<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 September 27, 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: November 5, 1998:
11,675,909.
===============================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------ -----------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 103,460 $ 115,250 $ 372,795 $ 364,051
Costs and expenses:
Cost of products sold 98,777 105,653 337,259 337,980
Depreciation expense 9,224 9,311 27,755 29,257
----------- ----------- ----------- ----------
Gross margin (4,541) 286 7,781 (3,186)
Selling and administrative expense 9,278 9,433 28,613 29,766
----------- ----------- ----------- ----------
Operating loss (13,819) (9,147) (20,832) (32,952)
Non-operating income (expense):
Interest expense (10,931) (10,482) (32,678) (30,377)
Interest income 268 19 897 479
Other-net (187) 12,257 (311)
----------- ----------- ----------- ----------
Loss before income taxes (24,482) (19,797) (40,356) (63,161)
Income tax (benefit) provision 68,174 (9,257) 62,618 (24,001)
----------- ----------- ----------- ----------
Net loss $ (92,656) $ (10,540) $ (102,974) $ (39,160)
Loss Per Share:
Basic:
Net loss $ (7.94) $ (0.91) $ (8.82) $ (3.37)
----------- ----------- ----------- -----------
Weighted average outstanding shares 11,676,425 11,629,281 11,672,654 11,628,556
============ ============ =========== ==========
Diluted:
Net loss $ (7.94) $ (0.91) $ (8.82) $ (3.37)
------------ ------------ ----------- ------------
Weighted average outstanding shares 11,676,425 11,629,281 11,672,654 11,628,556
============ ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement
2
<PAGE> 3
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
September 27, December 28,
1998 1997
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 13,390 $ 6,454
Accounts receivable trade, less allowances of $1,377, and
$1,296, respectively .......................................... 53,269 59,646
Inventories .................................................... 75,687 81,630
Income tax receivable .......................................... 230 24,936
Net assets held for sale ....................................... 3,808
Deferred income taxes .......................................... 14,082
Other current assets ........................................... 1,704 1,887
----------- ------------
Total current assets ........................................ 144,280 192,443
----------- ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies ............................ 18,717 17,395
Other assets ................................................... 21,520 20,357
Deferred income taxes .......................................... 48,536
----------- ------------
Total investments and other assets .......................... 40,237 86,288
----------- ------------
Property, plant and equipment:
Property, plant and equipment .................................. 899,902 864,192
Accumulated depreciation ....................................... (342,285) (313,842)
----------- ------------
Total property, plant and equipment ......................... 557,617 550,350
----------- ------------
$ 742,134 $ 829,081
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ $ 64,691
Accrued expenses ............................................... 26,176 34,109
Current installments of long-term debt ......................... 1,500
----------- ------------
Total current liabilities ................................... 26,176 100,300
----------- ------------
LONG-TERM LIABILITIES:
Long-term debt ................................................. 233,463 423,243
Other long-term liabilities .................................... 17,791
Postretirement benefits other than pensions .................... 97,235 95,814
Retirement benefit plans ....................................... 5,911 5,590
----------- ------------
Total long-term liabilities ................................. 336,609 542,438
----------- ------------
LIABILITIES SUBJECT TO COMPROMISE.................................. 295,568
----------- ------------
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, 11,672,654 and 11,627,380 shares issued and
outstanding, respectively .................................... 11,676 11,627
Additional paid-in capital ..................................... 165,971 165,608
Retained earnings (accumulated deficit) ........................ (81,547) 21,427
Accumulated other comprehensive loss ........................... (12,319) (12,319)
----------- ------------
Total shareholders' equity .................................. 83,781 186,343
----------- ------------
$ 742,134 $ 829,081
=========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For The Nine Months Ended
------------------------------
September 27, September 28,
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(102,974) $(39,160)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Gain on assets held for sale (12,000)
Depreciation 28,633 29,751
Accretion of Senior Discount Notes 8,803
Deferred income taxes 62,618
CHANGE IN CURRENT ASSETS AND LIABILITIES:
Receivables 9,860 (6,542)
Inventories 7,247 (272)
Accounts payable (8,495) (14,489)
Other current accounts 11,880 (1,672)
Pension contribution (3,691)
Income tax receivable 24,706 (16,320)
Other, net (3,544) 917
--------- --------
Net cash (used for) provided by operating activities 17,931 (42,675)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (331)
Sales and/or maturities of investments 12,148
Capital expenditures (23,025) (31,475)
--------- --------
Net cash used for investing activities (23,025) (19,658)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (1,250)
Proceeds for, assets held for sale 18,000
Borrowings under revolving credit agreement 129,750 73,500
Repayments of revolving credit agreement (134,750) (38,000)
Payments of capital lease (131)
Other 411 324
--------- --------
Net cash provided by financing activities 12,030 35,824
--------- --------
Net increase (decrease) in cash and cash equivalents 6,936 (26,509)
Cash and cash equivalents at beginning of period 6,454 33,224
--------- --------
Cash and cash equivalents at end of period $ 13,390 $ 6,715
========= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements for Acme Metals
Incorporated include its wholly owned subsidiaries including Acme Steel Company
("Acme Steel"), Acme Packaging Corporation ("Acme Packaging"), and Alpha Tube
Corporation ("Alpha Tube"), hereinafter collectively referred to as "the
Company," for the periods ended September 27, 1998 and September 28, 1997. The
statements should be read in conjunction with the audited financial statements
included in the Company's 1997 Annual Report on Form 10-K. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of such financial statements have been included.
The financial statements have been subjected to a limited review by
PricewaterhouseCoopers LLP, the Company's independent accountants. 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.
Third quarter results for 1998 and 1997 cover 13-week periods.
REORGANIZATION UNDER CHAPTER 11, BANKRUPTCY PROCEEDINGS:
On September 28, 1998, Acme Metals Incorporated and its subsidiary companies,
Acme Steel, Acme Packaging, Alpha Tube, Alabama Metallurgical Corporation and
Acme Steel Company International, Inc., voluntarily filed separate petitions for
protection under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy Code")
in the U.S. Bankruptcy Court for the District of Delaware. These petitions are
being jointly administered under Case 98-2179 pursuant to Rule 1015(b) of the
Federal Rules of Bankruptcy Procedure. The Company is in possession of its
properties and assets and continues to operate with its existing directors and
officers as debtors-in-possession ("DIP") subject to the Bankruptcy Court's
("Court") supervision and orders.
Pursuant to the provisions of the Bankruptcy Code, all of the Company's
liabilities as of September 28, 1998 were automatically stayed. Moreover, absent
approval from the Court, the Company is prohibited from paying any pre-petition
obligations. As debtors-in-possession, the Company has the right, subject to
Court approval and certain other conditions, to assume or reject any
pre-petition executory contracts and unexpired leases. Parties affected by such
rejections may file pre-petition claims with the Court in accordance with
bankruptcy procedures. The Court has approved payment of certain pre-petition
liabilities such as employee wages and benefits and certain specified
pre-petition obligations to vendors, customers, and taxing authorities.
Additionally, the Court has allowed for the retention of legal and financial
professionals.
The Company intends to present a plan of reorganization to the Court to
reorganize the Company's businesses and to restructure the Company's long-term
debt and trade obligations. Under the provisions of the Bankruptcy Code, the
Company has the exclusive right to file such plan at any time during the 120 day
period following September 28, 1998. The exclusive filing time period may be
extended by the Court at the Company's request.
5
<PAGE> 6
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Although the Chapter 11 filing raises substantial doubt about the Company's
ability to continue as a going-concern, the accompanying financial statements
have been prepared on a going-concern basis. This basis contemplates the
continuity of operations, realization of assets, and discharge of liabilities in
the ordinary course of business. Specifically, the statements do not present the
amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Chapter 11 reorganization case. A plan of
reorganization could materially change the amounts currently disclosed in the
financial statements.
Under Chapter 11, the rights of and ultimate payment by the Company to
prepetition creditors may be substantially altered. This could result in claims
being liquidated in the Chapter 11 proceedings at less (and possibly
substantially less) than 100 percent of their face value. At this time, because
of material uncertainties, these results are not reflected in the accompanying
financial statements. Although the actual filing for Chapter 11 reorganization
occurred after the end of the third quarter, the balance sheet reflects the
classification of liabilities as if the filing occurred on September 27, 1998.
DIP FINANCING:
In connection with the Company's Chapter 11 filing, the Company is currently
finalizing a Revolving Credit Agreement ("DIP Financing Agreement") with
BankAmerica Business Credit, Inc. ("BankAmerica") for a maximum of $100 million
subject to borrowing base limitations based on inventory and accounts
receivable. The DIP Financing Agreement is intended to support the Company's
operations during Chapter 11 proceedings, and to expire September 29, 2000 or
upon Court approval of the Company's plan of reorganization.
The DIP Financing Agreement would provide for borrowing under a revolving line
of credit and a letter of credit facility. The DIP Financing Agreement would be
collateralized by substantially all of the assets of the Company. The borrowings
will bear an interest rate equal to a fluctuating per annum rate ranging from
.50 percent to 1.00 percent based on the amount of borrowings plus the Reference
Rate as defined by Bank of America N.T. & S.A., San Francisco, California ("Bank
of America"). At the Company's option, the interest rate will be the applicable
margin (ranging from 1.75 percent to 3.00 percent based on the amount of
borrowings) plus the one month, two month, three month, or six month LIBOR rate
as quoted by Bank of America.
Covenants of the DIP Financing Agreement generally restrict creating additional
liens on its assets, creating any claims superior to those of BankAmerica,
paying pre-petition obligations, merging or consolidating with any person, or
selling assets. Additionally, the DIP Financing Agreement will restrict new debt
and payment of reclamation liens. Moreover, the Company will be required to
maintain financial covenants.
6
<PAGE> 7
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEGMENT INFORMATION:
The Company presents its operations in two segments, Steel Making and Steel
Fabricating.
Steel Making operations, conducted through Acme Steel, include the manufacture
of flat rolled steel 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, Alpha Tube,
and, until March 9, 1998, Universal Tool & Stamping Company, Inc. ("Universal").
Acme Packaging manufactures, 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. Principal markets of the Steel
Fabricating Segment include agricultural, automotive, brick, construction,
forest and paper products, appliance, heating and cooling equipment, household
and leisure equipment, truck exhaust, and wholesalers.
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 (loss) from operations consists of total sales
less operating expenses.
7
<PAGE> 8
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
For The For The
Three Months Ended Nine Months Ended
--------------------------- -------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
--------- ---------- ---------- ----------
(in thousands, except for shipment and production statistics)
<S> <C> <C> <C> <C>
Net Sales:
Steel Making:
Sales to unaffiliated customers $ 44,482 $ 44,495 $ 188,794 $ 148,825
Intersegment sales 22,271 23,620 67,039 73,405
--------- --------- --------- ----------
66,753 68,115 255,833 222,230
Steel Fabricating:
Sales to unaffiliated customers 58,978 70,755 184,001 215,226
Intersegment sales 157 221 547 798
--------- --------- --------- ----------
59,135 70,976 184,548 216,024
Eliminations (22,428) (23,841) (67,586) (74,203)
--------- --------- --------- ----------
Total $ 103,460 $ 115,250 $ 372,793 $ 364,051
--------- --------- --------- ----------
Income (loss) from Operations:
Steel Making $ (19,209) $ (16,451) $ (38,507) $ (53,047)
Steel Fabricating 5,390 7,304 17,675 20,095
--------- --------- --------- ----------
Total $ (13,819) $ (9,147) $ (20,832) $ (32,952)
--------- --------- --------- ----------
Depreciation:
Steel Making $ 8,518 $ 8,529 $ 25,485 $ 26,824
Steel Fabricating 1,166 990 3,104 2,916
Corporate 18 3 54 11
--------- --------- --------- ----------
Total $ 9,702 $ 9,522 $ 28,643 $ 29,751
--------- --------- --------- ----------
Capital Expenditures:
Steel Making $ 5,504 $ 4,364 $ 10,612 $ 23,144
Steel Fabricating 375 2,553 9,354 6,388
Corporate 15,690 4 15,832 57
--------- --------- --------- ----------
Total $ 21,569 $ 6,921 $ 35,798 $ 29,589
--------- --------- --------- ----------
Operating Data (in tons)
Steel Production (hot band) 166,963 184,096 619,554 543,387
Steel Shipments (flat roll) 161,806 141,980 627,232 464,050
</TABLE>
8
<PAGE> 9
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES:
Inventories as determined on the last-in, first-out method are summarized as
follows:
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------- -------------
(unaudited)
(in thousands)
<S> <C> <C>
Raw materials $ 13,674 $ 13,510
Semi-finished and finished products 55,091 62,126
Supplies 6,922 5,994
------------- -------------
$ 75,687 $ 81,630
------------- -------------
</TABLE>
INCOME TAXES:
As a result of the losses incurred to date, the related negative effect on the
Company's overall liquidity position and the Chapter 11 filing on September 28,
1998, the Company recorded a valuation allowance against its entire net deferred
assets.
