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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
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Act of 1934 for the quarterly period ended April 30, 1999.
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
----------------------------------
(Exact name of registrant as specified in its charter)
Alabama 63-1141013
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(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)
(256) 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 June 1, 1999
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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)
Statements of Operations
For the Three Months Ended April 30, 1999 and 1998;
For the Six Months Ended April 30, 1999 and 1998................. 1
Balance Sheets -
as of April 30, 1999 and October 31, 1998........................ 2
Statements of Cash Flows -
For the Six Months Ended April 30, 1999 and 1998................. 3
Notes to Financial Statements.................................... 4
ITEM 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations........................................ 9
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------
GULF STATES STEEL, INC. OF ALABAMA
Statements of Operations (Unaudited)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
------------------------------------ -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................ $ 78,918 $ 103,592 $ 153,541 $ 206,909
Costs of goods sold, excluding depreciation...... 85,104 89,294 154,750 176,797
Depreciation..................................... 5,253 5,043 10,506 10,086
Profit sharing................................... - - - -
Selling, general and administrative expenses..... 5,257 4,321 9,925 8,584
---------- ---------- ---------- ----------
Operating profit (loss).......................... (16,696) 4,934 (21,640) 11,442
Other (income) expense:
Interest expense.............................. 7,129 7,021 14,031 14,062
Interest income............................... - (1) (1) (3)
---------- ---------- ---------- ----------
7,129 7,020 14,030 14,059
---------- ---------- ---------- ----------
Loss before income taxes......................... (23,825) (2,086) (35,670) (2,617)
Income tax benefit............................... - - - -
---------- ---------- ---------- ----------
Loss before extraordinary item................... (23,825) (2,086) (35,670) (2,617)
Extraordinary charge for debt refinancing........ - - - (1,044)
---------- ---------- ---------- ----------
Net loss......................................... $ (23,825) $ (2,086) $ (35,670) $ (3,661)
========== ========== ========== ==========
Basic earnings per share:
Loss before extraordinary item................ $ (6.60) $ (.57) $ (9.88) $ (.72)
Extraordinary charge.......................... - - - (.29)
---------- ---------- ---------- ----------
Net loss per share............................... $ (6.60) $ (.57) $ (9.88) $ (1.01)
========== ========== ========== ==========
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
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
April 30, 1999 October 31, 1998
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,437 $ 1,990
Accounts receivable, less allowance for doubtful accounts
of $975 in 1999 and $930 in 1998............................. 30,619 25,117
Inventories.................................................... 45,743 60,941
Deferred income taxes.......................................... 2,949 2,949
Prepaids and other current assets.............................. 1,815 4,080
-------- --------
Total current assets........................................ 82,563 95,077
Property, plant and equipment, net............................... 198,873 200,702
Deferred charges, less accumulated amortization of $4,571 in
1999 and $3,965 in 1998........................................ 4,513 5,122
-------- --------
Total assets................................................ $285,949 $300,901
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 23,129 $ 29,832
Accrued payroll and employee benefits.......................... 8,715 5,264
Accrued workers compensation................................... 2,624 2,517
Accrued gainsharing............................................ 1,245 2,425
Accrued interest payable....................................... 14,378 1,431
Other accrued liabilities...................................... 5,412 6,742
Income taxes payable........................................... - -
Current portion of long-term debt.............................. 1,129 964
Long-term debt in default...................................... 237,409 -
-------- --------
Total current liabilities................................... 294,041 49,175
Long-term debt................................................... 4,583 230,123
Deferred postretirement health benefits.......................... 6,254 4,862
Deferred income taxes............................................ 2,949 2,949
Common stock warrants subject to put options..................... - -
Stockholders' equity (deficit):
Common Stock, par value $.01 per share; 4,000,000 shares
authorized, 3,610,000 shares issued and outstanding as of
June 1, 1999 36 36
Additional paid-in capital..................................... 39,050 39,050
Notes receivable from officers................................. (750) (750)
Accumulated deficit............................................ (60,214) (24,544)
-------- --------
Total stockholders' equity (deficit)........................ (21,878) 13,792
-------- --------
Total liabilities and stockholders' equity (deficit)........ $285,949 $300,901
======== ========
</TABLE>
See accompanying notes.
