<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------------------------------------------
Commission file number 033-80618
----------------------------------------------------------
GS Technologies Operating Co., Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1656035
- - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
GS Technologies Corporation
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3204785
- - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
1901 Roxborough Road, Suite 200, Charlotte, NC 28211
- - --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrants' telephone number, including area code (704) 366-6901
-----------------------------
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. x Yes No
---- ----
There were 100 shares of GS Technologies Operating Co., Inc. Common Stock, par
value $.01 per share, outstanding at May 13, 1996. There were 100 shares of GS
Technologies Corporation Common Stock, par value $.01 per share, outstanding at
May 13, 1996.
This document consists of 17 sequentially numbered pages.
----------
1
<PAGE> 2
PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Technologies Corporation (the "Company" or "GST") was incorporated in 1993
to effect the November 12, 1993 acquisition (the "Acquisition") of the business
and net assets of Armco Worldwide Grinding Systems, a division of Armco Inc.
("Armco"). In August 1994, GS Technologies Operating Co., Inc. ("GSTOC")
issued $125 million of registered debt securities. These securities are fully
and unconditionally guaranteed by GSTOC's parent, GST. On October 5, 1995,
GSTOC issued an additional $125 million of registered debt securities which are
also guaranteed by the Company.
On August 17, 1995, the Company was party to a merger transaction whereby it
was merged into a subsidiary of a new parent company, GS Industries, Inc.
("GSI"), resulting in all of the issued and outstanding common stock of the
Company being converted into shares of common stock of GSI and the Company
becoming a wholly owned subsidiary of GSI. On October 5, 1995, GSI and the
Company through its wholly owned subsidiary, GSTOC, purchased all the common
stock of Georgetown Industries, Inc. ("GII") and GII and its subsidiaries are
now wholly owned subsidiaries of GSTOC.
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
ended March 31, 1995 and March 31, 1996 3
Unaudited Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1995 and March 31, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
</TABLE>
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1995
(as restated,
Note 6) March 31, 1996
------------- --------------
<S> <C> <C>
Net sales $129,261 $221,340
Operating costs and expenses:
Cost of products sold 107,379 194,664
Selling, general and administrative expenses 8,589 13,536
Depreciation and amortization 1,700 7,721
-------- --------
117,668 215,921
-------- --------
Operating profit 11,593 5,419
Other income (expense)
Interest income 194 132
Interest expense (3,994) (11,296)
Equity in income of joint ventures 1,239 869
Fees from joint ventures 302 557
Other, net (295) (54)
-------- --------
(2,554) (9,792)
-------- --------
Income (loss) before income tax 9,039 (4,373)
Income tax (provision) benefit (3,927) 2,214
-------- --------
Income before minority interest 5,112 (2,159)
Minority interest (2) (48)
-------- --------
Net income (loss) $ 5,110 $ (2,207)
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE> 4
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,451 $ 14,305
Receivables less allowance for doubtful accounts 114,828 110,150
Receivable from related parties 7,283 8,153
-------- --------
Total receivables 122,111 118,303
-------- --------
Inventories, net 159,154 152,367
Prepaid expenses and other current assets 9,969 10,170
Recoverable income taxes 8,684 4,090
-------- --------
Total current assets 311,369 299,235
Investments in joint ventures 13,366 23,300
Properties, net 296,126 303,112
Acquisition premium 93,848 93,293
Other assets 23,355 23,416
Deferred tax benefit 1,830 2,531
-------- --------
Total $739,894 $744,887
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 5,176 $ 20,726
Current portion of long-term debt 2,933 931
Payables and accrued liabilities 163,393 150,831
Other current liabilities 4,114 6,887
-------- --------
Total current liabilities 175,616 179,375
Long-term debt 369,994 374,762
Post retirement benefit obligations other than pensions 24,268 24,721
