<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 June 28, 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 July 24, 1998: 11,677,520.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 124,339 $ 123,471 $ 269,335 $ 248,802
COSTS AND EXPENSES:
Cost of products sold .................... 108,583 112,682 238,482 232,327
Depreciation expense ..................... 9,272 9,943 18,531 19,946
---------- ---------- ---------- ----------
Gross margin ............................... 6,484 846 12,322 (3,471)
Selling and administrative expense ....... 9,463 10,142 19,335 20,334
---------- ---------- ---------- ----------
Operating loss ............................. (2,979) (9,296) (7,013) (23,805)
NON-OPERATING INCOME (EXPENSE):
Interest expense ......................... (10,810) (10,025) (21,747) (19,895)
Interest income .......................... 490 107 629 460
Other-net ................................ (109) 12,257 (124)
---------- ---------- ---------- ----------
Loss before income taxes ................... (13,299) (19,323) (15,874) (43,364)
Income tax benefit ......................... (4,656) (6,570) (5,556) (14,744)
---------- ---------- ---------- ----------
Net loss.................................. $ (8,643) $ (12,753) $ (10,318) $ (28,620)
========== ========== ========== ==========
LOSS PER SHARE:
BASIC:
Net loss .............................. $ (0.74) $ (1.10) $ (0.88) $ (2.46)
========== ========== ========== ==========
Weighted average outstanding shares ... 11,679,874 11,631,373 11,670,769 11,628,214
========== ========== ========== ==========
DILUTED:
Net loss .............................. $ (0.74) $ (1.10) $ (0.88) $ (2.46)
========== ========== ========== ==========
Weighted average outstanding shares ... 11,679,874 11,631,373 11,670,769 11,628,214
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 3
ACME METALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
June 28, December 28,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 27,234 $ 6,454
Accounts receivable trade, less allowances of $1,298, and $1,296, respectively..... 64,014 59,646
Inventories........................................................................ 67,006 81,630
Income tax receivable.............................................................. 1,346 24,936
Net assets held for sale........................................................... 3,808
Deferred income taxes.............................................................. 14,082 14,082
Other current assets............................................................... 2,085 1,887
--------- ---------
Total current assets............................................................. 175,767 192,443
--------- ---------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies................................................ 18,338 17,395
Other assets....................................................................... 19,680 20,357
Deferred income taxes.............................................................. 54,092 48,536
--------- ---------
Total investments and other assets............................................... 92,110 86,288
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment...................................................... 857,630 854,445
Construction in progress........................................................... 20,799 9,747
Accumulated depreciation........................................................... (332,593) (313,842)
--------- ---------
Total property, plant and equipment.............................................. 545,836 550,350
--------- ---------
$ 813,713 $ 829,081
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 51,783 $ 64,691
Accrued expenses................................................................... 43,106 34,109
Current installments of long-term debt............................................. 1,150 1,500
--------- ---------
Total current liabilities........................................................ 96,039 100,300
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt..................................................................... 421,085 423,243
Other long-term liabilities........................................................ 17,482 17,791
Postretirement benefits other than pensions........................................ 96,611 95,814
Retirement benefit plans........................................................... 5,985 5,590
--------- ---------
Total long-term liabilities...................................................... 541,163 542,438
--------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 2,000,000 shares authorized, no shares issued
Common stock, $1 par value, 20,000,000 shares authorized, 11,677,520 and 11,627,380
shares issued and outstanding, respectively...................................... 11,678 11,627
Additional paid-in capital......................................................... 166,042 165,608
Retained earnings.................................................................. 11,110 21,427
Accumulated other comprehensive loss............................................... (12,319) (12,319)
--------- ---------
Total shareholders' equity....................................................... 176,511 186,343
--------- ---------
$ 813,713 $ 829,081
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For The Six Months Ended
------------------------
June 28, June 29,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (10,318) $ (28,620)
ADJUSTMENTS TO RECONCILE LOSS TO
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Gain on assets held for sale ..................... (12,000)
Depreciation ..................................... 18,941 20,229
Accretion of senior discount notes ............... 7,368
Deferred income taxes ............................ (5,556) (14,744)
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivables ......................... (885) (6,289)
Income tax receivable ........................ 23,590
Inventories .................................. 15,928 7,440
Accounts payable ............................. (10,651) (19,088)
Other current accounts ....................... 13,291 1,893
Other, net ....................................... (6,802) 4,289
--------- ---------
Net cash (used for) provided by operating activities .. 25,538 (27,522)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments ............................... (331)
Sales and/or maturities of investments ................ 12,148
Capital expenditures-New Facility ..................... (8,235) (8,451)
Capital expenditures .................................. (9,007) (7,164)
--------- ---------
Net cash used for investing activities ................ (17,242) (3,798)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt ............................. (1,000)
Proceeds from assets held for sale .................... 18,000
Borrowings under revolving credit line agreement ...... 129,750 13,500
Repayment of revolving credit line agreement .......... (134,750) (11,000)
Exercise of stock options and other ................... 484 355
--------- ---------
Net cash provided by financing activities ............. 12,484 2,855
--------- ---------
Net increase (decrease) in cash and cash equivalents .. 20,780 (28,465)
Cash and cash equivalents at beginning of period ...... 6,454 33,224
--------- ---------
Cash and cash equivalents at end of period ............ $ 27,234 $ 4,759
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
The accompanying financial statements for the periods ended June 28, 1998 and
June 29, 1997 are unaudited. 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, whose report appears on page 19 of this filing. Such report is not
a "report" or "part of the Registration Statement" within the meaning of
Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
The Company's fiscal year ends on December 27, 1998 and will contain 52 weeks.
