<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
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<S> <C>
For the quarterly period ended June 30, 1996
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Commission file number 033-80618
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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
-----------------------------------------------
</TABLE>
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 August 10, 1995. There were 100 shares of
GS Technologies Corporation Common Stock, par value $.01 per share, outstanding
at August 9, 1996.
This document consists of 21 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
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ITEM PAGE
<S> <C>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Income for the Three Months and Six Months
ended June 30, 1996 and June 30, 1995 3
Unaudited Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1996 and June 30, 1995 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
</TABLE>
2
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- ----------------------------------
June 30, 1995 June 30, 1995
(as Restated, (as Restated,
Note 6) June 30, 1996 Note 6) June 30, 1996
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 110,272 $ 246,268 $ 239,534 $ 467,608
Operating costs and expenses:
Cost of products sold 90,487 212,742 197,866 407,406
Selling, general and administrative
expenses 8,335 14,245 16,925 27,781
Depreciation and amortization 1,792 8,089 3,492 15,810
------------- ------------- ------------- -------------
100,614 235,076 218,283 450,997
------------- ------------- ------------- -------------
Operating profit 9,658 11,192 21,251 16,611
Other income (expense)
Interest income 261 203 455 335
Interest expense (3,723) (11,260) (7,882) (22,556)
Equity in income of joint ventures 1,011 981 2,251 1,850
Fees from joint ventures 315 681 616 1,238
Other, net 87 (28) (43) (82)
------------- ------------- ------------- -------------
(2,049) (9,423) (4,603) (19,215)
------------- ------------- ------------- -------------
Income (loss) before income tax 7,609 1,769 16,648 (2,604)
Income tax (provision) benefit (3,232) (812) (7,159) 1,402
------------- ------------- ------------- -------------
Income (loss) before minority interest 4,377 957 9,489 (1,202)
Minority interest (55) (98) (57) (146)
------------- ------------- ------------- -------------
Income (loss) before cumulative
effect of accounting change 4,322 859 9,432 (1,348)
Cumulative effect of change in
accounting for spare parts
inventories, net of taxes of
$2,444 (Note 6) 3,556
------------- ------------- ------------- -------------
Net income $ 4,322 $ 859 $ 9,432 $ 2,208
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,451 $ 12,274
Receivables less allowance for doubtful accounts 114,828 117,709
Receivable from related party 7,283 8,639
----------- --------
Total receivables 122,111 126,348
----------- --------
Inventories 159,154 144,418
Prepaid expenses and other current assets 9,969 12,623
Recoverable income taxes 8,684 6,721
----------- --------
Total current assets 311,369 302,384
Investments in joint ventures 13,366 23,272
Properties, net 296,126 307,271
Acquisition premium 93,848 92,702
Other assets 23,355 22,969
Deferred tax benefit 1,830 2,490
----------- --------
Total $ 739,894 $751,088
=========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 5,176 $ 21,101
Current portion of long-term debt 2,933 449
Payables and accrued liabilities 163,393 153,628
Other current liabilities 4,114 7,142
----------- --------
Total current liabilities 175,616 182,320
Long-term debt 369,994 370,459
Post retirement benefit obligations other than pensions 24,268 25,224
Deferred income taxes payable 32,260 33,858
Other long-term liabilities 31,147 30,033
Commitments and contingencies
----------- --------
Total liabilities 633,285 641,894
----------- --------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares
issued and outstanding at December 31, 1995 and June 30, 1996 1 1
Additional paid in capital 132,166 132,166
Retained earnings (accumulated deficit) (24,164) (21,956)
Cumulative translation adjustment (1,394) (1,017)
----------- --------
Total stockholder's equity 106,609 109,194
----------- --------
Total $ 739,894 $751,088
=========== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six
Months Ended
June 30, 1995 Six
(as Restated, Months Ended
Note 6) June 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 9,432 $ 2,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change (3,556)
Depreciation and amortization 3,492 15,810
Loss on disposal of fixed assets 18
