<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 MARCH 31, 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 May 10, 2000. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at May 10, 2000.
This document consists of 14 sequentially numbered pages.
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 178,174 $ 179,925
Operating costs and expenses:
Cost of products sold 167,269 157,029
Selling, general and administrative expenses 9,333 9,917
Depreciation and amortization 6,813 6,729
--------- ---------
183,415 173,675
--------- ---------
Operating income (loss) (5,241) 6,250
Other income (expense):
Interest expense, net (9,252) (9,336)
Equity in income (loss) of joint ventures 864 (1,974)
Fees from joint ventures 786 886
Other, net 784 (63)
--------- ---------
(6,818) (10,487)
--------- ---------
Loss from continuing operations before income taxes (12,059) (4,237)
Income tax provision (769) (961)
--------- ---------
Loss from continuing operations (12,828) (5,198)
--------- ---------
Discontinued operations (net of tax)
Gain on sale 4,653 --
Income (loss) from operations (21) 214
--------- ---------
Total discontinued operations 4,632 214
Loss before extraordinary item (8,196) (4,984)
Extraordinary item (Note 5) (1,522) --
--------- ---------
Net loss $ (9,718) $ (4,984)
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,198 $ 3,937
Receivables, net of allowance of $1,725 in 2000 and $1,740 in 1999 84,932 86,924
Receivables from related parties 7,667 6,301
Inventories (Note 6) 111,577 111,181
Prepaid expenses and other current assets 15,897 7,343
Deferred income taxes 5,508 5,691
--------- ---------
Total current assets 232,779 221,377
Investments in joint ventures 14,422 14,919
Property, plant and equipment, net 234,650 234,168
Net acquisition premium 40,367 40,652
Net assets of discontinued operations (Note 3) -- 53,473
Other assets 14,399 14,094
--------- ---------
Total assets $ 536,617 $ 578,683
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade payables $ 81,816 $ 88,081
Notes payable (Note 9) 7,828 5,882
Current portion of long-term debt 274 1,034
Accrued expenses 45,088 44,872
Income taxes payable 3,843 2,859
Payables to related parties 4,696 4,706
--------- ---------
Total current liabilities 143,545 147,434
Long-term debt 312,948 342,568
Post retirement benefit obligations other than pensions 30,484 29,995
Deferred income taxes 14,297 14,427
Other long-term liabilities 22,991 22,649
--------- ---------
Total liabilities 524,265 557,073
Commitments and contingencies (Note 10)
Shareholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, 100
shares issued and outstanding at March 31, 2000 and December
31, 1999 1 1
Additional paid in capital 139,072 139,072
Accumulated deficit (121,499) (111,781)
Accumulated comprehensive loss (5,222) (5,682)
--------- ---------
Total shareholder's equity 12,352 21,610
--------- ---------
Total liabilities and shareholder's equity $ 536,617 $ 578,683
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
3
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,718) $ (4,984)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary item 1,522 --
Depreciation and amortization 6,813 6,729
Gain on divestitures (5,223) --
Deferred income taxes 53 128
Equity in (income) loss of joint ventures (864) 1,974
Dividends from joint ventures 662 785
Post retirement benefit obligations accrued in excess of cash paid 489 415
Changes in operating assets and liabilities:
Receivables 1,223 1,426
Inventories 339 16,694
Payables and accrued expenses (13,933) (10,128)
Other 1,330 2,194
--------- --------
Net cash provided by (used in) operating activities
of continuing operations (17,307) 15,233
Operating cash flow from discontinued operations (2,754) 95
--------- --------
Net cash provided by (used in) operating activities (20,061) 15,328
========= ========
INVESTING ACTIVITIES:
Capital expenditures (6,423) (4,762)
Investment in joint ventures -- (3,750)
Proceeds from divestiture 68,500 --
--------- --------
Net cash provided by (used in) investing activities
of continuing operations 62,077 (8,512)
Investing cash flow from discontinued operations (70) (386)
--------- --------
Net cash provided by (used in) investing activities 62,007 (8,898)
========= ========
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 111,125 38,234
Repayments on revolving credit facility (95,131) (43,966)
Repayments on long-term debt (46,389) (125)
Proceeds from (payments on) notes payable, net 1,664 (2,282)
Deposits on letters of credit (7,449) --
Deferred financing costs (2,218) --
Contribution from parent -- 466
--------- --------
Net cash used in financing activities (38,398) (7,673)
--------- --------
Effect of exchange rate changes on cash (287) (511)
--------- --------
Net increase (decrease) in cash and cash equivalents 3,261 (1,754)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,937 10,664
--------- --------
End of period $ 7,198 $ 8,910
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 10,518 $ 9,266
Cash paid during the period for taxes $ 305 $ 942
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)
Three Months Ended
-----------------------
March 31, March 31,
2000 1999
------- -------
Net loss $(9,718) $(4,984)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 460 325
------- -------
Other comprehensive income 460 325
Comprehensive loss $(9,258) $(4,659)
======= =======
See notes to unaudited consolidated financial statements.
