<PAGE> 1
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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 JUNE 30, 2000 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 August 14, 2000. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at August 14, 2000.
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<PAGE> 2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 190,610 $ 167,678 $ 368,784 $ 347,603
Operating costs and expenses:
Cost of products sold 179,319 150,762 346,588 307,791
Selling, general and administrative expenses 9,759 9,750 19,092 19,667
Depreciation and amortization 7,399 7,217 14,212 13,946
--------- --------- --------- ---------
196,477 167,729 379,892 341,404
--------- --------- --------- ---------
Operating income (loss) (5,867) (51) (11,108) 6,199
Other income (expense):
Interest expense, net (9,524) (9,381) (18,776) (18,717)
Equity in income (loss) of joint ventures 435 (5,579) 1,299 (7,553)
Fees from joint ventures 666 581 1,452 1,467
Other, net 642 130 1,426 67
--------- --------- --------- ---------
(7,781) (14,249) (14,599) (24,736)
--------- --------- --------- ---------
Loss from continuing operations before income taxes (13,648) (14,300) (25,707) (18,537)
Income tax provision (854) (736) (1,623) (1,697)
--------- --------- --------- ---------
Loss from continuing operations (14,502) (15,036) (27,330) (20,234)
--------- --------- --------- ---------
Discontinued operations (net of tax):
Gain on sale (Note 3) 5,153 -- 9,806 --
Income (loss) from operations -- 317 (21) 531
--------- --------- --------- ---------
Total discontinued operations 5,153 317 9,785 531
Loss before extraordinary item (9,349) (14,719) (17,545) (19,703)
Extraordinary item (Note 5) -- -- (1,522) --
--------- --------- --------- ---------
Net loss $ (9,349) $ (14,719) $ (19,067) $ (19,703)
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,132 $ 3,937
Receivables, net of allowance of $1,570 in 2000 and $1,740 in 1999 83,268 86,924
Receivables from related parties 4,863 6,301
Inventories (Note 6) 113,867 111,181
Prepaid expenses and other current assets 7,281 7,343
Deferred income taxes 5,325 5,691
--------- ---------
Total current assets 223,736 221,377
Investments in joint ventures 14,249 14,919
Property, plant and equipment, net 230,087 234,168
Net acquisition premium 40,082 40,652
Net assets of discontinued operations (Note 3) -- 53,473
Other assets 14,140 14,094
--------- ---------
Total assets $ 522,294 $ 578,683
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade payables $ 72,703 $ 88,081
Notes payable (Note 9) 14,693 5,882
Current portion of long-term debt 6 1,034
Accrued expenses 40,024 44,872
Income taxes payable 2,216 2,859
Payables to related parties 4,310 4,706
--------- ---------
Total current liabilities 133,952 147,434
Long-term debt 320,156 342,568
Post retirement benefit obligations other than pensions 30,887 29,995
Deferred income taxes 14,406 14,427
Other long-term liabilities 22,027 22,649
--------- ---------
Total liabilities 521,428 557,073
Commitments and contingencies (Note 10)
Shareholder's equity:
Common stock, $.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at June 30, 2000 and December 31, 1999 1 1
Additional paid in capital 139,072 139,072
Accumulated deficit (130,848) (111,781)
Accumulated comprehensive loss (7,359) (5,682)
--------- ---------
Total shareholder's equity 866 21,610
--------- ---------
Total liabilities and shareholder's equity $ 522,294 $ 578,683
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE> 4
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
2000 1999
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (19,067) $(19,703)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Extraordinary item 1,522 --
Depreciation and amortization 14,212 13,946
Gain on divestiture (10,680) --
Deferred income taxes 345 244
Equity in (income) loss of joint ventures (1,299) 7,553
Dividends from joint ventures 832 1,122
Post retirement benefit obligations accrued in excess of cash paid 892 866
Changes in operating assets and liabilities:
Receivables 4,738 (2,473)
Inventories (3,044) 13,681
Payables and accrued expenses (22,816) (11,597)
Other 3,146 (830)
--------- --------
Net cash provided by (used in) operating activities of continuing operations (31,219) 2,809
Operating cash flow from discontinued operations (2,754) 4,472
--------- --------
Net cash provided by (used in) operating activities (33,973) 7,281
--------- --------
