<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 July 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
--------- ---------
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
- --------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 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 September 10, 1997
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Statements of Income -
For the Three Months Ended July 31, 1997 and 1996; For the Nine Months
Ended July 31, 1997 and 1996....................................................... 1
Consolidated Balance Sheets -
as of July 31, 1997 and October 31, 1996........................................... 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended July 31, 1997 and 1996................................... 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>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------
<TABLE>
<CAPTION>
GULF STATES STEEL, INC. OF ALABAMA
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share data)
Three Months Ended Nine Months Ended
July 31 July 31
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 108,402 $ 114,540 $ 326,647 $ 330,998
Cost of goods sold, excluding depreciation.................. 98,750 100,026 289,813 294,950
Depreciation................................................ 4,518 3,600 14,086 11,849
Profit sharing.............................................. - 38 10 76
Selling, general and administrative expenses................ 3,877 3,379 10,974 11,524
Write-down of fixed assets.................................. 1,800 - 1,800 -
--------- --------- ---------- ---------
Operating profit (loss)..................................... ( 543) 7,497 9,964 12,549
Other income) expense
Interest expense................................... 7,149 6,484 20,378 18,278
Interest income.................................... ( 14) ( 16) ( 29) ( 33)
--------- --------- ---------- ---------
7,135 6,468 20,349 18,245
--------- --------- ---------- ---------
Income (loss) before income taxes........................... ( 7,678) 1,029 ( 10,385) (5,646)
Provision (benefit) for income taxes........................ - 296 ( 768) ( 2,080)
--------- --------- ---------- ---------
Net income (loss)........................................... $ ( 7,678) $ 733 $ ( 9,617) $ (3,566)
========= ========= ========== =========
Net income (loss) per share................................. $ ( 2.13) $ .19 $ ( 2.66) $ (1.01)
========= ========= ========== =========
Common and common equivalent shares outstanding 3,610,000 3,800,000 3,610,000 3,610,000
========= ========= ========== =========
See accompanying notes.
</TABLE>
1
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GULF STATES STEEL, INC. OF ALABAMA
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
July 31, 1997 October 31, 1996
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 2,089 $ 4,458
Accounts receivable, less allowance for doubtful accounts of
$1,050 in 1997 and 1996................................................... 38,074 40,788
Inventories.................................................................. 67,488 58,383
Deferred income taxes........................................................ 2,538 2,850
Prepaid expenses and other................................................... 3,392 2,873
-------- --------
Total current assets..................................................... 113,581 109,352
Property, plant and equipment, net............................................... 198,084 186,893
Deferred charges, less accumulated amortization of $2,795 in
1997 and $1,864 in 1996...................................................... 7,148 8,079
-------- --------
Total assets............................................................. $318,813 $304,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 33,859 $ 34,878
Accrued payroll and employee benefits........................................ 5,858 5,713
Accrued interest payable..................................................... 7,875 1,270
Other accrued liabilities.................................................... 9,051 9,165
Income taxes payable......................................................... - 156
Current portion of long-term debt............................................ 643 643
-------- --------
Total current liabilities................................................ 57,286 51,825
Long-term debt................................................................... 230,413 210,839
Deferred income taxes............................................................ 540 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.......................................................... ( 9,987) ( 370)
-------- --------
Total stockholders' equity............................................... 28,349 37,966
-------- --------
Total liabilities and stockholders' equity............................... $318,813 $304,324
======== ========
See accompanying notes.
