<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 29, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
---------------------------
Commission file number 1-14378
ACME METALS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 36-3802419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13500 South Perry Avenue, Riverdale, Illinois 60827-1182
(Address of principal executive offices) (Zip Code)
(708) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes x No
--- ---
Number of shares of Common Stock outstanding as of May 1, 1998: 11,680,064.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For The Three Months Ended
------------------------------
March 29, March 30,
1998 1997
------------ -------------
<S> <C> <C>
NET SALES ................................... $ 144,996 $ 125,331
COSTS AND EXPENSES:
Cost of products sold .............. 129,899 119,609
Depreciation expense ............... 9,259 10,039
------------ ------------
Gross margin ................................ 5,838 (4,317)
Selling and administrative expense.. 9,872 10,192
------------ ------------
Operating loss .............................. (4,034) (14,509)
NON-OPERATING INCOME (EXPENSE):
Interest expense ................... (10,937) (9,870)
Interest income .................... 139 353
Other - net ........................ 12,257 (15)
------------ ------------
Loss before income taxes .................... (2,575) (24,041)
Income tax benefit .......................... (900) (8,174)
------------ ------------
Net loss .................................... $ (1,675) $ (15,867)
============ ============
LOSS PER SHARE:
BASIC:
Net loss ........................... $ (0.14) $ (1.36)
Weighted average outstanding shares. 11,680,164 11,661,447
============ ============
DILUTED:
Net loss ........................... $ (0.14) $ (1.36)
------------ ------------
Weighted average outstanding shares. 11,680,164 11,661,447
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 3
ACME METALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
March 29, December 28,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 14,669 $ 6,454
Accounts receivable trade, less allowances of $1,305, and $1,296, respectively .... 68,785 59,646
Inventories ....................................................................... 64,408 81,630
Income tax receivable ............................................................. 1,252 24,936
Net assets held for sale .......................................................... 3,808
Deferred income taxes ............................................................. 14,082 14,082
Other current assets .............................................................. 2,563 1,887
------------ ------------
Total current assets ........................................................... 165,759 192,443
------------ ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies ............................................... 17,774 17,395
Restricted cash and investments ................................................... 17,361
Other assets ...................................................................... 20,539 20,357
Deferred income taxes ............................................................. 49,438 48,536
------------ ------------
Total investments and other assets ............................................. 105,112 86,288
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ..................................................... 856,598 854,445
Construction in progress .......................................................... 13,765 9,747
Accumulated depreciation .......................................................... (323,118) (313,842)
------------ ------------
Total property, plant and equipment ............................................ 547,245 550,350
------------ ------------
$ 818,116 $ 829,081
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 51,109 $ 64,691
Accrued expenses .................................................................. 41,105 34,109
Current installments of long-term debt ............................................ 1,500 1,500
------------ ------------
Total current liabilities ...................................................... 93,714 100,300
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt .................................................................... 419,433 423,243
Other long-term liabilities ....................................................... 17,739 17,791
Postretirement benefits other than pensions ....................................... 96,548 95,814
Retirement benefit plans .......................................................... 5,550 5,590
------------ ------------
Total long-term liabilities .................................................... 539,270 542,438
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 2,000,000 shares authorized, no shares issued
Common stock, $1 par value, 20,000,000 shares authorized, 11,680,164
and 11,627,380
shares issued and outstanding, respectively ................................... 11,680 11,627
Additional paid-in capital ........................................................ 166,017 165,608
Retained earnings ................................................................. 19,754 21,427
Accumulated other comprehensive loss .............................................. (12,319) (12,319)
------------ ------------
Total shareholders' equity ..................................................... 185,132 186,343
------------ ------------
$ 818,116 $ 829,081
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
March 29, March 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (1,675) $ (15,867)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
FROM OPERATING ACTIVITIES:
Gain on sale of net assets held for sale ......... (12,000)
Depreciation ..................................... 9,466 10,151
Deferred income taxes ............................ (900) (8,174)
Accretion of Senior Discount Notes ............... 3,638
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ............................ (5,656) (1,508)
Income tax receivable .......................... 23,684
Inventories .................................... 18,526 3,233
Accounts payable ............................... (11,939) (12,713)
Other current accounts ......................... 4,756 (5,816)
Other, net ....................................... (1,313) 3,191
--------- ---------
Net cash (used for) provided by operating activities. 22,949 (23,865)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ............................ (331)
Sales and/or maturities of investments .............. 6,690
Reclassification of restricted cash ................. (17,361)
Capital expenditures ................................ (3,352) (2,902)
Capital expenditures - New Facility ................. (7,233) (4,330)
--------- ---------
Net cash used for investing activities .............. (27,946) (873)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long term debt ........................... (250)
Proceeds from net assets held for sale .............. 18,000
Borrowings under revolving credit line agreement .... 129,750
Repayments of revolving credit line agreement ....... (134,750)
Exercise of stock options and other ................. 462 355
--------- ---------
Net cash provided by financing activities ........... 13,212 355
--------- ---------
Net (decrease) increase in cash and cash equivalents. 8,215 (24,383)
Cash and cash equivalents at beginning of period .... 6,454 33,224
--------- ---------
Cash and cash equivalents at end of period .......... $ 14,669 $ 8,841
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
The accompanying consolidated financial statements for the periods
ended March 29, 1998 and March 30, 1997 are unaudited. The statements should be
read in conjunction with the audited financial statements included in the
1997 Annual Report on Form 10-K of Acme Metals Incorporated (the
"Company"). In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of such
financial statements have been included. The financial statements have been
subjected to a limited review by Price Waterhouse LLP, the Company's
independent accountants, whose report appears on page 18 of this filing. Such
report is not a "report" or "part of the Registration Statement" within the
meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability
provisions of Section 11 of such Act do not apply.
The Company's fiscal year ends on December 27, 1998 and will contain 52 weeks.
First quarter results for 1998 and 1997 cover 13-week periods.
SEGMENT INFORMATION:
The Company presents its operations in two segments, Steel Making and Steel
Fabricating.
Steel Making operations, conducted through Acme Steel Company ("Acme
Steel"), include the manufacture of flat rolled steel products in low-, mid-,
and high-carbon, alloy and special grades. Principal markets include
agricultural, automotive, industrial equipment, industrial fasteners, welded
steel tubing, processor and tool manufacturing industries.
The Steel Fabricating Segment is conducted through Acme Packaging Corporation
("Acme Packaging"), Alpha Tube Corporation ("Alpha Tube"), and until March 9,
1998, Universal Tool & Stamping Company, Inc. ("Universal"). Acme Packaging
manfactures, processes and distributes steel and plastic strapping, strapping
tools and industrial packaging materials. Alpha Tube manufactures and
distributes welded steel tube. Universal manufactured and distributed auto and
light truck jacks. (See footnote entitled "Sale of Universal Tool & Stamping
Company, Inc."). Principal markets of the Steel Fabricating Segment include
agricultural, automotive, brick, construction, forest and paper products,
appliance, heating and cooling equipment, and household and leisure equipment.
All sales between segments are recorded at contractual prices determined on an
annual basis and reviewed periodically to approximate, as best as possible,
current market conditions. Income from operations consists of total sales
less operating expenses. Operating expenses include an allocation of expenses
incurred at the Corporate Office that are considered by the Company to be
operating expenses of the Segments rather than general corporate expenses.
Income from operations does not include other non-operating income or expense,
interest income or expense, income taxes, or extraordinary items.