Second quarter results for 1998 and 1997 cover 13-week periods.
SEGMENT INFORMATION:
The Company presents its operations in two segments, Steel Making and Steel
Fabricating.
Steel Making operations, conducted through Acme Steel Company ("Acme Steel"),
include the manufacture of flat rolled steel in low-, mid-, and high-carbon,
alloy and special grades. Principal markets include agricultural, automotive,
industrial equipment, industrial fasteners, welded steel tubing, processor and
tool manufacturing industries.
The Steel Fabricating Segment is conducted through Acme Packaging Corporation
("Acme Packaging"), Alpha Tube Corporation ("Alpha Tube"), and until March 9,
1998, Universal Tool & Stamping Company, Inc. ("Universal"). Acme Packaging
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 from operations consists of total sales less
operating expenses.
The products and services of the Steel Making and Steel Fabricating Segments are
distributed through their own respective sales organizations which have sales
offices at various locations in the United States. Export sales are
insignificant for the periods presented.
5
<PAGE> 6
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
For The For The
Three Months Ended Six Months Ended
-------------------- ---------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands, except for operating data)
<S> <C> <C> <C> <C>
Net Sales:
Steel Making:
Sales to unaffiliated customers $ 66,939 $ 49,964 $144,312 $104,331
Intersegment sales 20,248 25,031 44,768 49,785
-------- -------- -------- --------
87,187 74,995 189,080 154,116
Steel Fabricating:
Sales to unaffiliated customers 57,400 73,507 125,023 144,471
Intersegment sales 183 279 390 577
-------- -------- -------- --------
57,583 73,786 125,413 145,048
Eliminations (20,431) (25,310) (45,158) (50,362)
-------- -------- -------- --------
Total $124,339 $123,471 $269,335 $248,802
======== ======== ======== ========
Income (loss) from Operations:
Steel Making $ (8,780) $(16,671) $(19,199) $(36,596)
Steel Fabricating 5,801 7,375 12,186 12,791
-------- -------- -------- --------
Total $ (2,979) $ (9,296) $ (7,013) $(23,805)
======== ======== ======== ========
Depreciation:
Steel Making $ 8,482 $ 9,071 $ 16,967 $ 18,295
Steel Fabricating 974 1,004 1,938 1,926
Corporate 19 3 36 8
-------- -------- -------- --------
Total $ 9,475 $ 10,078 $ 18,941 $ 20,229
======== ======== ======== ========
Capital Expenditures:
Steel Making $ 3,064 $ 8,215 $ 5,108 $ 18,780
Steel Fabricating 4,876 1,986 8,979 3,835
Corporate 70 8 142 53
-------- -------- -------- --------
Total $ 8,010 $ 10,209 $ 14,229 $ 22,668
======== ======== ======== ========
Operating Data (in tons)
Steel Production (hot band) 231,137 167,413 452,591 359,291
Steel Shipments (flat rolled) 212,695 157,761 465,426 322,070
</TABLE>
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ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES:
Inventories as determined on the last-in, first-out method are summarized as
follows:
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
-------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Raw materials $ 11,800 $ 13,510
Semi-finished and finished products 48,424 62,126
Supplies 6,782 5,994
-------- --------
$ 67,006 $ 81,630
======== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
The Company has capitalized expenditures related to the construction of a
continuous thin slab caster and hot strip mill ("New Facility") totaling $462.0
million at June 28, 1998. Total cash payments for the New Facility in the
second quarter of 1998 were $1.0 million. Accrued payments to the general
contractor at June 28, 1998 and June 29, 1997 include accounts payable of $9.1
million and $19.0 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. The remainder of
capital expenditures was primarily for the plastic strapping lines, an upgrade
of the management information systems, and, to a lesser extent, the replacement
and rehabilitation of various production facilities.
LONG-TERM DEBT:
The Company's long-term debt (including current maturities) at June 28, 1998 and
December 28, 1997 is summarized as follows:
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
-------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
10.875 percent Senior Unsecured Notes, net of discount $198,581 $198,506
Senior Secured Credit Agreement 174,500 175,000
12.5 percent Senior Secured Notes 17,623 17,623
13.5 percent Senior Secured Discount Notes 669 669
Note Payable 5,500 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
Capitalized lease 5,432 2,015
-------- --------
$422,235 $424,743
======== ========
</TABLE>
7
<PAGE> 8
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CASH FLOWS:
Cash payments for interest expense were $15.5 million during the first six
months of 1998 and $11.1 million in the first six months of 1997. Cash
transactions in the second quarter of 1998 for the New Facility are discussed
in the Property, Plant and Equipment footnote.
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
effect on equity due to the adoption of SFAS No. 130 through the first six
months of 1998.
COMMITMENTS AND CONTINGENCIES:
Acme Steel's interest in an iron ore mining joint venture requires payment of
its proportionate share of all fixed operating costs, regardless of the quantity
of ore received, plus the variable operating costs of minimum ore production for
Acme Steel's account. Normally, Acme Steel reimburses the joint venture for
these costs through its purchase of ore.
Acme Steel's interest in NACME Steel Processing, L.L.C., formed to pickle, oil,
and slit steel products ("NACME"), requires Acme Steel to comply with certain
tonnage provision guarantees and cost plus return on investment payments.