Deferred income taxes 2,739 938
Equity in undistributed income of joint ventures (2,251) (1,850)
Dividends from joint ventures 1,228 3,439
Retiree medical benefits accrued in excess of cash paid 1,015 955
Changes in operating assets and liabilities:
Receivables 8,989 (4,057)
Inventories (24,119) 18,292
Payables and accrued liabilities 7,363 (9,765)
Other current liabilities 1,455 3,028
Income taxes (1,536) 1,963
Other 4,609 (3,919)
------------ ------------
Net cash provided by operating activities 12,416 23,504
------------ ------------
INVESTING ACTIVITIES:
Purchase of properties (34,054) (26,569)
Cash received from (paid to) Armco, net (85)
Proceeds from disposal of properties 1,000 951
Investment in joint ventures (11,166)
------------ ------------
Net cash used in investing activities (33,139) (36,784)
------------ ------------
FINANCING ACTIVITIES:
Distributions to stockholders (5,541)
Proceeds from (payments on) notes payable, net (2,274) 15,925
Proceeds from issuance of long-term debt 22,595 118,746
Repayments of long-term debt (1,855) (120,765)
------------ ------------
Net cash provided by financing activities 12,925 13,906
------------ ------------
Effect of exchange rate changes on cash 109 197
------------ ------------
Net increase (decrease) in cash and cash equivalents (7,689) 823
Cash and cash equivalents:
Beginning of period 19,317 11,451
------------ ------------
End of period $ 11,628 $ 12,274
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for interest $ 7,964 $ 21,509
Cash paid (refunded) during the period for taxes $ 5,171 $ (3,697)
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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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 except for the cumulative effect of a change
in accounting) 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 June 30,
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 maturing October 5,
2006 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.
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.
6
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
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. INVESTMENT IN JOINT VENTURES
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.
On June 12, 1996, the Company entered into an agreement to form a new Italian
corporation to be called GSI Lucchini SpA. The new joint venture, to be 49%
owned by the Company, will manufacture and sell grinding media. Amounts
expensed to date in connection with the planned joint venture have not been
material. Manufacturing assets from the Company's Cividale forged ball plant
will be sold to the joint venture and used in production in the joint venture's
new facility.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ---------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 73,065 $ 71,765
Raw materials 80,361 67,573
----------- --------
Total 153,426 139,338
----------- --------
Inventories at LIFO:
Finished and semi-finished 6,413 5,562
Adjustment to state inventories at LIFO value (685) (482)
----------- --------
Total 5,728 5,080
----------- --------
$ 159,154 $144,418
=========== ========
</TABLE>
The carrying value of inventories approximates replacement cost.
7
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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 second quarter and first six months of 1996 by $972
and $1,566, net of income taxes, respectively.
Effective January 1, 1996, the Company changed its method of accounting for
spare parts from expensing the spares at time of purchase to inventorying the
spares and charging them to expense in the period in which they are used. This
method is consistent with prevailing industry practice as well as the policy
followed by the Company's other operations and in management's opinion, results
in a better matching of costs with related revenues. The effect of the change
was to increase net income for the six months ended June 30, 1996 by $3,556, net
of applicable taxes. Proforma results for the six month period ended June 30,
1995 would not have been materially different from historical results had this
new method been employed.
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, June 30,
1995 1996
------------ ---------
<S> <C> <C>
Trade payables $108,505 $111,103
Salaries and wages 12,035 13,243
Accrued interest payable 10,136 9,633
Other 32,717 19,649
-------- --------
$163,393 $153,628
======== ========
</TABLE>
8. NOTES PAYABLE
Notes payable at June 30, 1996 consists of $15,528, $4,431 and $1,412 in
short-term revolving credit in Peru, Italy and Chile, respectively.