The products and services of the Steel Making and Steel Fabricating Segments are
distributed through their own respective sales organizations which have sales
offices at various locations in the United States. Export sales are
insignificant for the periods presented.
5
<PAGE> 6
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------
March 29, March 30,
1998 1997
---- ----
(dollars in thousands, except for operating data)
<S> <C> <C>
Net Sales:
Steel Making:
Sales to unaffiliated customers. $ 77,373 $ 54,367
Intersegment sales ............. 24,520 24,754
--------- ---------
101,893 79,121
Steel Fabricating:
Sales to unaffiliated customers. 67,623 70,964
Intersegment sales ............. 207 298
--------- ---------
67,830 71,262
Eliminations ................... (24,727) (25,052)
--------- ---------
Total .............................. $ 144,996 $ 125,331
========= =========
Income (loss) from Operations:
Steel Making ................... $ (10,419) $ (19,925)
Steel Fabricating .............. 6,385 5,416
--------- ---------
Total .............................. $ (4,034) $ (14,509)
========= =========
Depreciation:
Steel Making ................... $ 8,485 $ 9,224
Steel Fabricating .............. 964 922
Corporate ...................... 17 5
--------- ---------
Total .............................. $ 9,466 $ 10,151
========= =========
Capital Expenditures:
Steel Making ................... $ 2,044 $ 10,565
Steel Fabricating .............. 4,103 1,849
Corporate ...................... 72 45
--------- ---------
Total .............................. $ 6,219 $ 12,459
========= =========
Operating Data (in tons)
Steel Production (hot band) ........... 221,454 191,878
Steel Shipments (flat rolled) ......... 252,731 164,309
</TABLE>
6
<PAGE> 7
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES:
Inventories as determined on the last-in first-out method are summarized as
follows:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
--------- -----------
<S> <C> <C>
Raw materials ...................... $ 7,441 $13,510
Semi-finished and finished products. 49,257 62,126
Supplies ........................... 7,711 5,994
------- -------
$64,409 $81,630
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
The Company has capitalized expenditures related to the construction of a
continuous thin slab caster and hot strip mill (the "New Facility") totaling
$461.0 million at March 29, 1998, including total cash payments for the New
Facility in the first quarter of 1998 of $7.2 million. Accounts payable to the
general contractor at March 29, 1998 and March 30, 1997 were $9.7 million and
$17.2 million, respectively. At December 28, 1997 and December 29, 1996,
accounts payable included similar accruals of $15.5 million and $12.0 million,
respectively. Due to the non-cash nature of such payables at each date
they have been excluded from the Statements of Cash Flows. The remainder of
capital expenditures classified as construction in progress at March 29, 1998
was primarily for Acme Packaging's plastic strapping lines, and an upgrade of
the Company's management information systems.
LONG-TERM DEBT:
The Company's long-term debt (including current maturities) at March 29, 1998
and December 28, 1997 is summarized as follows:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1998 1997
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
10.875 percent Senior Unsecured Notes, net of discount.. $198,544 $198,506
Senior Secured Credit Agreement......................... 174,750 175,000
12.5 percent Senior Secured Notes....................... 17,623 17,623
13.5 percent Senior Secured Discount Notes.............. 669 669
Note Payable............................................ 6,000 6,000
Environmental Improvement Bonds 7.95 percent............ 11,345 11,345
Environmental Improvement Bonds 7.90 percent............ 8,585 8,585
Working Capital Facility................................ 5,000
Other long-term debt.................................... 3,417 2,015
-------- --------
$420,933 $424,743
======== ========
</TABLE>
7
<PAGE> 8
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SALE OF UNIVERSAL TOOL & STAMPING COMPANY, INC.:
In March 1998, the Company completed the stock sale of Universal, generating
proceeds to the Company of $18.0 million and a gain of $12.0 million
(classified under the account caption as "Other-net" on the Statement of
Operation). At December 28, 1997, the net assets of Universal (excluding cash
and intercompany accounts) were $3.8 million and were classified as a current
asset, "Net assets held for sale."
Proceeds from the sale of Universal are restricted by the Indentures
(the "1994 Indentures") covering the Company's 12 1/2% Senior Secured Notes and
13 1/2% Senior Secured Discount Notes, both issued in 1994 (together, the "1994
Notes"), and have been deposited with the Trustee. The sale proceeds net of
closing costs of $17.1 million have been classified as restricted cash on the
balance sheet at March 29, 1998. The Company is permitted to apply the proceeds
to related business investments or to offer to redeem on a pro rata basis the
remaining 1994 Notes. To the extent an offer to redeem is not accepted, the
proceeds become unrestricted.
CASH FLOWS:
Cash payments for interest expense were $5.2 million during the first three
months of 1998 and $9.8 million in the first three months of 1997. Cash
transactions in the first quarter of 1998 for the New Facility are discussed
above in the footnote entitled "Property, Plant and Equipment."
COMPREHENSIVE INCOME:
During the quarter ended March 29, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires the Company to disclose, in
financial statement format, all non-owner changes in equity. As of the quarter
ended March 29, 1998, there was no effect on equity due to the adoption of SFAS
No. 130.
COMMITMENTS AND CONTINGENCIES:
Acme Steel's interest in an iron ore mining joint venture requires payment of
its proportionate share of all fixed operating costs, regardless of the quantity
of ore received, plus the variable operating costs of minimum ore production for
Acme Steel's account. Normally, Acme Steel reimburses the joint venture for
these costs through its purchase of ore.
Acme Steel's interest in a joint venture formed to pickle, oil, and
slit steel products ("NACME") requires Acme Steel to comply with certain
tonnage provision guarantees and cost plus return on investment payments. Due
to a delay in reaching full operating levels, NACME was not in compliance with
certain financial covenants and obtained a waiver and negotiated modification
of those covenants under its financing arrangements with its lending
institution. NACME currently meets the requirements of the modified financial
covenants. However, there are no assurances NACME will continue to maintain
compliance, or, if it fails to do so, that it will be able to
8
<PAGE> 9
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
negotiate further waivers or amendments of its covenants. Currently, the Company
is unable to determine whether such failure would have an adverse effect on
the Company's operations.
The Company has long term operating lease commitments, principally for building
space for its Alpha Tube subsidiary and for various computer hardware and
software. A current lease agreement relating to building space for the Alpha
Tube subsidiary contains provisions for the Company to guarantee the lessor a
recovery of a fixed percentage of its interest in the property upon termination
of the lease. In the event the Company does not maintain compliance with
financial covenants which are consistent with those of the Company's $80
million Amended and Restated Credit Agreement dated as of December 18, 1997, as
amended (the " Working Capital Facility"), the Company could be required to
purchase the lessors' interest in the property.
The Company is subject to various Federal, state and local environmental
statutes and regulations which provide a comprehensive program for controlling
the release of materials into the environment and require responsible parties to
remediate certain waste disposal sites. In addition, various health and safety
statutes and regulations apply to the work-place environment. Administrative,
civil and criminal penalties may be applicable for failure to comply with these
laws. These environmental laws and regulations are subject to periodic revision
and modification. The United States Environmental Protection Agency, for
example, is currently evaluating changes to the National Air Quality Standards
for particulate matter and ozone.
From time to time, the Company is also involved in administrative proceedings
involving the issuance, or renewal, of environmental permits relating to the
conduct of its business. The final issuance of these permits have been resolved
on terms satisfactory to the Company; and, in the future, the Company expects
such permits will similarly be resolved on satisfactory terms.
