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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
---
Exchange Act of 1934 for the quarterly period ended April 30, 2000.
OR
____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______
Commission file Number 33-92496
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GULF STATES STEEL, INC. OF ALABAMA
----------------------------------
(Debtor-in-Possession as of July 1, 1999)
(Exact name of registrant as specified in its charter)
Alabama 63-114 1013
--------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
174 South 26th Street
Gadsden, Alabama 35904-1935
--------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(256) 543-6100
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period 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 ______
------
At the date of this filing, there are 3,610,000 shares of $.01 par value common
stock outstanding, all of which are owned by GSS Holding Corp. No voting stock
is held by nonaffiliates or traded on an established public trading market.
1
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GULF STATES STEEL, INC. OF ALABAMA
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited).......................................... 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 17
3. Quantitative and Qualitative Disclosures About
Market Risk.............................................................. 23
PART II - OTHER INFORMATION
1. Legal Proceedings......................................................... 24
3. Defaults Upon Senior Securities........................................... 24
6. Exhibits & Reports on Form 8-K............................................ 24
</TABLE>
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PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
------- --------------------------------
<S> <C>
Balance Sheets -
As of April 30, 2000 and October 31, 1999.................................................... 4
Statements of Operations -
For the Three Months and Six Months Ended April 30, 2000 and 1999............................ 5
Statements of Cash Flows -
For the Six Months Ended April 30, 2000 and 1999............................................. 6
Notes to Financial Statements.................................................................. 7
</TABLE>
3
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Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Balance Sheets (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS April 30, 2000 October 31, 1999
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,493 $ 1,551
Accounts receivable, less allowance for doubtful
accounts of $740 in 2000 and $941 in 1999 38,222 35,721
Inventories 42,364 37,861
Deferred income taxes 2,860 2,860
Prepaid and other current assets 4,332 9,461
----------- ---------
Total current assets 91,271 87,454
Noncurrent assets:
Property, plant and equipment (net of accumulated depreciation) 183,879 191,848
Deferred charges, less accumulated amortization of
$564 in 2000 and $199 in 1999 232 398
Other noncurrent assets 300 300
---------- ---------
Total assets $ 275,682 $ 280,000
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities not subject to compromise Current Liabilities:
Accounts payable $ 22,253 $ 19,795
Accrued payroll and employee benefits 11,787 11,101
Accrued workers compensation 3,295 2,933
Accrued other liabilities 3,745 6,637
Debtor-in-possession term loan (Note 5) 17,114 14,570
Debtor-in-possession credit facility (Note 5) 40,975 34,915
---------- ---------
Total current liabilities 99,169 89,951
Noncurrent liabilities:
Deferred postretirement health benefits 8,831 7,475
Accrued environmental expense 5,300 5,300
Deferred income taxes 2,860 2,860
---------- ---------
Total noncurrent liabilities 16,991 15,635
Liabilities subject to compromise (Note 2) 233,256 233,536
---------- ---------
Total liabilities 349,416 339,122
Stockholder's deficit:
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 (425) (535)
Accumulated deficit (112,395) (97,673)
----------- ----------
Total stockholder's deficit (73,734) (59,122)
----------- ----------
Total liabilities and stockholder's deficit $ 275,682 $ 280,000
========== =========
</TABLE>
The accompanying notes are an integral part of the Financial Statements
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Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Statements of Operations (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------- ------------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net sales $ 100,910 $ 78,918 $ 188,168 $ 153,541
Cost of goods sold, excluding depreciation 92,374 85,104 176,541 154,750
Depreciation and amortization 5,584 5,558 11,135 11,115
Selling, general and administrative expenses 4,418 3,825 8,789 8,089
--------- ---------- --------- ---------
Operating loss (1,466) (15,569) (8,297) (20,413)
Other (income) expense
Interest expense (Contractual interest of $8.0 million and
$15.8 million for the three and six months ended
April 30, 2000, respectively) 1,550 7,129 2,992 14,031
Interest income - - (6) (1)
--------- ---------- ---------- ---------
1,550 7,129 2,986 14,030
--------- --------- ---------- ---------
Loss before restructuring items and income taxes (3,016) (22,698) (11,283) (34,443)
Restructuring items:
Professional fees 1,263 1,127 3,439 1,227
--------- ---------- ---------- ---------
Loss before income taxes (4,279) (23,825) (14,722) (35,670)
Provision for income taxes - - -
--------- ---------- ---------- ---------
Net loss $ (4,279) $ (23,825) $ (14,722) $ (35,670)
========= ========== ========== =========
Basic and diluted loss per share $ (1.19) $ (6.60) $ (4.08) $ (9.88)
========= ========== ========== =========
Weighted average shares outstanding 3,610,000 3,610,000 3,610,000 3,610,000
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of the Financial Statements.
5
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Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Operating Activities:
Net loss $ (14,722) $ (35,670)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 10,770 10,506
Amortization 366 747
Write down of inventories - 1,081
Write down of officers' notes 110 -
Changes in operating assets and liabilities:
Accounts receivable (2,501) (5,502)
Inventories (4,503) 14,117
Prepaid and other current assets 5,029 2,363
Accounts payable 2,458 (4,337)
Accrued payroll and employee benefits 2,404 1,791
Accrued interest payable 57 12,947
Other accrued liabilities (3,218) 1,093
----------- ----------
Net cash used by operating activities (3,750) (864)
----------- ----------
Investing Activities:
Capital expenditures (2,801) (8,677)
----------- ----------
Net cash used in investing activities (2,801) (8,677)
----------- ----------
Financing Activities:
Net borrowings on revolving credit agreement 6,060 9,102
Proceeds from debtor-in-possession term loan 2,544 -
Debt issue costs paid (100) -
Reduction of capitalized lease obligations (11) (83)
Payments on long-term debt - (31)
----------- ----------
Net cash provided by financing activities 8,493 8,988
----------- ----------
Net increase/(decrease) in cash and cash equivalents 1,942 (553)
Cash and cash equivalents at beginning of period 1,551 1,990
----------- ----------
Cash and cash equivalents at end of period $ 3,493 $ 1,437
=========== ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,191 $ 1,084
Income taxes - -
</TABLE>
The accompanying notes are an integral part of the Financial Statements.
