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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 January 31, 1998.
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities
- -----
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)
<TABLE>
<CAPTION>
<S> <C>
Alabama 63-114 1013
- ------------------------------------------------------------- -----------------------------------
(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)
</TABLE>
(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
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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, 1998
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GULF STATES STEEL, INC. OF ALABAMA
INDEX
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, 1998 and 1997........... 1
Consolidated Balance Sheets -
as of January 31, 1998 and October 31, 1997.................... 2
Consolidated Statements of Cash Flows -
For the Three Months Ended January 31, 1998 and 1997............ 3
Notes to Consolidated Financial Statements (Unaudited).......... 4 - 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 8 - 10
PART II OTHER INFORMATION
ITEM 6. Exhibits & Reports on Form 8-K.................................. 11
<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, 1998 January 31, 1997
------------------- -------------------
<S> <C> <C>
Net sales.................................................... $ 103,317 $ 111,317
Cost of goods sold, excluding depreciation................... 87,503 97,719
Depreciation................................................. 5,043 4,974
Profit sharing............................................... - 6
Selling, general and administrative expenses................. 4,263 3,501
---------- ----------
Operating profit............................................. 6,508 5,117
Other (income) expense:
Interest expense........................................ 7,041 6,372
Interest income......................................... (2) (12)
----------- -----------
7,039 6,360
----------- -----------
Loss before income taxes..................................... (531) (1,243)
Income tax benefit........................................... - (401)
----------- -----------
Loss before extraordinary item............................... (531) (842)
Extraordinary charge for debt refinancing.................... (1,044) -
----------- -----------
Net loss..................................................... $ (1,575) $ (842)
=========== ===========
Basic earnings per share:
Loss before extraordinary item.......................... $ (.15) $(.23)
Extraordinary charge (Note 6)........................... (.29) -
----------- -----------
Net loss per share........................................... $ (.44) $(.23)
=========== ===========
Common and common equivalent shares outstanding 3,610,000 3,610,000
========== ==========
</TABLE>
1
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GULF STATES STEEL, INC. OF ALABAMA
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
January 31, 1998 October 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,684 $ 2,359
Accounts receivable, less allowance for doubtful accounts of
$395 in 1998 and $390 in 1997................................. 35,849 33,385
Inventories.................................................... 55,420 54,651
Deferred income taxes.......................................... 3,375 3,311
Prepaids and other current assets.............................. 9,266 7,140
-------- --------
Total current assets........................................ 106,594 100,846
Property, plant and equipment, net............................... 200,977 197,706
Deferred charges, less accumulated amortization of $3,038 in
1998 and $3,109 in 1997........................................ 6,085 6,840
-------- --------
Total assets................................................ $313,656 $305,392
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 31,036 $ 33,998
Accrued payroll and employee benefits.......................... 4,809 4,851
Accrued workers compensation................................... 3,282 3,056
Accrued gainsharing............................................ 1,076 2,934
Accrued interest payable....................................... 7,898 1,272
Other accrued liabilities...................................... 6,358 5,166
Income taxes payable........................................... 173 174
Current portion of long-term debt.............................. 643 643
-------- --------
Total current liabilities................................... $ 55,275 $ 52,094
Long-term debt................................................... 233,613 227,556
Deferred retiree health benefits................................. 3,274 2,736
Deferred income taxes............................................ 1,376 1,313
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............................................ (20,443) (18,868)
-------- --------
Total stockholders' equity.................................. 17,893 19,468
-------- --------
Total liabilities and stockholders' equity.................. $313,656 $305,392
======== ========
</TABLE>
See accompanying notes.