Although management believes it will be required to make further expenditures
for pollution abatement facilities in future years, because of the continuous
revision of these regulatory and statutory requirements, the Company is not able
to reasonably estimate the specific pollution abatement requirements, or the
amount or timing of such expenditures to maintain compliance with these
environmental laws. While such expenditures in future years may be
substantial, management does not presently expect they will have a material
adverse effect on the Company's future ability to compete within its markets.
In those cases where the Company has been identified as a Potentially
Responsible Party ("PRP") or is otherwise made aware of a possible exposure to
incur costs associated with an environmental matter, management determines (i)
whether, in fact, the Company has been properly named or is
9
<PAGE> 10
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
otherwise obligated, (ii) the extent to which the Company may be responsible
for costs associated with the site in question, (iii) whether another party
may be responsible under various indemnification agreements or insurance
policies the Company is a party to, and (iv) the estimated costs, if an
estimate can be made, associated with the clean-up efforts or settlement.
It is the Company's policy to make provisions for environmental clean-up
costs at the time that a reasonable estimate can be made. In March 29, 1998,
the Company had recorded reserves of $1.0 million for environmental clean-up
matters. While it is not possible to predict the ultimate costs of resolving
environmental related issues facing the Company, based upon information
currently available, they are not expected to have a material effect on the
consolidated financial condition or results of operations of the Company.
In connection with the Company's Spin-Off from Interlake on May 29, 1986,
the Company entered into certain indemnification agreements with Interlake.
Pursuant to the terms of the indemnification agreements, Interlake undertook
to defend, indemnify and hold the Company harmless from any claims, as
defined, relating to Acme Steel's operations or predecessor operations
occurring before May 29, 1986, the inception of the Company. The indemnification
agreements cover certain environmental matters including certain litigation and
Superfund sites in Duluth, Minnesota and Gary, Indiana for which either
Interlake or Acme Steel's predecessor operations have been named as defendants
or PRPs, as applicable. To date, Interlake has met its obligations under the
indemnification agreements and has provided the defense and paid all costs
related to these environmental matters. The Company does not have sufficient
information to determine the potential liability, if any, for the matters
covered by the indemnification agreements in the event Interlake fails to meet
its obligations thereunder in the future. In the event that Interlake, for any
reason, was unable to fulfill its obligations under the indemnification
agreements, the Company could have increased future obligations which could be
significant.
Also in connection with the Spin-Off from Interlake, the Company entered into
a Tax Indemnification Agreement ("TIA") which generally provides for Interlake
to indemnify the Company for certain tax matters. While certain issues have been
negotiated and settled between the Company, Interlake and the Internal Revenue
Service, certain significant issues for the tax years beginning in 1982 through
1986 remain unresolved.
On March 17, 1994, the Company received a Statutory Notice of Deficiency
in the amount of $16.9 million in tax as a result of the Internal
Revenue Service's examination of the 1982-1984 tax years. During 1997 Interlake
and the Internal Revenue Service settled significantly all issues that created
the additional tax, reducing the additional tax to $5.1 million. Substantial
interest could also be due (potentially in an amount greater than the tax
claimed). The taxes claimed relate principally to adjustments for which the
Company is indemnified by Interlake pursuant to the TIA. The Company has
adequate reserves to cover that portion for which it believes it may be
responsible per the TIA. To date, Interlake has met its obligations under the
TIA with respect to all covered matters. In the event that Interlake, for any
reason, were unable to fulfill its obligations under the TIA, the Company could
have increased future obligations.
10
<PAGE> 11
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's subsidiaries also have various litigation matters pending which
arise out of the ordinary course of their businesses. In the opinion of
management, the ultimate resolution of these matters will not have a material
adverse effect on the financial position of the Company.
11
<PAGE> 12
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
GUARANTOR FINANCIAL STATEMENTS
In December 1997, Acme Metals Incorporated, as issuer, and Acme Steel
Company, a wholly owned subsidiary of the Company, as guarantor, entered into
an offering pursuant to which $200 million of 10.875 percent Senior Unsecured
Notes due 2007 (the "Senior Unsecured Notes") were offered pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Act"). The Company
intends to register the Senior Unsecured Notes under the Act.
Following is unaudited consolidating condensed financial information
pertaining to the Company and its subsidiary guarantor and its subsidiary
nonguarantors.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 29, 1998
------------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 101,893 $ 67,830 $ (24,727) $ 144,996
Cost and expenses 107,180 56,705 (24,727) 139,158
------------ ------------ ------------ ------------- ------------
Gross profit (5,287) 11,125 5,838
Selling and administrative 5,132 4,740 9,872
------------ ------------ ------------ ------------- ------------
Operating income (loss) (10,419) 6,385 (4,034)
Other 257 12,000 12,257
Net interest income (expense) 3,817 (13,728) (887) (10,798)
------------ ------------ ------------ ------------- ------------
Income (loss) before income taxes 3,817 (23,890) 17,498 (2,575)
Income tax provision (benefit) 1,455 (8,234) 5,879 (900)
------------ ------------ ------------ ------------- ------------
Net income (loss) before equity
adjustment 2,362 (15,656) 11,619 (1,675)
Equity loss in subsidiaries (4,037) 4,037
------------ ------------ ------------ ------------- ------------
Net income (loss) $ (1,675) $ (15,656) $ 11,619 $ 4,037 $ (1,675)
============= ============= ============= ============== =============
</TABLE>
12
<PAGE> 13
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 30, 1997
-----------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 79,121 $ 71,262 $ (25,052) $ 125,331
Costs and expenses 94,214 60,486 (25,052) 129,648
---------- ----------- ------------- ------------ --------------
Gross profit (15,093) 10,776 (4,317)
Selling and administrative 4,832 5,360 10,192
---------- ----------- ------------- ------------ --------------
Operating income (loss) (19,925) 5,416 (14,509)
Net interest income (expense) and other 4,556 (13,473) (615) (9,532)
---------- ----------- ------------- ------------ --------------
Income (loss) before income taxes 4,556 (33,398) 4,801 (24,041)
Income tax provision (benefit) 1,433 (11,296) 1,689 (8,174)
---------- ----------- ------------- ------------ --------------
Net income (loss) before equity
adjustment 3,123 (22,102) 3,112 (15,867)
Equity loss in subsidiaries (18,990) 18,990
---------- ----------- ------------- ------------ --------------
Net income (loss) $ (15,867) $ (22,102) $ 3,112 $ 18,990 $ (15,867)
========== =========== ============= ============ ==============
</TABLE>
13
<PAGE> 14
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
AS OF MARCH 29, 1998
-------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
ASSETS PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,285 $ $ 384 $ $ 14,669
Accounts receivable, net 198 39,091 29,496 68,785
Income tax receivable 1,252 1,252
Inventories 40,353 25,706 (1,651) 64,408
Deferred income taxes 14,082 14,082
Other current assets 586 1,844 133 2,563
Due to (from) affiliates 459,879 (446,367) (15,163) 1,651
----------- ------------ ------------- -------------- -------------
Total current assets 490,282 (365,079) 40,556 165,759
----------- ------------ ------------- -------------- -------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 56,845 17,774 (56,845) 17,774
Restricted cash and investments 17,361 17,361
Other assets 15,002 3,996 1,541 20,539
Deferred income taxes 49,438 49,438
----------- ------------ ------------- -------------- -------------
Total investments and other assets 138,646 21,770 1,541 (56,845) 105,112
