<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
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 033-80618
</TABLE>
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 November 8, 2000. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at November 8, 2000.
<PAGE> 2
INDEX
Page
PART I Financial Information
ITEM 1 Financial Statements
Unaudited Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2000 and 1999.............3
Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999................4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2000 and 1999...............5
Unaudited Consolidated Statements of Comprehensive Loss for
the Three and Nine Months ended September 30, 2000 and 1999.........6
Notes to Unaudited Consolidated Financial Statements................7
ITEM 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations...................13
ITEM 3 Quantitative and Qualitative Disclosure about Market Risk..........17
PART II Other Information
ITEM 1 Legal Proceedings..................................................18
ITEM 6 Exhibits and Reports on Form 8-K...................................18
SIGNATURES..................................................................19
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<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 170,495 $ 162,979 $ 539,279 $ 510,582
Operating costs and expenses:
Cost of products sold 162,384 146,913 508,972 454,704
Selling, general and administrative expenses 9,355 10,122 28,447 29,790
Depreciation and amortization 7,158 7,124 21,370 21,070
--------- --------- --------- ---------
178,897 164,159 558,789 505,564
--------- --------- --------- ---------
Operating income (loss) (8,402) (1,180) (19,510) 5,018
Other income (expense):
Interest expense, net (10,448) (9,564) (29,225) (28,281)
Equity in income (loss) of joint ventures 537 (5,072) 1,836 (12,625)
Fees from joint ventures 631 569 2,083 2,036
Other, net 102 600 1,529 668
--------- --------- --------- ---------
(9,178) (13,467) (23,777) (38,202)
--------- --------- --------- ---------
Loss from continuing operations before income taxes (17,580) (14,647) (43,287) (33,184)
Income tax provision (955) (1,087) (2,578) (2,785)
--------- --------- --------- ---------
Loss from continuing operations (18,535) (15,734) (45,865) (35,969)
--------- --------- --------- ---------
Discontinued operations (net of tax):
Gain on sale (Note 3) -- -- 9,806 --
Income (loss) from operations -- 381 (21) 912
--------- --------- --------- ---------
Total discontinued operations -- 381 9,785 912
Loss before extraordinary item (18,535) (15,353) (36,080) (35,057)
Extraordinary item (Note 5) -- -- (1,522) --
--------- --------- --------- ---------
Net loss $ (18,535) $ (15,353) $ (37,602) $ (35,057)
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements
-3-
<PAGE> 4
GS TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,150 $ 3,937
Receivables, net of allowance of $1,566 in 2000 and $1,740 in 1999 82,348 86,924
Receivables from related parties 7,869 6,301
Inventories (Note 6) 104,444 111,181
Prepaid expenses and other current assets 9,409 7,343
Deferred income taxes 5,143 5,691
--------- ---------
Total current assets 220,363 221,377
Investments in joint ventures 14,107 14,919
Property, plant and equipment, net 231,314 234,168
Net acquisition premium 39,797 40,652
Net assets of discontinued operations (Note 3) -- 53,473
Other assets 7,716 14,094
--------- ---------
Total assets $ 513,297 $ 578,683
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade payables $ 85,277 $ 88,081
Notes payable (Note 9) 13,612 5,882
Current portion of long-term debt 2 1,034
Accrued expenses 45,439 44,872
Income taxes payable 2,282 2,859
Payables to related parties 5,524 4,706
--------- ---------
Total current liabilities 152,136 147,434
Long-term debt 318,814 342,568
Post retirement benefit obligations other than pensions 31,323 29,995
Deferred income taxes 14,174 14,427
Other long-term liabilities 16,460 22,649
--------- ---------
Total liabilities 532,907 557,073
Commitments and contingencies (Note 10)
Shareholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at September 30, 2000 and December 31, 1999 1 1
Additional paid in capital 139,072 139,072
Accumulated deficit (149,383) (111,781)
Accumulated comprehensive loss (9,300) (5,682)
--------- ---------
Total shareholder's equity (deficit) (19,610) 21,610
--------- ---------
Total liabilities and shareholder's equity (deficit) $ 513,297 $ 578,683
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
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<PAGE> 5
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (37,602) $ (35,057)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Extraordinary item 1,522 --
Depreciation and amortization 21,370 21,070
Gain on divestiture (10,680) --
Deferred income taxes 295 325
Equity in (income) loss of joint ventures (1,836) 12,625
Dividends from joint ventures 832 1,122
Post retirement benefit obligations accrued in excess of cash paid 1,328 1,293
Changes in operating assets and liabilities:
Receivables 2,075 (223)
Inventories 5,660 14,324
Payables and accrued expenses (3,391) (5,877)
