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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 April 30, 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)
Alabama 63-1141013
- ---------------------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer
of 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
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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 June 1, 1998
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GULF STATES STEEL, INC. OF ALABAMA
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME --
FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997; FOR THE
SIX MONTHS ENDED APRIL 30, 1998 AND 1997....................... 1
CONSOLIDATED BALANCE SHEETS --
AS OF APRIL 30, 1998 AND OCTOBER 31, 1997...................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS --
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1997............... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... 4-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 8-11
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 12
ITEM 5. OTHER INFORMATION.............................................. 12
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K................................. 12
</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 SIX MONTHS ENDED
APRIL 30 APRIL 30
----------------------------------- -------------------------------------
1998 1997 1998 1997
------------------ --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 103,592 $ 106,928 $ 206,909 $ 218,245
Costs of goods sold, excluding depreciation........ 89,294 93,344 176,797 191,063
Depreciation....................................... 5,043 4,594 10,086 9,568
Profit sharing..................................... - 4 - 10
Selling, general and administrative expenses....... 4,321 3,596 8,584 7,097
------------------ --------------- ------------------ -----------------
Operating profit................................... 4,934 5,390 11,442 10,507
Other (income) expense:
Interest expense................................ 7,021 6,857 14,062 13,229
Interest income................................. (1) (3) (3) (15)
------------------ --------------- ------------------ -----------------
7,020 6,854 14,059 13,214
------------------ --------------- ------------------ -----------------
Loss before income taxes........................... (2,086) (1,464) (2,617) (2,707)
Income tax benefit................................. - (367) - (768)
------------------ --------------- ------------------ -----------------
Loss before extraordinary item..................... (2,086) (1,097) (2,617) (1,939)
Extraordinary charge for debt refinancing.......... - - (1,044) -
------------------ --------------- ------------------ -----------------
Net loss........................................... $ (2,086) $ (1,097) $ (3,661) $ (1,939)
================= ============== ================= ================
Basic earnings per share:
Loss before extraordinary item.................. $(.57) $(.30) $ (.72) $(.54)
Extraordinary charge (Note 6)................... - - (.29) -
------------------ --------------- ------------------ -----------------
Net loss per share................................. $(.57) $(.30) $ (1.01) $(.54)
================= ============== ================= ================
Common and common equivalent shares
outstanding..................................... 3,610,000 3,610,000 3,610,000 3,610,000
================= ============== ================= ================
</TABLE>
See accompanying notes
1
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GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 30, 1998 OCTOBER 31, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 3,392 $ 2,359
Accounts receivable, less allowance for doubtful accounts of
$486 in 1998 and $390 in 1997................................. 33,831 33,385
Inventories.................................................... 62,300 54,651
Deferred income taxes.......................................... 3,777 3,311
Prepaids and other current assets.............................. 1,686 7,140
-------------- ----------------
Total current assets........................................ 104,986 100,846
Property, plant and equipment, net............................... 201,120 197,706
Deferred charges, less accumulated amortization of $3,357 in
1998 and $3,109 in 1997........................................ 5,763 6,840
-------------- ----------------
Total assets................................................ $311,869 $305,392
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 33,232 $ 33,998
Accrued payroll and employee benefits.......................... 6,517 4,851
Accrued workers compensation................................... 3,221 3,056
Accrued gainsharing............................................ 1,700 2,934
Accrued interest payable....................................... 1,473 1,272
Other accrued liabilities...................................... 7,569 5,166
Income taxes payable........................................... 173 174
Current portion of long-term debt.............................. 643 643
-------------- ----------------
Total current liabilities................................... 54,528 52,094
Long-term debt................................................... 233,723 227,556
Deferred retiree health benefits................................. 3,808 2,736
Deferred income taxes............................................ 1,778 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............................................ (22,529) (18,868)
-------------- ----------------
Total stockholders' equity.................................. 15,807 19,468
-------------- ----------------
