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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-11126-60
J&L SPECIALTY STEEL, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1564186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. BOX 3373
ONE PPG PLACE, PITTSBURGH, PA 15230-3373
(Address of principal executive offices) (Zip code)
412-338-1600
(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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding as of October 31, 1998: 38,758,000
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J&L SPECIALTY STEEL, INC.
SEC FORM 10-Q
Quarter Ended September 30, 1998
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements
of Income 3
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of
Cash Flows 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Trade sales, net $ 110,172 $ 142,561
Cost of products sold 109,763 136,562
Depreciation and amortization expenses 8,665 6,066
Selling, general and administrative expenses 5,709 4,824
Research and technology expense 1,453 1,463
Unusual item - (10,000)
---------- -----------
Operating income (loss) (15,418) 3,646
Interest expense 4,714 1,043
Interest income (27) (22)
Other (income) expense, net 197 (68)
---------- -----------
Income (loss) before income taxes (20,302) 2,693
Income tax expense (benefit) (8,907) 2,038
---------- -----------
Net income (loss) $ (11,395) $ 655
========== ===========
Earnings (loss) per common share:
Basic $ (.29) $ .02
========== ===========
Diluted $ (.29) $ .02
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Trade sales, net $ 373,627 $ 468,952
Cost of products sold 376,236 435,531
Depreciation and amortization expenses 26,054 18,192
Selling, general and administrative expenses 15,594 15,129
Research and technology expense 4,376 4,531
Unusual item - (15,907)
---------- ----------
Operating income (48,633) 11,476
Interest expense 13,294 3,070
Interest income (83) (93)
Other (income) expense, net 34 (129)
---------- ----------
Income (loss) before income taxes (61,878) 8,628
Income tax expense (benefit) (22,184) 6,318
---------- ----------
Net income (loss) $ (39,694) $ 2,310
========== ==========
Earnings (loss) per common share:
Basic $ (1.02) $ .06
========== ==========
Diluted $ (1.02) $ .06
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,137 $ 1,186
Trade receivables, less allowances of
$3,857 and $3,883, respectively 46,920 54,250
Trade receivables from affiliates 7,753 7,142
Inventories 152,781 151,115
Income tax receivable 20,711 3,743
Deferred income taxes 9,740 9,366
Prepaid expenses and other current assets 1,345 1,093
-------- --------
Total current assets 240,387 227,895
-------- --------
Property, plant and equipment, net of accumulated depreciation
of $126,071 and $105,137, respectively 319,974 338,062
Goodwill, net of accumulated amortization
of $73,998 and $69,082, respectively 207,016 211,932
Deferred income taxes 5,104 4,569
Other noncurrent assets 9,979 9,933
-------- --------
Total assets $782,460 $792,391
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 57,479 $ 76,679
Construction accounts payable 13,022 15,288
Accrued employee compensation and benefits 16,816 21,136
Other accrued liabilities 22,361 23,860
Short-term debt 33,696 23,319
-------- --------
Total current liabilities 143,374 160,282
-------- --------
Long-term debt 266,906 222,583
Postretirement benefits liability 56,098 53,473
Other noncurrent liabilities 20,978 19,547
Shareholders' equity:
Preferred stock (par value $.01 per share; 2,000,000
shares authorized, no shares issued and outstanding) - -
Common stock (par value $.01 per share; 100,000,000
shares authorized, 38,763,000 shares issued and outstanding) 388 388
Additional paid-in capital 315,611 311,823
Retained earnings (deficit) (19,529) 25,989
Unearned compensation (1,366) (1,694)
-------- --------
Total shareholders' equity 295,104 336,506
-------- --------
Total liabilities and shareholders' equity $782,460 $792,391
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided (used) by operating activities $(43,127) $ 9,154
-------- ---------
Cash flows from investing activities:
Capital expenditures (2,922) (50,561)
-------- ---------
Net cash used by investing activities (2,922) (50,561)
-------- ---------
Cash flows from financing activities:
Borrowings on lines of credit, net 55,700 52,300
Refinancing of long-term bank loan - 125,000
Repayment of long-term bank loan - (125,000)
Borrowings of industrial development notes, net (1,000) 942
Common stock dividends paid (8,700) (11,601)
-------- ---------
Net cash provided by financing activities 46,000 41,641
-------- ---------
Net (decrease) increase in cash and cash equivalents (49) 234
Cash and cash equivalents at beginning of period 1,186 499
-------- ---------
Cash and cash equivalents at end of period $ 1,137 $ 733
======== =========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 13,673 $ 10,825
Income taxes (8,061) 5,771
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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J&L SPECIALTY STEEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 FINANCIAL STATEMENTS
The information contained in these financial statements and notes for the
quarter ended September 30, 1998, should be read in conjunction with the audited
financial statements and notes contained in the J&L Specialty Steel, Inc. Annual
Report and Form 10-K for the year ended December 31, 1997. The accompanying
unaudited Condensed Consolidated Financial Statements of J&L Specialty Steel,
Inc. (the "Company" or "J&L") have been prepared in accordance with generally
accepted accounting principles and the rules and regulations of the Securities
and Exchange Commission. The condensed interim statements do not include all of
the information and footnotes required for complete financial statements. It is
management's opinion that all adjustments (including all normal recurring
adjustments) considered necessary for a fair presentation have been made;
however, results for the interim period are not necessarily indicative of
results to be expected for the full year.