----------- ------------ ------------- -------------- -------------
PROPERTY, PLANT AND EQUIPMENT- Net: 272 515,639 31,334 547,245
----------- ------------ ------------- -------------- -------------
$ 629,200 $ 172,330 $ 73,431 $ (56,845)$ 818,116
=========== ============ ============= ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,943 $ 66,359 $ 15,912 $ $ 92,214
Current maturities of long term debt 1,000 500 1,500
----------- ------------ ------------- -------------- -------------
Total current liabilities 10,943 66,859 15,912 93,714
----------- ------------ ------------- -------------- -------------
LONG-TERM LIABILITIES:
Long-term debt 413,933 5,500 419,433
Other long-term liabilities 14,956 2,783 17,739
Postretirement benefits other than pensions 1,731 80,522 14,295 96,548
Retirement benefit plans 2,505 4,268 (1,223) 5,550
----------- ------------ ------------- -------------- -------------
Total long-term liabilities 433,125 93,073 13,072 539,270
----------- ------------ ------------- -------------- -------------
SHAREHOLDERS' EQUITY: 185,132 12,398 44,447 (56,845) 185,132
----------- ------------ ------------- -------------- -------------
$ 629,200 $ 172,330 $ 73,431 $ (56,845)$ 818,116
=========== ============ ============= ============== =============
</TABLE>
14
<PAGE> 15
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 28, 1997
------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
ASSETS PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ $ 3,016 $ 3,438 $ $ 6,454
Accounts receivable, net 33,154 26,492 59,646
Income tax receivable 24,936 24,936
Inventories 58,657 23,990 (1,017) 81,630
Net assets held for sale 3,808 3,808
Deferred income taxes 14,082 14,082
Other current assets 614 1,145 128 1,887
Due to (from) affiliates 460,541 (434,649) (26,909) 1,017
---------- ---------- ---------- ---------- -------------
Total current assets 500,173 (338,677) 30,947 192,443
---------- ---------- ---------- ---------- -------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 60,882 17,395 (60,882) 17,395
Other assets 14,629 4,391 1,337 20,357
Deferred income taxes 48,536 48,536
---------- ---------- ---------- ---------- -------------
Total investments and other assets 124,047 21,786 1,337 (60,882) 86,288
---------- ---------- ---------- ---------- -------------
PROPERTY, PLANT AND EQUIPMENT 217 522,096 28,037 550,350
---------- ---------- ---------- ---------- -------------
$ 624,437 $ 205,205 $ 60,321 $ (60,882) $ 829,081
========== ========== ========== ========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,157 $ 79,310 $ 14,333 $ $ 98,800
Current installments of long-term debt 1,000 500 1,500
---------- ---------- ---------- ---------- -------------
Total current liabilities 6,157 79,810 14,333 100,300
---------- ---------- ---------- ---------- -------------
LONG-TERM LIABILITIES:
Long-term debt 412,743 10,500 423,243
Other long-term liabilities 14,939 2,852 17,791
Postretirement benefits other than pensions 1,731 79,803 14,280 95,814
Retirement benefit plans 2,524 4,186 (1,120) 5,590
---------- ---------- ---------- ---------- -------------
Total long-term liabilities 431,937 97,341 13,160 542,438
---------- ---------- ---------- ---------- -------------
SHAREHOLDERS' EQUITY: 186,343 28,054 32,828 (60,882) 186,343
---------- ---------- ---------- ---------- -------------
$ 624,437 $ 205,205 $ 60,321 $ (60,882) $ 829,081
========== ========== ========== ========== =============
</TABLE>
15
<PAGE> 16
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 29, 1998
-----------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- -------------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (USED FOR) PROVIDED BY
OPERATING ACTIVITIES $ 30,845 $ (1,922) $ (6,607) $ 633 $ 22,949
---------- ------------- ------------ ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reclassification to restricted cash (17,361) (17,361)
Capital expenditures (72) (7,812) (2,701) (10,585)
---------- ------------- ------------ ------------- --------------
Net cash (used for) provided by investing
activities (17,433) (7,812) (2,701) (27,946)
---------- ------------- ------------ ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 129,750 129,750
Repayments of revolving credit agreement (134,750) (134,750)
Payment of long term debt (250) (250)
Intercompany cash transactions 661 11,718 (11,746) (633)
Proceeds from net assets held for sale 18,000 18,000
Exercise of stock options and other 462 462
---------- ------------- ------------ ------------- --------------
Net cash (used for) provided by financing
activities 873 6,718 6,254 (633) 13,212
---------- ------------- ------------ ------------- --------------
Net increase (decrease) in cash and
cash equivalents 14,285 (3,016) (3,054) 8,215
Cash and cash equivalents at
beginning of period 3,016 3,438 6,454
---------- ------------- ------------ ------------- --------------
Cash and cash equivalents at
end of period $ 14,285 $ $ 384 $ $ 14,669
========== ============= ============ ============= ==============
</TABLE>
16
<PAGE> 17
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 30, 1997
----------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------------------------------------------------------
<S> <C>
NET CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (4,919) $ (23,111) $ 4,288 $ (123) $ (23,865)
----------- ------------ ----------- ----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and/or maturities of
investments, net of purchases 6,359 6,359
Capital expenditures (45) (5,338) (1,849) (7,232)
----------- ------------ ----------- ----------- --------------
Net cash (used for) provided by investing activities 6,314 (5,338) (1,849) (873)
----------- ------------ ----------- ----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany cash transactions (19,996) 22,142 (2,269) 123
Exercise of stock options and other 355 355
----------- ------------ ----------- ----------- --------------
Net cash (used for) provided by financing activities (19,641) 22,142 (2,269) 123 355
----------- ------------ ----------- ----------- --------------
Net increase (decrease) in cash and
cash equivalents (18,246) (6,307) 170 (24,383)
Cash and cash equivalents at
beginning of period 24,306 6,307 2,611 33,224
----------- ------------ ----------- ----------- --------------
Cash and cash equivalents at
end of period $ 6,060 $ $ 2,781 $ $ 8,841
=========== ============ =========== =========== ==============
</TABLE>
17
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Acme Metals Incorporated
We have reviewed the accompanying consolidated balance sheet as of March 29,
1998, the consolidated statements of operations for the three-month periods
ended March 29, 1998 and March 30, 1997, and the consolidated statements of cash
flows for the three-month periods ended March 29, 1998 and March 30, 1997 (the
"consolidated financial information") of Acme Metals Incorporated and its
subsidiaries. This consolidated financial information is the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 28, 1997, and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows for the year then ended (not presented herein), and in our report dated
January 23, 1998, except as to the Note entitled "Assets Held for Sale", which
is as of March 10, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 28, 1997,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ Price Waterhouse LLP
- -----------------------------
Price Waterhouse LLP
Chicago, Illinois
May 7, 1998
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company's operations are divided into two segments, the Steel
Making Segment and the Steel Fabricating Segment. The Steel Making Segment
consists of Acme Steel and includes all of the facilities used in the
manufacturing and finishing of flat rolled steel. The Steel Fabricating Segment
includes the operations of Acme Packaging and Alpha Tube, both of which use
flat rolled steel in their respective fabricating processes. Universal, which
was sold on March 9, 1998, was an operating subsidiary within the Steel
Fabricating Segment prior to that date.
Steel Making Segment. In September 1996, Acme Steel completed construction of
the New Facility. The New Facility, which cost approximately $400 million
(excluding capitalized interest and certain internal costs), allows Acme Steel
to build on its strengths as a low cost producer of high quality liquid steel
by increasing its overall efficiency and reducing its finished steel production
costs. The first coil was produced at the New Facility on October 3, 1996. The
New Facility is the world's first complex to produce hot rolled steel products
by combining highly efficient mini-mill casting and rolling technology with the
traditional high quality liquid steel produced via the blast furnace/basic
oxygen furnace technology.