6
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Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Notes to the Financial Statements
April 30, 2000
1. Basis of Presentation
The accompanying unaudited financial statements present the financial position,
results of operations and cash flows of Gulf States Steel, Inc. of Alabama (the
"Company") as of and for the fiscal three and six months ended April 30, 2000
and 1999.
The accompanying unaudited financial statements have been prepared by the
Company without an audit 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 management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the period November 1, 1999 to April 30, 2000, are not
necessarily indicative of the results that may be expected for the full fiscal
year ending October 31, 2000. The financial results for the fiscal year ending
October 31, 2000, will be subject to an annual audit. 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 fiscal year ended October
31, 1999.
The financial statements have been prepared in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7 ("SOP
90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code. The financial statements have been prepared using accounting principles
applicable to a going concern, which assumes continuity of operations,
realization of assets, and settlement of liabilities in the normal course of
business. The Company's recent losses from operations, significant stockholder's
deficit and the related bankruptcy filing raise substantial doubt about the
Company's ability to continue as a going concern. Realization of the carrying
amounts of the Company's assets and classification of its liabilities is
dependent upon, among other things, the ability to comply with
debtor-in-possession financing agreements, confirmation of a plan of
reorganization, the ability to achieve positive gross margins, and the ability
to generate sufficient cash flow from operations to meet its obligations.
Loss Per Share
The Company has outstanding common stock warrants subject to put options to
purchase 190,000 shares of common stock. The warrants are considered common
equivalent shares and, if dilutive, are included in the average shares
outstanding using the treasury stock method. The warrants were anti-dilutive for
the three and six months ended April 30, 2000 and 1999 and, therefore, are not
included in the loss per share calculation.
Reclassification
Certain amounts in the October 31, 1999 balance sheet have been reclassified to
conform with the presentation in the April 30, 2000 balance sheet. Certain
amounts in the fiscal 1999 statements of operations and cash flows have been
reclassified to conform with the presentation in the fiscal 2000 statements.
7
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2. Voluntary Filing Seeking Reorganization Under Chapter 11 of the United
States Bankruptcy Code
The Company's operating results for fiscal 1998 and 1999 were severely affected
by, among other things, a dramatic surge in steel imports beginning in the
summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
sales prices and shipments declined thereby causing a decrease in liquidity and
profitability. The decreased liquidity made it impossible for the Company to
service its then existing debt and fund ongoing operations. As a result, on July
1, 1999, the Company filed a voluntary petition seeking reorganization under
Chapter 11 of Title 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for Northern District
of Alabama, Eastern Division (the "Bankruptcy Court"), as previously described
in Note 1 to the Financial Statements of the Company's Annual Report on the Form
10-K for the year ended October 31, 1999.
The Company filed a Plan of Reorganization (the "Plan") with the Bankruptcy
Court on May 22, 2000. The Plan calls for the holders of the Company's
approximately $230 million of First Mortgage Notes (as defined below) and trade
debt creditors to receive 65% of the common stock of the reorganized Company in
full satisfaction of their claims. Miscellaneous equipment lessors and secured
creditors would be paid in installments over five years. In addition, the
Company would continue to make payments promised to vendors under the Credit
Program (as defined in Note 5 below) so long as vendors continue to extend
credit. The Plan is also contingent on the Company obtaining the Emergency Steel
Loan Guarantee (as discussed below) and obtaining an additional $75 million
revolving loan to cover working capital needs. In exchange for loans to be
provided by Bank of America, N.A. the Company will grant Bank of America a
redeemable option to acquire 35% of the common stock of the reorganized Company
which option will be redeemed for $5 million with the proceeds of a
"back-stopped" common stock rights offering to be made to the holders of the
First Mortgage Notes. The Board of the Company has tentatively approved the
Plan, contingent on several conditions being met. The Plan must also be voted on
by the creditors and later confirmed by the Bankruptcy Court before it can be
implemented by the Company.
The Company is in possession of its properties and assets and continues to
operate with its existing directors and officers as a debtor-in-possession. As a
debtor-in-possession, the Company is authorized to operate its business, but may
not engage in transactions outside of the normal course of business without
approval, after notice and hearing, of the Bankruptcy Court. Pursuant to the
provisions of the Bankruptcy Code, as of the petition date, actions to collect
prepetition indebtedness owed by the Company are stayed and other prepetition
contractual obligations may not be enforced against the Company. In addition, as
a debtor-in-possession, the Company has the right, subject to the Bankruptcy
Court's approval and certain other conditions, to assume or reject any
prepetition executory contracts and unexpired leases. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting such contracts or
leases or from the filing of claims, and no provisions have been made for these
items. The ultimate settlement of such liabilities is subject to the Plan.
As noted above, the Company filed a Plan with the Bankruptcy Court to reorganize
the Company's business and to restructure the Company's obligations. Under the
provisions of the Bankruptcy Code, the Company had the exclusive right to file
such plan at any time during the 120-day period following July 1, 1999. The
Company filed a motion to extend the exclusive period to file to May 31, 2000.
On April 28, 2000, the motion to extend the exclusive filing time period for the
Company was granted by the Bankruptcy Court. A committee, representing holders
(the "Ad Hoc Noteholders Committee") of the Company's 13 1/2% Series B First
Mortgage Notes, due 2003 (the "First Mortgage Notes") was granted
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the right, in exchange for permitting the subordination of the liens securing
the First Mortgage Notes to the liens securing the collateral under the Term
Loan (as defined in item 5 below), to file a Chapter 11 plan of reorganization
on the earlier of (a) the 305/th/ day (April 30, 2000) after the Company's
Chapter 11 filing, unless the Company failed to file a plan of reorganization by
the 244/th/ day (February 29, 2000) after its bankruptcy filing, in which case
the Ad Hoc Noteholders Committee could have filed a plan of reorganization on
the 245/th/ day (March 1, 2000), or (b) the first to occur of (i) certain
financial covenant defaults or (ii) 30 days after an uncured default under the
Term Loan. The Ad Hoc Noteholders Committee waived its right to file a plan
prior to May 31, 2000.