</TABLE>
2
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GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31
-------------------------------
1997 1996
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................ $ ( 9,617) $ ( 3,566)
Adjustments to reconcile net loss to
net cash provided (used)
by operating activities:
Depreciation........................ 14,086 11,849
Amortization........................ 1,142 1,236
Deferred income taxes............... ( 617) ( 2,467)
Write-down of fixed assets......... 1,800 -
Postretirement health care
plan prior service costs.......... 1,510 360
Changes in operating assets
and liabilities:
Accounts receivable............ 2,714 2,363
Inventories.................... ( 9,105) ( 7,337)
Prepaid assets and deferred
charges....................... ( 520) ( 2,317)
Accounts payable............... ( 1,019) ( 4,962)
Accrued payroll and employee
benefits...................... (1,366) 395
Accrued interest payable....... 6,605 6,576
Other accrued liabilities...... ( 114) ( 4,335)
Income taxes prepaid and
payable....................... ( 156) ( 1,182)
--------- ---------
Net cash provided (used) by
operations......................... 5,343 ( 3,387)
--------- ---------
INVESTING ACTIVITIES:
Building and equipment purchases........ ( 27,077) ( 18,409)
--------- ---------
Net cash used in investing
activities ........................ ( 27,077) ( 18,409)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings on revolving credit
agreement.............................. 19,857 18,150
Borrowings (payments) on
long-term debt......................... ( 492) 3,100
--------- ---------
Net cash provided by financing
activities......................... 19,365 21,250
--------- ---------
Net decrease in cash and cash
equivalents............................ ( 2,369) ( 546)
--------- ---------
Cash and cash equivalents at beginning
of year................................ 4,458 1,897
--------- ---------
Cash and cash equivalents at end of
period................................. $ 2,089 $ 1,351
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................ $ 15,399 $ 13,898
Income taxes........................ - -
</TABLE>
See accompanying notes.
3
<PAGE>
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
nine month periods ended July 31, 1997 and 1996. All material intercompany
accounts and transactions have been eliminated. An account has been
reclassified between general and administrative expense and interest expense,
and the financial statements of the 1996 comparative periods have been adjusted
accordingly.
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 July 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 - INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 31, 1997 OCTOBER 31, 1996
------------- ----------------
(dollars in thousands)
<S> <C> <C>
Raw Materials and Supplies $19,643 $16,920
Work-In-Process 26,467 11,803
Finished Products 21,378 29,660
------- -------
Total $67,488 $58,383
======= =======
</TABLE>
The Company's inventories are valued at the lower of cost, as determined by the
first-in, first-out (FIFO) method, or market.
NOTE 3 B DEFERRED INCOME TAXES
At July 31, 1997, the Company had net current deferred tax assets of
$5,049,000 and net non-current deferred tax liabilities of $540,000. During the
third quarter of fiscal year 1997, the Company established a deferred tax
valuation allowance of $2,511,000 due to operating losses in the current and
prior years.
NOTE 4 B 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.
4
<PAGE>
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 agreed to a $1.1 million civil penalty which has
been paid as of July 31, 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, if any, the Justice
Department will seek or when agreement will be reached with the Company.
The Company has also been contacted by the U.S. Department of Justice,
at the request of the Environmental Protection Agency, for alleged contribution
to the contamination of sediments in Black Creek and Lake Gadsden (where Black
Creek empties). The Environmental Protection Agency is requesting that the
Company either fund or participate in the remediation of the contaminated
sediments involved. In order to define the scope and potential cost of the
remediation, the Environmental Protection Agency must perform an Engineering
Evaluation/Cost Analysis and this study has yet to be commenced. As a
consequence, it is not possible to predict the potential liability associated
with the alleged contamination of Black Creek and Lake Gadsden. The Company has
nevertheless opened preliminary discussions with the Justice Department and the
Environmental Protection Agency regarding its claims, although, at this time it
is not possible to predict what the Company's allocated share of the costs of
remediation will be and whether it will be possible to reach agreement with the
Government regarding those costs.
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. At July 31,
1997 the Company has accrued $692,000 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 $0.9 million for the quarter ended July 31, 1997, and $3.0 million
for the nine months ended July 31, 1997.
The Company is involved in litigation arising from its normal
operations, including employee matters, the resolu- tion 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 equivalent
shares.
5
<PAGE>
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement on Accounting Standards No. 128, Earnings Per Share, which is
required to be adopted for periods ending after December 15, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share. Basic earnings per share under the new requirements
differs from primary earnings per share under current quidelines in that it only
includes the weighted average common shares outstanding and does not include any
dilutive securities in the calculation. Diluted earnings per share under the
new standard differs only in certain minor calculations compared to fully
diluted earnings per share under the existing standard. This change would not
currently have an impact on the Company's financial statements except for the
calculation of earnings per share for the third quarter ended July 31, 1996.