PROPERTY, PLANT AND EQUIPMENT:
As a result of its Chapter 11 bankruptcy filing, the Company recorded an
obligation for future payments under a lease for property used by Alpha Tube and
a computer related lease. These leases were formerly treated as operating
leases.
9
<PAGE> 10
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
LONG-TERM DEBT:
The Company's long-term debt (including current maturities) not subject to
compromise at September 27, 1998 and December 28, 1997 is summarized as follows:
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------- -------------
(unaudited)
(in thousands)
<S> <C> <C>
10.875 percent Senior Unsecured Notes, net of discount $ 198,506
Senior Secured Credit Agreement $ 174,250 175,000
12.5 percent Senior Secured Notes 17,623 17,623
13.5 percent Senior Secured Discount Notes 669 669
Note Payable 6,000
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
Alpha Tube obligation 14,700
Capitalized leases 6,291 2,015
----------- -----------
$ 233,463 $ 424,743
=========== ===========
</TABLE>
As a result of the Chapter 11 bankruptcy filing, all long-term debt is in
default.
LIABILITIES SUBJECT TO COMPROMISE:
Liabilities expected to be settled as part of a Plan of reorganization are
classified as "Liabilities subject to compromise" and include the following
liabilities at September 27, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $ 53,939
Accrued taxes 3,632
Accrued employee benefits 1,335
Workers' compensation 2,653
Accrued professional fees 634
Other accrued liabilities 6,208
Interest payable 6,598
10.875 percent Senior Unsecured Notes, net of discount 198,581
Note payable 5,500
Other long-term liabilities 16,488
----------
$ 295,568
==========
</TABLE>
CASH FLOWS:
Cash payments for interest expense were $23.0 million during the first nine
months of 1998 and $21.0 million in the first nine months of 1997. Accrued
payments to the general contractor for the
10
<PAGE> 11
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
New Facility at September 27, 1998 and September 28, 1997 include accounts
payable of $9.1 million and $10.1 million, respectively, while the accrual at
December 28, 1997 was $15.5 million. Due to the non-cash nature of such payables
at each date they have been excluded from the Statements of Cash Flows.
COMPREHENSIVE INCOME:
During the quarter ending 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. There was no
recorded effect on equity due to the adoption of SFAS No. 130 through the first
nine months of 1998.
COMMITMENTS AND CONTINGENCIES:
Under the Bankruptcy Code, actions by creditors to collect prepetition
indebtedness are stayed and other contractual obligations may not be enforced
against the Company. As debtors-in-possession, the Company has the right,
subject to Bankruptcy Court approval and certain other limitations, to assume or
reject executory contracts and unexpired leases. In this context, "rejection"
means that the debtor companies are relieved from their obligations to perform
further under the contract or lease but are subject to a claim for damages for
the breach thereof. Any damages resulting from rejection are treated as
pre-petition general unsecured claims in the reorganization. The parties
affected by these rejections may file claims with the Bankruptcy Court in
accordance with bankruptcy procedures. Prepetition claims which were contingent
or unliquidated at the commencement of the Chapter 11 proceeding are generally
allowable against the debtor-in-possession in amounts fixed by the Bankruptcy
Court.
11
<PAGE> 12
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
GUARANTOR'S 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 were offered pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Act"). See Exhibit 4.17 to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1997. In June, 1998, the Company
registered 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 SEPTEMBER 27, 1998
------------------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 66,753 $ 59,135 $ (22,428) $ 103,460
Cost and expenses 81,297 49,132 (22,428) 108,001
------------ --------------- ------------- --------------- -----------------
Gross margin (14,544) 10,003 (4,541)
Selling and administrative expense 4,665 4,613 9,278
------------ --------------- ------------- --------------- -----------------
Operating income (loss) (19,209) 5,390 (13,819)
Net interest income (expense) and
other 4,692 (14,598) (757) (10,663)
----------- --------------- ------------- --------------- ------------------
Income (loss) before income taxes 4,692 (33,807) 4,633 (24,482)
Income tax provision 26,695 30,127 11,352 68,174
------------ --------------- ------------- --------------- -----------------
Net loss before before equity
adjustment (22,003) (63,934) (6,719) (92,656)
Equity loss in subsidiaries (70,653) 70,653
============ =============== ============= =============== =================
Net income (loss) $ (92,656) $ (63,934) $ (6,719) $ 70,653 $ (92,656)
============ =============== ============= =============== =================
</TABLE>
12
<PAGE> 13
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 1997
----------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales $ 68,115 $ 70,976 $ (23,841) $ 115,250
Cost and expenses 79,845 58,960 (23,841) 114,964
------------ ------------- ------------- -------------- --------------
Gross margin (11,730) 12,016 286
Selling and administrative 4,720 4,712 9,433
------------ ------------- ------------- -------------- --------------
Operating income (loss) (16,451) 7,304 (9,147)
Net interest income (expense) and other 4,951 (14,524) (1,077) (10,650)
------------ ------------- ------------- -------------- --------------
Income (loss) before income taxes 4,951 (30,975) 6,227 (19,797)
Income tax provision (benefit) 2,606 (14,576) 2,713 (9,257)
------------ ------------- ------------- -------------- --------------
Net income (loss) before equity
adjustment 2,345 (16,399) 3,514 (10,540)
Equity loss in subsidiaries (12,885) 12,885
------------ ------------- ------------- -------------- --------------
Net income (loss) $ (10,540) $ (16,399) $ 3,514 $ 12,885 $ (10,540)
============ ============= ============== =============== ===============
</TABLE>
13
<PAGE> 14
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998
------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 255,834 $ 184,548 $ $ 372,796
(67,586)
Cost and expenses 279,477 153,124 (67,586) 365,015
----------- ------------ ------------ ------------- --------------
Gross margin (23,643) 31,424 7,781
Selling and administrative expense 14,864 13,749 28,613
----------- ------------ ------------ ------------- --------------
Operating income (loss) (38,507) 17,675 (20,832)
Interest income (expense) and
other 12,955 (42,105) 9,626 (19,524)
----------- ------------ ------------ ------------- --------------
Income (loss) before income taxes, 12,955 (80,612) 27,301 (40,356)
Income tax provision 29,732 13,782 19,104 62,618
----------- ------------ ------------ ------------- --------------
Net income (loss) before equity
adjustment (16,777) (94,394) 8,197 (102,974)
Equity loss in subsidiaries (86,197) 86,197
----------- ------------ ------------ ------------- --------------
Net income (loss) $ (102,974) $ (94,394) $ 8,197 $ 86,197 $ (102,974)
=========== ============ ============ ============= ==============
</TABLE>
14
<PAGE> 15
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
----------------------------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 222,230 $ 216,024 $ (74,203) $ 364,051
Cost and expenses 260,732 180,708 (74,203) 367,237
-------------- --------------- ----------------- ---------------- -----------------
Gross margin (38,502) 35,316 (3,186)
Selling and administrative 14,545 15,221 29,766
-------------- --------------- ---------------- ---------------- -----------------
Operating income (loss) (53,047) 20,095 (32,952)
Net interest income (expense)
and other 14,293 (41,974) (2,528) (30,209)
-------------- --------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 14,293 (95,021) 17,567 (63,161)
Income tax provision (benefit) 5,431 (36,108) 6,676 (24,001)
-------------- --------------- ----------------- ---------------- -----------------
Net income (loss) before equity
adjustment 8,862 (58,913) 10,891 (39,160)
Equity loss in subsidiaries (48,022) 48,022
-------------- --------------- ----------------- ---------------- -----------------
Net income (loss)
$ (39,160) $ (58,913) $ 10,891 $ 48,022 $ (39,160)
============== =============== ================= =============== =================
</TABLE>
15
<PAGE> 16
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 27, 1998
---------------------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
ASSETS PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,056 $ $ 334 $ $ 13,390
Accounts receivable, net 41 21,004 32,224 53,269
Income tax receivable 230 230
Inventories 50,966 26,194 (1,473) 75,687
Deferred income taxes
Other current assets 415 1,253 36 1,704
Due to (from) affiliates 547,958 (506,044) (43,387) 1,473
----------- ------------ ----------- ----------- --------------
Total current assets 561,700 (432,821) 15,401 - 144,280
----------- ------------ ----------- ----------- --------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies (46,095) 18,717 46,095 18,717
Other assets 15,908 3,894 1,718 21,520
Deferred income taxes
----------- ------------ ----------- ----------- -------------
Total investments and other assets (30,187) 22,611 1,718 46,095 40,237
----------- ------------ ----------- ----------- -------------
PROPERTY, PLANT AND EQUIPMENT- Net: 15,970 507,202 34,445 557,617
----------- ------------ ----------- ----------- -------------
$ 547,483 $ 96,992 $ 51,564 $ 46,095 $ 742,134
=========== ============ =========== =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,552 $ 16,466 $ 4,158 $ $ 26,176
Current maturities of long-term debt
----------- ------------ ----------- ------------ -------------
Total current liabilities 5,552 16,466 4,158 26,176
----------- ------------ ----------- ------------ -------------
LONG-TERM LIABILITIES:
Long-term debt 233,463 233,463
Other long-term liabilities
Postretirement benefits other than pensions 1,740 81,154 14,341 97,235
Retirement benefit plans 2,456 4,844 (1,389) 5,911
----------- ------------ ----------- ------------ -------------
Total long-term liabilities 237,659 85,998 12,952 336,609
----------- ------------ ----------- ------------ -------------
LIABILITIES SUBJECT TO COMPROMISE 220,491 60,868 14,209 295,568
SHAREHOLDERS' EQUITY (DEFICIT): 83,781 (66,340) 20,245 46,095 83,781
----------- ------------ ----------- ------------ -------------
$ 547,483 $ 96,992 $ 51,564 $ 46,095 $ 742,134
=========== ============ =========== ============ =============
</TABLE>
16
<PAGE> 17
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
AS OF 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
CURRENT LIABILITIES:
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
------------- ----------- ------------- ------------ --------------
431,937 97,341 13,160 542,438
Total long-term liabilities ------------- ----------- ------------- ------------ --------------
SHAREHOLDERS' EQUITY (DEFICIT): 186,343 28,054 32,828 (60,882) 186,343
------------- ----------- ------------- ------------ --------------
$ 624,437 $ 205,205 $ 60,321 $ (60,882) $ 829,081
============= =========== ============= ============= ==============
</TABLE>
17
<PAGE> 18
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 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 $ (7,243) $ 19,458 $ 5,716 $ $ 17,931
------------- ------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (142) (16,974) (5,909) (23,025)
------------- ------------ ------------ ------------ -------------
Net cash used for investing activities (117) (16,974) (5,909) (23,025)
------------- ------------ ------------ ------------ -------------
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 (750) (500) (1,250)
Proceeds from assets held for sale 18,000 18,000
Payment of capital lease (131) (131)
Payment of intercompany dividend 20,780 (20,780)
Other 411 411
------------- ------------ ------------ ------------ -------------
Net cash (used for) provided by financing
activities 20,441 (5,500) (2,911) 12,030
------------- ------------ ------------ ------------ -------------
Net increase (decrease) in cash and
cash equivalents 13,056 (3,016) (3,104) 6,936
Cash and cash equivalents at
beginning of period 3,016 3,438 6,454
------------- ------------ ------------ ------------ -------------
Cash and cash equivalents at $ 13,056 $ $ 334 $ $ 13,390
end of period ============= ============ ============ ============ =============
</TABLE>
18
<PAGE> 19
ACME METALS INCORPORATED
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
----------------------------------------------------------------
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (USED FOR) PROVIDED BY
OPERATING ACTIVITIES $ (51,771) $ (10,777) $ 19,873 $ $ (42,675)
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and/or maturities of
investments, net of purchases 11,817 11,817
Capital expenditures (57) (25,030) (6,388) (31,475)
------------ ------------ ----------- ----------- ------------
Net cash (used for) provided by investing
activities 11,760 (25,030) (6,388) (19,658)
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 67,500 6,000 73,500
Repayments of revolving credit agreement (38,000) (38,000)
Payment of intercompany dividend 18,300 18,300
Exercise of stock options and other 324 324
------------ ------------ ----------- ----------- ------------
Net cash provided (used for) by financing
activities 18,624 29,500 (12,300) 35,824
------------ ------------ ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents (21,387) (6,307) 1,185 (26,509)
Cash and cash equivalents at
beginning of period 24,306 6,307 2,611 33,224
------------ ------------ ----------- ----------- ------------
Cash and cash equivalents at
end of period $ 2,919 $ $ 3,796 $ $ 6,715
============ ============ =========== =========== ============
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
SIGNIFICANT EVENT
On September 28, 1998, Acme Metals Incorporated and its subsidiary companies,
Acme Steel, Acme Packaging, Alpha Tube, Alabama Metallurgical Corporation and
Acme Steel Company International, Inc., voluntarily filed separate petitions for
protection under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy Code")
in the U.S. Bankruptcy Court for the District of Delaware. These petitions are
being jointly administered under Case 98-2179 pursuant to Rule 1015(b) of the
Federal Rules of Bankruptcy Procedure. The Company is in possession of its
properties and assets and continues to operate with its existing directors and
officers as debtors-in-possession ("DIP") subject to the Bankruptcy Court's
("Court") supervision and orders.