In accordance with SOP 90-7, the accompanying balance sheet as of April 30,
2000, segregates Liabilities Subject to Compromise, such as unsecured claims, in
the amount of $233.3 million, from liabilities not subject to compromise and
liabilities arising subsequent to the bankruptcy filing. Liabilities Subject to
Compromise are detailed as follows:
LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
-------------- ------------
<S> <C> <C>
Bonds, and Accrued Interest net of Debt Issuance Cost
and Debt Discount (First Mortgage Notes) $ 202,863 $ 202,863
Accounts Payable (Unsecured) 14,497 14,476
Accrued Environmental Expenses (Unsecured) 7,980 7,900
Notes Payable (Secured Equipment Notes) 2,673 2,805
Vendor Notes Payable and Accrued Interest (Unsecured) 2,929 2,929
Real Estate and Personal Property Taxes (Unsecured) 1,721 1,877
Capitalized Lease Obligations (Secured) 593 686
-------------- ------------
Total Liabilities Subject to Compromise $ 233,256 $ 233,536
============== ============
</TABLE>
The prepetition liabilities relating to two suppliers have been compromised in
the Bankruptcy Court and, therefore, have been reclassified out of Liabilities
Subject to Compromise and into other current liabilities for October 31, 1999.
If approved, the Plan could materially change the amounts currently recorded in
the financial statements. The financial statements that might result from the
outcome of this uncertainty may be materially different than those presented
herein. Restructuring items represent expenses incurred by the Company as a
result of the bankruptcy proceedings, which are required to be expensed as
incurred.
On August 17, 1999, President Clinton signed Public L. No. 106-51, The Emergency
Steel Loan Guarantee Act of 1999 (the "Loan Guarantee Act"). The Loan Guarantee
Act will provide guarantees for up to $1 billion in loans to qualified steel and
iron ore companies, with no company receiving guarantees of more than $250
million. These loans will be made by private sector lenders, with the Federal
Government providing a guarantee for up to 85 percent of the amount of the
principal of the loan. A loan guarantee may be issued upon application to the
Emergency Steel Loan Guarantee Board (the "Loan Board") by a private banking or
investment institution which has committed to enter into an agreement to provide
a loan to a qualified steel company. The Bank of America, N.A. filed the
application under the Loan Guarantee Act on January 31, 2000, for a 85% federal
guarantee on a $130 million loan which, if issued, will be used by the Company
to reorganize and recapitalize its business. Due to the deadline being extended,
the application was supplemented on February 28, May 16, May 22, and May 31,
2000,
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and a decision is expected by the end of June 2000 with the Company being
notified in July 2000. There can be no assurance that the Loan Board will grant
a guarantee, or that the amount will be sufficient to meet the Company's capital
requirements.
3. Segment Reporting
The Company operates in one business segment with four primary product lines:
hot-rolled products, cold-rolled products, galvanized products and plate
products.
Hot-rolled products begin as slabs and are processed through the hot strip mill.
This process reduces the thickness of the metal to customer specifications while
improving its qualities. When the metal has obtained the desired thickness and
strength it is rolled into a coil as a finished product. Hot-rolled products
made up 25.6% and 20.4% of the Company's sales in the second quarter of fiscal
years 2000 and 1999, respectively. Hot-rolled products made up 26.3% and 20.4%
for the six months ended April 30, for fiscal years 2000 and 1999, respectively.
Cold-rolled products begin as a hot-rolled coil. These items are then processed
through the cold strip mill (tandem mill) which reduces the metal to the desired
thickness. The metal then goes through an annealing and temper process to
restore its flexibility and to obtain the qualities the customer has specified.
Once the metal has obtained all of the desired qualities it is rolled into a
coil as a finished product. Cold-rolled products made up 21.5% and 19.0% of the
Company's sales in the second quarter of fiscal years 2000 and 1999,
respectively. Cold-rolled products made up 22.5% and 18.5% for the six months
ended April 30, for fiscal years 2000 and 1999, respectively.
Galvanized products begin as either hot-rolled or cold-rolled coils and are then
coated with zinc. These items are recoiled as a finished product. Galvanized
products made up 13.2% and 16.8% of the Company's sales in the second quarter of
fiscal years 2000 and 1999, respectively. Galvanized products made up 11.9% and
16.4% for the six months ended April 30, for fiscal years 2000 and 1999,
respectively.
Plate products begin as slabs and are processed through the plate mill. Plate
slabs are reheated and passed through a series of fast moving rolls which makes
the slab longer and thinner. The plate is finished to the customers specified
thickness and then cut to the specified widths and lengths. Plate products made
up 38.0% and 41.2% of the Company's sales in the second quarter of fiscal years
2000 and 1999, respectively. Plate products made up 37.5% and 42.1% for the six
months ended April 30, for fiscal years 2000 and 1999, respectively.
The remaining sales of 1.7% and 2.6% in the second quarter, and 1.8% and 2.6%
year to date of fiscal years 2000 and 1999, respectively, are from sales of
coke, slabs and by-products.
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Net sales by product line are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended April 30, Six months ended April 30,
------------------------------ ---------------------------------
2000 1999 2000 1999
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Hot-Rolled $ 25,781 $ 16,063 $ 49,480 $ 31,381
Cold-Rolled 21,728 14,994 42,350 28,416
Galvanized 13,358 13,285 22,427 25,148
Plates 38,359 32,498 70,455 64,634
Other 1,684 2,078 3,456 3,962
---------- ----------- ----------- ------------
Total $ 100,910 $ 78,918 $ 188,168 $ 153,541
========== =========== =========== ============
</TABLE>
The Company does not have any foreign sales, and all of the Company's tangible
assets are located in the continental United States.
4. Inventories
Inventories consist of the following (dollars in thousands):
April 30, October 31,
2000 1999
-------- ------
Raw materials $ 12,038 $ 5,896
Work-in-process 9,782 10,985
Finished goods 20,544 20,980
----------- ----------
$ 42,364 $ 37,861
=========== ==========
The Company had no lower of cost or market reserves relating to inventory at
April 30, 2000, and had reserves of approximately $1.6 million at October 31,
1999.
5. Long-Term Debt and Debtor-in-Possession Financing
As a result of the Chapter 11 filing, all of the Company's long-term debt was in
default as of the bankruptcy date, and has been reclassified to Liabilities
Subject to Compromise on the accompanying balance sheets.