INVESTING ACTIVITIES:
Capital expenditures (11,062) (8,468)
Investment in joint ventures -- (3,750)
Proceeds from divestitures 68,953 --
--------- --------
Net cash provided by (used in) investing activities of continuing operations 57,891 (12,218)
Investing cash flow from discontinued operations (70) (1,386)
--------- --------
Net cash provided by (used in) investing activities 57,821 (13,604)
--------- --------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 160,534 78,858
Repayments on revolving credit facility (137,332) (73,347)
Repayments on long-term debt (46,389) (250)
Proceeds from (payments on) notes payable, net 8,754 (662)
Deferred financing costs (2,218) --
Contribution from parent -- 466
--------- --------
Net cash provided by (used in) financing activities (16,651) 5,065
--------- --------
Effect of exchange rate changes on cash (2,002) (665)
--------- --------
Net increase (decrease) in cash and cash equivalents 5,195 (1,923)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,937 10,664
--------- --------
End of period $ 9,132 $ 8,741
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 18,934 $ 18,813
Cash paid during the period for taxes $ 2,763 $ 2,948
NON CASH FINANCING ACTIVITIES:
Contribution of notes payable from parent $ -- $ 4,900
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (9,349) $(14,719) $(19,067) $(19,703)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (2,137) (1,487) (1,677) (1,162)
-------- -------- -------- --------
Comprehensive loss $(11,486) $(16,206) $(20,744) $(20,865)
======== ======== ======== ========
</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 unaudited consolidated financial statements of GS Technologies Corporation
(the "Company" or "GST") included herein reflect, in the opinion of management,
all normal recurring adjustments necessary for a fair presentation. The
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The Consolidated Balance Sheet as of December
31, 1999 has been extracted from the audited consolidated financial statements
as of that date. Certain amounts previously reported have been reclassified to
conform to the current year 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, 1999
for a summary of significant accounting policies and other information, the
substance of which has not changed materially as of June 30, 2000, unless
otherwise noted herein.
3. DIVESTITURES
In January 2000, GS Technologies Operating Co., Inc. ("GSTOC"), a wholly owned
subsidiary of GST, completed the sale of the common stock of its subsidiary
Florida Wire and Cable, Inc. ("FWC") for $68.5 million in cash, subject to a
purchase price adjustment as defined in the stock purchase agreement. As a
result of the sale, GSTOC recorded a gain of $4.7 million (net of taxes of $.5
million) in the first quarter and deferred recognition of additional gain
pending resolution of purchase price adjustments proposed by the buyer. In May
2000, GSTOC paid a $1.9 million purchase price adjustment to the buyer and
recognized additional gain on the sale of $5.2 million (net of taxes of $.3
million). The disposition of the wire products business represents the disposal
of a segment of a business under APB No. 30. Accordingly, the unaudited
consolidated financial statements have been restated to reflect the operations
of FWC as a discontinued operation. Net sales of FWC were $25.7 million and
$50.4 million for the three months and six months ended June 30, 1999,
respectively.
In June 2000, GST completed the sale of the stock of its Italian subsidiary GST
Europa SpA for $2.3 million in cash, resulting in a loss of $1.0 million which
had previously been recorded as an estimated loss reserve in the fourth quarter
of 1999.
4. NEW CREDIT FACILITIES
In March 2000, GSTOC and its subsidiaries entered into a new credit agreement
with a financial institution consisting of a $120 million revolver, including a
$25 million subfacility for the issuance of letters of credit (subject to a
borrowing base limitation), collateralized by inventory and accounts receivable
(the "New Revolving Credit Facility") and a $10 million term loan collateralized
by property, plant and equipment and other noncurrent assets of GSTOC and its
subsidiaries (the "New Term Loan Facility"). The new credit facilities contain
no financial covenants other than a requirement that GSTOC maintain availability
under the New Revolving Credit Facility of at least $25 million and certain
capital expenditure limitations.
