<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the
-----
Securities Act of 1934
For the quarterly period ended July 31, 1996.
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities Act
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of 1934
-------
For the transition period from to
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Commission file number 33-92496
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GULF STATES STEEL, INC. OF ALABAMA
----------------------------------
(Exact name of registrant as specified in its charter)
Alabama 63-114 1013
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
174 South 26th Street
Gadsden, Alabama 35904-1935
---------------- ----------
(Address of principal executive offices) (Zip Code)
(205) 543-6100
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(Registrant's telephone number, including area code)
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
----- -----
Indicate the number of shares outstanding of each class of common stock, as
of the latest practicable date:
Common Stock $ .01 par value - 3,610,000 shares as of August 31, 1996
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
INDEX
<TABLE>
<CAPTION>
PAGE NR.
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENTS OF INCOME -
FOR THE THREE MONTHS ENDED JULY 31, 1996 AND
1995; NINE MONTHS
ENDED JULY 31, 1996; FOR THE PERIOD APRIL 21,
1995 TO JULY 31, 1995;
FOR THE PERIOD NOVEMBER 1, 1994 TO APRIL 20,
1995 (PREDECESSOR)........................... 1
CONSOLIDATED BALANCE SHEETS -
AS OF JULY 31, 1996 AND OCTOBER 31, 1995..... 2
COMBINED STATEMENTS OF CASH FLOWS -
FOR NINE MONTHS ENDED JULY 31, 1996; FOR
THE PERIOD APRIL 21, 1995
TO JULY 31, 1995 AND FOR PERIOD FROM
NOVEMBER 1, 1994 TO APRIL 20, 1995
(PREDECESSOR)................................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)................................... 4 - 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7 - 10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K 11
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
GULF STATES STEEL, INC. OF ALABAMA
COMBINED STATEMENTS OF INCOME (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
ACTUAL THREE MONTHS NINE MONTHS ENDED PERIOD PERIOD
THREE MONTHS ENDED ENDED JULY 31, 1996 APRIL 21, 1995 TO JULY NOV. 1, 1994 TO
JULY 31, 1996 JULY 31, 1995 31, 1995 APRIL 20, 1995
<S> <C> <C> <C> <C> <C>
(PREDECESSOR)
Net sales $114,540 $125,477 $330,998 $141,566 $232,618
Cost of goods sold, 100,026 100,226 294,950 112,144 180,367
excluding depreciation
Effect of inventory - 13,195 - 13,195 -
write-up (Note 3)
Depreciation 3,600 3,900 11,849 4,338 8,683
Selling, general and 3,379 4,033 11,750 5,125 11,213
administrative expenses
Profit sharing 38 3,007 76 3,528 7,197
-------- -------- -------- -------- --------
Operating profit 7,497 1,116 12,373 3,236 25,158
Other (income) expense:
Interest expense 6,484 6,188 18,052 6,787 5,234
Interest income ( 16) ( 152) ( 33) ( 157) ( 4)
-------- -------- -------- -------- --------
6,468 6,036 18,019 6,630 5,230
-------- -------- -------- -------- --------
Income (loss) before 1,029 (4,920) (5,646) (3,394) 19,928
income taxes
Provision (benefit) for 296 (1,752) (2,080) (1,231) 7,126
income taxes -------- -------- -------- -------- --------
Net income (loss) $ 733 $ (3,168) $ (3,566) $ (2,163) $ 12,802
======== ======== ======== ======== ========
Net income (loss) per share $.19 $(.88) $(1.01) $(.60)
Common and common 3,800 3,610 3,610 3,610
equivalent shares
outstanding
</TABLE>
1
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 31, 1996 OCTOBER 31, 1995
--------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 1,351 $ 1,897
Accounts receivable, less allowance for doubtful accounts of
$1,214 in 1996 and $1,500 in 1995 37,295 39,658
Inventories................................................... 64,012 56,675
Deferred income taxes......................................... - 2,557
Prepaid taxes and other....................................... 3,211 894
-------- -------
Total current assets....................................... 105,869 101,681
Property, plant and equipment, net.............................. 183,473 176,913
Deferred charges, less accumulated amortization of $1,243 in
1996 and $ 618 in 1995........................................ 8,388 9,276
Deferred income taxes........................................... 2,784 -
-------- --------
Total assets............................................... $300,514 $287,870
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 30,608 $ 35,570
Accrued payroll and employee benefits......................... 5,501 4,746
Accrued interest payable...................................... 7,760 1,184
Other accrued liabilities..................................... 9,232 13,567
Income taxes payable.......................................... 45 1,157
