-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9FR+4id0BlVBD1SpxWGgXu6FdgQFqY662j6jApqc/YGM9AcMIjM6mSf4oKKhmMY 4S3l3g0QOhRZ1LmhxV/tTQ== 0000950149-96-002086.txt : 19961231 0000950149-96-002086.hdr.sgml : 19961231 ACCESSION NUMBER: 0000950149-96-002086 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961230 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENEVA STEEL CO CENTRAL INDEX KEY: 0000860192 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 930942346 STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10459 FILM NUMBER: 96687362 BUSINESS ADDRESS: STREET 1: 10 SOUTH GENEVA ROAD CITY: VINEYARD STATE: UT ZIP: 84058 BUSINESS PHONE: 8012279000 10-K 1 10-K FOR FISCAL YEAR ENDED 09/30/96 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 1996, 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 NO. 1-10459 GENEVA STEEL COMPANY (Exact name of Registrant as specified in charter) UTAH 93-0942346 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10 SOUTH GENEVA ROAD VINEYARD, UTAH 84058 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (801) 227-9000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on ------------------- ------------------------ which registered ---------------- CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE NO PAR VALUE PACIFIC STOCK EXCHANGE WARRANTS TO PURCHASE CLASS A COMMON STOCK PACIFIC STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Class A Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Class A Common Stock on the New York Stock Exchange on November 29, 1996, was approximately $47,201,998. Shares of Class A Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. As of November 29, 1996, the Registrant had 13,574,641 and 19,151,348 shares of Class A and Class B Common Stock, respectively, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference in Parts II, III and IV of this Report: (1) Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1996 (Parts II and IV), and (2) Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on February 20, 1997 (Part III). 2 PART I ITEM 1. BUSINESS. BACKGROUND Geneva Steel Company (the "Company" or "Geneva") owns and operates the only integrated steel mill operating west of the Mississippi River. The Company's mill manufactures steel slabs and hot-rolled sheet, plate and pipe products for sale primarily in the western and central United States. The steel mill is located 45 miles south of Salt Lake City, Utah on approximately 1,400 acres. The steel mill's facilities include four coke oven batteries, three blast furnaces, a plasma-fired cupola ironmaking facility, two Basic Oxygen Process ("Q-BOP") furnaces, a continuous casting facility, a combination continuous rolling mill and various finishing facilities. The Company's coke ovens produce coke from a blend of various grades of metallurgical coal. Coke is used as the principal fuel for the Company's blast furnaces, which convert iron ore into liquid iron. The liquid iron is then blended with scrap metal and metallic alloys and further refined in the Q-BOP furnaces to produce liquid steel. The liquid steel is then processed through the continuous casting facility. Steel slabs are either direct rolled or allowed to cool and then reheated prior to rolling. Slabs are rolled into hot-rolled steel products (sheet, plate and pipe) in the Company's rolling and finishing mills. The Company also sells a portion of its slabs to other steel processors. The Company acquired the steel mill and related facilities from USX Corporation ("USX") on August 31, 1987 at a price of approximately $44.1 million plus the assumption of certain liabilities. USX had operated the mill from 1944 until 1986, when it placed the mill on hot-idle status. Pursuant to the acquisition agreement between USX and the Company, USX retained liability for retiree life insurance, health care and pension benefits relating to employee service prior to the acquisition. USX also indemnified the Company for costs due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of environmental laws or otherwise results in the imposition of environmental liability, subject to the Company's sharing the first $20 million of certain clean-up costs on an equal basis. See "Environmental Matters." Since the Company began operations, its strategy has been to be a low-cost producer of steel products and to optimize its product quality and mix. CAPITAL PROJECTS Overview The Company has spent approximately $165 million, $68 million and $26 million on capital projects during the fiscal years ended September 30, 1994, 1995 and 1996, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization efforts. Management believes that the modernization projects completed to date have resulted in production efficiencies, increased throughput capacity and improved product quality and yield. The Company's capital projects are under continuous review, and depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. There can be no assurance that the projected benefits of the capital projects will be fully achieved, sufficient product demand will exist for the Company's additional throughput capacity, or that the planned capital projects can be completed in a timely manner or for the amounts budgeted. Notwithstanding the completion of many capital projects, management believes that additional, capital projects will be critical to the Company's long-term ability to compete and will require substantial expenditures. Capital Projects As a part of its capital plan, the Company has (i) completed a new continuous casting facility and related improvements, (ii) installed two Q-BOP furnaces, (iii) completed a direct rolling and large coil project, including installation of a coilbox and a 42-megawatt induction slab heating furnace, (iv) completed a wide coiled plate project, (v) installed a plasma-fired cupola ironmaking facility, (vi) installed various environmental projects, and (vii) completed various other projects. The following discussion highlights the major projects completed during fiscal year 1996 or which remain to be completed. 1 3 Plasma - Fired Cupola. The Company's new plasma-fired cupola ironmaking facility became available for operation during the year ended September 30, 1996. The cupola functions similar to a blast furnace although it utilizes only a fraction of the coke required by a blast furnace to produce liquid iron. The cupola can melt scrap steel, directly reduced iron or other metallic inputs. The cupola utilizes electric plasma technology as a secondary fuel source to further reduce coke requirements and substantially increase its capacity. The technology represents a means of meeting short-term ironmaking needs, providing a broader flexibility of inputs and decreasing coke requirements. The cupola is being used to supplement blast furnace iron production during the reline of one of the Company's blast furnaces and may also be used during periods when scrap prices are favorable or during other periods requiring supplementary ironmaking capacity. Rolling Mill Finishing Stand Improvements. The Company has a six-stand 132-inch combination continuous rolling mill, the widest of its type in the world, which gives the Company the flexibility to alter its mix of sheet and plate products in response to customer demands and changing market conditions. The final phase of the rolling mill modernization includes hydraulic gauge control, roll bending and automatic roll change. These improvements are designed to enhance the shape and gauge of the Company's products and to increase throughput capacity. Substantially all of the equipment for the rolling mill finishing stand improvements was completed during fiscal year 1996. The Company elected to defer installation of that equipment until fiscal year 1997 and 1998. The Company anticipates that it may incur significant start-up and transition cost as the finishing stand equipment is installed and implemented. Induction Slab Heating Furnace. The Company has installed a 42-megawatt induction slab heating furnace, which is located in-line with the Company's caster and rolling mill. The induction furnace has enabled the Company to increase production of large coils. The Company continues to evaluate its slab heating requirements and may elect to install additional heating capacity to increase production throughput rates. Development Venture The Company has formed a joint venture with Air Products and Chemicals, Inc. and Centerior Energy Corporation, which in turn entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a COREX(R) direct ironmaking facility and associated power generation and air separation facilities. This project, known as Clean Power from Integrated Coal/Ore Reduction (CPICOR(TM)), was selected under the United States Department of Energy's Clean Coal Technology Demonstration Program. The project includes construction and operation of a 3,000 ton per day COREX(R) cokeless ironmaking unit. Potential advantages of the project for the Company include additional ironmaking capacity, decreased dependence on coke, increased utilization of low-cost western raw materials and various environmental benefits. As of September 30, 1996, the Company had spent approximately $0.8 million on the project. The project, which includes up to $150 million in cost share funding from the Department of Energy, is anticipated to start-up no sooner than 2000 and is still subject to a number of contingencies, including obtaining private financing, continuing availability of the government funding and completion of project definition activities relating to the economic viability of the project. Under certain circumstances, the Company may be required to repay some or all of the government cost share funds in the event the project is terminated. PRODUCTS The Company's principal products are steel slabs and hot-rolled sheet, plate and pipe products. The Company also sells non-steel materials that are by-products of its steelmaking operations. The Company has a 132-inch combination continuous rolling mill, the widest of its type in the world, which gives the Company the flexibility to alter its mix of sheet and plate products in response to customer demands and changing market conditions and the opportunity to maximize utilization of the facilities. Generally, the Company manufactures products in response to specific customer orders. During fiscal year 1996, the Company increased its percentage of plate and slab products sold. Consistent with the Company's strategic objectives, plate shipments have increased as various upgrades to plate processing and finishing equipment have been integrated into the production process. The Company sells slabs to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. The Company expects that slab shipments will gradually decrease as rolling mill throughput improves. Product mix shifts are also 2 4 determined by Geneva's product mix optimization efforts. These efforts generally allow Geneva to focus on products with the highest margin contribution. The Company's product sales mix for fiscal years 1992 through 1996 is shown below:
--------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Sheet ........ 45% 56% 65% 41% 30% Plate ........ 41 31 24 35 45 Pipe ......... 11 10 7 6 6 Slab ......... -- -- 1 15 16 Non-steel .... 3 3 3 3 3 --- --- --- --- --- Total 100% 100% 100% 100% 100% === === === === ===
Sheet. The mill produces hot-rolled sheet steel which is sold in sheet or coil form in thicknesses of .96 to .230 of an inch and widths of 40 to 74 inches. Maximum widths vary according to thickness. Included in the sheet products made by the Company are cut-to-length sheet, hot-rolled bands and tempered coil. Sheet is used in a variety of applications such as storage tanks, light structural components and supports and welded tubing. Plate. The Company's plate products consist of hot rolled carbon and high-strength low alloy steel plate in coil form, cut-to-length from coil and flat rolled in widths varying from 48 to 126 inches and in thicknesses varying from .1875 of an inch to 3 inches. Plate can be used for heavy steel structures such as storage tanks, railroad cars, ships and bridges. Pipe. The Company produces electric resistance welded pipe ("ERW pipe") ranging from approximately 7 to 16 inches in diameter. ERW pipe is manufactured by heating and fusing the edges of the steel coil to form the pipe. The Company's ERW pipe is used primarily in pipelines, including water, natural gas and oil transmission and distribution systems, and in standard and structural pipe applications. Slab and Non-Steel. The Company sells steel slabs when market conditions are favorable and as a means of maximizing production through the continuous caster. The Company also sells products produced by its foundry operation and various by-products resulting from its steelmaking activities. MARKETING; PRINCIPAL CUSTOMERS The Company sells its sheet and plate products primarily to steel service centers and distributors, which in recent years have become one of the largest customer groups in the domestic steel industry. Service centers and distributors accounted for approximately 62% of the Company's finished product sales (excluding slabs) in fiscal year 1996. The Company also sells its products to steel processors and various end-users, including manufacturers of welded tubing, highway guardrail, storage tanks, railcars, ships and agricultural and industrial equipment. The Company believes that sales of its products, either directly or through service centers or distributors, to automotive or appliance manufacturers have been immaterial. The Company has developed a broad customer base. In fiscal year 1996, the Company sold its products domestically to approximately 265 customers in 38 states and abroad through exporters to eight customers in Canada, Mexico and Italy. The Company sells its ERW pipe to end-users and through distributors primarily in the western and central United States, where demand for pipe fluctuates in partial response to oil and gas industry cycles. The Company also occasionally sells products in the export market. Export sales, which generally have lower margins than domestic sales, accounted for approximately 0.3%, 1.3% and 0.7% of the Company's net sales during fiscal years 1994, 1995 and 1996, respectively. The Company's principal direct marketing efforts are in the western and central United States. Six sales representatives are employed in the western market, two of whom are located in the greater Los Angeles area, the largest single market for steel in the western United States. The Company believes that it holds a significant market share of the hot-rolled sheet, plate and pipe sales in the eleven western states. In the central United States, the Company currently has a small share of the market. Management believes, however, that there are attractive opportunities for revenue growth in this market. Substantially all of Geneva's sales in the 3 5 central United States are made through a sales arrangement with Mannesmann Pipe and Steel Corporation ("Mannesmann"), the United States steel marketing subsidiary of Mannesmann A.G., a major German industrial company. The sales arrangement entitles Mannesmann to sell the Company's products in 15 central states and to certain of the Company's customers in the eastern United States, and to receive a variable commission on its sales. Mannesmann has an exclusive right to sell the Company's products in these areas, subject to certain exceptions. The payment terms provide that Mannesmann make a production prepayment of up to $15 million. The prepayment arrangement is subject to certain financial covenants and rights of termination. The prepayment is recorded as a production prepayment until the product is shipped, at which time the sale is recorded. Mannesmann accounted for approximately 36% and 31% of the Company's net sales in fiscal years 1995 and 1996, respectively. Any termination or disruption of the Company's arrangements with Mannesmann could have a material adverse effect on the Company's results of operations and financial condition. The Company's strategy is to maintain its core market in the western United States, where its market position is the strongest, and to increase growth in the midwest and eastern regions, while focusing on profit maximization. The Company believes that service centers and distributors account for a substantially larger proportion of its sales than of sales for the industry as a whole. Demand from this customer group historically has experienced wide fluctuations due to substantial changes in the group's inventory levels. In view of these factors, the Company intends to develop a somewhat more diverse customer base, including selected steel processors and various end-users, while retaining strong relationships with service center and distributor customers. The Company expects its modernization efforts to play a critical role in the implementation of these strategies by enabling the Company to produce higher quality products and to gain access to a wider range of customers. The Company generally produces steel in response to specific orders. As of November 30, 1996, the Company had estimated total orders on hand for approximately 210,000 tons compared to approximately 274,000 tons as of November 30, 1995. The Company does not believe that its orders on hand are necessarily indicative of future operating results. EMPLOYEES; LABOR AGREEMENT The Company has a workforce of approximately 2,655 full-time employees, of whom approximately 520 are salaried and approximately 2,135 are hourly. The Company's 165 operating management personnel generally have had considerable experience in the steel industry. Almost half have more than 20 years of industry experience, with most of the remaining managers ranging in experience from 10 to 20 years. The Company's senior operating managers have an average of over 25 years of industry experience. