<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
GS TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3204785
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1901 ROXBOROUGH ROAD
SUITE 200
CHARLOTTE, NORTH CAROLINA 28211
(Address of principal executive office) (Zip Code)
REGISTRANT'S 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.
Yes [X] No [ ]
There were 100 shares of GS Technologies Operating Co., Inc. Common
Stock, par value $.01 per share, outstanding at May 1, 1998. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at May 1, 1998.
This document consists of 15 sequentially numbered pages.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Technologies Corporation (the "Company" or "GST") a wholly-owned subsidiary
of GS Industries ("GSI"), is the largest producer of steel wire rod in North
America and of grinding media and mill liners for the worldwide mining industry
as well as a leading producer of certain wire products for the U.S. and export
markets. GST has fully and unconditionally guaranteed two series of senior notes
totaling $250 million aggregate principal amount issued by its wholly-owned
subsidiary, GS Technologies Operating Co., Inc. ("GSTOC").
FORWARD-LOOKING STATEMENTS
The forward-looking statements, included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Words such as "expects", "anticipates", "believes" and "intends",
variations of such words and similar expressions are intended to identify such
forward-looking statements. Actual results could differ from those anticipated
in these forward-looking statements as a result of a number of factors
including, but not limited to, the factors discussed in that section.
Forward-looking information provided by the Company pursuant to the safe harbor
established under the Private Securities Litigation Reform Act of 1995 should be
evaluated in the context of these factors.
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, 1997 and March 31, 1998 3
Unaudited Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1997 and March 31, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
</TABLE>
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1997 1998
--------- ---------
<S> <C> <C>
Net sales $ 208,883 $ 216,690
Operating costs and expenses:
Cost of products sold 176,989 184,783
Selling, general and administrative expenses 11,550 10,942
Depreciation and amortization 7,209 7,665
--------- ---------
195,748 203,390
--------- ---------
Operating profit 13,135 13,300
Other income (expense):
Interest expense, net (10,200) (10,139)
Equity in income (loss) of joint ventures 1,816 (97)
Fees from joint ventures 887 1,179
Other, net 386 431
--------- ---------
(7,111) (8,626)
--------- ---------
Income from continuing operations before
income tax 6,024 4,674
Income tax provision (3,071) (2,014)
--------- ---------
Income from continuing operations 2,953 2,660
Discontinued operations (Note 3):
Income from discontinued operations,
net of taxes 1,402
Loss on disposal of discontinued operations,
net of taxes (23,965)
--------- ---------
(22,563)
--------- ---------
Net income (loss) $ (19,610) $ 2,660
========= =========
</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,
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,362 $ 3,745
Receivables less allowance for doubtful accounts 94,768 107,932
Receivable from related party 6,484 8,532
--------- ---------
Total receivables 101,252 116,464
--------- ---------
Inventories 144,063 146,451
Prepaid expenses and other current assets 6,495 6,379
Deferred tax benefit 1,023 849
--------- ---------
Total current assets 256,195 273,888
Investments in joint ventures 41,639 46,767
Properties, net 260,957 257,914
Acquisition premium 60,713 60,311
Other assets 26,773 26,025
--------- ---------
Total assets $ 646,277 $ 664,905
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities:
Notes payable $ 10,794 $ 11,672
Current portion of long-term debt 500 513
Income Taxes Payable 1,261 1,672
Payables and accrued liabilities 138,099 155,017
--------- ---------
Total current liabilities 150,654 168,874
Long-term debt 334,888 331,586
Post retirement benefit obligations other than pensions 26,848 27,415
Deferred income taxes payable 7,098 8,054
Other long-term liabilities 31,628 31,711
Commitments and contingencies (Note 8)
--------- ---------
Total liabilities 551,116 567,640
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares
issued and outstanding at December 31, 1997 and March
31, 1998 1 1
Additional paid in capital 132,166 132,166
Accumulated deficit (33,845) (31,185)
Cumulative translation adjustment (3,161) (3,717)
--------- ---------
Total stockholder's equity 95,161 97,265
