133,980)
--------- ---------
$ 483,790 $ 474,716
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE> 16
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 564,233 $ 314,726 $ 720,453
Cost of sales 560,451 421,812 659,132
--------- --------- ---------
Gross margin 3,782 (107,086) 61,321
Selling, general and administrative expenses 13,698 21,816 22,116
Write-down of impaired assets -- -- 17,811
--------- --------- ---------
Income (loss) from operations (9,916) (128,902) 21,394
--------- --------- ---------
Other income (expense):
Interest and other income 368 996 326
Interest expense (total contractual interest of $39,435
and $41,643 in 2000 and 1999, respectively) (6,366) (19,597) (42,483)
Gain on asset sales 9,808 4,666 30
--------- --------- ---------
3,810 (13,935) (42,127)
--------- --------- ---------
Loss before reorganization items and benefit for income taxes (6,106) (142,837) (20,733)
--------- --------- ---------
Reorganization items:
Provision for rejected executory contracts (1,750) 32,815 --
Professional fees 4,615 6,025 --
Write-off of deferred loan fees -- 3,430 --
--------- --------- ---------
2,865 42,270 --
--------- --------- ---------
Loss before benefit for income taxes (8,971) (185,107) (20,733)
Benefit for income taxes -- -- (1,790)
--------- --------- ---------
Net loss (8,971) (185,107) (18,943)
Less redeemable preferred stock dividends and
accretion for original issue discount 756 4,829 11,772
--------- --------- ---------
Net loss applicable to common shares $ (9,727) $(189,936) $ (30,715)
========= ========= =========
Basic and diluted net loss per common share $ (.58) $ (11.33) $ (1.90)
========= ========= =========
Weighted average common shares outstanding 16,854 16,759 16,155
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 17
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 ACCUMULATED TREASURY
CLASS A CLASS B CLASS A CLASS B CLASS A DEFICIT STOCK TOTAL
---------- ---------- -------- ------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 14,705,265 19,151,348 $ 87,979 $10,110 $ 5,360 $ (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 14,705,265 19,151,348 87,979 10,110 5,360 (47,749) (2,492) 53,208
Issuance of Class A common
stock to employee savings
plan -- -- -- -- -- (2,313) 2,492 179
Exercise of Warrants to
purchase Class A common
stock 233,502 -- 3,674 -- (1,105) -- -- 2,569
Conversion of Class B common
stock to Class A common
stock 70,000 (700,000) 369 (369) -- -- -- --
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 15,008,767 18,451,348 92,022 9,741 4,255 (239,998) -- 133,980)
Expiration of Warrants to
purchase Class A common
stock -- -- 4,255 -- (4,255) -- -- --
Conversion of Class B common
stock to Class A common
stock 869,919 (8,699,190) 4,593 (4,593) -- -- -- --
Redeemable preferred stock
accretion for original
issue discount -- -- -- -- -- (756) -- (756)
Net loss -- -- -- -- -- (8,971) -- (8,971)
---------- ---------- -------- ------- --------- --------- ------- ---------
Balance at September 30, 2000 15,878,686 9,752,158 $100,870 $ 5,148 $ -- $(249,725) $ -- $(143,707)
========== ========== ======== ======= ========= ========= ======= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 18
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,971) $(185,107) $(18,943)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation 42,505 44,679 42,272
Amortization and write-off of deferred loan fees 790 5,946 1,910
Deferred income tax benefit -- -- (2,049)
Gain on asset sales (9,808) (4,666) (30)
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 (42,016) 48,234 (3,267)
Inventories (3,231) 58,264 (15,143)
Prepaid expenses and other (482) (1,350) 13,821
Increase (decrease) in current liabilities -
Accounts payable (1,515) 35,243 (12,231)
Accrued liabilities (3,960) (1,914) 1,635
Accrued payroll and related taxes 1,911 (1,829) (941)
Accrued interest payable -- 10,329 521
Accrued pension and profit sharing costs (378) (1,219) 481
-------- --------- --------
Net cash provided by (used for) operating activities (25,155) 8,095 25,847
-------- --------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (13,005) (8,025) (10,893)
Proceeds from sale of property, plant and equipment 10,098 4,684 34
-------- --------- --------
Net cash used for investing activities $ (2,907) $ (3,341) $(10,859)
-------- --------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 19
GENEVA STEEL COMPANY
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings from credit facilities $ 64,294 $ 19,794 $ 25,649
Payments on credit facilities (37,085) (25,097) (39,785)
Payments for deferred loan fees and other assets (275) (1,580) --
Change in bank overdraft 1,128 2,129 (852)
-------- -------- --------
Net cash provided by (used for) financing activities 28,062 (4,754) (14,988)
-------- -------- --------
Net change in cash -- -- --
Cash at beginning of year -- -- --
-------- -------- --------
Cash at end of year $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 5,570 $ 9,268 $ 40,052
</TABLE>
Supplemental schedule of noncash financing activities:
For the years ended September 30, 2000, 1999 and 1998, the Company
increased the redeemable preferred stock by $756, $843, and $747,
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, 2000, the Company had accrued dividends payable
of $28,492 (total contractual dividends of $50,956).