The Company has long-term operating lease commitments, principally for building
space for its Alpha Tube subsidiary and for various computer hardware and
software. The lease agreement for the Alpha Tube subsidiary contains provisions
for the Company to guarantee the lessor a recovery of a fixed percentage of its
interest in the property upon termination of the lease. In the event the Company
does not maintain compliance with financial covenants which are consistent with
those of the Company's $80 million Amended and Restated Credit Agreement dated
as of December 18, 1997, as amended (the "Working Capital Facility"), the
Company could be required to purchase the lessors' interest in the property.
8
<PAGE> 9
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company is subject to various Federal, state and local environmental
statutes and regulations which provide a comprehensive program for controlling
the release of materials into the environment and require responsible parties to
remediate certain waste disposal sites. In addition, various health and safety
statutes and regulations apply to the work-place environment. Administrative,
civil and criminal penalties may be applicable for failure to comply with these
laws. These environmental laws and regulations are subject to periodic revision
and modification. The United States Environmental Protection Agency, for
example, has recently issued new and revised National Air Quality Standards for
particulate matter and ozone. From time to time, the Company is also involved
in administrative proceedings involving the issuance, or renewal, of
environmental permits relating to the conduct of its business. The final
issuance of these permits have been resolved on terms satisfactory to the
Company; and, in the future, the Company expects such permits will similarly be
resolved on satisfactory terms.
Although management believes it will be required to make further expenditures
for pollution abatement facilities in future years, because of the continuous
revision of these regulatory and statutory requirements, the Company is not able
to reasonably estimate the specific pollution abatement requirements, or the
amount or timing of such expenditures to maintain compliance with these
environmental laws. While such expenditures in future years may be substantial,
management does not presently expect they will have a material adverse effect on
the Company's future ability to compete within its markets.
In connection with the Company's Spin-Off from Interlake on May 29, 1986, the
Company entered into certain indemnification agreements with Interlake. Pursuant
to the terms of the indemnification agreements, Interlake undertook to defend,
indemnify and hold the Company harmless from any claims, as defined, relating to
Acme Steel's operations or predecessor operations occurring before May 29, 1986,
the inception of the Company. The indemnification agreements cover certain
environmental matters including certain litigation and Superfund sites in
Duluth, Minnesota and Gary, Indiana for which either Interlake or Acme Steel's
predecessor operations have been named as defendants or PRPs, as applicable. To
date, Interlake has met its obligations under the indemnification agreements and
has provided the defense and paid all costs related to these environmental
matters. The Company does not have sufficient information to determine the
potential liability, if any, for the matters covered by the indemnification
agreements in the event Interlake fails to meet its obligations thereunder in
the future. In the event that Interlake, for any reason, was unable to fulfill
its obligations under the indemnification agreements, the Company could have
increased future obligations which could be significant.
9
<PAGE> 10
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Also in connection with the Spin-Off from Interlake, the Company entered into a
Tax Indemnification Agreement ("TIA") which generally provides for Interlake to
indemnify the Company for certain tax matters. While certain issues have been
negotiated and settled between the Company, Interlake and the Internal Revenue
Service, certain significant issues for the tax years beginning in 1982 through
1986 remain unresolved.
On March 17, 1994, the Company received a Statutory Notice of Deficiency in the
amount of $16.9 million in tax as a result of the Internal Revenue Service's
examination of the 1982-1984 tax years. During 1997 Interlake and the Internal
Revenue Service settled significantly all issues that created the additional
tax, reducing the additional tax to $5.1 million. Substantial interest could
also be due (potentially in an amount greater than the $5.1 million tax
claimed). The taxes claimed relate principally to adjustments for which the
Company is indemnified by Interlake pursuant to the TIA. The Company has
adequate reserves to cover that portion for which it believes it may be
responsible per the TIA. To date, Interlake has met its obligations under the
TIA with respect to all covered matters. In the event that Interlake, for any
reason, were unable to fulfill its obligations under the TIA, the Company could
have increased future obligations.
The Company's subsidiaries also have various litigation matters pending which
arise out of the ordinary course of their businesses. In the opinion of
management, the ultimate resolution of these matters will not have a material
adverse effect on the financial position of the Company.