Other 2,078 (2,181)
--------- ---------
Net cash provided by (used in) operating activities of continuing operations (18,349) 7,421
Operating cash flow from discontinued operations (2,754) 10,538
--------- ---------
Net cash provided by (used in) operating activities (21,103) 17,959
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (19,949) (12,938)
Investment in joint ventures -- (3,750)
Proceeds from divestitures 68,953 --
--------- ---------
Net cash provided by (used in) investing activities of continuing operations 49,004 (16,688)
Investing cash flow from discontinued operations (70) (1,867)
--------- ---------
Net cash provided by (used in) investing activities 48,934 (18,555)
--------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 187,291 130,493
Repayments on revolving credit facility (165,431) (127,763)
Repayments on long-term debt (46,646) (375)
Proceeds from (payments on) notes payable, net 8,371 (6,369)
Deferred financing costs (2,218) --
Contribution from parent -- 466
--------- ---------
Net cash used in financing activities (18,633) (3,548)
--------- ---------
Effect of exchange rate changes on cash (1,985) (670)
--------- ---------
Net increase (decrease) in cash and cash equivalents 7,213 (4,814)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,937 10,664
--------- ---------
End of period $ 11,150 $ 5,850
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 29,524 $ 28,314
Cash paid during the period for taxes $ 3,703 $ 3,856
NON CASH FINANCING ACTIVITIES:
Contribution of notes payable from parent $ -- $ 4,900
</TABLE>
See notes to unaudited consolidated financial statements.
-5-
<PAGE> 6
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$(18,535) $(15,353) $(37,602) $(35,057)
Net loss
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (1,941) (596) (3,618) (1,758)
-------- -------- -------- --------
Comprehensive loss $(20,476) $(15,949) $(41,220) $(36,815)
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements
-6-
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
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.
The Company continues to incur net losses, primarily at its two steelmaking
facilities in the United States related to continued depressed sales prices for
its products in the United States resulting from high levels of lower priced
imports of wire rod, which continue at record levels despite the tariff rate
quota protection system approved by the President of the United States in
February 2000. Slow downs and mine closures within the U.S. mining industry have
also negatively affected demand and sales prices of grinding media produced by
the Company at its Kansas City facility. Additionally, the Company's Kansas City
facility continues to incur higher than normal manufacturing costs resulting
from very high electricity prices and a longer than anticipated start-up after
the shut down in the current quarter for capital improvements. Given these
factors, the Company's Kansas City facility is currently operating with negative
cash flows which, if not remedied, could impact the long-term viability of this
facility. Being highly leveraged, the Company also continues to incur high
levels of interest expense.
The Company also uses significant quantities of electricity in the Company's
electric arc furnaces and large quantities of natural gas in its own DRI
facility and reheat furnaces in its steelmaking operations in the United States.
Electricity prices have increased significantly during 2000, and natural gas
prices are currently at unprecedented high levels. If prices for electricity and
natural gas continue at their current levels, the Company will continue to
experience significant cost increases in the manufacturing of its products in
the United States.
The Company is currently evaluating numerous strategies including, but not
limited to, potential financial restructuring, cost containment programs and
amendments to existing contracts in order to improve its financial condition and
results of operations. Management's objective, based upon the strategies being
evaluated, is to improve the Company's financial condition and liquidity and to
return the Company to profitability. However, there can be no assurances that
the strategies being evaluated will be successful.
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 September 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 $25.1 million and
$75.5 million for the three months and nine months ended September 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.
-7-
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
4. NEW CREDIT FACILITIES
In March 2000, GSTOC and its subsidiaries entered into a new credit agreement
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" and together with the New Revolving Credit Facility, the
"New Credit Facilities"). 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 New Credit Facilities were used to prepay the outstanding
balances on the previously existing GSTOC revolver and term loan and the ME
International, Inc. ("MEI") revolver and term loan. Simultaneous with the
closing of the New Credit Facilities, 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.