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> 20
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 "Bankruptcy Court"). The
filing was made necessary by a lack of sufficient liquidity. Beginning in fiscal
year 1998, the Company's operating results were severely affected by, among
other things, a dramatic surge in steel imports. 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 a $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
prohibited 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"). While in the Chapter 11 bankruptcy, the
Company remained in possession of its properties and assets and continued to
manage its business as a debtor-in-possession, subject to the supervision of the
Bankruptcy Court. The Company had 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 both the years ended September 30, 2000 and 1999 was $33.1
million, which is $33.1 million and $22.0 million, respectively, in excess of
recorded interest expense included in the accompanying financial statements.
Contractual dividends on the redeemable preferred stock as of September 30, 2000
and 1999, were approximately $51.0 million and $36.9 million, respectively,
which are $22.5 million and $8.4 million, respectively, in excess of dividends
accrued in the accompanying balance sheets.
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 was prohibited from paying pre-petition
obligations. The Bankruptcy Court approved payment of certain pre-petition
obligations such as employee wages and benefits and customer claims and rebates.
Additionally, the Bankruptcy Court approved the retention of various legal,
financial and other professionals. As a debtor-in-possession, the Company had
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 had the right to file pre-petition claims
with the Bankruptcy Court.
On July 20, 2000, the Company and the Official Committee of Bondholders in the
Company's Chapter 11 case filed a proposed plan of reorganization (the "Plan")
and disclosure statement with the Bankruptcy Court. On December 8, 2000, the
Bankruptcy Court entered an order confirming the Plan, as amended and modified
(the "Confirmation Order"). The Plan was consummated on January 3, 2001,
together with the closing of the post-bankruptcy credit facilities.
Implementation of the Plan significantly reduced the Company's debt burden and
provided additional liquidity in the form of a $110 million term loan that is
eighty-five percent guaranteed by the United States Government under the
Emergency Steel Loan Guaranty Act of 1999, and a $125 million revolving line of
credit. (See Note 3).
Under the terms of the Plan, the Company changed its state of domicile from Utah
to Delaware, changed its form of organization from a corporation to a limited
liability company, and became a wholly-owned subsidiary of Geneva Steel Holdings
Corp. The Company transferred certain real property not used in the steel mill
operations to Williams Farm Property, LLC and its iron ore mines located in
southern Utah to Iron Ore Mines, LLC, both of which are also wholly-owned
subsidiaries of Geneva Steel Holdings Corp. The Company also transferred
ownership of Vineyard Iron Company and Vineyard Management Company to Geneva
Steel Holdings Corp., which made those entities wholly-owned subsidiaries of
Geneva Steel Holdings Corp.
<PAGE> 21
Under the terms of the Plan approved by the Bankruptcy Court, all rights with
respect to the previous outstanding common and preferred stock of the Company
were terminated. Shares of common stock of Geneva Steel Holdings Corp. were
issued to the holders of unsecured claims, which primarily consisted of holders
of an aggregate $340.6 million of Senior Notes, including unpaid interest
accrued prior to the bankruptcy, and approximately $47 million of general
unsecured debt, which includes disputed claims. Creditors who were owed $5,000
or less will receive a cash payment equal to 40% of their claim, and trade
creditors who were owed in excess of $5,000 could elect to receive $2,000,
rather than shares of common stock of Geneva Steel Holdings Corp. Secured
creditors of the Company will be paid in full with the proceeds of the term
loan.
Under the terms of an employee retention program approved by the Bankruptcy
Court, the executive officers and a manager of the Company received options to
purchase an aggregate of 5% of the shares of common stock of Geneva Steel
Holdings Corp. on a fully diluted basis.
The Plan also provides each holder of unsecured debt a right to participate in a
$25 million preferred stock rights offering by Geneva Steel Holdings Corp. In
the event that prebankruptcy holders of unsecured debt do not purchase all of
the new preferred stock, Geneva Steel Holdings Corp. will not receive the full
$25 million sought. Consequently, there can be no assurance that any of the $25
million capital infusion sought by the Plan will be available. The Company
previously entered into two standby purchase agreements for the purchase of up
to $25 million of the new preferred stock. The standby purchaser that would have
purchased up to $10 million of the preferred stock funded a portion of the $110
million term loan and was released from its standby purchase agreement. The
other standby purchaser has taken the position that for a number of reasons,
including the assertion of a material adverse change, it is no longer bound by
its standby commitment to purchase up to $15 million of the preferred stock and
has filed a lawsuit seeking a declaratory judgment that it is no longer bound.