2
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GULF STATES STEEL, INC. OF ALABAMA
Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 30, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Operating activities:
Net loss............................................................. $(35,670) $(3,661)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation, including amounts capitalized in inventory........... 10,506 10,086
Amortization....................................................... 747 779
Deferred income taxes.............................................. - -
Write off of debt issuance cost.................................... - 859
Write down of inventories.......................................... 1,081 -
Changes in operating assets and liabilities:
Accounts receivable............................................. (5,502) (446)
Inventories..................................................... 14,117 (7,649)
Prepaids and other current assets............................... 2,265 5,454
Accounts payable................................................ (6,703) 766
Accrued payroll and employee benefits........................... 3,770 1,669
Accrued interest payable........................................ 12,947 201
Other accrued liabilities....................................... (1,330) 2,403
Income taxes prepaid and payable................................
Proceeds from trade notes payable............................... 2,908 -
-------- --------
Net cash provided (used) by operating activities..................... (864) 8,928
-------- --------
Investing activities:
Building and equipment purchases..................................... (8,677) (13,167)
-------- --------
Net cash used in investing activities................................ (8,677) (13,167)
-------- --------
Financing activities:
Net borrowings (payments) on revolving credit facilities............. 9,102 43,459
Prepayment of prior revolving credit facility........................ - (37,393)
Payments on long-term debt........................................... (31) (315)
Reduction of capitalized lease obligations........................... (83) (55)
Debt issuance costs.................................................. - (424)
-------- --------
Net cash provided by financing activities............................ 8,988 5,272
-------- --------
Net increase (decrease) in cash and cash equivalents................. (553) 1,033
Cash and cash equivalents at beginning of year....................... 1,990 2,359
-------- --------
Cash and cash equivalents at end of period........................... $ 1,437 $ 3,392
======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest........................................................... $ 1,084 $ 14,772
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 Financial Statements (Unaudited)
April 30, 1999
NOTE 1 BASIS OF PRESENTATION AND LIQUIDITY
The accompanying financial statements present the financial position, results
of operations and cash flows of Gulf States Steel, Inc. of Alabama (the
"Company") for the fiscal six month periods ended April 30, 1999 and 1998.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article X of Regulation
S-X. 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, 1998 to April 30,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 1999. 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, 1998.
The Company has incurred losses in the current and prior years. During the
second quarter of fiscal 1999, orders, shipments and pricing for the Company's
products continued to be adversely affected by, among other things, increased
foreign steel imports. As a result of such increased imports and their effect
on the domestic steel market, the Company has noted that orders, shipments and
pricing have decreased significantly in fiscal 1999 and are expected to remain
at low levels throughout much of the year. Given current market conditions, the
level of debt and associated interest expense, required capital expenditures and
improvements and the potential realization of loss contingencies, the Company
believes that it will continue to incur losses in fiscal 1999.
If the Company is unable to increase sales and pricing, continue to reduce
costs and implement productivity improvements, maintain its borrowing
availability under the revolving credit facility, obtain additional financing,
and if the level of foreign steel imports is not reduced, the Company may not
have sufficient liquidity and capital resources to meet its projected fiscal
1999 cash requirements. The Company has retained financial and legal advisors
to assist it in reviewing financial restructuring alternatives, including
without limitation, obtaining additional financing. There can be no assurance
that a restructuring is possible or that it will be successful in addressing the
Company's liquidity and capital resources needs.