5
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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 March 31, 2000, unless
otherwise noted herein.
3. DIVESTITURE
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, the Company recorded a gain of $4.7 million (net of taxes of
$.5 million) and deferred recognition of additional gain pending resolution of
purchase price adjustments proposed by the buyer. 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 $24.7 million for the first quarter of 1999.
4. NEW CREDIT FACILITIES
On March 13, 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"). GSTOC expects to
replace the New Term Loan Facility with a new five year $50 million term loan
facility that is currently in the approval process. The new credit facilities
contain no operating 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 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 March 31, 2000 was 9.15%.
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
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
6. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2000 1999
-------- --------
Finished and semi-finished $ 60,336 $ 57,841
Raw materials, supplies and other 51,241 53,340
-------- --------
Total $111,577 $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 started
operations in January 1998 and 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, subject to the terms of the
agreement, to purchase 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 quarters ended March 31, 2000 and 1999, the Company sold most of its
purchases of DRI to third parties which resulted in a negative gross margin.
Income or losses from joint ventures, including AIR, are reported in the
statement of earnings under the caption "Equity in income (loss) of joint
ventures".
Because of 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. AIR and its
lenders have reached an agreement in principal regarding a restructuring that
provides AIR with cash flow relief over the next three years which will result
in lower DRI prices to GSTOC. Under the terms of the proposed 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. The proposed 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. The proposed
restructuring agreement is subject to approval by the credit committees of all
the lenders comprising the lending group, AIR, GSTOC and its joint venture
partner.
8. CLAIM SETTLEMENTS
During the first quarter of 1999, the Company recorded gains of $3.4 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 quarter
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 $7.8 million consists of short-term revolving credit facilities
in Chile, Peru and Italy for working capital requirements and general corporate
purposes.
7
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
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. 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 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.
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.
ENVIRONMENTAL MATTERS
The Company's U.S. facilities are subject to a broad range of federal, state and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous wastes and the
remediation of contamination associated with releases of hazardous substances at
Company facilities and associated offsite disposal locations. Liabilities with
respect to hazardous substance releases arise principally under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and similar state laws, which impose strict, retroactive, joint and several
liability upon statutorily defined classes of "potentially responsible parties."
The Company's foreign facilities and joint ventures are subject to varying
degrees of environmental regulation in the jurisdictions in which those
facilities are located.
Based on the continuing review of environmental requirements, the Company
believes it is currently in compliance with environmental requirements.
Nevertheless, as is the case with steel producers in general, if a release of
hazardous substances occurs on or from the Company's properties or any
associated offsite disposal locations, or if contamination from prior activities
is discovered at such properties or locations, the Company may be held liable
and may be required to pay the cost of remedying the condition or satisfying
third party damage claims. The amount of any such liability could be material.
The Company devotes considerable resources to ensuring that its operations are
conducted in a a manner that reduces such risks.