The Company disputes this position.
Although the Chapter 11 bankruptcy procedures and significant recurring net
losses raised substantial doubt about the Company's ability to continue as a
going concern, the Company's financial statements have been prepared on a going
concern basis. This basis contemplates the continuation of operations,
realization of assets, and discharge of liabilities in the ordinary course of
business. The financial statements also present the assets of the Company at
historical cost and reflect the intention that they will be realized as a going
concern and in the normal course of business. The implementation of the Plan
will materially change certain amounts currently disclosed in the accompanying
financial statements (See Note 2). As of September 30, 2000 and 1999,
pre-petition claims are carried at face value in the financial statements. The
accompanying financial statements do not present the amounts which will
ultimately be assigned to assets and amounts paid to settle liabilities and
contingencies in accordance with the Plan.
The domestic steel industry and the Company's business are highly cyclical in
nature and are sensitive to general market conditions. Integrated steel
producers like the Company have high fixed costs and need to maintain high
production levels to achieve competitive unit costs. High fixed costs motivate
steel producers to maintain high output levels even in the face of falling
prices, thereby increasing downward pressures on selling prices. This can result
in circumstances in which the costs of goods sold can exceed the revenues of the
Company. The business and profitability of the Company may be adversely affected
by these factors and others in the face of general economic or industry
downturns.
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, trade litigation and
world economic conditions generally. Most foreign markets are less open than the
U.S. market, allowing foreign producers to maintain higher prices in their own
markets while dumping excess production at lower prices into the U.S. market. In
addition, certain 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.
On November 13, 2000, several U.S. steel producers filed antidumping cases
against imports of hot-rolled sheet (which includes coiled plate) from eleven
countries: Argentina, China, India, Indonesia, Kazakhstan, Netherlands, Romania,
<PAGE> 22
South Africa, Taiwan, Thailand and Ukraine. Countervailing duty (subsidy) cases
were also filed against imports from Argentina, India, Indonesia, South Africa
and Thailand. The International Trade Commission made unanimous affirmative
preliminary determinations of a reasonable indication of injury on December 28,
2000. Petitioners intend to file critical circumstance allegations if imports
from the respondent countries surge, which could result in the imposition of
duties as early as January 2001. The Company expects that these cases will
ultimately have a significant beneficial effect on the market, although there
can be no assurance as to the outcome or effect.
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,
however, be inadequate to prevent the adverse impact of dumped and/or subsidized
steel imports. Moreover, the preparation and prosecution of trade cases requires
several months during which the Company and other domestic producers must
continue to suffer the adverse impact of unfairly traded imports. There is no
guarantee that domestic markets will not in the future be flooded illegally with
foreign imports of products in competition with the Company's products. While
the Company intends to oppose all such imports vigorously, there is no guarantee
that it will be successful. Consequently, such imports could pose continuing
problems for the domestic steel industry and the Company.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bankruptcy Accounting
While in Chapter 11 bankruptcy, the Company 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.
The Company will adopt, as of the effective date of the Plan, fresh-start
accounting pursuant to SOP 90-7. Under fresh-start accounting, the
reorganization fair value of the Company is allocated to the entity's assets,
the Company's accumulated deficit is eliminated, and the equity in the new
company is issued according to the Plan. As a result of adopting fresh-start
accounting and emerging from Chapter 11 status, the Company's financial
statements will not be comparable with those prepared before the Plan was
consummated, including the accompanying financial statements.
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> 23
Inventories
Inventories include costs of material, labor and manufacturing overhead.
Inventories are stated at the lower of cost (using a standard costing method
which approximates weighted average cost) or market value. The composition of
inventories as of September 30, 2000 and 1999 was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Raw materials $ 17,574 $ 17,081
Semi-finished and finished goods 38,808 33,762
Operating materials 2,309 4,617
--------- --------
$ 58,691 $ 55,460
========= ========
</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. As a result of the settlement of the claim in fiscal year 1998, 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:
<TABLE>
<S> <C>
Buildings 31.5 years
Machinery and Equipment 2-30 years
</TABLE>
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, 2000 and
1999, approximately $12.6 million and $6.2 million, respectively, of
construction in progress was included in machinery and equipment in the
accompanying balance sheets. 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 did not capitalize any interest during the year ended
September 30, 2000. The Company capitalized approximately $0.1 million and $0.3
million of interest during the years ended September 30, 1999 and 1998,
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.
Other Assets
Other assets consist primarily of a long-term defined benefit plan intangible
asset of $10.6 million and $10.7 million at September 30, 2000 and 1999,
respectively. 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
<PAGE> 24
of unamortized deferred loan fees on its Senior Notes during fiscal year 1999.