As described in Note 6 to the Financial Statements of the Company's Annual
Report on the Form 10-K for the year ended October 31, 1999, on July 20, 1999,
the Bankruptcy Court granted the Company's motion to approve a new $65 million
debtor-in-possession credit facility ("DIP Credit Facility"). The DIP Credit
Facility expires on the earlier of the consummation of a plan of reorganization
or July 6, 2000. Interest on the DIP Credit Facility is due on the first day of
each month for the previous month. The Bankruptcy Court also granted the
Company's motion to approve a new debtor-in-possession Term Loan agreement (the
"Term Loan") in the aggregate principal amount of $17.9 million, less
approximately $0.8 million which has been retained by the lender pending
resolution of certain collateral issues. The Term Loan is due in its entirety
July 6, 2000. Interest on the Term Loan is due on the last day of each month. In
addition, the Bankruptcy Court approved the Preferred Supplier Credit Program
(the "Credit Program") which is intended to encourage vendors to continue
extending credit to the Company. These three financing agreements as well as
operating cash flows are currently funding the Company's liquidity requirements.
The DIP Credit Facility is secured by the Company's accounts receivable and
inventories. At April 30,
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2000, the interest rate on the DIP Credit Facility was 9.75% and the accounts
receivable and inventories supported access to $56.1 million, less applicable
reserves of $3.3 million. There was $11.8 million available under the DIP Credit
Facility at April 30, 2000.
The Term Loan is secured by the property, plant and equipment and certain other
collateral of the Company. The final advance on the Term Loan of $2.5 million
was made in November 1999. At April 30, 2000, the interest rate on the Term Loan
was 14.0%. The final advance on the Term Loan also carries an additional
interest rate of 3.5% interest in kind. This interest is added to the principal
balance each month instead of being paid.
The new DIP Credit Facility and the Term Loan are included in current
liabilities because their terms expire within one year of the loan date, or on
the effective date of an approved plan of reorganization, whichever is earlier.
Borrowing availability under these facilities is subject to compliance with
various financial covenants, generally common to such loan agreements. At
October 31, 1999, and November 30, 1999, the Company was in default under
certain financial covenants contained in the DIP Credit Facility and the Term
Loan. Subsequently, the Company obtained a waiver from the lenders with respect
to the covenant defaults. Furthermore, the DIP Credit Facility agreement and the
Term Loan agreement have been amended to revise such covenants on a going
forward basis. These amendments were approved by the Bankruptcy Court on January
21, 2000. The Company was in compliance with the amended covenants as of April
30, 2000.
6. Contingencies
Contingencies
The Company is involved in litigation arising from its normal operations,
including employee matters, the resolution of which is not expected to have a
significant effect on the Company's financial position, results of operations or
liquidity.
Substantially all of the Company's hourly employees, and several salaried office
and clerical employees are represented by the United Steelworkers of America
("USWA"). The current contract which was signed in April 1996 was due to expire
in October 2000, however, the Company and the USWA reached an agreement for a
new five year contract on May 24, 2000. This agreement was voted on and approved
by the USWA members on May 26, 2000. The new contract becomes effective on the
date the Company emerges from Chapter 11. The predecessor to the Company
experienced a 1 1/2 day work stoppage in 1989, however, the Company has not
experienced any work stoppages since. The Company believes a work "slowdown"
occurred in November 1999, however, the Company believes overall that it has
satisfactory relationships with its union represented employees.
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 of the Company (as defined in Item 2 below) 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
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existing air emission regulations, solid and hazardous waste requirements 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"). The
Predecessor of the Company entered a consent decree in settlement of that claim,
which required a regulatory "closure" 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)
groundwater monitoring. Sixty-six sediment samples were taken throughout the
system and analyzed in March 1998. Eleven groundwater-monitoring wells were
installed and samples taken in February 1998. Based on the results obtained in
this sampling, on September 29, 1998, clean 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 $2.7 million ($90,000 annually for 30 years).
As another part of the settlement of this action, the Company is also required
to perform a RCRA Facility Investigation of certain solid waste management units
("SWMUs") at the site. The Company submitted a workplan for this investigation
to the EPA on May 26, 1999 and is waiting for the agency's comments. The RCRA
facility assessment conducted by the EPA identified a total of 41 SWMUs and 6
areas of concern ("AOCs") at the Gadsden facility. Of the 41 SWMUs, two are
recommended for confirmatory sampling ("CS"). Of the 6 AOCs, two are recommended
for CS. All other SWMUs or AOCs are recommended for no further action ("NFA") or
are recommended for action under other regulatory programs.
The Company recently concluded an enforcement action brought under the Clean
Water Act ("CWA") in 1997. In that action, 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 largely 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 CWA 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 CWA, 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. The DOJ has alleged that over 4,000 potential violations of the CWA
have occurred. On June 8, 1999, the district court issued an order granting
DOJ's motion for partial summary judgment holding the Company liable for 1,000
violations of its National Pollution Discharge Elimination System (the "NPDES")
permit from May 1995 to September 1998 comprising 4,290 days of violation. Each
violation carries a civil penalty of up to $27,500 per day. Almost two-thirds of
the exceedances occurred at points internal to the plant. 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 CWA and therefore the Company has no
liability for those discharges as a matter of law. In the event a civil penalty
is imposed, the CWA 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 the DOJ may
require in determining the amount of the penalty. On December 11, 1998, the
Company filed an expedited petition
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with the ADEM for a modification of its NPDES permit. If granted, the Company
will be in a position to be in compliance with the CWA at all times of the year.
ADEM has not yet acted on that petition.
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, Alabama, 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 CWA
enforcement action.
During negotiations with the DOJ over the CWA matter described above, the DOJ
raised remediation of Black Creek as a possible issue. The EPA conducted a
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
Site Investigation in two phases, the first in June 1997 and the second in
December 1997. Analyses of surface water samples indicated elevated levels of
zinc. Analyses of sediment samples indicated elevated levels of inorganic
constituents, primarily lead and zinc. Zinc contamination was found to be
widespread in Lake Gadsden sediments, not limited to discrete areas of the lake.
The EPA compiled its data into a CERCLA Site Investigation Report on September
30,1998. 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. On December 23, 1998, as a result of a routine file review at the
ADEM, the Company was provided 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." Although certain core samples were taken at Lake Gadsden more
than two years ago, the EPA has initiated no enforcement action regarding this
matter, although on November 24, 1999, the United States filed a Proof of Claim
on behalf of the United States seeking approximately $280,000 in alleged
prepetition unreimbursed CERCLA response costs to test and evaluate Lake Gadsden
and an estimated $13,020,000 in potential additional CERCLA response costs. 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 claimed that its 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.