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 September 30, 2000 was 9.9%
The Company through GSTOC has received approval under the U.S. Government's
Emergency Steel Loan Guarantee Program for a five year $50 million term loan.
The government guarantee, which will be for 85% of the amount borrowed, will be
issued to the lender, who will in turn provide the $50 million term loan to the
Company. The Company's lender and the government have been working for some time
on the form and details of the loan guarantee. The Company believes most of the
issues have been resolved and anticipates a loan closing during the fourth
quarter of 2000. However, there can be no assurances that all issues will be
resolved to the satisfaction of the parties and that the loan will be closed as
anticipated. A portion of the proceeds from this loan will be used to repay the
New Term Loan Facility of $10 million discussed above.
In October 2000, the Company through GSTOC, obtained a $5 million loan from a
Chilean bank, guaranteed by the Company's wholly owned Chilean subsidiary, to
fund capital expenditures made at its Kansas City facility in the third quarter
of 2000. Principal and interest at the rate of LIBOR plus 110 basis points are
due in October 2001. Proceeds from the loan were received by the Company on
October 17, 2000 and the interest rate at closing was 7.8%
5. EXTRAORDINARY ITEM
The Company incurred an extraordinary charge of $1,522 in the first quarter of
2000 for the write off of unamortized financing costs in connection with early
retirement of the previously existing revolver and term loan, which were repaid
with proceeds of the New Credit Facilities referred to in Note 4.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Finished and semi-finished $ 50,462 $ 57,841
Raw materials, supplies and other 53,982 53,340
----------------- ------------------
Total $ 104,444 $ 111,181
================= ==================
</TABLE>
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<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
7. JOINT VENTURES
GSTOC has a 50% interest in American Iron Reduction, L.L.C. ("AIR"), a joint
venture company that operates a direct reduced iron ("DRI") facility. DRI is a
substitute for high quality low residual steel scrap used in certain steel
making facilities. DRI is produced by reducing iron ore in a process that uses
substantial amounts of natural gas as the reducing agent.
As a part of the original construction financing at AIR, GSTOC entered into a
DRI purchase agreement (the DRI "Purchase Agreement") with AIR (through March
2013) pursuant to which GSTOC agreed to purchase, subject to the terms of the
Purchase Agreement, up to a maximum of 600,000 metric tons of DRI annually, if
produced and tendered by AIR. GSTOC'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. Income
or losses from joint ventures, including AIR, are reported in the consolidated
statements of operations under the caption "Equity in income (loss) of joint
ventures".
The AIR project was financed by AIR on a non-recourse basis to the Company. In
March 1999, AIR and its lenders were unable to agree on the conditions for
conversion of the construction loan ($179 million) into a term loan.
Consequently, in March 1999, AIR defaulted under the terms of the construction
loan. In May 2000, AIR completed a financial restructuring with its lenders
that, among other things, deferred principal and interest payments on a portion
of AIR's debt. The new agreement also reduced the annual amount of DRI to be
produced by AIR to 600,000 metric tons from 1.2 million metric tons and prorata
reduced the amount of DRI that GSTOC would be required to take, if produced and
tendered by AIR. GSTOC also agreed, as a part of this restructuring, to pay to
AIR 75% of any excess in the DRI market price received on its sales of DRI to
third parties over the price paid initially by GSTOC to AIR. Additionally, the
Company agreed to participate in efforts to sell AIR. It was also agreed that in
the event AIR is sold during the three year period following the restructuring.
GSTOC could be required under certain circumstances to make a cash payment up to
$15 million and would otherwise be released from its obligations related to AIR.
The market price for DRI has continued to deteriorate even at the same time that
the price of natural gas used to produce DRI has increased significantly. In
September 2000, AIR was unable to make its scheduled payments to the AIR lenders
and defaulted on the restructured credit agreement with its lenders. AIR shut
down its operations at the end of September due to insufficient cash flow.
AIR, the Company, and AIR's other 50% investor have been negotiating with AIR's
lenders to address the current situation. On November 3, 2000 GSTOC received
notice that AIR's lenders, as attorney-in fact for AIR, were canceling the DRI
Purchase Agreement alleging that GSTOC had repudiated the Purchase Agreement.