The Company has several environmental issues currently under discussion with
various federal and local agencies, some of which involve compliance and/or
remediation at certain properties. The Company records certain operating
expenses for environmental compliance, testing and other environmental related
costs as expenses when incurred. When it has been possible to determine
reasonable estimates of liabilities related to environmental issues, based upon
information from engineering and environmental specialists, the Company has made
provisions and accruals. At March 31, 2000, $2.7 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.
8
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
LABOR RELATIONS
A significant portion of the Company's 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.
There are approximately 140 union workers at the Duluth facility and management
together with its salaried workforce and temporary workers have continued to
operate the plant with no impact to production and without any interruption in
shipments to the Company's customers. Negotiations are ongoing with the union.
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. Europe and Other includes the Company's operations in Europe (principally
Italy), and other joint venture interests around the world including Canada,
Mexico and Australia.
<TABLE>
<CAPTION>
March 31, 2000 and the three months ended March 31, 2000
-------------------------------------------------------------------------
United South Europe
States America and Other Total
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 149,542 $ 25,734 $ 2,898 $ 178,174
Operating income (loss) (8,569) 3,152 176 (5,241)
Equity in income (loss) of joint ventures 1,539 (963) 288 864
Net earnings (loss) (11,661) 1,443 500 (9,718)
Total assets 460,792 61,165 14,660 536,617
Total liabilities 490,592 28,096 5,577 524,265
Net assets (29,800) 33,069 9,083 12,352
Three months ended March 31, 1999
------------------------------------------------------------------------
United South Europe
States America and Other Total
----------------- ------------------ ---------------- ---------------
Net sales $ 150,657 $ 26,476 $ 2,792 $ 179,925
Operating income 1,911 4,300 39 6,250
Equity in income (loss) of joint ventures (574) (1,485) 85 (1,974)
Net earnings (loss) (6,751) 1,607 160 (4,984)
</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 March 31, 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 the new credit
facilities (See Note 4). Accordingly, summarized financial information for GSTOC
on a stand alone basis is provided below.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
Current assets $ 187,922 $ 176,042
Noncurrent assets 269,772 324,937
--------- ---------
Total assets $ 457,694 $ 500,979
========= =========
Current liabilities $ 116,247 $ 117,925
Noncurrent liabilities 358,547 387,600
--------- ---------
474,794 505,525
Shareholder's deficit (17,100) (4,546)
--------- ---------
Total liabilities and shareholder's deficit $ 457,694 $ 500,979
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
(unaudited) (unaudited)
-------------- --------------
<S> <C> <C>
Net sales $ 149,556 $ 150,656
Cost of products sold 144,082 134,274
Selling, general and administrative expenses 7,053 7,517
Depreciation and amortization 6,329 6,291
--------- ---------
Operating income (loss) (7,908) 2,574
Interest expense (9,192) (9,348)
Equity in loss of joint venture -- (1,153)
Fees from joint ventures 1,078 1,272
Other, net 495 (4)
--------- ---------
Loss from continuing operations before income taxes (15,527) (6,659)
Income tax provision (137) (1,175)
--------- ---------
Loss from continuing operations (15,664) (7,834)
Discontinued operations (net of tax)
Gain on sale 4,653 --
Income (loss) from operations (21) 214
--------- ---------
Total discontinued operations 4,632 214
Loss before extraordinary item (11,032) (7,620)
Extraordinary item (1,522) --
--------- ---------
Net loss $ (12,554) $ (7,620)
========= =========
</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 and the Company's December 31, 1999 financial statements
included in the Company's Annual Report on Form 10-K.
RESULTS OF OPERATIONS - FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999.
NET SALES - Net sales for the first quarter of 2000 decreased slightly to $178.2
million from $179.9 million for the first quarter of 1999. The Company
experienced volume declines for all steel products in the first quarter of 2000
compared to the prior year first quarter. Also contributing to the slight
decline in revenues was an $11 per ton decline in average selling prices of
grinding media, caused by the slow down in worldwide mining activity. Offsetting
these factors in the first quarter of 2000 was a 6% increase in average selling
prices of the Company's mill liner business and an increase in DRI sales to
third parties of $5.0 million. Net sales in 1999 included a settlement of $2.6
million received from one of the Company's customers regarding minimum purchase
requirements.