Deferred income taxes payable 32,260 31,054
Other long-term liabilities 31,147 30,236
Commitments and contingencies
-------- --------
Total liabilities 633,285 640,148
-------- --------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares
issued and outstanding at December 31, 1995 and March 31, 1996 1 1
Additional paid in capital 132,166 132,166
Retained earnings (accumulated deficit) (24,164) (26,371)
Cumulative translation adjustment (1,394) (1,057)
-------- --------
Total stockholder's equity 106,609 104,739
-------- --------
Total $739,894 $744,887
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE> 5
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Three Months
1995 Ended
(As restated, March 31,
Note 6) 1996
--------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 5,110 $(2,207)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,700 7,721
Loss on disposal of fixed assets 24
Deferred income taxes 1,330 (1,907)
Equity in undistributed income of joint ventures (1,239) (869)
Dividends from joint ventures 2,356
Retiree medical benefits accrued in excess of cash paid 507 452
Changes in operating assets and liabilities:
Receivables (7,626) 3,958
Inventories (2,036) 6,787
Payables and accrued liabilities (1,928) (12,562)
Other current liabilities (928) 2,773
Income taxes 2,073 4,594
Other (511) (1,603)
------- -------
Net cash provided by (used in) operating activities (3,548) 9,517
------- -------
INVESTING ACTIVITIES:
Purchase of properties (15,182) (14,906)
Proceeds from disposal of fixed assets 887
Investment in Siderperu (11,147)
Other (99)
------- -------
Net cash used in investing activities (15,281) (25,166)
FINANCING ACTIVITIES:
Dividends (5,541)
Proceeds from (payments on) notes payable, net (2,086) 15,550
Proceeds from issuance of long-term debt 19,588 65,871
Repayments of long-term debt (1,742) (63,105)
------- -------
Net cash provided by financing activities 10,219 18,316
------- -------
Effect of exchange rate changes on cash 65 187
------- -------
Net increase (decrease) in cash and cash equivalents (8,545) 2,854
CASH AND CASH EQUIVALENTS:
Beginning of period 19,317 11,451
------- -------
End of period $10,772 $14,305
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 7,505 $10,903
Cash paid (refunded) during the period for taxes $ (968) $(5,043)
</TABLE>
5
<PAGE> 6
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GS Technologies
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, these statements reflect all adjustments (which include
only normal recurring adjustments) necessary for a fair presentation.
2. FINANCIAL STATEMENT NOTES
Reference is made to the Notes to Combined/Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 for a summary of significant accounting policies and other
information, the substance of which has not changed materially as of March 31,
1996, unless otherwise noted herein.
3. 1994 RECAPITALIZATION
On August 23, 1994 GSTOC filed a registration statement under the Securities
Act of 1933, as amended, involving the issuance of $125,000 of Senior Notes
which was part of the recapitalization of the Company (the "Recapitalization").
The proceeds of the offering were used to repay outstanding debt of $54,862,
to pay a distribution of $65,000 ( the "Distribution") of which $61,223 was
paid to the Company's stockholders and $3,777 was paid in lieu of dividends to
Armco pursuant to the terms of a warrant agreement, and to partially fund debt
issuance costs of $6,850. The Company paid $45,000 of the Distribution upon
consummation of the offering, and on October 27, 1994 the Board of Directors
declared a dividend of $20,000 of which $14,457 was paid in November 1994 and
$5,543 was paid in January 1995. The $125,000 of debt securities issued in the
Recapitalization are Senior Notes due September 1, 2004. Interest is payable
semi-annually at an annual rate of 12%.
4. THE GEORGETOWN ACQUISITION
On August 17, 1995, the Company was party to a merger transaction whereby it
was merged with a subsidiary of a new parent company, GS Industries, Inc.
("GSI"), resulting in all of the issued and outstanding common stock of the
Company being converted into shares of common stock of GSI and the Company
becoming a wholly owned subsidiary of GSI. On October 5, 1995, GSI and the
Company, through it's wholly owned subsidiary, GSTOC, acquired Georgetown
Industries, Inc. ("GII") which together with its subsidiaries are now wholly
owned subsidiaries of GSTOC.