NOTE 2 INVENTORIES
Inventories are stated at the lower of cost or market. Raw materials in all
levels of inventory are valued using the last in, first out ("LIFO") method. The
remaining costs of work-in-process and finished goods inventories are valued
using the specific identification cost method.
<TABLE>
<CAPTION>
September 30, December 31,
Inventories consisted of the following: 1998 1997
------------- ------------
<S> <C> <C>
Raw materials $ 11,141 $ 18,621
Work-in-process 106,537 107,572
Finished goods 33,777 40,270
-------- --------
Total inventories at current cost 151,455 166,463
Allowance to (reduce) increase current cost values
to LIFO basis 1,326 (15,348)
-------- --------
Total inventories $152,781 $151,115
======== ========
</TABLE>
NOTE 3 UNUSUAL ITEMS
During the first and third quarters of 1997, the Company reached settlements
with third-party vendors concerning commercial disputes relating to the quality
of certain material purchased by the Company. As a result of these settlements,
the Company recorded pretax gains of $5.9 million in the first quarter and $10.0
million in the third quarter.
7
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NOTE 4 EARNINGS PER SHARE
The third quarter 1998 and 1997 basic earnings per share were calculated using
38,763,000 and 38,670,000 weighted average shares, respectively. Due to the net
loss in 1998, there were no reconciling dilutive securities, as the 890,000
outstanding options to purchase common stock as of September 30, 1998 would have
been antidilutive had they been exercised. These options, with exercise prices
ranging from $12.00 to $16.94 per share, expire during the years 2003 through
2006. For the 1997 period, there were 1,488 dilutive common stock options and
38,671,488 shares were used to calculate diluted earnings per share.
For the nine months ended September 30, 1998 and 1997 basic earnings per share
were calculated using 38,763,000 and 38,670,000 weighted average shares,
respectively. Due to the net loss there were no reconciling dilutive securities
in 1998. For the 1997 period, there were 1,648 dilutive common stock options and
38,671,648 shares were used to calculate diluted earnings per share.
NOTE 5 NEW ACCOUNTING PRONOUNCEMENT
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No.
130"), which establishes standards for the reporting and display of
comprehensive income in financial statements. Comprehensive income is defined as
the change in equity during a period from transactions and other events and
circumstances from nonowner sources. SFAS No. 130 had no impact on the Company's
financial statements, as no items of other comprehensive income were recorded in
the accompanying interim financial statements.
NOTE 6 SUBSEQUENT EVENT
On November 5, 1998, Usinor and the Company entered into a definitive merger
agreement pursuant to which Usinor will offer to acquire for cash all the issued
and outstanding shares of the J&L common stock that it does not already own for
$6.375 per share. There are 18,033,000 outstanding shares of J&L common stock
not currently owned by Usinor representing approximately 46.5% of the
outstanding shares.
On November 12, 1998, a wholly owned subsidiary of Usinor commenced a cash
tender offer to acquire all the J&L shares. Unless a majority of the shares not
already owned by Usinor are validly tendered and not withdrawn, Usinor may not
purchase any shares in such tender offer without the consent of the Special
Committee of the Board of Directors. The tender offer is subject to other
customary conditions. Following the successful completion of the tender offer,
the agreement contemplates that a merger will be effected, in which the
remaining shareholders of J&L will be entitled to receive $6.375 per share net
in cash. Following the merger, J&L will become a wholly owned subsidiary of
Usinor.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of financial condition which
provides information with respect to the results of operations of the Company
for the three- and nine-month periods ended September 30, 1998 and 1997,
respectively. This discussion should be read in connection with the information
in the unaudited Condensed Consolidated Financial Statements and the notes
pertaining thereto.
RESULTS OF OPERATIONS
Net sales decreased 22.7% to $110.2 million in the third quarter of 1998 from
$142.6 million in the third quarter of 1997. Net sales in the first nine months
of 1998 decreased 20.3% to $373.6 million compared with $469.0 million in the
1997 period. The reduction in net sales for both periods was due to a
significant decrease in selling prices and to a lesser extent decreases in
shipments of 9.1% and 8.3%, respectively. The domestic stainless steel market
continued to experience severe downward pricing pressure on commodity grade
stainless steel. The Company's average stainless steel selling price was 15.0%
or $273 per ton lower in the third quarter of 1998 versus the third quarter of
1997. Average selling prices for the first nine months of 1998 decreased 13.1%
or $239 per ton from the first nine months of 1997. Effective with shipments on
or after October 4, 1998, the Company began implementing the announced price
increase of approximately 5% on certain stainless steel hot rolled and cold
rolled sheet, strip, and coiled plate products.