Pursuant to the provisions of the Bankruptcy Code, all of the Company's
liabilities as of September 28, 1998 were automatically stayed. Moreover, absent
approval from the Court, the Company is prohibited from paying any pre-petition
obligations. As debtors-in-possession, the Company has the right, subject to
Court approval and certain other conditions, to assume or reject any
pre-petition executory contracts and unexpired leases. Parties affected by such
rejections may file pre-petition claims with the Court in accordance with
bankruptcy procedures. The Court has approved payment of certain pre-petition
liabilities such as employee wages and benefits and certain specified
pre-petition obligations to vendors, customers, and taxing authorities.
Additionally, the Court has allowed for the retention of legal and financial
professionals.
The Company intends to present a plan of reorganization to the Court to
reorganize the Company's businesses and to restructure the Company's long-term
debt and trade obligations. Under the provisions of the Bankruptcy Code, the
Company has the exclusive right to file such plan at any time during the 120 day
period following September 28, 1998. The exclusive filing time period may be
extended by the Court at the Company's request.
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. During the first nine months of 1998, Acme Steel's product
mix continued 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 prior
year start-up issues at the New Facility, and imports of foreign steel creating
a significant oversupply in the steel market.
In addition, ongoing production cost inefficiencies resulting from the New
Facility operating at less than planned production levels (e.g., higher than
anticipated unplanned delay rates and slower than
22
<PAGE> 21
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 of the New Facility and adverse mix of products sold
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, despite a decrease in sales volume. The operating income of
these companies partially offset the operating losses of Acme Steel during the
first nine months of 1998 and was relatively unaffected by the transitional
issues faced by the Steel Making Segment.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
------------------------- ----------------------
Sept. 27, Sept. 28, 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 90.5 92.8 91.3 86.7 81.3
Depreciation expense 7.4 8.0 7.9 3.2 2.5
-------- --------- -------- -------- --------
Gross margin 2.1 (0.8) 0.8 10.1 16.2
Training and Pre-start-up-New Facility 2.0
Selling and administrative expense 7.7 8.2 8.0 7.1 6.8
-------- --------- -------- -------- --------
Operating income (loss) (5.6) (9.0) (7.2) 1.0 9.4
Interest expense, net (8.5) (8.2) (8.4) (0.1) (1.3)
Other non-operating income (expense), net 3.3 (0.1) 0.1 0.3
Income tax (benefit) provision 16.8 (6.6) (5.9) 0.5 0.3
-------- --------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (27.6) (10.7) (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) (27.6)% (10.7)% (15.8)% 0.5% 5.4%
-------- --------- -------- -------- --------
</TABLE>
Third Quarter 1998 as compared to Third Quarter 1997
NET SALES. Consolidated net sales of $103.5 million in the third quarter of 1998
were $11.8 million lower than third quarter 1997 net sales. Both the Steel
Making Segment and the Steel Fabricating Segment experienced lower sales.
Steel Making Segment. Net sales for the Steel Making Segment were $66.8 million
in the third quarter of 1998, a $1.4 million, or 2.0 percent, decrease from last
year's comparable period. Sales to unaffiliated customers remained constant
while intersegment sales of $22.3 million fell below the third quarter 1997
level by 5.7 percent due to lower sales at the Steel Fabricating Segment. Due
to an influx of foreign steel saturating the domestic market at extremely low
prices, traditional customers began holding back on purchases
23
<PAGE> 22
while waiting for further price declines. These adverse market conditions
coupled with an adverse product mix account for the unimproved sales results.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of $59.1
million in the third quarter of 1998 were $11.8 million, or 16.7 percent, below
the comparable period in the prior year. The decrease in sales volume is
primarily a result of the absence of Universal, which was sold during the
first quarter of 1998, sales. The sale of Universal accounted for 77.1 percent
of the decrease in volume in Fabricating sales. The remaining 22.9 percent is
primarily due to lower sales volume at Acme Packaging.
GROSS MARGIN. The gross loss for the third quarter of 1998 totaled $4.5 million
which was $4.8 million worse than the gross profit recorded during last year's
comparable period. The decrease was due primarily to lower sales as compared to
the same period last year. The gross margin, as a percentage of sales, was 4.6
percent lower in the third quarter of 1998 than in the third quarter of 1997.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was $9.3
million in the third quarter of 1998, consistent with the third quarter of 1997.
OPERATING LOSS. The operating loss for the Company in the third quarter of 1998
of $13.8 million was $4.7 million worse than the $9.1 million loss recorded
during the same period in 1997.
Steel Making Segment. The Steel Making Segment recorded a $19.3 million
loss from operations in the third quarter of 1998 which was $2.9 million worse
than the loss recorded in the third quarter of 1997. The additional loss in the
third quarter of 1998 as compared to 1997 was due to decreased sales. The
decrease in operating costs resulted from improved efficiency at the New
Facility. Approximately 70 percent of steel shipments and 63 percent of gross
margin in 1998 was attributable to external customers, as compared to 63 percent
of shipments and 60 percent of 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 recorded operating
income of $5.5 million in the third quarter of 1998 which was $1.8 million less
than the comparable period in 1997. This decline is attributable to the sale of
Universal on March 9, 1998 which had a third quarter 1997 operating income of
$1.1 million as well as slightly lower selling prices and volume at Acme
Packaging.
INTEREST INCOME. Interest income for the third quarter of 1998 exceeded the
third quarter of 1997 by $0.2 million.
INTEREST EXPENSE. Interest expense of $10.9 million for the third quarter of
1998 increased as compared to the same period of the prior year by $0.4 million.
The increase resulted from additional long-term debt, partially offset by lower
interest rates.
INCOME TAXES: As a result of the losses incurred to date, the related negative
effect on the Company's overall liquidity position and the Chapter 11 filing on
September 28, 1998, the Company recorded a valuation allowance against its
entire net deferred assets. No income tax benefits have been recorded in the
quarter.
24
<PAGE> 23
NET LOSS. The Company recorded a net loss, excluding any tax benefits for losses
incurred and including the valuation allowance against its deferred tax assets,
of $7.94 per share in the third quarter of 1998 versus a loss of $10.5 million,
or $0.91 per share, recorded in the third quarter of 1997. Per share amounts for
1998 and 1997 are based on the weighted average number of common shares and
dilutive common equivalent shares outstanding during the three-month periods
(11,676,425 in 1998 and 11,629,281 in 1997).
Nine Months Ended September 27, 1998 as compared to Nine Months Ended September
28, 1997
NET SALES. Consolidated net sales of $372.8 million for the nine months ended
September 27, 1998 were $8.7 million higher than the prior year's comparable
period. An increase in flat rolled product shipments as compared to the first
nine months of 1997 was somewhat offset by lower Fabricating Segment sales
volume.
Steel Making Segment. Net sales for the Steel Making Segment were $255.8
million in the first nine months of 1998, a $33.6 million, or 15 percent,
increase over last year's comparable period. Sales to unaffiliated customers
increased 27 percent or $40.0 million while intersegment sales of $67.0 million
fell below the first nine months of 1997 level by 9 percent. An increase in the
flat rolled shipments to unaffiliated customers accounted for the increased
sales in the first nine months of 1998 versus the first nine months of 1997,
partially offset by lower selling prices and an unfavorable product mix.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$184.5 million in the first nine months of 1998 were $31.5 million, or 15
percent, below the comparable period in the prior year. Both the March 9, 1998
sale of Universal and decreased sales volume at Acme Packaging accounted for
this decrease in sales.
GROSS MARGIN. The gross margin for the first nine months of 1998 was $7.8
million which was $11.0 million better than the gross loss recorded during last
year's comparable period. The increase in margin was due to lower operating
costs and increased Steel Making sales, partially offset by decreased realized
selling prices.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was $28.6
million in the first nine months of 1998, $1.2 million lower than the first nine
months of 1997, primarily resulting from the absence of Universal, which was
sold March 9, 1998.
OPERATING LOSS. The operating loss for the Company in the first nine months of
1998 of $20.8 million was $12.2 million better than the $33.0 million loss
recorded during the same period in 1997.
25
<PAGE> 24
Steel Making Segment. The Steel Making Segment recorded a $38.5 million
loss from operations in the first nine months of 1998, which was $14.5 million
better than the loss recorded in the comparable period in 1997.
The decreased loss in the first nine months 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 76 percent of steel shipments and 69 percent of gross margin in
1998 was attributable to external customers, as compared to 65 percent of
shipments and 55 percent of 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
$17.7 million for the first nine months of 1998 was $2.4 million lower than in
last year's comparable period. The absence of Universal primarily accounted for
the change.
INTEREST INCOME. Interest income for the first nine months of 1998 totaled $0.9
million, compared to $0.5 million in the first nine months of 1997.
INTEREST EXPENSE. Interest expense of $32.7 million for the first nine months of
1998 increased $2.3 million as compared to the same period of the prior year.
The increase resulted principally from additional long-term debt, partially
offset by lower interest rates.
INCOME TAXES: As a result of the losses incurred to date, the related negative
effect on the Company's overall liquidity position and the Chapter 11 filing on
September 28, 1998, the Company recorded a valuation allowance against its
entire net deferred assets.
NET LOSS. The Company recorded a loss of $103 million, or $8.82 per share in the
first nine months of 1998 versus a $39.2 million loss, or $3.37 per share,
recorded in the first nine months of 1997. Without the deferred tax asset
adjustment, and with a tax benefit for losses incurred, the Company would have
recorded a $26.2 million, or $2.25 per share net loss. Per share amounts for
1998 and 1997 are based on the weighted average number of common shares and
dilutive common equivalent shares outstanding during the nine-month periods
(11,672,654 in 1998 and 11,628,556 in 1997).
LIQUIDITY AND CAPITAL RESOURCES
At the end of the third quarter, the Company's cash and cash equivalents balance
was $13.4 million, up $6.9 million from the December 28, 1997 balance.
Operating activities provided $17.9 million of cash in the first nine months of
1998 primarily due to a combination of the receipt of an income tax refund, a
reduction of inventory levels, and decreased receivables.
Capital expenditures totaled $34.8 million in the first nine months of 1998.