--------- ---------
Total liabilities and stockholder's equity $ 646,277 $ 664,905
========= =========
</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, March 31,
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(19,610) $ 2,660
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 7,209 7,665
Loss on disposal of discontinued operations 23,965
Net cash from discontinued operations (3,095)
(Gain) loss on disposal of properties (1) (78)
Deferred income taxes 477 1,130
Equity in (income) loss of joint ventures (1,816) 97
Dividends from joint ventures 182 1,198
Post retirement benefit obligations accrued in excess of cash paid 302 567
Changes in operating assets and liabilities:
Receivables 8,878 (15,212)
Inventories (1,341) (2,388)
Payables and accrued liabilities (4,217) 16,918
Income taxes 959 411
Other (146) 875
-------- --------
Net cash provided by operating activities 11,746 13,843
-------- --------
INVESTING ACTIVITIES:
Purchase of properties (7,345) (4,483)
Investment in joint ventures (497) (6,447)
Proceeds from disposal of properties 13 437
-------- --------
Net cash used in investing activities (7,829) (10,493)
FINANCING ACTIVITIES:
Borrowings under long-term debt arrangements 52,371 55,525
Repayments on long-term debt (51,170) (58,814)
Proceeds from (payments on) notes payable, net (3,078) 878
-------- --------
Net cash provided by (used in) financing activities (1,877) (2,411)
-------- --------
Effect of exchange rate changes on cash (113) (556)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,927 383
CASH AND CASH EQUIVALENTS:
Beginning of period 7,747 3,362
-------- --------
End of period $ 9,674 $ 3,745
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 10,425 $ 10,523
Cash paid during the period for taxes $ 145 $ 489
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GS Technologies
Corporation (the "Company" or "GST") 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 unless otherwise noted herein) necessary for a fair
presentation.
2. FINANCIAL STATEMENT NOTES
Reference is made to the Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
for a summary of significant accounting policies and other information, the
substance of which has not changed materially as of March 31, 1998, unless
otherwise noted herein.
3. DISCONTINUED OPERATIONS
In 1997, the Company sold Georgetown Wire Company, Inc. and Tree Island
Industries, Ltd. (the "West Coast Wire Business") resulting in an estimated loss
on disposition of $24.0 million, net of taxes. Accordingly, the results of
operations, cash flows and net assets of this business have been classified as
discontinued operations for all periods presented. The West Coast Wire Business
had combined annual sales of $124.3 million and net earnings of $2.4 million in
1996.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------- ---------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 81,871 $ 86,830
Raw materials 60,870 58,664
--------- ---------
Total 142,741 145,494
--------- ---------
Inventories at LIFO:
Finished and semi-finished 1,382 997
Adjustment to state inventories at LIFO value (60) (40)
--------- ---------
Total 1,322 957
--------- ---------
$ 144,063 $ 146,451
========= =========
</TABLE>
The carrying value of inventories approximates replacement cost.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
5. JOINT VENTURES
The Company is a 50% shareholder in a Direct Reduced Iron (DRI) joint venture
which started operations January, 1998. This DRI facility is expected to produce
approximately 1.2 million metric tons of DRI annually. DRI is a substitute for
steel scrap used in the company's steel making facilities. The Company has made
equity contributions of $20 million ($6.4 million in the first quarter of 1998)
and under certain circumstances, the Company may be required to make an
additional equity contribution of up to $7.5 million. The Company is also party
to a DRI purchase agreement with this joint venture to purchase up to 600,000
metric tons of DRI annually.
All joint ventures are invoiced technical service fees pursuant to technology
and management support agreements. These amounts are included in the
accompanying income statements as a separate component of other income.
6. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
------------------ -----------------
<S> <C> <C>
Trade payables $ 86,015 $ 102,840
Salaries and wages 12,936 12,274
Accrued interest payable 10,509 9,709
Other 28,639 30,194
================== =================
$ 138,099 $ 155,017
================== =================
</TABLE>
7. NOTES PAYABLE
Notes payable of $11.7 million consists of short-term revolving credit
facilities in Chile and Peru.