Accumulated amortization of deferred loan fees totaled $1.3 million and $0.5
million at September 30, 2000 and 1999, 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, 2000 and
1999, reserves for estimated customer claims of $3.8 million and $4.2 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 were received for such inventory prior to
shipment, the Company would defer the revenue recognition until the inventory
was shipped. Until the product was shipped, the amount of the payment was
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 reflected as deferred revenue and included in the
inventory reserve in the accompanying balance sheet as of September 30, 1999.
The contract with Mannesmann was terminated beginning July 1, 2000, with a 180
day phase out of the liquidity arrangement. The Company estimates that
termination of the liquidity arrangement reduced the liquidity otherwise
available to the Company by approximately $12 million. In addition, the
Company's accounts receivable has increased significantly since the contract was
terminated.
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.
Long-Lived Assets
The Company evaluates its long-lived assets for impairment at each balance sheet
date for events and or changes in circumstances that may indicate the book value
of an asset may not be recoverable. 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 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 was 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
<PAGE> 25
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 estimated 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 declined due to 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 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, 2000, 1999 and 1998,
outstanding options and warrants to purchase Class A common stock were not
included in the calculation of diluted net loss per common share because their
inclusion would be antidilutive. Pursuant to the Confirmation Order, discussed
in Note 1, all outstanding options to purchase Class A common stock were
canceled on the effective date of the bankruptcy Plan. 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 was
convertible to Class A common stock at this same rate.
The net loss for the year ended September 30, 2000 was adjusted for the
accretion required over time to amortize the original issue discount on the
redeemable preferred stock incurred at the time of issuance. The net loss for
the years ended September 30, 1999 and 1998 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. The Company accounts for the plan in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits."
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998. The 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 and that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. As a result, the Company will adopt the
provisions of SFAS No. 133 in the first quarter of fiscal 2001. The adoption of
this statement is not expected to have a material impact on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. In June 2000, the SEC issued SAB
101B, which extended the implementation date to the Company's fourth quarter of
fiscal 2001. The Company does not expect the adoption of SAB 101 to have a
material impact on the Company's results of operations, financial position, or
liquidity.
Reclassifications
<PAGE> 26
Certain reclassifications were made in the prior periods' financial statements
to conform with the current year presentation.
3 SENIOR NOTES AND CREDIT FACILITY
The aggregate amounts of principal maturities as of September 30, 2000 and 1999
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<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 (6.62% at September 30, 2000), 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 82,675 55,466
--------- ---------
$ 407,675 $ 380,466
========= =========
</TABLE>
On January 3, 2001, Geneva Steel LLC entered into an agreement with Citicorp
USA, Inc., as agent, which provided Geneva Steel LLC with a $110 million term
loan ("Term Loan"). The Term Loan is 85% guaranteed by the United States
Government under the Emergency Steel Loan Guaranty Act of 1999 and secured by a
first lien on the real property and equipment of Geneva Steel LLC and by a
subordinated lien on its accounts receivable, inventory and certain other assets
and proceeds thereof. The Term Loan agreement requires relatively small
quarterly principal amortization payments beginning in June 2001 and is due and
payable on September 30, 2005. The loan structure contains various tranches
requiring different interest rates. The overall blended rate was approximately
LIBOR (6.7% at January 3, 2001) plus 2.6%. The agreement contains certain
reporting, notice requirements and affirmative and negative covenants.
On January 3, 2001, Geneva Steel LLC entered into a revolving credit facility
with a syndicate of banks led by Citicorp USA, Inc., as agent (the "Revolving
Credit Facility"). The Revolving Credit Facility, in the amount of up to $125
million, is secured by a first lien on Geneva Steel LLC's inventories, accounts
receivable and certain other assets, and proceeds thereof, and expires on March
31, 2005. Interest is payable at the defined base rate (9.0% at January 3, 2001)
plus 1.75% or the defined LIBOR rate (6.3% at January 3, 2001) plus 2.75%. The
Company pays a monthly commitment fee based on an annual rate of .50% of the
average unused portion of the borrowing limit under the Revolving Credit
Facility. The amount available to the Company under the Revolving Credit
Facility currently ranges between 50 and 60%, in the aggregate, of eligible
inventories plus 85% of eligible accounts receivable. Borrowing availability
under the Revolving Credit Facility is also subject to other financial tests and
covenants. As of January 4, 2001, the Company's eligible inventories, accounts
receivable and other assets supported access to $85.5 million under the
Revolving Credit Facility. As of January 4, 2001, the Company had $81.6 million
available under the Revolving Credit Facility, with $3.9 million in borrowings.