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under a collective bargaining agreement that expires in March 1998. The Company believes that its labor agreement is an important competitive advantage. Although the Company's wage rates under the agreement are high by local standards and comparable to regional competitors, its total hourly labor costs are substantially below recent industry averages compiled by the American Iron and Steel Institute. Unlike labor agreements negotiated by many other domestic integrated steel producers, the Company's labor agreement does not contain traditional work rules, limits the Company's financial pension obligations to a defined contribution plan and entitles the Company to reduce its profit sharing obligations by an amount equal to a portion of its capital expenditures. The Company did not assume any pension obligations or retiree medical obligations related to workers' service while the plant was owned by USX. The Company's labor agreement also contains a performance dividend plan designed to reward employees for increased shipments of steel products. Compensation under the plan includes a monthly guarantee of $.33 per hour for all union represented workers. The guaranteed payment is based on an annualized shipment rate of 1.5 million tons. As shipments increase above this level, compensation under the plan also increases. The Company has also implemented a performance dividend plan for all non-union employees that provides additional compensation as shipment levels increase. Unlike the union plan, however, there are no guaranteed payments. The Company's profit sharing obligations under the labor agreement are based on earnings before taxes, extraordinary items and profit sharing. Unlike the profit sharing arrangements of many major domestic integrated steel producers, the Company's profit sharing obligations are reduced by an amount equal to a portion of its capital expenditures. The Company is required to contribute each year to the profit sharing pool 10% of earnings before taxes, extraordinary items 4 6 and profit sharing after deducting 25% of the first $50 million of capital expenditures and 30% of all additional capital expenditures in such year (including, in each case, capital maintenance). All payments made to workers under the union performance dividend plan are deducted from any profit sharing obligations otherwise required. Effective March 1, 1995, the Company established a voluntary employee beneficiary association trust ("VEBA Trust") to fund post retirement medical benefits for future retirees covered by the collective bargaining agreement. Company contributions to the VEBA Trust are ten cents for each hour of work performed by employees covered by the collective bargaining agreement. In addition, union employees provide a contribution to the VEBA Trust based on a reduction from the performance dividend plan payment. No benefits will be paid from the VEBA Trust prior to March 31, 1998. Eligibility requirements and related matters will be determined at a later date. RAW MATERIALS AND RELATED SERVICES The Company is located near major deposits of several of the principal raw materials used to make steel, including iron ore, high volatile coal, limestone and natural gas. The Company believes that, in certain instances, this proximity, together with the Company's importance as a customer to suppliers of these materials, enhances its ability to obtain competitive terms for these raw materials. As the Company evaluates emerging technologies for the production of iron and steel, it focuses on those technologies that allow increased utilization of resources available in the western United States. Iron Ore. The Company's steelmaking process can use both iron ore and iron ore pellets. In recent years, the Company has used a high percentage of iron ore pellets in an effort to maximize the operating efficiencies of its blast furnaces in response to increased production needs. Iron ore pellets are generally purchased from USX, as discussed below, as well as on the spot market. The Company has iron ore deposits at mines in Utah. The ore is mined by an independent contractor under claims owned by the Company and transported by railroad to the steel mill. The Company expects future costs of recovery of this ore to increase gradually as the open reserves are depleted. The Company has historically purchased iron ore pellets from USX. Pursuant to a five year agreement entered into as of September 1, 1994, the Company has commitments to purchase at least 2,160,000 net tons in the third year of the agreement and 1,890,000 net tons in each of the fourth and fifth years of the contract. The agreement also limits the maximum quantity of pellets USX is obligated to supply. The remainder of the Company's pellet requirements is generally purchased on the spot market. The Company may in the future elect to purchase additional amounts of pellets on a longer-term basis. Coal and Coke. The coke batteries operated by the Company require a blend of various grades of metallurgical coal. The Company currently obtains high volatile coal from a mine in western Colorado owned by Oxbow Carbon and Minerals, Inc. under a contract that expires in March 2004. The Company also purchases various grades of coal under short-term contracts from sources in the eastern United States. Although the Company believes that such coal is available from several alternative eastern suppliers, the Company is subject to price volatility resulting from fluctuations in the spot market. There can be no assurance that the Company's blend of coal will not change or that its overall cost of coal will not increase. The Company is currently purchasing imported coke as a result of its increasing steel production and decreasing capacity to produce its own coke as the Company's coke ovens deteriorate. The ability of other domestic integrated steel mills to produce coke is also decreasing, thereby increasing the demand for purchased coke in the United States. The Company purchases coke from sources in Japan and China. As the Company's consumption of purchased coke increases, the Company's average cost of coke used in the manufacturing process will be higher. Energy. The Company's steel operations consume large amounts of oxygen, electricity and natural gas. The Company purchases oxygen, nitrogen and argon from two facilities located on the Company's premises which were constructed by Air Liquide America Corporation ("Air Liquide") and Praxair, Inc. ("Praxair"), respectively. These facilities are capable of providing approximately 280 and 550 tons of oxygen per day under contracts which expire in 1998 and 2006, respectively. Air Liquide has agreed to construct a new facility to accommodate the Company's increased production levels. Under a new agreement expiring 15 years from the date of first delivery of product (presently estimated in March 1997), the Company will have the right to receive an average of 800 tons of gaseous oxygen per day from the new facility. Praxair will also continue to supply product to the Company from its facility. The Company pays a monthly charge to Praxair for the 5 7 right to receive 100% of Praxair's production and will pay a monthly charge to Air Liquide to receive contract tonnages of oxygen when the new facility is completed. The Company generates a substantial portion of its electrical requirements using a 50 megawatt rated generator located at the steel mill and currently purchases most of its remaining electrical requirements from Utah Power & Light Company ("UP&L") under a 90 megawatt interruptible power contract expiring in 1999. The contract provides for price increases tied to the cost of energy used by the utility to produce electricity. The Company has also entered into a firm power contract expiring in 1999 with UP&L under which the Company purchases additional electrical needs. The firm contract provides for energy charges and price increases similar to the interruptible contract but also includes a significantly higher capacity charge. The Company also has other short-term contracts for additional power needs. Natural gas is purchased at the wellhead in the Rocky Mountain region and is transported to the steel mill by pipeline. The Rocky Mountain region has substantial natural gas reserves. Other. The Company's mill is served by both the Burlington Northern Santa Fe Railroad ("BNSF") and the Union Pacific Railroad Company ("UP"). The Company believes that it is one of the largest western customers of the UP railroad. The Company's location in the western United States facilitates backhauling, which reduces freight costs. In connection with the recent merger of the UP and Southern Pacific Transportation Company, the Company negotiated a long-term transportation contract with the UP intended to maintain a competitive rate structure. The terms of the contract, together with certain merger conditions, permit the Company to seek bids from the BNSF for a portion of its transportation needs. The Company also owns mining claims in a limestone quarry located approximately 30 miles from the Company's plant. The limestone is mined by the Company and transported by railroad to the mill. The Company uses scrap metal obtained from its own operations and external sources in its steelmaking process. As the Company increases its production volume, improves yield or implements steelmaking technologies that utilize scrap, such as the plasma-fired cupola, management anticipates that increased amounts of scrap will be purchased. The cost of the Company's raw materials, including energy, has been susceptible in the past to fluctuations in price and availability and is expected to increase over time. Worldwide competition in the steel industry has frequently limited the ability of steel producers to raise finished product prices to recover higher raw material costs. The Company's future profitability will be adversely affected to the extent it is unable to pass on higher raw material costs to its customers. COMPETITION AND OTHER MARKET FACTORS The Company competes with domestic and foreign steel producers on the basis of price, quality and service. Many of the Company's competitors are larger companies, have greater capital resources and, in some cases, more modern technology than the Company. Intense worldwide sales competition exists for all the Company's products. Both the industry and the Company face increasing competition from producers of certain materials such as aluminum, composites, plastics and concrete. The Company believes that certain of its raw material arrangements, particularly with respect to energy, and its current labor contract are favorable in relation to those of the domestic steel industry as a whole. The Company currently purchases iron ore pellets and a significant portion of its coal requirements from locations in the midwest and eastern United States, for which it has a transportation cost disadvantage. The Company believes that its geographic location enhances its ability to compete in the western United States, although it has a transportation disadvantage in midwestern and eastern markets. Product quality has improved significantly as a result of the Company's modernization efforts. The Company is presently at a competitive disadvantage with respect to certain product quality factors particularly with respect to sheet products. The Company believes, however, that its ongoing modernization efforts have enhanced the competitiveness of its products, particularly with respect to plate products. Standards of quality in the steel industry are, nevertheless, rising as buyers continually expect higher quality products. Foreign and domestic producers continue to invest heavily to achieve increased production efficiencies and product quality. The steel industry is cyclical in nature and highly competitive. Moreover, overall throughput capacity and competition are increasing due primarily to construction of mini-mills and improvements in production efficiencies at 6 8 existing mills. The Company, like other steel producers, is highly sensitive to price and production volume changes. Consequently, downward movements have had and will continue to have an adverse effect on the Company's results of operations. Integrated steel producers are facing increasing competitive pressures from mini-mills. Mini-mills use ferrous scrap metal as their basic raw material and serve regional markets. These operations traditionally produced lower margin, commodity type steel goods such as bars, rods and structural products. A number of mini-mills, however, produce plate, coil and pipe products that compete directly with the Company's products. Three mini-mills have been completed or are constructing facilities that will produce wide plate in coil form, thereby competing with products produced by the Company. Of these facilities, two have begun operations and the third will begin operations in the spring of 1997. Recently developed thin slab/direct rolling techniques have also allowed mini-mills to produce some of the types of sheet products that have traditionally been supplied by integrated producers. Several competitors have constructed or are constructing mini-mill facilities that are expected to significantly increase domestic steel production and thereby further increase competition. Foreign competition is a significant factor in the steel industry and has adversely affected product prices in the United States and tonnage sold by domestic producers. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against several other currencies as well as the strength of the United States economy relative to foreign economies. In addition, many foreign steel producers are controlled or subsidized by foreign governments whose decisions concerning production and exports may be influenced in part by political and social policy considerations as well as by prevailing market conditions and profit opportunities. Domestic pricing for all of the Company's products has been adversely affected by unfairly traded imports. In November 1996, the Company, together with another domestic plate producer, filed anti-dumping petitions with the Department of Commerce and the International Trade Commission ("ITC") against imports of cut-to-length carbon plate from the Russian Federation, Ukraine, the Peoples' Republic of China and the Republic of South Africa (the "Plate Trade Cases"). The petitions allege large dumping margins and also set forth the injury to the U.S. industry caused by these dumped imports. On December 18, 1996 the ITC made an affirmative preliminary injury determination with respect to all of the Plate Trade Cases. The Commerce Department will make its preliminary dumping margin determinations in April 1997. The Company expects that the ITC's preliminary determination will result in fewer plate imports from the subject countries during calendar 1997. Cut-to-length plate products from other countries not subject to the Plate Trade Cases, such as India, may, however, increase. The final outcome of the Plate Trade Cases will likely be decided by November 1997. Failure to win the Plate Trade Cases would have a material adverse effect upon the Company. The Company continues to monitor the levels of unfair imports of all types of products produced by the Company and may file additional trade cases in the future. The Company has also filed a civil lawsuit in Federal District Court against two defendants which the Company believes have facilitated the importation of dumped plate products. Existing trade laws and regulations may be inadequate to prevent unfair trade practices whereby imports could pose increasing problems for the domestic steel industry and the Company. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in the Company's business. The Company is subject to federal, state and local environmental laws and regulations concerning, among other things, air emissions, wastewater discharge, and solid and hazardous waste disposal. The Company believes that it is in compliance in all material respects with all currently applicable environmental regulations. The Company has incurred substantial capital expenditures for environmental control facilities, including the Q-BOP furnaces, the wastewater treatment facility, the benzene mitigation equipment, the coke oven gas desulfurization facility and other projects. The Company has budgeted a total of approximately $200,000 for environmental capital improvements in fiscal years 1997 and 1998. Environmental legislation and regulations have changed rapidly in recent years and it is likely that the Company will be subject to increasingly stringent environmental standards in the future. Although the Company has budgeted capital expenditures for environmental matters, it is not possible at this time to predict the amount of capital expenditures that may ultimately be required to comply with all environmental laws and regulations. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the U.S. Environmental Protection Agency and the states have authority to impose liability on waste generators, site owners and operators and others regardless of fault or the legality of the original disposal activity. Other environmental laws and regulations may also impose liability on the Company for conditions existing prior to the Company's acquisition of the steel mill. 7 9 At the time of the Company's acquisition of the steel mill, the Company and USX identified certain hazardous and solid waste sites and other environmental conditions which existed prior to the acquisition. USX has agreed to indemnify the Company (subject to the sharing arrangements described below) for any fines, penalties, costs (including costs of clean-up, required studies, and reasonable attorneys' fees), or other liabilities for which the Company becomes liable due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of any environmental law, is otherwise required by applicable judicial or administrative action, or is determined to trigger civil liability (the "Pre-existing Environmental Liabilities"). The Company has provided a similar indemnity (but without any similar sharing arrangement) to USX for conditions that may arise after the acquisition. Although the Company has not completed a comprehensive analysis of the extent of the Pre-existing Environmental Liabilities, such liabilities could be material. Under the acquisition agreement between the two parties, the Company and USX agreed to share on an equal basis the first $20 million of costs incurred by either party to satisfy any government demand for studies, closure, monitoring, or remediation at specified waste sites or facilities or for other claims under CERCLA or the Resource Conservation and Recovery Act. The Company is not obligated to contribute more than $10 million for the clean-up of wastes generated prior to the acquisition. The Company believes that it has paid the full $10 million necessary to satisfy its obligations under the cost-sharing arrangement. USX has advised the Company, however, of its position that a portion of the amount paid by the Company may not be properly credited against Geneva's obligations. Although the Company believes that USX's position is without merit, there can be no assurance that this matter will be resolved without litigation. The Company believes that resolution of this matter will not likely have a material adverse effect. The Company's ability to obtain indemnification from USX in the future will depend on factors which may be beyond the Company's control and may also be subject to dispute. ITEM 2. PROPERTIES. The Company's principal properties consist of the approximately 1,400-acre site on which the steel mill and related facilities are located, the Company's iron ore mines in southern Utah and the limestone quarry near the steel mill. The Company also leases from the State of Utah, under a lease expiring in 2016, a 300-acre site which includes a retention pond. The retention pond is a significant part of the Company's water pollution control facilities. Although the Company's facilities are generally suitable to its needs, the Company believes that such facilities will continue to require future improvements and additional modernization projects in order to remain competitive. See Item 1. "Business--Capital Projects" and "--Competition and Other Market Factors." ITEM 3. LEGAL PROCEEDINGS. In addition to the matters described under Item 1. "Business--Environmental Matters," the Company is a party to routine legal proceedings incidental to its business. In the opinion of management, after consultation with its legal counsel, none of the proceedings to which the Company is currently a party to are expected to have a material adverse effect on the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. 8 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock is listed and traded on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the symbol "GNV." The following table sets forth, for the periods indicated, the high and low sales prices for the Class A Common Stock as reported on the NYSE Composite Tape.