-------- --------
Total current liabilities.................................. 53,146 56,224
Long-term debt.................................................. 210,373 188,775
Deferred income taxes........................................... - 2,310
Common stock warrants subject to put options........................ 2,225 2,225
Stockholders' equity :
Common Stock, par value $.01 per share; 4,000,000
shares authorized, 3,610,000 shares issued and outstanding 36 36
Additional paid-in capital............................... 39,050 39,050
Notes receivable from officers........................... (750) (750)
Accumulated deficit..................................... (3,566) -
-------- --------
Total stockholders' equity........................ 34,770 38,336
-------- --------
Total liabilities and stockholders' equity................. $300,514 $287.870
======== ========
</TABLE>
2
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD PERIOD
NINE MONTHS ENDED APRIL 21, 1995 TO NOVEMBER 1, 1994
------------------ ----------------------- TO APRIL 20, 1995
JULY 31, 1996 JULY 31, 1995 ------------------
------------------ ------------------ (PREDECESSOR)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $ (3,566) $ (2,163) $ 12,802
Adjustments to reconcile net income
(loss) to net cash provided
(used) by operating activities:
Depreciation, including amounts
capitalized in inventories.............. 11,849 3,919 8,994
Amortization............................ 1,236 419 415
Deferred income taxes................... (2,467) - 1,824
Changes in operating assets and
liabilities:
Accounts receivable..................... 2,363 (129) 3,899
Inventories............................. (7,337) (4,574) ( 871)
Effect of inventory write up............ - 13,195
Prepaid assets and deferred charges..... (2,317) (11,207) (1,547)
Accounts payable........................ (4,962) (1,060) (10,175)
Accrued payroll and employee benefits... 755 (1,835) 1,946
Accrued interest payable................ 6,576 7,154 (33)
Other accrued liabilities............... (4,335) 1,275 1,913
Income taxes prepaid and payable....... (1,182) - (6,790)
-------- --------- --------
Net cash provided (used) by operations. (3,387) 4,994 12,377
INVESTING ACTIVITIES:
Acquisition of predecessor company...... - (201,954) -
Building and equipment purchases........ (18,409) (7,990) (11,611)
-------- --------- --------
Net cash used in investing activities... (18,409) (209,944) (11,611)
FINANCING ACTIVITIES:
Proceeds from first mortgage notes...... - 190,000 -
Capital contribution.................... - 28,853 -
Borrowings (payments) on long-term debt. 3,100 - (18,839)
Net borrowings on revolving credit 18,150 - 18,079
agreement............................... -------- --------- --------
Net cash provided (used) by financing 21,250 218,853 (760)
activities.............................. -------- --------- --------
Net increase (decrease) in cash and (546) 13,903 6
cash equivalents........................
Cash and cash equivalents at beginning 1,897 1 179
of period............................... -------- --------- --------
Cash and cash equivalents at end of $ 1,351 $13,904 $ 185
period.................................. ======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................ $ 13,898 - $ 5,267
Income taxes............................ - - 12,092
</TABLE>
3
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Gulf States Steel, Inc. of
Alabama and its wholly-owned subsidiary (the "Company") for the three month
periods ended July 31, 1996 and 1995, the nine month period ended July 31,
1996 and the period April 21, 1995 to July 31, 1995. All material
intercompany accounts and transactions have been eliminated. The
accompanying predecessor financial statements present the combined financial
position, results of operations and cash flows of Gulf States Steel, Inc. of
Alabama and Affiliates for the period November 1, 1994 to April 20, 1995.
(See Note 2.)
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
period November 1, 1995 to July 31, 1996 are not necessarily indicative of
the results that may be expected for the fiscal year ended October 31, 1996.
For further information, refer to the consolidated financial statements of
the Company and the notes thereto, included in the Company's Form 10- K for
the year ended October 31, 1995.
NOTE 2 - ACQUISITION
On April 21, 1995, the Company (f/k/a Gulf States Steel Acquisition
Corp.) completed the acquisition (the "Acquisition") of substantially all
of the assets and certain liabilities of the Gadsden, Alabama facilities
of Gulf States Steel, Inc. of Alabama (the "Predecessor"), and other
affiliates of the Brenlin Group, a privately held investment company. A new
company, GSS Holdings Corp. ("Holdings") holds 100 % of the stock of the
Company.