Shipments for the third quarter of 1998 were 71,299 tons, down from 78,403 tons
shipped in the third quarter of 1997. Shipments for the first nine months of
1998 were 235,792 tons, down from the 257,102 tons shipped in the first nine
months of 1997. Both decreases involved lower shipments of semi-finished
products, with the quarter to quarter decrease also resulting from lower cold
rolled stainless steel shipments.
Cost of products sold, excluding Direct Roll Anneal and Pickle ("DRAP") Line
commissioning costs, decreased from $1,614 per ton in the third quarter of last
year to $1,523 per ton in the third quarter of 1998, and from $1,623 per ton in
the first nine months of 1997, to $1,549 per ton in the first nine months of
1998. These decreases were primarily due to lower raw material costs. DRAP Line
commissioning costs in the third quarter of 1998 were $1.2 million or $16 per
ton versus $10.0 million or $127 per ton in the third quarter of 1997. For the
first nine months of 1998, DRAP Line commissioning costs were $10.9 million or
$46 per ton versus $18.3 million or $71 per ton in the same period a year ago.
Depreciation and amortization expenses for the third quarter of 1998 increased
$2.6 million from the third quarter of 1997 and $7.9 million for the first nine
months of 1998 as compared to the same year ago period. This increase was
primarily a result of depreciation expense on the DRAP Line, which was placed
into service in the fourth quarter of 1997.
9
<PAGE> 10
During the first and third quarters of 1997, the Company reached settlements
with third-party vendors concerning commercial disputes relating to the quality
of certain material purchased by the Company. As a result of these settlements,
the Company recorded pretax gains of $5.9 million in the first quarter and $10.0
million in the third quarter of 1997.
Interest expense increased $3.7 million in the third quarter of 1998 compared to
the third quarter of 1997 and $10.2 million in the first nine months of 1998
versus the first nine months of 1997. The increases were due to interest no
longer being capitalized on the DRAP Line project and an increase in outstanding
debt. The capitalized interest amount for the third quarter and the first nine
months of 1997 was $2.6 million and $7.4 million, respectively.
The Company's reported income tax benefits in 1998 included the recognition of
$2.3 million in favorable tax settlements. The overall tax benefit was limited
by the amortization of the purchase accounting adjustment, primarily goodwill,
not being deductible for income tax purposes. The income tax expense for the
third quarter and nine months of 1997 resulted in an effective tax rate higher
than statutory income tax rates due to the amortization of the purchase
accounting adjustments, primarily goodwill.
Due to the items described above, the net loss for the third quarter of 1998 was
$11.4 million or $.29 per share, compared with net income of $.7 million or $.02
per share for the third quarter of 1997. The after tax effect of the one-time
gain included in the third quarter of 1997 was $.16 per share. For the first
nine months of 1998, the net loss was $39.7 million, or $1.02 per share,
compared with net income of $2.3 million, or $.06 per share, in the same 1997
period. Included in the 1997 nine-month period were one-time gains of $.25 per
share. The startup costs of the DRAP Line reduced 1998 third quarter earnings by
$.02 per share as compared to a $.16 per share reduction in the third quarter of
1997. During the first nine months of 1998, DRAP Line startup costs reduced
earnings by $.18 per share as compared to a reduction of $.29 per share for the
same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net borrowings of $54.7 million were used to meet operating activity
requirements of $43.1 million, capital expenditures of $2.9 million, and
dividend payments of $8.7 million. The Company's debt-to-total capitalization
ratio at September 30, 1998 was 50.5%, up from 42.2% at December 31, 1997.
Working capital increased $29.4 million from the prior year-end to $97.0 million
as of September 30, 1998. The increase in the income tax receivable and the
decrease in accounts payable were the most significant changes that affected
working capital.
10
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Given the very difficult market conditions throughout the stainless steel
industry and the resulting negative impact this has had on the Company's
financial position, the Company indefinitely postponed a decision on the
construction of a state-of-the-art Steckel Mill at the Company's Midland
facility. Also, the Company delayed a new temper mill project at the Louisville
plant by approximately six months.
The Company declared a quarterly cash dividend of $.025 per share on September
25, 1998. This dividend was paid on October 21, 1998 to shareholders of record
as of the close of business on October 7, 1998.
On September 3, 1998, the Company and three wholly owned subsidiaries of Usinor,
entered into an accounts receivable securitization program. The program
established a trust, to which the four companies sell certain qualifying trade
receivable accounts. The trust pools the accounts it buys and sells an interest
in them to a commercial paper conduit. While the other three companies began
selling receivables under the program on the closing date, as a result of
restrictions contained in the Company's loan agreements, the Company must obtain
the consent of its primary lenders prior to participating. The Company's maximum
participation in the program is $45 million. If the Company were participating
as of September 30, 1998, it could have obtained approximately $30 million under
this program. The Company anticipates obtaining the consent of its lenders, and
is expecting to begin its participation before the end of the year.