In February 1996, Acme Steel and its joint venture partner began construction of
NACME, adjacent to the New Facility. NACME pickles, oils, slits and packages
steel coils produced by the New Facility. Pickling operations at NACME began in
December 1997. Due to a five-month delay in delivery of the slitting equipment
to NACME, slitting operations did not begin until late in the second quarter of
1997.
Commencing in the fourth quarter of 1996, Acme Steel began phasing in the New
Facility and concurrently phasing out the redundant ingot-based operations. The
decommissioning of Acme Steel's old ingot-based steel making facility was
completed in June 1997. During the first quarter of 1998, the New Facility
operated on average at approximately 87 percent of its planned production
levels. As part of ramping up the New Facility, Acme Steel has successfully
produced 99 percent of the steel grades comprising Acme Steel's intended
product mix.
In the second half of 1997, Acme Steel's ability to produce flat rolled
steel outpaced steel finishing capability. A contributing factor was the
delayed start-up of NACME's slitting equipment which resulted in a reliance on
outside processors and adversely affected on-time shipping capabilities and
results of operations. Acme Steel continues to work with NACME and other outside
processors to improve slitting productivity and increase shipping capability.
During 1997 and the first quarter of 1998, Acme Steel's product mix
was, and it continues to be, adversely affected by a substantial reduction of
orders from its traditional niche customers in the high and mid-carbon, alloy,
HSLA and processed, value-added steel product markets principally due to
production start-up issues at the New Facility and the late delivery and slower
than anticipated ramp-up of the slitting capabilities at the NACME facility. As
a result, in
19
<PAGE> 20
1997 Acme Steel shipped 120,000 fewer tons of its traditional higher margin
niche products compared to 1996.
The Company had significant net losses in 1997 due to, among other
factors, ongoing production cost inefficiencies resulting from the New
Facility operating at less than planned production levels (as a result of, among
other factors, higher than anticipated unplanned delay rates and a slower than
expected improvement in material yield performance), an adverse mix of products
resulting in lower selling prices, operational issues at the NACME facility
which led to reduced shipments and higher than desired inventory levels and
increased depreciation and interest expense related to the New Facility. The
production inefficiencies and the inventory buildup significantly reduced cash
flow from operations. The production inefficiencies of the New Facility and
adverse mix of products sold in 1997 are expected to continue throughout 1998,
adversely affecting the Company's results of operations and cash flow. (See
"Outlook")
Steel Fabricating Segment. The Steel Fabricating Segment recorded strong
operating results. The operating income of these companies partially offset
the operating losses of Acme Steel during the ramp-up at the New Facility and
was relatively unaffected by the transitional issues faced by the Steel Making
Segment.
RESULTS OF OPERATIONS
- ---------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Years Ended
-------------------------- ------------------------------------
March 29, March 30, Dec. 28, Dec. 29, Dec. 31,
1998 1997 1997 1996 1995
------------ ----------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and Expenses:
Cost of products sold 89.6 95.4 91.3 86.7 81.3
Depreciation expense 6.4 8.0 7.9 3.2 2.5
----- ----- ----- ----- -----
Gross margin 4.0 (3.4) 0.8 10.1 16.2
Training and Pre-start-up--New Facility 2.0
Selling and administrative expense 6.8 8.1 8.0 7.1 6.8
----- ----- ----- ----- -----
Operating income (loss) (2.8) (11.5) (7.2) 1.0 9.4
Interest expense, net (7.5) (7.6) (8.4) (0.1) (1.3)
Other non-operating income, net 8.5 0.1 0.3
Income tax (benefit) provision (0.6) (6.5) (5.9) 0.5 3.0
----- ----- ----- ----- -----
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (1.2) (12.6) (9.7) 0.5 5.4
Extraordinary item, net of taxes (4.8)
Cumulative effect of a change in accounting
principle, net of tax (1.3)
----- ----- ----- ----- -----
Net income (loss) (1.2)% (12.6)% (15.8)% 0.5% 5.4%
===== ===== ===== ===== =====
</TABLE>
First Quarter 1998 as compared to First Quarter 1997
NET SALES. Consolidated net sales of $145.0 million for the first quarter of
1998 were $19.7 million higher than the prior year. An increase in flat rolled
product shipments as compared to the prior year was the primary reason for the
increase in sales.
20
<PAGE> 21
Steel Making Segment. In the first three months of 1998, net sales for the Steel
Making Segment were $101.9 million, a $22.8 million or 29 percent increase over
last year. Sales to unaffiliated customers increased 42 percent or $23.0 million
while intersegment sales of $24.5 million were consistent with the first quarter
of 1997. The increase in the unaffiliated shipments of flat rolled products was
partially offset by lower selling prices and an adverse product mix in 1998
versus the prior year. (See "Outlook - Customers and Product Mix")
Steel Fabricating Segment. The Steel Fabricating Segment net sales of $67.6
million in 1998 were $3.4 million, or 5 percent below the comparable period in
the prior year. A decrease in sales volume for the fabricating businesses,
primarily as a result of the sale of Universal on March 9, 1998, was somewhat
offset by slightly higher selling prices.
GROSS MARGIN. The gross margin for the first quarter of 1998 was $5.8 million
which was $10.1 million higher than the gross loss of $4.3 million recorded
during last year's comparable period. The increase in gross margin was due
primarily to increased sales volume of flat rolled products, and lower
operating costs at the Steel Making segment.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was $9.9
million in the first quarter of 1998, $0.3 million lower than the prior year.
Selling and administrative expenses represented approximately 7 percent of net
sales in 1998 compared to 8 percent for the comparable period in 1997.
OPERATING INCOME/LOSS. The operating loss for the Company in the first quarter
of 1998 of $4.0 million represents a $10.5 million improvement from the
$14.5 million loss recorded during the same period in 1997.
Steel Making Segment. The Steel Making Segment recorded a $10.4 million loss
from operations in the first quarter of 1998, which was $9.5 million less than
the loss recorded in the comparable period in 1997 when Acme Steel was
operating both the New Facility and the old ingot based operations.
The decreased loss in the first quarter of 1998 as compared to 1997 was due to
increased flat rolled shipments combined with lower operating costs. The
decrease in operating costs resulted from improved efficiency and increased
production utilization at the New Facility along with the shut-down of Acme
Steel's old ingot based primary rolling and hot-strip mill in mid-year 1997.
Approximately 77 percent of steel shipments and 68 percent of gross margin in
1998 was attributable to external customers, as compared to 62 percent of
shipments and 60 percent gross margin in the prior year. The remainder of sales
in both periods was generated by sales to the Steel Fabricating Segment. (See
"Outlook - Operating Losses")
Steel Fabricating Segment. The Steel Fabricating Segment's operating income of
$6.4 million for the first quarter of 1998 was $1.0 million higher than in last
year's comparable period, due primarily to lower raw material costs.
OTHER NON-OPERATING INCOME. Other non-operating income in March 1998 includes
the stock sale of Universal, generating proceeds to the Company of
$18.0 million and a gain of $12.0 million (included in the account
caption as
21
<PAGE> 22
"other-net" on the income statement). Proceeds from the sale of assets
are restricted by the 1994 Indentures and the $175 million Credit Agreement
dated as of December 18, 1997 (the "Senior Secured Credit Agreement") and have
been deposited with the Trustee. Net proceeds from asset sales (including the
Universal proceeds) of $17.4 million have been classified as restricted cash
on the balance sheet at March 29, 1998. The Company is permitted to apply such
proceeds to related business investments or to offer to redeem, on a pro
rata basis, the remaining 1994 Notes. To the extent an offer to redeem the 1994
Notes is not accepted, such proceeds become unrestricted.