10
<PAGE> 11
ACME METALS INCORPORATED
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
10K 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 JUNE 28, 1998
==================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ $ 87,187 $ 57,583 $ (20,431) $ 124,339
Cost and expenses 90,999 47,287 (20,431) 117,855
-------- --------- ---------- ------------ ------------
Gross margin (3,812) 10,296 6,484
Selling and administrative expense 5,067 4,396 9,463
-------- --------- ---------- ------------ ------------
Operating income (loss) (8,879) 5,900 (2,979)
Net interest income (expense) and other 4,446 (14,036) (730) (10,320)
-------- --------- ---------- ------------ ------------
Income (loss) before income taxes 4,446 (22,915) 5,170 (13,299)
Income tax provision (benefit) 1,582 (8,111) 1,873 (4,656)
-------- --------- ---------- ------------ ------------
Net income (loss) before equity
adjustment 2,864 (14,804) 3,297 (8,643)
Equity loss in subsidiaries (11,507) 11,507
-------- --------- ---------- ------------ ------------
Net income (loss) $ (8,643) $ (14,804) $ 3,297 $ 11,507 $ (8,643)
======== ========= ========== ============ ============
</TABLE>
11
<PAGE> 12
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 29, 1997
==================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ $ 74,995 $ 73,786 $ (25,310) $ 123,471
Cost and expenses 86,673 61,262 (25,310) 122,625
-------- --------- ---------- ------------ ------------
Gross margin (11,678) 12,524 846
Selling and administrative 4,993 5,149 10,142
-------- --------- ---------- ------------ ------------
Operating income (loss) (16,671) 7,375 (9,296)
Net interest income (expense) and other 4,786 (13,977) (836) (10,027)
-------- --------- ---------- ------------ ------------
Income (loss) before income taxes 4,786 (30,648) 6,539 (19,323)
Income tax provision (benefit) 1,392 (10,236) 2,274 (6,570)
-------- --------- ---------- ------------ ------------
Net income (loss) before equity
adjustment 3,394 (20,412) 4,265 (12,753)
Equity loss in subsidiaries (16,147) 16,147
-------- --------- ---------- ------------ ------------
Net income (loss) $(12,753) $ (20,412) $ 4,265 $ 16,147 $ (12,753)
======== ========= ========== ============ ============
</TABLE>
12
<PAGE> 13
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 28, 1998
====================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ $ 189,080 $ 125,413 $ (45,158) $ 269,335
Cost and expenses 198,179 103,992 (45,158) 257,013
-------- --------- ---------- ------------ ------------
Gross margin (9,099) 21,421 12,322
Selling and administrative expense 10,199 9,136 19,335
-------- --------- ---------- ------------ ------------
Operating income (loss) (19,298) 12,285 (7,013)
Interest income (expense) 8,263 (27,507) 10,383 (8,861)
-------- --------- ---------- ------------ ------------
Income (loss) before income taxes, 8,263 (46,805) 22,668 (15,874)
Income tax provision (benefit) 3,037 (16,345) 7,752 (5,556)
-------- --------- ---------- ------------ ------------
Net income (loss) before equity
adjustment 5,226 (30,460) 14,916 (10,318)
Equity loss in subsidiaries (15,544) 15,544
-------- --------- ---------- ------------ ------------
Net income (loss) $(10,318) $ (30,460) $ 14,916 $ 15,544 $ (10,318)
======== ========= ========== ============ ============
</TABLE>
13
<PAGE> 14
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 29, 1997
=================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ $ 154,116 $ 145,048 $ (50,362) $ 248,802
Cost and expenses 180,887 121,748 (50,362) 252,273
-------- --------- ---------- ------------ ------------
Gross margin (26,771) 23,300 (3,471)
Selling and administrative 9,825 10,509 20,334
-------- --------- ---------- ------------ ------------
Operating income (loss) (36,596) 12,791 (23,805)
Net interest income (expense) and other 9,342 (27,450) (1,451) (19,559)
-------- --------- ---------- ------------ ------------
Income (loss) before income taxes 9,342 (64,046) 11,340 (43,364)
Income tax provision (benefit) 2,825 (21,532) 3,963 (14,744)
-------- --------- ---------- ------------ ------------
Net income (loss) before equity
adjustment 6,517 (42,514) 7,377 (28,620)
Equity loss in subsidiaries (35,137) 35,137
-------- --------- ---------- ------------ ------------
Net income (loss) $(28,620) $ (42,514) $ 7,377 $ 35,137 $ (28,620)
======== ========= ========== ============ ============
</TABLE>
14
<PAGE> 15
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
AS OF JUNE 28, 1998
========================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
ASSETS PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 26,656 $ $ 578 $ $ 27,234
Accounts receivable, net 108 34,596 29,310 64,014
Income tax receivable 1,346 1,346
Inventories 45,129 23,128 (1,251) 67,006
Deferred income taxes 14,082 14,082
Other current assets 533 1,490 62 2,085
Due to (from) affiliates 479,981 (448,212) (33,020) 1,251
-------- ---------- ---------- ------------ ------------
Total current assets 522,706 (366,997) 20,058 175,767
-------- ---------- ---------- ------------ ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 24,558 18,338 (24,558) 18,338
Other assets 15,431 4,112 137 19,680
Deferred income taxes 54,092 54,092
-------- ---------- ---------- ------------ ------------
Total investments and other assets 94,081 22,450 137 (24,558) 92,110
-------- ---------- ---------- ------------ ------------
PROPERTY, PLANT AND EQUIPMENT- Net: 323 510,206 35,307 545,836
-------- ---------- ---------- ------------ ------------
$617,110 $ 165,659 $ 55,502 $ (24,558) $ 813,713
======== ========== ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,669 $ 74,704 $ 15,516 $ $ 94,889
Current maturities of long-term debt 1,000 150 1,150
-------- ---------- ---------- ------------ ------------
Total current liabilities 5,669 74,854 15,516 96,039
-------- ---------- ---------- ------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 415,735 5,350 421,085
Other long-term liabilities 14,974 2,508 17,482
Postretirement benefits other than pensions 1,801 80,492 14,318 96,611
Retirement benefit plans 2,420 4,861 (1,296) 5,985
-------- ---------- ---------- ------------ ------------
Total long-term liabilities 434,930 93,211 13,022 541,163
-------- ---------- ---------- ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT): 176,511 (2,406) 26,964 (24,558) 176,511
-------- ---------- ---------- ------------ ------------
$617,110 $ 165,659 $ 55,502 $ (24,558) $ 813,713
======== ========== ========== ============ ============
</TABLE>
15
<PAGE> 16
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 28, 1997
=========================================================================
SUBSIDIARY
SUBSIDIARY NON TOTAL
ASSETS PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ $ 3,016 $ 3,438 $ $ 6,454
