<PAGE>
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 January 31, 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)
<TABLE>
<S> <C>
Alabama 63-114 1013
- ----------------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
174 South 26th Street
Gadsden, Alabama 35904-1935
- ----------------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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.
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
FORM 10-Q
TABLE OF CONTENTS
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<CAPTION>
Item Page
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PART I - FINANCIAL INFORMATION
1. Financial Statements ................................................. 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 18
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>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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<S> <C>
Balance Sheets -
As of January 31, 2000 and October 31, 1999.................................... 4
Statements of Operations -
For the Three Months Ended January 31, 2000 and 1999........................... 5
Statements of Cash Flows -
For the Three Months Ended January 31, 2000 and 1999........................... 6
Notes to Financial Statements....................................................... 7
</TABLE>
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Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Balance Sheets (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
January 31, 2000 October 31, 1999
--------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,417 $ 1,551
Accounts receivable, less allowance for doubtful
accounts of $806 in 2000 and $941 in 1999 37,481 35,721
Inventories 45,083 37,861
Deferred income taxes 2,860 2,860
Prepaid and other current assets 6,303 9,461
------------ -------------
Total current assets 93,144 87,454
Noncurrent assets:
Property, plant and equipment (net of accumulated depreciation) 188,069 191,848
Deferred charges, less accumulated amortization of
$365 in 2000 and $199 in 1999 431 398
Other noncurrent assets 300 300
------------ -------------
Total assets $ 281,944 $ 280,000
============ =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities not subject to compromise
Current Liabilities:
Accounts payable $ 20,000 $ 19,795
Accrued payroll and employee benefits 9,888 11,101
Accrued workers compensation 3,099 2,933
Accrued other liabilities 4,705 6,637
Debtor-in-possession term loan (Note 5) 17,070 14,570
Debtor-in-possession credit facility (Note 5) 47,141 34,915
------------ -------------
Total current liabilities 101,903 89,951
Noncurrent liabilities:
Deferred postretirement health benefits 8,153 7,475
Accrued environmental expense 5,300 5,300
Deferred income taxes 2,860 2,860
------------ -------------
Total noncurrent liabilities 16,313 15,635
Liabilities subject to compromise (Note 2) 233,256 233,536
------------ -------------
Total liabilities 351,472 339,122
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 (498) (535)
Accumulated deficit (108,116) (97,673)
------------ -------------
Total stockholder's deficit (69,528) (59,122)
------------ -------------
Total liabilities and stockholder's deficit $ 281,944 $ 280,000
============ =============
</TABLE>
The accompanying notes are an integral part of the Financial Statements
4
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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 Three Months Ended
January 31, 2000 January 31, 1999
------------------ -----------------
<S> <C> <C>
Net sales $ 87,258 $ 74,623
Cost of goods sold, excluding depreciation 84,167 69,646
Depreciation and amortization 5,551 5,253
Selling, general and administrative expenses 4,371 4,568
------------ ------------
Operating loss (6,831) (4,844)
Other (income) expense
Interest expense (Contractual interest of $7.8 million for three
months ended January 31, 2000) 1,442 6,902
Interest income (6) (1)
------------ ------------
1,436 6,901
------------ ------------
Loss before restructuring items and income taxes (8,267) (11,745)
Restructuring items:
Professional fees 2,176 100
------------ ------------
Loss before income taxes (10,443) (11,845)
Provision for income taxes - -
------------ ------------
Net loss $ (10,443) $ (11,845)
============ ============
Basic and diluted loss per share $ (2.89) $ (3.28)
============ ============
Weighted average shares outstanding 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>
Three Months Ended Three Months Ended
January 31, 2000 January 31, 1999
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<S> <C> <C>
Operating Activities:
Net loss $ (10,443) $ (11,845)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 5,385 5,253
Amortization 166 374
Write down of officers' notes 37 -
Changes in operating assets and liabilities:
Accounts receivable (1,760) (1,984)
Inventories (7,222) (4,822)
Prepaid and other current assets 3,059 225
Accounts payable 205 (4,368)
Accrued payroll and employee benefits (369) (824)
Accrued interest payable 110 6,502
Other accrued liabilities (2,322) 1,904
------------- -----------
Net cash used by operating activities (13,154) (9,585)
------------- ------------
Investing Activities:
Capital expenditures (1,606) (5,360)
------------- ------------
Net cash used in investing activities (1,606) (5,360)
------------- ------------
Financing Activities:
Net borrowings on revolving credit agreement 12,226 13,577
Proceeds from debtor-in-possession term loan 2,500 -
Debt issue costs paid (100) -
Payments on long-term debt - (289)
------------ -----------
Net cash provided by financing activities 14,626 13,288
------------ -----------
Net decrease in cash and cash equivalents (134) (1,657)
Cash and cash equivalents at beginning of period 1,551 1,990
------------ -----------
Cash and cash equivalents at end of period $ 1,417 $ 333
============ ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,494 $ 400
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
January 31, 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 month periods ended January 31, 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 January 31, 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 first quarters of fiscal 2000 and fiscal 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 January 31, 2000 balance sheet.