COST OF PRODUCTS SOLD AND GROSS MARGINS - Cost of products sold as a percent of
net sales increased to 93.9% in the first quarter of 2000 from 87.3% in the
first quarter of the prior year. Margins were adversely impacted in 2000 by the
overall decline in the Company's average selling prices and by increases in the
Company's raw materials costs. During the first quarter of 1999, the Company
recorded gains of $3.4 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 $9.3 million for the first
quarter of 2000 as a result of the Company's continuing efforts regarding cost
reductions.
NET INTEREST EXPENSE - Net interest expense remained constant at $9.3 million.
Included in this amount for both quarters was $.4 million of amortization of
debt issuance costs.
OTHER INCOME (EXPENSE) - Other income (expense), which is primarily comprised of
equity in income (loss) of joint ventures and fees from joint ventures, was
income of $2.4 million for the first quarter of 2000 compared to net expense of
$1.2 million in 1999. The 1999 results included equity losses of $1.2 million
from the Company's direct reduced iron ("DRI") joint venture and $1.4 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 quarter of 2000.
INCOME TAXES - Income tax expense for the quarter ended March 31, 2000 was $.8
million on a pre-tax loss of $12.1 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.
Likewise, income tax expense for the first quarter of 1999 was $1.0 million on a
pre-tax loss of $4.2 million.
LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, the Company had
a loss from continuing operations before extraordinary item of $12.8 million for
the three months ended March 31, 2000 as compared to a loss of $5.2 million for
the same period in 1999. The Company incurred an extraordinary charge of $1.5
million in the first quarter of 2000 in connection with early debt retirement.
11
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had total cash and cash equivalents of $7.2
million, an increase of $3.3 million from December 31, 1999. The ratio of
current assets to current liabilities at March 31, 2000 was 1.62, increasing
from 1.50 at December 31, 1999. Operating activities from continuing operations
used $17.3 million of cash during the first quarter of 2000, whereas the Company
generated $15.2 million of operating cash flow in the first quarter of 1999. The
changes in operating assets and liabilities generated negative cash flow of
$11.0 million in the first quarter of 2000 compared to positive cash flow of
$10.2 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 $16.7 million decrease in inventories.
Net cash provided by investing activities of continuing operations was $62.0
million for the first quarter of 2000, consisting of proceeds from the sale of
Florida Wire and Cable, Inc. less capital expenditures of $6.4 million. During
the first quarter of 2000, the Company made debt repayments of $28.7 million,
cash collateralized $7.4 million of letters of credit issued under the previous
credit facility, 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 cash flow from
operations and credit facilities 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.
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 revolving credit facility and term loan and MEI's 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"). GSTOC
expects to replace the New Term Loan Facility with a new five year $50 million
term loan facility that is currently in the approval process.
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 March 31, 2000, $7.8 million of letters of
credit were outstanding, and the unused availability under the New Revolving
Credit Facility was $24.5 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 quarter of 2000, the Company's results were negatively
impacted by market conditions within the domestic steel industry. 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. In February 2000, the U.S. President
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. Until such time that these tariffs and
price increases take effect, the Company's financial condition could continue to
be negatively impacted.
12
<PAGE> 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
three months ended March 31, 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 March 31, 2000, the Company had fixed rate long term debt of
$247.0 million and variable rate borrowings of $66.0 million. Assuming a
hypothetical adverse change in interest rates of 10%, the Company would incur an
additional $.3 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 in the
Unaudited Consolidated Balance Sheets. None of the components of the Company's
unaudited consolidated financial statements was materially affected by exchange
rate fluctuations in the quarters ended March 31, 2000 or 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
March 31, 2000.
13
<PAGE> 14
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 10th of May 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
14
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