During the period, the Company was unable to make its April 15, 1999 interest
payment of $12.8 million due on the Company's 13 1/2% Series B First Mortgage
Notes due 2003 (the "First Mortgage Notes"). The Company was also unable to
cure that default by May 15, 1999, which date represented the expiration of the
30-day cure period from the original interest payment due date. The Company is
in default on its revolving credit facility failing the cross-default covenant
as a result of the default on the First Mortgage Notes and the tangible net
worth covenant contained in that agreement. Approximately $188.9 million in
First Mortgage Notes and approximately $48.5 million of borrowing outstanding
under the revolving credit facility, previously classified as Long-Term Debt,
has been classified as Current Portion of Long-Term Debt. An additional $4.6
million remains in Long-Term Debt representing obligations on equipment loans,
leases, and vendors notes. The Company continues its confidential discussions
with a representative committee of holders of the First Mortgage Notes (the
"Noteholders") covering the full range of financial restructuring alternatives
and to obtain the committee's consent to arrange additional borrowing. The
committee has indicated to the Company that it has no present intention of
accelerating the First Mortgage Notes. Fleet Capital Corporation and Congress
Financial Corporation, the lenders under the revolving credit facility, have
continued to advance funds under the facility despite the defaults, although
they have expressed an intention to reduce the inventory-borrowing base. There
can be no assurance that the Noteholders or the lenders will not accelerate the
First Mortgage Notes or the borrowing under the revolving credit facility, as
the case may be. The Company's failure to successfully negotiate a
4
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restructuring of its debt would have a material adverse effect on the financial
condition and liquidity of the Company.
Debt which remains classified as Long-Term Debt (including $1.3 million
classified as current portion) consist of $2.8 of capitalized lease obligations
and $2.9 million in trades notes payable. The trade notes payable were issued
during the six months ended April 30, 1999 to satisfy trade accounts payable.
Interest payments are made quarterly, with the interest rates of 8.7%. Principal
payments are to be quarterly in eight installments beginning May 31, 2000.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
NOTE 2 INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
(Unaudited)
April 30, 1999 October 31, 1998
---------------------------------------
(dollars in thousands)
<S> <C> <C>
Raw Materials and Supplies $ 9,346 $15,677
Work-in-Process 9,876 17,821
Finished Products 26,521 27,443
------- -------
Total $45,743 $60,941
======= =======
</TABLE>
The Company's inventories are valued at the lower of cost, as determined by
the first-in first-out (FIFO) method, or market. Cost of Sales in the current
period includes an inventory write-down of approximately $1.1 million resulting
from lower realizable values of certain steel products as a result of depressed
market conditions.
NOTE 3 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 (the "Predecessor") 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 ("RCRA"). As of
October 31, 1994, the Predecessor had remediated a portion of the ditch. The
Predecessor also agreed to a $1.1 million civil penalty, of which $300,000 was
to be offset by future capital expenditures, related to this issue. As of
October 31, 1996, the $800,000 penalty had been paid. Subsequently, the
$300,000 of capital expenditures was not approved by the EPA, and during fiscal
5
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year 1997 the Company made an additional penalty payment of that amount plus
interest. 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) groundwater monitoring. Sixty-six sediment
samples were taken throughout the system and analyzed in March 1998. Eleven
groundwater-monitoring wells were installed and samples were taken in February
1998. On September 29, 1998, closure certification was granted by ADEM
releasing the Company from providing financial assurance of closure. The EPA
has not yet responded to the closure certification. If clean closure cannot be
achieved, the Company estimates the contingent closure costs will be $1.1
million with post-closure costs of $2.8 million ($90,000 annually for 30 years).
As part of the settlement of this action, the Company is required to perform a
RCRA Facility Investigation of certain solid waste management units at the site.
The Company submitted a workplan for this investigation to EPA on May 26, 1999
and is waiting for the agency comments. The RCRA facility assessment conducted
by EPA identified a total of 41 solid waste management units ("SWMUs") and six
areas of concern ("AOCs") at the Gadsden facility. Of the 41 SWMUs, two are
recommended for a RCRA facility investigation ("RFI") and 11 are recommended for
confirmatory sampling ("CS"). Of the six AOCs, two are recommended for CS. All
the other SWMUs or AOCs are recommended for no further action ("NFA") or are
recommended for action under other regulatory programs.