INTEREST INCOME. The decrease of $0.2 million in interest income is the result
of reduced cash and investment balances.
INTEREST EXPENSE. Interest expense of $10.9 million for the three months ended
March 29, 1998 was $1.1 million higher compared to the same period of the prior
year. The higher interest expense in the first quarter of 1998 resulted from
increased long term debt over the prior period, partially offset by lower
interest rates.
INCOME TAXES. Income tax benefits from operations recorded in the first quarter
of 1998 totaled $0.9 million based on an effective tax rate of 35 percent as
compared to $8.2 million of tax benefit in the first quarter 1997, based on a 34
percent effective tax rate.
NET INCOME (LOSS). The Company recorded a loss of $1.7 million, or $0.14 per
share in the first quarter of 1998 versus a loss of $15.9 million, or $1.36 per
share, recorded in the first quarter of the prior year. Per share amounts for
1998 and 1997 are based on the weighted average number of common shares
calculated on both the basic and fully diluted methods, which are equivalent in
amount. Excluding a gain on sale of assets of $12.0 million ($7.8 million net
of tax), or $0.67 per share, the net loss for the first quarter of 1998 would
have been $9.5 million or $0.81 per share. (See "Sale of Universal Tool &
Stamping Company, Inc." in "Notes to Unaudited Consolidated Financial
Statements")
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liquidity requirements include working capital needs, cash
interest payments and capital investments. The Company intends to finance its
current operating and investing activities with existing cash balances, cash
from operations and by borrowing against its $80 million Working Capital
Facility. At March 29, 1998, the Company had no outstanding borrowings against
its Working Capital Facility with $79.4 million available for borrowing.
Operating activities provided $22.9 million of cash in the first quarter of 1998
primarily due to a combination of the receipt of an income tax refund and a
reduction of inventory levels. Investing activities used $27.9 million of cash
due to a reclassification to restricted cash of $17.4 million and $10.5 million
of cash payments for capital expenditures during the first quarter of 1998.
At the end of the first quarter of 1998, the Company's cash and cash equivalents
balance was $14.7 million, up $8.2 million from the December 28, 1997 balance
and the Company's long-term indebtedness was $420.9 million. Long-term debt
decreased $3.8 million primarily due to the payment of Working Capital
Facility borrowings.
Capital expenditures totaled $6.2 million (on an accrual basis) during the first
quarter of 1998. Total capital expenditures for the New Facility were $1.5
million. The remaining $4.7 million of
22
<PAGE> 23
capital expenditures were for the Acme Packaging plastic strapping lines,
update of the Company's management information systems and the replacement and
rehabilitation of various production facilities.
Working capital of $72.0 million at the end of the first quarter of 1998 was
$20.1 million lower than the December 28, 1997 balance. The Company currently
has a Working Capital Facility through January 2001, which provides each
operating subsidiary borrowing availability with an overall limitation of $80
million. The Company's ratio of debt to total capitalization as of March 29,
1998 was .69 to 1. The short-term and long-term liquidity of the Company is
dependent upon several factors, including steel selling prices, availability of
capital, competitive and market forces, capital expenditures and general
economic conditions. Moreover, the United States steel market is subject to
cyclical fluctuations which may affect the amount of cash internally generated
by the Company and the ability of the Company to obtain external financing. In
addition, because of the Company's current leverage position, its financial
flexibility is limited.
Since December 28, 1997, the Company and its lenders amended certain definitions
and made other changes under its credit agreements to provide the Company with
greater flexibility under the covenants contained in the agreements.
Although the Company believes the anticipated cash for future operations and
borrowings under the Working Capital Facility will provide sufficient liquidity
for the Company to meet its debt service requirements and fund ongoing
operations, including required capital expenditures, there can be no assurance
these or other possible sources will be adequate. (See "Outlook - Operating
Losses")
OUTLOOK
The Company expects to continue recognizing losses during 1998 due to the
operating performance of Acme Steel. Acme Steel is aggressively working to
regain and improve orders from and deliveries to the higher margin niche
product customers, optimize performance of the New Facility, reduce
manufacturing costs and achieve design slitting capabilities at the NACME
facility.
23
<PAGE> 24
CUSTOMERS AND PRODUCT MIX. During 1997 and the first quarter of 1998,
Acme Steel experienced a substantial reduction in the average selling price per
ton for sales to external customers due to competitive pressures and a
substantial reduction in orders from its traditional higher margin niche
customers in the markets for high- and mid-carbon, alloy, HSLA and processed
valued-added products. The loss of orders from niche customers was due,
principally, to the delivery performance caused by the slow ramp-up of the New
Facility and of the slitting capabilities of the NACME facility. As a result,
these customers were forced to obtain their steel from other sources. Acme
Steel continues working to improve operating performance of the New Facility
and slitting performance at the NACME facility. These actions are expected to
improve delivery performance to the traditional, higher margin niche product
customers and gradually improve product mix and margins.
PERFORMANCE OF NEW FACILITY. Acme Steel is in the process of ramping up the New
Facility to planned shipping levels of 970,000 tons per year. The New Facility
is operating at less than planned production levels and incurring ongoing cost
inefficiencies due to, among other factors, a higher than expected rate of
unplanned delays and a slower than expected improvement in material yield
performance (raw steel to finished steel coil). These factors will continue to
adversely affect the financial performance of Acme Steel and the consolidated
results of the Company during 1998.
The Company believes it will achieve a substantial portion of the
projected benefits of the New Facility by the end of 1998. When the New
Facility reaches planned production levels, it is expected to reduce cash
manufacturing costs by approximately $70 per ton from 1996 cash manufacturing
costs. As of the first quarter of 1998, the Company had achieved cash cost
savings related to the New Facility of approximately half the expected $70 per
ton savings, excluding additional depreciation associated with the New Facility
of approximately $24 per ton.
NACME FACILITY. During the first quarter of 1998, the NACME facility operated,
on average, at approximately 60% of its planned slitting capability. NACME and
Acme Steel are cooperating in efforts to improve the performance of the slitting
operations.
OPERATING LOSSES. Should the Company incur greater than anticipated losses
during 1998, the Company could be at risk of breaching certain of the financial
covenants in its loan agreements (which become more restrictive in future
periods), and absent relief from its lenders, the Company would have to
consider financial alternatives to enable it to adequately fund its operations
and meet all of its obligations.
There can be no assurances the Company will be able to satisfactorily resolve
all of these concerns in the near term. No assurances can be given that the
Company will not continue to experience operational difficulties, will achieve
the projected cost benefits, will improve deliveries, improve material yield
performance, or increase sales to its traditional niche market customers, or
that
24
<PAGE> 25
financing will be available if required, or if available, whether such
financing will be on terms satisfactory to the Company.
STEEL FABRICATING. For 1998, Steel Fabricating Segment earnings
(excluding Universal) are expected to remain relatively steady. Alpha Tube
expects to complete the relocation and consolidation of its tube mills in
mid-1998. The consolidation project will improve material handling capability,
provide increased capacity of large diameter tubing and lower operating costs.
Acme Packaging anticipates installation of the new plastic strapping lines
will be completed during the second quarter of 1998.