Currently, the Company's revolving credit agreement and term loan agreement
contain certain financial covenants that the Company is required to meet,
including a minimum adjusted consolidated tangible net worth covenant and a
consolidated leverage ratio covenant. These agreements provide for a put option
at the discretion of any of the banks if the Company's consolidated tangible net
worth, as defined therein, is less than $100 million at the end of any fiscal
quarter in 1998 or if its consolidated leverage ratio is greater than .55. As of
September 30, 1998, the Company's consolidated tangible net worth, as defined in
these agreements, was $100.4 million and its consolidated leverage ratio was
.50. Also, the agreements limit the amount of uncommitted short term lines of
credit that the Company may utilize. The Company's total borrowing availability
as of September 30, 1998, was $17.2 million, and as of October 31, 1998, was
$13.7 million.
The Company, the Company's parent (Usinor), and the Company's lenders have
discussed the Company's current financial situation and are considering actions
necessary to maintain the Company's liquidity and avoid a violation of the
consolidated tangible net worth and consolidated leverage ratio covenants. While
it is not possible to determine the specific actions to be taken at this time,
the ultimate outcome is expected to involve an amendment of the above loan
agreements, including a Usinor guarantee of such debt, and obtainment of
additional sources of liquidity, including the accounts receivable
securitization facility. Based on these considerations, the Company believes
that it will be able to satisfy planned capital expenditures and other cash
requirements for the foreseeable future and avoid any violation of the financial
covenants contained in its loan agreements.
11
<PAGE> 12
TENDER OFFER
On November 5, 1998, Usinor and the Company entered into a definitive merger
agreement pursuant to which Usinor will offer to acquire for cash all the issued
and outstanding shares of the J&L common stock that it does not already own for
$6.375 per share. There are 18,033,000 outstanding shares of J&L common stock
not currently owned by Usinor representing approximately 46.5% of the
outstanding shares.
On November 12, 1998, a wholly owned subsidiary of Usinor commenced a cash
tender offer to acquire all the J&L shares. Unless a majority of the shares not
already owned by Usinor are validly tendered and not withdrawn, Usinor may not
purchase any shares in such tender offer without the consent of the Special
Committee of the Board of Directors. The tender offer is subject to other
customary conditions. Following the successful completion of the tender offer,
the agreement contemplates that a merger will be effected, in which the
remaining shareholders of J&L will be entitled to receive $6.375 per share net
in cash. Following the merger, J&L will become a wholly owned subsidiary of
Usinor.
TRADE CASES
J&L has joined with other producers of stainless steel and several specialty
steel industry labor unions in filing antidumping duty petitions and parallel
countervailing duty petitions with the U.S. Department of Commerce and the U.S.
International Trade Commission (ITC). These actions charge certain named
countries with dumping coiled sheet, strip and plate in the United States or
being unfairly aided by foreign government subsidies. In early November, the
petitioners in the sheet and strip case filed a "critical circumstances" charge
with the Department of Commerce accusing manufacturers in five named countries
with resorting to a massive surge in imports to avoid duties.
In the stainless steel plate in coil form case, the Department of Commerce
announced on September 1, 1998, preliminary countervailing duties on imports of
stainless steel plate in coil form from the four named countries, ranging from
1% to 68%. In late October the Department of Commerce announced preliminary
antidumping duties on imports of stainless steel plate in coil form from the six
named countries, ranging from 3% to 68%. The final Department of Commerce order
on this trade case is scheduled to be issued in early March of 1999.
In the stainless steel sheet and strip case, the Department of Commerce
announced on November 10, 1998, preliminary countervailing duties on imports
from three named countries, ranging from .75% to 59%. The Department of Commerce
is expected to announce preliminary antidumping duties in mid-December for the
eight named countries. The final Department of Commerce order on the sheet and
strip case is scheduled for April, 1999.
12
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YEAR 2000
The Company utilizes software and related technologies throughout its business
that will be affected by the date change in the year 2000. In 1997 the Company
developed and began working on a plan to identify and assess the Company
processes that might be impacted by the data processing difficulties arising
from the year 2000 date change. The Company has been modifying its mainframe
computer systems in accordance with this plan. Currently, approximately 90% of
the mainframe and intermediary system modifications have been completed and
tested, with the remaining 10% expected to be completed and tested by the end of
1998. Following such modifications, additional testing of all critical mainframe
computer systems will be performed throughout 1999 to confirm that all material
aspects of the year 2000 problem have been identified and addressed prior to the
date change.
In early 1998 the Company began a systematic assessment of its computer
controlled manufacturing equipment. Approximately 85% of the systems and devices
have been tested for year 2000 capability. Approximately 75% of the systems are
determined to be compliant, and all remaining systems will be tested. Those
systems which are not year 2000 capable will be modified or replaced. The
remaining systems are expected to be compliant before the year 2000.