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. Although the Company's reorganization
plan has not been finalized, the Company has implemented a restructuring program
to reduce costs, improve operating efficiencies and increase financial
flexibility.
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 are subject to a plan of
reorganization.
The Company intends to present a plan of reorganization to 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 has 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 a plan to April 30, 2000. On February 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") has been granted 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
305th day (April 30, 2000) after the Company's Chapter 11 filing, unless the
Company has failed to file a plan of reorganization by the 244th day (February
29, 2000) after its bankruptcy filing, in which case the Ad Hoc Noteholders
Committee may file a plan of reorganization on the 245th 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 has waived its right to file a plan prior to April 30, 2000 by reason
of the Company's failure to file a plan on or before February 29, 2000.
8
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In connection with a plan of reorganization, the Company anticipates that the
holders of the First Mortgage Notes will receive equity in exchange for the
First Mortgage Notes. It is also anticipated that lenders providing exit
financing to the Company will be issued equity as an incentive for providing
exit financing.
In accordance with SOP 90-7, the accompanying balance sheet as of January 31,
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>
January 31, October 31,
2000 1999
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<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) 14,512 14,476
Accrued Environmental Expenses (Unsecured) 7,900 7,900
Notes Payable (Secured Equipment Notes) 2,633 2,805
Vendor Notes Payable and Accrued Interest (Unsecured) 2,929 2,929
Real Estate and Personal Property Taxes (Unsecured) 1,733 1,877
Capitalized Lease Obligations (Secured) 686 686
----------- ----------
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.
A plan of reorganization 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, 2000, and a decision is
expected by May 30, 2000. Thirteen companies filed applications for loan
guarantees totaling $901.3 million. There
9
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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 27.2% and 20.5% of the Company's sales in the first quarter of fiscal
year 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 23.6% and 18.0% of the
Company's sales in the first quarter of fiscal year 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 10.4% and 15.9% of the Company's sales in the first quarter of
fiscal year 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 36.8% and 43.1% of the Company's sales in the first quarter of fiscal year
2000 and 1999, respectively.
The remaining sales of 2.0% and 2.5% in the first quarter of fiscal year 2000
and 1999, respectively, are from sales of coke, slabs and by-products.
Net sales by product line are as follows (dollars in thousands):
Quarter ended January 31,
---------------------------------------
2000 1999
----------- ----------
Hot-Rolled $ 23,699 $ 15,318
Cold-Rolled 20,622 13,422
Galvanized 9,069 11,863
Plates 32,096 32,136
Other 1,772 1,884
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Total $ 87,258 $ 74,623
======= ==========
The Company does not have any foreign sales, and all of the Company's tangible
assets are located in the continental United States.
10
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4. Inventories
Inventories consist of the following (dollars in thousands):
January 31, October 31,
2000 1999
----------- ----------
Raw materials $ 11,861 $ 5,896
Work-in-process 10,082 10,985
Finished goods 23,140 20,980
----------- ----------
$ 45,083 $ 37,861
=========== ==========
The Company had lower of cost or market reserves relating to inventory of
approximately $408,000 and $1,583,000 at January 31, 2000 and October 31, 1999,
respectively.
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 are currently
funding the Company's liquidity requirements.
The DIP Credit Facility is secured by the Company's accounts receivable and
inventories. At January 31, 2000, the interest rate on the DIP Credit Facility
was 9.25% and the accounts receivable and inventories supported access to $58.6
million, less applicable reserves of $3.3 million. There was $8.2 million
available under the DIP Credit Facility at January 31, 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 January 31, 2000, the interest rate on the Term
Loan was 13.5%.
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.
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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 January
31, 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 is due to expire
in October 2000. The Company is currently in negotiations with the USWA
regarding the contract expiring in October 2000, and management believes a
settlement will be reached. However, there can be no assurance that such a
settlement will be reached. 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. If an extended work stoppage
were to occur, or no settlement were to be reached, it could have a material
adverse effect on the Company's financial position, results of operations and
liquidity. In addition, prospective lenders have made a satisfactory settlement
with the USWA a condition to providing exit financing to the Company.