Depending on the outcome of the claims of AIR's lenders, GSTOC could incur
additional losses related to AIR that could be material to the Company's
financial position, results of operations and cash flows.
GSTOC also has a contract to supply DRI to a third party for use in the third
party's steel facility through the year 2002. The sales price of DRI is
determined by a formula based on scrap price, subject to a minimum and maximum.
During the nine months ending September 30, 2000 and 1999, GSTOC purchased all
of the DRI required to meet these supply commitments from the AIR facility.
These sales resulted in a loss at the gross margin level of $2.6 million in 2000
and $2.3 million in 1999. In October 2000, GSTOC declared force majeure under
this DRI supply agreement for the period after September 30, 2000 due to the
shutdown of AIR's operations and the third party has notified GSTOC that it
believes the supply contract has been breached, GSTOC is currently in
discussions with this third party regarding any further obligations to supply
DRI. Until this issue is resolved, GSTOC is unable to determine the amount, if
any, of any potential future loss, which could be material to the Company's
financial condition, results of operations and cash flow.
-9-
<PAGE> 10
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
8. CLAIM SETTLEMENTS
During the first nine months of 1999, the Company recorded gains of $5.9 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 nine
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.
9. NOTES PAYABLE
Notes payable of $13.6 million consists of short-term revolving credit
facilities in Chile and Peru for working capital requirements and general
corporate purposes.
10. COMMITMENTS AND 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. In June
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 manner that reduces such risks.
-10-
<PAGE> 11
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
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 September 30, 2000, $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 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
returned 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 the Philippines and joint
venture interests around the world including Canada, Mexico, Italy and
Australia.
<TABLE>
<CAPTION>
September 30, 2000 and the nine months ended September 30, 2000
-----------------------------------------------------------------------------
United South
States America Other Total
----------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 458,309 $ 74,478 $ 6,492 $ 539,279
Operating income (loss) (30,357) 10,485 362 (19,510)
Equity in income of joint ventures 1,433 - 403 1,836
Net earnings (loss) (44,132) 5,852 678 (37,602)
Total assets 444,756 60,909 7,632 513,297
Total liabilities 503,437 26,494 2,976 532,907
Net assets (deficit) (58,681) 34,415 4,656 (19,610)
Nine months ended September 30, 1999
-----------------------------------------------------------------------------
United South
States America Other Total
-------------------- ----------------- ---------------- ------------------
Net sales $ 423,332 $ 78,657 $ 8,593 $ 510,582
Operating income (loss) (8,583) 13,384 217 5,018
Equity in income (loss) of joint ventures (6,693) (6,086) 154 (12,625)
Net earnings (loss) (39,360) 3,794 509 (35,057)
</TABLE>
-11-
<PAGE> 12
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
12. SUMMARIZED FINANCIAL INFORMATION OF GSTOC
GSTOC has issued Senior Notes, of which $247 million principal amount was
outstanding as of September 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>
September 30, December 31,
2000 1999
(unaudited)
------------------- ------------------
<S> <C> <C>
Current assets $ 172,951 $ 176,042
Noncurrent assets 259,728 324,937
------------------- ------------------
Total assets $ 432,679 $ 500,979
=================== ==================
Current liabilities $ 123,371 $ 117,925
Noncurrent liabilities 359,782 387,600
------------------- ------------------
483,153 505,525
Shareholder's deficit (50,474) (4,546)
------------------- ------------------
Total liabilities and shareholder's deficit $ 432,679 $ 500,979
=================== ==================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 144,494 $ 133,409 $ 458,400 $ 423,329
Cost of products sold 142,619 124,323 445,538 387,707
Selling, general and administrative expenses 6,922 7,639 21,266 22,426
Depreciation and amortization 6,733 6,681 19,950 19,744
------------------ ------------------- ------------------- ------------------
Operating loss (11,780) (5,234) (28,354) (6,548)
Interest expense (10,183) (9,467) (29,044) (28,061)
Equity in loss of joint venture - (3,427) - (8,248)
Fees from joint ventures 918 947 2,917 3,114
Other, net 134 153 1,084 281
------------------ ------------------- ------------------- ------------------
Loss before income tax (20,911) (17,028) (53,397) (39,462)
Income tax provision (335) (774) (794) (2,832)