2
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GULF STATES STEEL, INC. OF ALABAMA
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
January 31, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $ (1,575) $ (842)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation....................................................... 5,043 4,974
Amortization....................................................... 390 380
Deferred income taxes.............................................. - (644)
Extraordinary item................................................. 859 -
Changes in operating assets and liabilities:
Accounts receivable............................................. (2,464) 1,343
Inventories..................................................... (769) (5,053)
Prepaids and other current assets............................... (2,126) (5,105)
Accounts payable................................................ (2,962) 13,120
Accrued payroll and employee benefits........................... (1,136) (2,585)
Accrued interest payable........................................ 6,626 6,445
Other accrued liabilities....................................... 1,192 (2,868)
Income taxes prepaid and payable................................ (1) 211
--------- --------
Net cash provided by operations...................................... 3,077 9,376
--------- --------
Investing activities:
Building and equipment purchases..................................... (7,995) (7,889)
--------- --------
Net cash used in investing activities................................ (7,995) (7,889)
--------- --------
Financing activities:
Net borrowings (payments) on revolving credit facilities............. 43,216 (2,982)
Prepayment of prior revolving credit facility (Note 6)............... (37,393) -
Payments on long-term debt........................................... (156) (161)
Debt issuance costs.................................................. (424) -
--------- --------
Net cash provided (used) by financing activities..................... 5,243 (3,143)
--------- --------
Net increase (decrease) in cash and cash equivalents................. 325 (1,656)
Cash and cash equivalents at beginning of year....................... 2,359 4,458
--------- --------
Cash and cash equivalents at end of period........................... $ 2,684 $ 2,802
========= ========
Supplemental cash flow information:
Cash paid during the year for:
Interest........................................................... $ 787 $ 575
Income taxes....................................................... 1 -
Noncash investing and financing activities:
Capital lease obligations.......................................... $ 319 -
</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, 1998 and 1997. All material intercompany
accounts and transactions have been eliminated. Effective January 30, 1998, the
Company's wholly-owned subsidiary, Alabama Structural Beam Corp., was merged
into the Company as a separate division. Certain amounts in the 1997
Consolidated Balance Sheet have been reclassified to conform to the 1998
presentation.
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,
1997 to January 31, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ending October 31, 1998. 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, 1997.
NOTE 2 -- ACCOUNTING CHANGE
Effective October 31, 1997, the Company changed its method of accounting
for costs incurred for process reengineering. These costs, totaling $2.6 million
at October 31, 1997, were previously capitalized by the Company and were written
off in 1997 as the cumulative effect of an accounting change. This accounting
change is in accordance with a consensus reached by the Emerging Issues Task
Force, Issue 97-13, Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation. The income tax benefit
relating to this write-off is reserved by a deferred income tax valuation
allowance. The effect of this accounting change was not material for years prior
to 1997. Approximately, $20,000 of business process reengineering costs which
are required to be expensed per EIFT 97-13 were incurred during the first
quarter of fiscal 1998.
NOTE 3 -- INVENTORIES
Inventories are as follows:
(Unaudited)
January 31, 1998 October 31, 1997
-----------------------------------
(dollars in thousands)
Raw Materials and Supplies $16,439 $19,534
Work-in-Process 15,117 13,528
Finished Products 23,864 21,589
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Total $55,420 $54,651
======= =======
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 -- DEFERRED INCOME TAXES
At January 31, 1998, the Company had net current deferred tax assets of $4.2
million and net non-current deferred tax assets of $3.9 million. As of January
31, 1998, the Company has established a deferred tax valuation allowance of
$6.1 million due to operating losses in the current and prior years. This
valuation allowance will be reviewed on a quarterly basis.
NOTE 5 -- 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:
The predecessor company settled with the Alabama Department of Environmental
Management ("ADEM") 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, subject, however, to the matters set forth below.
During 1992, the U.S. Environmental Protection Agency ("EPA") asserted that a
wastewater ditch system on the Company's property should be remediated and
closed. As of October 31, 1994, the predecessor Company has remediated a
portion of the ditch. Sampling results indicate that Clean Closure was
achieved; however, EPA has not yet granted Clean Closure Certification. On
November 26, 1997, ADEM approved the closure plan for the wastewater ditch
system. The requirements of the closure plan are: (1) sediment sampling in the
ditch system and (2) ground water monitoring. Sixty-six sediment samples will
be taken throughout the system. These will be analyzed and, if background
levels are exceeded, some sort of risked-based closure or soil removal will be
required. Eleven groundwater-monitoring wells will be installed. These will be
monitored until EPA and ADEM approve the closure certification. The Company
believes Clean Closure will be achieved; however, if clean closure can not be
achieved, the company estimates the contingent closure costs will be $1.1
million, with post-closure costs of $2.8 million ($94,000 annually for 30
years).
The Company faces an enforcement action under the Clean Water Act. The U.S.