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 Part II, 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
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
12
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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 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 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 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. The 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 partial summary
judgement 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 Clean Water Act and therefore the Company
has no liability for those discharges as a matter of law. In the event a civil
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 the DOJ may require in determining the amount of the penalty. On
December 11, 1998, the Company filed an expedited petition 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 Clean Water Act 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
13
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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
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 has 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 Company, the DOJ, and the EPA
have been negotiating the terms of a potential consent decree that would settle
both the current Clean Water Act claims and any potential CERCLA claims that
could be asserted against the Company in the future. In light of these
discussions, a Pretrial Order was entered by the District Court for the Northern
District of Alabama on December 6, 1999, allowing discovery to proceed through
January 31, 2000, but reaffirming that the date for the Clean Water Act trial
remains set for March 27, 2000. On February 29, 2000, at a status conference,
the Company and the DOJ informed the District Court for the Northern District of
Alabama (the "District Court") that they have finalized the terms of a consent
decree that is expected to be lodged with the District Court and published in
the Federal Register for public comment during March 2000. The District Court
then entered an Order continuing the March 27, 2000 trial date and suspending
pretrial obligations of the parties, pending further order of the District
Court.
Based on the most recent draft consent decree provided to the Company on January
19, 2000, the Company believes that all pending claims under the Clean Water Act
and potential claims under CERCLA, will be resolved by a settlement, which is
expected to contain the following elements:
1. The Company has agreed to be assessed a civil penalty of
$8,000,000, however, because of the Company's bankruptcy
proceeding, the United States has agreed to accept a payment
of $100,000 on or before July 1, 2001, in settlement of the
Company's liability for penalties arising out of the alleged
violations of the Company's NPDES permit. The United States
agrees that the remainder of the assessed civil penalty of
$7,900,000 will be subordinated to all other claims and
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interests in the bankruptcy proceeding. Stipulated penalties
are also prescribed for any future violations of the Clean
Water Act.
2. The Company has agreed to undertake the construction of four
Supplemental Environmental Projects, expending the following
amounts on each: Plate Mill Scale Pit ($2,000,000); Water
Intake Flow Reduction ($200,000); Oil Lubrication System
Replacements ($150,000); and Oil Cellar Improvement Project
($150,000). These projects were recommended by the expert
engineering firm employed by the Department of Justice and
are designed to secure significant environmental protection
and improvements. In addition, not later than 18 months
after the date of the entry of a final judgment, the Company
will contribute $100,000 for the purchase of "ecologically
valuable land" for benefit of the Alabama Land Trust, which
will be responsible for retaining such land in its natural
condition in perpetuity.
3. The Company has agreed to pay to the EPA Hazardous Substance
Superfund $6,400,000. Monthly payments will be made in
installments of approximately $177,800 over 36 months into
an escrow account and will commence on the latter of July 1,
2001, or 30 days after the date that the EPA issues a formal
cleanup decision, i.e., an Action Memo or a Record of
Decision, pursuant to the National Contingency Plan, 40
C.F.R. Part 300. If the EPA has not commenced cleanup at the
site after the Company makes four monthly payments, the
Company may temporarily cease making payments until cleanup
commences. When the EPA issues a Certification of
Completion, any monies remaining in the escrow account will
revert to the Company. The Company also agreed to dispose of
up to 434,000 cubic yards of any sediment removed from Lake
Gadsden on the Company's property, or purchase no more than
30 acres of land within a 10 mile radius of Lake Gadsden, at
the option of the Company.
4. The United States will settle all pending claims under the
Clean Water Act and provide a Covenant Not to Sue or take
any other civil or administrative action against the
Company, pursuant to Sections 106 or 107(a) of CERCLA with
respect to any existing contamination at the site. However,
the Company reserves any and all rights (including, but not
limited to, any right to contribution), defenses, claims,
demands, and causes of action that it may have with respect
to any matter, transaction, or occurrence relating to the
facility or the site against any person that is not a party
to the consent decree.
Although the consent decree has not been finalized and requires the approval of
the Attorney General of the United States, the Administrator of the EPA, the
United States District Court for the Northern District of Alabama, and the
Bankruptcy Court, and therefore may be subject to further revision, it is the
Company's belief, after participating in these negotiations and having consulted
with legal counsel responsible for this case, that the final language of the
consent decree will not likely vary materially from the description provided
herein. Therefore, the Company has recorded a liability for such matters in the
amount of $13,300,000, using a present value calculation for the future
payments, for item 3) above. Of this amount, $7,900,000 is subject to
subordination in the bankruptcy proceeding and is thus reflected in the
accompanying balance sheets as prepetition Liabilities Subject to Compromise.
The remaining amount ($6,500,000 discounted to $5,400,000) is not subject to
compromise. However, there can be no assurance that the consent decree will be
accepted on the terms set forth above.