------------------ ------------------- ------------------- ------------------
Loss from continuing operations (21,246) (17,802) (54,191) (42,294)
Discontinued operations (net of tax):
Gain on sale - - 9,806 -
Income (loss) from operations - 381 (21) 912
------------------ ------------------- ------------------- ------------------
Total discontinued operations - 381 9,785 912
Loss before extraordinary item (21,246) (17,421) (44,406) (41,382)
Extraordinary item - - (1,522) -
------------------ ------------------- ------------------- ------------------
Net loss $ (21,246) $ (17,421) $ (45,928) $ (41,382)
================== =================== =================== ==================
</TABLE>
-12-
<PAGE> 13
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 - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
NET SALES - Net sales for the nine months ended September 30, 2000 increased
5.6% to $539.3 million from $510.6 million for the first nine months of 1999,
due primarily to an increase in total shipment volume of approximately 217,000
tons. Included in the sales increase was an increase in DRI sales to third
parties of $15.3 million. Excluding DRI, overall average selling prices for the
Company's products increased slightly from the comparable nine month period in
1999. The Company had higher average selling prices for wire rod which was
partially off-set by decreased average selling prices for grinding media.
COST OF PRODUCTS SOLD AND GROSS MARGINS -Cost of products sold as a percentage
of net sales increased to 94.4% in the first nine months of 2000 from 89.1% in
the same period of the prior year. Margins were adversely impacted in 2000 by
increases in the Company's average raw material costs, higher manufacturing cost
(primarily at the Kansas City facility) and losses on sales of DRI to third
parties. During the first nine months of 1999, the Company recorded gains of
$5.9 million from settlements of anti-trust claims against its electrode
suppliers, which were recorded as a reduction to costs of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $1.3 to $28.4 million for the first nine
months of 2000, primarily due to costs associated with new system installations
and Year 2000 compliance incurred in the first nine months of 1999.
NET INTEREST EXPENSE - Interest expense, net of interest income, of $29.2
million for the first nine months of 2000 remained relatively constant versus
the same period of 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
$5.4 million for the first nine months of 2000, compared to net expense of $9.9
million for the comparable period in 1999. The 1999 results included equity
losses of $9.0 million from the Company's DRI joint venture and $6.1 million
from the Company's joint venture in Peru. As of December 31, 1999, the Company's
investment in both of these joint ventures was zero; therefore, no further
equity losses from these joint ventures was recognized in the first nine months
of 2000.
INCOME TAXES - Income tax expense for the nine months ended September 30, 2000
was $2.6 million on a pre-tax loss of $43.3 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 nine months of 1999 was $2.8 million on a pre-tax loss of $33.2
million.
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<PAGE> 14
LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, the Company had
a loss from continuing operations of $45.9 million for the nine months ended
September 30, 2000, as compared to a loss of $36.0 million for the same period
in 1999. The Company also incurred an extraordinary charge of $1.5 million in
the nine months ended September 30, 2000 for the write off of unamortized
financing costs in connection with early debt retirement.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES - Net sales for the third quarter of 2000 increased $7.5 million, or
4.6%, over the comparable period in 1999. The Company's total shipment volume
increased approximately 43,000 tons to 529,000 tons for the quarter. Average
selling prices for mining products were down from the comparable quarter of
1999, but this decrease was partially 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 95.2% in the third quarter of 2000 from 90.1% in the same
period of 1999. Margins were negatively impacted in the third quarter of 2000 by
increased conversion costs due to a longer than expected shutdown at the Kansas
City facility for recurring maintenance and capital improvements and losses on
sales of DRI to third parties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the third quarter of 2000 decreased $.8 million to
$9.4 million due to costs associated with new system installations and Year 2000
compliance incurred in the third quarter of 1999.
NET INTEREST EXPENSE - Net interest expense for the third quarter of 2000
increased to $10.4 million from $9.6 million for the third quarter of 1999 due
to increased borrowings under the revolving credit facility and increases in the
prevailing interest rates on the Company's variable borrowings.