FORWARD LOOKING STATEMENTS
Actual events might materially differ from those projected in the above
forward looking statements. The timely and successful ramp-up of the New
Facility and successful installation of new computer systems are important
assumptions in the Company's projection of a fully operational facility and the
related earnings benefits. If there are substantial unexpected production
interruptions or other operating difficulties and if the New Facility fails to
achieve certain production utilization and material yield goals, or NACME fails
to achieve its planned slitting capabilities, the competitive and financial
position of the Company could be materially adversely affected. In addition to
uncertainties with respect to the New Facility, forward looking statements
regarding all of the Company's businesses, but particularly the Steel Making
Segment, are based on various economic assumptions. These assumptions include
projections regarding: selling prices for the Company's products, costs for
labor, energy, raw material, supplies, pensions and active and retiree medical
care, volume or units of product sales, competitive developments in the
marketplace by domestic and foreign competitors, including Asian steel
companies in the midst of the current Asian economic downturn, and the
competitive impact of the facilities which are expected to compete with the
Company's products, general economic developments in the United States or abroad
affecting the business of the Company's customers, including the strength of
the U.S. dollar against other currencies and similar events which may affect
the costs, price or volume of products sold by the Company.
There can be no assurances the results of these factors will conform with the
Company's assumptions and projections. If one or more of these factors fails to
meet the Company's projections, the adverse impact on the Company's business and
financial results could be significant. Similarly, in the event the Company's
assumptions and projections are too conservative, the Company's performance may
exceed these forecasts.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", issued in June 1997, established standards for reporting
information about operating segments in annual financial statements and interim
financial reports. It also establishes standards for related disclosures about
products and service, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company is currently evaluating its disclosure
requirements
25
<PAGE> 26
and expects to adopt this standard in its financial statements for the year
ending December 27, 1998.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Shareholders was held on April 23, 1998. In
connection with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals considered and
voted upon at the meeting, all of which are described in the Company's Proxy
Statement dated March 25, 1998.
1. The three nominees for election as Class III Directors listed in the
Proxy Statement were elected:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
<S> <C> <C>
Reynold C. MacDonald 8,265,012 241,728
Brian W. H. Marsden 8,330,313 176,427
William P. Sovey 8,332,415 174,325
</TABLE>
2. The proposal to ratify the appointment of Price Waterhouse LLP as the
Company's independent accountants for the fiscal year 1998 was passed.
(8,377,662 votes FOR, 85,536 votes ABSTAINED, 43,542 votes AGAINST)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 - Second Amendment dated May 11, 1998 to Amended and
Restated Credit Agreement dated as of December 18, 1997
Exhibit 10.2 - First Amendment dated May 4, 1998 to the $175 million
Credit Agreement dated as of December 18, 1997
Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial data schedule
(b) Reports on Form 8-K
Report on Form 8-K filed on March 20, 1998 reported the
sale by the Company on March 9, 1998 of Universal Tool
& Stamping Company, Inc.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACME METALS INCORPORATED
Date: May 12, 1998 By: /s/ Jerry F. Williams
------------------------------------
Jerry F. Williams
Vice President - Finance and
Administration and Chief Financial
Officer
(Principal Financial Officer)
By: /s/ Derrick T. Bay
------------------------------------
Derrick T. Bay
Controller and Chief Accounting Officer
(Principal Accounting Officer)
27
<PAGE> 1
EXHIBIT 10.1
ACME GROUP
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
The First National Bank of Chicago
Chicago, Illinois
Mercantile Bank National Association
St. Louis, Missouri
The Bank of Nova Scotia
Atlanta, Georgia
General Electric Capital Corporation
Stamford. Connecticut
Ladies and Gentlemen:
Reference is hereby made to that certain Amended and Restated Credit
Agreement dated as of December 18, 1997 between the undersigned, Acme Steel
Company, a Delaware corporation ("Acme Steel"), Acme Packaging Corporation, a
Delaware corporation ("Acme Packaging") and Alpha Tube Corporation, a Delaware
corporation ("Alpha Tube") (Acme Steel, Acme Packaging and Alpha Tube are being
hereinafter referred to collectively as the "Borrowers" and individually as a
"Borrower") and you (the "Lenders") as amended by that certain First Amendment
to Amended and Restated Credit Agreement dated as of March 18, 1998 (said
Amended and Restated Credit Agreement, as so amended, being hereinafter referred
to as the "Credit Agreement"). All capitalized terms used herein without
definition shall have the same meanings herein as such terms have in the Credit
Agreement.
The Borrowers have requested that the Lenders make certain amendments to
the Credit Agreement, and the Lenders are willing to do so under the terms and
conditions set forth in this Amendment.
1. AMENDMENTS.
Upon the satisfaction of the conditions precedent set forth in Section 3
hereof, the Credit Agreement shall be and hereby is amended as follows:
(a) Section 7.13(c) of the Credit Agreement shall be amended by
inserting the following new sentence immediately at the end thereof:
"Also notwithstanding anything herein to the contrary, Alpha Tube may
make Restricted Payments to Acme Packaging if at the time
<PAGE> 2
each such Restricted Payment is made and immediately after giving
effect thereto, no Event of Default or (if arising under Sections
8.1(a) or 8.1(n) hereof or as a result of noncompliance with any of
Sections 7.7, 7.8 or 7.9 hereof) Default occurs or is continuing."
2. WAIVER.
The Company acknowledges that prior to giving effect to this Amendment, the
Company is not in compliance with its obligations under Section 7.13 of the
Credit Agreement by reason of the payment of dividends by Universal Tool and/or
Alpha Tube to Acme Packaging in 1996, 1997 and 1998 and the overpayment of
dividends by Universal Tool to Acme Packaging in 1996 by the amount of
$1,249,000 (the "Corrected Overpayment") and by Acme Packaging to the Company in
1997 by the amount of $1,695,000 (such $1,695,000 amount being referred to as
the "Uncorrected Overpayment") (collectively, the "Non-Complying Events"). Acme
Packaging hereby represents and warrants to the Lenders that the Corrected
Overpayment was rectified in 1997 by Universal Tool's reduction in the amount of
dividends it would otherwise have paid to Acme Packaging and that the 1997
dividend to be paid in 1998 by Acme Packaging to the Company shall be reduced by
the amount of the Uncorrected Overpayment. Upon the effectiveness of this
Amendment as hereinafter set forth and in reliance upon the foregoing
representations by Acme Packaging, the Lenders hereby waive the Non-Complying
Events and consent to the correction of the Corrected Overpayment as set forth
above. The foregoing waiver and consent are expressly limited to the matters
stated herein.
3. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
(a) The Borrowers and the Lenders shall have executed and delivered
this Amendment.
(b) Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Lenders and their counsel.
4. REPRESENTATIONS.
In order to induce the Lenders to execute and deliver this Amendment, the
Borrowers hereby represent to the Lenders that as of the date hereof, the
representations and warranties set forth in Section 5 of the Credit Agreement
are and shall be and remain true and correct (except that the representations
contained in Section 5.6 shall be deemed to refer to the most recent financial
statements of the Company delivered to the Lenders) and the Borrowers are in
full compliance with all of the terms and conditions of the Credit Agreement and
no Default or Event of Default (other than the Non-Complying Events being waived
pursuant to
-2-
<PAGE> 3
Section 2 hereof) has occurred and is continuing under the Credit Agreement or
shall result after giving effect to this Amendment.