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
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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. The Company is in the process
of providing necessary documentation 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 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.
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.
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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 three months of fiscal year 2000 and 1999, capital expenditures
for environmental projects were $1.1 million and $0.8 million, respectively.
As of January 31, 2000, the Company has accrued $14.1 million for unresolved
environmental remediation matters, with $7.9 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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PART IV
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. Although the Company's
reorganization plan has not been finalized,
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the Company has implemented a restructuring program to reduce costs, improve
operating efficiencies and increase financial flexibility.
Results of Operations
Results of operations for an interim period are not necessarily indicative
of results for the full year.
Three Months Ended January 31, 2000 Compared to Three Months Ended January 31,
1999
Net Sales. Net sales increased 16.9% to $87.3 million for the first quarter
of fiscal year 2000 from $74.6 million for the first quarter of fiscal year
1999. This increase in revenues was primarily caused by shipments of 240,900
tons in the first quarter of fiscal 2000, which was 60,000 tons more than the
shipments of 180,900 tons in the same period in the prior fiscal year. The
increase in revenues from more tons shipped was slightly offset by a decrease in
the sales price from $402 per ton in the first quarter of fiscal 1999 to $355 in
the same period in fiscal 2000.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, increased
20.9% to $84.2 million for the first quarter of fiscal year 2000 from $69.6
million for first quarter of fiscal year 1999. As a percentage of net sales,
cost of goods sold, excluding depreciation, increased to 96.5% in the first
quarter of fiscal 2000 compared to 93.3% 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 increase in cost of goods sold as a percentage of
net sales is a result of the lower sales price per ton. Average manufacturing
costs for flat rolled products decreased $34 per ton shipped from $375 in the
first quarter of fiscal 1999 to $341 in the same period in fiscal 2000. This
decrease is a result of a higher sales and production volume. Depreciation and
amortization expense was $5.6 million for the first quarter of fiscal 2000
compared to $5.3 million in the same period in fiscal 1999. This increase was
primarily due to continuing expenditures for the Company's capital improvement
projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $4.4 million, or 5.0% of net sales in the
first quarter of fiscal 2000, from $4.6 million, or 6.1% of net sales in the
same period in fiscal 1999. This decrease was primarily due to reduced
management fee costs (fees paid to affiliates for management agreements and
insurance services were discontinued on July 1, 1999, due to the Chapter 11
filing), lower amortization expense, and other cost reductions. The decrease as
a percentage of sales is a result of higher sales.
Restructuring Expenses. Restructuring expenses for the first quarter of
fiscal 2000 were approximately $2.2 million which is $2.1 million higher than
the $0.1 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.
Operating Loss. As a result of the decline in sales price per ton of 11.7%,
which was somewhat offset by the decline in manufacturing costs of 9.0%, the
Company experienced an operating loss of $6.8 million in the first quarter of
fiscal 2000, which is $1.9 million higher than the operating loss of $4.9
million in the same period in fiscal 1999.
Interest Expense. Interest expense, net of interest income and capitalized
interest (approximately $0.2 million and $0.7 million in the first quarter of
fiscal 2000 and fiscal 1999,
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respectively), decreased to $1.4 million in the first quarter of fiscal 2000
from $6.9 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 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 first quarter of fiscal 2000.
Liquidity and Capital Resources
The Company's net cash used by operations was $13.2 million during the
first quarter of fiscal 2000 compared to cash used by operations of $9.6 million
for the same period in fiscal 1999. The primary reasons for this increase was a
build up of inventories to counter difficulties in obtaining raw materials due
to winter weather during the first quarter of fiscal 2000 and the Company not
accruing interest expense on the First Mortgage Notes, due to the bankruptcy
filing, during the first quarter of fiscal 2000. If this interest had been
accrued, the net loss would have been $16.8 million for the three months ended
January 31, 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, 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 January 31, 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 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 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 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
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funding the Company's liquidity requirements.
The DIP Credit Facility is secured by the Company's accounts receivable and
inventories. At January 31, 2000, the interest rate on the DIP Credit Facility
was 9.25% and the accounts receivable and inventories supported access to $58.6
million, less applicable reserves of $3.3 million. There was $8.2 million
available under the DIP Credit Facility at January 31, 2000.
The Term Loan is secured by the property, plant and equipment and certain
other collateral of the Company. At January 31, 2000, the interest rate on the
Term Loan was 13.5%.
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 January
31, 2000.
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 2000. 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, 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 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 quarter of fiscal 2000 were $ 1.6 million compared to
$5.4 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 of 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 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 allowed the bosh to be
stabilized such that operating activities are not adversely impacted. However,
should the bosh suffer further deterioration such that relining is necessary,
the Company expects to have all 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
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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, 2000, and a decision is expected by May 30, 2000. Thirteen
companies filed applications for loan guarantees totaling $901.3 million. 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 January 31, 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 January 31, 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
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
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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 three months ended January 31, 2000.