Fiscal Year Ended September 30, 1995 HIGH LOW First Quarter ended December 31 $18 $12 1/4 Second Quarter ended March 31 16 9 3/4 Third Quarter ended June 30 12 7 1/8 Fourth Quarter ended September 30 9 3/4 7 3/4 Fiscal Year Ended September 30, 1996 HIGH LOW First Quarter ended December 31 $ 8 $6 3/8 Second Quarter ended March 31 8 1/4 5 1/8 Third Quarter ended June 30 7 1/8 5 1/4 Fourth Quarter ended September 30 5 1/2 3 1/8
As of November 29, 1996, the Company had 13,574,641 shares of Class A Common Stock outstanding, held by 643 stockholders of record, and 19,151,348 shares of Class B Common Stock outstanding, held by five stockholders of record. Shares of Class B Common Stock are convertible into shares of Class A Common Stock at the rate of ten shares of Class B Common Stock for one share of Class A Common Stock. There is no public market for the Class B Common Stock. The Company currently anticipates that it will retain all available funds to finance its capital expenditures and other business activities, and it does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company's revolving credit facility and senior notes restrict the amount of dividends that the Company may pay. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 2 of Notes to Consolidated Financial Statements included in this Report. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference to page 8 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference to pages 10 through 16 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference to pages 17 through 34 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 9 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the sections entitled "Election of Directors -- Nominees for Election as Directors" and "Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 20, 1997. The definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 1996, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the sections entitled "Election of Directors -- Director Compensation" and "Executive Compensation" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 20, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled "Principal Holders of Voting Securities" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 20, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On September 27, 1996, the Company entered into an agreement to loan up to $500,000 to its Chief Executive Officer. On September 27, 1996 and October 4, 1996, the Company loaned $250,000 and $210,000, respectively. The loan is evidenced by a promissory note which bears interest at the rate of 8.54% and is payable at the earlier of September 27, 1997 or demand for repayment by the Company. The loan is secured by interests in real and personal property owned by the Chief Executive Officer and an affiliated entity. 10 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) Documents Filed: 1. Consolidated Financial Statements. The following Consolidated Financial Statements of the Company and Report of Independent Public Accountants included in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996 are incorporated by reference in Item 8 of this Report: - Report of Independent Public Accountants - Consolidated Balance Sheets at September 30, 1996 and 1995 - Consolidated Statements of Operations for the years ended September 30, 1996, 1995 and 1994 - Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996, 1995 and 1994 - Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994 - Notes to Consolidated Financial Statements 2. Financial Statement Schedule. The following Financial Statement Schedule of the Company for the years ended September 30, 1996, 1995 and 1994 is filed as part of this Report and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto:
Schedule Page -------- ---- II - Valuation and Qualifying Accounts 17
Financial statements and schedules other than those listed are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto, or contained in this Report. (b) Reports on Form 8-K None. 11 13 (c) Exhibits
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH - ----------- ------------------------------------------------------------------- ------------------- -------------- 3.1 Revised Articles of Incorporation of the Registrant (1) 3.2 Articles of Amendment dated February 17, 1993 to the Registrant's (2) Revised Articles of Incorporation 3.3 Articles of Amendment dated March 12, 1993 to the Registrant's (3) Revised Articles of Incorporation 3.4 Restated Bylaws of the Registrant dated March 12, 1993 (2) 4.1 Specimen Certificate of the Registrant's Class A Common Stock, (1) no par value 4.2 Specimen Certificate of the Registrant's Series B Preferred Stock, (4) no par value 10.1 Asset Sales Agreement between USX and the Registrant dated as (1) of June 26, 1987, as Amended and Restated August 31, 1987 10.2 Registration Rights Agreement among the signatories listed on the (1) signature pages thereof and the Registrant dated November 6, 1989 10.3 License Agreement between ENSR Corporation and the Registrant (1) dated December 8, 1988 10.4 Second Amended and Restated Revolving Credit Agreement among (5) the Registrant, the Lender Parties named therein, Citicorp U.S.A., Inc. and Heller Financial Inc., dated May 14, 1996. 10.5 Second Amended and Restated Security Agreement dated May 14, (5) 1996. 10.6 Amended and Restated Sales Representation Agreement between (5) Mannesmann Pipe & Steel Corporation and the Registrant dated April 1, 1996. 10.7 Geneva Steel Key Employee Plan* (6) 10.8 Amendment to Geneva Steel Key Employee Plan dated May 12, (7) 1991* 10.9 Form of Non-Statutory Stock Option Agreement* (1) 10.10 Management Employee Savings and Pension Plan, as Amended (8) and Restated generally effective January 1, 1994, dated as of July 3, 1995* 10.11 Form of revised Executive Split Dollar Insurance Agreement* (9) 10.12 Form of revised Executive Supplemental Retirement Agreement* (9) 10.13 Union Employee Savings and Pension Plan, as Amended and (8) Restated effective January 1, 1995, dated as of June 22, 1995* 10.14 Collective Bargaining Agreement between United Steelworkers of (10) America and the Registrant ("Collective Bargaining Agreement") dated March 1, 1995*
12 14 10.15 Agreement between Union Carbide Industrial Gases, Inc. and the (6) Registrant dated July 12, 1990, as amended August 3, 1990 (the "Union Carbide Agreement") 10.16 Amendment to the Union Carbide Agreement dated December 1, (9) 1992 10.17 Oxygen Supply Agreement between Big Three Industrial Gas, Inc. (6) (successor in interest to Liquid Air Corporation) and the Registrant dated September 27, 1988 and Amendment thereto dated June 8, 1990 10.18 Coilbox License Agreement between Stelco Technical Services (1) Limited and the Registrant dated August 23, 1989 10.19 License Agreement for the K-OBM Process between (1) Klockner Contracting and Technologies GmbH and the Registrant dated November 25, 1989 10.20 Special Use Lease Agreement No. 897 between the State of Utah (9) and the Registrant dated January 13, 1992 and Amendment thereto dated June 19, 1992 10.21 Indenture dated as of January 15, 1994 between the Registrant and (11) Bankers Trust Company, as Trustee, including a form of 9 1/2% Senior Note due 2004 10.22 Indenture dated as of March 15, 1993 between the Registrant and (3) The Bank of New York, as Trustee, including a form of 11 1/8% Senior Note due 2001 10.23 License Agreement relating to the desulfurization process between (1) BS&B Engineering Company, Inc. and the Registrant dated March 1, 1990 10.24 Lo-Cat(R)Licensing Agreement between ARI Technologies, Inc. (6) and the Registrant dated April 16, 1990 10.25 Agreement relating to the closure of hazardous waste surface (6) impoundments between USX Corporation, the Registrant and Duncan Lagnese Associates, Incorporated dated October 22, 1990 10.26 Agreement for the Sale and Purchase of Coke between the (12) Registrant and Mitsubishi International Corporation dated November 9, 1993 (the "Mitsubishi Agreement") 10.27 First Amendment to the Mitsubishi Agreement dated as of (13) December 28, 1993 10.28 Second Amendment to the Mitsubishi Agreement dated as of June X 1995 10.29 Third Amendment to the Mitsubishi Agreement dated as of May (5) 22, 1996. 10.30 Agreement for Sale and Purchase of Coke between the Registrant (14) and Pacific Basin Resources (a division of Oxbow Carbon and Minerals, Inc.) dated April 29, 1994 (the "Oxbow Coke Agreement")
13 15
10.31 First Amendment to the Oxbow Coke Agreement dated April 11, X 1996 10.32 Agreement for the Sale and Purchase of Coal between the (15) Registrant and Oxbow Carbon and Minerals, Inc. dated February 19, 1996, effective as of April 1, 1994 10.33 Warrant Agreement dated as of March 16, 1993 between the (2) Registrant and The Bank of New York, as Warrant Agent 10.34 Form of Indenture between the Registrant and the Trustee (3) thereunder related to the Exchange Debentures, including a form of Exchange Debenture 10.35 Taconite Pellet Sales Agreement between USX Corporation and (10) Geneva Steel dated May 31, 1995 10.36 Industrial Gas Supply Agreement between Air Liquide America (10) Corporation and Geneva Steel dated June 8, 1995. 13 Selected portions of the Registrant's Annual Report to Shareholders X for the year ended September 30, 1996 which are incorporated by reference in Parts II and IV of this Report 23 Consent of Arthur Andersen LLP, independent public accountants X 27 Financial Data Schedule X
- -------------------- * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the Registration Statement on Form S-1 dated March 27, 1990, File No. 33-33319. (2) Incorporated by reference to the Registration Statement on Form S-3 dated June 16, 1993, File No. 33-64548. (3) Incorporated by reference to the Registration Statement on Form S-4 dated April 15, 1993, File No. 33-61072. (4) Incorporated by reference to the Registration Statement on Form S-4 dated August 9, 1993, File No. 33-61072. (5) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996. (6) Incorporated by reference to the Registration Statement on Form S-1 dated November 5, 1990, File No. 33-37238. (7) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1991. (8) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 14 16 (9) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (10) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (11) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (12) Incorporated by reference to the Current Report on Form 8-K dated December 2, 1993. (13) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994. (14) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994. (15) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (d) Financial Statement Schedule See page 17 herein. 15 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Geneva Steel Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements incorporated by reference in Item 8 of this Form 10-K, and have issued our report thereon dated October 17, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Salt Lake City, Utah October 17, 1996 16 18 GENEVA STEEL COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (Dollars in Thousands)
Additions Balance at Charged to Deductions, Balance Beginning Costs and Net of at End Description of Year Expenses Recoveries of Year - ----------- ------- -------- ---------- ------- Year Ended September 30, 1996 Allowance for doubtful accounts.......... $2,012 $8,616 $(6,597) $4,031 ====== ====== ======= ====== Year Ended September 30, 1995 Allowance for doubtful accounts.......... $3,113 $5,138 $(6,239) $2,012 ====== ====== ======= ====== Year Ended September 30, 1994 Allowance for doubtful accounts.......... $2,983 $4,826 $(4,696) $3,113 ====== ====== ======= ======
17 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 27, 1996. GENEVA STEEL COMPANY By: /s/ Joseph A. Cannon --------------------------------------- Joseph A. Cannon, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Joseph A. Cannon Chairman of the Board and Chief December 27, 1996 - -------------------------------------------- Executive Officer Joseph A. Cannon (Principal executive officer) /s/ Robert J. Grow President and Chief Operating December 27, 1996 - -------------------------------------------- Officer and Director Robert J. Grow /s/ Richard D. Clayton Executive Vice President, Vice December 27, 1996 - -------------------------------------------- President of Environment and Richard D. Clayton Director /s/ Dennis L. Wanlass Vice President, Treasurer and December 27, 1996 - -------------------------------------------- Chief Financial Officer Dennis L. Wanlass (Principal financial and accounting officer) /s/ Alan C. Ashton Director December 27, 1996 - -------------------------------------------- Alan C. Ashton /s/ Arch L. Madsen Director December 27, 1996 - -------------------------------------------- Arch L. Madsen /s/ R. J. Shopf Director December 27, 1996 - -------------------------------------------- R. J. Shopf
EX-10.28 2 SECOND AMENDMENT TO THE MITSUBISHI AGREEMENT 1 EXHIBIT 10.28 SECOND AMENDMENT TO AGREEMENT OR THE SALE AND PURCHASE OF COKE This Second Amendment to the Agreement for the Sale and Purchase of Coke (the 'Second Amendment') is entered into this ___ day of June 1995, between Geneva Steel Company, a Utah corporation ('Buyer') and Mitsubishi International Corporation, a New York corporation ('Seller'). Recitals: A. On or about 9th November, 1993, Buyer and Seller entered into a certain Agreement for Sale and Purchase of Coke effective 12th January, 1993, as amended 28th December, 1993 (the 'Agreement'), wherein Seller agreed to sell and Buyer agreed to purchase certain Coke. B. Buyer and Seller desire to further amend the Agreement as set forth herein. Second Amendment: NOW, THEREFORE, in consideration of the premises, terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: 1. Definitions. Except as otherwise expressly indicated herein the capitalized terms used in this Second Amendment, including the Recitals hereto, shall have the same meanings ascribed to such terms in this Agreement. 2. Price. The reference to Section 3.6 in Section 2.1 of the Agreement is hereby changed to refer to 'Section 3.5' of the Agreement. 3. Quantity. The last sentence of Section 6.1.1 of the Agreement is hereby amended by appending the following language to the end of such sentence; provided, however, notwithstanding the foregoing, that with respect to the Third Contract Year, Buyer shall only purchase three (3) shipments as follows: (i) First shipment to be effected, at a price equal to US$_______ per MT ex-ship at the Destination Port, in June 1995 per M/V 'Neo Cymbidium' which vessel will load a cargo of approximately ______ MT of coke as an exception to the required approximately ______ MT per Panamax ocean vessel; and (ii) Second shipment to be affected at the Purchase Price for the Third Contract Year in the second quarter (April to June ) of 1996; and 2 (iii) Third shipment to be effected at the Purchase Price for the Third Contract Year in the third quarter (July to September) of 1996. 4. Benefit. This Second Amendment is for the sole benefit of the parties hereto and shall not be for the benefit of or enforceable by any other person or entity. 5. Ratification. Except as specifically amended by this Second Amendment, Seller and Buyer hereby ratify and reaffirm the terms, warranties and conditions set forth in the Agreement. IN WITNESS WHEREOF, the parties have caused this Second Amendment to be executed effective as of the date first above written. 'Buyer' GENEVA STEEL COMPANY, a Utah corporation by: /s/ Keith Hanks ----------------------------------- 'Seller' MITSUBISHI INTERNATIONAL CORPORATION, a New York corporation by: /s/ Hiroshi Matsumoto ----------------------------------- 2 EX-10.31 3 FIRST AMENDMENT TO THE OXBOW COKE AGREEMENT 1 EXHIBIT 10.31 FIRST AMENDMENT TO AGREEMENT FOR THE SALE AND PURCHASE OF COKE This First Amendment to Agreement for the Sale and Purchase of Coke (this "Amendment") is entered into as of the 11th day of April, 1996, effective as of March 1, 1996 between GENEVA STEEL COMPANY, a Utah corporation ("Buyer") and OXBOW CARBON AND MINERALS, INC., a Delaware corporation formerly doing business as Pacific Basin Resources ("Seller"). Recitals: A. Buyer and Seller entered into a certain Agreement for the Sale and Purchase of Coke dated April 29, 1994, effective as of January 1, 1994 (the "Agreement"), wherein Seller agreed to provide certain Coke, as defined in the Agreement, for use in Buyer's blast furnaces located at the Geneva Steel Mill located in Vineyard, Utah. B. The parties desire to amend the Agreement to provide for the consignment of such Coke on a vessel-by-vessel basis prior to any purchase by Buyer. Agreement: NOW, THEREFORE, in consideration of the promises and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree to amend the Agreement as follows: 1. Definitions. The capitalized terms used in this Amendment shall have the same meanings ascribed to such terms in the Agreement. 2. Price. The first paragraph of Section 3 of the Agreement is hereby deleted and the following substituted in lieu thereof: 3. Price. Subject to Sections 15 and 31 hereof, during the Term or any extension thereof, the purchase price (the "Purchase Price") for Coke purchased by Buyer hereunder _______________________. As used herein, the term "inventory cost" means the sum of (a) the ________, as hereinafter defined, of each ton of Coke removed by Buyer from any Pile, determined on a first Vessel in - first Vessel out basis (without regard to which Pile from which a particular ton is removed), plus (b) the ________ per net ton applicable to such purchased Coke, plus (c) a ___________ (the "__________"), which _____________ shall be calculated as follows: Consignment Fee = ___________________ 2 Where: ________________________________ ________________________________ ________________________________ As used herein, the term "Vessel Price" means the price, ex ship at the Levin Richmond Terminal Corporation terminals in Richmond, California, U.S.A. (or the terminal of such other services company in the San Francisco, California area or such other port as may be mutually agreed upon by Buyer and Seller) (the "Destination Port"), as such price is applicable to a Vessel on the date on which the Coke was shipped to the Destination Port, for each ton of Coke sold pursuant to this Agreement. The Vessel Price for each Vessel shall be determined in accordance with the following provisions of this Section 3. As used herein, the term (a) "LIBOR Rate" means the three-month London Interbank Offered Rate as of the date of adjustment, as published on the Adjustment Date, as hereinafter defined, in the Money Rates section of the Wall Street Journal, and (b) "Adjustment Date" means March 1, 1997 and the first day of the month occurring each six (6) months thereafter. 3. Vessel Price. The term "Purchase Price" as used in Sections 3.1, 3.2, 3.4, 3.6, 6.1.1, and 15 of the Agreement is hereby changed to be "Vessel Price" in each place it occurs. 4. Vessel Price for Third Contract Year. Section 3.3. of the Agreement is hereby deleted and the following substituted in lieu thereof: For the third Contract Year, effective as of the first day of such third Contract Year, the Vessel Price shall be ___________ per ton of Coke. 5. Purchase Price All Inclusive. Section 3.5 of the Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: The Purchase Price for each Contract Year includes all costs and expenses required for Seller to deliver the Coke to Buyer at the Geneva Steel Mill except Buyer shall pay any Destination Port off-loading charges as provided in Section 5 hereof, the railroad freight charges to transport Coke from the Destination Port to the Geneva Steel Mill, and any applicable sales and use taxes relating to each ton of Coke purchased by Buyer hereunder. Subject to the foregoing, the Purchase Price includes all other costs, insurance, freight, costs of capital, fees, taxes, assessments, tariffs, excises, special and general duties, custom brokerage charges, costs incurred to comply with any applicable international, federal, state and local laws and regulations 2 3 applicable to the sale of Coke at the Piles, and all other items that are the responsibility of Seller pursuant to this Agreement. 