Basic earnings per share for that quarter would increase to $.20 per share while
diluted earnings per share would remain at $.19 per share. For all other
periods presented this change would have no effect because the Company's stock
warrants have been antidilutive for those periods due to losses.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
on Accounting Standards No. 130, Reporting Comprehensive Income, which requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997, and
the impact on the Company's financial statements has not been determined.
Additionally, in June 1997, the FASB issued Statement on Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which requires that an enterprise (a) report financial and
descriptive information about its reportable operating segments, (b) report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets with reconciliation of such amounts to the financial
statements of the enterprise and (c) report information about revenues derived
from the Company's products or services and information about major customers.
This Statement is effective for fiscal years beginning after December 15, 1997,
and the impact on the Company's financial state- ments has also not been
determined.
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
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. The words "believe," "expect," "anticipate" and similar expressions
identify forward-looking statements. Such statements are based on management's
current assumptions and expectations and are subject to a number of factors and
uncertainties which could cause actual results or business conditions to differ
materially from those anticipated in the forward-looking statements. There can
be no assurance that actual results will not differ materially from those
described in such statements because of various factors, including, but not
limited to:
- - the size and timing of significant orders, as well as deferral of
orders, over which the Company has little control; the variation in the
Company's sales cycles from customer to customer; increased competition posed by
other steel producers; changes in pricing policies by the Company and its
competitors; the need to secure or build manufacturing capacity in order to meet
demand for the Company's products; the Company's success in expanding its sales
programs and its ability to gain increased market acceptance for its existing
product lines; the gain or loss of significant customers; the ability to
complete the Company's capital investment program and successfully produce its
products; shortages in the availability of raw materials from the Company's
suppliers; fluctuations in the price and availability of energy; the costs of
environmental compliance and the impact of government regulations; the Company's
relationship with its work force; the restrictive covenants and tests contained
in the Company's debt instruments, which could limit the Company's operating and
financial flexibility; and, general economic conditions.
RESULTS OF OPERATIONS
Results of operations for an interim period are not necessarily
indicative of results for the full year.
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996
Net Sales. Net sales decreased 5.3% to $108.4 million for the three
months ended July 31, 1997 from $114.5 million for the comparable period in
1996. This decrease in revenues was primarily the result of a 8.6% decrease in
shipments of flat rolled products from 271,620 net tons during the 1996 period
to 248,340 net tons during the 1997 period. Sales volume was lower due to
planned outages of production facilities during May and June of 1997. This
decrease in revenues due to the lower sales volume was partially offset by an
increase in the average selling price of flat rolled products to $425 per ton
for the 1997 period from $419 per ton for the comparable period in 1996. This
increase in average selling price resulted from improved transaction prices and
an improved shipping mix.
Cost of Goods Sold. Cost of goods sold, excluding depreciation,
decreased 1.3% to $98.8 million for the 1997 period from $100.0 million during
the 1996 period. As a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 91.1% from 87.3%. This increase was due to higher
hourly labor costs and allocated fixed costs during planned outages of
facilities which more than offset the benefits from the Company's cost reduction
programs. Average manufacturing costs for flat rolled products increased to
$384 per ton during the 1997 period from $365 per ton in the 1996 period.
Depreciation expense was $4.5 million in the 1997 period compared to $3.6
million in the 1996 period. This increase was largely due to continuing
expenditures for the Company's capital improvement program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3.9 million, or 3.6% of sales, in the 1997
period from $3.4 million, or 3.0% of sales in the 1996 period. This increase
was primarily due to higher staffing costs, increased employee benefit plan
costs and noncapitalized costs relating to the Company's business process
improvement initiative.