Capital expenditures were primarily for the Alpha Tube obligation, the
26
<PAGE> 25
plastic strapping lines, update of the management information systems, and the
replacement and rehabilitation of various production facilities.
Working capital of $44.5 million at the end of the third quarter of 1998 was
$47.6 million lower than the year-end 1997 balance. The Company is currently
finalizing a DIP Financing Agreement which provides each operating subsidiary
borrowing availability with an overall limitation of $100 million.
The Company's current liquidity requirements include working capital needs, cash
interest payments on the DIP Financing Agreement, capital investments, and may
include certain adequate protection payments. At September 27, 1998, the Company
had no outstanding borrowings against its Working Capital Facility which will be
entirely replaced by the DIP Financing Agreement. The Company intends to
finance its current operating and investing activities with existing cash
balances, cash from operations and, if necessary, by borrowing from its DIP
Financing Agreement.
Although the Company believes the anticipated cash used for future operations
and borrowings under the DIP Financing Agreement 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 "Operating Losses")
YEAR 2000 COMPLIANCE. The Company and each of its operating subsidiaries are in
the process of implementing and executing a Year 2000 assessment with the
objective of having all of their significant business systems, including those
that affect facilities and manufacturing activities, functioning properly with
respect to the Year 2000 issue before January 1, 2000. As part of this
assessment, significant service providers, vendors, suppliers and customers that
are believed to be critical to business operations after January 1, 2000, have
been identified and steps are being undertaken in an attempt to reasonably
ascertain their stage of Year 2000 readiness through questionnaires, interviews,
on-site visits and other available means.
The Company has implemented a Year 2000 compliant SAP business system at Acme
Metals, and its Acme Steel and Acme Packaging subsidiaries. The proposed
implementation of a Year 2000 compliant business system at Alpha Tube is
expected to cost approximately $2.0 million. Costs to update other production
software and hardware are not expected to be material to the Company.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the implementation of new business systems and the completion of its
Year 2000 assessment as scheduled, the possibility of significant interruptions
of normal operations should be reduced.
27
<PAGE> 26
STEEL MAKING SEGMENT. The Steel Making Segment is seeing signs of continued
price pressure and a softer order book in the steel markets as imports and
domestic supplies continue to increase.
Customers and Product Mix. During the first nine months 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. Additionally, increased imports selling at below market prices
adversely affected Acme Steel sales. Acme Steel continues working to improve its
operating levels and performance.
Operating Losses. It is unlikely that Acme Steel will achieve the production
levels and performance levels necessary to achieve profits for the remainder of
1998.
STEEL FABRICATING SEGMENT. For 1998, Steel Fabricating Segment earnings
(excluding Universal) are expected to remain relatively steady. Alpha Tube has
completed the relocation and consolidation of its tube mills. The consolidation
project will improve material handling capability, provide increased capacity of
large diameter tubing and lower operating costs. Acme Packaging has completed
the new plastic strapping lines and has begun to sell commercial product.
FORWARD LOOKING STATEMENTS:
Actual events might materially differ from those projected in the above forward
looking statements. Reference is made to "Forward Looking Statements" in Item 7
of the Company's Report on Form 10-Q for the quarterly period ended June 28,
1998. In addition, the Company may be adversely impacted as a result of its
status as DIP pursuant to Chapter 11 of the U.S. Bankruptcy Code or if it is
unable to conclude final agreements and Court approval of the DIP Financing
Agreement.
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.
28
<PAGE> 27
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit 10.1 - DIP Commitment Letter and attached Term Sheet
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 October 8, 1998 reported the voluntary
filing by the Company for protection under Chapter 11 of the
Federal Bankruptcy Code in the United State Bankruptcy Court for
the District of Delaware.
29
<PAGE> 28
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: November 10, 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
(Principal Accounting Officer)
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<PAGE> 1
EXHIBIT 10.1
BANKAMERICA BUSINESS CREDIT, INC.
September 29, 1998
Acme Metals Incorporated
13500 S. Perry Avenue
Riverside, Illinois 60627-1182
Attention: Jerry F. Williams
Chief Financial Officer
Re: DIP Financing Commitment
Dear Sirs:
You have advised BankAmerica Business Credit, Inc. ("BABC") that
Acme Metals Incorporated, a Delaware corporation (the "Company"), and its
subsidiaries (the "Subsidiaries" and together with the Company, the "Borrowers")
have filed a petition under chapter 11 of title 11 of the United States Code
(the "Bankruptcy Code"). In connection with the Borrowers' bankruptcy filing,
BABC is pleased to advise you that it is willing, subject to the terms and
conditions of this letter agreement, to provide the Borrowers, as debtors in
possession, with a revolving credit facility (the "Permanent Facility")
providing for extensions of credit in an amount (the "Commitment Amount") not to
exceed $100,000,000 in the form of revolving credit loans and letters of credit.
BABC would act as agent (the "Agent") for itself and one or more other lenders
acceptable to BABC (together with BABC, as a lender, the "Lenders") under the
Financing Facility (as hereinafter defined). The amount available at any time
for revolving credit loans and letters of credit under the Permanent Facility
shall be the excess (the "Available Amount") of (x) the lesser of the Borrowing
Base (as defined in the Term Sheet (as hereinafter defined)) and the Commitment
Amount over (y) the sum of (i) the undrawn amount of issued and outstanding
letters of credit under the Financing Facility, (ii) the amount of drawn letters
of credit under the Financing Facility for which there has been no
reimbursement, (iii) the then outstanding revolving credit loans under the
Financing Facility and (iv) reserves instituted by the Agent in its reasonable
discretion (including, without limitation, a $2,000,000 reserve for professional
fees). The undrawn amount of issued and outstanding letters of credit under the
Financing Facility plus the amount of drawn letters of credit under the
Financing Facility for which there has been no reimbursement shall not exceed
$5,000,000 at any time.
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Although BABC's commitment is for the Permanent Facility, BABC
understands that the Bankruptcy Code and the applicable rules under the Federal
Rules of Bankruptcy Procedure require the approval of the Permanent Facility by
the United States Bankruptcy Court (the "Court") in the Borrowers' chapter 11
case (the "Case") upon notice to those creditors and parties in interest that
the Court may direct. Therefore, BABC is willing, subject to the terms and
conditions of this letter agreement, to extend credit on an interim basis (the
"Interim Facility" and together with the Permanent Facility, as used herein and
in the Term Sheet, the "Financing Facility"). The commitment under the Interim
Facility (the "Interim Commitment Amount") shall not exceed $50,000,000, or such
lesser amount as may be approved by the Court. The amount available at any time
for revolving credit loans and letters of credit under the Interim Facility
shall be the excess (the "Interim Facility Available Amount") of (x) the lesser
of the Borrowing Base (as defined in the Term Sheet) and the Interim Commitment
Amount over (y) the sum of (i) the undrawn amount of issued and outstanding
letters of credit under the Interim Facility, (ii) the amount of drawn letters
of credit under the Interim Facility for which there has been no reimbursement,
(iii) the then outstanding revolving credit loans under the Interim Facility and
(iv) reserves instituted by the Agent in its reasonable discretion (including,
without limitation, a $2,000,000 reserve for professional fees). The undrawn
amount of issued and outstanding letters of credit under the Interim Facility
plus the amount of drawn letters of credit under the Interim Facility for which
there has been no reimbursement shall not exceed $5,000,000 at any time.
Advances under the Interim Facility shall be substantially on the terms and
conditions set forth on the Term Sheet and in an order authorizing the
Borrowers, as debtors in possession, to obtain interim financing and to incur
post-petition indebtedness with a first priority security interest and lien on
collateral consisting of now or hereafter acquired or created accounts
receivable and inventory of the Borrowers and all proceeds thereof and liens on
all other property of the Borrowers having a priority junior only to Existing
Liens (as hereinafter defined) and with a superpriority administrative expense
status (the "Interim Order ") to be entered by the Court. The Interim Order
shall be substantially in the form attached as Annex I to the Outline of
Proposed Terms and Conditions attached hereto as Exhibit A (the "Term Sheet").
The Financing Facility shall have substantially the terms and
conditions set forth in the Term Sheet. Each Borrower will be jointly and
severally liable for the payment of all amounts due under the Financing
Facility. The commitment of BABC is subject in all respects to satisfaction of
the terms and conditions set forth below and in the Term Sheet.
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<PAGE> 3
As a condition precedent to BABC'S commitment to provide the
Financing Facility and in consideration therefor, the Borrower has agreed to
pay, on the date of the Interim Order or any other interim order authorizing
borrowing, a closing fee equal to $750,000. BABC acknowledges that it has
received from the Borrowers an advance of $25,000 to fund the "Expenses" (as
such term is defined in the Term Sheet) in connection with the Financing
Facility. To the extent that the Expenses exceed $25,000, the Borrowers shall,
jointly and severally, reimburse BABC promptly upon BABC's request therefor. If
the Expenses are less than $25,000 at the time this commitment expires and the
closing of the Interim Facility has not occurred by such expiration, BABC shall
return the unused portion of the $25,000 advance payment to the Company on
behalf of the Borrowers. If the Expenses are less than $25,000 at the closing of
the Interim Facility, the unused portion of the $25,000 advance payment shall be
applied to payment of the fees owing by the Borrowers to the Agent and/or
Lenders on the date of such closing. All reasonable fees and expenses incurred
by the Agent in connection with the preparation, negotiation, consummation,
administration, syndication, enforcement and termination of any portion of the
Financing Facility and Agent's review and due diligence with respect to the
Financing Facility, such as reasonable legal fees and expenses (including the
allocated costs of in-house counsel to the Agent), audit and appraisal expenses,
together with an allocated charge per auditor which is currently $750 per day
(or portion thereof) per auditor, search and filing fees and travel expenses,
shall be paid, jointly and severally, by the Borrowers whether or not any of the
transactions herein contemplated is consummated.
By its execution hereof and the Company's acceptance of the
commitment, each of the Borrowers agrees, jointly and severally, to indemnify
and hold harmless the Agent and each Lender, each of their affiliates and each
of the Agent's, Lenders' and their affiliates' respective directors, officers,
employees, counsel, consultants and agents (each an "Indemnified Party") from
and against any and all losses, claims, damages, liabilities and expenses
(including fees and disbursements of counsel, which shall include the allocated
costs of in-house counsel to the Agent) arising out of, or in any manner related
to, this letter agreement, the commitment made herein, the Financing Facility or
the use of proceeds thereof, but excluding therefrom for any Indemnified Party
all losses, claims, damages, liabilities or expenses which are finally
determined in a non-appealable decision of a court to have resulted from such
Indemnified Party's gross negligence or willful misconduct. Each of the
Borrower's obligations to the Indemnified Parties under this paragraph shall
remain effective whether or not definitive documentation is executed or any
financing is provided to any Borrower and notwithstanding any termination of
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<PAGE> 4
this letter agreement or the closing of any portion of the Facility Financing.
None of the Indemnified Parties shall be responsible or liable to any Borrower
or any other person for any special, indirect, punitive, exemplary or
consequential damages which may be alleged.
BABC's commitment to provide the Financing Facility is subject
to the satisfaction of BABC at all times prior to and including the date on
which the Final Order approving the Financing Facility is entered that there has
not occurred or become known to BABC any material adverse change with respect to
the condition, financial or otherwise, operations, assets, liabilities, business
or prospects of the Borrowers, taken as a whole, from the date hereof (other
than (i) the commencement of the Borrowers' Case and (ii) the continuation of
the circumstances giving rise to the filing thereof, so long as BABC has been
made aware as of the date hereof of all such circumstances).
The Company acknowledges that the Term Sheet is not a complete
statement of the terms and conditions of the Financing Facility and those
matters which are not covered in, or finally determined by, the Term Sheet are
subject to the mutual agreement of the parties hereto. Nevertheless, BABC is
willing to provide the Interim Facility (and make revolving credit loans and
arrange for the issuance of letters of credit thereunder) on the basis (and
subject to the conditions) of this letter agreement, the Term Sheet and the
Interim Order. BABC's commitment to provide the Permanent Facility is
conditioned upon the conditions precedent set forth in the Term Sheet and the
preparation, execution and delivery of all final documentation for the Permanent
Facility (if not previously delivered), in form and substance satisfactory to
BABC.