6. Billing and Payment. Section 4 of the Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: 4. Billing and Payment. Seller shall invoice Buyer for each ton of Coke sold hereunder as follows: 4.1 Summary of Coke Purchases. On each business day during the Term, commencing on the date Buyer first removes Coke from a Pile after March 1, 1996, Buyer shall provide to Seller a written summary (the "Summary") of the quantity of Coke that Buyer purchased for use during the period from and including the prior business day. Each Summary shall specify the quantity of Coke purchased, the dates of purchase, and a detailed calculation of the Purchase Price. As used herein, the term "business day" means Monday through Friday excluding federal and state holidays observed in the State of Utah. 4.2 Payment based on Summary. Concurrently with the delivery of such Summary to Seller, Buyer shall pay to Seller by wire transfer remittance the Purchase Price applicable to the Coke identified in such Summary, less any penalties applicable thereto pursuant to Section 8.3 hereof. The parties intend the transfer of Coke and the payment therefor, as described herein, to be a contemporary exchange for new value given. The parties believe that the payment arrangements established herein provide for an exchange that is substantially contemporaneous and that the time between transfer and payment represents the shortest commercially practicable time for the parties to establish the quantities of Coke transferred. The parties believe that the sale and purchase of Coke contemplated herein, and the payments therefor, are being made in the ordinary course of business of the parties hereto, according to ordinary business terms. 7. Shipment. The following is added at the end of Section 5.1 of the Agreement: Seller and Buyer shall mutually agree on the shipping schedule for all Vessels hereunder. 8. Shipment Documentation. The following is added as new Section 5.4 to the Agreement: 3 4 5.4 Shipment Documentation. Promptly after shipment from the Loading Port, Seller shall provide to Buyer bills of lading, the draft survey reports contemplated by Section 7 hereof and the analyses of the Coke pursuant to Section 9 hereof. Seller shall provide to Buyer by facsimile a legible copy of each bill of lading as soon as practicable after a shipment is loaded on a Vessel for delivery to the Destination Port. 9. Possession and Acceptance of Coke. The following is added as new Section 5.5 of the Agreement: 5.5 Possession and Acceptance of Coke. Notwithstanding anything in this Agreement to the contrary, the following provisions shall apply to the shipment, delivery and purchase of Coke pursuant to this Agreement commencing March 1, 1996: 5.5.1 Unloading and Transportation of Seller's Coke. Except as provided in Section 5.5.8 hereof, Buyer shall arrange for the off-loading of each Vessel at the Destination Port and the transportation of such Coke to the Geneva Steel Mill where Buyer shall hold, and use commercially reasonable efforts to care for, the Coke as the property of Seller. At all times prior to its sale to Buyer under this Agreement, the Coke shall be subject to and under the direction and control of Seller. In the event of a loss or other claim that is the responsibility of the Destination Port or the railroad under their respective contracts, Buyer, at the sole cost and expense of Seller, shall use commercially reasonable efforts to recover the amount of such loss or claim from such companies; provided, however, that Buyer shall have the right to assign to Seller any claim it may have against the Destination Port and thereafter be relieved of any responsibility to pursue such claim on Seller's behalf. Buyer shall have no obligation to pursue any claim that it determines in good faith is not likely of being recovered. 5.5.2 Inventory Piles; Point of Sale. 5.5.2.1 Subject to Section 18 hereof, Coke belonging to Seller and delivered to the Geneva Steel Mill shall be segregated into and maintained by Buyer as separate piles (each a "Pile") but each Pile may contain Coke from one or more Vessels. Each Pile shall be identified as containing Coke owned by Seller by a sign to be installed and maintained by Buyer. Unless otherwise agreed in writing by Buyer and Seller, (a) subject to the provisions of this Section 5.5.2.1, Seller shall maintain at least ________ tons of Coke in the Piles, and (b) Seller shall use commercially reasonable efforts to ensure that 4 5 not more than _________ tons of Coke, in the aggregate, are maintained in storage at the Destination Port, in transit from the Destination Port to the Geneva Steel Mill and in the Piles. 5.5.2.2 The actual inventory amount maintained by Seller pursuant to Section 5.5.2.1 hereof shall be subject to the approval of Buyer, which consent shall not be unreasonably withheld so long as such inventory amount is consistent with the shipping schedule approved pursuant to Section 5.1 hereof. Seller shall immediately notify Buyer in writing if such inventory level is or may not be maintained for any reason. Seller shall not be in default of this Agreement if such inventory level is not maintained due to (a) deviations in the approved shipping schedule requested in writing by Buyer, (b) Buyer's purchase of Coke in excess of Buyer's forecasted purchase of Coke on which the approved shipping schedule was based, (c) breach by the Destination Port of its contractual obligations to unload, handle and load such Coke, (d) breach by the railroad of its contractual obligations to transport Coke from the Destination Port to the Geneva Steel Mill, or (e) an event of Force Majeure under this Agreement. 5.5.2.3 For all Coke which Buyer purchases from Seller pursuant to this Agreement, such sale shall be deemed to occur at the time when Buyer pays for such Coke as provided in Section 4.2 hereof or removes such Coke from a Pile, whichever first occurs, and shall be accounted for on a first Vessel in - first Vessel out basis. Buyer agrees to notify Seller by facsimile on a daily basis in arrears of the quantity of Coke removed by Buyer from a Pile. Such notice shall contain the Pile number, identification of the Vessel(s) from which the Coke originated, and the quantity of Coke removed from such Pile. The quantity of Coke removed from a Pile shall be determined by multiplying the number of truckloads of Coke removed by Buyer by twenty-eight (28) net tons if Cline trucks are used for such removal. If Buyer uses any other type of truck to remove Coke from a Pile, the volume of Coke removed per truck load shall be mutually agreed upon by Buyer and Seller. 5.5.3 Pile Reconciliation. Once a month or when a Pile is fully depleted, whichever first occurs, Buyer and Seller shall reconcile (a) the quantity of Coke sold to Buyer, as reflected in Buyer's daily 5 6 notices, (b) the quantity of Coke initially stored in such Pile, as reflected in the average of the draft survey reports, (c) the quantity of Coke remaining in a Pile based on a physical inspection of such Pile, and (d) the quantity of Third Party Coke, as hereinafter defined, sold by Seller pursuant to Section 5.5.8 hereof. Any differences between (i) the quantity of Coke initially stored in a Pile less Third Party Coke and (ii) the amount of Coke remaining in a Pile based on such physical survey of such Pile, shall be deemed to be Coke sold by Seller and purchased by Buyer hereunder and Buyer shall pay the Purchase Price for such Coke, less the amounts of previous payments applicable thereto and any penalties applicable thereto pursuant to Section 8.3 hereof, in the manner provided for in Section 4 hereunder. 5.5.4 Handling Fee. Buyer shall be paid a handling, transportation and storage fee (the "Handling Fee") for each ton of Coke transported to the Geneva Steel Mill to cover Buyer's services in unloading, switching, handling and loading of Coke, transportation charges and charges incurred by Buyer at the Destination Port. Seller shall pay the amount of the Handling Fee within forty-five (45) days after the date of the bill of lading associated with a Vessel to which the Handling Fee applies. The Handling Fee from and after March 1, 1996 and for Coke delivered prior to February 28, 1997 shall be ________ per ton of Coke delivered by Seller to the Destination Port, as reflected on the draft survey reports. The Handling Fee for subsequent Contract Years, shall be mutually agreed upon by the parties on or before March 1 of each such Contract Year. If the parties are unable to agree upon such Handling Fee, the Handling Fee shall be the actual cost to Buyer, plus or minus _____ per net ton, of Buyer's services in unloading, switching, handling and loading of Coke, transportation charges and charges incurred by Buyer at the Destination Port based on Buyer's rail contract, contract with the Destination Port and Buyer's standard cost accounting allocations for costs incurred at the Geneva Steel Mill. There shall be no other handling charge by Buyer to Seller for removal of any Coke from a Pile at the Geneva Steel Mill except as provided in Section 5.5.8 hereof. Upon Seller's reasonable request not more than once per year, Buyer shall cause Arthur Anderson & Company to certify in writing the amount of the Handling Fee. Unless otherwise agreed in writing, any shortfall or overage between the proper Handling Fee and the billed Handling Fee shall be adjusted on the next succeeding invoice for Handling Fees between the parties hereto. 6 7 5.5.5 Acceptance of Coke. All Coke is subject to inspection and approval, as provided in Section 8.3 of this Agreement, after delivery to the Geneva Steel Mill and before acceptance by Buyer. The transaction between the parties to this Agreement is a consignment sale on approval. Acceptance of Coke shall occur only upon removal of such Coke from a Pile and not by lapse of time or any other manner. Acceptance of part of a Pile shall not constitute acceptance of any other part of a Pile. In the event such Coke is not accepted based on inspection and analyses as provided for in this Agreement, Buyer shall give written notice to Seller and thereafter Seller and not Buyer shall be solely responsible for the handling and disposition of such Coke at Seller's sole risk and expense. Nothing in this Section 5.5.5 shall affect Buyer's rights or remedies in the event of a breach by Seller of this Agreement. 5.5.6 Protective Filings. Seller shall have the right to file a financing statement pursuant to Section 9-408 of the Utah Uniform Commercial Code, Utah Code Ann. Section 70-9-408, to evidence of record that the Coke in the Piles is owned by Seller and not by Buyer. 5.5.7 Site License. Buyer hereby grants Seller a non-exclusive license to store Coke obtained and owned by Seller pursuant to this Agreement on that parcel of real property located at the Geneva Steel Mill and more specifically identified on Exhibit A hereto (the "Site"). Such license is granted for reasonable ingress and egress to the Site for the purposes of inspection, testing, loading and unloading of Seller's Coke. Seller shall not store at or transport to the Geneva Steel Mill any coke which is owned by any party other than Seller or which has not been ordered by Buyer. The intent of this license is to allow Coke consigned to Buyer under this Agreement to be stored at the Site and to allow Seller to make incidental sales of Third Party Coke. Buyer shall pay all real property taxes on the Site and Seller shall pay all other taxes, charges and assessments arising out of Seller's ownership of its Coke or the use of the Site for the storage of such Coke. The license granted in this Section 5.5.7 shall be coextensive with the Term of this Agreement; provided that, subject to Buyer's rights, for a period of _____ calendar days after the termination or expiration of this Agreement, Seller shall have the right to enter upon the Site for the purpose of screening and removing any Coke to which it has title. Subject to the immediately foregoing sentence, upon the expiration or termination of this Agreement, Seller's rights under this Section 5.5.7 shall cease and be of no further force or effect. Inasmuch as Buyer retains possession of the 7 8 Site, it shall have the right to enter the Site at all times for any purpose whatsoever, including, but not limited to, removal of Coke from the Piles as contemplated by this Agreement or the laying, repairing, removal, modification, or expansion of any utility, facility, system or improvement. Nothing contained herein shall be, or be interpreted to be, the creation of a real property interest in the Site or the transfer of a license coupled with an interest, and the license provided herein shall at all times be revocable in accordance with the provisions hereof. So long as this Agreement has not expired or been terminated, unless otherwise agreed in writing by Buyer, Seller shall not have the right to bring any third party on the Site for the purpose of handling, transporting or removing Coke. Buyer shall have the right from time to time upon written notice to Seller to change the location of the Site to another location at the Geneva Steel Mill so long as the cost of moving any Pile is borne by Buyer, at all times the Piles are located on the Site as so changed, and such alternative Site has reasonable ingress and egress and adequate area for the Coke inventory contemplated hereby. Buyer shall use commercially reasonable efforts to maintain in force any existing permits it has obtained for the Geneva Steel Works relating to the use of the Site by Seller contemplated hereby; provided, however, that Seller shall be solely responsible to obtain all permits, licenses and approvals required by any governmental entity with jurisdiction for the conduct of Seller's business at the Site or the storage of the Piles and Buyer makes no representation or warranty concerning the existence or adequacy of any of Buyer's permits for such purpose. 5.5.8 Third Party Sales. 5.5.8.1 Subject to the terms and conditions of this Section 5.5.8 Seller shall have the right to sell to third parties all or any portion of the Coke which has not been purchased by Buyer (the "Third Party Coke"). Such sales of Third Party Coke from Piles at Geneva Steel Mill shall be taken in approximately equal increments and shall not exceed the greater of _____ (___%) of the quantity of Coke from all Vessels or ______ net tons in the aggregate during any twelve (12) month period if Buyer is purchasing on average more than one (1) Vessel of Coke each ninety (90) days; provided, that in all events Seller shall maintain the minimum inventory levels for sale to Buyer as required by Section 5.5.2.1 hereof. If Seller desires to sell Coke to any third party it shall notify Buyer at least five (5) working days in advance of such sale. Such notice shall include the amount of Coke 8 9 to be sold and the date of sale. All handling and transportation of Third Party Coke shall be arranged and paid for by Seller. 5.5.8.2 If such sale occurs while the Third Party Coke is located at the Destination Port, Seller shall be solely responsible to arrange and pay for all unloading, switching, storage, handling, stevedoring, loading, transportation and other charges related to such Third Party Coke and Buyer shall have no obligation to take possession of, care for or transport any Third Party Coke. The quantity of Third Party Coke sold by Seller to a third party shall be determined by certified scale weights at the Destination Port. Upon removal of such Third Party Coke from storage at the Destination Port, Buyer shall be paid a fee of $_____ per net ton for each ton of Third Party Coke so removed to compensate Buyer for the freight loss and administrative costs incurred by Buyer associated with such Third Party Coke. 5.5.8.3 If such sale occurs while the Third Party Coke is located at the Geneva Steel Mill, upon reasonable advance notice, Buyer shall load such Third Party Coke for transport to such third parties for a charge of $_____ per net ton, said charge to be credited against the next invoice payable by Buyer to Seller hereunder; provided, however, that such loading activities shall be subject to the priority of Buyer's operating requirements and labor and equipment availability and Buyer shall not be liable in anyway for such loading activities so long as Buyer uses commercially reasonable efforts to meet Seller's loading directions. The quantity of Coke loaded for shipment shall be determined by certified scale weights at the Geneva Steel Mill. 5.5.8.4 Seller shall not store at or transport to the Geneva Steel Mill any coke, including any Third Party Coke, which is owned by any party other than Seller. 5.5.8.5 Seller shall indemnify, defend and hold harmless Buyer from and against any and all claims, demands, damages, losses, costs and expenses (including attorneys' fees) (each a "Claim") arising out of or related in any way to Third Party Coke except that the foregoing indemnity shall not apply to any Claim to the extent caused by Buyer's negligence. Buyer shall have no obligation, liability or responsibility for any degradation of Third Party Coke, and Seller expressly acknowledges that such Third Party Coke shall be loaded by Buyer as run of Pile, "as is" and "where is," without representation or warranty whatsoever. 9 10 10. Quantity of Coke. The following is added at the end of Section 6.1.1 of the Agreement: During the period from March 1, 1996 through August 1, 1997, Buyer shall purchase from Seller at least _____ (___) Vessels (the "Additional Vessels") of Coke in addition to any Vessels that Buyer is otherwise obligated to purchase pursuant to this Section 6.1.1. Notwithstanding the foregoing, Buyer shall order _____ (___) of such Additional Vessels for delivery at the Destination Port during the third Contract Year hereunder. Such Additional Vessels shall be subject to the other terms and conditions of this Agreement and to the following terms and conditions: 6.1.1.1 Coke shall be obtained by Seller from a source and ordered at a price, f.o.b. Loading Port acceptable to Buyer. Seller shall use commercially reasonable efforts to obtain the lowest available price for such Coke. Such prices and sources shall be presented to Buyer for its review and approval as early as is practicable prior to Seller contracting for the purchase of such Coke. Neither Seller nor Buyer shall be obligated to obtain such Coke from Antai. The price, f.o.b. Loading Port for the additional Vessel to be ordered during the third Contract Year shall not exceed the then current competitive market price for coke of similar quality and quantity from China. 6.1.1.2 In no event shall the Purchase Price to Buyer exceed the purchase price, f.o.b. Loading Port, for other coke available to Buyers, similar in quantity and quality. 11. Independent Contractor. The first sentence of Section 16 of the Agreement is hereby amended to add the words "on approval" after the word "Coke" on the first line thereof. 12. Title. Section 18 of the Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: 18. Title. Title to all Coke shall be vested in Seller until such time as such Coke is either paid for pursuant to Section 4.2 of this Agreement or it is removed by Buyer from a Pile hereunder, whichever first occurs. Seller warrants title to the Coke and quiet possession to Buyer of such Coke upon payment or as such Coke is removed from a Pile pursuant to Section 5.5.2 hereof, whichever first occurs. Title to the Coke, as well as the risk of loss, shall transfer from Seller to Buyer when such Coke is paid for or when such Coke is removed from the Pile, whichever first occurs. 