<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 Exchange Act of 1934 For the Quarterly Period ended January 31,
1997.
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act 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
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(Exact name of registrant as specified in its charter)
Alabama 63-114 1013
- -------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
174 South 26th Street
Gadsden, Alabama 35904-1935
- -------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(205) 543-6100
--------------
(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 periods 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 practical date:
Common Stock $ .01 par value - 3,610,000 shares as of March 1, 1997
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GULF STATES STEEL, INC. OF ALABAMA
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME -
FOR THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996............................................ 1
CONSOLIDATED BALANCE SHEETS -
AS OF JANUARY 31, 1997 AND OCTOBER 31, 1996......... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS -
FOR THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996............................................ 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)......................................... 4 - 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 6 - 7
PART II OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K...................... 8
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------
GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1996
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<S> <C> <C>
Net sales............................. $ 111,317 $ 111,782
Cost of goods sold, excluding
depreciation......................... 97,719 97,802
Depreciation.......................... 4,974 4,649
Profit sharing........................ 6 -
Selling, general and administrative
expenses............................. 3,501 3,734
---------- ----------
Operating profit...................... 5,117 5,597
Other (income) expense:
Interest expense................... 6,372 5,833
Interest income.................... (12) (3)
---------- ----------
6,360 5,830
---------- ----------
Income (loss) before income taxes..... ( 1,243) ( 233)
Provision (benefit) for income taxes.. (401) ( 83)
---------- ----------
Net income (loss)..................... $ ( 842) $ ( 150)
========== ==========
Net (loss) per share.................. $ (.23) $ (.04)
========== ==========
Common and common equivalent shares
outstanding.......................... 3,610,000 3,610,000
========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 2,802 $ 4,458
Accounts receivable, less allowance for doubtful
accounts of $1,050 in 1997 and 1996............ 39,445 40,788
Inventories..................................... 63,436 58,383
Deferred income taxes........................... 3,441 2,850
Prepaid taxes and other......................... 4,227 2,873
-------- --------
Total current assets......................... 113,351 109,352
Property, plant and equipment, net................ 189,808 186,893
Deferred charges, less accumulated amortization of
$2,175 in 1997 and $1,864 in 1996.............. 7,768 8,079
-------- --------
Total assets................................. $310,927 $304,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 47,998 $ 34,878
Accrued payroll and employee benefits........... 4,061 5,713
Accrued interest payable........................ 7,715 1,270
Other accrued liabilities....................... 1,613 9,165
Income taxes payable............................ 367 156
Current portion of long-term debt............... 643 643
-------- --------
Total current liabilities.................... 62,397 51,825
Long-term debt.................................... 207,765 210,839
Deferred income taxes............................. 1,416 1,469
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............................. (1,212) (370)
-------- --------
Total stockholders' equity.................... 37,124 37,966
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Total liabilities and stockholders' equity.... $310,927 $304,324
======== ========
</TABLE>
See accompanying notes.
2
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GULF STATES STEEL, INC. OF ALABAMA
STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ (842) $ (150)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation............................... 4,974 4,649
Amortization............................... 380 518
Deferred income taxes...................... (644) -
Changes in operating assets and
liabilities:
Accounts receivable....................... 1,343 1,626)
Inventories............................... (5,053) 6,069
Prepaid assets and deferred charges....... (1,354) (2,645)
Accounts payable.......................... 13,120 (9,050)
Accrued payroll and employee benefits..... (1,652) (234)
Accrued interest payable................... 6,445 6,492
Other accrued liabilities.................. (7,552) (2,125)
Income taxes prepaid and payable.......... 211 (981)
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Net cash provided by operations............. 9,376 917
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INVESTING ACTIVITIES:
Building and equipment purchases............ (7,889) (6,606)
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Net cash used in investing activities....... (7,889) (6,606)
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FINANCING ACTIVITIES:
Net borrowings (payments) on revolving
credit agreement........................... (2,982) 5,246
Payments on long-term debt................. (161) -
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Net cash provided (used) by financing (3,143) 5,246
activities............................. ------- -------
Net decrease in cash and cash (1,656) (443)
equivalents............................
Cash and cash equivalents at beginning 4,458 1,897
of year................................ ------- -------
Cash and cash equivalents at end of $ 2,802 $ 1,454
period................................. ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for
Interest............................... $ 575 $ 219
Income taxes........................... - 898
</TABLE>
See accompanying notes.
3
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GULF STATES STEEL, INC. OF ALABAMA
NOTES TO CONSOLIDATED 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 fiscal three
month periods ended January 31, 1997 and 1996. All material intercompany
accounts and transactions have been eliminated.
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, 1996 to January 31, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 1997. 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, 1996.
NOTE 2 - ACQUISITION
On April 21, 1995, the Company (f/k/a Gulf States Steel Acquisition Corp.)
completed the acquisition of substantially all of the assets and certain
liabilities of the Gadsden, Alabama facilities of Gulf States Steel, Inc. of
Alabama, from the Brenlin Group, a privately held investment company. The
acquisition was accounted for using the purchase method of accounting and is
included in the Company's financial statements from the date of acquisition.
A new company, GSS Holdings Corp., holds 100% of the stock of the Company.
<TABLE>
NOTE 3 - INVENTORIES
Inventories are as follows:
(UNAUDITED)
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
(dollars in thousands)
<S> <C> <C>
Raw Materials and Supplies $17,440 $16,920
Work-In-Process 18,999 11,803
Finished Products 26,997 29,660
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Total $63,436 $58,383
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</TABLE>
The Company's inventories are valued at the lower of cost, as determined by
the first-in first-out (FIFO) method, or market.