The Company faces an enforcement action under the Clean Water Act. The U.S.
Department of Justice ("DOJ") 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 DOJ in an attempt to settle these claims.
These discussions resulted in substantial agreement as to certain additional
upgrades to the Company's wastewater treatment system, and these upgrades have
now been completed. On August 28, 1997, while negotiations were ongoing with
the DOJ, 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 DOJ 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 DOJ continued to
explore a possible settlement. As a result of these discussions, an agreement
in principle was reached with the EPA and DOJ on September 1, 1998 pursuant to
the terms of which the Company would pay $500,000 as a cash civil penalty and
would agree to implement $4.0 million in facility improvements as Supplemental
Environmental Projects ("SEPs") which offer environmental benefits. On December
27, 1998, DOJ decided to reduce the SEP expenditures required from $4 million to
$3,175,000, which was accepted by the Company, on the condition that additional
minor language modifications be made in the proposed consent decree. On January
4, 1999, however, settlement discussions terminated because DOJ required the
Company to agree to waive certain defenses to any and all future actions of any
nature that the United States might initiate in the future against the Company.
The Company declined to agree to this unconditional waiver. On January 8, 1999,
the United States District Court for the Northern District of Alabama ("district
court") convened a Status Conference, at which time a Pretrial Conference was
set for October 25, 1999. On January 22, 1999, the district court issued a
scheduling order regarding dispositive motions and discovery, which are to be
completed by September 30, 1999. 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.
DOJ has alleged that over 4,000 potential violations of the Clean Water Act have
occurred. On June 8, 1999, the district court issued an order granting DOJ's
motion for a partial summary judgement holding the Company liable for 1,000
violations of its NPDES permit from May 1, 1995 to September 1998 comprising
4,290 days of violation. The Company intends to file a motion to certify this
order for an interlocutory appeal to the U. S. Court of Appeals for the Eleventh
Circuit before the district court considers the imposition of potential civil
penalties. In the event the Company's appeal is not granted at that time, the
district court's opinion provides that "the amount of the penalty for violations
of the effluent limitations on outfalls along the Company's internal waste
streams might be subject to mitigation, given that those outfalls do not
discharge directly into waters of the United States." It is the Company's
belief that if that is true, such discharges are not regulated by the Clean
Water Act and therefore the Company has no liability for those discharges as a
matter of law. In the event a civil
6
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penalty is imposed, the Clean Water Act requires the district court to consider
the seriousness of the violations, the economic benefits (if any) resulting from
the violations, any good faith efforts to comply with the applicable
requirements, the economic impact of the penalty on the Company, and such other
matters as justice may require in determining the amount of the penalty. On
December 11, 1998, the Company filed an expedited petition with the Alabama
Department of Environmental Management for a modification of its NPDES permit.
If granted, the Company will be in a position to be in compliance with the Clean
Water Act at all times of the year.
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 wastewater discharges. The Company believes the claims of Mr.
Williams are without merit, and that no class should be certified. On motion of
the Company, this action has been stayed pending possible resolution of the
Clean Water Act enforcement action.
During negotiations with the DOJ over the Clean Water Act matter described
above, the DOJ raised remediation of Black Creek as a possible issue. The EPA
investigated Black Creek and 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,
although the EPA indicated that another round of sampling would be performed to
define the scope of the potential remediation. On December 23, 1998, as a
result of a routine file review at the Alabama Department of Environmental
Management, the Company was provided with the initial page of a "Comprehensive
Environmental Response Compensation Liability Act Site Investigation Report,"
("CERCLA") prepared for EPA on September 30, 1998, under the supervision of a
EPA Task Monitor, together with a November 30, 1998 e-mail message from the EPA
Task Monitor addressed to a member of the public. That e-mail reported that the
Gulf States Steel Site Investigation Report was referred from EPA's Emergency
Response and Removal Branch to the EPA Superfund Remedial Program for evaluation
and potential remediation, but reported that "the time frame for this is
uncertain." Since the time that core samples were taken at Lake Gadsden almost
one year ago, EPA has initiated no further communications with the Company
regarding this matter. The Company was informed that when the EPA's Site
Investigation Report was completed, the Company would have an opportunity to
discuss the findings with EPA prior to the time that EPA made any future
decisions regarding this matter. Instead, the Company learned about these
events through the above-referenced file review. The Company informed 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. The Company continues to request further information about
EPA's intentions regarding this issue.