10 11 13. Guaranteed Specifications. Section 8.2 of the Agreement is hereby amended to change the Ash specification to be "11.75% Maximum." 14. Ash Penalty. Section 8.3.2 of the Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: If the ash content exceeds 11.75%, a penalty of $____ per net ton for each one percent (1.0%) of ash in excess of 11.75% shall be applied pro rata. 15. Notices. Section 22 of the Agreement is hereby amended to provide that notices to Seller shall be sent in the manner provided in the Agreement addressed as follows: Oxbow Carbon and Minerals, Inc. 3478 Buskirk Avenue, Suite 346 Pleasant Hill, CA 94523-4342 Attn: Vice President of Sales and Marketing Facsimile No. (510) 932-8920 With a copy to: Oxbow Corporation 1601 Forum Place West Palm Beach, Florida 33401 Attention: J. Michael Smith, Esq. Facsimile No. (407) 640-8812 16. Termination of Amendment. Buyer shall have the right to terminate the consignment arrangement provided for in this Amendment by giving written notice of such termination at least three (3) months prior to the effective date of such termination. Such notice shall specify the effective date of such termination. Upon the effective date of such termination, Buyer shall pay to Seller the Purchase Price for, and Seller shall transfer ownership of, all Coke at the Destination Port, in transit from the Destination Port to the Geneva Steel Mill, and in the Piles, and thereafter this Amendment shall be of no further force or effect as to shipments made subsequent to the effective date of such termination except that the provisions of Sections 7, 10, 13, 14, 15 and 16 of this Amendment shall survive such termination and remain binding upon the parties hereto. The intent of this Section 16 is to return the relationship between the parties hereto as of the termination 11 12 date to the relationship provided for in the Agreement as if this Amendment had not been entered into, except as provided in the immediately foregoing sentence. Once such notice of termination is given, Buyer and Seller shall reasonably cooperate to achieve such intent. After such termination, Buyer agrees to sell to Seller Coke from the Piles, at a purchase price to be agreed upon by the parties, f.o.b. Pile, in such quantities to enable Seller to meet its pre-existing third-party contractual requirements (but excluding any provisions for renewal or extension) for the sale of Third Party Coke provided that such sale does not reduce purchased Coke inventories in the Piles at the Geneva Steel Mill below 30,000 net tons. 17. Amber Coke; Benefit. This Amendment shall not apply to Coke shipped to Buyer on a vessel known as the "Amber" which docked at the Destination Port on or about January 20, 1996. This Amendment is for the sole benefit of the parties hereto and shall not be for the benefit or enforceable by any other person or entity. 18. Counterparts; Facsimile Signatures. This Amendment may be executed in any number of counterparts each of which shall constitute but one agreement. Each signed counterpart of this Amendment delivered by way of facsimile transmission shall have the same force and effect and be treated as if it is the delivery of the original signed counterpart. 19. Ratification. Except as specifically modified herein, the parties hereby ratify and reaffirm the terms, conditions, warranties and guarantees set forth in the Agreement. 12 13 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the day and year first above written. "Seller" OXBOW CARBON AND MINERALS, INC., a Delaware corporation By /s/ Brian L. Acton -------------------- Brian L. Acton President "Buyer" GENEVA STEEL COMPANY, a Utah corporation By /s/ Max E. Sorenson ---------------------- Max E. Sorenson Senior Vice President Engineering and Technology 13 EX-13 4 SELECTED PORTIONS OF REGISTRANT'S ANNUAL REPORT 1 EXHIBIT 13 Selected Financial Data (Dollars in thousands, except per share and per ton data)
1996 1995 1994 1993 1992 OPERATING STATISTICS: Net sales $ 712,657 $ 665,699 $ 486,062 $ 465,181 $ 420,026 Gross margin 50,350 71,508 15,514 21,723 13,735 Income (loss) from operations 25,729 47,713 (6,791) 1,102 (8,587) Income (loss) before extraordinary item (7,238) 11,604 (16,696) (8,606) (13,092) Net income (loss) (7,238) 11,604 (26,230) (8,606) (13,092) Net income (loss) applicable to common shares (16,327) 3,606 (33,276) (12,072) (13,092) Net income (loss) per common share before (1.07) .24 (1.57) (.80) (.87) extraordinary item Net income (loss) per common share (1.07) .24 (2.20) (.80) (.87) BALANCE SHEET STATISTICS: Cash and cash equivalents $ 597 $ 12,808 $ -- $ 64,267 $ 3,122 Working capital 83,315 33,045 46,797 89,167 75,654 Current ratio 1.76 1.29 1.49 2.04 2.33 Net property, plant and equipment 454,523 470,390 453,286 314,590 252,797 Total assets 657,386 628,797 606,815 498,384 390,462 Long-term debt 388,431 342,033 357,348 224,991 178,182 Redeemable preferred stock 55,437 51,031 43,032 35,986 -- Stockholders' equity 92,827 108,074 103,664 135,775 141,832 Long-term debt as a percentage of stockholders' 418% 316% 345% 166% 126% equity ADDITIONAL STATISTICS Operating income (loss) per ton shipped $ 12.00 $ 24.99 $ (4.63) $ .73 $ (6.49) Capital expenditures 26,378 68,025 164,918 82,534 66,617 Depreciation and amortization 44,415 39,308 29,870 23,150 21,136 Cash flows from operating activities (31,724) 84,130 (28,018) 64,394 8,200 Raw steel production (tons in thousands) 2,428 2,145 1,890 2,000 1,769 Steel products shipped (tons in thousands) 2,145 1,909 1,467 1,511 1,323
8 Geneva Steel 2 Selected Financial Data (Continued) (Dollars in thousands, except per share and per ton data) PRICE RANGE OF COMMON STOCK The following table sets forth, for the periods indicated, the high and low sales prices for the Class A common stock as reported on the NYSE Composite Tape.
YEAR ENDED SEPTEMBER 30, HIGH LOW Fiscal Year Ended September 30, 1995 First Quarter ended December 31 $18 $12 1/4 Second Quarter ended March 31 16 9 3/4 Third Quarter ended June 30 12 7 1/8 Fourth Quarter ended September 30 9 3/4 7 3/4 Fiscal Year Ended September 30, 1996 First Quarter ended December 31 $ 8 $ 6 3/8 Second Quarter ended March 31 8 1/4 5 1/8 Third Quarter ended June 30 7 1/8 5 1/4 Fourth Quarter ended September 30 5 1/2 3 1/8
As of November 29, 1996, the Company had 13,574,641 shares of Class A common stock outstanding, held by 643 stockholders of record, and 19,151,348 shares of Class B common stock outstanding, held by five stockholders of record. Geneva Steel 9 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain cost and expense items to net sales for the years indicated.
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 Net sales 100.0% 100.0% 100.0% Cost of sales 92.9 89.3 96.8 --------------------------------- Gross margin 7.1 10.7 3.2 Selling, general and administrative expenses 3.5 3.5 4.6 --------------------------------- Income (loss) from operations 3.6 7.2 (1.4) Other income (expense): Interest and other income 0.1 0.1 0.3 Interest expense (5.1) (4.6) (4.4) Other expense (0.2) (0.4) -- --------------------------------- Income (loss) before provision (benefit) for income taxes and extraordinary item (1.6) 2.3 (5.5) Provision (benefit) for income taxes (0.6) 0.6 (2.1) --------------------------------- Income (loss) before extraordinary item (1.0)% 1.7% (3.4)% ---------------------------------
The following table sets forth the sales product mix as a percentage of net sales for the years indicated:
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 Sheet 29.7% 40.7% 65.3% Plate 45.0 35.1 23.5 Pipe 6.6 6.4 6.9 Slab 15.9 15.0 1.0 Non-steel 2.8 2.8 3.3 -------------------------------------------------------------------- 100.0% 100.0% 100.0% --------------------------------------------------------------------
10 Geneva Steel 4 FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1995 Net sales increased 7.1% due to increased shipments of approximately 235,600 tons, offset in large part by decreased overall average selling prices for the year ended September 30, 1996 as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of sheet, plate, pipe and slab products decreased by 8.5%, 2.0%, 0.9% and 11.8%, respectively, in the year ended September 30, 1996, as compared to the previous fiscal year. The decrease in prices was due to pricing pressure resulting from unfairly traded imports and an increase in domestic hot-rolled capacity as well as other market factors. Shipped tonnage of plate, pipe and slabs increased approximately 239,300 tons or 40.1%, 11,900 tons or 11.9% and 106,500 tons or 28.8%, respectively, while shipped tonnage of sheet decreased approximately 122,100 tons or 14.5% between the two years. The overall average selling price realization per ton was favorably affected by a shift in product mix to higher-priced plate and pipe products from lower-priced sheet products, offset in part by a shift in product mix to lower-priced slab products. Consistent with the Company's strategic objectives, plate shipments have increased as various upgrades to plate processing and finishing equipment have been integrated into the production process. The Company sells slabs to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. The Company expects that slab shipments will gradually decrease as rolling mill throughput improves. During the second and third fiscal quarters of 1996, the Company announced several price increases. During the third and fourth fiscal quarters of the year, the Company realized the benefit of those previously announced price increases. As a result of an increase in steel supply, particularly unfairly traded imports, order entry weakened during the final weeks of the fiscal year ended September 30, 1996. As a result, the Company reduced prices for most of its products. Prices for plate products in particular have continued to decline since September 30, 1996. The Company expects that these price reductions will adversely affect the results of operations beginning in the first quarter of fiscal year 1997. The Company intends to react to price increases or decreases in the market as justified by competitive conditions. Domestic competition remains intense and imported steel continues to adversely affect the market. The Company sells substantially all of its products in the spot market at prevailing market prices. The Company believes its percentage of such sales is significantly higher than that of most of the other domestic integrated producers. Consequently, the Company may be affected by price increases or decreases more quickly than many of its competitors. As of November 30, 1996, the Company had estimated total orders on hand for approximately 210,000 tons compared to approximately 274,000 tons as of November 30, 1995. In November 1996, the Company, together with another domestic plate producer, filed anti-dumping petitions with the Department of Commerce and the International Trade Commission against imports of cut-to-length carbon plate from the Russian Federation, Ukraine, the People's Republic of China and the Republic of South Africa (the "Plate Trade Cases"). The petitions allege large dumping margins and also set forth the injury to the U.S. industry caused by these dumped imports. The International Trade Commission ("ITC") made an affirmative preliminary injury determination in late December. The Commerce Department will make its preliminary dumping margin determinations in April 1997. The Company expects that the ITC's preliminary determination will result in fewer plate imports from the subject countries during calendar 1997. The final outcome of the Plate Trade Cases will likely be decided by November 1997. Failure to win the Plate Trade Cases would have a material adverse effect upon the Company. Cost of sales includes raw materials, labor costs, energy costs, depreciation and other operating and support costs associated with the production process. The Company's cost of sales, as a percentage of net sales, increased to 92.9% for the year ended September 30, 1996 from 89.3% for the previous fiscal year primarily as a result of lower average selling prices, offset in part by lower average operating costs. The overall average cost of sales per ton shipped decreased approximately $2 per ton between the years primarily as a result of lower operating costs, offset in part by a shift in product mix to Geneva Steel 11 5 higher-cost plate and pipe products from lower-cost sheet products. Operating costs decreased as a result of improved production yields and throughput rates, offset in part by higher depreciation expense, the adverse impact of the plant-wide power outage discussed below, increased raw materials costs, higher wages and benefits, and other increased costs. The Company expects that production yields and throughput will continue to improve in future periods as completed capital projects continue to be integrated into the production process. A plant-wide power outage caused by unusual weather conditions in late January 1996 had a significant effect on operating results during the fiscal year. The Company maintains insurance for both property damage and business interruption, subject to a deductible of $1 million per occurrence. The Company is continuing to assess the full financial impact of the outage and recorded a portion of the expected loss recovery during the second and third quarters of the fiscal year. The Company expects that the insurance claim will be settled within the next year. The Company's new plasma-fired cupola ironmaking facility became available for operation during the year ended September 30, 1996. The cupola is being used to supplement blast furnace iron production during the reline of one of the Company's blast furnaces and may also be used during periods when scrap prices are favorable or during other periods requiring supplementary ironmaking capacity. The facility lease cost of the cupola adds approximately $2 per ton to finished product cost, effective July 1, 1996. The impact of the cupola facility on finished product cost is significantly dependent on raw material costs and consumption rates, particularly with respect to scrap and coke, and the level of use of the cupola. Depreciation costs included in cost of sales increased approximately $5.1 million for the year ended September 30, 1996 as compared with the previous fiscal year. This increase was due to increases in the asset base resulting from capital expenditures. Depreciation expense will further increase due to implementation of the Company's capital projects. Selling, general and administrative expenses for the year ended September 30, 1996 increased approximately $0.8 million as compared to the previous fiscal year. These higher expenses resulted primarily from increased outside services. Interest expense increased approximately $5.6 million during the year ended September 30, 1996, as compared to the previous fiscal year as a result of significantly lower capitalized interest and higher levels of borrowing. The higher levels of borrowing resulted from the termination of the Company's receivables securitization facility discussed below. In May 1996, the Company terminated its receivables securitization facility in connection with an amendment to and restatement of the Company's revolving credit facility. Deferred fees of approximately $550,000 associated with establishing the receivables securitization facility were expensed to other expense during the year ended September 30, 1996. 12 Geneva Steel 6 FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1994 Net sales increased 37.0% due to increased shipments of approximately 441,700 tons and increased average selling prices for the year ended September 30, 1995, as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of sheet, plate, pipe and slab products increased by 5.4%, 9.9%, 11.5% and 6.2%, respectively, in the year ended September 30, 1995, as compared to the previous fiscal year. The overall average selling price realization per ton also increased between the years as a result of a shift in product mix to higher-priced plate products. This increase was offset, in part, by the Company's increased sales of lower-priced slab products. Consistent with the Company's strategic objectives, plate shipments have increased as various upgrades to plate processing and finishing equipment have been completed and implemented. The Company increased slab shipments in response to favorable slab pricing and to maximize production from the continuous caster. Shipped tonnage of plate, pipe and slabs increased approximately 276,400 tons or 86.2%, 12,700 tons or 14.5% and 350,300 tons or 1,762.5%, respectively, while shipped tonnage of sheet decreased approximately 197,700 tons or 19.0% between the two years. The Company's cost of sales, as a percentage of net sales, decreased to 89.3% for the year ended September 30, 1995 from 96.8% for the previous fiscal year as a result of higher average selling prices and lower operating costs. The average cost of sales per ton shipped decreased approximately $9 per ton between the two years. The decreased cost per ton resulted from lower operating costs and from increased sales of lower-cost slab products, offset, in part, by a shift in product mix to higher-cost plate products. Costs decreased primarily as a result of increased production efficiencies associated with completed capital projects, increased production throughput and other operating improvements, offset in part by higher depreciation expense, increased raw materials costs and higher wages and benefits. Depreciation costs included in cost of sales increased approximately $11.2 million for the year ended September 30, 1995, as compared with the previous fiscal year. This increase was due to increases in the asset base resulting from capital expenditures. Selling, general and administrative expenses for the year ended September 30, 1995, increased approximately $1.5 million as compared to the previous fiscal year. The higher expenses resulted primarily from increased salaries and wages and outside services. Interest and other income decreased approximately $1.1 million during the year ended September 30, 1995, as compared to the previous fiscal year as a result of a decrease in the amount of invested cash and cash equivalents. Interest expense increased approximately $8.9 million during the year ended September 30, 1995, as compared to the previous fiscal year. Interest expense increased due to higher levels of borrowing and decreased capitalized interest during the year ended September 30, 1995 offset, in part, by a reduction in interest rates as a result of restructuring the Company's debt during fiscal year 1994. Other expense was $2.4 million for the year ended September 30, 1995. Other expense reflects the costs incurred in connection with the Company's receivables securitization facility, which was established by the Company in November 1994. The provision for income taxes for the year ended September 30, 1995, was reduced by utilization of a net operating loss carryforward and a $1.2 million income tax benefit resulting from a reassessment of the Company's deferred income tax liabilities. As a result, the Company's effective tax rate was 24% for the year ended September 30, 1995. Geneva Steel 13 7 LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from capital expenditures and working capital requirements, including interest payments. The Company has met these requirements principally from the incurrence of additional long-term indebtedness, including borrowings under the Company's credit facilities, equipment lease financing and cash provided by operations. In March 1993, the Company issued in a public offering $135 million principal amount of 11 1/8% senior notes (the "11 1/8% Senior Notes" and, together with the 9 1/2% Senior Notes discussed below, the "Senior Notes"). The 11 1/8% Senior Notes mature in 2001, are unsecured and require interest payments semi-annually on March 15 and September 15. After March 1998, the 11 1/8% Senior Notes are redeemable, in whole or in part, at the option of the Company, subject to certain redemption premiums. A portion of the proceeds from the 11 1/8% Senior Notes offering was used to repurchase, at par value, approximately $70 million aggregate principal amount of term debt. In connection with the offering of the 11 1/8% Senior Notes, the Company issued $40 million of 14% cumulative redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") at a price of $100 per share and warrants to purchase an aggregate of 1,132,000 shares of Class A common stock. The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a liquidation preference of approximately $151 per share as of September 30, 1996. Dividends accrue at a rate equal to 14% per annum of the liquidation preference and, except as provided below, are payable quarterly in cash from funds legally available therefor. Prior to April 1996, the Company elected to add the dividends to the liquidation preference. The Redeemable Preferred Stock is exchangeable, at the Company's option, into subordinated debentures of the Company due 2003 (the "Exchange Debentures"). The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally available therefor. The Company's ability to pay cash dividends on the Redeemable Preferred Stock is subject to the covenants and tests contained in the indentures governing the Senior Notes and in the Company's revolving credit facility. Restricted payment limitations under the Company's 11 1/8% Senior Notes precluded payment of the preferred stock dividends due on June 15, 1996, September 15, 1996 and December 15, 1996. Unpaid dividends were approximately $4.7 million at September 30, 1996. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. In the event that the Company fails to pay dividends on the Redeemable Preferred Stock in an amount equal to four full quarterly dividends, then the holders of the Redeemable Preferred Stock have the right to elect not less than 25 percent of the members of the board of directors. The right of such holders to elect directors continues until the Company has paid all dividends in arrears and has paid the dividends due for two consecutive quarters thereafter. After March 1998, both the Redeemable Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's option, subject to certain redemption premiums. While not affecting net income/loss, dividends and the accretion required over time to amortize the original issue discount associated with the Redeemable Preferred Stock will negatively impact quarterly earnings per share by approximately $.15 per share. The warrants to purchase the Company's Class A common stock are exercisable at $11 per share, subject to adjustment in certain circumstances, and expire in March 2000. In February 1994, the Company completed a public offering of $190 million principal amount of 9 1/2% senior notes (the "9 1/2% Senior Notes"). The 9 1/2% Senior Notes mature in 2004, are unsecured and require interest payments semi-annually on January 15 and July 15. After January 1999, the 9 1/2% Senior Notes are redeemable, in whole or in part, at the option of the Company, subject to certain redemption premiums. A portion of the proceeds from the 9 1/2% Senior Notes offering was used to repay the Company's remaining outstanding term debt of approximately $90 million aggregate principal amount and to pay contractual prepayment premiums of approximately $12.3 million. 14 Geneva Steel 8 On May 14, 1996, the Company amended and restated its revolving credit facility (the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA, Inc., as agent, which is used primarily for the working capital and capital expenditure needs of the Company. The Revolving Credit Facility, in the amount of up to $125 million, is secured by the Company's inventories, accounts receivable, general intangibles, and proceeds thereof, and expires on May 14, 2000. Interest is payable monthly at the defined base rate (8.25% at September 30, 1996) plus 1.50% or the defined LIBOR rate (5.47% at September 30, 1996) plus 2.75%. The Company pays a monthly commitment fee based on an annual rate of .50% of the average unused portion of the borrowing limit under the Revolving Credit Facility. The amount available to the Company under the Revolving Credit Facility ranges between 50 to 60 percent, in the aggregate, of eligible inventories plus 85 percent of eligible accounts receivable. Borrowing availability under the Revolving Credit Facility is also subject to other financial tests and covenants. The Company's receivables securitization facility was terminated in connection with the amendment. As of September 30, 1996, the Company's eligible inventories and accounts receivable supported access to $113.0 million under the Revolving Credit Facility. As of September 30, 1996, the Company had $63.4 million in borrowings and $8.4 million in letters of credit outstanding under the Revolving Credit Facility, leaving $41.2 million in additional borrowing availability. As a result of the amendment to the Revolving Credit Facility, the Company significantly increased its borrowing availability. The terms of the Revolving Credit Facility and the Company's Senior Notes include cross default and other customary provisions. Financial covenants contained in the Revolving Credit Facility and/or the Senior Notes also include, among others, a limitation on dividends and distributions on capital stock of the Company, a tangible net worth requirement, a cash interest coverage requirement, a cumulative capital expenditure limitation, a limitation on the incurrence of additional indebtedness unless certain financial tests are satisfied, a limitation on mergers, consolidations and dispositions of assets and limitations on liens. In the event of a change in control, the Company must offer to purchase all Senior Notes then outstanding at a premium. Prior to the most recent amendment to and restatement of the Revolving Credit Facility, the Company entered into various amendments modifying or waiving the financial covenants and tests contained in the revolving credit facility. Besides these and other financing activities, the Company's major source of liquidity has been cash provided by operating activities. Net cash used for operating activities was $31.7 million for the year ended September 30, 1996, as compared with net cash provided by operating activities of $84.1 million and net cash used by operating activities of $28.0 million for the years ended September 30, 1995 and 1994, respectively. The uses of cash for operating activities during the year ended September 30, 1996, resulted primarily from a $13.0 million increase in other current assets, a $31.7 million reduction in fundings under the Company's receivables securitization facility when the facility was terminated in May 1996, an increase in accounts receivable of $9.6 million as a result of increased sales, a decrease in accounts payable of $8.4 million, a decrease in the net deferred tax liability of $3.6 million, an increase in inventories of $3.2 million and a net loss of $7.2 million. These uses of cash flow were offset by depreciation and amortization of $44.4 million. Subsequent to September 30, 1996, the Company received from its insurers a $5 million advance in partial payment of the claim related to the power outage described above. Capital expenditures were $26.4 million, $68.0 million and $164.9 million for fiscal years 1996, 1995 and 1994, respectively. Capital expenditures for 1996 were lower than expected as a result of the longer-than-anticipated performance of one of its blast furnaces. Capital expenditures for fiscal year 1997 are estimated at $35 to $40 million, which includes $8.0 million in capital spending previously scheduled for fiscal year 1996 for the blast furnace reline. Capital projects for fiscal year 1997 consist of a blast furnace reline, installation of rolling mill finishing stand equipment and various other projects designed to reduce costs and increase product quality and throughput. The Company anticipates that it may incur significant start-up and transition costs when the rolling mill finishing stand equipment is installed and implemented. Depending on market, operational, liquidity and other factors, the Company Geneva Steel 15 9 may elect to adjust the design, timing and budgeted expenditures of its capital plan. In addition, the Revolving Credit Facility contains certain limitations on capital expenditures. The Company formed a joint venture with certain unrelated parties, which in turn entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a COREX(R) direct ironmaking facility and associated power generation and air separation facilities. As of September 30, 1996, the Company had spent approximately $822,000 in connection with the COREX(R)project, which was included in construction in progress in the accompanying consolidated financial statements. Expenditures on the project are subject to government cost share arrangements. Completion of the project remains subject to several contingencies. Under certain circumstances, the Company may be required to repay some or all of the government cost share funds in the event the project is terminated. The Company is required to make substantial interest and dividend payments on the Senior Notes, its Redeemable Preferred Stock and outstanding balances under the Revolving Credit Facility. Currently, the Company's annual cash interest expense is approximately $37 million and its annual preferred stock dividends are approximately $8.9 million. FACTORS AFFECTING FUTURE RESULTS The Company's future operations will be impacted by, among other factors, pricing, product mix, throughput levels and production efficiencies. As stated above, near term operating results will be adversely affected by weakened pricing and volume due to, among other factors, a recent surge in unfairly traded imports. The Company has efforts underway to increase throughput and production efficiencies and to continue shifting its product mix to higher-margin products. There can be no assurance that the Company's efforts will be successful or that sufficient demand will exist to support the Company's additional throughput capacity. Pricing in future periods is a key variable that remains subject to significant uncertainty. Future pricing will be affected by several factors, including the level of imports, the outcome of the Plate Trade Cases, future capacity additions, and other market factors. The short-term and long-term liquidity of the Company also is dependent upon several factors, including availability of financing, foreign currency fluctuations, competitive and market forces, capital expenditures and general economic conditions. Moreover, the United States steel market is subject to cyclical fluctuations that may affect the amount of cash internally generated by the Company and the ability of the Company to obtain external financing. Although the Company believes that the anticipated cash from future operations and borrowings under the Revolving Credit Facility will provide sufficient liquidity for the Company to meet its debt service requirements and to fund ongoing operations, including required capital expenditures, there can be no assurance that these or other possible sources will be adequate. Moreover, because of the Company's current leverage situation, its financial flexibility is limited. Inflation can be expected to have an effect on many of the Company's operating costs and expenses. Due to worldwide competition in the steel industry, the Company may not be able to pass through such increased costs to its customers. This annual report contains certain forward-looking statements with respect to the Company that are subject to risks and uncertainties that include, but are not limited to, those identified in this report, described from time to time in the Company's other Securities and Exchange Commission filings or discussed in the Company's press releases. Actual results may vary materially from expectations. 16 Geneva Steel 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO GENEVA STEEL COMPANY: We have audited the accompanying consolidated balance sheets of Geneva Steel Company (a Utah corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Geneva Steel Company and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP - -------------------------- Salt Lake City, Utah October 17, 1996 Geneva Steel 17 11 Consolidated Balance Sheets (DOLLARS IN THOUSANDS)
ASSETS SEPTEMBER 30, 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 597 $ 12,808 Accounts receivable, less allowance for doubtful accounts of $4,031 and $2,012, respectively 76,527 35,178 Inventories 93,139 89,909 Deferred income taxes 7,637 6,885 Prepaid expenses and other 15,410 2,661 Related party receivable 250 -- ------------------------- Total current assets 193,560 147,441 ------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 1,990 1,941 Buildings 16,109 16,092 Machinery and equipment 600,290 576,066 Mineral property and development costs 8,425 8,425 ------------------------- 626,814 602,524 Less accumulated depreciation (172,291) (132,134) ------------------------- Net property, plant and equipment 454,523 470,390 ------------------------- OTHER ASSETS 9,303 10,966 ------------------------- $657,386 $ 628,797 -------------------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 18 Geneva Steel 12 Consolidated Balance Sheets (Continued) (DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, 1996 1995 CURRENT LIABILITIES: Accounts payable 59,575 $ 67,939 Accrued liabilities 23,035 19,045 Accrued payroll and related taxes 10,867 10,667 Production prepayments 9,763 10,000 Accrued interest payable 4,746 4,610 Accrued pension and profit sharing costs 2,259 2,135 -------------------------- Total current liabilities 110,245 114,396 -------------------------- LONG-TERM DEBT 388,431 342,033 -------------------------- DEFERRED INCOME TAX LIABILITIES 10,446 13,263 -------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 5) REDEEMABLE PREFERRED STOCK, SERIES B, NO PAR VALUE; 400,000 shares authorized, issued and outstanding, with a liquidation value of $60,443 and $56,753, respectively 55,437 51,031 -------------------------- STOCKHOLDERS' EQUITY Preferred stock, no par value; 3,600,000 shares authorized for all series, excluding Series B, none issued -- -- Common stock- Class A, no par value; 60,000,000 shares authorized, 14,705,265 and 14,695,265 shares issued, respectively 87,979 87,926 Class B, no par value; 50,000,000 shares authorized, 19,151,348 and 19,251,348 shares issued and outstanding, respectively 10,110 10,163 Warrants to purchase Class A common stock 5,360 5,360 Retained earnings 5,077 22,754 Less 1,194,897 and 1,379,863 Class A common stock treasury shares, respectively, at cost (15,699) (18,129) -------------------------- Total stockholders' equity 92,827 108,074 -------------------------- $ 657,386 $ 628,797 --------------------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Geneva Steel 19 13 Consolidated Statements of Operations (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 Net sales $ 712,657 $ 665,699 $ 486,062 Cost of sales 662,307 594,191 470,548 ------------------------------------------- Gross margin 50,350 71,508 15,514 Selling, general and administrative expenses 24,621 23,795 22,305 ------------------------------------------- Income (loss) from operations 25,729 47,713 (6,791) ------------------------------------------- Other income (expense): Interest and other income 552 520 1,583 Interest expense (36,199) (30,579) (21,722) Other expense (1,749) (2,386) -- ------------------------------------------- (37,396) (32,445) (20,139) ------------------------------------------- Income (loss) before provision (benefit) for income taxes and extraordinary item (11,667) 15,268 (26,930) Provision (benefit) for income taxes (4,429) 3,664 (10,234) ------------------------------------------- Income (loss) before extraordinary item (7,238) 11,604 (16,696) Loss on early extinguishment of debt (net of benefit for income taxes of $4,429) -- -- (9,534) ------------------------------------------- Net income (loss) (7,238) 11,604 (26,230) Less redeemable preferred stock dividends and accretion for original issue discount 9,089 7,998 7,046 ------------------------------------------- Net income (loss) applicable to common shares $ (16,327) $ 3,606 $ (33,276) ------------------------------------------- Income (loss) per common share before extraordinary item $ (1.07) $ .24 $ (1.57) Extraordinary item per common share -- -- (.63) ------------------------------------------- Net income (loss) per common share $ (1.07) $ .24 $ (2.20) ------------------------------------------- Weighted average common shares outstanding 15,309 15,330 15,129 -------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 Geneva Steel 14 Consolidated Statements of Stockholders' Equity (DOLLARS IN THOUSANDS)
SHARES ISSUED AMOUNT WARRANT TO COMMON COMMON COMMON COMMON PURCHASE CLASS A CLASS B CLASS A CLASS B COMMON CLASS A Balance at September 30, 1993 14,360,886 22,595,138 $ 86,094 $ 11,929 $ 5,360 Exercise of options to purchase Class A common stock -- -- (76) -- -- Conversion of Class B common stock into Class A common stock 195,545 (1,955,450) 1,033 (1,033) -- Issuance of Class A common stock to employee savings plan -- -- 142 -- -- Redeemable preferred stock -- -- -- -- -- dividends Redeemable preferred stock accretion for original issue discount -- -- -- -- -- Net loss -- -- -- -- -- ------------------------------------------------------------------------------------------ Balance at September 30, 1994 14,556,431 20,639,688 87,193 10,896 5,360 Conversion of Class B common stock into Class A common stock 138,834 (1,388,340) 733 (733) -- Issuance of Class A common stock to employee savings plan -- -- -- -- -- Redeemable preferred stock -- -- -- -- -- dividends Redeemable preferred stock accretion for original issue discount -- -- -- -- -- Net income -- -- -- -- -- ------------------------------------------------------------------------------------------ Balance at September 30, 1995 14,695,265 19,251,348 87,926 10,163 5,360 Conversion of Class B common stock into Class A common stock 10,000 (100,000) 53 (53) -- Issuance of Class A common stock to employee savings plan -- -- -- -- -- Redeemable preferred stock -- -- -- -- -- dividends Redeemable preferred stock accretion for original issue discount -- -- -- -- -- Net loss -- -- -- -- -- ------------------------------------------------------------------------------------------ Balance at September 30, 1996 14,705,265 19,151,348 $ 87,979 $ 10,110 $ 5,360 ------------------------------------------------------------------------------------------