<PAGE> 27
The terms of the Revolving Credit Facility and the Term Loan include cross
default and other customary provisions. Financial covenants contained in the
Revolving Credit Facility and/or the Term Loan also include, among others, a
limitation on dividends and distributions on capital stock of the Company, a
tangible net worth requirement, a cash interest coverage requirement, a
cumulative capital expenditure limitation, a limitation on the incurrence of
additional indebtedness unless certain financial tests are satisfied, a
limitation on mergers, consolidations and dispositions of assets and limitations
on liens.
On February 19, 1999, the U.S. District Court for the District of Utah granted
the Company's motion to approve a $125 million debtor-in-possession credit
facility with Congress Financial Corporation (the "Credit Facility"). The Credit
Facility expired and was paid in full on the effective date of the Company's
Plan, January 3, 2001. The Credit Facility was secured by, among other things,
accounts receivable; inventory; and property, plant and equipment. Actual
borrowing availability was subject to a borrowing base calculation and the right
of the lender to establish various reserves, which it did. The amount available
to the Company under the Credit Facility was 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 was also subject to
other covenants.
Albert Fried & Company, LLC also provided a short-term loan to the Company in
the amount of $3.5 million pursuant to an agreement dated December 22, 2000. The
proceeds of this loan were used to meet necessary operating expenses of the
Company prior to the completion of its plan of reorganization. This loan was
repaid from the proceeds of the Revolving Credit Facility at the time of the
consummation of the plan of reorganization on January 3, 2000. Albert Fried &
Company, LLC was paid loan commitment fees of $275,000 in connection with this
transaction.
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.
4 MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES
During the years ended September 30, 2000, 1999, and 1998, the Company derived
approximately 83%, 72% and 33%, respectively, of its net sales through
Mannesmann, which is a distributor to other companies. The agreement with
Mannesmann to distribute the Company's products terminated on July 1, 2000.
International sales during the years ended September 30, 2000, 1999 and 1998 did
not exceed 10%.
5 INCOME TAXES
The provision (benefit) for income taxes for the years ended September 30, 2000,
1999 and 1998 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Current income tax provision
Federal $ -- $ -- $ 227
State -- -- 32
-------- -------- -------
-- -- 259
-------- -------- -------
Deferred income tax provision (benefit)
Federal 13,571 51,418 3,461
State 1,939 7,345 495
Change in valuation allowance (15,510) (58,763) (6,005)
-------- -------- -------
-- -- (2,049)
-------- -------- -------
Benefit for income taxes $ -- $ -- $(1,790)
======== ======== =======
</TABLE>
<PAGE> 28
The benefit for income taxes as a percentage of loss for the years ended
September 30, 2000, 1999 and 1998 differs from the statutory federal income tax
rate due to the following:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<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 38.3 29.7
------- ------- -------
Effective income tax rate -- % -- % (8.6)%
======= ======= =======
</TABLE>
As of September 30, 2000, the Company had deferred income tax assets of $148.6
million. The deferred income tax assets have been reduced by a $80.3 million
valuation allowance. This valuation allowance was established during the years
ended September 30, 2000, 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, 2000 and 1999 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $123,046 $ 89,214
Provision for rejected executory contract 9,288 --
Inventory costs capitalized 2,870 9,481
Alternative minimum tax credit carryforward 6,464 6,464
Accrued vacation 1,323 1,168
Allowance for doubtful accounts 3,286 4,179
General business credits 1,445 2,064
Other 889 374
-------- --------
Total deferred income tax assets 148,611 112,944
Valuation allowance (80,278) (64,768)
-------- --------
68,333 48,176
-------- --------
Deferred income tax liabilities:
Accelerated depreciation (46,340) (46,181)
Post bankruptcy petition interest on Senior Notes (21,109) --
Operating supplies (884) (1,995)
-------- --------
Total deferred income tax liabilities (68,333) (48,176)
-------- --------
$ -- $ --
======== ========
</TABLE>
As of September 30, 2000, the Company had a net operating loss carryforward for
financial reporting purposes of approximately $210.1 million. As of September
30, 2000, the Company had a net operating loss carryforward and an alternative
minimum tax credit carryforward for tax reporting purposes of approximately
$321.7 million and $6.5 million, respectively. Net operating loss carryforwards
of $45.7 million, $36.7 million, $16.4 million, $39.7 million, $142.8 million
and $40.4 million expire on December 31, 2009, 2011, 2012, 2018, 2019 and 2020,
respectively. The alternative minimum tax credit carryforward of $6.5 million at
September 30, 2000, currently does not expire.