Total liabilities and stockholders' equity.................. $311,869 $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>
SIX MONTHS ENDED SIX MONTHS ENDED
APRIL 30, 1998 APRIL 30, 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $ (3,661) $ (1,939)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation....................................................... 10,086 9,568
Amortization....................................................... 779 761
Deferred income taxes.............................................. - (1,013)
Extraordinary item................................................. 859 -
Changes in operating assets and liabilities:
Accounts receivable............................................. (446) 5,108
Inventories..................................................... (7,649) (15,152)
Prepaids and other current assets............................... 5,454 (56)
Accounts payable................................................ (766) 281
Accrued payroll and employee benefits........................... 1,669 (2,047)
Accrued interest payable........................................ 201 173
Other accrued liabilities....................................... 2,403 648
Income taxes prepaid and payable................................ (1) 213
---------------- ----------------
Net cash provided (used) by operations............................... 8,928 (3,455)
---------------- ----------------
INVESTING ACTIVITIES:
Building and equipment purchases..................................... (13,167) (16,445)
---------------- ----------------
Net cash used in investing activities................................ (13,167) (16,445)
---------------- ----------------
FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facilities............. 43,459 17,407
Prepayment of prior revolving credit facility (Note 6)............... (37,393) -
Payments on long-term debt........................................... (315) (326)
Reduction of capitalized lease obligations........................... (55) -
Debt issuance costs.................................................. (424) -
---------------- ----------------
Net cash provided by financing activities............................ 5,272 17,081
---------------- ----------------
Net increase (decrease) in cash and cash equivalents................. 1,033 (2,819)
Cash and cash equivalents at beginning of year....................... 2,359 4,458
---------------- ----------------
Cash and cash equivalents at end of period........................... $ 3,392 $ 1,639
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................... $ 14,772 $ 14,296
Income taxes....................................................... 1 -
Noncash investing and financing activities:
Capital lease obligations.......................................... $ 333 $ -
</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 six month
periods ended April 30, 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. Certain amounts in the 1997 Consolidated Balance Sheet and Statement
of Cash Flows 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 April 30, 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, $28,400 of business process reengineering
costs which are required to be expensed per EIFT 97-13 were incurred during the
first six months of fiscal 1998.
NOTE 3--INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 30, 1998 OCTOBER 31, 1997
------------------------------------------
(dollars in thousands)
<S> <C> <C>
Raw Materials and Supplies $23,597 $19,534
Work-in-Process 12,212 13,528
Finished Products 26,491 21,589
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Total $62,300 $54,651
======= =======
</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--DEFERRED INCOME TAXES
At April 30, 1998, the Company had net current deferred tax assets of $4.7
million and net non-current deferred tax assets of $4.1 million. As of April
30, 1998, the Company has established a deferred tax valuation allowance of $6.8
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" under the Resource Conservation and Recovery Act. As of October 31,
1994, the predecessor Company had remediated a portion of the ditch. 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 have
been taken throughout the system. If background levels are exceeded, some sort
of risk-based closure or soil removal will be required. Eleven groundwater-
monitoring wells have been installed. These will be monitored until EPA and
ADEM approve the closure certification. Based upon the preliminary results of
sampling, the Company believes that 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. On October 27, 1997, Mr. Williams
moved to intervene in the government's action, and this intervention was allowed
by the court. On April 21, 1998, a second motion to intervene was filed by L.E.
McGriff and Herbert Patterson, and this motion was also allowed by the court.
Despite the filing of this litigation, 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
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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. 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.
On April 22, 1998, the EPA issued an NOV to the Company relating to alleged
violations of the Toxic Substance Control Act ("TSCA") based upon an inspection
conducted on May 16, 1996. In this NOV, the EPA requests that a meeting be held
to show cause why the EPA should not proceed with an enforcement action. As of
this date, such a meeting has not yet been held, and it is not currently
possible to predict whether the EPA will choose to proceed with an enforcement
action and, if so, whether it will seek to impose penalties upon the Company.
The conditions cited in the April 22, 1998 NOV had been promptly addressed by
the Company following the May 16, 1996 inspection.