Accounts receivable, net 33,154 26,492 59,646
Income tax receivable 24,936 24,936
Inventories 58,657 23,990 (1,017) 81,630
Net assets held for sale 3,808 3,808
Deferred income taxes 14,082 14,082
Other current assets 614 1,145 128 1,887
Due to (from) affiliates 460,541 (434,649) (26,909) 1,017
-------- ---------- ---------- ------------ ------------
Total current assets 500,173 (338,677) 30,947 192,443
-------- ---------- ---------- ------------ ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 60,882 17,395 (60,882) 17,395
Other assets 14,629 4,391 1,337 20,357
Deferred income taxes 48,536 48,536
-------- ---------- ---------- ------------ ------------
Total investments and other assets 124,047 21,786 1,337 (60,882) 86,288
-------- ---------- ---------- ------------ ------------
PROPERTY, PLANT AND EQUIPMENT 217 522,096 28,037 550,350
-------- ---------- ---------- ------------ ------------
$624,437 $ 205,205 $ 60,321 $ (60,882) $ 829,081
======== ========== ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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
-------- ---------- ---------- ------------ ------------
Total long-term liabilities 431,937 97,341 13,160 542,438
-------- ---------- ---------- ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT): 186,343 28,054 32,828 (60,882) 186,343
-------- ---------- ---------- ------------ ------------
$624,437 $ 205,205 $ 60,321 $ (60,882) $ 829,081
======== ========== ========== ============ ============
</TABLE>
16
<PAGE> 17
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 28, 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 $ 6,034 $ 13,964 $ 5,540 $ $ 25,538
-------- ---------- ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (142) (11,480) (5,620) (17,242)
-------- ---------- ---------- ------------ ------------
Net cash used for investing activities (142) (11,480) (5,620) (17,242)
-------- ---------- ---------- ------------ ------------
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 (500) (500) (1,000)
Proceeds from assets held for sale 18,000 18,000
Payment of intercompany dividend 20,780 (20,780)
Exercise of stock options and other 484 484
-------- ---------- ---------- ------------ ------------
Net cash (used for) provided by financing activities 20,764 (5,500) (2,780) 12,484
-------- ---------- ---------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents 26,656 (3,016) (2,860) 20,780
Cash and cash equivalents at
beginning of period 3,016 3,438 6,454
-------- ---------- ---------- ------------ ------------
Cash and cash equivalents at
end of period $ 26,656 $ $ 578 $ $ 27,234
======== ========== ========== ============ ============
</TABLE>
17
<PAGE> 18
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 29, 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 $(32,868) $ 2,920 $ 2,426 $ $ (27,522)
-------- ---------- ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and/or maturities of
investments, net of purchases 11,817 11,817
Capital expenditures (53) (11,727) (3,835) (15,615)
-------- ---------- ---------- ------------ ------------
Net cash (used for) provided by investing activities 11,764 (11,727) (3,835) (3,798)
-------- ---------- ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 13,500 13,500
Repayments of revolving credit agreement (11,000) (11,000)
Exercise of stock options and other 355 355
-------- ---------- ---------- ------------ ------------
Net cash provided by financing activities 355 2,500 2,855
-------- ---------- ---------- ------------ ------------
Net increase decrease in cash and
cash equivalents (20,749) (6,307) (1,409) (28,465)
Cash and cash equivalents at
beginning of period 24,306 6,307 2,611 33,224
-------- ---------- ---------- ------------ ------------
Cash and cash equivalents at
end of period $ 3,557 $ $ 1,202 $ $ 4,759
======== ========== ========== ============ ============
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Acme Metals Incorporated
We have reviewed the accompanying consolidated balance sheet as of June 28,
1998, the consolidated statements of operations for the three and six-month
periods ended June 28, 1998 and June 29, 1997, and the consolidated statements
of cash flows for the six-month periods ended June 28, 1998 and June 29, 1997
(the "consolidated financial information") of Acme Metals Incorporated and its
subsidiaries. This consolidated financial information is the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 28, 1997, and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows for the year then ended (not presented herein), and in our report dated
January 23, 1998, except as to the Note entitled "Assets Held for Sale", which
is as of March 10, 1998, and except as to the Note entitled "Summary of
Significant Accounting Policies - Comprehensive Income", which is as of May 8,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet information as of December 28, 1997, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chicago, Illinois
August 11, 1998
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company's operations are divided into two segments, the Steel Making Segment
and the Steel Fabricating Segment. The Steel Making Segment consists of Acme
Steel and includes all of the facilities used in the manufacturing and finishing
of flat rolled steel. The Steel Fabricating Segment includes the operations of
Acme Packaging and Alpha Tube, both of which use flat rolled steel in their
respective fabricating processes. Universal, which was sold on March 9, 1998,
was an operating subsidiary within the Steel Fabricating Segment prior to that
date.
Steel Making Segment. In September 1996, Acme Steel completed construction of
the New Facility. The New Facility, which cost approximately $400 million
(excluding capitalized interest and certain internal costs), allows Acme Steel
to build on its strengths as a low cost producer of high quality liquid steel by
increasing its overall efficiency and reducing its finished steel production
costs. The New Facility is the world's first complex to produce hot rolled
steel products by combining highly efficient mini-mill casting and rolling
technology with the traditional high quality liquid steel produced via the blast
furnace/basic oxygen furnace technology.
Commencing in the fourth quarter of 1996, Acme Steel began phasing in the New
Facility and concurrently phasing out the redundant ingot-based operations. The
decommissioning of Acme Steel's old ingot-based steel making facility was
completed in June 1997. During the first half of 1998, the New Facility
operated on average at approximately 89 percent of its planned production
levels. As part of ramping up the New Facility, Acme Steel has successfully
produced substantially all of the steel grades comprising Acme Steel's intended
product mix.