8
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
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, June 30,
1995 1996
------------ ---------
<S> <C> <C>
Current assets $255,850 $248,145
Noncurrent assets 375,444 383,933
-------- --------
Total $631,294 $632,078
======== ========
Current liabilities $132,901 $154,149
Noncurrent liabilities 452,012 429,622
-------- --------
584,913 583,771
Common stock, additional paid-in
capital and retained earnings 46,381 48,307
-------- --------
Total $631,294 $632,078
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
June 30, 1995 June 30, 1995
(as Restated, (as Restated,
Note 6) June 30, 1996 Note 6) June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $66,442 $200,025 $155,827 $ 379,650
Cost of products sold 56,751 177,844 133,911 340,339
Selling, general and administrative
expenses 3,655 8,853 7,171 17,769
Depreciation and amortization 815 7,186 1,587 14,009
------ -------- -------- ----------
Operating profit 5,221 6,142 13,158 7,533
Interest expense (3,336) (10,347) (6,814) (20,792)
Fees from joint ventures 315 811 616 1,703
Other, net 265 (206) 677 (323)
------ -------- -------- ----------
Income (loss) before income tax 2,465 (3,600) 7,637 (11,879)
Income tax (provision) benefit (1,003) 1,630 (3,093) 5,219
------ -------- -------- ----------
Income (loss) before cumulative
effect of accounting change 1,462 (1,970) 4,544 (6,660)
Cumulative effect of change in
accounting 3,556
------ -------- -------- ----------
Net income (loss) $1,462 $ (1,970) $4,544 $ (3,104)
====== ======== ======== ==========
</TABLE>
9
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES
INDEMNIFICATIONS FROM ARMCO
As part of the Purchase and Sale Agreement with Armco, the Company has been
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 other unknown pre-closing environmental
matters or conditions for a period of six years from closing, 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. Additionally, for a
period of two years from closing, Armco's indemnity extends to all
unquantified, known or unknown, pre-closing tax-related exposures as well as
other pre-closing non-environmental contingent liabilities, subject to an
aggregate deductible of $650. 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, some of which involve compliance
and/or remediation at certain properties.
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
June 30, 1996, $4,139 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.
10
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
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. During the second quarter 1996, the Company resolved approximately
$3,500 of the remaining proposed tax assessments for a total payment of $88,
leaving an unsettled balance of approximately $8,700 as of June 30, 1996. The
amounts paid for resolution of such tax assessments were or will be 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.
11
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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>
June 30, 1996 and the six months ended June 30, 1996
----------------------------------------------------
United South Europe
States America and Other Total
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $370,929 $41,383 $ 55,296 $467,608
Equity in income (loss) of joint
ventures 1,549 (442) 743 1,850
Operating profit 10,390 4,319 1,902 16,611
Net income (842) 2,178 872 2,208
Identifiable assets 582,092 58,492 110,504 751,088
Total liabilities 559,622 40,386 41,886 641,894
Net assets 23,214 17,362 68,618 109,194
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1995
---------------------------------------------------
Total (as
United South Europe Restated,
States America and Other Note 6)
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $189,816 $34,438 $15,280 $239,534
Equity in income of joint ventures 2,251 2,251
Operating profit 17,607 3,095 549 21,251
Net income 6,752 2,081 599 9,432
</TABLE>
12
<PAGE> 13
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 INCOME
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, 1995(1) June 30, 1996 June 30, 1995(1) June 30, 1996
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 110,272 $ 246,268 $ 239,534 $ 467,608
Cost of products sold 90,487 212,742 197,866 407,406
Selling, general and administrative expenses 8,335 14,245 16,925 27,781
Depreciation 1,792 8,089 3,492 15,810
--------------- ------------ --------------- ------------
Operating profit 9,658 11,192 21,251 16,611
Net interest expense (2) (3,462) (11,057) (7,427) (22,221)
Other income (3) 1,358 1,536 2,767 2,860
Income tax provision (3,232) (812) (7,159) 1,402
--------------- ------------ --------------- ------------
Income (loss) before cumulative effect of
accounting change 4,322 859 9,432 (1,348)
Cumulative effect of accounting change 3,556
--------------- ------------ --------------- ------------
Net income $ 4,322 $ 859 $ 9,432 $ 2,208
=============== ============ =============== ============
</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
amortization of debt-issuance costs.
(3) - Other income includes equity in income of joint ventures, fees from joint
ventures, minority interest and other, net.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
NET SALES. Net sales for the six months ended June 30, 1996 were $467.6
million compared to $239.5 million for the first six months of 1995, an
increase of $228.1 or 95.2%. Net sales for the acquired GII group were $230.4
million. Excluding the GII acquisition, sales decreased $2.3 million resulting
principally from a softening in wire rod selling prices.
Wire rod sales were $184.0 million for the first six months of 1996 compared to
$96.4 million for the same period of 1995. The net increase results from
incorporating wire rod sales from the Georgetown, South Carolina facility (part
of the GII acquisition) of $90.5 million for the first half of 1996.
Additionally, wire rod shipments from the Kansas City facility were up 18,700
tons due to the second quarter 1995 shutdown for the rod mill modernization
project. The effect of this volume increase was offset by a decline in average
wire rod selling prices of $24 per ton compared to the first half of 1995.