Proceeds from the refinancing were used to prepay the outstanding balances on
the existing GSTOC revolver and term loan and the ME International, Inc. ("MEI")
revolver and term loan. Simultaneous with the closing of the new credit
agreement, MEI, a producer of mill liners used in the mining industry, became a
wholly owned subsidiary of GSTOC. Previously, MEI was a wholly owned subsidiary
of GST.
In June 2000, GSTOC received an offer of guarantee from the U.S. Government on a
five year $50 million term loan facility. GSTOC expects to close with the lender
on this term loan facility, which will replace the New Term Loan Facility,
during the third quarter of 2000.
Borrowings under the New Revolving Credit Facility and New Term Loan Facility
bear interest at varying margins over the prime rate or the Eurodollar rate. The
rate in effect on June 30, 2000 was 9.7%.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
5. EXTRAORDINARY ITEM
The Company incurred an extraordinary charge of $1.5 million in the first
quarter of 2000 for the write off of unamortized financing costs in connection
with early debt retirement.
6. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2000 1999
-------- ------------
Finished and semi-finished $ 54,714 $ 57,841
Raw materials, supplies and other 59,153 53,340
-------- --------
Total $113,867 $111,181
======== ========
7. JOINT VENTURES
The Company has a 50% interest in American Iron Reduction, L.L.C. ("AIR"), a
joint venture company producing direct reduced iron ("DRI"). AIR has rated
capacity of approximately 1.2 million metric tons of DRI annually. DRI is a
substitute for high quality steel scrap used in certain steel making facilities.
The Company is also party to a DRI purchase agreement with AIR in effect through
March 2013, pursuant to which the Company agrees to purchase, subject to the
terms of the agreement, up to a maximum of 300,000 metric tons of DRI annually,
if produced and tendered by AIR. The Company's cost of acquiring DRI from AIR
approximates 50 % of AIR's total cash cost which excludes depreciation and
amortization and includes capital expenditures, cash interest and debt principal
paid by AIR. The Company accounts for DRI purchased from AIR and resold to
others as components of net sales and cost of products sold and accounts for DRI
used in its own steelmaking operations as a component of production cost. During
each of the six months ended June 30, 2000 and 1999, the Company sold most of
its purchases of DRI to third parties which resulted in a negative gross margin
of $1.6 million in 2000 and $1.5 million in 1999, excluding the minimum purchase
requirement settlement received (see Note 8). Income or losses from joint
ventures, including AIR, are reported in the consolidated statement of earnings
under the caption "Equity in income (loss) of joint ventures".
Due to construction problems with the adjacent third party material handling
facility, the date for the conversion of AIR's construction loan to term loan
status was extended until March 31, 1999 at which time AIR and its lenders were
unable to agree upon conditions of conversion and effective March 31, 1999, AIR
defaulted under the terms of the construction loan agreement. During the second
quarter of 2000, AIR completed a financial restructuring with its lenders that
provides AIR with cash flow relief over the next three years which should result
in lower DRI prices to GSTOC. The new agreement includes a clawback provision
whereby 75% of any excess in the DRI market price over the price paid for DRI by
GSTOC would be added to GSTOC's invoice price from AIR and applied to
outstanding principal. Additionally, under the terms of the restructuring, in
the event AIR is sold during the next three years, GSTOC will be released from
all obligations related to AIR and may be required, under certain circumstances,
to make a cash payment up to a maximum of $15 million.
8. CLAIM SETTLEMENTS
During the first six months of 1999, the Company recorded gains of $4.3 million
from settlements of antitrust claims against its electrode suppliers. Such gains
were recorded as a reduction to cost of products sold. Also in the first six
months of 1999, the Company received a settlement of $2.6 million from one of
its customers regarding minimum purchase requirements which was included in net
sales.
7
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
9. NOTES PAYABLE
Notes payable of $14.7 million consists of short-term revolving credit
facilities in Chile and Peru for working capital requirements and general
corporate purposes.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION AND 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's parent), 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. On June
20, 2000 the suit against GSI, the Company, and its Peruvian subsidiary was
dismissed on the grounds of lack of jurisdiction and subsequently appealed by
Samsung. The Company believes that it has substantial and meritorious defenses
and will defend itself accordingly.