Acme Steel and its partner operate NACME adjacent to the New Facility. NACME
pickles, oils, slits and packages steel coils produced by the New Facility.
Pickling operations at NACME began in December 1996. Due to a five-month delay
in delivery of the slitting equipment to NACME, slitting operations did not
begin until late in the second quarter of 1997.
In the second half of 1997, Acme Steel's ability to produce flat rolled steel
outpaced steel finishing capability. A contributing factor was the delayed
start-up of NACME's slitting equipment which resulted in a reliance on outside
processors and adversely affected on-time shipping capabilities and results of
operations.
During the first half 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 prior year production
start-up issues at the New Facility and the late delivery and slower than
anticipated ramp-up of the slitting capabilities at the NACME facility.
20
<PAGE> 21
The Company had significant net losses in 1997, and, to a lesser extent, in the
first half of 1998, due to, among other factors, 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 expected improvement in material yield performance), an adverse mix
of products resulting in lower selling prices, operational issues at the NACME
facility which led to reduced shipments and higher than desired inventory
levels, and increased depreciation and interest expense related to the New
Facility. The production inefficiencies and the 1997 inventory buildup has
significantly reduced cash flow from operations. 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 half of 1998 and was relatively unaffected by the transitional issues
faced by the Steel Making Segment.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
------------------------ -------------------
June 28, June 29, 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 88.5 93.4 91.3 86.7 81.3
Depreciation expense 6.9 8.0 7.9 3.2 2.5
-------- -------- -------- -------- --------
Gross margin 4.6 (1.4) 0.8 10.1 16.2
Training and Pre-start-up-New Facility 2.0
Selling and administrative expense 7.2 8.2 8.0 7.1 6.8
-------- -------- -------- -------- --------
Operating income (loss) (2.6) (9.6) (7.2) 1.0 9.4
Interest expense, net (7.9) (7.8) (8.4) (0.1) (1.3)
Other non-operating income, net 4.6 0.1 0.3
Income tax (benefit) provision (2.1) (5.9) (5.9) 0.5 3.0
-------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (3.8) (11.5) (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) (3.8)% (11.5)% (15.8)% 0.5% 5.4%
======== ======== ======== ======== ========
</TABLE>
Second Quarter 1998 as compared to Second Quarter 1997
NET SALES. Consolidated net sales of $124.3 million in the second quarter of
1998 were $0.9 million higher than second quarter 1997 net sales. Sales
increases at the Steel Making Segment were mostly offset by sales decreases at
the Steel Fabricating Segment.
21
<PAGE> 22
Steel Making Segment. Net sales for the Steel Making Segment were $87.2
million in the second quarter of 1998, a $12.2 million, or 16 percent, increase
over last year's comparable period. Sales to unaffiliated customers increased
34 percent to $66.9 million while intersegment sales of $20.2 million fell
below the second quarter 1997 level by 19 percent due to lower sales at the
Steel Fabricating Segment. The increase in unaffiliated shipments of flat
rolled products was partially offset by lower selling prices and an adverse
product mix in 1998 versus the prior year.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$57.6 million in the second quarter of 1998 were $16.2 million, or 22 percent,
below the comparable period in the prior year. The decrease in sales volume is
primarily a result of the sale of Universal during the first quarter of 1998.
The sale of Universal accounted for 66 percent of the decrease in volume of
fabricating sales. The remaining 34 percent is primarily due to lower sales
volume at Acme Packaging.
GROSS MARGIN. The gross margin for the second quarter of 1998 totaled $6.5
million which was $5.6 million higher than the gross margin recorded during last
year's comparable period. The increase was due to increased sales of flat
rolled steel and lower operating costs as compared to the same period last year.
The gross margin, as a percentage of sales, was 6 percent higher in the second
quarter of 1998 than in the second quarter of 1997.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was $9.5
million in the second quarter of 1998, $0.7 million lower than the second
quarter of 1997, primarily reflecting the sale of Universal.
OPERATING LOSS. The operating loss for the Company in the second quarter of
1998 of $3.0 million was $6.3 million better than the $9.3 million loss recorded
during the same period in 1997.
Steel Making Segment. The Steel Making Segment recorded an $8.8 million
loss from operations in the second quarter of 1998 which was $7.9 million less
than the loss recorded in the second quarter of 1997. The decreased loss in the
second quarter of 1998 as compared to 1997 was due to increased flat rolled
shipments combined with lower operating costs offsetting a falloff in realized
selling prices. 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 78 percent of steel shipments and 75 percent of
gross margin in 1998 was attributable to external customers, as compared to 65
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 $5.8 million in the second quarter of 1998 which was $1.6
million less than the comparable period in 1997. This decline is primarily
attributable to the sale of Universal on March 9, 1998 which had a second
quarter 1997 operating income of $1.5 million.
INTEREST INCOME. Interest income for the second quarter of 1998 totaled $0.5
million, $0.4 million over the second quarter of 1997.
22
<PAGE> 23
INTEREST EXPENSE. Interest expense of $10.8 million for the second quarter of
1998 increased as compared to the same period of the prior year by $0.8 million.
The increase resulted from additional long-term debt, partially offset by lower
interest rates.
INCOME TAXES. Income tax benefits recorded in the second quarter of 1998
totaled $4.7 million based on an effective tax rate of 35 percent as compared to
$6.6 million of tax benefit in the second quarter of 1997, based on a 34 percent
effective tax rate.
NET LOSS. The Company recorded a loss of $8.6 million, or $0.74 per share in
the second quarter of 1998 versus a loss of $12.8 million, or $1.10 per share,
recorded in the second 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 (11,679,874 in 1998
and 11,631,373 in 1997).