OTHER INCOME (EXPENSE) - Other income (expense) was income of $1.3 million for
the third quarter of 2000 compared to net expense of $3.9 million for the same
period of 1999. The 1999 results included $3.7 million of losses 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 third quarter of 2000 was $1.0 million
on a pre-tax loss of $17.6 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 third quarter of
1999 was $1.1 million on a pre-tax loss of $14.6 million
LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, the Company had
a loss from continuing operations of $18.5 million for the quarter ended
September 30, 2000, as compared to a loss of $15.7 million for the quarter ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities of continuing operations was $18.3 million
during the first nine months of 2000, compared to net cash provided of $7.4
million in the same period of 1999. During the first nine months of 2000,
margins deteriorated due to higher raw materials costs, higher average
conversion costs and increased losses on sales of DRI to third parties. The
Company has taken steps to improve its cash flow from operations by implementing
improved working capital management programs, particularly in the areas of
inventory and accounts receivable. In 2000, changes in operating assets and
liabilities provided cash of $6.4 million, principally due to a $5.6 million
decrease in inventories and a $2.1 million decrease in receivables. During the
same period of 1999, changes in operating assets and liabilities provided cash
of $6.0 million, principally due a $14.3 million decrease in inventories, which
was partially offset by a $5.9 million decrease in payables and accrued
expenses.
-14-
<PAGE> 15
Investing Activities
Net cash provided by investing activities of continuing operations was $49.0
million for the nine months ended September 30, 2000, compared to net cash used
of $16.7 million for the same period of 1999. In 2000, investing activities
included net proceeds of $69.0 million from the sale of FWC and GST Europa SpA
(see Note 3 to the unaudited consolidated financial statements, which is herein
incorporated by reference). Capital expenditures increased to $19.9 million for
the nine months ended September 30, 2000 from $12.9 million in the same period
of 1999, principally due to increased expenditures at the Kansas City facility.
Financing Activities
Net cash used in financing activities was $18.6 million for the nine months
ended September 30, 2000 compared to net cash used in financing activities of
$3.5 million during the same period of 1999. In 2000, the Company increased its
borrowings under its Revolving Credit Facility by $21.9 million to fund working
capital needs and capital expenditures. However, the Company made net repayments
on other debt of $38.3 million and paid $2.2 million of financing costs in
connection with the refinancing discussed below.
General
The Company manages its liquidity needs on a consolidated basis with borrowings
available under the New Revolving Credit Facility, and various credit facilities
available to its international subsidiaries and joint ventures. In March 2000,
GSTOC and its subsidiaries, which now includes MEI, entered into the New Credit
Facilities, 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) the New
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 and (ii) the
New Term Loan Facility of $10 million collateralized by property, plant and
equipment and other noncurrent assets of GSTOC and its subsidiaries.
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 increases or the principal amount outstanding under the New
Revolving Credit Facility increases, there will be corresponding increases in
the Company's interest obligations. At September 30, 2000 the interest rate on
the New Revolving Credit Facility was 9.9%.
At September 30, 2000, the Company had total cash and cash equivalents of $11.2
million, an increase of $7.2 million from December 31, 1999. In addition, as of
September 30, 2000 there were $4.4 million in Letters of Credit outstanding and
GSTOC had remaining unused borrowing availability of $11.1 million, after
deducting a $25 million special reserve, under its New Revolving Credit
Facility. See Note 4 to the Company's unaudited consolidated financial
statements regarding the New Credit Facilities, which is herein incorporated by
reference.
The Company, through GSTOC, has also obtained a $5 million loan from a Chilean
bank, guaranteed by the Company's wholly owned Chilean subsidiary, to fund the
capital expenditures made at its Kansas City facility in the current quarter.
Principal and interest at the rate of LIBOR plus 110 basis points are due in
October 2001. Proceeds from this loan were received by the Company on October
17, 2000 and the interest rate at closing was 7.8%.
The Company through GSTOC has received approval under the U.S. Government's
Emergency Steel Loan Guarantee Program for a five year $50 million term loan.