7
<PAGE>
Write-down of Fixed Assets. During the third quarter of fiscal 1997,
management decided to close the blooming mill in connection with the Company's
capital improvement program and upgrading of its facilities. This closing
should be completed in the fourth quarter of fiscal 1997, and the Company has
recorded a non-recurring charge of $1.8 million for the related write-down of
the associated fixed assets.
Operating Profit. As a result of the changes in net sales, cost of
goods sold, depreciation, selling, general and administrative expenses and the
write-down of fixed assets discussed above, the Company recorded an operating
loss of $0.5 million, or (0.5)% of net sales, in the 1997 period compared to an
operating profit of $7.5 million, or 6.5% of net sales, in the 1996 period.
Interest Expense. Interest expense, net of interest income, increased
to $7.1 million in the 1997 period from $6.5 million in the 1996 period. This
increase was almost entirely due to the higher average balance of borrowings
under the Company's revolving credit agreement.
NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS ENDED JULY 31, 1996
Net Sales. Net sales decreased 1.3% to $326.6 million for the 1997
period from $331.0 million for the 1996 period. The Company realized a 2.9%
increase in the average selling price of flat rolled products from $414 per ton
during the 1996 period to $426 per ton during the first nine months of fiscal
1997; however, this increase in average selling price was more than offset by a
decrease in net tons shipped of 4.3% from 789,290 tons during the 1996 period to
755,170 tons during the comparable period in 1997. The increase in average
selling price resulted from improved transaction prices and an improved shipping
mix. The decrease in net tons shipped was primarily due to planned outages of
production facilities during fiscal 1997.
Cost of Goods Sold. Cost of goods sold, excluding depreciation,
decreased 1.7% to $289.8 million for the 1997 period from $295.0 million for the
1996 period. As a percentage of net sales, cost of goods sold, excluding
depreciation, decreased to 88.7% for the 1997 period from 89.1% for the
comparable period in 1996. This decrease was primarily due to improved
productivity and to early benefits of the Company's cost reduction programs
despite being largely offset by higher natural gas prices, higher hourly labor
costs and the effect of continuing fixed costs during planned outages of
production facilities. Average manufacturing costs for flat rolled products
increased to $376 per ton during the 1997 period from $367 per ton during the
1996 period. Depreciation expense increased to $14.1 million in the 1997 period
compared to $11.8 million in the 1996 period. This increase was primarily due
to the Company's continuing capital expenditures for the replacement, upgrading
and improvement of manufacturing facilities and equipment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $11.0 million, or 3.4% of sales, during the
1997 period from $11.5 million, or 3.5% of sales during the 1996 period. This
improvement was primarily due to lower selling expenses and to lower state sales
and use tax expense resulting from the Company's being awarded "Enterprise
Zone" status by the State of Alabama and the resulting recovery of prior period
payments. Largely offsetting those decreases were higher staffing costs,
increased benefit plan costs and noncapitalized costs related to the Company's
business process improvement initiative.
Write-down of Fixed Assets. As was discussed above, during the third
quarter of 1997 management decided to close the blooming mill in connection with
the Company's capital improvement program and upgrading of its facilities. This
closing should be completed in the fourth quarter of fiscal 1997, and the
Company has recorded a non-recurring charge of $1.8 million for the related
write-down of the associated fixed assets.
Operating Profit. As a result of the changes in net sales, cost of
goods sold and depreciation, operating profit decreased to $10.0 million, or
3.1% of net sales, in the 1997 period, from $12.5 million, or 3.8% of net sales,
in the 1996 period.
Interest Expense. Interest expense, net of interest income, increased
to $20.3 million during the 1997 period from $18.2 million during the comparable
period in 1996. This increase was primarily due to the higher average balance
of borrowings under the Company's revolving credit agreement.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements consist of capital
expenditures and debt service. The Company makes 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 for the nine months ended July 31, 1997 were
$27.1 million compared to $18.4 million in the nine months ended July 31, 1996.
For fiscal year 1997, the Company expects capital expenditures, excluding
capitalized interest, to total approximately $7.7 million for replacement and
environmental projects and expenditures relating to upgrading and improvement of
facilities to total approximately $26.2 million.