The Company's subsidiary, Georgetown Steel Corporation, is the defendant in
three related suits filed in 1998 by certain private plaintiffs in the Court of
Common Pleas for the County of Georgetown, South Carolina. The plaintiffs allege
trespass, nuisance, negligence and violation of State and Federal law in
connection with the escape of "mill dust" and gases from Georgetown's steel mill
into the atmosphere and onto the plaintiffs' property in Georgetown, South
Carolina. The plaintiffs seek certification as a class in each case. The
plaintiffs in these actions seek unspecified actual, compensatory and punitive
damages. The Company believes the actions lack merit and intends to defend them
vigorously.
There are various other claims pending involving the Company and its
subsidiaries arising out of the normal course of business. In management's
opinion, the ultimate liability resulting therefrom will not materially effect
the financial position, results of operations or cash flows of the Company.
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.
8
<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
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 June 30, 2000, $2.5 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 cash flows.
INDEMNIFICATIONS FROM ARMCO
As part of the Purchase and Sale Agreement with Armco, Inc. ("Armco") (which
merged with and into AK Steel in September 1999), the Company has been
indemnified by Armco for certain environmental issues at certain of its
facilities.
LABOR RELATIONS
A significant portion of the Company's hourly employees are covered by
collective bargaining agreements negotiated with various unions. These
agreements expire at various times between October 2002 and November 2003. In
the course of previous contract negotiations, the Company has on occasion been
affected by work stoppages.
The Company's collective bargaining agreement at the Duluth, Minnesota facility
expired on August 24, 1999. The Company and the United Steelworkers Union were
unable to reach an agreement and a work stoppage by the union workers commenced.
Management at the Duluth facility, its salaried workforce and temporary workers
continued to operate the plant with no impact to production and without any
interruption in shipments to the Company's customers. In June 2000, the
employees covered by this agreement ratified a new five year agreement and will
return to work in August.
11. GEOGRAPHIC INFORMATION
Financial information by geographic region for the Company is presented below.
South America is principally comprised of the Company's operations in Chile and
Peru. Other includes the Company's operations in Europe, the Philippines and
other joint venture interests around the world including Canada, Mexico and
Australia.
<TABLE>
<CAPTION>
June 30, 2000 and the six months ended June 30, 2000
----------------------------------------------------
United South
States America Other Total
--------- -------- ------ ---------
<S> <C> <C> <C> <C>
Net sales $ 313,853 $ 49,566 $5,365 $ 368,784
Operating income (loss) (17,912) 6,471 333 (11,108)
Equity in income (loss) of joint ventures 2,395 (1,413) 317 1,299
Net earnings (loss) (23,184) 3,491 626 (19,067)
Total assets 455,366 58,026 8,902 522,294
Total liabilities 492,824 24,782 3,822 521,428
Net assets (37,458) 33,244 5,080 866
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
----------------------------------------------------
United South
States America Other Total
--------- -------- ------ ---------
<S> <C> <C> <C> <C>
Net sales $ 289,924 $ 51,650 $6,029 $ 347,603
Operating income (loss) (2,636) 8,661 174 6,199
Equity in income (loss) of joint ventures (3,809) (3,937) 193 (7,553)
Net earnings (loss) (22,517) 2,404 410 (19,703)
</TABLE>
9
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
12. SUMMARIZED FINANCIAL INFORMATION OF GSTOC
GSTOC has issued Senior Notes, of which $247 million principal amount was
outstanding as of June 30, 2000. The Senior Notes are unconditionally guaranteed
by the Company. The Company has also unconditionally guaranteed GSTOC's
obligations to pay principal and interest with respect to its credit facilities.