7
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
8. COMMITMENTS AND CONTINGENCIES
LITIGATION OTHER CONTINGENCIES
In August, 1996, Samsung America, Inc. ("Samsung") filed an action in the
Supreme Court of the state of New York seeking monetary damages against GSI, the
Company, its Peruvian subsidiary, Acerco, and Acerco's partners in the Siderperu
joint venture, collectively, ("the Defendants"). Samsung seeks to recover
purported damages of $48.5 million and punitive damages of $10.0 million and
alleges that the Defendants failed to honor a written contract which entitled
Samsung to obtain an equity interest in Siderperu and to provide certain
distribution and trading services on an exclusive basis. In August 1997, the
action was dismissed from the Supreme Court of the State of New York. Samsung
has appealed the dismissal decision to the 1st Department Appellate Division of
the State of New York. The Company believes that it has substantial and
meritorious defenses and will defend itself accordingly.
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 materially effect the financial position or results of
operations of the Company.
INDEMNIFICATIONS FROM ARMCO
As part of the Purchase and Sale Agreement with Armco, the Company has been
indemnified by Armco for certain environmental issues at certain of its
facilities.
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 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 a manner that reduces such risks.
The Company has several environmental issues currently under discussion with
various federal and local agencies, 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 March 31, 1998, $2.6 million was 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.
8
<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
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. In the course of previous contract negotiations, the Company has
on occasion been affected by work stoppages.
During 1997 the Company's results were adversely impacted by a ten week work
stoppage at its Kansas City facility (April 2 -June 13, 1997) and a four week
work stoppage at its Georgetown facility (December 5, 1997 - January 7, 1998).
Long term agreements are now in place at both facilities.
The Company's collective bargaining agreement at the Jacksonville, Florida
facility is due to expire on April 30, 1998. The Company is currently in
discussions with the USWA.
9. 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), and other joint venture
interests around the world.
<TABLE>
<CAPTION>
March 31, 1998 and the three months ended March 31, 1998
-------------------------------------------------------------------
United South Europe
States America and Other Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 187,590 $ 26,830 $ 2,270 $ 216,690
Equity in income (loss) of joint ventures (838) 757 (16) (97)
Operating Profit 9,595 3,664 41 13,300
Net Income (loss) (1,288) 3,655 293 2,660
Identifiable assets 580,562 73,357 10,986 664,905
Total liabilities 520,604 42,821 4,215 567,640
Net assets 59,958 30,536 6,771 97,265
<CAPTION>
Three months ended March 31, 1997
-------------------------------------------------------------------
United South Europe
States America and Other Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $181,390 $21,868 $5,625 $208,883
Equity in income of joint ventures 1,563 253 1,816
Operating profit 12,563 360 212 13,135
Net income (loss) (21,582) 1,919 53 (19,610)
</TABLE>
9
<PAGE> 10
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
10. 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,
1997 1998
-------- --------
<S> <C> <C>
Current assets $191,164 $204,995
Noncurrent assets 337,626 321,170
-------- --------
Total assets $528,790 $526,165
======== ========
Current liabilities $100,405 $114,182
Noncurrent liabilities 371,485 355,034
-------- --------
Total liabilities 471,890 469,216
Common stock, additional paid-in
capital and retained earnings 56,900 56,949
-------- --------
Total $528,790 $526,165
======== ========
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1998
--------- ---------
<S> <C> <C>
Net sales $ 164,697 $ 167,935
Cost of products sold 142,664 148,180
Selling, general and administrative expenses 6,515 6,284
Depreciation and amortization 6,282 6,630
--------- ---------
Operating profit 9,236 6,841
Interest expense (9,904) (9,761)
Equity in loss of joint venture (1,253)
Fees from joint ventures 1,049 1,296
Other, net 523 97
--------- ---------
Income (loss) from continuing operations before income tax 904 (2,780)
Income tax (provision) benefit (302) 1,329
--------- ---------
Income (loss) from continuing operations 602 (1,451)
Discontinued operations:
Income from discontinued operations 1,402
Loss on disposal (23,965)
--------- ---------
(22,563)
--------- ---------
Net income (loss) $ (21,961) $ 1,451
========= =========
</TABLE>
10
<PAGE> 11
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. All amounts and percentages are presented net
of discontinued operations unless otherwise noted.