<PAGE> 29
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 approximately $13.0
million and $8.0 million on capital projects during the fiscal years ended
September 30, 2000 and 1999, respectively. These expenditures were made
primarily in connection with the Company's ongoing modernization and capital
maintenance efforts. Capital expenditures for fiscal year 2001 are estimated at
approximately $85 million, which includes a blast furnace reline, spending on a
walking beam furnace ($24.5 million, which is subject to obtaining appropriate
financing), maintenance items and various projects designed to reduce costs and
increase product quality and throughput. Given the Company's recent emergence
from Chapter 11, current market conditions and the uncertainties created
thereby, the Company is continuing to closely monitor and control its capital
spending levels and will likely reduce its budgeted capital expenditures for
fiscal year 2001. Depending on market, operational, liquidity and other factors,
the Company may elect to adjust the design, timing and budgeted expenditures of
its capital plan.
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
bankruptcy 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 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 an aggregate total of
approximately $8.4 million for environmental capital improvements in fiscal
years 2001 and 2002. 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, 2000, the Company
determined that there were no environmental compliance or remediation
obligations requiring accrual 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
<PAGE> 30
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
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 have 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.
The Company's used oil reclamation system has recently come under scrutiny by
the Utah Division of Solid and Hazardous Waste ("UDSHW") and the U.S.
Environmental Protection Agency ("EPA") for certain alleged violations of Utah's
used oil regulations. These assertions are contained in a UDSHW letter addressed
to the Company and supported by an attached EPA opinion letter addressed to
UDSHW. In a separate assertion, the EPA has also indicated that the Company may
be in violation of the Oil Pollution Act of 1990. The Company believes that its
longstanding used oil reclamation process qualifies for pertinent regulatory
exemptions and intends to vigorously contest any asserted liability by either
agency. Neither agency has yet issued a Notice of Violation, but the state of
Utah has indicated its intention to do so. Potential penalties could be
significant; nevertheless, UDSHW staff have indicated that the agency is not
particularly interested in collecting a large fine but would prefer to work with
the Company to upgrade the used oil system. The Company has expressed a
willingness to work with UDSHW towards such a goal. Negotiations are ongoing.
The State can impose civil penalties of up to $10,000 per day, and the Federal
Government can impose penalties up to $25,000 per day if it is not satisfied
with the State's handling of the matter.
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 $0.7
million for fiscal years 2001, 2002 and 2003, respectively.
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 Producer's Price Index ("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
<PAGE> 31
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 July 1, 2000, the Company entered into an agreement to purchase 35,000
MMBtu per day of natural gas with provisions to offsell any unusable volumes to
offset other agreements with the expiration date of July 1, 2002. 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 $50.2
million for fiscal year 2001.
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 expired 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.
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 rejected as
part of the Chapter 11 proceedings. The aggregate commitments under
non-cancelable operating leases at September 30, 2000, were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ending September 30,
-------------------------
<S> <C>
2001 $3,374
2002 950
2003 162
2004 7
2005 7
Thereafter 86
------
$4,586
======
</TABLE>
Total rental expense for non-cancelable operating leases was approximately $4.4
million, $8.7 million and $9.2 million for the years ended September 30, 2000,
1999 and 1998, respectively.
Letters of Credit
As of September 30, 2000, the Company had outstanding letters of credit totaling
approximately $3.8 million.
Other Matters
In September 2000, Utah OSHA began an audit at the Company's plant, which has
been completed. The Company has not received the report, but understands that
the inspector will recommend some violations. Utah OSHA is also investigating
the death of an employee that occurred in the Blast Furnace area when steel
pellets were released into a rail car in which he was working. A final report or
citation has not been issued and is not expected until early 2001. Because of
the preliminary nature of these proceedings, the likely outcome of these matters
cannot be assessed with any certainty.
The Company's union contract expires on April 30, 2001. In late 1999, the
Company participated in informal discussions with the union regarding a possible
extension of the union contract, but was unable to reach agreement on terms and
conditions for such an extension. Several issues could not be resolved at that
time in a manner acceptable to the parties. The Company intends to commence
formal discussions with the union in advance of the current expiration date of
the
<PAGE> 32
union contract. There can be no assurance, however, that a new labor agreement
satisfactory to the Company can be reached. The Company's operations and future
profitability will be adversely affected to the extent that it is unable to
reach a new labor agreement with the union on terms and conditions satisfactory
to the Company.
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, 2000, 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. Upon the expiration of the warrants in March of 2000,
the Company reclassified the balance of the warrants to purchase Class A common
stock as Class A common stock. The warrants to purchase the Company's Class A
common stock were exercisable at $11 per share, subject to adjustment in certain
circumstances, and expired in March 2000. Dividends on the Redeemable Preferred
Stock accrued at a rate equal to 14% per annum of the liquidation preference and
were payable quarterly in cash 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 accumulated and accrued 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,
2000, were approximately $51.0 million, which is $22.5 million in excess of
dividends accrued in the accompanying balance sheet. The Company did not pay
dividends on the Redeemable Preferred Stock during the pendency of its Chapter
11 proceeding. Pursuant to the Plan, as discussed in Note 1, the holders of the
redeemable preferred stock did not receive any distributions under the Plan and
all rights in the redeemable preferred stock were terminated.