5. MISCELLANEOUS.
(a) Except as specifically amended herein, the Credit Agreement shall
continue in full force and effect in accordance with its terms. Reference to
this specific Amendment need not be made in the Credit Agreement, or any other
instrument or document executed in connection therewith, or in any certificate,
letter or communication issued or made pursuant to or with respect to the Credit
Agreement, any reference in any of such items to the Credit Agreement being
sufficient to refer to the Credit Agreement as amended hereby.
(b) The Borrowers agree to pay on demand all costs and expenses of or
incurred by the Agent in connection with the negotiation, preparation, execution
and delivery of this Amendment, including the fees and expenses of counsel for
the Agent.
(c) This Amendment may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
Dated as of this 11th day of May, 1998.
ACME STEEL COMPANY
By
------------------------------------
Its
---------------------------------
ACME PACKAGING CORPORATION
By
------------------------------------
Its
---------------------------------
ALPHA TUBE CORPORATION
By
------------------------------------
Its
---------------------------------
ACME METALS INCORPORATED
By
------------------------------------
Its
---------------------------------
-3-
<PAGE> 4
Accepted and agreed to as of the date and year last above written.
HARRIS TRUST AND SAVINGS BANK
By
------------------------------------
Its Vice President
---------------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By
------------------------------------
Its
---------------------------------
MERCANTILE BANK NATIONAL ASSOCIATION
By
------------------------------------
Its
---------------------------------
THE BANK OF NOVA SCOTIA
By
------------------------------------
Its
---------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By
------------------------------------
Its
---------------------------------
-4-
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT
FIRST AMENDMENT (this "Amendment"), dated as of May 4, 1998, among ACME
METALS INCORPORATED (the "Borrower"), the lenders party to the Credit Agreement
referred to below (the "Lenders"), BANKERS TRUST COMPANY, as Administrative
Agent (the "Administrative Agent") and MORGAN STANLEY SENIOR FUNDING, INC., as
Syndication Agent and Arranger (the "Syndication Agent"). All capitalized terms
used herein and not otherwise defined herein shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, the Administrative Agent and the
Syndication Agent are parties to a Credit Agreement, dated as of December 18,
1997 (as amended, modified or supplemented to, but not including, the date
hereof, the "Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided; and
WHEREAS, subject to the terms and conditions of this Amendment. the parties
hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. The definition of Consolidated EBITDA appearing in Section 9.01 of the
Credit Agreement is hereby amended by (i) deleting the word "and" appearing at
the end of clause (ii) thereof and inserting a comma in lieu thereof and (ii)
inserting the following new clause (iv) at the end thereof:
"and (iv) for any Test Period which includes the first fiscal quarter of
the Borrower in its fiscal year 1998, the $12,000,000 gain resulting from
the sale of Universal Tool & Stamping in such fiscal quarter to the extent
that such gain is not already included in the computation of Consolidated
EBITDA for any such Test Period (it being understood and agreed, however,
that the adjustment provided for in this clause (iv) shall only apply for
determining compliance with Sections 7.09, 7.1O, 7.11 and 7.12 and not for
purposes of determining the Applicable Base Rate Margin or the Applicable
Eurodollar Rate Margin)".
2. The definition of Consolidated Cash Interest Expense appearing in
Section 9.01 of the Credit Agreement is hereby amended by inserting the
following proviso at the end thereof:
<PAGE> 2
", provided that any commitment fee payable under Section 3.1 of the
Working Capital Facility shall be excluded from Consolidated Cash Interest
Expense to the extent same would otherwise have been included therein".
3. Schedule 5.22 of the Credit Agreement is hereby amended by inserting
the following two items of Indebtedness which were existing on the Effective
Date as Existing Indebtedness but did not appear on Schedule 5.22:
"Letter of Credit in the face amount of $250,000.
Letter of Credit in the face amount of $ 12,000."
4. Schedule 7.01 of the Credit Agreement is hereby amended by inserting
the following Lien which was existing on the Effective Date but did not appear
on Schedule 7.01:
"Certificate of Deposit in the amount of $262,000 securing two letters of
credit in the aggregate face amount of $262,000, which letters of credit
constitute Existing Indebtedness."
5. This Amendment shall become effective on the date (the "Amendment
Effective Date") when the Borrower, the Administrative Agent and the Required
Lenders shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office.
6. In order to induce the Lenders to enter into this Amendment, the
Borrower hereby represents and warrants that:
(a) no Default or Event of Default exists on the Amendment Effective Date,
after giving effect to this Amendment; and
(b) on the Amendment Effective Date, after giving effect to this
Amendment, all representations and warranties contained in the Credit Agreement
and in the other Credit Documents are true and correct in all material respects
as though such representations and warranties were made on the Amendment
Effective Date.
7. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be delivered to the Borrower and the Administrative Agent.
8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
-2-
<PAGE> 3
9. From and after the Amendment Effective Date, all references in the
Credit Agreement and each of the other Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as amended hereby.
10. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
* * *
-3-
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
ACME METALS INCORPORATED
By:
-------------------------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By:
-------------------------------------------
Title:
MORGAN STANLEY SENIOR FUNDING, INC.,
Individually and as Syndication Agent
and Arranger
By:
-------------------------------------------
Title:
SANWA BUSINESS CREDIT CORPORATION
By:
-------------------------------------------
Title:
<PAGE> 5
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By:
-------------------------------------------
Title:
GCB INVESTMENT PORTFOLIO
By: Citibank, N.A.
By:
-------------------------------------------
Title:
KZH HOLDING CORPORATION III
By:
-------------------------------------------
Title:
FLOATING RATE PORTFOLIO
By: Chancellor LGT Senior Secured
Management, Inc., as Attorney-in-fact
By:
-------------------------------------------
Title:
<PAGE> 6
AMARA-1 FINANCE LTD.
By:
-------------------------------------------
Title:
CERES FINANCE LTD.
By:
-------------------------------------------
Title:
CAPTIVA FINANCE LTD.
By:
-------------------------------------------
Title:
STRATA FUNDING LTD
By:
-------------------------------------------
Title:
<PAGE> 7
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:
-------------------------------------------
Title:
STANFIELD CAPITAL PARTNERS
By:
-------------------------------------------
Title:
<PAGE> 1
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Sirs:
We are aware that Acme Metals Incorporated has included our report dated May 7,
1998 (issued pursuant to the provisions of Statement on Auditing Standards No.
71) in the Prospectuses constituting part of its Registration Statements on Form
S-8 (Nos. 33-17235, 33-19437 and 33-30841) and in its Registration Statements on
Form S-8 (Nos. 33-38747 and 33-59627). We are also aware of our responsibilities
under the Securities Act of 1933.
Very truly yours,
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Chicago, Illinois
May 12, 1998
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Unaudited Consolidated Balance Sheets at March 29, 1998 and Unaudited
Consolidated Statements of Operations from the Three Months Ended March 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 14,669
<SECURITIES> 0
<RECEIVABLES> 70,090
<ALLOWANCES> 1,305
<INVENTORY> 64,408
<CURRENT-ASSETS> 165,759
<PP&E> 870,363
<DEPRECIATION> (323,118)
<TOTAL-ASSETS> 818,116
<CURRENT-LIABILITIES> 93,714
<BONDS> 419,433
0
0
<COMMON> 11,680
<OTHER-SE> 173,452
<TOTAL-LIABILITY-AND-EQUITY> 818,116
<SALES> 144,996
<TOTAL-REVENUES> 144,996
<CGS> 139,158
<TOTAL-COSTS> 149,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,937)
<INCOME-PRETAX> (2,575)
<INCOME-TAX> (900)
<INCOME-CONTINUING> (1,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,675)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