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
7
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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 on an inspection
conducted on May 16, 1996. The conditions cited in the NOV had been promptly
addressed following the May 16, 1996 inspection. On December 31, 1998 the
Company and the EPA reached an administrative settlement of these allegations
for a penalty payment of $31,813 and the voluntary replacement of four PCB
transformers at an estimated total cost of $149,500.
As a result of a September 1997 inspection, ADEM determined that certain
violations of hazardous waste rules had occurred at the Company's facility and
had resulted in the release of hazardous waste from a secondary containment area
on site. The Company is addressing assessment and possible remediation of this
site area with ADEM. In August 1998, ADEM proposed a Consent Order with an
administrative penalty of $80,000. On September 28, 1998, ADEM issued a second
NOV regarding the same issue. These matters have been consolidated. The
Company has responded and has entered settlement discussions with ADEM on this
matter.
The solid waste permit for the on-site landfill at the facility expired on
December 31, 1988. On April 1, 1999, ADEM issued the renewed solid waste permit
to the Company.
On April 1, 1999, the Company was identified by the Environmental Protection
Division of the State of Georgia Department of Natural Resources ("EPD") as one
of the parties responsible for the SoGreen Barren Area Site in Tifton, Georgia.
Previously, the Company had responded to EPD that it had no records of any
materials being shipped to the site, and that a review of EPD documents revealed
that the Company was incorrectly identified as a "successor" to Republic Steel
Corporation. EPD nevertheless issued an Administrative Order to the Company.
The Company declined to participate in the Order, and EPD now may seek cost
recovery and punitive damages for expenses it incurs to complete the corrective
action at the site. No appeal was available from the Administrative Order;
however, the Company may petition for a hearing in the event EPD seeks to
recover costs, enforce the Administrative Order, or recover a penalty. It is
unknown at this time whether EPD will take any of these actions. Should EPD
take any such action, the Company will petition for a review, as it believes it
has valid defenses as it is not a successor to Republic Steel Corporation.
The Company's expenditures for environmental capital projects aggregated $1.3
million and $1.8 million for the six months ended April 30, 1999 and 1998,
respectively. As of April 30, 1999, the Company has accrued $2.0 million for
unresolved environmental matters. Though the Company believes that it has
adequately reserved for the cost of all known environmental conditions in
accordance with generally accepted accounting principles, the relevant 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
ultimate resolution of the above matters may have a material adverse effect on
the Company's financial position, results of operations, and liquidity.
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 4 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 (the "New
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 account receivable and
inventories. The New Credit Facility has an original term of three years
through November 13, 2000, at which time the
8
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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 adjusted tangible net worth at all times. As described in Note
1, the Company is not in compliance with the tangible net worth requirements.
NOTE 5 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 stock equivalent shares.
As a result, diluted earnings per share at April 30, 1999 and 1998 does not
differ from basic earnings per share.