On March 28, 2000, a proposed Consent Decree was lodged in the United States
District Court for the Northern District of Alabama that resolves the CWA
liability of the Company as alleged in the complaint, and also resolves certain
liabilities under Section 107 of CERCLA.
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Under the Consent Decree, the Company will be assessed a civil penalty in the
amount of $8.0 million. The Company agreed to pay a civil penalty to the United
States in the amount of $0.1 million, with the remaining $7.9 million penalty to
be subordinated to all other claims in the bankruptcy proceeding. The Company
also agreed to operate its plant in compliance with its NPDES permit and with
the CWA. In addition, the Company agreed to undertake certain Supplemental
Environmental Projects ("SEPs") in the amount of $2.6 million.
Furthermore, the Company agreed to pay the EPA Hazardous Substance Superfund
$6.5 million. Payments will be made in monthly installments of approximately
$0.2 million each for 36 months, commencing on the later of July 1, 2001 or 30
days after the date the EPA issues a formal cleanup decision. Payments may be
suspended if, after 4 months, the EPA has not commenced cleanup at the site
until cleanup commences. In addition, if the EPA decides to dispose of
contaminated sediments on property within 10 miles of the Company's plant, the
Company agrees to provide or purchase up to 30 acres of property for such
disposal, and to donate the property to the EPA.
In return for these agreements by the Company, the United States settled all
pending claims against the Company under the CWA and provided the Company with a
Covenant Not to Sue and Contribution Protection under Section 113(f)(2) of
CERCLA with respect to any existing contamination at the site, which includes
Black Creek and Lake Gadsden. The Company, however, reserves its rights,
including any rights to contribution from other third parties who are not party
to the Consent Decree.
Notice of the proposed Consent Decree was published April 7, 2000; however, due
to a typographical error, a corrected notice was filed, extending the comment
period. The extended period expired May 17, 2000, with only one comment being
filed. The U.S. District Court for the Northern District of Alabama entered the
Consent Decree as Final Order and Judgment on May 19, 2000.
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. The Company received a NOV, dated September 27, 1999, which
documented excessive emissions from the No. 3 and No. 4 coke oven combustion
stacks, but did not refer to any continuous opacity monitors.
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 of December 31, 1999,
all four of the transformers have been replaced. As of April 27, 2000, the
Company provided necessary documentation of proper destruction of the old PCB
transformers to the EPA which would close this matter.
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
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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. ADEM issued a draft Administrative Order regarding the
consolidated NOV's on May 20, 1999, again proposing a civil penalty of $80,000.
The Company requested a meeting with ADEM to discuss settlement of this matter.
At this meeting, the Company discussed with ADEM coordination of any state
required activities with the ongoing RCRA Facility Investigation workplan. ADEM
generally agreed with this approach and issued a negotiated Administrative Order
on these matters on February 7, 2000. Pursuant to this Order, the Company
submitted closure plans for two hazardous waste storage tanks. Those plans were
noticed for public comment on May 22, 2000.
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 has applied for a Title V Major Source Operating Permit under the
Clean Air Act. On October 14, 1999, ADEM placed a copy of a draft permit on the
public record for a 30 day comment period. The Company and ADEM are in the
process of negotiating certain terms and conditions of the permit as a result of
that process.
On January 27, 1999, the EPA filed an information request with the Company
regarding certain potential violations of the Clean Air Act regarding Prevention
of Significant Deterioration ("PSD") preconstruction review and permitting for
certain boilers (Nos. 1, 2, 3, 4, 5, 7, 8, and 9). The Company responded to the
request on May 6, 1999. The EPA has not yet replied.
For the first six months of fiscal year 2000 and 1999, capital expenditures for
environmental projects were $1.9 million and $1.3 million, respectively.
As of April 30, 2000, the Company has accrued $13.9 million for unresolved
environmental remediation matters, with $8.0 million being reflected in
Liabilities Subject to Compromise. 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
may insist upon different and more costly remedial measures than those
previously believed by the Company to be adequate or required by existing law.
The ultimate resolution of the above matters could have a material adverse
effect on the Company's financial position, results of operations and liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 such as "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 described in the forward-looking statements. There can be
no assurance that actual results or business conditions will not differ
materially from those anticipated or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: 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 renewed increase of foreign steel
imports at extremely low prices; the continued access to and adequacy of the DIP
Credit Facility and the Term Loan; the gain or loss of significant customers;
the ability to complete the Company's capital improvement program and
successfully produce its products; shortages in the availability of raw
materials from the Company's suppliers; fluctuations in 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; adverse developments
arising from the Company's Chapter 11 proceedings; the Company's ability to
successfully reorganize under Chapter 11; and general economic conditions.
General
The following discussion should be read in conjunction with the unaudited
financial statements and the accompanying notes included in this Form 10-Q. As
described in Note 2 to the unaudited financial statements, the Company filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.
The Company's operating results for fiscal 1998 and 1999, were severely
affected by, among other things, a dramatic surge in steel imports beginning in
the summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
sales prices and shipments declined thereby causing a decrease in liquidity and
profitability. The decreased liquidity made it impossible for the Company to
service its then existing debt and fund ongoing operations. As a result, on July
1, 1999, the Company filed a voluntary petition seeking reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, as previously
described in Note 1 to the Financial Statements of the Company's Annual Report
on the Form 10-K for the year ended October 31, 1999.
Company filed the Plan with the Bankruptcy Court on May 22, 2000. The Plan
calls for the holders of the Company's approximately $230 million of First
Mortgage Notes and trade debt creditors to receive 65% of the common stock of
the reorganized Company in full satisfaction of their claims.
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Miscellaneous equipment lessors and secured creditors would be paid in
installments over five years. In addition, the Company would continue to make
payments promised to vendors under the Credit Program so long as vendors
continue to extend credit. The Plan is also contingent on the Company obtaining
the Emergency Steel Loan Guarantee and obtaining an additional $75 million
revolving loan to cover working capital needs. In exchange for loans to be
provided by Bank of America, N.A. the Company will grant Bank of America a
redeemable option to acquire 35% of the common stock of the reorganized Company
which option will be redeemed for $5 million with the proceeds of a "back-
stopped" common stock rights offering to be made to the holders of the First
Mortgage Notes. The Board of the Company has tentatively approved the Plan,
contingent on several conditions being met. The Plan must also be voted on by
the creditors and later confirmed by the Bankruptcy Court before it can be
implemented by the Company.