RETAINED TREASURY EARNINGS STOCK TOTAL Balance at September 30, 1993 $52,542 $(20,150) $135,775 Exercise of options to purchase Class A common stock -- 449 373 Conversion of Class B common stock into Class A common stock -- -- -- Issuance of Class A common stock to employee savings plan -- 650 792 Redeemable preferred stock (6,358) -- (6,358) dividends Redeemable preferred stock accretion for original issue discount (688) -- (688) Net loss (26,230) -- (26,230) --------------------------------------------------- Balance at September 30, 1994 19,266 (19,051) 103,664 Conversion of Class B common stock into Class A common stock -- -- -- Issuance of Class A common stock to employee savings plan (118) 922 804 Redeemable preferred stock (7,296) -- (7,296) dividends Redeemable preferred stock accretion for original issue discount (702) -- (702) Net income 11,604 -- 11,604 --------------------------------------------------- Balance at September 30, 1995 22,754 (18,129) 108,074 Conversion of Class B common stock into Class A common stock -- -- -- Issuance of Class A common stock to employee savings plan (1,350) 2,430 1,080 Redeemable preferred stock (8,372) -- (8,372) dividends Redeemable preferred stock accretion for original issue discount (717) -- (717) Net loss (7,238) -- (7,238) --------------------------------------------------- Balance at September 30, 1996 $ 5,077 $(15,699) $ 92,827 ---------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Geneva Steel 21 15 Consolidated Statements of Cash Flows (DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH AND CASH EQUIVALENT YEAR ENDED SEPTEMBER 30, 1996 1995 1994 Cash Flows From Operating Activities: Net income (loss) $ (7,238) $ 11,604 $ (26,230) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation 42,077 37,293 26,111 Amortization of loan fees 2,338 2,015 3,759 Deferred income tax provision (benefit) (3,569) 6,378 (15,619) (Increase) decrease in current assets- Accounts receivable, net (41,349) 12,729 (1,650) Inventories (3,230) (3,900) (22,779) Prepaid expenses and other (12,999) 177 (1,412) Increase (decrease) in current liabilities- Accounts payable (8,364) 10,918 4,039 Accrued liabilities (692) 3,572 1,320 Accrued payroll and related taxes 1,279 2,293 1,392 Production prepayments (237) -- -- Accrued interest payable 136 30 3,047 Accrued pension and profit sharing costs 124 1,021 4 ------------------------------------------ Net cash provided by (used for) operating activities (31,724) 84,130 (28,018) ------------------------------------------ Cash Flows From Investing Activities: Purchase of property, plant and equipment (26,378) (68,025) (164,918) Proceeds from sale of property, plant and equipment 213 15,966 -- Change in other assets 889 (889) -- ------------------------------------------ Net cash used for investing activities $ (25,276) $ (52,948) $(164,918) ------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 Geneva Steel 16 Consolidated Statements of Cash Flows (Continued) (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 Cash Flows From Financing Activities: Proceeds from issuance of long-term debt $ 59,752 $ - $ 222,348 Payments on long-term debt (13,354) (15,315) (89,991) Payments for deferred loan costs and other assets (1,563) (1,724) (5,513) Proceeds from exercise of options to purchase Class A common stock - - 373 Change in bank overdraft - (1,341) 1,341 Other (46) 6 111 ------------------------------------------- Net cash provided by (used for) financing activities 44,789 (18,374) 128,669 ------------------------------------------- Net increase (decrease) in cash and cash equivalents (12,211) 12,808 (64,267) Cash and cash equivalents at beginning of year 12,808 - 64,267 ------------------------------------------- Cash and cash equivalents at end of year $ 597 $ 12,808 - ------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 36,498 $ 34,357 $ 16,559 Income taxes 367 250 512
Supplemental schedule of noncash financing activities: For the years ended September 30, 1996, 1995 and 1994, the Company increased the redeemable preferred stock liquidation preference by $3,690, $7,296 and $6,358, respectively, in lieu of paying cash dividends. In addition, for the same years, redeemable preferred stock was increased by $717, $702 and $688, respectively, for the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. The accompanying notes to consolidated financial statements are an integral part of these statements. Geneva Steel 23 17 Notes to Consolidated Financial Statements (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company's steel mill manufactures steel slabs and hot-rolled sheet, plate and pipe products for sale to various distributors, steel processors or end-users primarily in the western and central United States. PRINCIPALS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Geneva Steel Company and its wholly-owned subsidiaries (collectively, the "Company" ). Intercompany balances and transactions have been eliminated in consolidation. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid income-earning securities with an initial maturity of ninety days or less to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates fair market value. The Company's cash management system utilizes a revolving credit facility with a syndicate of banks (see Note 2). INVENTORIES Inventories include costs of material, labor and manufacturing overhead. Inventories are stated at the lower of cost (using a weighted-average method) or market value. The composition of inventories as of September 30, 1996 and 1995 was as follows:
1996 1995 Raw materials $31,064 $27,784 Semi-finished and finished goods 53,604 54,191 Operating materials 8,471 7,934 ------------------------ $93,139 $89,909 ------------------------
Operating materials consist primarily of production molds, platforms for the production molds and furnace lining refractories. INSURANCE CLAIM RECEIVABLE A plant-wide power outage caused by unusual weather conditions in January 1996 had a significant effect on operating results during the fiscal year ended September 30, 1996. The Company is continuing to assess the full financial impact of the outage and has recorded a portion of the expected loss recovery in the accompanying fiscal year 1996 consolidated financial statements. The Company expects that the insurance claim will be settled within the next year. 24 Geneva Steel 18 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives as follows: Buildings 31.5 years Machinery and Equipment 2-30 years Interest related to the construction or major rebuild of facilities is capitalized and amortized over the estimated life of the related asset. Capitalization of interest ceases when the asset is placed in service. The Company capitalized approximately $2,112, $5,674 and $12,053 of interest during the years ended September 30, 1996, 1995 and 1994, respectively. Maintenance and repairs are charged to expense as incurred and costs of improvements and betterments are capitalized. Upon disposal, related costs and accumulated depreciation are removed from the accounts and resulting gains or losses are reflected in income. Major spare parts and back-up facilities for machinery and equipment are capitalized and included in machinery and equipment in the accompanying consolidated financial statements. Major spare parts and back-up facilities are depreciated using the straight-line method over the useful lives of the related machinery and equipment. Costs incurred in connection with the construction or major rebuild of facilities are capitalized as construction in progress. No depreciation is recognized on these assets until placed in service. As of September 30, 1996 and 1995, approximately $39,194 and $80,876, respectively, of construction in progress was included in machinery and equipment in the accompanying consolidated financial statements. Mineral property and development costs are depleted using the units of production method based upon estimated recoverable reserves. Accumulated depletion is included in accumulated depreciation in the accompanying consolidated financial statements. OTHER ASSETS Other assets consist primarily of deferred loan costs incurred in connection with obtaining long-term financing. These costs are being amortized on a straight-line basis over the term of the applicable financing agreement. Accumulated amortization totaled $4,700 and $3,023 at September 30, 1996 and 1995, respectively. PRODUCTION PREPAYMENTS The Company has production prepayment terms with a major customer. The arrangement previously provided for up to $10,000 in production prepayments upon entry of new orders. During the year ended September 30, 1996, the Company completed an amendment increasing the maximum amount of production prepayments to $15,000. Prepayments are recorded as a production prepayment liability until the product is shipped, at which time the sale is recorded. As of September 30, 1996 and 1995, production prepayments of $9,763 and $10,000 are included in the accompanying consolidated financial statements. REVENUE RECOGNITION Sales are recognized when the product is shipped to the customer. Sales are reduced by the amount of customer claims. As of September 30, 1996 and 1995, reserves for estimated customer claims of $2,502 and $1,202, were included in the allowance for doubtful accounts in the accompanying consolidated financial statements. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses, which, when realized, have been within the range of management's expectations. Geneva Steel 25 19 RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company is required to adopt SFAS No. 121 in fiscal year 1997. This new accounting standard is not expected to have a significant impact on the Company's financial position or results of operations, when implemented. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is based upon the weighted average number of common and common equivalent shares outstanding during the periods presented. Common equivalent shares consist of warrants and options to purchase Class A common stock which have a dilutive effect when applying the treasury stock method. Class B common stock is included in the weighted average number of common shares outstanding at one share for every ten shares outstanding as the Class B common stock can be converted into Class A common stock at this same rate. Also, the Class B common stock is entitled to one-tenth of the dividends and other distributions paid to Class A common stockholders. The holders of both classes of common stock are entitled to one vote per share. The net income (loss) for the years ended September 30, 1996, 1995 and 1994 was adjusted for the redeemable preferred stock dividends and the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. RECLASSIFICATIONS Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the current year presentation. 2. LONG TERM DEBT The aggregate amounts of principal maturities of long-term debt as of September 30, 1996 and 1995 consisted of the following:
1996 1995 Senior term notes issued publicly, interest payable January 15 and July 15 at 9.5%, principal due January 15, 2004, unsecured $190,000 $190,000 Senior term notes issued publicly, interest payable March 15 and September 15 at 11.125 %, principal due March 15, 2001, unsecured 135,000 135,000 Revolving credit facility from a syndicate of banks, interest is payable monthly at the defined base rate (8.25% at September 30, 1996) plus 1.50% or the defined LIBOR rate (5.47% at September 30, 1996) plus 2.75%, due May 14, 2000 (see discussion below), secured by inventories and accounts receivable 63,431 17,033 -------------------------- $388,431 $342,033 ==========================
26 Geneva Steel 20 The aggregate amounts of principal maturities of long-term debt as of September 30, 1996 were as follows: YEAR ENDED SEPTEMBER 30, 1997 $ -- 1998 -- 1999 -- 2000 63,431 2001 135,000 Thereafter 190,000 ------------ $ 388,431 ------------
In May 1996, the Company amended and restated its revolving credit facility (the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA, Inc., as agent, which is used primarily for the working capital and capital expenditure needs of the Company. The Revolving Credit Facility, in the amount of up to $125,000, is secured by the Company's inventories, accounts receivable, general intangibles, and proceeds thereof, and expires on May 14, 2000. Interest is payable monthly at the defined base rate (8.25% at September 30, 1996) plus 1.50%, or the defined LIBOR rate (5.47% at September 30, 1996) plus 2.75%. The Company pays a monthly commitment fee based on an annual rate of .50% of the average unused portion of the borrowing limit under the Revolving Credit Facility. The amount available to the Company under the Revolving Credit Facility currently ranges between 50 and 60 percent, in the aggregate, of eligible inventories plus 85 percent of eligible accounts receivable. Borrowing availability under the Revolving Credit Facility is also subject to other financial tests and covenants. The Company's receivables securitization facility was terminated in connection with the amendment. Certain deferred fees associated with establishing the Company's receivables securitization facility were expensed during the year ended September 30, 1996. During the years ended September 30, 1995, and 1994, the Company retired certain term loans and revolving credit facilities. Deferred loan costs applicable to debt retired were expensed by the Company and are included in the accompanying consolidated financial statements. The terms of the Revolving Credit Facility and the Company's $190,000 9 1/2% Senior Notes issued in January 1994 (the "9 1/2% Senior Notes") and $135,000 11 1/8% Senior Notes issued in March 1993 (the "11 1/8% Senior Notes" and together with the 9 1/2% Senior Notes the "Senior Notes") include cross default and other customary provisions. Financial covenants contained in the Revolving Credit Facility and/or the Senior Notes also include, among others, a limitation on dividends and distributions on capital stock of the Company, a tangible net worth requirement, a cash interest coverage requirement, a cumulative capital expenditure limitation, a limitation on the incurrence of additional indebtedness unless certain financial tests are satisfied, a limitation on mergers, consolidations and dispositions of assets and limitations on liens. Based on such covenants, as of September 30, 1996, all of the Company's retained earnings balance was restricted from payment of cash dividends. In the event of a change in control, the Company must offer to purchase all Senior Notes then outstanding at a premium. The Company is in compliance with the covenants and tests contained in the Revolving Credit Facility and the Senior Notes. The Company estimates that the aggregate fair market value of its debt and related obligations was approximately $323,531 as of September 30, 1996. These estimates were based on quoted market prices or current rates offered for debt with similar terms and maturities. 3. MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES During the years ended September 30, 1996, 1995, and 1994, the Company derived approximately 31%, 36%, and 42%, respectively, of its net sales through one customer, which is a distributor to other companies. International sales during the years ended September 30, 1996, 1995 and 1994 did not exceed 10%. Geneva Steel 27 21 4. INCOME TAXES The provision (benefit) for income taxes as of September 30, 1996, 1995 and 1994 consisted of the following:
1996 1995 1994 Current income tax provision (benefit): Federal $ (752) $ (2,375) $ 1,163 State (108) (339) (207) ---------------------------------------- (860) (2,714) 956 ---------------------------------------- Deferred income tax provision (benefit): Federal (3,123) 4,543 (9,080) State (446) 649 (924) Change in valuation allowance -- 1,186 (1,186) ---------------------------------------- (3,569) 6,378 (11,190) ---------------------------------------- Provision (benefit) for income taxes $ (4,429) $ 3,664 $(10,234) ----------------------------------------
The provision (benefit) for income taxes as a percentage of income (loss) for the years ended September 30, 1996, 1995 and 1994 differs from the statutory federal income tax rate due to the following:
1996 1995 1994 Statutory federal income tax rate (35.0)% 35.0% (35.0)% State income taxes, net of federal income tax impact (3.3) 3.3 (3.3) Change in valuation allowance -- (7.8) 4.4 Reassessment of deferred income tax liabilities -- (8.0) -- Other 0.3 1.5 (4.1) ------------------------------------ Effective income tax rate (38.0)% 24.0% (38.0)% ------------------------------------
28 Geneva Steel 22 INCOME TAXES (CONTINUED) The components of the net deferred income tax assets and liabilities as of September 30, 1996 and 1995 were as follows:
1996 1995 Deferred income tax assets: Net operating loss carryforward $ 26,019 $ 16,346 Inventory costs capitalized 4,604 3,949 Alternative minimum tax credit carryforward 6,464 6,748 Accrued vacation 1,836 1,802 Allowance for doubtful accounts 1,248 956 General business credits 2,978 2,911 Other 188 306 ----------------------- Total deferred income tax assets 43,337 33,018 ----------------------- Deferred income tax liabilities: Accelerated depreciation (41,323) (34,022) Mineral property development costs (2,467) (2,335) Operating supplies (2,356) (3,039) ----------------------- Total deferred income tax liabilities (46,146) (39,396) ----------------------- Net deferred income tax liabilities $ (2,809) $ (6,378) -----------------------