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, both domestic and foreign; 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 continued increase of foreign
steel imports at extremely low level prices; the ability to negotiate a
restructuring of its existing debt, the Company's ability to raise additional
capital or to restructure its existing debt in order to meet its cash flow needs
and to have the funds available to implement its capital improvement projects;
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, 1999 Compared to Three Months Ended April 30, 1998
Net Sales. Net sales decreased 23.8% to $78.9 million for the 1999 period
from $103.6 million for the 1998 period. This decline is primarily the result
of a 12.3% decrease in sales volume on shipments of flat rolled products to
208,579 net tons in the 1999 period compared to 237,698 net tons in the 1998
period. This decline was primarily the result of depressed market conditions
resulting from the sharp increase in
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foreign steel imports. In addition, average selling prices decreased $62 per ton
in the second quarter of fiscal 1999 to $368 per ton compared to $430 per ton in
1998. This decrease is also due primarily to unfavorable market conditions
resulting from the sharp increase in foreign imports at distressed level prices.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
4.7% to $85.1 million for the 1999 period from $89.2 million for the 1998
period. This decrease is primarily due to lower production volumes in the
second quarter of 1999 compared to the 1998 period. As a percentage of net
sales, cost of goods sold, excluding depreciation, increased to 107.7% from
86.2%. This increase is due to lower selling prices per ton resulting from the
unfavorable market conditions as well as higher average manufacturing costs per
ton resulting from lower production volumes. In addition, costs of goods sold
in the current period includes an inventory write down of approximately $1.1
million. Average manufacturing costs for flat rolled products increased to $397
per ton in the 1999 period from $368 per ton in the 1998 period. Depreciation
expense increased to $5.3 million in the second quarter of fiscal 1999 compared
to $5.0 million in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5.3 million, or 6.7% of sales, in the 1999
period from $4.3 million, or 4.2% of sales in the 1998 period. This increase is
primarily due to additional costs incurred for financial and legal advisors to
assist in reviewing financial alternatives to the Company in the second three
months of 1999 as compared to the 1998 period.
Operating Profit (Loss). As a result of the changes in net sales, cost of
goods sold, selling and general and administrative expenses, operating profit
decreased $20.5 million from $4.9 million in 1998 to a loss of $(16.7) million
for the 1999 period.
Interest Expense. Interest expense, net of interest income, increased to $7.1
million in the 1999 period from $7.0 million during the comparable period in
1998. This increase is due to a slightly higher average balance of borrowings
under the Company's revolving credit agreement offset by additional capitalized
interest in the second quarter of 1999 as compared to 1998.
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998
Net Sales. Net sales decreased 25.8% to $153.5 million for the 1999 period
from $206.9 million for the 1998 period. This decline is primarily the result
of a 19.2% decrease in sales volume on shipments of flat rolled products to
389,492 net tons in the 1999 period compared to 482,017 net tons in the 1998
period. This decline was primarily the result of depressed market conditions
resulting from the sharp increase in foreign steel imports. In addition,
average selling prices decreased $41 per ton in the first six months of fiscal
1999 to $384 per ton compared to $425 per ton in 1998. This decrease is also
due primarily to unfavorable market conditions resulting from the sharp increase
in foreign imports at distressed level prices.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
12.5% to $154.8 million for the 1999 period from $176.8 million for the 1998
period. This decrease is primarily due to lower production volumes in the first
six months of 1999 compared to the 1998 period. As a percentage of net sales,
cost of goods sold, excluding depreciation, increased to 100.8% from 85.4%.
This increase is due to lower selling prices per ton resulting from the
unfavorable market conditions as well as higher average manufacturing costs per
ton resulting from lower production volumes. In addition, costs of goods sold
in the current period includes an inventory write down of approximately $1.1
million. Average manufacturing costs for flat rolled products increased to $386
per ton in the 1999 period from $360 per ton in the 1998 period. Depreciation
expense increased to $10.5 million in the first six months of fiscal 1999
compared to $10.1 million in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.9 million, or 6.5% of sales, in the 1999
period from $8.6 million, or 4.1% of sales in the 1998 period.
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This increase is primarily due to additional costs incurred for financial and
legal advisors in the first six months of 1999 as compared to the 1998 period.
Operating Profit (Loss). As a result of the changes in net sales, cost of
goods sold, selling and general and administrative expenses, operating profit
decreased $32.0 million from $11.4 million in 1998 to a loss of $(21.6) million
for the 1999 period.