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, 2000 Compared to Three Months Ended April 30, 1999
Net Sales. Net sales increased 27.9% to $100.9 million for the second
quarter of fiscal year 2000 from $78.9 million for the second quarter of fiscal
year 1999. This increase in revenues was primarily caused by shipments of
261,500 tons in the second quarter of fiscal 2000, which was 52,900 tons more
than the shipments of 208,600 tons in the same period in the prior fiscal year.
In addition to the increase in revenues from the increase in tons shipped, sales
price increased from $368 per ton in the second quarter of fiscal 1999 to $379
in the same period in fiscal 2000.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, increased
8.5% to $92.4 million for the second quarter of fiscal year 2000 from $85.1
million for second quarter of fiscal year 1999. As a percentage of net sales,
cost of goods sold, excluding depreciation, decreased to 91.5% in the second
quarter of fiscal 2000 compared to 107.8% during the same period in fiscal 1999.
While much of the overall increase in costs is a result of the increase in sales
volume described above, the decrease in cost of goods sold as a percentage of
net sales is a result of the higher sales price per ton, and lower cost per ton
due to increased production. Average manufacturing costs for flat rolled
products decreased $45 per ton shipped from $391 in the second quarter of fiscal
1999 to $346 in the same period in fiscal 2000. This decrease is a result of
higher sales and production volume. Depreciation and amortization expense
remained constant at $5.6 million for the second quarter of fiscal 2000 and for
the same period in fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.4 million, or 4.4% of net sales in the
second quarter of fiscal 2000, from $3.8 million, or 4.9% of net sales in the
same period in fiscal 1999. This increase in expense was primarily due to a
large sales and use tax refund that was received in March of 1999, with no
similar amount received in the second quarter of fiscal 2000. The decrease as a
percentage of sales is a result of much higher sales.
Restructuring Expenses. Restructuring expenses for the second quarter of
fiscal 2000 were approximately $1.3 million which is $0.2 million higher than
the $1.1 million during the same period in the prior year. Restructuring
expenses include additional costs for financial and legal advisors incurred as a
result of the Company's Chapter 11 filing and are classified as professional
fees under restructuring items on the fiscal 2000 Statement of Operations.
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Operating Loss. As a result of the increase in sales price per ton of 3.0%
and an increase in tons sold of 25.4%, the Company experienced an operating loss
of $1.5 million in the second quarter of fiscal 2000, which is an improvement of
$14.1 million from the operating loss of $15.6 million in the same period in
fiscal 1999.
Interest Expense. Interest expense, net of interest income and capitalized
interest (approximately $0.2 million and $0.6 million in the second quarter of
fiscal 2000 and fiscal 1999, respectively), decreased to $1.6 million in the
second quarter of fiscal 2000 from $7.1 million in the same period in fiscal
1999. This decrease was primarily due to the Company discontinuing to accrue
interest on prepetition debt as of July 1, 1999, due to the bankruptcy filing.
The second quarter of fiscal 2000 contains only interest expense related to the
$65 million DIP Credit Facility and the Term Loan whereas, the same period in
fiscal 1999 includes interest on the First Mortgage Notes. Contractual interest
is $6.4 million in excess of the reported interest expense for the second
quarter of fiscal 2000.
Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 1999
Net Sales. Net sales increased 22.6% to $188.2 million for the first six
months of fiscal year 2000 from $153.5 million for the same period of fiscal
year 1999. This increase in revenues was primarily caused by shipments of
502,400 tons in the first six months of fiscal 2000, which was 112,900 tons more
than the shipments of 389,500 tons in the same period in the prior fiscal year.
The increase in tons sold was partially offset by a decrease in the sales price
from $384 per ton in the first six months of fiscal 1999 to $368 per ton in the
same period in fiscal 2000.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, increased
14.1% to $176.6 million for the first six months of fiscal year 2000 from $154.8
million for same period of fiscal year 1999. As a percentage of net sales, cost
of goods sold, excluding depreciation, decreased to 93.8% in the first six
months of fiscal 2000 compared to 100.8% during the same period in fiscal 1999.
While much of the overall increase in costs is a result of the increase in sales
volume described above, the decrease in cost of goods sold as a percentage of
net sales is a result of the higher sales, and lower cost per ton due to
increased production. Average manufacturing costs for flat rolled products
decreased $39 per ton shipped from $383 in the first six months of fiscal 1999
to $344 in the same period in fiscal 2000. This decrease is a result of higher
sales and production volume. Depreciation and amortization expense was $11.1
million for the first six months of both of fiscal 2000 and fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $8.8 million, or 4.7% of net sales in the
first six months of fiscal 2000, from $8.1 million, or 5.3% of net sales in the
same period in fiscal 1999. This increase in expense was partially due to a
large sales and use tax refund that was received in March of 1999, with no
similar amount received in fiscal 2000, and due to $0.3 million being paid as
part of the Preferred Supplier Program in fiscal 2000. The decrease as a
percentage of sales is a result of higher sales.
Restructuring Expenses. Restructuring expenses for the first six months of
fiscal 2000 were approximately $3.4 million which is $2.2 million higher than
the $1.2 million during the same period in the prior year. Restructuring
expenses include additional costs for financial and legal advisors incurred as a
result of the Company's Chapter 11 filing and are classified as professional
fees under restructuring items on the fiscal 2000 Statement of Operations.
Operating Loss. As a result of the large increase in tons sold of 29.0%
partially offset by a decrease in the sales price per ton of 4.2%, the Company
experienced an operating loss of $8.3 million in the first six months of fiscal
2000, which is an improvement of $12.1 million from the operating loss of $20.4
million in the same period in fiscal 1999.
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Interest Expense. Interest expense, net of interest income and capitalized
interest (approximately $0.4 million and $1.3 million in the first six months of
fiscal 2000 and fiscal 1999, respectively), decreased to $3.0 million in the
first six months of fiscal 2000 from $14.0 million in the same period in fiscal
1999. This decrease was primarily due to the Company discontinuing to accrue
interest on prepetition debt as of July 1, 1999, due to the bankruptcy filing.