The Company exchanges data electronically with vendors and customers and this
electronic exchange could be affected by the year 2000 issue. Testing of new
year 2000 compliant electronic data interchange software will be performed with
these third parties in 1999. The Company has sent letters to its significant
vendors asking them to discuss their readiness for the year 2000 issue. The
responses are being evaluated for purposes of identifying vendors that may not
have adequate plans for minimizing the risks associated with the year 2000
issue. If any such companies are identified, appropriate contingency plans will
be developed.
Total costs for year 2000 modifications are not expected to exceed $4 million
and are being expensed as incurred. Since the Company expects to have completed
and tested all of its internal computer systems year 2000 solutions well in
advance of the year 2000 date change, at this time the Company has not developed
any contingency plans for the event of not being ready. Specific contingency
plans will be developed in 1999 if and when deemed necessary.
13
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NEW ACCOUNTING STANDARD
In the second quarter of 1998, the Financial Accounting Standards Board (the
"Board") issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS No. 133"). This new
statement establishes standards for the accounting and reporting of financial
instruments based on the Board's conclusion that the fair values of financial
assets and liabilities provide more relevant and understandable information than
cost based measures. It requires that an entity recognizes all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. SFAS No. 133 becomes effective January 1, 2000.
The impact that SFAS No. 133 will have on the Company's financial statements has
not been determined at this time; however, given the Company's limited use of
derivative financial instruments the impact of adoption is not expected to be
significant.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Use of the words "outlook,"
"anticipates," "believes," "estimate," "expect" and similar statements represent
the Company's current judgment on what the future holds. While the Company
believes the forward-looking statements to be reasonable, a number of important
factors could cause actual results to differ materially from those projected.
Notably, the new DRAP Line utilizes novel technology which could result in
further unforeseen startup expense or delays. Furthermore, in the event the
Company is unable to arrange additional borrowing availability, the Company's
financial results do not improve, the Company and Usinor are not able to reach
agreement with the Company's primary banks on the terms of an amendment to the
Company's loan agreements or a Usinor debt guarantee, or there are substantial
adverse changes in financial markets, the Company can not be certain that cash
flow from operating activities and amounts available from financial sources will
satisfy its future cash requirements, or that it will be able to avoid a
violation of the financial covenants contained in its loan agreements. While the
scope of the Company's year 2000 plan is considered comprehensive, there may be
year 2000 issues that have not been identified, the impact of which could be
material to the Company. The cost of year 2000 solutions could be significantly
greater than the estimates because of numerous reasons, such as changes in the
availability or costs for trained personnel or changes to solution plans or
identification of other year 2000 matters. Also, failure of third parties being
ready for the year 2000 could adversely affect the Company.
14
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
10.1 Document related to short term uncommitted bank line
of credit for $10 million with Comerica Bank dated
October 1, 1998.
(b) REPORTS ON FORM 8-K
Registrant filed the following reports on Form 8-K relating to
Item 5 thereof:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
DATE DESCRIPTION
---------------------------------------------------------------------------------------------------
<S> <C>
SEPTEMBER 23, 1998 Announcement that Usinor made a cash merger proposal to
acquire the remaining outstanding shares of J&L stock
at $5.75 per share.
---------------------------------------------------------------------------------------------------
OCTOBER 30,1998 Usinor and J&L announced they entered into a definitive
merger agreement pursuant to which Usinor would offer
to buy the shares of J&L it did not already own for
$6.25 per share.
---------------------------------------------------------------------------------------------------
NOVEMBER 4, 1998 Announcement that the Special Committee was withdrawing
its prior recommendation that shareholders accept the
$6.25 per share offer by Usinor, in light of
additional information that required further study.
---------------------------------------------------------------------------------------------------
NOVEMBER 5, 1998 Usinor and J&L announced they entered into a new
definitive merger agreement in which Usinor would offer
to buy the shares of J&L it did not already own for
$6.375 per share.
---------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
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.
J&L SPECIALTY STEEL, INC.
(Registrant)
November 16, 1998 /s/ Kirk F. Vincent
------------------------------------------
Kirk F. Vincent
Executive Vice President, Finance and
Administration and Chief Financial Officer
(Principal financial officer and
duly authorized signatory)
16
<PAGE> 17
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Document related to short term uncommitted bank line of
credit for $10 million with Comerica Bank dated October 1,
1998.
27.1 Financial Data Schedule
17
<PAGE> 1
Exhibit 10.1
TAX I.D. No. 25-1564186
PROMISSORY NOTE
$10,000,000.00 Detroit, Michigan
as of October 1, 1998
On or before January 1, 1999, FOR VALUE RECEIVED, the undersigned, J&L
SPECIALTY STEEL, INC., a Pennsylvania corporation (herein called the "Company"),
promises to pay to the order of COMERICA BANK, a Michigan banking corporation
(herein called "Bank"), at the principal office of Bank at Comerica Tower at
Detroit Center, 500 Woodward Avenue, Detroit, Michigan 48226, or at such other
office as Bank notifies Company in writing from time to time, in lawful currency
of the United States of America, the sum of TEN MILLION DOLLARS
($10,000,000.00), or so much of said sum as has been advanced and is then
outstanding hereunder, together with interest thereon as hereinafter set forth.