Department of Justice notified the Company that it, at the request of the EPA,
was prepared to take "appropriate enforcement action in federal court" against
the Company for alleged violations of its water discharge permit, and invited
the Company to discuss a possible settlement prior to filing suit. The Company
opened discussions with the Justice Department in an attempt to settle these
claims. These discussions have resulted in substantial agreement as to certain
additional upgrades to the Company's waste water treatment system; however, no
agreement has been reached as to civil penalties for past violations. On August
28, 1997, while negotiations were ongoing with the Justice Department, a 60-day
notice of intent to file a citizen suit under the Clean Water Act was sent by
one Johnny Williams, a resident of Rainbow City, Alabama. Prior to expiration
of the 60-day period, the Justice Department filed its action under the Clean
Water Act, thus precluding the citizen suit (see United States v. Gulf States
Steel, Inc., CV 97-S-2755-M filed October 17, 1997). On October 27, 1997, Mr.
Williams moved to intervene in the government's action. Despite the filing, the
Company and the Justice Department are continuing to explore possible settlement
of the civil penalty. The Clean Water Act provides for civil penalties of up to
$25,000 per day for violations occurring before January 30, 1997 and $27,500 per
day for violations occurring on or after January 30, 1997. At this time it is
not possible to predict what level of civil penalties the Justice Department
will ultimately seek for these alleged exceedances, or when agreement will be
reached with the Company.
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, individually and as a representative of a
putative class of downstream property owners, seeking unspecified damages and
injunctive relief on a variety of theories for the alleged diminution of
downstream property values and unspecified health hazards as a result of the
Company's waste water discharges. The Company believes the claims of Mr.
Williams are without merit, and that no class should be certified.
5
<PAGE>
During negotiations with the Justice Department over the Clean Water Act
matter described above, the Justice Department raised remediation of Black Creek
as a possible issue. The EPA is now investigating Black Creek and has performed
sampling in Black Creek and Lake Gadsden. Sampling results thus far indicate
levels of metals, primarily lead and zinc, in the sediment of Black Creek and in
certain locations in Lake Gadsden. The levels of metals in the sediment
generally increase with depth, indicating historical discharges are a greater
contributor to the elevated levels. The EPA has made no determination of what
remediation, if any, will be necessary. In December, 1997, the EPA performed
another round of sampling to better define the scope of the potential
remediation. The Company has received copies of the results of the most recent
sampling round, but the EPA has made no further suggestions regarding the
appropriate scope of any potential remediation activities. The Company has
expressed its position to the EPA that its contribution, if any, to the sediment
findings is divisible, and that apportioned, rather than joint and several
liability, is appropriate. Additionally, the Company's relative contribution,
if any, to the sediment results must be further reduced to the extent that it is
the result of a federally permitted discharge. The combined effect of the
Company's analysis is that any potential liability that is assignable to it is
so small as to be de minimis. Given current information, it is not possible to
predict the scope or cost of any potentially required remediation of Black Creek
and/or Lake Gadsden, nor is it known whether the Company's analysis regarding
its potential liability will be accepted.
On February 20, 1996, ADEM issued a Notice of Violation ("NOV") to the Company
for continuing violation of opacity limits from the combustion stacks of the
coke ovens, and included in the NOV a requirement that the Company install
continuous opacity monitors in the stacks. The Company appealed this
requirement, and it was subsequently withdrawn by ADEM on the condition that the
Company employ an independent contractor to conduct visible emission readings on
the stacks. The Company complied with this condition. While there has been no
renewed request by ADEM that the Company install opacity monitors, ADEM has, in
subsequent NOV's, identified such monitors as a possible future requirement.
The Company has taken the position, in its communications with ADEM, that the
installation of such monitors on its existing stacks is not feasible; however,
it is not currently possible to predict whether ADEM will again attempt to
require that continuous opacity monitors be installed in the coke oven
combustion stacks.
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 remedial measures than those believed by the
Company to be adequate or required by existing law. The Company's expenditures
for environmental capital projects aggregated $0.7 million and $1.1 million for
the three months ended January 31, 1998 and 1997, respectively. As of January
31, 1998, the Company has accrued $1.1 million for unresolved environmental
matters.