The first six months of fiscal 2000 contains only interest expense related to
the $65 million DIP Credit Facility and the Term Loan whereas, the same period
in fiscal 1999 includes interest on the First Mortgage Notes. Contractual
interest is $12.8 million in excess of the reported interest expense for the
first six months of fiscal 2000.
Liquidity and Capital Resources
The Company's net cash used by operations was $3.8 million during the first
six months of fiscal 2000 compared to cash used by operations of $0.9 million
for the same period in fiscal 1999. The primary reasons for this increase was an
increase in inventories of ore and coke during the first six months of fiscal
2000, compared to a significant reduction of inventories in the first six months
of 1999. Also, the Company did not accrue interest expense on the First Mortgage
Notes, due to the bankruptcy filing, during the first six months of fiscal 2000.
If this interest had been accrued, the net loss would have been $27.5 million
for the six months ended April 30, 2000.
The Company's current liquidity requirements include working capital needs,
Chapter 11 administrative expenses and capital expenditures as allowed by the
covenants in the DIP Credit Facility and the Term Loan. The Company intends to
finance its current operations and investing activities with existing cash
balances, operating cash flows, borrowings under the DIP Credit Facility, funds
from the Term Loan, and trade credit, including amounts provided under the
Credit Program. Although the Company believes that anticipated cash flows from
future operations and borrowings under the DIP Credit Facility, the Term Loan,
and the Credit Program should provide sufficient liquidity for the Company to
meet its debt service requirements, satisfy covenants under the financing
agreements and fund ongoing operations and capital improvements, there can be no
assurances these or other possible sources of liquidity will be adequate.
The Company's recent losses from operations, significant stockholder's
deficit and the related Chapter 11 filing raise substantial doubt about the
Company's ability to continue as a going concern. Realization of the carrying
amount of the Company's assets and classification of its liabilities is
dependent upon, among other things, the ability to comply with debtor-in-
possession financing agreements, the ability to achieve positive gross margins,
and the ability to generate sufficient cash flow from operations to meet its
obligations.
Under the terms of the bankruptcy case, liabilities in the amount of
approximately $233.3 million at April 30, 2000, are subject to compromise under
a plan of reorganization. Pursuant to the provisions of the Bankruptcy Code and
during the pendency of the bankruptcy proceeding, actions to enforce or
otherwise effect repayment of prepetition liabilities, as well as all pending
litigation against the Company, are stayed while the Company continues its
business operations as debtor-in-possession. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
As described in Note 6 to the Financial Statements of the Company's Annual
Report on Form 10-K for the year ended October 31, 1999, on July 20, 1999, the
Bankruptcy Court granted the Company's motion to approve the $65 million DIP
Credit Facility. The DIP Credit Facility expires on the earlier of the
consummation of a plan of reorganization or July 6, 2000. The Bankruptcy Court
also
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granted the Company's motion to approve the Term Loan in the aggregate principal
amount of $17.9 million. In addition, the Bankruptcy Court approved the Credit
Program which is designed to encourage vendors to continue extending credit to
the Company. These three financing agreements are currently funding the
Company's liquidity requirements.
The DIP Credit Facility is secured by the Company's accounts receivable and
inventories. At April 30, 2000, the interest rate on the DIP Credit Facility was
9.75% and the accounts receivable and inventories supported access to $56.1
million, less applicable reserves of $3.3 million. There was $11.8 million
available under the DIP Credit Facility at April 30, 2000.
The Term Loan is secured by the property, plant and equipment and certain
other collateral of the Company. At April 30, 2000, the interest rate on the
Term Loan was 14.0%. The final advance on the Term Loan ($2.5 million made in
November 1999) also carries an additional interest rate of 3.5% interest in
kind. This interest is added to the principal balance each month instead of
being paid.
The new DIP Credit Facility and the Term Loan are included in current
liabilities because their terms expire within one year of the loan date, or on
the effective date of an approved plan of reorganization, whichever is earlier.
Borrowing availability under these facilities is subject to compliance with
various financial covenants, generally common to such loan agreements. At
October 31, 1999, and November 30, 1999, the Company was in default under
certain financial covenants contained in the DIP Credit Facility and the Term
Loan. Subsequently, the Company obtained a waiver from the lenders with respect
to the covenant defaults. Furthermore, the DIP Credit Facility agreement and the
Term Loan agreement have been amended to revise such covenants on a going
forward basis. These amendments were approved by the Bankruptcy Court on January
21, 2000. The Company was in compliance with the amended covenants as of April
30, 2000.
Given current market conditions, the levels of debt and associated interest
expense, levels of depreciation, required capital expenditures and improvements
and the potential realization of loss contingencies, the Company believes that
it will continue to incur losses in fiscal 2000. If the Company is unable to
increase sales and pricing, continue to reduce costs, implement productivity
improvements, comply with the covenant requirements contained in the Company's
financing documents and maintain its borrowing availability under the DIP Credit
Facility and the Term Loan, the Company may not have sufficient liquidity and
capital resources to meet its fiscal year 2000 requirements. The Company's DIP
Credit Facility and the Term Loan are due on the earlier of the consummation of
the Plan or July 6, 2000. The Company is in negotiations to extend the maturity
dates of the DIP Credit Facility and the Term Loan. However, there can be no
assurance that such extensions will be granted. If the maturity dates of the DIP
Credit Facility and Term Loan are not extended, it could have an adverse effect
on the Company's liquidity and financial condition.
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 first six months of fiscal 2000 were $2.8 million compared
to $8.7 million for the same period in fiscal 1999. 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 the potential cost
savings will be realized.
As part of the Company's long-range strategic plan, major capital projects
are planned. The major capital projects for fiscal 2000 are anticipated to be
blast furnace bosh repairs and installation of a tilting runner which will
require the blast furnace to be shut down for approximately 28 days. The
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Company is currently evaluating when it will commence the bosh reline project,
but anticipates that it will be in the fall of 2000. The project was originally
scheduled for fiscal 1999, but the Company's cash constraints required that it
be postponed. The Company's maintenance practices have currently allowed the
bosh to be stabilized such that operating activities have not been severely
impacted. However, due to accelerated deterioration of the bosh during the
second quarter of fiscal 2000, maintenance has been required more frequently.