The following unaudited pro forma information presents the results of
operations as though the aforementioned Acquisition, which occurred on April
21, 1995, had occurred as of the beginning of each of the periods presented
below.
<TABLE>
<CAPTION>
PRO-FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31,1996 JULY 31, 1995
(dollars in thousands)
<S> <C> <C>
Net sales $330,998 $374,184
Net income (loss) (3,636) 9,215
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NOTE 3 - INVENTORIES
Inventories are as follows:
(UNAUDITED)
JULY 31, 1996 OCTOBER 31, 1995
--------------------------- -------------------------
(dollars in thousands)
<S> <C> <C>
Raw Materials and Supplies $ 13,555 $ 11,254
Work-In-Process 19,707 18,351
Finished Products 30,750 27,070
------- -------
Total $ 64,012 $ 56,675
======= =======
</TABLE>
At the time of the Acquisition, the purchase price allocated to inventory
resulted in a $ 13.2 million write-up from the Predecessor's historical
cost. The $ 13.2 million write-up was expensed as a non-recurring cost as
the inventory was sold during the period from April 21, 1995 to July 31,
1995.
The Company's inventories are valued at the lower of cost, as determined by
first-in first-out (FIFO) method, or market. The Predecessor's inventories
were valued at lower of cost, as determined by last-in first-out (LIFO)
method, or market.
NOTE 4 - CONTINGENCIES
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to
the air and water, the handling and disposal of solid and/or hazardous
wastes, and the remediation of contamination associated with releases of
hazardous substances. The Company conducts continuous environmental
compliance and monitoring programs and believes that it is currently in
substantial compliance with all known material and applicable environmental
regulations except as follows:
During 1992, the Environmental Protection Agency asserted that a waste
water ditch system on the Company's property should be remediated and
closed. At October 31, 1994, the Company had remediated a portion of the
ditch and believes that the most probable course of action for the remainder
of the ditch will involve sampling soil and water and possibly removing some
contaminated soil at a nominal cost. The less likely, but more expensive
course of action would involve sampling soil and water, closing and
securing the ditch with the possibility of some contaminated soil remaining
in place, and monitoring for any migration of the contaminants. This
remediation would cost $1.1 million for closure with post-closure monitoring
costs over thirty years of $2.8 million. The Company also has agreed to a
$1.1 million civil penalty, of which $300,000 can be offset by future
capital expenditures, related to this issue. At July 31, 1996, the $800,000
penalty has been paid, however, the $300,000 of capital expenditures have
not been approved by the EPA.
The Company has been named a Potentially Responsible Party (PRP) at three
hazardous waste sites. These sites have resulted in nominal remediation
cost to the Company, and the Company believes that there will be no material
expense for these sites in the future.
The Company settled with the Alabama Department of Environmental
Management during 1994 for all outstanding air and water violations and the
Company believes that its facility now operates, as a general matter, in
substantial compliance with existing air emission regulations and its water
discharge permit.
The Company's expenditures for environmental capital projects aggregated
$1.6 million for the quarter ended July 31, 1996, and $4.9 for the nine
months ended July 31, 1996.
5
<PAGE>
Though the Company believes that it has adequately provided for the cost
of all known environmental conditions, the applicable agencies could insist
upon different and possibly more costly remediative measures than those
believed by the Company to be adequate or required by existing law.
The Company is involved in litigation arising from its normal operations,
including employee matters, the resolution of which is not expected to have
a significant effect on the Company's financial position or results of
operations.
NOTE 5 - EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares outstanding and the dilutive common equivalent shares. The Company
has outstanding common stock warrants subject to put options to purchase
190,000 shares of the common stock. During periods of net losses, the
warrants are considered antidilutive and are therefore not considered common
equivalent shares. Earnings per share data for the Predecessor have been
omitted because its capital structure is not comparable to the Company.
NOTE 6 - LONG TERM CONTRACTS
On April 1, 1996, the Company agreed upon a contract with the United
Steelworkers of America (the "USWA") which replaced the previous contract
expiring on that date. The new contract is for a term of 54 months expiring
on October 1, 2000. It includes wage increases, certain benefit increases
including other post retirement benefits, changes to local work rules,
language restricting the Company from participation in non-represented
businesses and gives the USWA representation on the Company's strategic
planning committee.
As noted above, one of the changes from the previous labor contract was
the granting of retiree health benefits subject to certain limitations.