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1997 March 31, 1998
-------------- --------------
<S> <C> <C>
Net sales $ 208.9 $ 216.7
Cost of products sold 177.0 184.9
Selling, general and administrative expenses 11.6 10.9
Depreciation and amortization 7.2 7.6
------ ------
Operating profit 13.1 13.3
Net interest expense (1) (10.2) (10.1)
Other income (2) 3.1 1.5
Income tax (provision) benefit (3.0) (2.0)
------ ------
Income (loss) from continuing operations 3.0 2.7
Discontinued operations 1.4
Loss on disposal of business (24.0)
------ ------
Net income $ (19.6) $ 2.7
====== ======
</TABLE>
(1) - Net interest expense includes interest income, interest expense and
$459 of amortization of debt issuance costs.
(2) - Other income includes equity in income (loss) of joint ventures, fees
from joint ventures, minority interest and other, net.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
DISCONTINUED OPERATIONS. In 1997, the Company sold its West Coast Wire Business
resulting in an estimated loss on disposition of $24.0 million, net of taxes.
Accordingly, the results of operations of this business have been reclassified
as discontinued operations and the following discussion excludes results of this
business for all periods presented.
1997 WORK STOPPAGES. The Company's labor contracts for the Kansas City and
Georgetown mini-mills expired in March 1997 and December 1997, respectively.
When the Company and the USWA were unable to reach accord on the terms of new
contracts, the unions in each location stopped working. Management estimates
that the ten week work stoppage in Kansas City cost the Company approximately
$21.9 million in pre-tax earnings, primarily in the second quarter of 1997. The
Georgetown work stoppage, which occurred during the last three weeks of 1997 and
the first week of 1998, is estimated to have cost approximately $6.8 million in
pre-tax earnings, primarily in the fourth quarter of 1997.
NET SALES. Net sales increased by $7.8 million over first quarter 1997 to $216.7
million. The Company generated new sales of $7.1 in 1998 from DRI purchased for
resale from the Company's 50% owned DRI joint venture. This joint venture
completed construction of its plant and commenced production of DRI in January
1998. Due to start-up production costs, initial sales of DRI by the company were
at unfavorable margins. As the facility ramps-up to its rated capacity of 1.2
million metric tons, it is anticipated that margins will improve.
Wire rod sales were up $5.4 million to $111.6 million for the first quarter of
1998 reflecting the combination of a $20 per ton improvement in average selling
price and a reduction in volume of approximately 3,500 tons. The reduction in
shipments reflects the Georgetown work stoppage during the first week of 1998,
partially offset by improvements in the Kansas City rod mill performance.
11
<PAGE> 12
Grinding media sales were $49.4 million in the first quarter of 1998 compared to
$51.0 million in 1997. Shipments of grinding media in the 1st quarter 1997 were
high due to the prospect of a work stoppage in Kansas City. As a result,
worldwide grinding media shipments were below shipments for the same period in
1997, despite continued strength in the South American market. The net decrease
in volume was partially offset by a net world-wide increase in average selling
prices of $7 per ton.
The Company's wire products sales were down $.9 million for the first quarter of
1998 compared to the first quarter of 1997 reflecting continued competition from
imports and weather related delays in construction activity. Additionally, the
Company has increased its internal consumption of billets and had no third party
sales of billets in the first quarter of 1998. In the first quarter of 1997, the
Company sold 21,300 tons of billets to third parties.
COST OF PRODUCTS SOLD AND GROSS MARGINS. Cost of products sold as a percent of
net sales increased to 85.3% in 1998 from 84.7% in 1997. Margins were impacted
by 1) the work stoppage at Georgetown, 2) the reduction in domestic grinding
media volume, 3) higher production conversion costs, and 4) AIR's start-up
production costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter have decreased as a percent of net sales
to 5.0% from 5.5% as the Company continues to closely monitor costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first quarter increased by $.4 million to $7.6 million. This increase results
from capital additions and improvements.