The Company represents, warrants and covenants that (i) other
than projections (as to which clause (ii) of this paragraph is applicable), all
written information or other materials concerning the Company and the other
Borrowers (collectively, the "Information") which has been, or is hereafter,
made available by, or on behalf of, the Company or any other Borrower is, or
when delivered will be (considered as a whole), complete and correct in all
material respects and does not, or will not when delivered, contain any untrue
statements of material fact or omit to state a material fact necessary in order
to make the statements contained therein not misleading in light of the
circumstances under which such statements were made and (ii) to the extent that
any such Information contains projections, such projections were prepared in
good faith on the basis of (X) assumptions, methods and tests stated therein
which are reasonably believed by the Company to have been reasonable and (Y)
information reasonably believed by the Company to have
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<PAGE> 5
been accurate based upon the information available to the Company at the time
such projections were furnished to BABC.
The Company agrees that prior to the filing, distribution or
release thereof it will (i) consult with BABC as to any filings or document
distribution in which reference is made to BABC or the Financing Facility (other
than the delivery of draft documents to the Court and to the United States
Trustee) and (ii) obtain the prior approval of BABC, before releasing any public
announcement in which reference is made to BABC or the Financing Facility except
as required by law or the Court. Neither the Company nor any other Borrower will
show this commitment letter to any third party (other than legal counsel and
financial advisors) prior to the filing of a chapter 11 petition by the
Borrowers without the prior written consent of BABC.
The offer made by BABC to the Company in this letter agreement
shall remain in effect until 5:00 p.m. in New York City on September 29, 1998,
at which time it will expire unless prior thereto BABC has received (i) a signed
copy of this letter from the Company accepting this letter agreement and from
the other Borrowers agreeing to this letter agreement and (ii) payment from the
Company, in immediately available funds, of $75,000 representing payment of a
$50,000 non-refundable fee and $25,000 expense advance referred to in the letter
agreement dated September 29, 1998 by the Borrowers to BABC.
The commitment by BABC to provide the Financing Facility shall
expire at 5:00 p.m. in New York City on October 28, 1998, unless (x) final loan
documentation shall have been entered into by the Borrowers, the Lenders and the
Agent on or prior thereto and such documentation shall have been approved by the
Court pursuant to terms satisfactory to the Agent, the Lenders and the
Borrowers, and (y) the Borrowers shall have satisfied all conditions to the
initial borrowing thereunder.
Should the terms and conditions of the offer contained herein
meet with your approval, please indicate your acceptance by signing and
returning a copy of this letter agreement to the undersigned.
Any inconsistency between this letter and the Term Sheet shall
be governed by the Term Sheet.
This letter agreement may be executed by the parties hereto
individually or in any combination, in one or more counterparts, each of which
shall together constitute one and
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<PAGE> 6
the same agreement. Delivery of an executed counterpart of a signature page to
this letter agreement by telecopier shall be effective as delivery of a manually
executed counterpart of this letter agreement.
This letter agreement shall be governed by the law of the State
of New York, without giving effect to the conflict of laws provisions thereof,
and, upon execution by all parties hereto, shall be binding upon BABC, the
Company, the other Borrowers and their respective successors and assigns. This
letter agreement may only be amended, modified or waived in a writing signed by
the parties hereto.
Very truly yours,
BankAmerica Business Credit, Inc.
By: ______________________________
Name:
Title:
Agreed to and accepted on the date hereof:
Acme Metals Incorporated
By:__________________________________
Name:
Title:
Agreed to on the date hereof:
Acme Steel Company
By:___________________________________
Name:
Title:
Acme Packaging Corporation
By:____________________________________
Name:
Title:
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Alpha Tube Corporation
By:_____________________________________
Name:
Title:
Alabama Metallurgical Corporation
By:______________________________________
Name:
Title:
Acme Steel Company, International Inc.
By:_______________________________________
Name:
Title:
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<PAGE> 8
EXHIBIT A
ACME METALS INCORPORATED
ACME STEEL COMPANY
ACME PACKAGING CORPORATION
ALPHA TUBE CORPORATION
ALABAMA METALLURGICAL CORPORATION
ACME STEEL COMPANY, INTERNATIONAL INC.
Outline of Proposed Terms and Conditions
Agent: BankAmerica Business Credit, Inc.
Lenders: BankAmerica Business Credit, Inc. ("BABC")
and such other lenders acceptable to BABC
(the "Lenders").
Borrowers: Acme Metals Incorporated, a Delaware
corporation(the "Company"), and each of the
Company's subsidiaries (including, without
limitation, Acme Steel Company, Acme
Packaging Corporation, Alpha Tube Corpora-
tion, Alabama Metallurgical Corporation and
Acme Steel Company, International Inc.) (the
"Subsidiaries" and together with the Company,
the "Borrowers"), each debtors in possession
in a case (the "Case") to be pending under
chapter 11 of the Bankruptcy Code and to be
filed with the United States Bankruptcy Court
(the "Court") for the District of Delaware.
The liability of the Borrowers with respect
to the Interim Facility and the Permanent
Facility shall be joint and several.
Interim Facility: BABC and the other Lenders shall provide the
Borrowers, on an emergency basis, with a
revolving credit facility (the "Interim
Facility") providing for extensions of credit
in an amount (the "Interim Commitment
Amount") as shall be approved by the Court
but not exceeding $50,000,000, in the form of
revolving credit loans and letters of credit.
The undrawn amount of issued and outstanding
letters of credit under the Interim Facility
plus the amount of drawn letters of credit
under the Interim Facility for which there
has been no reimbursement shall not exceed an
aggregate of $5,000,000 (or such lower
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<PAGE> 9
Interim Commitment Amount approved by the
Court) at any time. The amount available at
any time for revolving credit loans and
letters of credit under the Interim Facility
shall be the excess (the "Interim Available
Amount") of (x) the lesser of the Borrowing
Base (as hereinafter defined) and the Interim
Commitment Amount over (y) the sum of (i) the
undrawn amount of issued and outstanding
letters of credit under the Interim Facility,
(ii) the amount of drawn letters of credit
under the Interim Facility for which there has
been no reimbursement, (iii) the then
outstanding revolving credit loans under the
Interim Facility and (iv) reserves instituted
by the Agent in its reasonable discretion
(including, without limitation, a $2,000,000
reserve for professional fees). Advances and
issuances of letters of credit against
inventory of the Borrowers shall not exceed
$20,000,000 at any one time. The Interim
Facility shall be made available upon entry by
the Court of an order authorizing the
Borrowers to obtain interim financing and to
incur post-petition indebtedness with a first
priority security interest and lien on
collateral consisting of all now or hereafter
acquired or created accounts receivable and
inventory of the Borrowers and all proceeds
thereof and security interests and liens on
all other property of the Borrowers having a
priority junior only to the Existing Liens and
with superpriority administrative expense
status (the "Interim Order"). The Interim
Order shall be substantially in the form
attached hereto as Annex 1. The Interim
Facility will have a final maturity of the
earlier of (i) the date of entry of the Final
Order (as hereinafter defined) and (ii)
October 28, 1998 (unless it has been
terminated earlier as expressly provided
herein or extended by written agreement of the
Borrowers, the Lenders and the Agent). The
Interim Facility shall be on substantially the
same terms and conditions as the Permanent
Facility (as hereafter defined) (and all
covenants, representations and warranties,
default provisions and other terms to the
extent set forth in the Term Sheet shall be
binding on the Borrowers on and after the
closing of the Interim
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<PAGE> 10
Facility), provided, however, in the event
there is no Permanent Facility for any reason
or no reason, (i) the Borrowers shall
immediately cash collateralize all documentary
and standby letters of credit remaining
outstanding on the maturity of the Interim
Facility at 105% of the face amount of such
letters of credit and (ii) the Interim Order
shall provide for the repayment in full of all
borrowings under the Interim Facility.
Permanent Facility: BABC and the other Lenders shall provide the
Borrowers with a revolving credit facility
(the "Permanent Facility") providing for
extensions of credit in an amount not to
exceed $100,000,000 (the "Commitment Amount")
in the form of revolving credit loans and
letters of credit. The undrawn amount of
issued and outstanding letters of credit
under the Financing Facility plus the amount
of drawn letters of credit under the
Financing Facility for which there has been
no reimbursement shall not exceed an
aggregate of $5,000,000 at any time. The
amount available at any time for revolving
credit loans and letters of credit under the
Permanent Facility shall be the excess (the
"Available Amount") of (x) the lesser of the
Borrowing Base (as hereinafter defined) and
the Commitment Amount over (y) the sum of
(i) the undrawn amount of issued and
outstanding letters of credit under the
Financing Facility, (ii) the amount of drawn
letters of credit under the Financing
Facility for which there has been no
reimbursement, (iii) the then outstanding
revolving credit loans under the Financing
Facility and (iv) reserves instituted by the
Agent in its reasonable discretion
(including, without limitation, a $2,000,000
reserve for professional fees). If the
Permanent Facility is entered into, it will
repay in full and replace the Interim
Facility. Standby letters of credit and
documentary letters of credit issued under
the Financing Facility shall not be used in a
manner that violates the "Purposes" section
of this Term Sheet. Advances and issuances
of letters of credit against inventory of the
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Borrowers shall not exceed $60,000,000 at any one
time under the Permanent Facility.
All borrowings and drawings of letters of
credit by the Borrowers, all Expenses (as
hereinafter defined) of the Agent and Lenders
and all other obligations owed to the Agent
or any of the Lenders, in each case, under
the Financing Facility, shall be directly
charged to the loan account.
Letters of Credit: All letters of credit under the Financing
Facility will be issued by a bank mutually
acceptable to the Company and the Agent (the
Company agreeing that Bank of America
National Trust and Savings Association is
acceptable) for the joint and several account
of the Borrowers and shall have an expiry
date no later than the earlier of (i) one
year from the date of issuance and (ii)
fifteen days prior to the Maturity Date (as
hereinafter defined), unless on or prior to
such date such letters of credit shall be
cash collateralized at 105% of the face
amount of such letters of credit. The
Borrowers will be bound by usual and
customary terms contained in the issuing
bank's letter of credit issuance documentation,
including indemnification for capital
adequacy and taxes, as well as payment of
usual and customary fees and charges of such
bank. At the Maturity Date, no liens will be
released (and the superpriority status in
favor of the Agent and Lenders shall
continue) until all letters of credit that
are not cash collateralized in accordance
with the foregoing expire and all amounts due
under the Permanent Facility are paid.
Letter of Credit Fee: A fee of 1-3/4% per annum (plus bank
charges), payable monthly in arrears, based
upon the average daily undrawn amount of all
letters of credit outstanding. If any event
of default occurs and is continuing under the
Financing Facility, then the fee shall be
3-3/4% per annum (plus bank charges) payable
on demand.
Term of Commitment: The Permanent Facility will expire and the
borrowings thereunder (other than letters of
credit that are cash collateralized) will be
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due and payable upon the earlier of (i) the second
anniversary of the date of entry of the Interim Order
(the "Maturity Date") or (ii) the substantial
consummation (as defined in section 1101 of Chapter 11
of the Bankruptcy Code) of a plan of reorganization (a
"Plan") in the Case that has been confirmed by an order
of the Court (such confirmation order shall not
discharge any of the obligations of the Borrowers to
the Agent and the Lenders under the Financing Facility
other than after payment in full of such obligations
and in no event shall indemnities in favor of the Agent
and the Lenders which by their terms survive the
termination of the Financing Facility be affected by
the repayment of the obligations).
Expiration of
Commitments: The Commitment of BABC with respect to the
Interim Facility shall expire on October 2,
1998, unless all conditions to the Interim
Facility set forth herein shall have been
satisfied by such date. In the event that
the Interim Facility has been approved by the
Court, the Commitment of BABC with respect to
the Permanent Facility shall expire on the
earlier of October 28, 1998 and the date of
entry of the Final Order, unless all
conditions to the Permanent Facility shall
have been satisfied by such date.