Six Months Ended June 28, 1998 as compared to Six Months Ended June 29, 1997
NET SALES. Consolidated net sales of $269.3 million for the six months ended
June 28, 1998 were $20.5 million higher than the prior year's comparable period.
An increase in flat rolled product shipments as compared to the first half of
1997 was somewhat offset by lower Fabricating Segment sales volume.
Steel Making Segment. Net sales for the Steel Making Segment were $189.1
million in the first six months of 1998, a $35.0 million, or 23 percent,
increase over last year's comparable period. Sales to unaffiliated customers
increased 38 percent or $40.0 million while intersegment sales of $44.8 million
fell below the first six months of 1997 level by 10 percent. An increase in the
flat rolled shipments to unaffiliated customers accounted for the increased
sales in the first half of 1998 versus the first half of 1997, partially offset
by lower selling prices and an unfavorable product mix.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$125.4 million in the first six months of 1998 were $19.6 million, or 13.5
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 the decreased sales.
GROSS MARGIN. The gross margin for the first half of 1998 was $12.3 million
which was $15.8 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, which was partially offset by decreased realized
selling prices.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was
$19.3 million in the first half of 1998, $1.0 million lower than the first half
of 1997, primarily representing the March 9, 1998 sale of Universal.
OPERATING LOSS. The operating loss for the Company in the first six months of
1998 of $7.0 million was $16.8 million better than the $23.8 million loss
recorded during the same period in 1997.
Steel Making Segment. The Steel Making Segment recorded a $19.2 million
loss from operations in the first half of 1998, which was $17.4 million better
than the loss recorded in the
23
<PAGE> 24
comparable period in 1997 when Acme Steel was operating both the New Facility
and the old ingot based operations.
The decreased loss in the first half 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 78 percent of steel shipments and 71 percent of gross margin in
1998 was attributable to external customers, as compared to 66 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's operating
income of $12.2 million for the first half of 1998 was $0.6 million lower than
in last year's comparable period, resulting from the sale of Universal,
partially offset by lower raw material costs.
INTEREST INCOME. Interest income for the first half of 1998 totaled $0.6
million, compared to $0.5 million in the first half of 1997.
INTEREST EXPENSE. Interest expense of $21.7 million for the first half of 1998
increased as compared to the same period of the prior year by $1.9 million. The
increase resulted principally from additional long-term debt, partially offset
by lower interest rates.
INCOME TAXES. Income tax benefits recorded in the first six months of 1998
totaled $5.6 million based on an effective tax rate of 35 percent as compared to
$14.7 million of tax expense in the first six months of 1997, based on a 34
percent effective tax rate.
NET LOSS. The Company recorded a loss of $10.3 million, or $0.88 per share in
the first half of 1998 versus a $28.6 million loss, or $2.46 per share, recorded
in the first half 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 six-month periods (11,670,769 in 1998 and 11,628,214 in
1997). Excluding a gain on sale of assets of $12.0 million ($7.8 million net of
tax), or $0.67 per share, the net loss for the first half of 1998 would have
been $18.1 million, or $1.55 per share.
LIQUIDITY AND CAPITAL RESOURCES
At the end of the second quarter, the Company's cash and cash equivalents
balance was $27.2 million, up $20.8 million from the December 28, 1997 balance.
The increase in cash is primarily due to the March 1998 sale of Universal.
The Company's current liquidity requirements include working capital needs, cash
interest payments and capital investments. The Company intends to finance its
current operating and investing activities with existing cash balances, cash
from operations and, if necessary, by borrowing against its $80 million Working
Capital Facility. At June 28, 1998, the Company had no outstanding borrowings
against its Working Capital Facility.
24
<PAGE> 25
Operating activities provided $25.5 million of cash in the first half of 1998
primarily due to a combination of the receipt of an income tax refund and a
reduction of inventory levels. Investing activities decreased cash $17.2
million due to cash payments for capital expenditures.
Capital expenditures totaled $14.2 million in the first half of 1998. (Note:
Capital expenditures include accounts payable of $9.1 million at June 28, 1998
and $15.5 million at December 28, 1997.) Total capital expenditures for the New
Facility were $2.8 million. The remaining $11.4 million of capital expenditures
were primarily for the plastic strapping lines, update of the management
information systems, and the replacement and rehabilitation of various
production facilities.
At June 28, 1998, the Company's long-term indebtedness was $422.2 million.
Long-term debt decreased $2.5 million in the first half of 1998, due to payment
of Working Capital Facility borrowings which was partially offset by increased
borrowing under a capital lease to finance the plastic strapping lines.
Working capital of $79.7 million at the end of the second quarter of 1998 was
$12.4 million lower than the year-end 1997 balance. The Company currently has a
Working Capital Facility through January 2001, which provides each operating
subsidiary borrowing availability with an overall limitation of $80 million.
The Company's ratio of debt to total capitalization as of June 28, 1998 was .71
to 1. The liquidity of the Company is dependent upon several factors, including
steel selling prices, availability of capital, competitive and market forces,
capital expenditures and general economic conditions. Moreover, the United
States steel market is subject to cyclical fluctuations which may affect the
amount of cash internally generated by the Company and the ability of the
Company to obtain external financing. In addition, because of the Company's
current leverage position, its financial flexibility is limited.