NET INTEREST EXPENSE. Net interest expense of $10.1 million for the first
quarter remained relatively unchanged with the $10.2 million for the same
quarter of 1997.
OTHER INCOME. Other income, which is primarily equity in income (loss) of joint
ventures and fees from joint ventures, decreased to $1.5 million for 1998
compared to $3.1 million for 1997 due primarily to inclusion in first quarter
1998 of an equity loss from AIR operations of $1.3 million. The selling price of
AIR's DRI to the joint venture partners was designed to "pass through" debt
service principal payments and all operating costs except depreciation.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax provision of
$2.0 million on pre-tax earnings from continuing operations of $4.7 million for
the first quarter of 1998 at an effective rate of 43.1%. This compares to an
income tax provision of $3.1 million on a pre-tax earnings from continuing
operations of $6.0 million for the first quarter of 1997 at an effective rate of
51.1%. The effective rate remains high due primarily to limitations on the
Company's ability to utilize foreign tax credits and the nondeductibility of
amortization expense associated with the premium recorded in connection with the
GII acquisition.
INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the factors discussed
above, the Company had income from continuing operations of $2.7 million for the
first quarter of 1998 compared to income from continuing operations of $3.0
million for the first quarter of 1997.
NET INCOME (LOSS). Due to the loss on the disposal of the West Coast Wire
Business, the Company recorded a net loss for the first quarter of 1997 of $19.6
million compared to net income of $2.7 million for the first quarter of 1998.
COLLECTIVE BARGAINING AGREEMENT. The Company's collective bargaining agreement
at the Jacksonville, Florida facility is due to expire April 30, 1998. The
Company has begun discussions with the USWA.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had total cash and cash equivalents of $3.7
million, an increase of $.4 million from December 31, 1997. Operating activities
provided $13.8 million of cash during the three months ended March 31, 1998,
composed primarily of net earnings of $2.7 million, non-cash depreciation and
amortization of $7.7 million, changes in deferred taxes providing $1.1 million
and changes in current assets and liabilities for the quarter providing $1.3
million.
While 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 1998, management continues to evaluate alternative sources of funds. 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
12
<PAGE> 13
business, management believes that it is important for the Company to maintain
borrowing facilities in excess of working capital requirements.
As part of its strategy to expand its mining products business in South America,
the Company has signed an agreement to form a joint venture which will build and
operate a mill liner foundry in Santiago, Chile. The Company intends to make
equity investments of up to $9.0 million dollars through the end of 1999.
The Company will manage its liquidity needs on a consolidated basis with
borrowings that will be available under the Company's 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 Company's 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 $120.0 million (subject to a borrowing
base limitation). As of March 31, 1998, the unused availability under the
Revolving Credit Facility was $87.2 and $9.9 million of letters of credit were
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 8 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 8 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:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
14
<PAGE> 15
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 4th day of May, 1998.
GS Technologies Corporation
and
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
-------------------------------------------
Luis E. Leon, Senior Vice President-Finance
and Administration, Chief Financial Officer
and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,745
<SECURITIES> 0
<RECEIVABLES> 116,464<F1>
<ALLOWANCES> 0
<INVENTORY> 146,451
<CURRENT-ASSETS> 273,888
<PP&E> 257,914<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 664,905
<CURRENT-LIABILITIES> 168,874
<BONDS> 331,586
0
0
<COMMON> 1
<OTHER-SE> 97,264
<TOTAL-LIABILITY-AND-EQUITY> 664,905
<SALES> 216,690
<TOTAL-REVENUES> 216,690
<CGS> 184,783
<TOTAL-COSTS> 18,607
<OTHER-EXPENSES> (1,513)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,139
<INCOME-PRETAX> 4,674
<INCOME-TAX> 2,014
<INCOME-CONTINUING> 2,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,660
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS PRESENTED ARE NET.
</FN>
</TABLE>