Collateral
and Priority: All indebtedness, liabilities and obligations
of the Borrowers to the Agent and the Lenders
shall be: (x) entitled to superpriority
administrative expense claim status in
accordance with 11 U.S.C. Section 364(c)(1) in the
Case over any and all administrative expenses
of the Borrowers, whether heretofore or
hereafter incurred, of the kind specified in
11 U.S.C. Section 503(b) or 507(b), but subject
and subordinate to (i) in the event that an
Event of Default has occurred and is
continuing, the payment of allowed professional
fees and disbursements incurred by the
Borrowers or any statutory committee
appointed in the Case ("Professional Fees")
in an aggregate amount not in excess of
$2,000,000 at any time (the "Cap") (provided
such fees are not incurred in connection with
a challenge to any aspect of the Agent's or
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any Lender's rights and obligations under the
Interim Facility or the Permanent Facility);
and (ii) the payment of fees pursuant to 28
U.S.C. Section 1930 (collectively, the
"Carveout"); and (y) secured pursuant to 11
U.S.C. Sections 364(c)(1) and (c)(2), subject to
the Carveout and, only with respect to assets
other than inventory, accounts receivable and
their proceeds, any valid, perfected, prior
and unavoidable liens as may exist on the day
the Case is commenced (as described in
Schedule 1 hereto, the "Existing Liens"), by a
first and senior security interest and lien
not subject to subordination, in and on all
now existing and hereafter acquired property
of the Borrowers, including without limitation
all now existing and hereafter acquired
property described in clauses (i) through and
including (vi) below (the "Collateral"): (i)
accounts receivable, (ii) inventory, (iii)
machinery and equipment, leases and real
property (whether owned or leased), (iv)
general intangibles (including patents, trade
names and trademarks and licenses thereof),
(v) books and records of the Borrowers and
(vi) all cash and all proceeds of the
foregoing. As a condition to the Financing
Facility, there shall be no liens or
encumbrances of any kind on any Collateral
(other than Existing Liens (only with respect
to assets other than inventory, accounts
receivable and their proceeds) and Permitted
Liens (as hereinafter defined)). "Permitted
Liens" shall mean (i) liens for current
property taxes not delinquent or for property
taxes being contested in good faith and by
appropriate proceedings (and in respect of
which adequate reserves or other appropriate
provisions are being maintained in accordance
with GAAP), (ii) carriers', warehousemen's,
mechanics', materialmen's, repairmen's and
other like liens imposed by law, arising in
the ordinary course of business and securing
obligations that are not overdue by more than
30 days or are being contested in good faith
and by appropriate proceedings diligently
pursued, (iii) pledges and deposits made in
the ordinary course of business in compliance
with workers' compensation, unemployment
insurance and other social security laws or
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<PAGE> 14
regulations (other than for the repayment of
borrowed money),(iv) liens in connection with
the acquisition of machinery and equipment
after the date hereof, and attaching only to
the machinery and equipment being acquired,
provided that the indebtedness secured by such
liens may not exceed an aggregate amount
agreed to by the Borrowers and the Lenders
prior to the entry of the Final Order, and (v)
liens on real property arising in the ordinary
course of business which do not materially
detract from the value or interfere with the
use of such property of the Borrowers or
otherwise materially impair the business or
operations of the Borrowers, provided that the
indebtedness secured by such liens may not
exceed an aggregate amount agreed to by the
Borrowers and the Lenders prior to the entry
of the Final Order. The Borrowers hereby grant
to the Agent for the benefit of the Agent and
the Lenders a security interest in all
Collateral to secure all present and future
indebtedness, liabilities and obligations of
Borrowers to the Agent and the Lenders. The
Borrowers shall be permitted to pay, as the
same may become due and payable (i)
administrative expenses of the kind specified
in 11 U.S.C. Section 503(b) incurred in the
ordinary course of business of the Borrowers,
(ii) compensation and reimbursement of
expenses to professionals allowed and payable
under 11 U.S.C. Sections 330 and 331, and, in
the absence of the occurrence of an Event of
Default, the payment of such compensation and
reimbursement of expenses to professionals
shall not reduce the Cap and (iii) payments
pursuant to "first day" orders reviewed and
acceptable to the Agent.
Purpose: To fund working capital (including inventory
purchases in the ordinary course of business
of the Borrowers) needs of the Borrowers;
provided, however, that documentary letters
of credit issued under the Interim Facility
or the Permanent Facility shall not be used
for the purchase of inventory from domestic
vendors.
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<PAGE> 15
Revolving
Credit Note: At the option of the Agent, Promissory Note(s)
in a maximum aggregate amount for each
Lender equal to each Lender's share of the
Interim Commitment Amount and/or the
Commitment Amount, as the case may be.
Closing Fee: A closing fee of $750,000, payable on the
date of the Interim Order or any other interim
order authorizing borrowing.
Collateral Manage-
ment Fee: $100,000 per annum, payable annually in
advance on the closing date of the Interim
Facility and on each subsequent
anniversary date thereof.
Unused Line Fee: .375% per annum on the average daily excess
of the Commitment Amount or Interim
Commitment Amount, as the case may be, over
the sum of outstanding borrowings, the
undrawn amount of issued and outstanding
letters of credit and the amount of drawn
letters of credit for which reimbursement has
not been made. Such fee shall be paid
monthly in arrears.
Nature of Fees: Non-refundable under all circumstances.
Fees, Expenses and interest may be charged by
the Agent to any Borrower's loan account.
Notices: The Borrowers shall give such notice of the
motions regarding the Interim Facility and
Permanent Facility, as shall be required by
the Court.
Interest Rate: The unpaid balance on the revolving loans
outstanding under the Financing Facility
shall bear interest (payable monthly on the
first day of each month) at a rate equal to
(i) a fluctuating per annum rate equal to the
applicable margin set forth below in excess
of the Reference Rate or (ii) at the
Borrowers' option, the applicable margin set
forth below plus the one month, two month,
three month or six month LIBOR rate as quoted
from time to time by Bank of America N.T. &
S.A., San Francisco, California ("Bank of
America"). No more than eight LIBOR rate
loans may be outstanding at any time and each
shall be in amounts of not less than $500,000
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<PAGE> 16
and shall be subject to certain restrictions relating
to terms, maturity, and incremental amounts. All
interest (as well as the Unused Line Fee and Letter of
Credit Fees set forth above) shall be calculated on the
basis of a 360-day year for actual days elapsed. If any
event of default occurs and is continuing under the
Facility Financing, then the Borrowers will pay
interest on the unpaid balance of loans outstanding at
a per annum rate two percent (2%) greater than the rate
of interest specified above. "Reference Rate" means the
rate of interest publicly announced from time to time
by Bank of America as its reference rate. It is a rate
set by Bank of America based upon various factors,
including Bank of America's costs and desired return,
general economic conditions, and other factors, and it
is used as a reference point for pricing some loans.
However, Bank of America may price loans at, above, or
below the reference rate.
<TABLE>
<CAPTION>
Applicable Margin
-----------------
Exposure for relevant Applicable Margin for Applicable Margin for
Interest Period Reference Rate Loans LIBOR Rate Loans
--------------- -------------------- ----------------
<S> <C> <C>
Less than $20,000,000 .50% 1.75%
Equal to or greater .50% 2.00%
than $20,000,000 and
less than $50,000,000
Equal to or greater .75% 2.50%
than $50,000,000 and
less than $75,000,000
Equal to or greater 1.00% 3.00%
than $75,000,000
</TABLE>
Exposure shall mean, for any calendar month or shorter
period of determination, the average utilization of
loans and letters of credit for such calendar month or
shorter period as determined by the Agent on the last
day of such calendar month or shorter period.
Borrowing Base: An aggregate amount of up to (i) seventy-five
percent (75%) of the net amount of eligible
accounts of the Borrowers (increasing, if
agreed to by the Agent in its sole
-9-
<PAGE> 17
discretion, up to eighty-five percent (85%), after
completion and satisfaction with results by the
Agent of due diligence with respect to accounts),
(ii) thirty percent (30%) of the net amount of
eligible inventory of the Borrowers constituting
finished goods and commodity raw materials
(increasing, if agreed to by the Agent in its sole
discretion, up to sixty percent (60%) after
completion and satisfaction with results by the
Agent of due diligence with respect to inventory),
calculated at the lower of cost (on a FIFO basis)
or market value, and (iii) if agreed to by the
Agent after completion and satisfaction with
results by the Agent with respect to inventory,
fifty percent (50%) of the net amount of eligible
inventory of the Borrowers constituting
work-in-process, calculated at the lower of cost
(on a FIFO basis) or market value. Collateral
eligibility and the establishment of reserves
against Borrowing Base availability shall be
determined by the Agent in its reasonable
discretion, provided, however, that (A) the
following inventory in any event shall be
ineligible: coals, stores, molds, stools and other
items carried in inventory which are not either
basic materials core products used in producing
finished steel or items which are not sold in the
ordinary course of business and (B) the following
accounts in any event shall be ineligible:
accounts remaining unpaid for more than 90 days
from original invoice date, accounts of any
obligor where 50% or more of such obligor's
accounts remain unpaid for more than 90 days from
original invoice date, contra accounts,
intercompany or affiliate accounts and foreign
accounts. The Borrowing Base shall be adjusted
weekly.
Mandatory Prepayment: Mandatory prepayment, but not reduction of
commitment, immediately if aggregate
borrowings and letters of credit exceed the
lesser of the Borrowing Base and the Interim
Commitment Amount or the Commitment Amount,
as the case may be, until aggregate
borrowings and letters of credit are within
the limitations of the Borrowing Base and the
Interim Commitment Amount or the Commitment
Amount, as the case may be.
-10-
<PAGE> 18
On and after the execution and delivery by
the Borrowers, the Lenders and the Agent of
definitive loan documentation for the
Financing Facility, the Borrowers shall be
required on a daily basis to concentrate all
cash receipts and other collections into one
or more deposit accounts that are subject to
an agreement among the relevant Borrower, the
depository bank (which bank shall be
acceptable to the Agent) and the Agent,
acceptable to the Agent. The agreements would
provide that (i) after the occurrence of a
default or (ii) if unused loan availability
is below $20,000,000, the Agent would have
the right to notify the depository bank that
all amounts deposited in such accounts would
thereafter be transferred to the Agent's
account on a daily basis. All payments
received by the Agent would be credited to
the Borrowers' loan account on the date of
receipt of good funds, if such good funds are
received by 12 noon (New York time) of such
day.
Optional Prepayment/
Reduction of Commit-
ment Amount: Optional prepayment in whole or in part at
any time at option of the Borrowers without
penalty. Optional reductions of commitment
at any time in whole or in integral multiples
of $5,000,000 at option of the Borrowers
without penalty, subject to compliance with
mandatory prepayment requirements set forth
above.
Conditions of Initial
Extension of Credit
Under Interim
Facility: (a) The Agent shall have received consolidated
and consolidating financial statements of the
borrowers as of August 31, 1998, in form and
substance satisfactory to the Agent.
(b) The Interim Order of the Court substantially
in the form attached hereto as Annex I shall have
been entered by no later than October 2, 1998
(and the Agent shall have received a copy thereof
certified by the Court). The Interim Order shall
not have been
-11-
<PAGE> 19
reversed, vacated, modified, amended or stayed
(or any application for any of the foregoing
shall have been filed which contests any finding
in such order that the Agent and the Lenders are
entitled to the benefits of Section 364(e) of the
Bankruptcy Code), except for modifications and
amendments that are acceptable to the Agent and
the Lenders.
(c) There shall have been no material adverse
change in the business, operations, assets,
properties, liabilities, profits, prospects or
financial position of the Borrowers as determined
by the Agent and the Lenders in their sole
discretion other than (i) the commencement of the
Case and (ii) the continuation of the circum-
stances giving rise to the filing thereof, so
long as the Agent and the Lenders have been made
aware as of the date hereof of all such
circumstances.
(d) The Agent shall have completed the due
diligence that it was practicable to
undertake given the proposed filing date
of the Case, including, without limita-
tion, a review satisfactory to the Agent
of the Borrowers' books and records,
systems and control and analysis of the
accounts receivable and inventory by an
outside consultant selected by the
Agent. The results of such review shall
be in form and substance satisfactory to
the Agent. The Agent expressly reserves
the right to continue its diligence
efforts during the term of the Interim
Facility.