During the first quarter 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, and for the
three months ended January 31, 2000, 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.
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 April 15 and October 15, 1999, on the Company's 13 1/2% Series B
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:
10.22 (a) Final Preferred Supplier Continuous Credit Program
(27) Financial Data Schedule
(99) Business Plan
(b). No Exhibits on Form 8-K were filed by the Company during the three
months ended January 31, 2000
24
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
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)
3/15/00 /s/ Robert Schaal
- ----------- -----------------------------------------------------
Date Robert Schaal, Chairman and Chief Executive Officer
(principal executive officer)
3/15/00 /s/ James R. Grimm
- ----------- -----------------------------------------------------
Date James R. Grimm, Senior Vice President and CFO
(principal financial and accounting officer)
<PAGE>
Exhibit 10.22
GULF STATES STEEL, INC. OF ALABAMA
Preferred Supplier Continuous Credit Program
Each supplier listed on the attached schedule who offers the Debtor
post-petition credit terms at least equal to the lesser of (i) twice the number
of days that are listed on the schedule as "Current Trade Term Days," (but not
less than 30 days) or (ii) 45 days, or any supplier not listed on the attached
schedule who offers the Debtor post-petition credit terms of at least 45 days,
in all cases for a continuous period of at least 6 months ("Continuous Credit"),
shall receive the following treatment:
1. Such supplier's post-petition claim for Continuous Credit shall be
entitled to priority administrative expense status subordinate to all
claims of DIP lenders granted under Bankruptcy Code Section 364(c)(1).
2. Such supplier's post-petition claim for Continuous Credit shall be secured
by a collection lien as described below on all of Gulf States' assets that
are subject to the pre-petition security interest of the indenture trustee
with respect to Gulf States' 13 1/2% First Mortgage Notes and shall be
senior to such lien but shall be subordinate and junior to all liens of
any entities having claims for money borrowed under Bankruptcy Code
Section 364(d)(1).
3. After 6 months of Continuous Credit, and assuming Continuous Credit
continues to exist at the date each payment is due, the supplier shall
receive, at the Debtor's sole discretion, a credit extension fee in an
amount not to exceed the following percentages: the lower of (i) such
supplier's pre-petition debt or (ii) such supplier's cumulative average
monthly balance of post-petition debt, beginning the second month after
the supplier enters the Preferred Supplier Continuous Credit Program.
Maximum
Month Amount Cumulative Amount
----- ------ -----------------
7-12 1.25% 7.5%
13-18 1.00% 13.5%
19-35 2.00% 47.5%
36 2.50% 50.0%
4. The maximum aggregate amount of the debtor's pre-petition debt eligible to
receive a credit extension fee as described in number 3 above is $15
million and the maximum amount payable as a credit extension fee is $7.5
million.
<PAGE>
5. Such supplier's pre-petition claim shall be entitled to the same recovery,
if any, as is subsequently negotiated for all similarly situated unsecured
trade creditors with respect to pre-petition debt.
If a supplier ceases Continuous Credit before 6 months have elapsed, then
measurement of the 6 month period restarts from the time that the supplier next
begins to offer Continuous Credit.
If a supplier ceases Continuous Credit after the payments have begun as
described in Number 3 above, then the remaining payments shall resume at the
option of the Debtor after Continuous Credit resumes for a period of at least 3
months. During the cessation period, the supplier will not be entitled to status
as a secured creditor.
If a supplier never provides Continuous Credit, then that supplier shall be
entitled to (i) administrative expense claim status as statutorily provided with
respect to post-petition debt and, (ii) recovery, if any, as is subsequently
negotiated for all similarly situated unsecured trade creditors with respect to
pre-petition debt.
The "DIP Lenders" shall include any party to whom the Debtor becomes indebted
for money borrowed in any amount approved by the Court during the Debtor's
Chapter 11 case.
The collection lien provided to suppliers of Continuous Credit under the Program
shall entitle them to any collateral proceeds remaining after enforcement of
prior liens, but shall not entitle them to any right to accelerate, to commence
foreclosure or other enforcement proceedings, to demand marshalling, to receive
adequate protection or to any other rights or remedies, including, without
limitation to contest, object to or otherwise dispute the valuation of
collateral subject to the collection lien or any other action that holders of
senior liens may take with respect to such collateral, it being understood that
the collection lien provides for and pertains only to a right of a collection of
any remaining proceeds of such collateral.