The Company is also 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 6 -- EXTRAORDINARY ITEM
On November 13, 1997, the Company retired its previous $70 million Revolving
Credit Facility and entered into a new $80 million Credit Facility which
includes a $70 million revolving credit facility and a $10 million equipment
financing facility. In connection with this refinancing, the Company recorded
an extraordinary expense of $1.04 million, consisting of a noncash charge of
$0.86 million to write-off of unamortized debt issuance costs and a prepayment
penalty of $0.18 million. The income tax benefit relating to this write-off is
reserved by a deferred income tax valuation allowance. Available borrowings are
subject to limits based on eligible accounts receivable and inventories. The
new Credit Facility has an original term of three years through November 13,
2000, at which time the agreement will automatically renew itself for one-year
terms unless terminated by either party. Obligations under the new Credit
Facility are secured by inventories and accounts receivable, and the Company is
required to maintain a defined amount of consolidated adjusted tangible net
worth at all times.
6
<PAGE>
NOTE 7 EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. In addition, the
Company has outstanding common stock warrants subject to put options to purchase
190,000 shares of common stock. During periods of net losses, the warrants are
antidilutive and, therefore, are not considered common equivalent shares. As a
result, diluted earnings per share at January 31, 1998 and 1997 does not differ
from basic earnings per share.
7
<PAGE>
ITEM 2. 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 January 31, 1998 Compared to Three Months Ended January 31,
1997
Net Sales. Net sales decreased 7.2% to $103.3 million for the 1998 period
from $111.3 million for the 1997 period. This decline is primarily the result
of a 5.7% decrease in sales volume on shipments of flat rolled products to
244,320 net tons in the 1998 period compared to 259,070 net tons in the 1997
period. This decline was primarily the result of closing the blooming mill in
August, 1997 due to its unfavorable economic margins. In addition, average
selling prices decreased $8 per ton in the first quarter of fiscal 1998 to $418
per ton compared to $426 per ton in 1997. This change was primarily due to
unfavorable changes in the shipping mix as well as weak transaction prices for
alloy plate.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
10.4% to $87.5 million for the 1998 period from $97.7 million for the 1997
period. As a percentage of net sales, cost of goods sold, excluding
depreciation, decreased to 84.7% from 87.8%. Although much of this decrease was
due to lower sales volume in the 1998 period compared to the 1997 period,
significant improvements resulted from the Company's cost reduction program,
control of labor hours and improved throughput at the major production units.
Average manufacturing costs for flat rolled products decreased to $351 per ton
in the 1998 period from $372 per ton during the comparable period in fiscal
1997. Depreciation expense increased to $5.04 million in the first quarter of
fiscal 1998 compared to $4.97 million in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.3 million, or 4.1% of sales, in the 1998
period from $3.5 million, of 3.1% of sales in the 1997 period. This increase
resulted from higher staffing costs, increased benefit plan costs and higher
noncapitalized costs relating to the Company's business process reengineering
and information technology transformation initiatives.
8
<PAGE>
Operating Profit. As a result of the changes in net sales, cost of goods
sold, selling and general and administrative expenses, operating profit
increased to $6.5 million, or 6.3% of net sales, in the 1998 period, from $5.1
million, or 4.6% of net sales, in the 1997 period.
Interest Expense. Interest expense, net of interest income, increased to $7.0
million in the 1998 period from $6.4 million during the comparable period in
1997. This increase was due to the higher average balance of borrowings under
the Company's revolving credit agreement.
Income Taxes. The benefit for income taxes decreased from $0.4 million during
the first quarter of 1997 to zero for the same period in fiscal 1998. This
change in the effective tax rate was due to the establishment of a valuation
allowance for the Company's deferred tax assets which reduced the tax benefit
rate.
Liquidity and Capital Resources
The Company's net cash provided by operations was $3.0 million during the
first three months of fiscal 1998 compared to $9.4 million for the three months
ended January 31, 1997. The primary reason for this decrease in cash provided
by operations was the large increase in accounts payable during the first
quarter of fiscal 1997 compared to the small decrease in accounts payable during
the same period of fiscal 1998. This effect was partially offset by the large
increase in inventories and prepaid assets during the first quarter of fiscal
1997 compared to the same period in fiscal 1998.
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 three months ended January 31, 1998 were $8.0 million
compared to $7.9 million in the three months ended January 31, 1997. For fiscal
year 1998, the Company expects capital expenditures, excluding capitalized
interest, to total approximately $2.4 million for environmental projects and
expenditures for the replacements, upgrading and improvement of facilities and
equipment to total approximately $18.5 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 this 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. The Notes are senior obligations of
the Company and are secured by substantially all the assets of the Company
except accounts receivable and inventories. The Notes impose certain
limitations on the Company including the ability to incur additional
indebtedness, pay dividends, make certain restricted payments, create liens or
sell substantially all of the Company's assets.