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 $1.8 million and $2.0 million for
the six months ended April 30, 1998 and 1997, respectively. As of April 30,
1998, the Company has accrued $1.4 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 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 successive
one-year terms unless
6
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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.
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 April 30, 1998 and 1997 does not differ
from basic earnings per share.
7
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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 APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
Net Sales. Net sales decreased 3.1% to $103.6 million for the 1998 period
from $106.9 million for the same period in fiscal 1997. This is a direct
result of a 4.1% decrease in sales volume on shipments of flat rolled products
from 247,750 net tons during the second quarter of fiscal 1997 to 237,700 net
tons during the comparable period in fiscal 1998. This decline can primarily be
attributed to a planned decrease in production due to closing the blooming mill
in August 1997 and to decreased plate production during the quarter resulting
from equipment outages at the plate mill. The effect of the decreased
production was slightly offset by a rise in average selling prices from $428 per
ton in fiscal 1997 to $431 per ton during the same period of fiscal 1998.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
4.3% to $89.3 million for the 1998 period from $93.3 million for the 1997
period. As a percentage of net sales, cost of goods sold, excluding
depreciation, decreased to 86.2% from 87.3%. Although some of this decrease was
due to the lower sales volume in the 1998 period compared to the 1997 period,
improvements which favorably impacted cost of sales were the Company's cost
reduction programs and improved throughput at the steelmaking units and the hot
strip mill. Average manufacturing costs for flat rolled products decreased to
$369 per ton in the 1998 period from $372 per ton during the comparable period
in fiscal 1997. Depreciation expense increased to $5.0 million during second
quarter of fiscal 1998 compared to $4.6 million during the same period in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.3 million, or 4.2% of net sales, in the
1998 period from $3.6 million, of 3.4% of net 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.
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 $4.9 million, or 4.8% of net sales, in the 1998 period, from $5.4
million, or 5.0% of net sales, in the 1997 period.
8
<PAGE>
Interest Expense. Interest expense, net of interest income, increased to $7.0
million in the 1998 period from $6.9 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 second 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 current tax
benefit rate to zero.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
Net Sales. Net sales decreased 5.2% to $206.9 million for the 1998 period
from $218.2 million for the same period in 1997. The primary cause of this
decline in revenues was a decrease in net tons shipped of 4.9% from 506,830 tons
during the 1997 period to 482,020 tons during the comparable period in 1998.
This decrease in production was 6,540 tons less than the 6.2% decrease
forecasted by the Company's fiscal 1998 business plan. Production for the first
six months of fiscal 1998 had been forecasted to decline from that of fiscal
1997 due to the closing of the blooming mill in August 1997 because of its
unfavorable economic margins. During the first six months of fiscal 1998, the
average selling price of flat rolled products declined 0.7% to $424 per ton as
compared to $427 per ton during the 1997 period.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
7.5% to $176.8 million for the 1998 period from $191.1 million for the 1997
period. As a percentage of net sales, cost of goods sold, excluding
depreciation, decreased to 85.4% for the 1998 period from 87.5% for the
comparable period in 1997. As was the case for the second quarter, this
decrease was primarily due to improved productivity and to realized benefits of
the Company's cost reduction programs despite being partially offset by higher
hourly labor costs. Average manufacturing costs for flat rolled products
decreased to $360 per ton during the 1998 period from $371 per ton during the
1997 period. Depreciation expense increased to $10.1 million in the 1998 period
compared to $9.6 million in the 1997 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 increased to $8.6 million, or 4.1% of net sales, during
the first six months of 1998 from $7.1 million, or 3.3% of net sales, during the
same period of 1997. As noted, the increase was primarily due to higher
staffing costs, increased benefit plan costs and higher noncapitalized costs
relating to the Company's business process reengineering and information
technology transformation initiatives.
Operating Profit. As a result of the changes in net sales, cost of goods sold
and selling and general and administrative expenses, operating profit increased
to $11.4 million, or 5.5% of net sales, in the 1998 period, from $10.5 million,
or 4.8% of net sales, during the 1997 period.