Accordingly, summarized financial information for GSTOC on a stand alone basis
is provided below.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
----------- ------------
<S> <C> <C>
Current assets $ 181,049 $ 176,042
Noncurrent assets 265,719 324,937
--------- ---------
Total assets $ 446,768 $ 500,979
========= =========
Current liabilities $ 110,027 $ 117,925
Noncurrent liabilities 365,969 387,600
--------- ---------
475,996 505,525
Shareholder's deficit (29,228) (4,546)
--------- ---------
Total liabilities and shareholder's deficit $ 446,768 $ 500,979
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 164,350 $ 139,265 $ 313,906 $ 289,921
Cost of products sold 158,837 129,110 302,919 263,384
Selling, general and administrative expenses 7,291 7,270 14,344 14,787
Depreciation and amortization 6,888 6,772 13,217 13,063
--------- --------- --------- ---------
Operating loss (8,666) (3,887) (16,574) (1,313)
Interest expense (9,669) (9,245) (18,861) (18,593)
Equity in loss of joint venture -- (3,668) -- (4,821)
Fees from joint ventures 921 895 1,999 2,167
Other, net 455 128 950 124
--------- --------- --------- ---------
Loss before income tax (16,959) (15,777) (32,486) (22,436)
Income tax provision (322) (881) (459) (2,056)
--------- --------- --------- ---------
Loss from continuing operations (17,281) (16,658) (32,945) (24,492)
Discontinued operations (net of tax):
Gain on sale 5,153 -- 9,806 --
Income (loss) from operations -- 317 (21) 531
--------- --------- --------- ---------
Total discontinued operations 5,153 317 9,785 531
Loss before extraordinary item (12,128) (16,341) (23,160) (23,961)
Extraordinary item -- -- (1,522) --
--------- --------- --------- ---------
Net loss $ (12,128) $ (16,341) $ (24,682) $ (23,961)
========= ========= ========= =========
</TABLE>
10
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties that could cause actual results of the Company to differ
materially from those matters expressed in or implied by such forward-looking
statements. Words such as "expects", "anticipates", "believes" and "intends",
variations of such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking information provided by the Company
should be evaluated in the context of these factors.
The following discussion and analysis is based on continuing operations
excluding the impact of the discontinued operations discussed in Note 3 to the
unaudited consolidated financial statements. This discussion should be read in
conjunction with the unaudited consolidated financial statements and
accompanying notes herein incorporated by reference, and the Company's December
31, 1999 financial statements included in the Company's Annual Report on Form
10-K.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
NET SALES - Net sales for the six months ended June 30, 2000 increased 6.1% to
$368.8 million from $347.6 million for the first six months of 1999, due
primarily to an increase in total shipment volume of approximately 174,000 tons.
Included in the sales increase was an increase in DRI sales to third parties of
$11.7 million. Overall average selling prices for the Company's products
increased slightly from the comparable six month period of 1999. Average selling
prices for grinding media decreased as a result of the slow down in worldwide
mining activity; however, this decrease was more than offset by higher average
selling prices for wire rod.
COST OF PRODUCTS SOLD AND GROSS MARGINS - Cost of products sold as a percent of
net sales increased to 94.0% in the first six months of 2000 from 88.5% in the
same period of the prior year. Margins were adversely impacted in 2000 by
increases in the Company's average raw material costs and losses on sales of DRI
to third parties. During the first six months of 1999, the Company recorded
gains of $4.3 million from settlements of antitrust claims against its electrode
suppliers, which were recorded as a reduction to cost of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $.6 million to $19.1 million for the first
half of 2000, primarily due to Year 2000 compliance costs incurred in the first
half of 1999.
NET INTEREST EXPENSE - Interest expense, net of interest income, remained
essentially unchanged at $18.8 million, from $18.7 million in 1999.
OTHER INCOME (EXPENSE) - Other income (expense), comprised primarily of equity
in income (loss) of joint ventures and fees from joint ventures, was income of
$4.2 million for the first six months of 2000, compared to net expense of $6.0
million for the comparable period in 1999. The 1999 results included equity
losses of $4.8 million from the Company's DRI joint venture and $3.8 million
from the Company's joint venture in Peru. As of December 31, 1999, the Company's
investment in each of these joint ventures was zero; therefore, no equity losses
were recognized in the first six months of 2000.
INCOME TAXES - Income tax expense for the six months ended June 30, 2000 was
$1.6 million on a pre-tax loss of $25.7 million, resulting in an effective tax
rate that is not meaningful. The Company did not record any tax benefit on
domestic losses, but did provide for taxes on the income of its foreign
subsidiaries and state taxes where applicable. Likewise, income tax expense for
the first six months of 1999 was $1.7 million on a pre-tax loss of $18.5
million.
LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, the Company had
a loss from continuing operations of $27.3 million for the six months ended June
30, 2000, as compared to a loss of $20.2 million for the same period in 1999.
The Company also incurred an extraordinary charge of $1.5 million in the first
half of 2000 for the write off of unamortized financing costs in connection with
early debt retirement.
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THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES - Net sales for the second quarter of 2000 increased $22.9 million, or
13.7%, over the comparable 1999 period. The Company's total shipment volume
increased approximately 104,000 tons to 620,000 tons for the quarter. Average
selling prices for mining products were down quarter to quarter as a result of
the slow down in worldwide mining activity; however, this decrease was more than
offset by higher average selling prices for wire rod.
COST OF PRODUCTS SOLD AND GROSS MARGINS - Cost of products sold as a percent of
net sales increased to 94.1% in the second quarter of 2000 from 89.9% in the
same period of 1999. Margins were negatively affected in 2000 by increases in
the Company's raw material costs and losses on sales of DRI to third parties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the second quarter remained constant at $9.8
million.
NET INTEREST EXPENSE - Net interest expense for the second quarter remained
essentially unchanged at $9.5 million, from $9.4 million for the 1999 second
quarter.
OTHER INCOME (EXPENSE) - Other income (expense) was income of $1.7 million
compared to net expense of $4.9 million for the comparable period of 1999. The
1999 results included equity losses of $3.7 million from the Company's DRI joint
venture and $2.5 million from the Company's joint venture in Peru. As mentioned
previously, the Company's investment in each of these joint ventures was zero as
of December 31, 1999; therefore, no equity losses were recognized in 2000.
INCOME TAXES - Income tax expense for the second quarter of 2000 was $.9 million
on a pre-tax loss of $13.6 million, resulting in an effective tax rate that is
not meaningful. The Company did not record any tax benefit on domestic losses,
but did provide for taxes on the income of its foreign subsidiaries and state
taxes where applicable. Likewise, income tax expense for the second quarter of
1999 was $.7 million on a pre-tax loss of $14.3 million
LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, the Company had
a loss from continuing operations of $14.5 million for the quarter ended June
30, 2000, as compared to a loss of $15.0 million for the quarter ended June 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had total cash and cash equivalents of $9.1
million, an increase of $5.2 million from December 31, 1999. The ratio of
current assets to current liabilities at June 30, 2000 was 1.67, increasing from
1.50 at December 31, 1999. Operating activities from continuing operations used
$31.2 million of cash during the first six months of 2000, whereas the Company
generated $2.8 million of operating cash flow in the first six months of 1999.
In addition to the Company's net loss, the changes in operating assets and
liabilities generated negative cash flow of $18.0 million in the first six
months of 2000 compared to negative cash flow of $1.2 million in the same prior
year period, primarily due to a decrease in payables and accrued expenses.
Operating cash flow in 1999 included positive cash flow generated by a $13.7
million decrease in inventories.
Net cash provided by investing activities of continuing operations was $57.9
million for the first six months of 2000, consisting of net proceeds of $69.0
million from the sale of Florida Wire and Cable, Inc. and GST Europa SpA less
capital expenditures of $11.1 million. During the first six months of 2000, the
Company made net debt repayments of $14.4 million and paid $2.2 million of
financing costs in connection with the refinancing discussed below.
While management believes that funds available from the Company's credit
facilities and cash flow from operations will be sufficient, in the aggregate,
to fund planned working capital, capital expenditure and debt service
requirements for 2000, 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 business, management believes that it is important for
the Company to maintain borrowing facilities in excess of working capital
requirements.
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Capital expenditures in the Company's business tend to vary from year to year as
the impact of major programs is concentrated in certain periods followed by
periods of maintenance spending. Management believes that this pattern is
typical of the industry. Recent capital spending has been maintenance related
with some focus towards growth in production, improvement in product quality and
reduction in product cost.