8 STOCK OPTIONS
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 provided that incentive and nonstatutory stock
options to purchase Class A common stock and corresponding stock appreciation
rights may be granted. The Employee Plan provided 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,
determined the time or times when each incentive or nonstatutory stock option
vested and became exercisable; provided no stock option could be exercisable
within six months of the date of grant (except in the event of death or
disability) and no incentive stock option could 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 must 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 was 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 provided that
1,500,000 shares of class A common stock will be available for the grant of
options or awards.
The Incentive Plan was administered by a committee consisting of non-employee
directors of the Company (the "Committee"). The Committee determined, 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 did
not exceed ten years. The per share purchase price could not be less than 80
percent of the fair market value on the date of grant.
The Incentive Plan also provided for the non-discretionary grant of options to
non-employee directors ("Director Options"). Each non-employee director who
became a director after January 1, 1997 was 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 was in
effect, all non-employee directors who were members of the Board at the time
were granted a Director Option of 2,000 shares; provided, however, that a
director was not entitled to receive an
<PAGE> 33
annual grant during the year elected or appointed. Director Options were granted
at a purchase price equal to the fair market value of the shares on the date of
grant. Director Options vested 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 remained in
service as a director on each date. The Director Options generally had a ten
year term.
Stock option activity for the years ended September 30, 2000, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
Exercise Weighted Average
Number of Price Per Exercise Price
Shares Share Range Per Share
--------- ------------- ----------------
<S> <C> <C> <C>
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) 2.2 - 7.75 4.30
--------- ------------- ---------
Outstanding at September 30, 1999 1,240,973 0.56-10.91 4.63
Canceled (141,850) 02.25-10.91 9.50
--------- ------------- ---------
Outstanding at September 30, 2000 1,099,123 $ 0.56- 7.75 $ 4.00
========= ============= =========
</TABLE>
Options to purchase 948,827, 1,003,772 and 1,032,606 shares of Class A common
stock were exercisable on September 30, 2000, 1999 and 1998, respectively. There
were no options granted during the fiscal year 2000. As of the effective date of
the Plan, all rights in the outstanding options were terminated and the Employee
Plan and Incentive Plan will have no further force and effect. As of September
30, 2000, 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,
---------------------------------------------
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Net loss as reported $ (8,971) $(185,107) $(18,943)
Net loss pro forma (8,971) (185,254) (19,166)
Diluted net loss per common share as reported $ (.58) $ (11.33) $ (1.90)
Diluted net loss per common share pro forma (.58) (11.34) (1.92)
</TABLE>
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 and 1998, in calculating compensation cost: expected stock price
volatility of 89.6% and 71.6% for 1999 and 1998, respectively, an average risk
free interest rate of approximately 5.3% and 5.75% for 1999 and 1998,
respectively, and expected lives ranging between three years to seven years for
1999 and 1998.
The weighted average fair value of options granted during fiscal years 1999 and
1998 was $0.56 and $2.76 per share, respectively. At September 30, 2000, the
1,099,123 options outstanding had exercise prices between $0.56 and $7.75 per
share with a weighted average exercise price of $3.96 and a weighted average
remaining contractual life of 5.6 years. 948,827 of these options were
exercisable with a weighted average exercise price of $4.17.
Pursuant to the Plan, as discussed in Note 1, all outstanding options to
purchase shares of Class A common stock were canceled on January 3, 2001, the
effective date of the bankruptcy Plan. As part of the Plan,
<PAGE> 34
the Bankruptcy Court approved a management incentive compensation program
pursuant to which management was granted options to acquire an aggregate of 5%
of the common stock of the new Company, Geneva Steel Holdings Corp., effective
January 3, 2001. These options vest 25% immediately and 25% on the first, second
and third anniversaries of the date of grant. The options have a term of 10
years from the date in which they vest. The exercise price will be equal to the
lower of the initial trading price of the common stock subsequent to the
effective date or $15.43 per share.
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 1998, the Company
match has been made in cash. Prior to December 1998, the Company matched
participants' contributions to the savings plan in shares of class A common
stock. For the pension plan, the Company contributed 5 1/4% of each
participant's compensation to this plan for the period May 1, 1999 through
September 30, 2000. The Company contributed 5% of each participants'
compensation to this plan for the period October 1, 1997 through April 30, 1999.
Total contributions by the Company for both plans for the years ended September
30, 2000, 1999 and 1998 were $4.2 million, $2.9 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 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.
Benefits under the Plan are determined based upon a flat dollar formula, which
is calculated as a flat dollar amount multiplied by the years of credited
service with pro rata adjustments for the whole months of credited service.