This Note is a note under which Advances, repayments and new Advances may
be made from time to time, provided that Bank shall not be obligated to make any
Advance hereunder (notwithstanding anything expressed or implied herein or
elsewhere to the contrary), and the Bank, at any time and from time to time,
without notice, and in its sole and absolute discretion, may refuse to make
Advances to Company hereunder without incurring any liability whatsoever and
without in any way affecting Company's liability hereunder for all amounts
advanced. Advances hereunder may be requested in Company's discretion by
telephonic notice to Bank or by submission to Bank of a Request for Advance in
form annexed hereto as Exhibit "A". Any Advance requested by telephone notice
shall be confirmed by Company that same day by submission to Bank by telefax or
first class mail of the written Request for Advance aforementioned. Company
acknowledges that if Bank makes an Advance based on a telephonic request, it
shall be for Company's convenience and all risks involved in the use of such
procedure shall be borne by Company, and Company expressly agrees to indemnify
and hold Bank harmless therefor. Bank shall have no duty to confirm the
authority of anyone requesting an advance by telephone.
Each Prime-based Advance outstanding under this Note shall bear interest at
the Prime-based Rate, and each Quoted Rate Advance outstanding under this Note
shall bear interest at the applicable Quoted Rate. Each Advance hereunder shall
be payable upon the repayment date therefor, which repayment date shall not be
later than the maturity date of this Note, as set forth above. Interest shall be
computed on a daily basis using a year of 360 days and shall be assessed for the
actual number of days elapsed, and in such computations, effect shall be given
to any change in the interest rate as a result of any change in the Prime-based
Rate on the date of each such change in the Prime-based Rate. Interest on each
Prime-based Advance shall be payable monthly on the last Business Day of each
month, and, in the case of Quoted Rate Advances, on the respective repayment
date therefor; provided, however, if such repayment date is more than thirty
(30) days after the date of any such Quoted Rate Advance, interest thereon shall
also be payable at intervals of thirty (30) days from the date of such Advance.
<PAGE> 2
The amount, applicable interest rate, and repayment date of each Advance
shall be noted on Bank's books and records, which books and records will be
conclusive evidence thereof; provided, however, any failure on the part of Bank
to make any such notation shall not relieve Company of its obligations to repay
Bank all amounts owing under this Note in accordance with the terms hereof.
If Company makes any payment of principal with respect to any Quoted Rate
Advance on any day other than the applicable repayment date therefore (whether
voluntarily, by acceleration, or otherwise), or if Company fails to borrow a
Quoted Rate Advance after notice has been given by Company to Bank in accordance
with the terms of this Note requesting such Advance and Bank has agreed to make
such Quoted Rate Advance, or if Company fails to make any payment of principal
or interest in respect of any Quoted Rate Advance when due, Company shall
reimburse Bank, on demand, for any resulting loss, cost or expense incurred by
Bank as a result thereof, including without limitation, any such loss, cost or
expense incurred in obtaining, liquidating, employing or redeploying deposits
from third parties, whether or not Bank shall have funded or committed to fund
such Advance. Calculation of any amounts payable to Bank under this paragraph
shall be made as though Bank shall have actually funded or committed to fund the
relevant Quoted Rate Advance through the purchase of an underlying deposit in an
amount equal to the amount of such Advance and having a maturity date comparable
to the applicable repayment date of such Quoted Rate Advance; provided, however,
Bank may fund any Quoted Rate Advance in any manner it deems fit and the
foregoing assumption shall be utilized only for the purpose of the calculation
of amounts payable under this paragraph.
Until such time that all indebtedness of Company to Bank under this Note
shall be paid and satisfied in full, Company covenants and agrees with Bank as
follows:
(a) Subject to the following proviso, each of the covenants set forth
under Articles V and VI of that certain Credit Agreement and that
certain Term Loan Agreement, each dated as of June 30, 1997, among
Company, various lenders from time to time parties thereto, Mellon
Bank, N.A., as Agent, and Credit Lyonnais New York Branch, as
Syndication Agent, and Morgan Guaranty Trust Company of New York, as
Documentation Agent (herein, together with any amendments thereto,
together called the "Credit Agreements"), are hereby incorporated by
reference as fully set forth herein, mutatis mutandis; provided,
however, after the date on which both of the Credit Agreements shall
have terminated and Company shall have no further liabilities,
obligations or indebtedness thereunder, then, until such time that all
indebtedness of Company to Bank under this Note shall have been paid
and satisfied in full, Company will not (i) consolidate with or merge
into any other corporation (unless Company is the surviving
corporation thereof and no Default shall have occurred and be
continuing hereunder), or (ii) convey, sell, lease, transfer or
otherwise dispose of, or create, assume or suffer to exist any lien or
encumbrance on, all or substantially all of its assets; and
2
<PAGE> 3
(b) Company shall provide Bank with prompt written notice of the
occurrence or existence of any Default hereunder, or any event or
condition which, with passage of time or the giving of notice, or
both, would constitute a Default hereunder.