The Company manages its liquidity needs on a consolidated basis with borrowings
available under the New Revolving Credit Facility (as defined below), and
various credit facilities available at its international subsidiaries and joint
ventures. On March 13, 2000, GSTOC and its subsidiaries (which now includes ME
International, Inc. "MEI") entered into a new credit agreement with a financial
institution, the proceeds of which were used to prepay the outstanding balances
on GSTOC's then existing revolving credit facility and term loan and MEI's then
existing credit facilities. The new credit facilities consist of (i) a revolving
credit facility of up to $120 million, including a $25 million subfacility for
the issuance of letters of credit (subject to a borrowing base limitation),
collateralized by inventory and accounts receivable (the "New Revolving Credit
Facility") and (ii) a $10 million term loan collateralized by property, plant
and equipment and other noncurrent assets of GSTOC and its subsidiaries (the
"New Term Loan Facility). In June 2000, GSTOC received an offer of guarantee
from the U.S. Government on a five year $50 million term loan facility. GSTOC
expects to close with the lender on this term loan facility, which will replace
the New Term Loan Facility, during the third quarter of 2000.
Borrowings under the New Revolving Credit Facility bear interest at varying
margins over the prime rate or the Eurodollar rate. Increases in prevailing
rates could adversely affect the Company's cash flow. To the extent that the
interest rate on the New Revolving Credit Facility increases or the principal
amount outstanding increases, there will be corresponding increases in the
Company's interest obligations. As of June 30, 2000, $3.6 million of letters of
credit were outstanding, and the unused availability under the New Revolving
Credit Facility was $17.4 million.
See Note 7 to the Company's Unaudited Consolidated Financial Statements
regarding the Company's DRI joint venture which is herein incorporated by
reference.
RISK FACTORS AND OUTLOOK
During 1999 and the first half of 2000, distressed economic conditions in
foreign markets, particularly in Asia, have resulted in record levels of low
priced imports into the U.S. causing increased competition and dramatic declines
in selling prices within the domestic steel industry. In February 2000, the
President of the United States granted domestic wire rod producers some import
protection in the form of a tariff rate quota, which went into effect in March
2000 and will remain in place for three years. In the first year, wire rod
imports in excess of 1.58 million tons will be subject to a tariff of 10%. The
level of imports will be allowed to increase by 2 percent a year in the second
and third years, while the tariff penalty will decrease by 2.5 percentage points
a year.
In February 2000, the Company, along with some competitors, announced wire rod
price increases effective April 1, 2000. The Company experienced a 5% increase
in average selling prices of wire rod in the second quarter of 2000, compared to
the same period in 1999. However, until such time that these tariffs take effect
and more significant price increases are realized, the Company's financial
condition could continue to be negatively impacted.
See Note 7 to the Company's Unaudited Consolidated Financial Statements
regarding the Company's DRI joint venture which is herein incorporated by
reference.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the six
months ended June 30, 2000. The Company is exposed to various types of market
risk in the ordinary course of business, including the impact of potential
adverse changes in interest rates and foreign currency exchange rate
fluctuations.
INTEREST RATE RISK
The Company manages interest rate risks by maintaining certain ratios of fixed
to variable rate debt. The Company does not currently use derivative financial
instruments. At June 30, 2000, the Company had fixed rate long term debt of
$247.0 million and variable rate borrowings of $73.2 million. Assuming a
hypothetical 10% adverse change in interest rates with all other variables held
constant, the Company would incur an additional $.7 million in interest expense
per year on variable rate borrowings.
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FOREIGN CURRENCY RISK
The Company is exposed to foreign currency exchange risk as the local currency
financial statements of its international operations are translated to U.S.
dollars. As currency exchange rates fluctuate, such changes result in cumulative
translation adjustments which are included in shareholder's equity in the
Unaudited Consolidated Balance Sheets. The Company is not materially exposed to
exchange rate risk on transactions denominated in currencies other than the
functional currency. None of the components of the Company's unaudited
consolidated financial statements was materially affected by exchange rate
fluctuations in the six months ended June 30, 2000 or June 30, 1999. The Company
does not currently have any foreign currency forward contracts or foreign
currency swap agreements.
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:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th of August 2000.
GS Technologies Corporation
and
GS Technologies Operating Co., Inc.
(Registrants)
By: /s/ Luis E. Leon
----------------------------------------
Luis E. Leon, Executive Vice President -
Chief Financial Officer
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