Interest Expense. Interest expense, net of interest income, remained
comparably the same at $14.0 million in the 1999 period to $14.1 million during
the comparable period in 1998. A slightly higher interest expense resulting
from the higher average balance of borrowings under the Company's revolving
credit agreement was offset by additional capitalized interest in the first six
months of 1999 as compared to 1998.
Liquidity and Capital Resources
The Company's net cash used in operations was $0.9 million during the first
six months of fiscal 1999 compared to cash provided by operations of $8.9
million for the six months ended April 30, 1998. The primary reasons for this
decrease was the decrease in earnings during the first six months of fiscal 1999
compared to fiscal 1998 and decrease in accounts payable offset by decreased
inventory and an increase in interest payable.
The Company's current liquidity requirements include working capital needs,
cash for debt service and capital expenditures. The Company intends to finance
its current operations and investing activities with existing cash balances and
borrowing under the New Credit Facility (as defined) and funds from new
financing sources. 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 six months ended April 30, 1999 were $8.7 million
compared to $13.2 million in the six months ended April 30, 1998. For fiscal
year 1999, the Company expects capital expenditures, excluding capitalized
interest, to total approximately $4.0 million for environmental projects and
expenditures for the replacements, upgrading and improvement of facilities and
equipment to total approximately $11.0 million. Although the Company expects to
benefit from improved operating performance related to its capital investments,
there can be no assurance that any or all of these potential cost savings will
be realized.
During the period, the Company was unable to make its April 15, 1999, interest
payment of $ 12.8 million due on the First Mortgage Notes. The Company was also
unable to cure that default by May 15, 1999, which date represented the
expiration of the 30-day cure period from the original interest payment due
date. The Company continues its confidential discussions with a representative
committee of Noteholders covering the full range of financial restructuring
alternatives and to obtain the committee's consent to arrange additional
borrowing. The committee has indicated to the Company that it has no present
intention of accelerating the First Mortgage Notes. There can be, however, no
assurance that the Noteholders will not accelerate the First Mortgage Notes. If
the First Mortgage Notes are accelerated, such an event will have a material
effect on the Company.
The Company is also in default on its New Credit Facility as defined below,
failing both the tangible net worth and cross-default covenants contained in
that agreement. Fleet Capital Corporation and Congress Financial Corporation,
lenders under the New Credit Facility, have continued to advance funds under the
facility despite the defaults, although they have expressed an intention to
reduce the inventory borrowing base. There can be no assurance that the lenders
will continue to permit borrowing thereunder. If the Company is unable to
borrow under the New Credit Facility and obtain additional financing sources,
the Company's liquidity, operations and financial condition will be materially
adversely affected.
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Given current market conditions, the levels of debt and associated interest
expense, required capital expenditures and improvements and the potential
realization of loss contingencies, the Company believes that it will continue to
incur losses in fiscal 1999. If the level of foreign imports is not reduced and
if the Company is unable to increase sales and pricing, continue to reduce
costs, implement productivity improvements, maintain its borrowing availability
under the New Credit Facility and obtain additional financing sources, the
Company may not have sufficient liquidity and capital resources to meet its
projected fiscal year 1999 requirements. The Company's failure to successfully
negotiate a financial restructuring would have a material adverse effect on the
financial condition and liquidity of the Company. As a result, the Company has
been evaluating when it will commence the bosh reline project, discussed under
"Capital Investments" in Item 1, Part I of the Company's Form 10-K for the year
ended October 31, 1998, and is developing a restructuring plan to improve
operating results and to increase its financial flexibility. The evaluation has
determined that certain refractories maintenance techniques may allow the
project to be deferred for at least one more year. This estimate could be
affected by unseen deterioration of the bosh lining. A failure of the blast
furnace would have a material adverse effect on the Company. The Company is
unable, at this time, to determine what effect failure to obtain such financing
would have on its operations.
The Company has retained financial and legal advisors to assist it in
reviewing financial alternatives available to the Company, including without
limitation, raising additional capital and a possible financial restructuring.