As of September 30, 1996, the Company had a net operating loss carryforward and an alternative minimum tax credit carryforward for tax reporting purposes of approximately $67,935 and $6,464, respectively. The net operating loss carryforward begins expiring in 2009. 5. COMMITMENTS AND CONTINGENCIES CAPITAL PROJECTS The Company has incurred substantial capital expenditures to modernize its steelmaking, casting, rolling and finishing facilities, thereby reducing overall operating costs, broadening the Company's product line, improving product quality and increasing throughput capacity. The Company spent $26,378 and $68,025 on capital projects during the fiscal years ended September 30, 1996 and 1995, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization and capital maintenance efforts. Capital expenditures for 1996 were lower than expected primarily as a result of the longer-than-anticipated performance of one of its blast furnaces. Capital expenditures for fiscal year 1997 are estimated at $35,000 to $40,000, which includes $8,000 in capital spending previously scheduled for fiscal year 1996 for the blast furnace reline. In addition, capital projects for fiscal year 1997 consist of installation of the rolling mill finishing stand equipment and various other projects designed to reduce costs and increase product quality and throughput. Depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. The Company formed a joint venture with certain unrelated parties, which in turn entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a COREX(R) direct ironmaking facility and associated power generation and air separation facilities. As of September 30, 1996, the Company had spent approximately $822 in connection with the COREX(R) project, which was included in construction in progress in the accompanying consolidated financial statements. Expenditures on the project are subject to government cost share arrangements. Completion of the project remains subject to several contingencies. Under certain circumstances, the Company may be required to repay some or all of the government cost share funds in the event the project is terminated. Geneva Steel 29 23 LEGAL MATTERS The Company is subject to various legal matters, which it considers normal for its business activities. Management, after consultation with the Company's legal counsel, believes that these matters will not have a material impact on the financial condition or result of operations of the Company. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in the Company's business. The Company is subject to federal, state and local environmental laws and regulations concerning, among other things, air emissions, wastewater discharge, and solid and hazardous waste disposal. The Company believes that it is in compliance in all material respects with all currently applicable environmental regulations. The Company has incurred substantial capital expenditures for environmental control facilities, including the Q-BOP furnaces, the wastewater treatment facility, the benzene mitigation equipment, the coke oven gas desulfurization facility and other projects. The Company has budgeted a total of approximately $200 for environmental capital improvements in fiscal years 1997 and 1998. Environmental legislation and regulations have changed rapidly in recent years and it is likely that the Company will be subject to increasingly stringent environmental standards in the future. Although the Company has budgeted for capital expenditures for environmental matters, it is not possible at this time to predict the amount of capital expenditures that may ultimately be required to comply with all environmental laws and regulations. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), EPA and the states have authority to impose liability on waste generators, site owners and operators and others regardless of fault or the legality of the original disposal activity. Other environmental laws and regulations may also impose liability on the Company for conditions existing prior to the Company's acquisition of the steel mill. At the time of the Company's acquisition of the steel mill, the Company and USX Corporation ("USX") identified certain hazardous and solid waste sites and other environmental conditions which existed prior to the acquisition. USX has agreed to indemnify the Company (subject to the sharing arrangements described below) for any fines, penalties, costs (including costs of clean-up, required studies and reasonable attorneys fees), or other liabilities for which the Company becomes liable due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of any environmental law, is otherwise required by applicable judicial or administrative action, or is determined to trigger civil liability (the "Pre-existing Environmental Liabilities"). The Company has provided a similar indemnity (but without any similar sharing arrangement) to USX for conditions that may arise after the acquisition. Although the Company has not completed a comprehensive analysis of the extent of the Pre-existing Environmental Liabilities, such liabilities could be material. Under the acquisition agreement between the two parties, the Company and USX agreed to share on an equal basis the first $20,000 of costs incurred by either party to satisfy any government demand for studies, closure, monitoring, or remediation at specified waste sites or facilities or for other claims under CERCLA or the Resource Conservation and Recovery Act. The Company is not obligated to contribute more than $10,000 for the clean-up of wastes generated prior to the acquisition. The Company believes that it has paid the full $10,000 necessary to satisfy its obligations under the cost-sharing arrangement. USX has advised the Company, however, of its position that a portion of the amount paid by the Company may not be properly credited against the Company's obligations. Although the Company believes that USX's position is without merit, there can be no assurance that this matter will be resolved without litigation. The Company believes that resolution of this matter will not likely have a material adverse effect. The Company's ability to obtain indemnification from USX in the future will depend on factors which may be beyond the Company's control and may also be subject to dispute. PURCHASE COMMITMENTS Effective September 27, 1988, the Company entered into an agreement, which was subsequently amended on June 8, 1990, to purchase a minimum of approximately 207 million standard cubic feet of oxygen each month. The contract expires on April 1, 1998. The contract price is adjusted semi-annually based on the change in the Producer Price Index for Industrial Commodities ("PPI"). The Company has agreed to pay all sales and excise taxes levied against the supplier. Effective September 1, 1989, the Company entered into an agreement to purchase interruptible and firm back-up power through January 31, 1999. For interruptible power, the Company pays an energy charge adjusted annually to reflect changes in the supplier's average energy costs and facilities charge, based on 90,000 kilowatts, adjusted annually to reflect changes in the supplier's per megawatt fixed transmission investment. For firm back-up power, the Company pays a monthly facilities charge based on 20,000 kilowatts that remains constant, and demand and energy charges based on actual usage. On November 3, 1993, the Company executed a firm power contract with the same supplier for additional power needs. Under this contract, the Company will pay the same energy price as under the interruptible contract and a power charge based on the supplier's filed industrial tariff. 30 Geneva Steel 24 Effective July 12, 1990, the Company entered into an agreement, which was subsequently amended in April 1992, to purchase 100% of the oxygen, nitrogen and argon produced at a facility located at the Company's steel mill which is owned and operated by an independent party. The contract expires in September 2006 and specifies that the Company will pay a base monthly charge that is adjusted semi-annually each January 1 and July 1 based upon a percentage of the change in the PPI. Effective January 1, 1994, the Company entered into a ten-year agreement to purchase metallurgical coke, which was subsequently amended on April 11, 1996. The Company has a commitment to purchase a minimum of 274,800 net tons of coke at a specified price in the third contract year. The quantity and price for subsequent years will be as agreed by the parties. Effective September 1, 1994, the Company entered into a five year agreement to purchase taconite pellets. The Company has commitments to purchase 2,160,000 net tons in the third year of the contract and 1,890,000 net tons in each of the fourth and fifth years of the contract. Prices are adjusted each year based on an index related to the "Cartier Pellets Price." Effective June 6, 1995, the Company entered into an agreement to purchase 800 tons a day of oxygen from a new plant being constructed at the Company's steel mill which will be owned and operated by an independent party. Upon completion of the new oxygen plant, the Company will pay a monthly facility charge which will be adjusted semi-annually each January 1 and July 1 based on an index. The contract continues for fifteen years after the completion of the plant. Effective July 1, 1995, the Company entered into an agreement, which was subsequently amended in August 1996, to purchase 15,228 MMBTU per day of natural gas. The contract expires on October 31, 1997. The price is adjusted monthly based on the index price as reported by "Inside FERC Gas Market Report." LEASE OBLIGATIONS The Company leases certain facilities and equipment used in its operations. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The aggregate commitments under non-cancelable operating leases at September 30, 1996, were as follows: YEAR ENDED SEPTEMBER 30, 1997 $ 8,457 1998 7,763 1999 7,602 2000 7,431 2001 7,328 Thereafter 31,706 --------- $ 70,287 ---------
Total rental expense for non-cancelable operating leases was approximately $5,964, $3,931 and $1,505 for the years ended September 30, 1996, 1995 and 1994, respectively. LETTERS OF CREDIT As of September 30, 1995, the Company had outstanding letters of credit totaling approximately $8,400. 6. REDEEMABLE PREFERRED STOCK In March 1993, the Company issued $40,000 of 14% cumulative redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") and related warrants to purchase an aggregate of 1,132,000 shares of Class A common stock. The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a liquidation preference of approximately $151 per share as of September 30, 1996. Dividends accrue at a rate equal to 14% per annum of the liquidation preference and, except as provided below, are payable quarterly in cash from funds legally available therefor. Prior to April 1996, the Company elected to add the dividends to the liquidation preference. During the years ended September 30, 1996 and 1995, the Company increased the liquidation value of the Redeemable Preferred Stock to $60,443 and $56,753, respectively, by adding dividends to the liquidation preference. The Redeemable Preferred Stock is exchangeable, at the Company's option, into subordinated debentures of the Company due 2003 (the "Exchange Debentures"). The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally available therefor. The Company's ability to pay cash dividends on the Redeemable Preferred Stock is subject to the covenants and tests contained in the indentures Geneva Steel 31 25 governing the Senior Notes and in the Revolving Credit Facility. Restricted payment limitations under the Company's 11 1/8% Senior Notes precluded payment of the preferred stock dividends due on June 15, 1996, September 15, 1996 and December 15, 1996. Unpaid dividends of approximately $4,682 were included in accrued liabilities in the accompanying financial statements at September 30, 1996. Unpaid dividends accumulate until paid and accrue additional dividends at the rate of 14% per annum. In the event that the Company fails to pay dividends on the Redeemable Preferred Stock in an amount equal to four full quarterly dividends, then the holders of the Redeemable Preferred Stock have the right to elect not less than 25 percent of the members of the board of directors. The right of such holders to elect directors continues until the Company has paid all dividends in arrears and has paid the dividends due for two consecutive quarters thereafter. After March 1998, both the Redeemable Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's option, subject to certain redemption premiums. The warrants to purchase Class A common stock are exercisable at $11 per share, subject to adjustment in certain circumstances, and expire in March 2000. The Company estimates that the aggregate fair market value of its Redeemable Preferred Stock was approximately $32,000 at September 30, 1996. The Company estimates that the aggregate fair market value of its warrants to purchase Class A common stock was approximately $1,274 at September 30, 1996. The Company's estimates for the Redeemable Preferred Stock and warrants to purchase Class A common stock were based on quoted market prices. 7. STOCK OPTIONS Effective January 2, 1990, the Company granted options to purchase 330,000 shares of Class A common stock to key employees at an exercise price of $10.91 per share. The stock options became fully exercisable on January 2, 1995. The stock options remain exercisable until the earlier of 90 days after the employee's termination of employment or ten years from the date such stock options were granted. Effective July 20, 1990, the Company's Board of Directors adopted a Key Employee Plan (the "Employee Plan") which was approved by the Company's stockholders in January 1991. The Employee Plan provides that incentive and nonstatutory stock options to purchase Class A common stock and corresponding stock appreciation rights may be granted. The Employee Plan provides for issuance of up to 1,000,000 shares of Class A common stock, with no more than 750,000 shares of Class A common stock cumulatively available upon exercise of incentive stock options. The Employee Plan Committee (the "Committee"), consisting of outside directors, determines the time or times when each incentive or nonstatutory stock option vests and becomes exercisable; provided no stock option shall be exercisable within six months of the date of grant (except in the event of death or disability) and no incentive stock option shall be exercisable after the expiration of ten years from the date of grant. The exercise price of incentive stock options to purchase Class A common stock shall be at least the fair market value of the Class A common stock on the date of grant. The exercise price of nonstatutory options to purchase Class A common stock is determined by the Committee. Stock option activity for the years ended September 30, 1996, 1995 and 1994 consisted of the following:
NUMBER OF PRICE PER SHARES SHARE RANGE OUTSTANDING AT SEPTEMBER 30, 1993 531,035 $7.88 - 10.91 Granted 128,700 7.75 - 8.66 Exercised (34,200) 10.91 Cancelled (4,100) 7.75-7.88 ---------------------------- OUTSTANDING AT SEPTEMBER 30, 1994 621,435 7.75-10.91 Granted 131,100 7.75-8.66 Cancelled (1,200) 7.75-7.88 ---------------------------- OUTSTANDING AT SEPTEMBER 30, 1995 751,335 7.75-10.91 Granted 173,438 3.75 - 4.125 Cancelled (15,825) 7.75-7.88 ---------------------------- OUTSTANDING AT SEPTEMBER 30, 1996 908,948 $3.75 - 10.91
Options to purchase 459,320, 356,920 and 237,600 shares of Class A common stock were exercisable on September 30, 1996, 1995 and 1994, respectively. As of September 30, 1996, 284,827 shares are available for grant under the Employee Plan. 32 Geneva Steel 26 8. EMPLOYEE BENEFIT PLANS UNION SAVINGS AND PENSION PLAN The Company has a savings and pension plan which provides benefits for all eligible employees covered by the collective bargaining agreement. This plan is comprised of two qualified plans; (1) a union employee savings 401(k) plan with a cash or deferred compensation arrangement and matching contributions and (2) a noncontributory defined contribution pension plan. Participants may direct the investment of funds related to their deferred compensation in this plan. On March 1, 1996, the Company began to match participants' contributions to the savings plan at 25% up to 4% of their compensation. For the pension plan, the Company contributed 5% of each participant's compensation to this plan from March 1, 1996 through September 30, 1996 and contributed 4 1/2% of each participant's compensation to this plan from March 1, 1995 through February 29, 1996. For the period from October 1, 1994 through February 28, 1995 and for the year ended September 30, 1994, the Company contributed 4% of each participant's compensation to this plan. Total contributions by the Company for the years ended September 30, 1996, 1995 and 1994 were $4,480, $3,485 and $3,086, respectively. The participants vest in these contributions at 20% for each year of service until fully vested after five years. VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION TRUST Effective March 1, 1995, the Company established a voluntary employee beneficiary association trust ("VEBA Trust") to fund post-retirement medical benefits for future retiree's covered by the collective bargaining agreement. Company contributions to the VEBA Trust are ten cents for each hour of work performed by employees covered by the collective bargaining agreement. In addition, union employees provide a contribution to the VEBA Trust based on a reduction from their performance dividend plan payment. No benefits will be paid from the VEBA Trust prior to March 31, 1998. Eligibility requirements and related matters will be determined at a later date. MANAGEMENT EMPLOYEE SAVINGS AND PENSION PLAN The Company has a savings and pension plan which provides benefits for all eligible employees not covered by the collective bargaining agreement. This plan is comprised of two qualified plans: (1) a management employee savings 401(k) plan with a cash or deferred compensation arrangement and discretionary matching contributions and (2) a noncontributory defined contribution pension plan. Participants may direct the investment of funds related to their deferred compensation in this plan. The employee savings plan provides for discretionary matching contributions as determined each plan year by the Company's Board of Directors. The Board of Directors elected to match participants' contributions to the employee savings plan up to 4% of their compensation during fiscal years 1996, 1995 and 1994. For the pension plan, the Company contributed 5% of each participant's compensation to this plan from March 1, 1996 through September 30, 1996 and contributed 4 1/2% of each participant's compensation to this plan from March 1, 1995 through February 29, 1996. For the period from October 1, 1994 through February 28, 1995 and for the year ended September 30, 1994, the Company contributed 4% of each participant's compensation to this plan. During the years ended September 30, 1996, 1995 and 1994, total contributions by the Company were $2,139, $1,981 and $1,780, respectively. The participants vest in the Company's contributions at 20% for each year of service until fully vested after five years. PROFIT SHARING AND BONUS PROGRAMS The Company has a profit sharing program for full-time union eligible employees. Participants receive payments based upon operating income reduced by an amount equal to a portion of the Company's capital expenditures. No profit sharing was accrued in the years ended September 30, 1996, 1995 and 1994. The Company also has implemented a performance dividend plan designed to reward employees for increased shipments. As shipments increase above an annualized rate of 1.5 million tons, compensation under this plan increases. Payments made under the performance dividend plan are deducted from any profit sharing obligations to the extent such obligations exceed the performance dividend plan payments in any given fiscal year. During the years ended September 30, 1996, 1995 and 1994, performance dividend plan expenses were $9,177, $6,391 and $1,885, respectively. SUPPLEMENTAL EXECUTIVE PLANS The Company maintains insurance and retirement agreements with certain of the management employees and executive officers. Pursuant to the insurance agreements, the Company pays the annual premiums and receives certain policy proceeds upon the death of the retired management employee or executive officer. Pursuant to the retirement agreements, the Company provides for the payment of supplemental benefits to certain management employees and executive officers upon retirement. Geneva Steel 33 27 9. RELATED PARTY TRANSACTIONS On September 27, 1996, the Company entered into an agreement to loan up to $500 to its Chief Executive Officer. On September 27, 1996 and October 4, 1996, the Company loaned $250 and $210, respectively. The loan is evidenced by a promissory note which bears interest at the rate of 8.54% and is payable at the earlier of September 27, 1997 or demand for repayment by the Company. The loan is secured by interests in real and personal property owned by the Chief Executive Officer and an affiliated entity. 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly financial information for the years ended September 30, 1996 and 1995 is as follows:
1996 QUARTERS FIRST SECOND THIRD FOURTH Net sales $ 167,090 $ 159,131 $ 183,105 $ 203,331 Gross margin 12,202 7,805 9,420 20,923 Net income (loss) (1,332) (4,685) (4,360) 3,139 Net income (loss) applicable to common shares (3,496) (6,920) (6,655) 744 Net income (loss) per common share (.23) (.45) (.43) .05 1995 QUARTERS FIRST SECOND THIRD FOURTH Net sales $ 164,424 $ 157,213 $ 175,196 $ 168,866 Gross margin 15,944 15,812 23,059 16,693 Net income 1,008 1,131 5,696 3,769 Net income (loss) applicable to common shares (898) (837) 3,667 1,674 Net income (loss) per common share (.06) (.06) .24 .11
34 Geneva Steel EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8, File No. 33- 40867 and the Company's previously filed Registration Statement on Form S-3, File No. 33-64548. ARTHUR ANDERSEN LLP /s/ ARTHUR ANDERSEN LLP - ----------------------- Salt Lake City, Utah December 27, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO. 1,000 US DOLLARS YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 1 597 0 76,527 4,031 93,139 193,560 626,814 172,291 657,386 110,245 388,431 55,437 0 82,390 10,437 657,386 712,657 712,657 662,307 662,307 24,621 8,616 37,396 (11,667) (4,429) (7,238) 0 0 0 (7,238) (1.07) (1.07)
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