GSI's common stockholders and certain members of management purchased stock of
GSI for $30,000 in cash. GSI purchased a portion of the GII common stock with
approximately 4% of its common stock and a combination of pay-in-kind
subordinated notes and preferred stock of GSI, which in the aggregate, had a
fair market value of approximately $102,000. The pay-in-kind subordinated
notes and preferred shares are unsecured obligations of GSI and are not
guaranteed by any of GSI's subsidiaries. The $30,000 in cash and the common
stock of GII acquired by GSI were contributed to the Company and were in turn
contributed to GSTOC. GSTOC used the $30,000 in cash, proceeds from a $125,000
public senior note offering (see below) and proceeds from borrowings under it's
credit facilities, to pay the cash portion of the consideration in connection
with the merger of a newly-formed subsidiary of GSTOC with and into GII,
thereby acquiring the remaining GII common stock. The total consideration was
$307,000 of which $205,000 was cash and $102,000 was the fair value of the
securities described above.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
The $125,000 Senior Notes were issued by GSTOC on October 5, 1995 and are due
on October 1, 2005. Interest is payable semi-annually at an annual rate of 12
1/4%. GSTOC replaced it's existing credit facility with a new facility
providing up to $145,000 in aggregate availability secured by the Company's
current assets and entered into a new $50,000 term loan facility secured by
property, plant and equipment. Proceeds from these facilities were used to
complete the acquisition and to refinance GII indebtedness.
The acquisition has been recorded in accordance with the purchase method of
accounting. Accordingly, the purchase price plus direct costs have been
allocated to the assets acquired and liabilities assumed based on fair values
at the date of acquisition. A summary of the assets acquired, liabilities
assumed and the purchase price paid follows:
<TABLE>
<S> <C>
Consideration:
Cash portion of purchase price $205,000
Non-cash equity contributions from GSI 102,000
Fees and expenses 3,000
--------
$310,000
========
Allocated as follows:
Identifiable assets acquired $180,122
Increase in properties to fair value 58,108
Deferred income taxes (22,662)
Acquisition premium 94,432
--------
$310,000
========
</TABLE>
5. SIDERPERU INVESTMENT
The Company's Peruvian subsidiary, Acerco, and two consortium partners (the
"Consortium") acquired on March 21, 1996 through Sidercorp S.A. ("Sidercorp")
approximately ninety-six percent (96%) of the outstanding common stock of
Empresa Siderurgica del Peru S.A., ("Siderperu"). Siderperu is a steel
manufacturer which produced and sold approximately 250,000 tons of rebar and
flat rolled steel products in 1995. Each of the Consortium members invested
approximately $11,147 and owns one-third (1/3) of the outstanding capital stock
of Sidercorp. Under the terms of the acquisition, Acerco will manage the
operations of Siderperu. Also, in connection with the acquisition, Siderperu
entered into a Technical Assistance Agreement with each of Acerco and GST and
entered into a Steel Bar Supply Agreement with Acerco and the Company's Chilean
subsidiary, MolyCop Chile S.A.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
----------- ---------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 73,065 $ 80,945
Raw materials 80,361 66,176
-------- --------
Total 153,426 147,121
-------- --------
Inventories at LIFO:
Finished and semi-finished 6,413 5,899
Adjustment to state inventories at LIFO value (685) (653)
-------- --------
Total 5,728 5,246
-------- --------
$159,154 $152,367
======== ========
</TABLE>
The carrying value of inventories approximates replacement cost.
7
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
During the fourth quarter of 1995, the Company elected to change its method of
inventory valuation for its Kansas City Operations from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. Under the current
economic environment of low inflation, the Company believes that the FIFO
method will result in a better measurement of operating results. In accordance
with Accounting Principles Board Opinion No. 20, the change in the method of
inventory valuation from the LIFO method to the FIFO method has been applied
retroactively, and all prior period financial statements have been restated.