The Debtor shall develop such rules and procedures as are necessary to carry out
the provisions of this Continuous Credit arrangement for suppliers.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GULF STATES
STEEL, INC. OF ALABAMA'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JANUARY 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 1,417
<SECURITIES> 0
<RECEIVABLES> 38,287
<ALLOWANCES> (806)
<INVENTORY> 45,083
<CURRENT-ASSETS> 93,144
<PP&E> 275,407
<DEPRECIATION> (87,338)
<TOTAL-ASSETS> 281,944
<CURRENT-LIABILITIES> 101,903
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> (69,528)
<TOTAL-LIABILITY-AND-EQUITY> 281,944
<SALES> 87,258
<TOTAL-REVENUES> 87,258
<CGS> 84,167
<TOTAL-COSTS> 89,718
<OTHER-EXPENSES> 6,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,436
<INCOME-PRETAX> (10,443)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,443)
<EPS-BASIC> (2.89)
<EPS-DILUTED> (2.89)
</TABLE>
<PAGE>
Exhibit 99
GULF STATES STEEL, INC. OF ALABAMA
BUSINESS PLAN
FISCAL YEARS 2000-2005
Forward - Looking Statements
This Business Plan contains 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 financing
and liquidity; 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.
The following projections were prepared internally by the Company's
management. Due to factors and variables both within and outside management's
control and because events and circumstances frequently do not occur as
expected, there may be material differences between projected and actual
results. The Company will not update the financial projections for events or
circumstances after the date hereof.
<PAGE>
PROJECTED FINANCIAL STATEMENTS
Gulf States' forecast is predicated upon management's best estimate of future
market share and pricing recovery . Management believes that its long-term
business strategy will be achieved through substantial capital expenditures
funded with proceeds from the proposed guaranteed financing and operating
earnings.
The financial projections presented were prepared by the management of Gulf
States as of January 2000, and are based on management's best estimate and
certain assumptions outlined below. Projections, by their nature, are based on
estimates and assumptions that are subject to change based on significant
economic and competitive factors beyond Gulf States' control.
ASSUMPTIONS:
1. The Asian economies gradually improve and no significant economic
slowdowns occur in the United States during the five-year projection
period.
2. Total 1999 volume was 845,902 tons. Sales volumes steadily increase
throughout fiscal year 2000 to reflect a continuing reduction of imports
as the Asian economies improve. Total 2000 volume is 1.0 million tons.
Sales volumes gradually increase from this level to 1.45 million tons in
2004. In 2005, volume levels off at 1.44 million tons. The increase from
2000 through 2005 reflects plant capital and productivity improvements and
the impact of implementing customer service and partnering arrangements
during these years.
3. Average selling prices were reviewed with an outside steel consultant,
Beddows & Company. The prices increase to $382, $412 and $422 per ton for
2000, 2001 and 2002, respectively as a result of: (i) decreased imports in
2000; (ii) increased volumes of higher-priced galvanized sales in 2001
(resulting from capital improvements to the cold mill, annealing and
galvanizing line); and (iii) increased volumes of higher-priced plate
sales in 2001 (resulting from capital improvements to the plate mill),
partially reduced by the impact of the opening of new plate mini-mills in
North Carolina and Mobile, Alabama. Beginning in 2003, average market
selling prices will decrease throughout the steel industry at a rate of
about 1% per year. Gulf States' prices are $423, $422, and $421 in 2003
through 2005, respectively.
4. Standard production costs are projected to decrease from $349 in 1999 to
$345 in 2000, and $340, $340, $333, $335, and $333 in 2001 through 2005,
respectively as a result of increased production levels, plant capital and
productivity improvements, reductions in certain labor and labor-related
costs, as reflected in a new five-year union agreement, and a change in
the product mix to a greater proportion of lower-cost products.
<PAGE>
5. Profit sharing expense, previously 26.25% (i.e., 16.5% union and 9.75%
non-union) of net income before profit sharing and tax expense is forecast
at zero, reflecting the terms of a proposed new labor agreement.
6. Reorganization expenses are forecast under the assumption that the
reorganization plan will be implemented on July 1, 2000.
7. The Preferred Supplier Credit Enhancement Fee is forecast assuming that
$10 million of credit qualifies for the program.
8. Income taxes are computed at 38% of income, assuming no net operating loss
carry-forward from periods prior to the time the Company is reorganized.
9. Historic, rather than fresh-start accounting, is used throughout the
projection period.
10. Retiree health benefits reflect amounts estimated under Statement of
Financial Accounting Standard 106 by Gulf States' actuary, Watson Wyatt &
Company, on November 30, 1998. These estimates were based on a discount
rate of 7% and on data, provisions, and health care rates as of November
1, 1997. The actuarial report covers the period through 2003. Gulf States
estimated amounts for 2004 through 2005 using a 6% annual increase in the
accrual and a $125,000 annual increase in the benefit payment amounts.