(e) If requested by the Agent, delivery of the
Promissory Note and other financing documents
executed by the Borrowers (not later than the
earlier of October 28, 1998 and the date of the
initial hearing before the Court for the
Permanent Facility (the "Permanent Facility
Hearing Date")), as applicable, as well as the
delivery to the Agent of evidence (including UCC
searches) establishing
-12-
<PAGE> 20
the absence of any liens on Collateral (other than
Existing Liens and Permitted Liens) and upon the
request of the Agent, the execution and delivery
of any public filings deemed necessary or
desirable by the Agent.
(f) Payment of fees required hereunder.
(g) The terms, conditions and amounts of all
outstanding indebtedness related to any of the
Borrowers shall be reasonably satisfactory to the
Agent.
(h) Any and all security interests and liens in any
Collateral consisting of accounts receivable,
inventory or proceeds of any of the foregoing
shall have been released by the holders thereof.
(i) The Borrowers shall have unused availability
under the Interim Facility of not less than
$30,000,000.
None of the Agent nor any Lender shall be deemed to
have waived any of the foregoing conditions unless it
has delivered to the Borrowers a writing evidencing
such waiver. In the event that the Agent and the
Lenders do not request the execution and/or delivery
or other satisfaction of any of the foregoing
conditions (a) through and including (i) prior to the
closing of the Interim Facility, the Borrowers hereby
covenant and agree to promptly execute, deliver
and/or satisfy any and all such conditions upon the
request of the Agent or the Lenders at any time
thereafter so long as any obligations or commitments
are outstanding under the Financing Facility.
Conditions of Initial
Extension of Credit
under Permanent
Facility: (a) All conditions to the Interim Facility
shall have been satisfied (or waived in writing
by the Agent and the Lenders by a waiver,
additional to, and which shall supersede, the
waiver granted in connection with the conditions
to the Interim Facility).
-13-
<PAGE> 21
(b) An order (the "Final Order") of the Court shall
have been entered by no later than October 28,
1998, which Final Order shall contain the Order
Provisions, other appropriate provisions
contained in the Interim Order and otherwise
authorizing the Permanent Facility and the
superpriority status and lien status described
herein, such Final Order to be in all respects in
form and substance satisfactory to the Agent and
the Lenders. Such Final Order shall not have been
reversed, vacated, modified, amended (except for
modifications and amendments that are acceptable
to the Agent and the Lenders) or stayed (or any
application for any of the foregoing shall have
been filed which contests any finding in such
order that the Agent and the Lenders are entitled
to the benefits of Section 364(e) of the
Bankruptcy Code). The Agent shall have received a
copy of the Final Order certified by the Court.
(c) There shall be no material adverse change in the
business, operations, assets, properties,
liabilities, profits, prospects or financial
position of the Borrowers as determined by the
Agent and the Lenders in their sole discretion
other than (i) the commencement of the Case and
(ii) the continuation of the circumstances
giving rise to the filing thereof, so long as the
Agent and the Lenders have been made aware as of
the date hereof of all such circumstances.
(d) The Agent shall have completed the due diligence
with respect to the Financing Facility,
including, without limitation, a review
satisfactory to the Agent of the Borrowers' books
and records, systems and control and analysis of
the accounts receivable and inventory by an
outside consultant selected by the Agent and
environmental matters with respect to the
Borrowers and their properties. The results of
such review shall be in
-14-
<PAGE> 22
form and substance satisfactory to the Agent.
(e) Satisfactory opinions of counsel to the Borrowers
concerning, among other things, entry of the
Final Order and notice having been given in
accordance with the Final Order.
(f) Payment of fees required hereunder.
(g) The Lenders' full satisfaction with the
compliance by the Borrowers with any and all
applicable laws, statutes, rules and regulations
relating to the conduct and operations of the
business and properties of the Borrowers.
(h) No order shall have been entered (i) for the
appointment of a trustee or receiver with respect
to the Case, (ii) to convert the Case to a
Chapter 7 case or dismiss the proceeding, or
(iii) terminating the Borrowers' exclusive time
period to file a plan of reorganization and no
such order shall have been requested unless such
requested order is being contested in good faith
and by appropriate proceedings diligently
pursued.
(i) The exclusive period to file a plan of
reorganization in the Case shall not have expired
or terminated and no proposed plan of
reorganization shall have been filed in the Case
by a party without the exclusive right to do so.
Any such plan of reorganization shall be in form
and substance acceptable to the Agent and the
Lenders.
(j) Such other conditions as may be required by the
Agent or the Lenders in its or their reasonable
discretion and which are customary in
transactions of this nature, including the
execution by the Borrowers of such financing
documents as the Agent may reasonably request.
-15-
<PAGE> 23
Conditions of Each The obligation to provide each extension of credit
Extension of Credit: (including the initial extension of credit) shall be
subject to the satisfaction of the following
conditions:
(a) The borrowing, together with the aggregate amount
of all outstanding borrowings under the Financing
Facility (including the undrawn amount of all
issued and outstanding letters of credit under
the Financing Facility and amount of all drawn
letters of credit under the Financing Facility
which have not been reimbursed), shall not exceed
the lowest of the amount authorized by (i) the
Interim Commitment Amount or the Commitment
Amount, as the case may be, (ii) the Borrowing
Base then in effect and (iii) the Interim Order
or Final Order, as the case may be.
(b) The Interim Order or the Final Order, as the case
may be, shall be in full force and effect and
shall not have been reversed, modified, amended
or stayed (or application therefor made), except
for modifications and amendments that are
acceptable to the Agent and the Lenders.
(c) No Event of Default and no condition which would
constitute an Event of Default with the giving of
notice or lapse of time or both shall exist.
(d) Representations and warranties shall be true and
correct in all material respects at the date of
each extension of credit as if made on such date
(except if such representation or warranty
specifically relates only to a prior date).
(e) Receipt of a notice of borrowing or a letter of
credit application from the Borrowers. The
request for and the acceptance of each extension
of credit by the Borrowers shall constitute a
representation and warranty that the conditions
to each extension of credit shall have been
satisfied.
-16-
<PAGE> 24
(f) No administrative claim that is senior to or pari
passu with the superpriority claims of the Agent
and the Lenders shall exist, except the
Carveouts.
(g) Satisfactory corporate proceedings and receipt of
information and documents (including corporate
resolutions and incumbency certificates)
reasonably requested by the Agent.
Representations
and Warranties: The Borrowers are hereby representing with respect to
the initial advance under the Interim Facility and
shall represent and warrant with respect to each
subsequent advance as to:
(a) Due incorporation and good standing; the Company
has no subsidiaries except the other Borrowers;
(b) No governmental or judicial consent or approval
is required other than the Interim Order or the
Final Order, as the case may be;
(c) Due authorization, execution and delivery of the
Interim Facility and the Permanent Facility and
any documents delivered pursuant thereto;
(d) Compliance in all material respects with all
applicable laws and regulations (including,
without limitation, environmental laws and
regulations), except to the extent the Borrowers
are exempted from such compliance or the
Borrowers are prohibited from complying, under
applicable bankruptcy law;
(e) The historical financial statements present
fairly, in all material respects, the
consolidated financial position of the Company
and the other Borrowers at the balance sheet
dates, and the consolidated results of their
operations and their consolidated cash flows for
the periods covered by such financial statements,
in conformity with GAAP;
-17-
<PAGE> 25
(f) (i) All Information, other than projections (as
to which clause (ii) of this sentence is
applicable), which has been, or is hereafter,
made available by, or on behalf of, any of the
Borrowers to the Agent or the Lenders, does not,
or will not when delivered, contain any untrue
statements of material fact or omit to state a
material fact necessary in order to make the
statements contained therein not misleading in
light of the circumstances under which such
statements were made and (ii) to the extent that
any such Information contains projections, such
projections were prepared in good faith on the
basis of (X) assumptions, methods and tests
stated therein which are reasonably believed by
the Borrowers to have been reasonable and (Y)
information reasonably believed by the Borrowers
to have been accurate based upon the information
available to the Borrowers at the time such
projections were furnished to the Agent or the
Lenders. No material adverse change shall have
occurred in the financial position, business,
operations, assets, liabilities, profits or
prospects of the Borrowers since August 31, 1998
other than (i) the commencement of the Case and
(ii) the continuation of the circumstances giving
rise to the filing thereof, so long as the Agent
has been made aware as of the date hereof of all
such circumstances;
(g) Continued effectiveness of the Interim Order and
the Final Order as applicable;
(h) Use of proceeds; and
(i) With respect to advances subsequent to the
initial advances under the Interim Facility, such
other representations and warranties as shall be
satisfactory to the Agent in its reasonable
discretion and which are customary to
transactions of this nature.
Affirmative Covenants: (a) The Borrowers shall permit the Agent and
the Lenders or their designees from time
-18-
<PAGE> 26
to time to conduct an audit of accounts
receivable and inventory (and/or conduct an
inventory valuation) and to inspect the books and
records of the Borrowers at any time and from
time to time; Borrowers will provide from time
to time access to all information reasonably
requested by the Agent or any Lender. All
reasonable costs and expenses of the Agent or any
of the Lenders incurred in connection with the
foregoing shall be included within the definition
of "Expenses" as set forth in this Term Sheet;
(b) No later than the execution and delivery by the
Borrowers, the Lenders and the Agent of
definitive loan documentation for the Financing
Facility, the Borrowers shall enter into a
collection account satisfactory to the Agent with
a bank acceptable to the Agent; all cash receipts
and other collections shall be deposited in such
collection account to be subject to the first
(other than Existing Liens) and sole (other than
Existing Liens and certain Permitted Liens) lien
of the Agent and, upon the occurrence of a
default or as otherwise provided in the Mandatory
Prepayment section above, shall be remitted to
the Agent and applied to repay amounts
outstanding under the Interim Facility or the
Permanent Facility, as the case may be, and at
the Agent's option shall be used to cash
collateralize letters of credit;
(c) The Borrowers shall prepare financial statements
in accordance with GAAP, and shall maintain true
and complete books and records in all material
respects;
(d) The Borrowers shall furnish collateral reporting
and financial or accounting statements as the
Agent or any Lender may reasonably request from
time to time, including, without limitation, a
weekly borrowing base certificate (which
certificate shall update accounts receivable on a
weekly basis and
-19-
<PAGE> 27
inventory on a monthly basis) and monthly agings,
all in form, substance and detail satisfactory to
the Agent and delivered to the Agent in a timely
fashion;
(e) The Borrowers shall deliver to counsel for the
Agent all pleadings, motions, applications and
other documents filed with the Court and will
deliver to the Agent any financial information
distributed to any official committee appointed
in the Case;
(f) The Borrowers shall maintain insurance on all
their property for such risks, in such amounts
and with such deductible amounts, as are
customarily maintained by similar businesses,
with financially sound and responsible insurance
carriers having ratings acceptable to the Agent
and cause the Agent to be named as loss payee or
additional insured on such policies as the Agent
may require and such insurance policies covering
the Collateral (including business interruption
or similar insurance) shall contain provisions
regarding 30 days notification to the Agent with
respect to material modification or cancellation
and provisions protecting the Agent from the
Borrowers' breach, each as the Agent customarily
requires;
(g) The Borrowers shall comply in all material
respects with all laws, rules, applicable
environmental laws and regulations, except to the
extent the Borrowers are exempted from such com-
pliance or the Borrowers are prohibited from
complying, under applicable federal bankruptcy
law;
(h) The Borrowers shall preserve, renew and keep in
full force their respective corporate existences,
their respective material licenses, etc.;
(i) The Borrowers shall notify the Agent of any
default or Event of Default;
-20-
<PAGE> 28
(j) The Borrowers shall deliver to the Agent not
later than the closing date of the Permanent
Facility a projection of their financial position
and results of operations for the period ending
on December 31, 2000 prepared on a monthly basis
(on a quarterly or annual basis for the calendar
year 2000);
(k) The Borrowers shall provide other financial
information reasonably requested by the Agent or
any Lender in a manner reasonably satisfactory to
the Agent and the Lenders;
(l) The Borrowers shall pay all post-petition
obligations under real estate leases and licenses
of intellectual property as required by the
Bankruptcy Code or the Court, provided, however,
that without the consent of the Lenders, the
Borrowers may reject or permit to expire any real
estate leases (in a manner consistent with a
maximization of the value of the assets of the
Borrowers);
(m) The Borrowers shall comply with such other
affirmative covenants as may be required by the
Agent or the Lenders in their reasonable
discretion, and which are customary in
transactions of this nature; and
(n) The Borrowers shall promptly furnish the Agent
and the Lenders with information and notices
regarding reclamation claims (including amount
and claimant) upon any Borrower's receipt
thereof.