This change in accounting method had the effect of increasing previously
reported net income for the first quarter of 1995 by $594, net of income taxes.
The Italian operations continue to value inventory on the LIFO method.
7. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
----------- ----------
<S> <C> <C>
Trade payables $108,505 $110,341
Salaries and wages 12,035 9,150
Accrued interest payable 10,136 10,069
Other 32,717 21,271
-------- --------
$163,393 $150,831
======== ========
</TABLE>
8. NOTES PAYABLE
Notes payable at March 31, 1996 consists of $15,550 in short-term revolving
credit in Peru and $5,176 in short-term revolving credit in Italy.
9. SUMMARIZED FINANCIAL INFORMATION OF GSTOC
GS Technologies Operating Co., Inc. and its subsidiaries ("GSTOC") is a
wholly-owned subsidiary of the Company. GSTOC has issued Senior Notes
unconditionally guaranteed by the Company. Accordingly, summarized financial
information for GSTOC on a stand alone basis is provided below.
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
<S> <C> <C>
Current assets $255,850 $246,679
Noncurrent assets 375,444 381,291
-------- --------
Total $631,294 $627,970
======== ========
Current liabilities $132,901 $148,435
Noncurrent liabilities 452,012 436,511
-------- --------
584,913 584,946
Common stock, additional paid-in
capital and retained earnings 46,381 43,024
-------- --------
Total $631,294 $627,970
======== ========
</TABLE>
8
<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995 Three Months
(as restated, Ended March 31,
Note 6) 1996
------------------ ---------------
<S> <C> <C>
Net sales $89,384 $179,625
Cost of products sold 77,159 162,495
Selling, general and administrative expenses 3,516 8,916
Depreciation and amortization 771 6,823
------- --------
Operating profit 7,938 1,391
Interest expense (3,478) (10,445)
Service fees from joint ventures 302 892
Interest income and other, net 411 (117)
------- --------
Income (loss) before income tax 5,173 (8,279)
Income tax (provision) benefit (2,091) 3,589
------- --------
Net income (loss) $3,082 $ (4,690)
======= ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
INDEMNIFICATIONS FROM ARMCO
As part of the Purchase and Sale Agreement with Armco, the Company is
indemnified by Armco for known environmental matters and known quantified
income tax issues related to periods prior to November 12, 1993. The Company
has also been indemnified against all unknown other pre-closing environmental
matters or conditions for a period of six years from closing. Armco's indemnity
covers 100% of the first $10,000 subject to an aggregate deductible of $250 and
a fifty-fifty sharing for aggregate claims between $10,000 and $15,000 with a
maximum cap of $12,500. Management of the Company is not aware of any current
information which would indicate that Armco will not be able to satisfy its
obligation to the Company under these indemnifications.
ENVIRONMENTAL MATTERS
The Company's U.S. facilities are subject to a broad range of federal, state
and local environmental requirements, including those governing discharges to
the air and water, the handling and disposal of solid and hazardous wastes and
the remediation of contamination associated with releases of hazardous
substances at Company facilities and associated offsite disposal locations.
Liabilities with respect to hazardous substance releases arise principally
under the federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state laws, which impose strict,
retroactive, joint and several liability upon statutorily defined classes of
"potentially responsible parties." The Company's foreign facilities and joint
ventures are subject to varying degrees of environmental regulation in the
jurisdictions in which those facilities are located. Based on the continuing
review of environmental requirements the Company believes that, except for the
immaterial effect on the business of exceeding permit limits or other minor
regulatory violations, it is currently in compliance with environmental
requirements. Nevertheless, as is the case with steel producers in general, if
a release of hazardous substances occurs on or from the Company's properties or
any associated offsite disposal locations, or if contamination from prior
activities is discovered at such properties or locations, the Company may be
held liable and may be required to pay the cost of remedying the condition or
satisfying third party damage claims. The amount of any such liability could be
material. The Company devotes considerable resources to ensuring that its
operations are conducted in a manner that reduces such risks.
