-----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, FuJ3OuAAPKbDfV2Yk+17vfZ1elk9fqpuJdnHUTkJ/Tt1GW4jqf8CLU715xeeCrqS 8MQzKJeMLO3NcuRTgPFTNQ== 0000950149-98-001012.txt : 19980518 0000950149-98-001012.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950149-98-001012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE SROS: PCX 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-Q SEC ACT: SEC FILE NUMBER: 001-10459 FILM NUMBER: 98625186 BUSINESS ADDRESS: STREET 1: 10 SOUTH GENEVA ROAD CITY: VINEYARD STATE: UT ZIP: 84058 BUSINESS PHONE: 8012279000 10-Q 1 QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/98 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File #1-10459 GENEVA STEEL COMPANY (Exact name of registrant as specified in its charter) UTAH 93-0942346 (State of Incorporation) (I.R.S. Employer Identification No.) 10 South Geneva Road Vineyard, Utah (Address of principal executive offices) 84058 (Zip Code) Registrant's telephone number, including area code: (801) 227-9000 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 the number of shares outstanding of each class of the issuer's common stock, as of the latest practicable date. 14,293,864 and 19,151,348 shares of Class A and Class B common stock, respectively, outstanding as of April 30, 1998. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENEVA STEEL COMPANY CONDENSED BALANCE SHEETS (Dollars in thousands) (Unaudited)
ASSETS March 31, September 30, 1998 1997 --------- --------- Current assets: Cash and cash equivalents $ -- $ -- Accounts receivable, net 79,625 60,163 Inventories 113,839 100,081 Deferred income taxes 10,094 3,059 Prepaid expenses and other 3,856 5,291 Related party receivable 126 753 --------- --------- Total current assets 207,540 169,347 --------- --------- Property, plant and equipment: Land 1,990 1,990 Buildings 16,119 16,109 Machinery and equipment 657,153 645,807 Mineral property and development costs 8,425 8,425 --------- --------- 683,687 672,331 Less accumulated depreciation (236,900) (214,016) --------- --------- Net property, plant and equipment 446,787 458,315 --------- --------- Other assets 17,452 18,408 --------- --------- $ 671,779 $ 646,070 ========= =========
The accompanying notes to condensed financial statements are an integral part of these condensed balance sheets. Page 2 of 20 3 GENEVA STEEL COMPANY CONDENSED BALANCE SHEETS (Continued) (Dollars in thousands) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30, 1998 1997 --------- --------- Current liabilities: Accounts payable $ 49,981 $ 46,348 Accrued liabilities 17,686 23,671 Accrued payroll and related taxes 11,403 11,715 Accrued dividends payable 19,613 14,290 Accrued interest payable 4,874 4,559 Accrued pension and profit sharing costs 1,326 1,701 --------- --------- Total current liabilities 104,883 102,284 --------- --------- Long-term debt 419,616 399,906 --------- --------- Deferred income tax liabilities 12,478 5,108 --------- --------- Redeemable preferred stock 56,541 56,169 --------- --------- Stockholders' equity: Preferred stock -- -- Common stock: Class A 87,979 87,979 Class B 10,110 10,110 Warrants to purchase Class A common stock 5,360 5,360 Accumulated deficit (19,293) (11,399) Class A common stock held in treasury, at cost (5,895) (9,447) --------- --------- Total stockholders' equity 78,261 82,603 --------- --------- $ 671,779 $ 646,070 ========= =========
The accompanying notes to condensed financial statements are an integral part of these condensed balance sheets. Page 3 of 20 4 GENEVA STEEL COMPANY CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (In thousands, except per share data) (Unaudited)
1998 1997 --------- --------- Net sales $ 192,405 $ 182,961 Cost of sales 170,403 175,040 --------- --------- Gross margin 22,002 7,921 Selling, general and administrative expenses 5,646 5,405 --------- --------- Income from operations 16,356 2,516 --------- --------- Other income (expense): Interest and other income 66 54 Interest expense (10,811) (10,072) --------- --------- (10,745) (10,018) --------- --------- Income (loss) before provision (benefit) for income taxes 5,611 (7,502) Provision (benefit) for income taxes 2,219 (1,998) --------- --------- Net income (loss) 3,392 (5,504) Less redeemable preferred stock dividends and accretion for original issue discount 2,894 2,542 --------- --------- Net income (loss) applicable to common shares $ 498 $ (8,046) ========= ========= Basic and diluted net income (loss) per common share $ .03 $ (.52) ========= ========= Weighted average common shares outstanding Basic 16,096 15,584 ========= ========= Diluted 16,131 15,584 ========= =========
The accompanying notes to condensed financial statements are an integral part of these condensed statements. Page 4 of 20 5 GENEVA STEEL COMPANY CONDENSED STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1998 AND 1997 (In thousands, except per share data) (Unaudited)
1998 1997 --------- --------- Net sales $ 373,918 $ 352,702 Cost of sales 340,123 331,851 --------- --------- Gross margin 33,795 20,851 Selling, general and administrative expenses 11,539 11,041 --------- --------- Income from operations 22,256 9,810 --------- --------- Other income (expense): Interest and other income 151 229 Interest expense (21,082) (19,774) --------- --------- (20,931) (19,545) --------- --------- Income (loss) before provision (benefit) for income taxes 1,325 (9,735) Provision (benefit) for income taxes 648 (2,822) --------- --------- Net income (loss) 677 (6,913) Less redeemable preferred stock dividends and accretion for original issue discount 5,695 5,003 --------- --------- Net loss applicable to common shares $ (5,018) $ (11,916) ========= ========= Basic and diluted net loss per common share $ (.31) $ (.77) ========= ========= Basic and diluted weighted average common shares outstanding 16,019 15,531 ========= =========
The accompanying notes to condensed financial statements are an integral part of these condensed statements. Page 5 of 20 6 GENEVA STEEL COMPANY CONDENSED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands) (Unaudited) Increase (Decrease) in Cash and Cash Equivalents