This loan will effectively serve as a replacement to the one that was in place
prior to the sale of FWC. Approximately $40 million of the proceeds from the FWC
sale was used to pay down the Company's previously existing term loan. The
government guarantee, which will be for 85% of the amount borrowed, will be
issued to the lender, who will in turn provide the $50 million term loan to the
Company. The Company's lender and the government have been working for some time
on the form and details of the loan guarantee. The Company believes most of the
issues have been resolved and anticipates a loan closing during the fourth
quarter of 2000. However, there can be no assurances that all issues will be
resolved to the satisfaction of the parties and that the loan will be closed as
anticipated. A portion of the proceeds from this loan will be used to repay the
New Term Loan Facility of $10 million discussed above.
-15-
<PAGE> 16
The Company continues to incur net losses, primarily at its two steelmaking
facilities in the United States related to continued depressed sales prices for
its products in the United States resulting from high levels of lower priced
imports of wire rod, which continue at record levels despite the tariff rate
quota protection system approved by the President of the United States in
February 2000. Slow downs and mine closures within the U.S. mining industry have
also negatively affected demand and sales prices of grinding media produced by
the Company at its Kansas City facility. Additionally, the Company's Kansas City
facility continues to incur higher than normal manufacturing costs resulting
from very high electricity prices and a longer than anticipated start-up after
the shut down in the current quarter for capital improvements. Given these
factors, the Company's Kansas City facility is currently operating with negative
cash flows which, if not remedied, could impact the long term viability of this
facility. Being highly leveraged, the Company also continues to incur high
levels of interest expense.
The Company's liquidity may also be negatively impacted by payments that may be
required under certain conditions in conjunction with its AIR joint venture. See
Note 7 to the Company's Unaudited Consolidated Financial Statements regarding
the Company's AIR joint venture, which is herein incorporated by reference.
RISK FACTORS AND OUTLOOK
Outlook
The Company continues to experience depressed sales prices for its wire rod due
primarily to record levels of low priced imports into the United States. The
tariff rate quota protection system approved by the President of the United
States in February 2000 has had no impact on the volume of imports of wire rod
into the United States. Through July of 2000 wire rod imports have increased
over the record levels for the comparable period of 1999.
Slow downs and mine closures within the United States mining industry have also
negatively effected demand and sales prices of grinding media in the United
States market.
The Company also uses significant quantities of electricity in the Company's
electric arc furnace and large quantities of natural gas in its own DRI facility
and its reheat furnaces in its steelmaking operations in the United States.
Electricity prices have increased significantly during 2000, and natural gas
prices are currently at unprecedented high levels. If prices for electricity and
natural gas continue at their current levels, the Company will experience
significant cost increases in the manufacturing of its products in the United
States.
The Company is currently evaluating numerous strategies including, but not
limited to, potential financial restructuring, cost containment programs and
amendments to existing contracts in order to improve its financial condition and
results of operations. Management's objective, based upon the strategies being
evaluated, is to improve the Company's financial condition and liquidity and to
return the Company to profitability. However, there can be no assurance that the
strategies being evaluated will be successful.
Risk Factors
Risk factors that could cause the Company's operating results to be further
impaired include, but are not limited to the following:
o The failure of wire rod prices to improve from the current depressed
levels or further deterioration of sales prices of wire rod in the
United States.
o Further reduction in demand and sales prices of grinding media supplied
to the mining industry in the United States.
o Continued high prices or availability of electricity in the United
States.
o Continuation of, or a further increase in the current price of natural
gas in the United States.
o Failure to consummate the U.S. Government backed $50 million term loan
described above.
o Failure to reach a satisfactory agreement regarding the AIR joint
venture as described in Note 7 to the Company's unaudited consolidated
financial statements, which is herein incorporated by reference.
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<PAGE> 17
o Failure to reach a satisfactory agreement with the third party to whom
GSTOC supplies DRI, as described in Note 7 to the Company's unaudited
consolidated financial statements, which is herein incorporated by
reference.
o Increases in the price or availability of raw materials, including
steel scrap, DRI and other supplies used by the Company.
o Existing or possible future litigation filed by/or against the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the nine
months ended September 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 September 30, 2000, the Company had fixed rate long term debt of
$247.0 million and variable rate borrowings of $71.8 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.
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. 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 nine months ended September 30, 2000 or the
same period in 1999. The Company does not currently have any foreign currency
forward contracts or foreign currency swap agreements.
-17-
<PAGE> 18
PART 2 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
September 30, 2000.
-18-
<PAGE> 19
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 8th of November 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
-19-