The Company has held discussions with certain of its trade creditors including
several raw material, supply, and service contractors, some of whom have
received interest bearing notes in the amount of $2.9 million and others who
have extended additional payment terms with respect to outstanding accounts
payable balances. These trade creditors are continuing to supply the Company.
There can be no assurance that a restructuring or obtaining additional
financing are possible or that such action will be successful in addressing the
Company's liquidity and capital resource needs. The Company's failure to
achieve its cost reduction initiatives or improve operating performance through
capital investments could also have a material adverse effect on 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 for outside purchases and
the impact of the Asian and eastern European economic problems, among others,
could have a material adverse effect on the Company's financial results and
liquidity. If the First Mortgage Notes are accelerated, or borrowing
availability under the New Credit Facility is terminated or reduced, or the
Company's financial results continue to decline, the Company's liquidity and
capital resources would be materially adversely effected which would also
significantly limit the Company's ability to withstand competitive pressures or
additional adverse economic conditions.
On November 13, 1997, the Company retired its previous $70 million credit
facility and entered into a new $80 million credit facility (the "New Credit
Facility"). The New Credit Facility includes a $70 million revolving credit
line and a $10 million equipment financing facility. The Company has used
borrowing under its credit facilities to cover outstanding commitments and to
fund operating losses as discussed below. 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 non-cash transaction consisting of the write-off of prior
unamortized debt issuance costs. As of April 30, 1999, approximately $48.5
million was borrowed under the New Credit Facility, and the remaining
availability per the terms of the new credit facility was $4.7 million. In
December 1998, the Company obtained an amendment to its debt covenant which
decreased the minimum adjusted tangible net worth from $(11.6) million to
$(20.0) million. The Company's adjusted tangible net worth at April 30, 1999,
was $(26.4) million and it is in default of the agreement.
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On April 21, 1995 the Company completed the Acquisition (see the Business
section of Item 1 of Form 10-K for the year ended October 31, 1998) of
substantially all the assets and the assumption of 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. 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 First Mortgage
Notes are senior obligations of the Company and are secured by substantially all
the assets of the Company except accounts receivable and inventories. The First
Mortgage Notes impose certain limitations on the Company including restricting
the ability to incur additional indebtedness, pay dividends, make certain
restricted payments, create liens or sell substantially all of the Company's
assets.
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 the 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, 1999. 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, 1999.
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.
In order to assess third-party compliance and progress on this issue, the
Company has canvassed its suppliers. The Company believes that no material
contingencies exist that would require it to modify its products.
As previously reported in the Company's Form 10-K for the fiscal year ended
October 31, 1998, 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 $11.7 million (of which
$9.1 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 and borrowing on its Revolving Credit Facility.
The primary purchased software is for an enterprise resource planning system
which will provide enhanced productivity and customer service benefits in
addition to mitigating potential consequences of the Year 2000 problem. Through
April 30, 1999, the Company has incurred expenditures for software and
consultant support of $11.4 million and has spent another $1.1 million for
contractors to rewrite existing systems. Those activities were initiated in
late 1996 for all business systems. The Company believes that the costs to
rewrite existing systems, which will be expensed as incurred, are not expected
to have a material effect on its results of operations.
The Company anticipates completing the Year 2000 project by June 30, 1999,
which is prior to any anticipated impact on its operating systems. A team of
information systems personnel is evaluating the progress and has developed
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.
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The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. See also the Company's statements regarding "forward-looking
statements" contained in this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
GULF STATES STEEL, INC. OF ALABAMA
----------------------------------
(registrant)
By: /s/ Robert Schaal
---------------------------------------
Robert Schaal
Chairman & Chief Executive Officer
(Principal Executive Officer)
Dated: June 21, 1999 By: /s/ James R. Grimm
---------------------------------------
James R. Grimm
Senior Vice President & CFO
(Principal Financial and Accounting Officer)
15