Those limitations include provisions for employee contributions, the
transfer of a VEBA trust to fund a portion of the future expense,
ineligibility for those employees covered under separate plans and
appropriate allowances upon the attainment of eligibility under Medicare by
the covered employees. Preliminary calculations by the Company's actuaries
indicate an unfunded accumulated post retirement benefit obligation (APBO)
of approximately $6.0 million and annual net periodic post retirement
benefit cost (NPPBC) of $1.3 million.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
To facilitate a comparison of the Company's operations with the results of the
Predecessor, the following discussion and analysis for the nine months ended
July 31, 1996 and 1995 is based on a comparison of the company's historical
statements of income to Predecessor's pro forma statements of income prepared
under the assumption that the Acquisition of the Predecessor and related
issuance of the First Mortgage Notes (the "Notes") occurred at the beginning of
the period.
The pro forma financial statements of income presented below are for
discussion purposes only and should not be construed to be indicative of the
Company's results of operations had the Acquisition of the Predecessor and
issuance of the Notes been consummated on the date assumed and do not project
the Company's results of operations for any future period.
The pro forma financial statements of income differs from the historical
financial statements of income of the Predecessor due to the following
adjustments: (i) inventory is costed on a FIFO basis instead of LIFO (the basis
used by the Predecessor); (ii) a change in depreciation expense resulting from
the increased cost basis of Plant and Equipment resulting from the allocation of
the purchase price of the Company; (iii) management fees are adjusted to reflect
the provisions of the Company's management agreement; (iv) additional
amortization expense related to debt issuance cost of the First Mortgage Notes
less the reversal of certain Predecessor amortization expense; (v) additional
net interest expense based on the Company's debt structure; (vi) the effect on
profit sharing expense of the above adjustments; and (vii) the effect on tax
expense of the above adjustments.
Results of operations for an interim period are not necessarily indicative of
results for the full year.
<TABLE>
<CAPTION>
PRO-FORMA
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 ENDED
JULY 31, 1995
------------------ ------------------ ----------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales.............................. $114,540 $125,477 $330,998 $374,184
Cost of goods sold, excluding 100,026 100,226 294,950 291,817
depreciation..........................
Effect of inventory - 13,195 - 13,195
write-up..............................
Depreciation........................... 3,600 3,900 11,849 12,022
Selling, general and administrative 3,379 4,033 11,750 13,962
expenses..............................
Profit sharing......................... 38 3,007 76 9,907
-------- -------- -------- --------
Operating profit (loss)................ 7,497 1,116 12,373 33,281
Other (income) expense:
Interest expense................ 6,484 6,188 18,052 19,205
Interest income................. ( 16) (152) ( 33) ( 161)
-------- -------- -------- --------
6,468 6,036 18,019 19,044
-------- -------- -------- --------
Income (loss) before income taxes...... 1,029 (4,920) ( 5,646) 14,237
Provision (benefit) for income taxes.. 296 (1,752) ( 2,080) 5,022
-------- -------- -------- --------
Net income (loss)...................... $ 733 $( 3,168) $( 3,566) $ 9,215
======== ======== ======== ========
</TABLE>
7
<PAGE>
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31,
1995
Net Sales. Net sales decreased 8.7% to $114.5 million for the 1996
period from $125.5 million for the 1995 period. This is primarily the
result of a 3.7 % decrease in sales volume on shipments of flat rolled
products at 271,620 net tons in the 1996 period from 281,990 net tons in
the 1995 period due primarily to a planned plate mill outage in the
current period. In addition, total revenues decreased due to a $9 per ton
decline in average selling prices to $419 in the 1996 period from $428 per
ton in the 1995 period as a result of lower demand and increased
competition.
Cost of Goods Sold. Cost of goods sold, excluding depreciation,. as a
percentage of net sales, increased to 87.3% in the 1996 period from 79.9%
in the 1995 period. This increase resulted from the lower average selling
price and cost increases. Average manufacturing costs for flat rolled
products increased to $365 per ton in the 1996 period from $332 in the 1995
period. This increase was primarily the result of higher raw material
prices, natural gas prices and higher wage rates. Also, because of
production shortfalls due to gas curtailments in the first two fiscal
quarters, cast slabs were purchased in the third fiscal quarter at a cost
penalty. Depreciation costs, at $3.6 million in the 1996 period were lower
than the $ 3.9 million in the 1995 period due to revised estimates of
project completions.