Although the Company believes the anticipated cash for future operations and
borrowings under the Working Capital Facility will provide sufficient liquidity
for the Company to meet its debt service requirements and fund ongoing
operations, including required capital expenditures, there can be no assurance
these or other possible sources will be adequate. (See "Outlook - Operating
Losses")
The Company is currently undergoing an enterprise-wide assessment of its Year
2000 expenses.
OUTLOOK. The Company expects to continue recognizing losses during 1998 due to
the operating performance of Acme Steel. Acme Steel is aggressively working to
regain and improve orders from and deliveries to the higher margin niche product
customers, optimize the operating performance of the New Facility and reduce
manufacturing costs.
The third quarter will be affected by a planned ten day outage at the Steel
Making Segment. In addition, the Steel Making Segment is seeing signs of
selective price pressure and a softer order book in the steel markets as imports
and domestic supply continue to increase.
CUSTOMERS AND PRODUCT MIX. During the first half of 1998, Acme Steel
experienced a substantial reduction in the average selling price per ton for
sales to external customers due to competitive pressures and a substantial
reduction in orders from its traditional higher margin niche customers in the
markets for high- and mid-carbon, alloy, HSLA and processed valued-added
products. The loss of orders from niche customers was due, principally, to the
delivery performance caused by the slow ramp-ups of the New Facility and of the
slitting capabilities of the NACME facility. As a result, these customers were
forced to obtain their steel from other sources. Acme Steel continues
25
<PAGE> 26
working to improve its operating performance. These actions are expected to
improve delivery performance to the traditional, higher margin niche product
customers and gradually improve product mix and margins.
PERFORMANCE OF NEW FACILITY. The New Facility is operating at less than planned
production levels and incurring ongoing cost inefficiencies due to, among other
factors, a higher than expected rate of unplanned delays and a slower than
expected improvement in material yield performance (raw steel to finished steel
coil). These factors will continue to adversely affect the financial
performance of Acme Steel and the consolidated results of the Company during
1998.
The Company believes it will achieve a substantial portion of the projected
benefits of the New Facility by the end of 1998. When the New Facility reaches
planned production levels, it is expected to reduce cash manufacturing costs by
approximately $70 per ton from 1996 cash manufacturing costs. As of the first
half of 1998, the Company had achieved cash cost savings related to the New
Facility of approximately half the expected $70 per ton savings.
OPERATING LOSSES. Should the Company incur greater than anticipated losses
during the remainder of 1998, the Company could be at risk of breaching certain
of the financial covenants in its loan agreements (which become more restrictive
in future periods), and, absent relief from its lenders, the Company would have
to consider financial alternatives to enable it to adequately fund its
operations and meet all of its obligations.
No assurances can be given that the Company will not continue to experience
operational difficulties, will achieve the projected cost benefits, will improve
deliveries, improve material yield performance, or increase sales to its
traditional niche market customers, or that financing will be available if
required, or if available, whether such financing will be on terms satisfactory
to the Company.
STEEL FABRICATING. For 1998, Steel Fabricating Segment earnings (excluding
Universal) are expected to remain relatively steady. Alpha Tube 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. If there are substantial unexpected production
interruptions or other operating difficulties, or if the New Facility fails to
achieve production utilization and material yield goals, the competitive and
financial position of the Company could be materially adversely affected. In
addition to uncertainties with respect to the New Facility, forward looking
statements regarding all of the Company's businesses, but particularly the Steel
Making Segment, are based on various economic assumptions. These assumptions
include projections regarding: selling prices for the Company's products, costs
for labor, energy, raw material, supplies, pensions and active and retiree
medical care, volume or units of product sales, competitive developments in the
marketplace by domestic and foreign competitors, including Asian steel companies
in the midst of the current Asian economic downturn, and the competitive impact
of the facilities which are expected to compete with the Company's products,
general economic developments in the United States or abroad affecting the
business of the Company's customers, including the strength of the
26
<PAGE> 27
U.S. dollar against other currencies and similar events which may affect the
costs, price or volume of products sold by the Company.
There can be no assurances the results of these factors will conform with the
Company's assumptions and projections. If one or more of these factors fails to
meet the Company's projections, the adverse impact on the Company's business and
financial results could be significant. Similarly, in the event the Company's
assumptions and projections are too conservative, the Company's performance may
exceed these forecasts.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", issued in June 1997, established standards for reporting
information about operating segments in annual financial statements and interim
financial reports. It also establishes standards for related disclosures about
products and service, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company is currently evaluating its disclosure
requirements and expects to adopt this standard in its financial statements for
the year ending December 27, 1998.
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial data schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter of
1998.
28
<PAGE> 29
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: August 11, 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)
29
<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 August
11, 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
August 11 , 1998
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Unaudited Consolidated Balance Sheets at June 28, 1998 and Unaudited
Consolidated Statements of Operations for the Six Months Ended June 28, 1998 and
is qualified in its entirely by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 27,234
<SECURITIES> 0
<RECEIVABLES> 65,312
<ALLOWANCES> (1,298)
<INVENTORY> 67,006
<CURRENT-ASSETS> 175,767
<PP&E> 878,429
<DEPRECIATION> (332,593)
<TOTAL-ASSETS> 813,713
<CURRENT-LIABILITIES> 96,039
<BONDS> 421,085
0
0
<COMMON> 11,678
<OTHER-SE> 164,833
<TOTAL-LIABILITY-AND-EQUITY> 813,713
<SALES> 269,335
<TOTAL-REVENUES> 269,335
<CGS> 257,013
<TOTAL-COSTS> 266,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,747
<INCOME-PRETAX> (15,874)
<INCOME-TAX> (5,556)
<INCOME-CONTINUING> (10,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,318)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