Upon the occurrence and during the continuance of any Default, Bank may
declare this Note and all unpaid principal, interest and other amounts owing by
Company to Bank hereunder to be immediately due and payable, without
presentment, demand, protest, or further notice of any kind, all of which are
hereby expressly waived by Company, and an action therefore shall immediately
accrue.
Upon the occurrence and during the continuance of any Default, Bank may at
any time and from time to time, without notice to Company (any requirement for
such notice being expressly waived by Company), set off and apply against any
and all of the indebtedness of Company to Bank any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by Bank to or for the credit or the account of
Company and any property of Company from time to time in possession of Bank,
irrespective of whether or not Bank shall have made any demand hereunder and
although such obligations may be contingent and unmatured. The rights of Bank
under this paragraph are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which Bank may otherwise have.
Upon the occurrence and during the continuance of any Default hereunder,
(a) interest on all outstanding Prime-based Advances shall be payable at a per
annum rate of two percent (2%) above the Prime-based Rate, and (b) interest on
any outstanding Quoted Rate Advances shall be payable until the respective
repayment date for each such Advance at a per annum rate equal to the greater of
two percent (2%) above (i) the applicable Quoted Rate, or (ii) the Prime-based
Rate, and after such repayment date, at a per annum rate equal to two percent
(2%) above the Prime-based Rate, which interest, in any case, shall be payable
upon demand.
All payments under this Note shall be in immediately available United
States funds, without setoff or counterclaim.
Company agrees to reimburse the Bank, or any other holder or owner of this
Note, for any and all reasonable out-of-pocket costs and expenses (including,
without limit, court costs, legal expenses reasonable attorneys' fees, whether
or not suit is instituted, and, if suit is instituted, whether at the trial
court level, appellate level, in a bankruptcy, probate or administrative
proceeding or otherwise) incurred in collecting or attempting to collect this
Note or the Indebtedness or incurred in any other matter or proceeding relating
to this Note or the Indebtedness, except to the extent that any such costs or
expenses result primarily from the gross negligence or willful misconduct of
Bank.
Company acknowledges and agrees that there are no contrary agreements, oral
or written, establishing a term of this Note and agree that the terms and
conditions of this Note may not be
3
<PAGE> 4
amended, waived or modified except in a writing signed by a duly authorized
officer of the Bank expressly stating that the writing constitutes an
amendment, waiver or modification of the terms of this Note. If any provision of
this Note is unenforceable in whole or part for any reason, the remaining
provisions shall continue to be effective. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN.
This Note shall bind the Company and the Company's respective successors
and assigns.
For purposes of this Note, the following terms will have the following
meanings:
"Advance" means a borrowing requested by Company and made by Bank under
this Note in accordance with the terms hereof, and shall include a Prime-based
Advance and a Quoted Rate Advance.
"Business Day" means any day, other than a Saturday, Sunday or holiday, on
which Bank is open for all or substantially all of its commercial banking
business in Detroit, Michigan.
"Default" means the occurrence or existence of any one of the following:
(a) Company shall fail to pay principal or interest under any Advance or
shall fail to pay any other amount owing by Company to Bank under
this Note when due in accordance with the terms hereof, and such
failure shall continue for a period of three (3) Business Days after
notice thereof has been given by Bank to the Company;
(b) any representation, warranty, certification or statement made or
deemed to have been made by Company herein or in any certificate,
financial statement or other document or agreement delivered to Bank
pursuant hereto shall prove to be untrue in any material respect when
made or deemed made;
(c) Company shall fail to observe or perform any covenant or agreement of
Company set forth in (a)(i) or (ii) set forth in the third full
paragraph commencing on page 2 of this Note; or Company shall fail to
observe or perform any condition, covenant or agreement of Company
set forth in any loan or security agreement or other agreement with
Bank, other than provided in subparagraph (a) above or under the
Credit Agreements described subparagraph (d) below, and Company shall
fail to cure such failure within any grace or cure period provided
with respect thereto;
(d) the occurrence or existence of any Put Event or any Event of Default
under either of the Credit Agreements at any time prior to the
termination or expiration thereof;
(e) Company shall fail to perform any of its direct or indirect
obligations for the payment of any indebtedness in excess of Five
Million Dollars ($5,000,000.00)
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<PAGE> 5
(other than indebtedness described in subparagraph (a) or (d) above)
when due (whether at scheduled maturity or upon acceleration, demand or
otherwise), or if Company shall default under any agreement or
instrument relating to such indebtedness if the effect of such default
is to accelerate the maturity of such indebtedness;
(f) Company shall (i) commence a voluntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its assets, or shall consent to any such
relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against
it, or shall make a general assignment for the benefit of creditors,
or shall fail generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the forgoing; (ii)
suffer the commencement of an involuntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its assets, and such involuntary case or
other proceedings shall not be controverted by appropriate proceedings
within thirty (30) days or shall remain undismissed and unstayed for a
period of sixty (60) days; or (iii) suffer the entry of an order for
relief or be adjudicated bankrupt or insolvent under the bankruptcy,
insolvency or similar laws of any competent jurisdiction;
(g) if any final non-appealable judgment or judgments for the payment of
money in excess of Three Million Dollars ($3,000,000.00), individually
or in the aggregate, shall be rendered against Company and Company
shall not have satisfied the same or caused execution thereof to be
stayed within thirty (30) days.