The Company has several environmental issues currently under discussion with
various federal and local agencies, some of these involve compliance and/or
remediation at certain properties.
9
<PAGE> 10
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
The Company records certain operating expenses for environmental compliance,
testing and other environmental related costs as expenses when incurred. When
it has been possible to determine reasonable estimates of liabilities related
to environmental issues, based upon information from engineering and
environmental specialists the Company has made provisions and accruals. At
March 31, 1996, $4,068 is accrued for environmental related issues. The Company
believes, based upon information currently available to management, that it
will not require expenditures to maintain compliance with environmental
requirements which would have a material adverse effect on its financial
condition, results of operations or competitive position.
PERU TAX CONTINGENCIES
The Company's Peruvian subsidiaries had received notice from the Peruvian tax
authorities of proposed tax assessments aggregating approximately $16,900 as of
December 31, 1994 for the years 1985 through 1990 relating to sales taxes,
employer taxes and income taxes. During 1995, the Company resolved
approximately $4,700 of the proposed tax assessments for a total payment of
$140, leaving an unsettled balance of approximately $12,200 as of March 31,
1996. The amount paid for resolution of such tax assessments was reimbursed in
full by Armco. The Peruvian tax authorities currently assess a 3.5% per month
increase in the aggregate amount of the tax assessment owed, which is
reflective of historical interest and inflation rates. In addition, the
Peruvian tax authorities can assess penalties that range from 6.5% to 100% of
disputed tax assessments that are ultimately collected, which penalties may
materially increase the amount of the proposed tax assessments. The Company has
obtained a specific indemnity from Armco for the first $1,750 of any amount of
tax assessment paid, without regard to any deductible. The Company would also
be indemnified by Armco for the full amount of any tax assessment paid in
excess of $1,750 pursuant to the general indemnification provisions of the
Company's agreement with Armco, subject to a one time deductible of $650.
LABOR RELATIONS
A significant portion of the Company's employees are covered by collective
bargaining agreements negotiated with various unions. These agreements expire
at various times between December 1996 and March 1999. In the course of
contract negotiations, the Company has on occasion been affected by work
stoppages which have been short in duration and have not had a material adverse
effect on the Company's results of operations or financial position.
Management believes that its relationships with the unions are generally good
and that upcoming negotiations will be conducted on a mutually satisfactory
basis.
OTHER CONTINGENCIES
There are various claims pending involving the Company arising out of the
normal course of business. In management's opinion, the ultimate liability
resulting therefrom will not have a material adverse effect on the financial
position or results of operations of the Company.
10
<PAGE> 11
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
11. GEOGRAPHIC INFORMATION
Financial information, by geographic region, for the Company is presented
below. United States includes GSTOC and MEI. South America is principally
comprised of the Company's operations in Chile and Peru. Europe and Other
includes the Company's operations in Europe (principally Italy), Canada and
other joint venture interests around the world.
<TABLE>
<CAPTION>
March 31, 1996 and the three months ended March 31, 1996
--------------------------------------------------------
United South Europe
States America and Other Total
------------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Net sales $175,340 $19,115 $26,885 $221,340
Equity in income of joint ventures 450 419 869
Operating profit (loss) 3,657 2,169 (407) 5,419
Net income (loss) (3,597) 1,165 225 (2,207)
Identifiable assets 567,918 61,734 115,235 744,887
Total liabilities 550,525 43,140 46,483 640,148
Net assets 17,393 18,594 68,752 104,739
</TABLE>
<TABLE>
<CAPTION>
The three months ended March 31, 1995 (as restated, Note 6)
-----------------------------------------------------------
United South Europe
States America and Other Total
------------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales $105,319 $16,796 $7,146 $129,261
Equity in income of joint ventures 1,239 1,239
Operating profit 9,683 1,732 178 11,593
Net income 3,866 1,072 172 5,110
</TABLE>
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the unaudited consolidated financial
statements and accompanying notes. The results of operations, cash flows and
financial position reported by the Company for 1996 are not comparable with
1995 due to the acquisition of Georgetown Industries, Inc. ("GII") on October
5, 1995.