Negative Covenants: The Borrowers shall not (nor shall they apply to the
Court for authority to):
(a) Create or permit to exist any liens or
encumbrances on any Collateral, other than
Existing Liens and Permitted Liens;
(b) Create or permit to exist any other
administrative claim which is senior to or pari
passu with the superpriority claims of the Agent
and the Lenders, other than the Carveouts;
-21-
<PAGE> 29
(c) Pay pre-petition indebtedness of any kind;
provided, however, that the Borrowers may (i) pay
pre-petition obligations to employees and payroll
taxes, sales and similar taxes to taxing
authorities to the extent approved by order of
the Court and (ii) make adequate protection
payments with respect to pre-petition
indebtedness in an aggregate amount mutually
agreed to by the Borrowers and the Lenders;
(d) Merge or consolidate with any other person or
sell or otherwise dispose of assets outside the
ordinary course of business except for (i)
dispositions of assets in connection with the
rejection or expiration of any real estate leases
in a manner consistent with a maximization of
the value of the assets of the Borrowers
(provided that all proceeds of such dispositions
shall be applied to repayment of the borrowings
hereunder), (ii) the disposition of the
manufacturing plant of the Borrowers located in
New Britain, Connecticut, (iii) dispositions of
machinery, equipment and real estate in an
aggregate amount not to exceed $5,000,000 during
the term of the Financing Facility (provided that
all proceeds of such dispositions shall be
applied to promptly replace such assets or for
corporate purposes of the Borrowers not
prohibited hereby or by the definitive loan
documentation), (iv) dispositions of machinery
and equipment (other than those covered in clause
(iii) above)in the ordinary course of business
that are obsolete or no longer used by the
Borrowers in their businesses not to exceed
$500,000 for any item of machinery or equipment
or $4,000,000 in the aggregate for all such
machinery and equipment during the term of the
Financing Facility and (v) other dispositions of
assets (other than inventory and not in any event
including a significant portion of the assets)
for fair market value, if the proceeds are used
to promptly replace such assets;
-22-
<PAGE> 30
(e) Create or permit to exist indebtedness for
borrowed money other than pre-petition debt and
debt contemplated by the Interim Order or the
Final Order;
(f) Limit capital expenditures to a stated maximum
amount;
(g) Establish or acquire any subsidiary;
(h) Incur liens related to reclamation claims;
(i) Fail to maintain for the period from September 1,
1998 through each date thereafter through and
including the closing date of the Permanent
Facility EBITDA (exclusive of restructuring
costs) of not less than negative $4,000,000 and
thereafter fail to maintain such financial
covenants as shall be mutually agreed to by the
Borrowers and the Lenders; and
(j) Fail to observe such other negative covenants,
including a prohibition on "restricted payments"
by the Borrowers, as may be required by the Agent
or the Lenders in their reasonable discretion,
and which are customary in transactions of this
nature.
Events of Default: Upon the occurrence and continuance of any of the
following Events of Default beyond the applicable
grace period (if any) set forth below, the Agent or
the Lenders may (but the same shall not be deemed to
be by way of limitation) take all or any of the
following actions without further order of or
application to the Court upon 3 business days'
written (including facsimile) notice to Borrowers and
their counsel (and each of the Interim Order and the
Final Order shall provide for the lifting of the
automatic stay with respect to any and all such
actions):
(i) Declare the principal of and accrued interest
on the outstanding obligations to be immediately
due and payable;
-23-
<PAGE> 31
(ii) Terminate, reduce or restrict any further
commitment to extend credit to the
Borrowers;
(iii) Set-off against outstanding obligations,
amounts in the accounts maintained by or
with any Lender or any agent or bailee
thereof and otherwise exercise any and all
rights and remedies with respect to the
Collateral; and
(iv) Maintain cash collateral equal to 105% of
all outstanding Letters of Credit.
Events of Default shall include (without limitation):
(a) Failure by any of the Borrowers to pay to the
Agent or the Lenders principal when due, or
failure for more than 2 days to pay interest or
fees when due;
(b) Breach by any of the Borrowers of any of the
negative covenants described above;
(c) Breach by any of the Borrowers of any other
covenant or agreement contained herein or in any
loan documentation, subject to grace periods for
certain covenants to be negotiated by the Agent
and the Borrowers;
(d) Any representation or warranty made by any of the
Borrowers shall prove to have been incorrect in
any material respect when made;
(e) Any lien or encumbrance shall exist on any
Collateral, other than the lien of the Agent,
Permitted Liens and Existing Liens;
(f) (i) The Case shall be dismissed or converted to a
chapter 7 case; a chapter 11 trustee shall be
appointed in the Case or an examiner shall be
appointed in the Case and given powers
substantially similar to those of a trustee; any
administrative claim (other than the Carveouts)
or lien, other than Existing Liens, which is
-24-
<PAGE> 32
senior to or pari passu with the superpriority
claim of the Agent and the Lenders shall be
granted in the Case without the Agent's consent;
the Interim Order or the Final Order, as the case
may be, shall be stayed, amended, modified,
reversed or vacated without the Agent's consent,
except for modifications and amendments that are
acceptable to the Agent; a plan shall be filed by
any of the Borrowers, which does not provide for
termination of the Commitment and payment in full
in cash of the Borrowers' obligations under the
Financing Facility on the effective date of the
plan; or an order shall be entered which
dismisses the Case and which order does not
provide for termination of the Commitment and
payment in full in cash of all obligations of
Borrowers under the Financing Facility or (ii)
any of the Borrowers shall take any action,
including the filing of an application, in
support of any of the foregoing or any person
other than the Borrowers shall do so and the
Borrowers shall not duly and promptly contest
such application in good faith;
(g) The Court shall enter an order granting relief
from the automatic stay to the holder of any
security interest in any assets of any of the
Borrowers in excess of a diminimus amount to be
agreed to by the Borrowers and the Lenders;
(h) All loan documentation shall not have been
entered into in a form satisfactory to the Agent
on or before the earlier of October 28, 1998 and
the Permanent Facility Hearing Date; and
(i) The Interim Order shall not have been replaced by
the Final Order by October 28, 1998 and all other
conditions to the Permanent Facility shall not
have been satisfied by such date.
-25-
<PAGE> 33
Costs and Expenses: All Expenses (as hereinafter defined) of the
Agent shall, first, be paid out of the $25,000
advance of expenses made by the Borrowers and, after
$25,000 of Expenses are incurred or the unused
portion of the advance is returned to the Company on
behalf of the Borrowers, shall be payable by the
Borrowers, jointly and severally, on demand directly
or at the option of the Agent through direct charges
to the loan account (if one has been established)
whether or not the transactions contemplated hereby
are consummated. "Expenses" shall mean all amounts
payable under clause (a) in the definition of
affirmative covenants in this Term Sheet and the
reasonable fees and expenses of the Agent and the
Lenders in connection with the Financing Facility
(including in connection with the preparation,
negotiation, consummation and administration of the
loan documentation, the syndication of the Financing
Facility and the protection and enforcement of the
Agent's and Lenders' rights thereunder and all
reasonable fees and expenses of third parties
incurred by the Agent or the Lenders in connection
therewith), including, without limitation, the
reasonable fees and expenses of the Agent's counsel
incurred in connection with the Financing Facility
(including allocated costs of in-house counsel to the
Agent) (including in connection with the negotiation,
preparation and execution of definitive documenta-
tion of the Interim Facility and the Permanent
Facility (and any subsequent amendments or waivers)
and advice and preparation of documents in
connection with the protection and enforcement of the
Agent's and Lenders' rights under the Financing
Facility, the fees and expenses of a third party
inventory valuation consultant incurred in connection
with the Agent's due diligence investigation of the
Borrowers, audit and appraisal expenses, together
with an allocated charge per auditor which is
currently $750 per day (or portion thereof) per
auditor, search and filing fees, travel expenses
(including those incurred in connection with periodic
field audits by employees of the Agent), fees and
expenses incurred by the Agent in connection with the
monitoring of the Collateral, messenger and delivery
expenses, and duplicating expenses,
-26-
<PAGE> 34
in each case, incurred by the Agent or any Lender in
connection with the Financing Facility (including the
protection and enforcement of the Agent's and
Lenders' rights thereunder). The Borrowers shall also
pay on demand, jointly and severally, directly or at
the option of the Agent through direct charges to the
outstanding balance of the loan all costs and
expenses incurred by the Agent or any Lender in
connection with any litigation, contest, dispute,
suit or proceeding relating to the commitment letter
or the Financing Facility.
Documentation: Satisfactory in form and substance to the
Agent and the Lenders and customary
in transactions of this nature.
Governing Law: New York except as governed by Bankruptcy
Code.
Participations, etc.: Each Lender may sell or assign all or any
portion of its Commitment and/or loans with
the prior consent of the Agent after notice
to the Borrowers and the opportunity of the
Borrowers to consult with the Agent with
respect to the prospective purchaser or
assignee. Each Lender may grant
participations in all or any of its loans and
letter of credit exposure without the prior
consent of the Borrower but with the prior
consent of the Agent.
Order Provisions: As used herein, the term "Order Provisions"
shall mean the following:
(i) a finding by the bankruptcy court that pursuant
to Section 364(e) of the Bankruptcy Code, the Agent
and Lenders are acting in good faith by extending the
Financing Facility; (ii) a finding by the bankruptcy
court that the Financing Facility constitutes an
arm's length transaction between the Borrowers and
the Lenders and that the benefits of Section 364(e)
of the Bankruptcy Code shall apply to the Financing
Facility; (iii) an order granting the Agent a
perfected first priority lien upon and security
interest in the assets described in this letter
consisting of accounts receivable, inventory and all
proceeds thereof and approving the Financing Facility
and the definitive documentation relating thereto;
-27-
<PAGE> 35
(iv) an order prohibiting other security interests
and liens on the Collateral, except as expressly
permitted in this Term Sheet; (v) an order requiring
the Borrowers to pay the Financing Facility on
maturity or upon the acceleration due to a default;
(vi) an order containing a stipulation that the terms
of such order may not be modified without notice to
the Agent; and (vii) such other terms as the Agent or
the Lenders may deem necessary or appropriate.
Defined Terms: Capitalized terms used but not defined in this Term
Sheet shall have the meaning assigned thereto in the
commitment letter to which this Term Sheet is Exhibit
A.
-28-
<PAGE> 36
SCHEDULE 1
EXISTING LIENS
-29-
<PAGE> 37
ANNEX 1
INTERIM ORDER
-30-
<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
November 10, 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/ PricewaterhouseCoopers LLP
- -------------------------------------------
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
November 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 27, 1998 AND
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MOTNHS ENDED
SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 13,390
<SECURITIES> 0
<RECEIVABLES> 54,646
<ALLOWANCES> (1,377)
<INVENTORY> 75,687
<CURRENT-ASSETS> 144,280
<PP&E> 899,902
<DEPRECIATION> (342,285)
<TOTAL-ASSETS> 742,134
<CURRENT-LIABILITIES> 26,176
<BONDS> 233,463
0
0
<COMMON> 11,676
<OTHER-SE> 72,106
<TOTAL-LIABILITY-AND-EQUITY> 742,134
<SALES> 372,795
<TOTAL-REVENUES> 372,795
<CGS> 365,014
<TOTAL-COSTS> 393,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,678
<INCOME-PRETAX> (40,356)
<INCOME-TAX> 62,618
<INCOME-CONTINUING> (102,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (102,974)
<EPS-PRIMARY> (8.82)
<EPS-DILUTED> (8.82)
</TABLE>