Benefit accounts are reduced by benefits payable to the retiree from the USX
pension plan and the Company's other pension plan. The following provides a
reconciliation of the change in benefit obligation for fiscal years 2000 and
1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Benefit obligation at beginning of fiscal year $11,682 $12,047
Service cost 246 201
Interest cost 962 621
Actual distributions (532) (486)
Actuarial gains 827 (701)
------- -------
Benefit obligation at end of fiscal year $13,185 $11,682
======= =======
</TABLE>
<PAGE> 35
The following provides a reconciliation for plan assets for the fiscal years
2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Fair value of plan assets at beginning of fiscal year $ 116 $ --
Company contributions 2,475 600
Benefits paid from plan assets (532) (486)
Actual return on plan assets (73) 2
------- -------
Fair value of plan assets at end of fiscal year $ 1,986 $ 116
======= =======
</TABLE>
The following provides the funded status of the plan as of September 30, 2000
and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Funded status $(11,199) $(11,566)
Unrecognized prior service cost 10,617 11,434
Unrecognized net actuarial loss 260 (703)
-------- --------
Preliminary accrued benefit liability (322) (835)
-------- --------
Additional liability (10,877) (16,731)
-------- --------
Funded Status of plan at the end of fiscal year $ 11,199 $ 11,566
======== ========
</TABLE>
Net periodic pension cost includes the following components for the years ended
September 30, 2000 and 1999 (dollars in thousands):
<TABLE>
<S> <C> <C>
Service cost $ 246 $ 201
Interest cost 962 621
Amortization of prior service cost 817 613
Expected return on plan assets (63) --
-------- --------
$ 1,962 $ 1,435
======== ========
</TABLE>
The assumptions as of September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Discount rate 8.00% 8.00%
Long-term rate of return on plan assets 8.00% 8.00%
Rate of compensation increase 3.00% 3.00%
</TABLE>
Defined Contribution Union Employee Post-Retirement Medical Plan
Effective March 1, 1995, the Company established a defined contribution Union
employee post-retirement medical plan pursuant to a collective bargaining
agreement. The plan is for the benefit of eligible retirees. The Plan is funded
by Company contributions to a voluntary Employee Beneficiary Association Trust.
Company contributions to the plan are $.25 from April 1, 2000 through September
30, 2000, $.20 from April 1, 1999 through March 31, 2000, $.15 from April 1,
1998 through March 31, 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 plan based on a
reduction from their performance dividend plan payment until April 30, 1998.
Beginning in February 2000, the plan provides retiree medical benefits subject
to a cost sharing arrangement with eligible retirees. The benefit cost sharing
arrangement amount is determined annually based on number of participants,
available funds in the trust and cost of the medical insurance.
<PAGE> 36
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 up to 4% of their compensation. Beginning in
December 1998, the Company began matching participants' contributions in cash.
Prior to December 1998, the Company matched participants' contributions to the
savings plan in shares of Class A common stock. For the pension plan, the
Company contributed 5 1/4% of each participant's compensation to this plan for
the period May 1, 1999 through September 30, 2000. The Company contributed 5% of
each participants compensation to this plan for the period October 1, 1997
through April 30, 1999. During the years ended September 30, 2000, 1999 and
1998, total contributions by the Company were $1.4 million, $1.4 million and
$1.9 million, respectively. The participants vest in the Company's contributions
at 20% for each year of service until fully vested after five years.
Profit Sharing and Bonus Programs
The Company has a profit sharing program for full-time union eligible employees.
Participants receive payments based upon operating income reduced by an amount
equal to a portion of the Company's capital expenditures. No profit sharing was
accrued or paid in the years ended September 30, 2000, 1999 and 1998.
The Company also has implemented a performance dividend plan designed to reward
employees for increased shipments. As shipments increase above an annualized
rate of 1.5 million tons, compensation under this plan increases. Payments made
under the performance dividend plan are deducted from any profit sharing
obligations to the extent such obligations exceed the performance dividend plan
payments in any given fiscal year. During the years ended September 30, 2000,
1999 and 1998, performance dividend plan expenses were $5.3 million, $0.7
million and $8.5 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.
<PAGE> 37
10 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial information for the years ended
September 30, 2000 and 1999 is as follows (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
2000 Quarters First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $126,167 $149,724 $153,939 $134,400
Gross margin (694) 5,563 6,157 (7,244)
Net income (loss) 1,761 (1,666) 492 (9,558)
Net income (loss) applicable to common shares 1,574 (1,854) 302 (9,749)
Basic and diluted net income (loss) per common share 0.09 (0.11) 0.02 (0.58)
</TABLE>
<TABLE>
<CAPTION>
2000 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>