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, 1995 March 31, 1996
(1)
-------------- --------------
<S> <C> <C>
Net sales $129,261 $221,340
Cost of products sold 107,379 194,664
Selling, general and administrative expenses 8,589 13,536
Depreciation and amortization 1,700 7,721
-------- --------
Operating profit 11,593 5,419
Net interest expense (2) (3,800) (11,164)
Other income (3) 1,244 1,324
Income tax (provision) benefit (3,927) 2,214
-------- --------
Net income (loss) $ 5,110 $ (2,207)
======== ========
</TABLE>
(1) - As restated to reflect the effect of retroactively changing the Kansas
City operations' method of valuing inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. See Note 6 to the
unaudited consolidated financial statements.
(2) - Net interest expense includes interest income, interest expense and
$459 of amortization of debt issuance costs.
(3) - Other income includes equity in income of joint ventures, fees from
joint ventures, minority interest and other, net.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995.
NET SALES. Net sales increased by 71.1% or $92.1 million as compared to the
prior year's quarter. Net sales from the GII acquisition for the quarter were
$106.8 million. The remaining reduction in net sales can be attributed to a
softening in wire rod selling prices and a lower shipment level in wire rods
from the Kansas City facility following the modernization to the rod mill.
Wire rod sales were $87.2 million in 1996 compared to $59.4 million in 1995.
The net increase results from the incorporation of wire rod sales from the
Georgetown, South Carolina facility (part of the GII acquisition) of $41.7
million, partially offset by a decrease in wire rod sales from the Kansas City
facility. Contributing to this decrease was a volume decline of approximately
29,000 net tons and a decrease in the average selling price of approximately
$26 per ton. The decrease in net tons shipped resulted from a gradual return
to normal capacity following the rod mill modernization which is expected to
result in a reduction of manufacturing costs by approximately $10.0 million per
year.
Domestic grinding media sales were down slightly to $26.8 million in 1996
compared to $27.6 million in 1995. A decrease of 6.9% in net tons shipped was
largely offset by a $16 increase in selling price per ton. Sales of grinding
media from international operations were $19.5 million in 1996 compared to
$16.5 million in 1995, an 18% increase which resulted from a 13.2% volume
increase and a $25 increase in average selling price per ton.
Additional 1996 sales resulting from the GII acquisition include $51.7 million
of wire products and $12.3 million of billets.
12
<PAGE> 13
COST OF PRODUCTS SOLD. Cost of products sold as a percent of net sales
increased to 87.9% in 1996 from 83.1% in 1995. This increase results from the
GII acquisition and an increase in production costs at the Kansas City
facility due to inefficiencies associated with the rod mill modernization which
did not commence until the second quarter of 1995. Gross profit increased by
$4.8 million or 21.9% to $26.6 million for the current quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses are up in total dollars to $13.5 million in 1996
compared to $8.6 million in 1995, but have decreased as a percent of net sales
to 6.1% from 6.6%. The increase in total dollars results from the GII
acquisition while the decrease as a percent of sales reflects cost reductions
and efficiencies of combining operations and management teams.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first quarter increased by $6.0 million to $7.7 million. Of this increase,
$5.3 million results from the GII acquisition and the remainder from capital
additions and improvements.
NET INTEREST EXPENSE. The increase in net interest expense of $7.3 million
results from debt incurred to effect the GII acquisition. Of this total, $459
relates to amortization of loan acquisition costs.
OTHER INCOME. Other income, which is primarily equity in income of joint
ventures and fees from joint ventures increased to $1.3 million for 1996
compared to $1.2 million for 1995.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax benefit of
$2.2 million on a pre-tax loss of $4.4 million for the first quarter of 1996 at
an effective rate of 50.6%. This compares to income tax expense of $3.9
million on pre-tax earnings of $9.0 million for the first quarter of 1995 at an
effective rate of 43.4%. The effective rate increased primarily due to
limitations on the Company's ability to currently utilize foreign tax credits
and the nondeductibility of amortization expense associated with the premium
recorded in connection with the GII acquisition.