Grinding media sales of $97.4 million for the six months ended June 30, 1996
exceeded prior year six month sales by $7.9 million resulting from an 11,000
ton increase in volume and an increase in average selling price of $12 per ton.
Additional sales for the first six months resulting from the GII acquisition
include $110.3 million of wire products and $26.3 million of billets.
13
<PAGE> 14
COST OF PRODUCTS SOLD. Cost of products sold as a percent of net sales for the
first six months increased to 87.1% in 1996 from 82.6% in 1995. This increase
results from an increase in production costs at the Kansas City facility due to
inefficiencies associated with the rod mill modernization combined with the
decline in wire rod prices noted above. As a result, gross margin remains low
and tends to be at lower than historical levels at 12.9% for the first half of
1996 compared to 17.4% for the same period in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were up in total dollars to $27.8 million in the first
six months of 1996 compared to $16.9 million in 1995, but have decreased as a
percent of net sales to 5.9% from 7.1%. 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 six months increased by $12.3 million to $15.8 million. Of this
increase, $10.9 million results from the GII acquisition and the remainder from
capital additions and improvements.
NET INTEREST EXPENSE. The increase in net interest expense of $14.8 million to
$22.6 million results from debt incurred to effect the GII acquisition and
borrowings related to the investment in Sidercorp. Of this total, $0.9 million
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 $2.9 million for the six
months ended June 30, 1996 compared to $2.8 million for 1995.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax benefit of
$1.4 million on a pre-tax loss of $2.7 million for the first six months of 1996
at an effective rate of 50.9%. This compares to income tax expense of $7.2
million on pre-tax earnings of $16.6 million for the first six months 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.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING. Effective January 1, 1996, the
Company adopted, at its Kansas City facility, the prevailing industry practice
which is to inventory spare parts when purchased and to charge them to
operations as utilized. This is consistent with the policy followed by the
Company's other operations and in management's opinion, results in a better
matching of costs with related revenues. Net earnings for the six months ended
June 30, 1996 include income of $3,556, net of applicable taxes, for the
cumulative effect of this change.
NET INCOME. As a result of the various factors noted above, the Company had
net income for the first six months of 1996 of $2.2 million compared to net
income of $9.4 million for the first six months of 1995.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
NET SALES. Net sales for the second quarter ended June 30, 1996 were $246.3
million compared to $110.3 million for the second quarter of 1995, an increase
of $135.9 million or 123.3%. Net sales for the acquired GII group were $123.1
million. The remainder of the increase results from volume increases in wire
rod and grinding media as partially offset by a decline in wire rod selling
prices.
Wire rod sales were $96.8 million for the second quarter of 1996 compared to
$37.0 million for 1995. Excluding wire rod sales resulting from the GII
acquisition of $48.8 million, the net increase is $11.0 million. This increase
results from lower 1995 volume of approximately 103,000 tons compared to 1996
volume of 151,000 tons as the mill continues to ramp up production following
the rod mill modernization which required a shut down of 36 days during the
second quarter of 1995.
Grinding media sales of $50.6 million for the quarter exceeded prior year sales
of $45.3 million resulting from the combination of a volume increase of
approximately 12,000 tons and a price increase of $5 per ton.
Additional sales for the three months ended June 30, 1996 resulting from the
GII acquisition include $58.3 million of wire products and $14.0 million of
billets.
14
<PAGE> 15
COST OF PRODUCTS SOLD. Cost of products sold as a percent of net sales
increased to 86.4% in the second quarter of 1996 from 82.1% in 1995. This
increase results from an increase in production costs at the Kansas City
facility due to inefficiencies associated with the rod mill modernization and
the decline in wire rod selling prices. As a result, gross margin decreased to
13.6% in second quarter 1996 from 17.9% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were up in total dollars to $14.2 million in 1996
compared to $8.3 million in 1995, but have decreased as a percent of net sales
to 5.8% from 7.6%. 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
second quarter increased by $6.3 million to $8.1 million. Of this increase,
$5.7 million results from the GII acquisition and the remainder from capital
additions and improvements.
NET INTEREST EXPENSE. The increase in net interest expense of $7.6 million
results from debt incurred to effect the GII acquisition and borrowings related
to the investment in Sidercorp. Of this total, $0.5 million 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 $1.5 million for 1996
compared to $1.4 million for 1995.