On November 13, 1997, the Company retired its previous $70 million credit
facility and entered into a new $80 million credit facility. This new Credit
Facility includes a $70 million revolving credit line and a $10 million
equipment financing facility. Available borrowings are subject to limits based
on eligible accounts receivable and inventories. The new Credit Facility has an
original term of three years through November 13, 2000, at which time the
agreement will automatically renew itself for one-year terms unless terminated
by either party. Obligations under the new Credit Facility are secured by
inventories and accounts receivable, and the Company is required to maintain a
defined amount of consolidated adjusted tangible net worth at all times. During
November 1997, the Company recorded an extraordinary expense of $1.0 million in
connection with the refinancing, however, $0.9 million was a noncash transaction
consisting of the write-off of prior unamortized debt issuance costs. As of
January 31, 1998, approximately $43.0 million was borrowed under the current
Credit Facility.
At the time of the acquisition, GSS Holdings Corp. issued certain promissory
notes to Capital Resource Lenders II, L.P. as a part of a related transaction.
Although the Company has no obligation with respect to these
9
<PAGE>
promissory notes, GSS Holdings is required to make payments thereon in
accordance with the respective terms thereof, for which the source of funds is
expected to be dividend distributions or loans from the Company. The promissory
notes require GSS Holdings to cause the Company to pay dividends to Holdings to
the maximum extent allowed under the terms of the First Mortgage Notes indenture
and applicable law until the GSS Holdings notes are repaid in full. No
dividends are payable by the Company as of January 31, 1998. In addition, in
connection with the acquisition, GSS Holdings issued a promissory note to the
seller for which the source of funds for repayment 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, 1998.
The Company has incurred losses in the current and prior years. An
anticipated outage to repair the blast furnace is currently scheduled for fiscal
year 1999, although it could occur earlier depending on the blast furnace's
condition. This outage will impact operating results at the time the repairs
are made. In addition, the Company has initiated recent cost reduction measures
and expects to realize benefits in operating performance from its capital
improvement program; however, there can be no assurance that any of these
measures and improvements will result in the full realization of the Company's
recorded deferred tax assets. Considering these factors, the Company has
established a valuation allowance of $6.1 million relating to the net deferred
tax assets.
The Company believes that future cash flows from operations, together with
borrowings available under the new Credit Facility, will provide the Company
with sufficient liquidity and capital resources to conduct its 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
restrictive covenants in the Company's borrowing agreements. In the event that
the Company's financial results and/or borrowing availability under the new
Credit Facility were so affected, the Company's liquidity and capital resources
could be adversely affected which could also significantly limit the Company's
ability to withstand competitive pressures or adverse economic conditions.
Year 2000 Issue
The Company has conducted an assessment of its exposure to disruption
associated with the Year 2000 issue. Many of its computer based transactional
business systems are subject to potential failure. The Company believes that
it could be materially affected by such failures. In addition, certain process
control systems are also exposed. The Company is also vulnerable to third-party
failures to correct their systems but believes that such exposure is minimal.
The Company believes that no material contingencies exist that would require it
to modify its products.
The Company has recognized the serious nature of its exposure under the Year
2000 Issue and has developed a modification plan that will minimize this
exposure. It has budgeted approximately $8.8 million (of which $6.2 million is
expected to be capitalized) for the purchase of Year 2000 compliant software and
consultant support all of which is expected to be funded through operating cash
flows. The Company has budgeted an additional $0.4 million in expense for the
rewrite of systems modules that cannot be purchased as packages. The company
believes that these items, which will be expensed as incurred, are not expected
to have a material effect on its results of operation.
The Company anticipates completing the Year 2000 project by October 31, 1998,
which is prior to any anticipated impact on its operating systems. A team of
information systems personnel is evaluating the progress and is developing
contingency plans that ensure the continued operation of the business. The
Company has appointed a task force to further evaluate and develop action plans
for minimizing the impact of the Year 2000 Issue on its process control systems.
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 January 31, 1998.
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: March 12, 1998 By: /s/ Hugh D. Bennett
------------------------------
Hugh D. Bennett
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 JANUARY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
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<SECURITIES> 0
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<ALLOWANCES> (395)
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36
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