Effect of Inventory Write-up At the time of the Acquisition, the
purchase price allocated to inventory resulted in a $ 13.2 million write-up
from the Predecessor's historical cost. The $ 13.2 million write-up was
expensed as a non-recurring cost as the inventory was sold during the period
from April 21, 1995 to July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3.4 million, or 3.0 % of sales, in the
1996 period from $4.0 million, or 3.2% of sales in the 1995 period. This
was primarily due to reduced sales & use tax expense.
Profit Sharing. Under terms of the Company's profit sharing plan, no
profit sharing expense was accrued in the 1996 period with the exception of
a small amount at it's subsidiary operation. This compares to $3.0 million
in the 1995 period.
Operating Profit. As a result of the changes in net sales, cost of goods
sold, the effect of the inventory write-up, selling, general and
administrative expenses, and profit sharing discussed above, operating
profit increased to $7.5 million, or 6.5 % of net sales, in the 1996
period, from $1.1 million, or 0.9% of sales, in the 1995 period.
Interest Expense. Interest expense, net of interest income, increased to
$6.5 million in the 1996 period from $6.0 million in the 1995 period. This
was due to the higher average balance of the revolving credit facility.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO THE NINE MONTHS ENDED JULY 31,
1995.
Net Sales. Net sales decreased 11.5% to $330.1 million for the 1996
period from $374.2 million for the 1995 period. The Company realized a
decrease of $27 per ton in average selling price on flat rolled products to
$414 per ton in the 1996 period from $441 per ton in the 1995 period. The
reduced average selling price resulted from lower demand and increased
competition. The Company experienced a 4.7% decrease in shipments of flat
rolled products to 789,290 tons in the 1996 period from 828,560 tons in the
1995 period due primarily to production shortfalls during periods of gas
curtailments and due to planned and unplanned facilities outages.
8
<PAGE>
Cost of Goods Sold. Cost of goods sold, excluding depreciation, increased
1.1% to $295.0 million for the 1996 period from $291.8 million for the 1995
period. As a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 89.1% in the 1996 period from 78.0% in the 1995
period. This increase resulted from manufacturing delays caused by natural
gas curtailments, and planned and unplanned facilities outages, and was
also influenced by higher raw material prices, natural gas prices, and
higher wage rates. Depreciation costs decreased to $11.8 million in the 1996
period from $12.0 million in the 1995 period, primarily due to an revised
estimates of project completions.
Effect of Inventory Write-up At the time of the Acquisition, the
purchase price allocated to inventory resulted in a $ 13.2 million write-
up from the Predecessor's historical cost. The $ 13.2 million write-up was
expensed as a non-recurring cost as the inventory was sold during the period
from April 21, 1995 to July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $11.8 million, or 3.5% of sales, in
the 1996 period from $14.0 million, or 3.7 % of sales in the 1995 period.
This was primarily due to a decrease in the corporate management fee and
reduced sales and use tax expense in the 1996 period.
Profit Sharing. Under terms of the Company's profit sharing plan, no
profit sharing expense was accrued in the 1996 period with the exception of
a small amount at it's subsidiary operation. This compares to $9.9 million
in the 1995 period.
Operating Profit. As a result of the changes in net sales, cost of goods
sold, the effect of inventory write-up, selling, general and administrative
expenses and profit sharing discussed above, operating profit decreased to
$12.3 million, or 3.7% of net sales, in the 1996 period, from $33.3
million, or 8.9% of sales, in the 1995 period.
Interest Expense. Interest expense, net of interest income, decreased to
$18.0 million in the 1996 period from $19.0 million in the 1995 period.
This was due to higher capitalized interest associated with increased
construction-in-progress balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements consist of capital expenditures
and debt service. The Company incurs capital expenditures for the
replacement of existing plant and equipment, compliance with environmental
regulations, and the upgrading and improvement of manufacturing facilities.
The Company's capital expenditures in the three months ended July 31, 1996
were $6.0 million compared to $7.8 million in the three months ended July
31, 1995. For fiscal year 1996, the Company expects replacement and
environmental capital expenditures to total approximately $6.9 million and
expenditures relating to upgrading and improvement of facilities to total
approximately $ 20.5 million.
In connection with the Acquisition on April 21, 1995, $190 million in
First Mortgage Notes were issued, upon which the Company will be required to
make semi-annual cash interest payments of approximately $12.8 million
($25.7 annually). Although the Company will not be required to make
principal payments on the First Mortgage Notes until maturity, in the event
of Excess Cash Flow, as defined by the First Mortgage Note Indenture, the
Company will be required to repurchase First Mortgage Notes with 50% of such
Excess Cash Flow.