INCOME TAX PROVISION/BENEFIT. The company recorded an income tax provision of
$0.8 million on pre-tax earnings of $1.8 million for the second quarter of 1996
at an effective rate of 48.6%. This compares to income tax expense of $3.2
million on pre-tax earnings of $7.6 million for the second quarter of 1995 at
an effective rate of 42.8%. 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
had net income for the second quarter of 1996 of $0.9 million compared to net
income of $4.3 million for the second quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had total cash and cash equivalents of $12.3
million, mostly at the Company's foreign operations, an increase of $0.8
million from December 31, 1995. Operating activities for the six months
provided $23.5 million of cash during the six months ended June 30, 1996.
Dividends received from joint ventures provided $3.4 million in cash. Changes
in operating assets and liabilities provided $1.9 million of cash. Financing
activities provided $13.9 million of cash from borrowings on revolvers and
long-term debt, and $26.6 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 up to $22.5
million primarily during 1997 in American Iron Reduction LLC, a joint venture
to build and operate a scrap substitute facility. This joint venture will be
financed on a non-recourse basis to GSTOC and the Company.
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.
15
<PAGE> 16
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 availability is $145 million (subject to
a borrowing base limitation). As of June 30, 1996, the availability under the
Revolving Credit Facility was $134 million, of which $58.5 million was
outstanding.
The unsecured MEI revolving credit agreement permits borrowings on the
revolving line of credit up to $9 million. Unused availability under this
facility was $5.2 million at June 30, 1996.
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 in herein
incorporated by reference.
16
<PAGE> 17
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) Exhibits filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
18 Letter regarding Change in Accounting Principles
27 Financial Data Schedule
</TABLE>
All other 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 during the quarter ended June 30,
1996.
17
<PAGE> 18
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 9th day of August, 1996.
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
-------------------------------------------
Luis E. Leon
Senior Vice President, Chief Financial Officer
and Treasurer
18
<PAGE> 19
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 9th day of August, 1996.
GS Technologies Corporation
(Registrant)
By: /s/ Luis E. Leon
----------------------------------------------
Luis E. Leon
Senior Vice President, Chief Financial Officer
and Treasurer
19
<PAGE> 1
EXHIBIT 18
To the Board of Directors
of GS Technologies Corporation
Dear Directors:
We have been furnished with a copy of the Corporation's Form 10-Q for the
quarter ended June 30, 1996. Note 6 therein describes a change in the method
of accounting for spare parts and manufacturing supplies from expensing the
parts and supplies at the time of purchase to inventorying the spare parts and
supplies, and charging them to expense in the period in which they are used.
It should be understood that the preferability of one acceptable method of
inventory accounting over another has not been addressed in any authoritative
accounting literature and in arriving at our opinion expressed below, we have
relied on management's business planning and judgment. Based upon our
discussions with management and the stated reasons for the change, we believe
that such change represents, in your circumstances, the adoption of a
preferable alternative accounting principle for spare parts in conformity with
Accounting Principles Board Opinion No. 20.
We have not made an audit in accordance with generally accepted auditing
standards of the financial statements of GS Technologies Corporation for the
three-month or six-month periods ended June 30, 1996 or June 30, 1995 and,
accordingly, we express no opinion thereon or on the financial information
filed as part of the Form 10-Q of which this letter is to be an exhibit.
Yours very truly,
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Charlotte, North Carolina
August 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,274
<SECURITIES> 0
<RECEIVABLES> 126,348<F1>
<ALLOWANCES> 0
<INVENTORY> 144,418
<CURRENT-ASSETS> 302,384
<PP&E> 307,271<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 751,088
<CURRENT-LIABILITIES> 302,384
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 109,193
<TOTAL-LIABILITY-AND-EQUITY> 751,088
<SALES> 467,608
<TOTAL-REVENUES> 467,608
<CGS> 407,406
<TOTAL-COSTS> 450,997
<OTHER-EXPENSES> (3,341)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,296
<INCOME-PRETAX> (2,750)
<INCOME-TAX> (1,402)
<INCOME-CONTINUING> (1,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,556<F1>
<NET-INCOME> 2,208
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS PRESENTED ARE NET.
</FN>
</TABLE>