The Company's management intends to repair the bosh in October 2000, and
believes, but there can be no assurance, that the blast furnace will be able to
operate at current production rates until that time. Should the bosh suffer
extensive deterioration such that relining is necessary, the Company expects to
have most materials on hand to perform the reline and hire contractors to
perform the reline, provided that financing is available, there is a waiver
obtained under the current Term Loan, and that liquidity, at that time, is
sufficient. In addition, if the repair of the bosh occurs during a period of
favorable market conditions, the Company may be unable to participate in such a
favorable market. The Company expects to spend approximately $7.9 million on
this project during fiscal 2000 and approximately $1.9 million in fiscal 2001.
On August 17, 1999, President Clinton signed the Loan Guarantee Act. The
Loan Guarantee Act will provide guarantees for up to $1 billion in loans to
qualified steel and iron ore companies, with no company receiving guarantees of
more than $250 million. These loans will be made by private sector lenders, with
the Federal Government providing a guarantee for up to 85 percent of the amount
of the principal of the loan. A loan guarantee may be issued upon application to
the Loan Board by a private banking or investment institution which has
committed to enter into an agreement to provide a loan to a qualified steel
company. The Bank of America, NA. filed an application under the Loan Guarantee
Act on January 31, 2000, for a 85% federal guarantee on a $130 million loan
which, if issued, will be used by the Company to reorganize and recapitalize its
business. Due to the deadline being extended, the application was supplemented
on February 28, May 16, May 22, and May 31, 2000, and a decision is expected by
the end of June 2000, with the Company being notified in July 2000. There can be
no assurance that the Loan Board will grant a guarantee, or that the amount will
be sufficient to meet the Company's capital requirements.
On April 21, 1995, the Company completed the acquisition of substantially
all of the assets and the assumption of certain liabilities (the "Acquisition")
of the Gadsden, Alabama facilities of Gulf States Steel, Inc. of Alabama (the
"Predecessor of the Company") from the Brenlin Group. In connection with the
Acquisition, GSS Holdings Corp ("GSS Holdings") 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 was expected to be dividend
distributions or loans from the Company. The promissory notes require GSS
Holdings to cause the Company to pay dividends to GSS Holdings to the maximum
extent allowed under the terms of the First Mortgage Notes Indenture and
applicable law until the GSS Holding notes are repaid in full. No dividends were
payable by the Company as of April 30, 2000. In addition, in connection with the
Acquisition, GSS Holdings issued a promissory note to the seller for which the
source of funds for repayment was 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, 2000. As noted above, the Company is prohibited
from making payments with respect to prepetition debt, except pursuant to
Bankruptcy Court approval.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. The most probable worst case
scenario could have resulted in a system failure or miscalculations causing
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disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company conducted an assessment of its exposure to disruption
associated with the Year 2000 issue. Many of its computer based transactional
business systems were subject to potential failure. The Company believed that it
could have been materially affected by such failures. In addition, certain
process control systems were also exposed. The Company was also vulnerable to
third-party failures to correct their systems but believed that such exposure
was minimal. In order to assess third-party compliance and progress on this
issue, the Company surveyed its suppliers. The Company believed that no material
contingencies existed that would require it to modify its products.
As previously reported last year in the Company's Form 10-K for the fiscal
year ended October 31, 1999, the Company recognized the serious nature of its
exposure under the Year 2000 Issue and developed a modification plan that would
minimize this exposure. It purchased and implemented Year 2000 compliant
software and consultant support, all of which was funded through operating cash
flows and borrowing on its DIP Credit Facility. The primary purchased software
was for an enterprise resource planning system which provides enhanced
productivity and customer service benefits in addition to mitigating potential
consequences of the Year 2000 problem. There were no significant costs incurred
related to the Year 2000 Issue during the six months ended April 30, 2000.
During the first six months of fiscal 2000, the transition into the Year
2000 occurred and only minor problems were experienced. These problems were
remedied quickly and there was no effect on the Company's financial position.
The Company continues to monitor its computer systems to ensure they are
operating properly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
------- -----------------------------------------------------
RISK
----
The Company does not hold any market risk sensitive instruments.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
------- -----------------
On July 1, 1999, the Company filed a voluntary petition seeking
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
The Company's operating results for fiscal 1999 and fiscal 1998 were severely
affected by, among other things, a dramatic surge in steel imports beginning in
the summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
price realization and shipments declined. Decreased liquidity made it impossible
for the Company to service its debt and fund ongoing operations. Therefore, the
Company sought protection under Chapter 11 of the Bankruptcy Code. The Company
filed a Plan of Reorganization with the Bankruptcy Court on May 22, 2000.
In addition to the environmental proceedings described in the Note 6 to the
accompanying financial statements, the Company has from time to time been a
party to legal proceedings relating to personal injuries sustained by employees.
The Company has made settlement payments in several employee personal injury
cases. The Company believes, however, that such settlement payments have not had
a material effect on its financial position, results of operations or liquidity.
The Company is not a party to any significant pending legal proceedings other
than litigation incidental to its normal business. The Company believes that
these proceedings will not have a material effect on its financial position,
results of operations or liquidity. The majority of such non-environmental
claims, including employee matters, against the Company are ordinarily covered
by insurance although the Company does have significant deductibles. There can
be no assurance, however, that insurance will be available in the future at
reasonable rates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
------- -------------------------------
The Company did not make its interest payments of approximately $12.8
million due each of April 15, 1999, October 15, 1999, or April 15, 2000, on the
Company's First Mortgage Notes, due 2003. The Company was also unable to cure
the default during the 30 day cure period from the original interest payment
dates, which resulted in a default under the terms thereof. As described above,
the Company filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy code on July 1, 1999. The Bankruptcy Code generally prohibits
the Company from making payments on unsecured, prepetition debt, including the
First Mortgage Notes, except pursuant to Bankruptcy Court approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a). Exhibit Index:
(27) Financial Data Schedule
(b). None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULF STATES STEEL, INC. OF ALABAMA
(Registrant)
6/5/00 /s/ Robert Schaal
--------------- ----------------------------------------------------
Date Robert Schaal, Chairman and Chief Executive Officer
(principal executive officer)
6/5/00 /s/ James R. Grimm
--------------- ----------------------------------------------------
Date James R. Grimm, Senior Vice President and CFO
(principal financial and accounting officer)
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