4
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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.
The Company has 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 subsequent monitoring for any
migration of the contaminants. This remediation would cost approximately $1.1
million for closure with post-closure monitoring costs over thirty years of $2.8
million. Also, the Company has agreed to a $1.1 million civil penalty, of which
$800,000 had been paid at January 31, 1997. A final payment of $0.3 million was
made on February 24, 1997.
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 has been contacted by the U.S. Department of Justice, at the
request of the Environmental Protection Agency, for alleged violations of its
water discharge permit. Since December 21, 1994 there have been exceedances of
certain of the permit limits, but the Company asserts that these have been
sporadic and non-continuous, and the Company has taken, and continues to take,
appropriate remedial measures. The Company has opened discussions with the
Justice Department in an attempt to settle these claims; however, at this time
it is not possible to predict what level of penalties the Justice Department
will seek or when agreement will be reached with the Company.
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 has accrued
$750,000 at January 31, 1997 for unresolved environmental matters and does not
expect that the final resolution of any such matters would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
The Company's expenditures for environmental capital projects aggregated
$1.1 million for the three months ended January 31, 1997, and $1.4 million for
the three months ended January 31, 1996.
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, results of operations or
liquidity.
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 shares.
5
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1996
Net Sales. Net sales decreased 0.4% to $111.3 million for the 1997 period
from $111.8 million for the 1996 period. This decline is primarily the result of
a 3.1% decrease in sales volume on shipments of flat rolled products to 259,080
net tons in the 1997 period compared to 267,370 net tons in the 1996 period.
Although total revenues decreased slightly due to the lower net tons shipped,
this was largely offset by an increase of $12 per ton in average selling prices
to $426 for the 1997 period compared to $414 per ton for the 1996 period. The
increase in average selling price resulted from improved transaction prices,
improved shipping mix and continued strong industry demand.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
0.1% to $97.7 million for the 1997 period from $97.8 million for the 1996
period. As a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 87.8% from 87.5%. This increase was primarily due to
sharply higher natural gas prices and higher hourly labor costs including the
results of the new labor agreement with the USWA. Average manufacturing costs
for flat rolled products increased to $372 per ton in the 1997 period from $365
per ton in the 1996 period. Depreciation costs were $5.0 million in the 1997
period compared to $4.6 million in the 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3.5 million, or 3.1% of sales, in the 1997
period from $3.7 million, or 3.3% of sales in the 1996 period. This was
primarily due to lower state sales and use tax expense resulting from the
Company's being awarded "Enterprise Zone" status by the State of Alabama and
recovery of prior period overpayments. This benefit was partially offset by
higher staffing costs.
Operating Profit. As a result of the changes in net sales, cost of goods
sold, selling and general and administrative expenses, operating profit
decreased to $5.1 million, or 4.6 % of net sales, in the 1997 period, from $5..6
million, or 5.0% of net sales, in the 1996 period.
Interest Expense. Interest expense, net of interest income, increased to
$6.4 million in the 1997 period from $5.8 million in the 1996 period. This was
due to the higher average balance of borrowings under the Company's revolving
credit agreement.
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 January 31, 1997 were $7.9 million
compared to $6.6 million in the three months ended January 31, 1996. For fiscal
year 1997, the Company expects replacement and environmental capital
expenditures, excluding capitalized interest, to total approximately $17.5
million and expenditures relating to upgrading and improvement of facilities to
total approximately $24.7 million.
6
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In connection with the acquisition on April 21, 1995 (See Note 2), $190
million in First Mortgage Notes were issued, upon which the Company is 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
purchase First Mortgage Notes with 50% of such Excess Cash Flow.
Also, in connection with the acquisition, the Company entered into an
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 Facility requires 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 January 31,
1997, approximately $17 million was borrowed under the Revolving Credit
Facility.
At the time of the acquisition, GSS Holdings Corp. issued certain
promissory notes (the "Holdings Notes") to Capital Resources Lenders II, L.P. as
part of a related transaction. Although the Company has no obligation with
respect to the promissory notes, GSS Holdings Corp. 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 January 31, 1997. 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 January 31, 1997.
The Company's net cash provided by operations was $9.4 million in the
first three months of fiscal 1997, compared to $0.9 million in the three months
ended January 31, 1996.
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.
7
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PART II OTHER INFORMATION
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 January 31, 1997.
8
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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: March 12, 1997 By: /s/ Jack R. Collins
-------------------
Jack R. Collins
Senior Vice President
& Chief Financial Officer
(Principal Financial and
Accounting Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 2,802 0
<SECURITIES> 0 0
<RECEIVABLES> 40,495 0
<ALLOWANCES> (1,050) 0
<INVENTORY> 63,436 0
<CURRENT-ASSETS> 113,351 0
<PP&E> 217,137 0
<DEPRECIATION> (27,329) 0
<TOTAL-ASSETS> 310,927 0
<CURRENT-LIABILITIES> 62,397 0
<BONDS> 187,775 0
0 0
0 0
<COMMON> 36 0
<OTHER-SE> 37,088 0
<TOTAL-LIABILITY-AND-EQUITY> 310,927 0
<SALES> 111,317 111,782
<TOTAL-REVENUES> 111,317 111,782
<CGS> 102,693 102,448
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,507 3,734
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,260 5,830
<INCOME-PRETAX> (1,243) (233)
<INCOME-TAX> (401) (83)
<INCOME-CONTINUING> (842) (150)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (842) 150
<EPS-PRIMARY> (.23) (.04)
<EPS-DILUTED> 0 0
</TABLE>