"Prime-based Advance" means an Advance which bears interest at the
Prime-based Rate.
"Prime-based Rate" means a per annum interest rate which is equal to the
greater of (a) the Prime Rate, or (b) the rate of interest equal to the sum of
one-percent (1%) plus the rate of interest equal to the average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers (the "Overnight Rates"), as published
by the Federal Reserve Bank of New York, or, if the Overnight Rates are not so
published for any day, the average of the quotations for the Overnight Rates
received by Bank from three (3) Federal funds brokers of recognized standing
selected by Bank, as the same may be changed from time to time.
"Prime Rate" means the per annum rate of interest established by Bank from
time to time as its prime rate, which rate may not necessarily be Bank's
lowest rate for loans.
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<PAGE> 6
"Quoted Rate" means a per annum rate of interest, other than the
Prime-based Rate, which is quoted by Bank and accepted by Company as the
applicable interest rate with respect to a Quoted Rate Advance hereunder.
"Quoted Rate Advance" means an Advance which bears interest at a Quoted
Rate.
COMPANY AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY
IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN
ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
No delay or failure of Bank in exercising any right, power or privilege
hereunder shall affect such right, power or privilege, nor shall any single or
partial exercise thereof preclude any further exercise thereof, or the exercise
of any other power, right or privilege. The rights of Bank under this Agreement
are cumulative and not exclusive of any right or remedies which Bank would
otherwise have, whether by other instrument, by law or otherwise.
J&L SPECIALTY STEEL, INC.
By: /s/ K. F. Vincent
---------------------------------
K. F. Vincent
Its: Executive Vice President,
Finance and Administration and
Chief Financial Officer
6
<PAGE> 7
EXHIBIT "A"
REQUEST FOR ADVANCE
TO: COMERICA BANK (the "Bank")
The undersigned hereby requests a * ________________ Advance, or confirms
such a request made by telephone, under a Promissory Note dated as of
October 1, 1998, in the principal amount of Ten Million Dollars
($10,000,000.00) (the "Note") made by the undersigned to the Bank, pursuant to
the following terms:
Advance Amount $________________
Quoted Rate (if applicable): ____% per annum
Advance Date: _______________, 19__
Repayment Date: _______________, 19__
The proceeds of this Advance shall be or have been deposited to the Account
No. _____________________ of the undersigned with the Bank or as follows:
_______________________________________________________________________________.
The undersigned warrants and certifies that no condition exists or event
has occurred which constitutes or, with the running of time or the giving of
notice, or both, would constitute, a Default under the Note or any other
agreement or instrument of the undersigned with the Bank, and the undersigned
further warrants and certifies that the making of the Advance requested hereby
shall not violate any of the terms, conditions or provisions of either of the
Credit Agreements referenced in the Note.
Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Note.
Dated this ________ day of _______________________, 19__.
J&L SPECIALTY STEEL, INC.
By:
-----------------------------------
Its:
---------------------------------
*Insert as applicable: "Prime-based" or "Quoted Rate".
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED) 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,137
<SECURITIES> 0
<RECEIVABLES> 50,590
<ALLOWANCES> 3,857
<INVENTORY> 152,781
<CURRENT-ASSETS> 240,387
<PP&E> 446,045
<DEPRECIATION> 126,071
<TOTAL-ASSETS> 782,460
<CURRENT-LIABILITIES> 143,374
<BONDS> 266,906
0
0
<COMMON> 388
<OTHER-SE> 296,082
<TOTAL-LIABILITY-AND-EQUITY> 782,460
<SALES> 373,627
<TOTAL-REVENUES> 373,627
<CGS> 376,236
<TOTAL-COSTS> 376,236
<OTHER-EXPENSES> 26,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,294
<INCOME-PRETAX> (61,878)
<INCOME-TAX> (22,184)
<INCOME-CONTINUING> (39,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,694)
<EPS-PRIMARY> (1.02)<F1>
<EPS-DILUTED> (1.02)<F1>
<FN>
<F1>The EPS information has been prepared in accordance with SFAS No. 128, and
therefore basic and diluted EPS have been entered in place of primary and
diluted, respectively.
</FN>
</TABLE>