NET INCOME (LOSS). As a result of the various factors noted above, the Company
experienced a net loss for the first quarter of 1996 of $2.2 million compared
to net income of $5.1 million for the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had total cash and cash equivalents of $14.3
million, an increase of $2.9 million from December 31, 1995. Operating
activities provided $9.5 million of cash during the three months ended March
31, 1996. Net income before non-cash adjustments for depreciation and
amortization and equity in undistributed earnings of joint ventures was $4.6
million. Dividends received from joint ventures provided $2.4 million in cash.
Changes in operating assets and liabilities provided $3.9 million of cash
comprised principally of the net of a decrease in accounts receivable ($4.0
million) and a decrease in inventories ($6.8 million) offset by a decrease in
payables and accrued liabilities ($12.6 million). Financing activities provided
$18.3 million of cash from borrowings on revolvers and long-term debt, and
$14.9 million was invested in properties. The Company also invested $11.1
million to purchase a one-third interest in a joint venture in Peru which will
operate a steel manufacturer which produces rebar and flat rolled steel
products.
Management believes that funds available from the Company's cash flow from
operations and credit facilities will be sufficient, in the aggregate, to fund
planned working capital and capital expenditure requirements for the remainder
of 1996. There are fluctuations in the Company's working capital needs over
the course of a year, generally influenced by various factors such as
seasonality, inventory levels and the timing of raw material purchases. Due to
the cyclical nature of the Company's business, management believes that it is
important for the Company to maintain borrowing facilities in excess of working
capital requirements.
The Company currently intends to make an equity investment of $15 million to
$20 million primarily during 1997 in American Iron, a joint venture to build
and operate a scrap substitute facility.
13
<PAGE> 14
The Company will manage its liquidity needs on a consolidated basis with
borrowings that will be available under the Revolving Credit Facility, a
revolving credit facility at MEI and various credit facilities available at its
international subsidiaries and joint ventures. Management believes the
additional borrowing availability under the Credit Facilities (as defined
below) and the cash flows from operations will be sufficient to meet
anticipated capital expenditures through the term of the capital investment
program and to make principal and interest payments on the Company's
indebtedness when due. The Company believes cash flows from operations will
continue to improve due to the ongoing benefits of its business strategy,
including its cost reduction program and planned capital investment projects.
Borrowings under the Revolving Credit Facility bear interest at a floating
rate. Increases in prevailing rates could adversely affect the Company's cash
flow. To the extent that the interest rate on the Revolving Credit Facility
increases or the principal amount outstanding increases, there will be
corresponding increases in the Company's interest obligations. Under the
Revolving Credit Facility, the Company's availability is $145 million (subject
to a borrowing base limitation). As of March 31, 1996, the availability under
the Revolving Credit Facility was $142 million, of which $53 million was
outstanding.
The acquisition premium recorded as a result of the GII Acquisition is being
amortized over a period of forty years. Management believes that the use of
the forty-year amortization period is appropriate given the expected longevity
of the industry, Georgetown's leading market position, Georgetown's utilization
of modern manufacturing technology, and the diversity and lack of expected
obsolescence of Georgetown's products.
ENVIRONMENTAL AND TAX CONTINGENCIES AND INDEMNIFICATION
Note 10 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 10 to the Company's Unaudited Consolidated Financial
Statements is herein incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) All exhibits otherwise required in connection with this
quarterly report on Form 10-Q have heretofore been filed with the
Securities and Exchange Commission.
(b) No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 13th day of May, 1996.
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
---------------------------------
Luis E. Leon
Senior Vice President, Chief Financial
Officer and Treasurer
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 13th day of May, 1996.
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
---------------------------------
Luis E. Leon
Senior Vice President, Chief Financial
Officer and Treasurer
17
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