11. Claims subject to compromise are frozen throughout the forecast period.
12. Beginning July 1, 2000, the new working capital facility will use advance
rates of 85% of eligible Accounts Receivable and 65% on eligible raw
materials and eligible finished goods inventory (60% on semi-finished
steel).
13. Beginning July 1, 2000, the Company will borrow $90 million on a Term Loan
and will have the ability to borrow up to an additional $40 million as a
Capital Expenditures line, with both loans guaranteed pursuant to the
federal loan guarantee program established by the Emergency Steel Loan
Guarantee Act of 1999.
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
BUSINESS PLAN FINANCIAL PROJECTION
PROJECTED INCOME STATEMENTS (in 000s)
<TABLE>
<CAPTION>
Forecast Forecast Forecast Forecast Forecast Forecast
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES $387,915 $453,444 $481,898 $597,527 $617,591 $613,195
COST OF SALES $361,054 $382,520 $395,735 $483,073 $504,805 $503,367
------------------------------------------------------------------------
GROSS MARGIN $26,861 $70,924 $86,163 $114,454 $112,786 $109,828
GENERAL OVERHEAD:
Selling, general & administrative 16,627 17,700 18,230 18,761 19,293 19,826
Preferred supplier credit enhancement fee 1,150 2,200 1,650 -- -- --
------------------------------------------------------------------------
OPERATING CASH FLOW (before reorganization expense) $9,084 $51,024 $66,283 $95,693 $93,493 $90,002
Reorganization expense 10,736 -- -- -- -- --
------------------------------------------------------------------------
EBITDA ($1,652) $51,024 $66,283 $95,693 $93,493 $90,002
Depreciation and Amortization (using historical cost) 22,759 28,819 36,339 41,865 43,934 45,153
Interest expense for Working Capital,
Term and Capital Expenditure Loans 7,934 8,406 8,266 12,781 11,044 11,333
------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX ($32,345) $13,799 $21,678 $41,047 $38,515 $33,516
Income tax -- 2,173 8,238 15,598 14,636 12,736
------------------------------------------------------------------------
NET INCOME (LOSS) ($32,345) $11,626 $13,440 $25,449 $23,879 $20,780
========================================================================
</TABLE>
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
BUSINESS PLAN FINANCIAL PROJECTION
PROJECTED BALANCE SHEETS (in 000s)
<TABLE>
<CAPTION>
Forecast Forecast Forecast Forecast Forecast Forecast
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash $15,000 $15,000 $10,000 $10,000 $25,615 $10,000
Accounts receivable 36,716 40,434 43,069 53,774 55,632 55,225
Inventory 47,492 45,902 47,488 57,969 60,577 60,404
Deferred tax assets 2,860 2,860 2,860 2,860 2,860 2,860
Other current assets 4,577 2,513 2,579 2,647 2,716 2,790
-----------------------------------------------------------------
Current assets 106,645 106,709 105,996 127,250 147,400 131,279
Net fixed assets 193,906 236,463 300,304 284,360 263,357 239,427
Loan costs (DIP term loan, working capital) 7,301 5,758 4,215 2,672 1,129 100
-----------------------------------------------------------------
TOTAL ASSETS $307,852 $348,930 $410,515 $414,282 $411,886 $370,806
=================================================================
LIABILITIES AND EQUITY:
Accounts payable $33,242 $33,668 $34,831 $42,519 $44,431 $44,305
Other current liabilities 21,959 21,757 20,147 18,553 17,995 18,570
-----------------------------------------------------------------
Current liabilities 55,201 55,425 54,978 61,072 62,426 62,875
Working capital revolver 7,381 8,747 46,158 23,004 -- 41,389
Term loan 90,000 90,000 84,508 79,015 73,523 --
Capital Expenditure Line -- 25,000 38,474 36,033 33,592 --
Retiree health benefits 10,192 13,254 16,453 19,765 23,073 26,490
Deferred tax liabilities 2,860 2,860 2,860 2,860 2,860 2,860
Claims subject to compromise 233,647 233,447 233,447 233,447 233,447 233,447
-----------------------------------------------------------------
Total liabilities 399,281 428,733 476,878 455,196 428,921 367,061
-----------------------------------------------------------------
EQUITY (DEFICIT) (91,429) (79,803) (66,363) (40,914) (17,035) 3,745
-----------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY (DEFICIT) $307,852 $348,930 $410,515 $414,282 $411,886 $370,806
=================================================================