Interest Expense. Interest expense, net of interest income, increased to
$14.1 million during the 1998 period from $13.2 million during the comparable
period in 1997. This was primarily due to the higher average balance of
borrowings under the Company's revolving credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operations was $8.9 million during the
first six months of fiscal 1998 compared to cash used by operations of $3.5
million for the six months of 1997. The primary reasons for the increase in
cash provided by operations was the decreased use of cash for inventories
during the first six months of fiscal 1998 compared to the same period of fiscal
1997 as well as a large decrease in the prepaid ore and shipping accounts during
the first six months of fiscal 1998 compared to almost no change in these
accounts during the same period of fiscal 1997.
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
9
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capital expenditures for the six months ended April 30, 1998 were $13.5 million
compared to $16.4 million for the six months ended April 30, 1997. For fiscal
year 1998, the Company expects capital expenditures, excluding capitalized
interest, to total approximately $2.9 million for environmental projects and
expenditures for the replacement, upgrading and improvement of facilities and
equipment to total approximately $17.1 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 successive 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 April 30, 1998, approximately $37.5 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 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 April 30, 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 April 30, 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 $6.8 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
10
<PAGE>
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.
11
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A. The annual meeting of stockholders of Gulf States Steel, Inc. of
Alabama was held on March 11, 1998.
B. Nine (9) members of the Board of Directors were unanimously elected
(all 3,610,000 common shares outstanding voting affirmatively) to serve
until the next annual meeting of the Company. The elected directors are
as follows:
Robert Schaal......... Chairman and Chief Executive Officer, Director
John D. Lefler........ President and Chief Executive Officer, Director
Robert W. Ackerman.... Director
Dale S. Okonow........ Vice President, Secretary and Director
Steven E. Karol....... Chairman of the Board, Director
William S. Karol...... Vice President and Director
Howard H. Stevenson... Director
Robert M. Wadsworth... Director
Alexander S. McGrath.. Director
C. The stockholders unanimously ratified the appointment of Ernst and
Young LLP as the Company's independent auditors for the year ending
October 31, 1998. All 3,610,000 common shares out- standing were voted
for the proposal.
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 April 30, 1998.
12
<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)
Dated: June 10, 1998 By: /s/ Robert Schaal
-----------------------------------------
Robert Schaal
Chairman & Chief Executive Officer
(principal executive officer)
Dated: June 10, 1998 By: /s/Hugh D. Bennett
-----------------------------------------
Hugh D. Bennett
Vice President & Chief Financial Officer
(principal financial officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> NOV-01-1997 FEB-01-1998
<PERIOD-END> APR-30-1998 APR-30-1998
<CASH> 3,392 0
<SECURITIES> 0 0
<RECEIVABLES> 34,317 0
<ALLOWANCES> (486) 0
<INVENTORY> 62,300 0
<CURRENT-ASSETS> 104,986 0
<PP&E> 251,837 0
<DEPRECIATION> (50,717) 0
<TOTAL-ASSETS> 311,869 0
<CURRENT-LIABILITIES> 54,528 0
<BONDS> 188,609 0
0 0
0 0
<COMMON> 36 0
<OTHER-SE> 15,771 0
<TOTAL-LIABILITY-AND-EQUITY> 311,869 0
<SALES> 206,909 103,592
<TOTAL-REVENUES> 206,909 103,592
<CGS> 176,797 89,294
<TOTAL-COSTS> 186,883 94,337
<OTHER-EXPENSES> 8,430 4,167
<LOSS-PROVISION> 154 154
<INTEREST-EXPENSE> 14,059 7,020
<INCOME-PRETAX> (2,617) (2,086)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,617) (2,086)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,044) 0
<CHANGES> 0 0
<NET-INCOME> (3,661) (2,086)
<EPS-PRIMARY> (1.01) (0.57)
<EPS-DILUTED> 0 0
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