On April 21, 1995, the Company completed the acquisition of
substantially all the assets and certain liabilities of the Gadsden, Alabama
facilities of Gulf States Steel, Inc. of Alabama (predecessor) from the Brenlin
Group. In connection with the acquisition, $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
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 Facility requires the Company to maintain a
ratio of EBITDA (earnings before interest, taxes, depreciation and amortization)
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, 1997,
approximately $40.0 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 July 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 July 31, 1997.
The Company's net cash provided by operations was $5.3 million during
the first nine months of fiscal 1997, compared to cash used by operations of
$3.4 million for the nine months ended July 31, 1996. The primary cause of this
increase in cash provided by operations was the large decrease in accounts
payable and other accrued liabilities during the first nine months of fiscal
1996 compared to the much smaller decrease in these amounts during the same
period of fiscal 1997. This effect was partially offset by a greater increase
in inventories during the same period in fiscal 1997 than during the same period
in fiscal 1996.
The Company has incurred operating losses in the current and prior
years. An anticipated outage to rework the blast furnace will be necessary in
either fiscal year 1998 or 1999, and this outage will impact operating results
at that time. Although the Company is initiating cost reduction measures and
expects to realize benefits in operating performance from its capital
improvement program, there can be no assurance that any of these improvements
will result in the full realization of the recorded deferred tax assets.
Considering these factors, the Company has established a valuation allowance of
$2.5 million relating to the net deferred tax assets. The Company will continue
to evaluate the need for a change in the valuation allowance on a quarterly
basis.
9
<PAGE>
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. Although the Company is continuously instituting
cost reduction initiatives and expects to benefit from improved operating
performance related to its capital investments, there can be no assurance that
any or all of these potential savings will be realized. Failure to achieve
these cost reduction initiatives or improve operating performance through these
capital investments could adversely affect the financial results or liquidity of
the Company in the future. In addition, external factors affect the Company's
market and related transaction prices for its products as well as its cost
structure for outside purchases (i.e. ore, natural gas, electricity, etc.).
Unfavorable price movements in these items, among others, could adversely affect
the Company's financial results and its ability to maintain compliance with the
required restrictive covenants in the Revolving Credit Facility. In the event
that the Company's financial results and/or borrowing availability under the
Revolving Credit Facility were so affected, the Company's liquidity and capital
resources could be adversely affected.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. EXHIBIT: Exhibit 27 - Financial Data Schedule
B. No Exhibits on Form 8-K were filed by the Company during the three
months ended July 31, 1997.
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 15, 1997 By: /s/ Jack R. Collins
-----------------------------------
Jack R. Collins
Senior Vice President & Chief
Financial Officer
(Principal Financial and Accounting
Officer)
12
<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 JULY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997
<PERIOD-START> NOV-01-1996 MAY-01-1997
<PERIOD-END> JUL-31-1997 JUL-31-1997
<CASH> 2,089 0
<SECURITIES> 0 0
<RECEIVABLES> 39,124 0
<ALLOWANCES> (1,050) 0
<INVENTORY> 67,488 0
<CURRENT-ASSETS> 113,581 0
<PP&E> 234,522 0
<DEPRECIATION> (36,438) 0
<TOTAL-ASSETS> 318,813 0
<CURRENT-LIABILITIES> 57,286 0
<BONDS> 188,401 0
0 0
0 0
<COMMON> 36 0
<OTHER-SE> 28,313 0
<TOTAL-LIABILITY-AND-EQUITY> 318,813 0
<SALES> 326,647 108,402
<TOTAL-REVENUES> 326,647 108,402
<CGS> 289,813 98,750
<TOTAL-COSTS> 303,899 103,268
<OTHER-EXPENSES> 12,784 5,677
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,349 7,135
<INCOME-PRETAX> (10,385) (7,678)
<INCOME-TAX> (768) (0)
<INCOME-CONTINUING> (9,617) (7,678)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,617) (7,678)
<EPS-PRIMARY> (2.66) (2.13)
<EPS-DILUTED> 0 0
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