Also, in connection with the Acquisition, the Company entered into an
agreement described as the Revolving Credit Facility, which provided the
Company with a credit facility of $70 million, subject to a borrowing
availability formula applied to eligible accounts receivable and inventory
of the Company and a requirement to maintain borrowing availability of not
less than $ 10 million at all times. The Revolving Credit
9
<PAGE>
Facility was available for working capital and other general corporate
purposes upon the closing of the sale of assets, but was not drawn upon at
that time. The Revolving Credit Facility will require the Company to
maintain a ratio of EBITDA to Cash Interest of 1.0 to 1.0 for the preceding
twelve month period measured at the end of each of the Company's fiscal
quarters and, under certain circumstances, to meet additional financial
covenants. At July 31, 1996, approximately $19,150,000 was borrowed under
the Revolving Credit Facility.
Although the Company has no obligation with respect to the promissory
notes issued by Holdings to Capital Resources Lenders II, L.P. in connection
with the Acquisition ( the "Holdings Notes"), Holdings is required to make
payments thereon in accordance with the respective terms thereof, for which
the sole source of funds is expected to be dividend distributions or loans
from the Company. The Holdings Notes require Holdings to cause the Company
to pay dividends to Holdings to the maximum extent allowed under the terms
of the Indenture and applicable law (until the Holdings Notes are repaid in
full). No dividends are payable by the Company as of July 31, 1996. In
addition, in connection with the Acquisition, Holdings issued a promissory
note to the seller ( the "Seller Note"), for which the sole source of funds
is also expected to be dividend distributions or loans from the Company.
There have been no cash payments required or made on the Seller Note through
July 31, 1996.
The Company's net cash used by operations was $ 3.4 million in the first
nine months of fiscal 1996, compared to $12.4 million provided in the
period from November 1, 1994 to April 20, 1995, and the $ 5.0 million
provided in the period from April 21, 1995 to July 31, 1995.
Effective April 1, 1996, the Company entered into a 54-month contract with
the USWA (see Note 6 to the financial statements under Item 1 for additional
information).
The Company believes that future cash flows from operations, together with
borrowings available under the Revolving Credit Facility, will provide the
Company with sufficient liquidity and capital resources to conduct its
future business activities, including its capital investments, and to meet
its cash interest payment requirements.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) No Exhibits on Form 8-K were filed by the Company during the three
months ended July 31, 1996.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
GULF STATES STEEL, INC. OF ALABAMA
-----------------------------------
(registrant)
By: /s/ John D. Lefler
------------------
John D. Lefler
President & Chief Executive Officer
(Principal Executive Officer)
Dated: September 12, 1996 By: /s/ Jack R. Collins
-------------------
Jack R. Collins
Senior Vice President &
Chief Financial Officer
(Chief Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from quarterly
report on Form 10-K for the quarterly period ended July 31, 1996 and is
qualified in its entireity by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1995
<PERIOD-START> AUG-01-1996 NOV-01-1995
<PERIOD-END> JUL-31-1996 JUL-31-1996
<CASH> 1,351 1,897
<SECURITIES> 0 0
<RECEIVABLES> 38,509 41,158
<ALLOWANCES> (1,216) (1,500)
<INVENTORY> 64,012 56,675
<CURRENT-ASSETS> 105,869 101,681
<PP&E> 202,184 183,783
<DEPRECIATION> (18,711) (6,870)
<TOTAL-ASSETS> 300,514 287,870
<CURRENT-LIABILITIES> 53,146 56,224
<BONDS> 187,775 187,775
0 0
0 0
<COMMON> 36 36
<OTHER-SE> 34,734 38,300
<TOTAL-LIABILITY-AND-EQUITY> 300,514 287,870
<SALES> 114,540 330,998
<TOTAL-REVENUES> 114,540 330,998
<CGS> 103,626 306,799
<TOTAL-COSTS> 103,626 306,799
<OTHER-EXPENSES> 3,417 11,826
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,468 18,019
<INCOME-PRETAX> 1,029 (5,646)
<INCOME-TAX> 296 (2,080)
<INCOME-CONTINUING> 733 (3,566)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 733 (3,566)
<EPS-PRIMARY> .19 (1.01)
<EPS-DILUTED> 0 0
</TABLE>