</TABLE>
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
BUSINESS PLAN FINANCIAL PROJECTION
PROJECTED CASH FLOW STATEMENTS (in 000s)
<TABLE>
<CAPTION>
Forecast Forecast Forecast Forecast Forecast Forecast
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) (32,345) 11,626 13,440 25,449 23,879 20,780
Depreciation and Amortization 22,797 28,819 36,339 41,865 43,934 45,153
---------------------------------------------------------------
(9,548) 40,445 49,779 67,314 67,813 65,933
Changes in operating assets and liabilities:
(Increase)Decrease in A/R (994) (3,718) (2,634) (10,705) (1,858) 407
(Increase)Decrease in Inventories (9,631) 1,589 (1,586) (10,481) (2,608) 173
(Increase)Decrease in Other Current Assets (2,631) 2,065 (66) (68) (70) (73)
Increase(Decrease) in Prepetition Debt (2,135) (200) -- -- -- --
Increase(Decrease) in A/P 13,447 426 1,163 7,687 1,913 (127)
Increase(Decrease) in Other Current Liabilities (921) (202) (1,610) (1,595) (558) 574
---------------------------------------------------------------
Net Cash Provided (Used) by Operations (12,413) 40,405 45,046 52,152 64,632 66,887
---------------------------------------------------------------
INVESTING ACTIVITIES:
Capital Expenditures on Plant and Equipment (23,904) (69,833) (98,637) (24,377) (21,388) (20,194)
---------------------------------------------------------------
Cash Used in Investing Activities (23,904) (69,833) (98,637) (24,377) (21,388) (20,194)
---------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds/(Repayments) of Revolving
Credit Facility 30,842 1,366 37,410 (23,154) (23,004) 41,390
Proceeds/(Repayments) of Term Loan 2,544 -- (5,492) (5,492) (5,492) (73,523)
Proceeds/(Repayments) of Equipment Financing -- 25,000 13,474 (2,441) (2,441) (33,592)
---------------------------------------------------------------
Cash Provided (Used) by Financing Activities 33,386 26,366 45,392 (31,087) (30,937) (65,725)
---------------------------------------------------------------
Other - Noncurrent Employee Benefits 2,717 3,062 3,199 3,312 3,308 3,417
---------------------------------------------------------------
Period Cash Flow (214) -- (5,000) -- 15,615 (15,615)
---------------------------------------------------------------
Beginning cash 15,214 15,000 15,000 10,000 10,000 25,615
---------------------------------------------------------------
Ending cash 15,000 15,000 10,000 10,000 25,615 10,000
===============================================================
</TABLE>
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
BUSINESS PLAN FINANCIAL PROJECTION
PROJECTED PROPERTY, PLANT & EQUIPMENT (in 000s)
<TABLE>
<CAPTION>
Forecast Forecast Forecast Forecast Forecast Forecast
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PROPERTY, PLANT & EQUIPMENT ADDITIONS
STRATEGIC FACILITY ADDITIONS
Plate Mill 364 -- -- -- -- --
HAGC, WR Bending, Plan View Rolling 200 7,600 2,200 -- -- --
Normalizing -- 80 5,220 2,700 -- --
Increased Heating 150 850 -- -- -- --
1000 PIW Project (Hot Mill) 150 9,350 34,050 2,450
Cold Mill
New Galvanize Line 200 17,700 7,100 -- -- --
New Pickle Line -- 6,800 29,700 3,500 -- --
Tandem Mill Upgrade -- -- -- 15 3,605 6,380
Tandem Mill Cleaning System -- -- 500 1,500 -- --
Coil Anneal Upgrade -- -- -- 150 6,450 1,400
4 HI Temper Mill Upgrade -- -- -- -- 350 650
Electric Arc Furnace -- -- -- -- -- 80
No. 2 Caster -- -- -- -- -- 180
No. 2 LMF -- -- -- -- -- 80
Blast Furnace 8,550 7,200 -- -- -- --
Melt Shop 200 800 -- -- -- --
Caster 800 2,200 500 -- -- --
-----------------------------------------------------------
Total Strategic Facility Additions $10,614 $52,580 $79,270 $10,315 $10,405 $8,770
-----------------------------------------------------------
GENERAL PLANT
General 10,727 9,530 8,620 9,000 8,580 8,720
Environmental Requirements 2,555 5,770 5,420 3,610 1,920 2,080
-----------------------------------------------------------
Total Primary & General Plant Additions $13,282 $15,300 $14,040 $12,610 $10,500 $10,800
-----------------------------------------------------------
Capitalized Interest 8 1,953 5,327 1,452 483 624
-----------------------------------------------------------
TOTAL CAPITAL IMPROVEMENTS $23,904 $69,833 $98,637 $24,377 $21,388 $20,194
===========================================================
</TABLE>