1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) $ 677 $ (6,913) Adjustments to reconcile net income (loss)to net cash provided by (used for)operating activities: Depreciation 23,357 20,690 Amortization 956 956 Deferred income taxes 335 (2,809) (Increase) decrease in current assets-- Accounts receivable, net (19,462) (4,184) Inventories (13,758) (4,339) Prepaid expenses and other 2,062 (457) Increase (decrease) in current liabilities-- Accounts payable 3,633 2,049 Accrued liabilities (4,870) 120 Accrued payroll and related taxes 364 1,746 Production prepayments -- 5,237 Accrued interest payable 315 (118) Accrued pension and profit sharing costs (375) (619) -------- -------- Net cash provided by (used for) operating activities (6,766) 11,359 -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment $(11,834) $(26,782) -------- --------
The accompanying notes to condensed financial statements are an integral part of these condensed statements. Page 6 of 20 7 GENEVA STEEL COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Continued) SIX MONTHS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands) (Unaudited)
1998 1997 -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt $ 24,984 $ 37,841 Payments on long-term debt (5,274) (23,865) Change in bank overdraft (1,114) 789 Other 4 61 -------- -------- Net cash provided by financing activities 18,600 14,826 -------- -------- Net decrease in cash and cash equivalents -- (597) Cash and cash equivalents at beginning of period -- 597 Cash and cash equivalents at end of period $ -- $ -- ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest (net of amount capitalized) $ 19,811 $ 18,937
Supplemental schedule of noncash financing activities: For the six months ended March 31, 1998 and 1997, the Company increased the redeemable preferred stock by $372 and $364, respectively, for the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. At March 31, 1998 and 1997, the Company had accrued dividends payable of $19,613 and $9,321, respectively. The accompanying notes to condensed financial statements are an integral part of these condensed statements. Page 7 of 20 8 GENEVA STEEL COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) - ----------------------------------------------------------------------- (1) INTERIM CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements of Geneva Steel Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. (2) INVENTORIES Inventories were comprised of the following components (dollars in thousands):
March 31, September 30, 1998 1997 -------- -------- Raw materials $ 27,399 $ 26,783 Semi-finished and finished goods 78,754 65,406 Operating materials 7,686 7,892 -------- -------- $113,839 $100,081 ======== ========
(3) BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" was issued. This statement specifies requirements for computation, presentation and disclosure of earnings per share ("EPS"). SFAS No. 128 simplifies the standards for computing EPS and replaces the presentations of Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company adopted SFAS No. 128 during the quarter ended December 31, 1997. The adoption of SFAS No. 128 did not result in an adjustment to the prior period EPS data presented in the accompanying statements of operations. Page 8 of 20 9 Basic net income (loss) per common share is calculated based upon the weighted average number of common shares outstanding during the periods. Diluted net income (loss) per common share is calculated based upon the weighted average number of common shares outstanding plus the assumed exercise of all dilutive securities using the treasury stock method. For the three months ended March 31, 1998, the diluted weight average common shares outstanding included 34,150 incremental shares from the assumed exercise of dilutive stock options using the treasury stock method. For the three months ended March 31, 1997 and the six months ended March 31, 1998 and 1997, stock options and warrants prior to conversion are not included in the calculation of diluted net loss per common share because their inclusion would be antidilutive. For the three and six-months ended March 31, 1998, 2,236,149 and 3,063,149 common stock equivalents, respectively, were not included in the calculation of diluted weighted average common shares outstanding because they were antidilutive. Class B common stock is included in the weighted average number of common shares outstanding as one share for every ten shares outstanding because the Class B common stock is convertible to Class A common stock at this same rate. The net income (loss) for the three and six-month periods ended March 31, 1998 and 1997 was adjusted for 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. Page 9 of 20 10 ITEM 2. 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 periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 88.6 95.7 91.0 94.1 -------- -------- -------- -------- Gross margin 11.4 4.3 9.0 5.9 Selling, general and administrative expenses 2.9 2.9 3.0 3.1 -------- -------- -------- -------- Income from operations 8.5 1.4 6.0 2.8 -------- -------- -------- -------- Other income (expense): Interest and other income 0.1 -- 0.1 -- Interest expense (5.6) (5.5) (5.7) (5.6) -------- -------- -------- -------- (5.5) (5.5) (5.6) (5.6) -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes 3.0 (4.1) 0.4 (2.8) Provision (benefit) for income taxes 1.2 (1.1) 0.2 (0.8) -------- -------- -------- -------- Net income (loss) 1.8% (3.0)% 0.2% (2.0)% ======== ======== ======== ========
The following table sets forth the sales product mix as a percentage of net sales for the periods indicated:
Three Months Ended Six Months Ended March 31, March 31, ------------------------- ------------------------ 1998 1997 1998 1997 ----- ----- ----- ----- Plate 58.8% 41.5% 56.1% 40.6% Sheet 18.4 34.2 19.4 36.3 Pipe 12.9 7.5 12.9 8.0 Slab 7.5 13.5 9.3 12.1 Non-Steel 2.4 3.3 2.3 3.0 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Page 10 of 20 11 THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1997 Net sales increased 5.2% due to a shift in product mix to higher-priced plate and pipe products from lower-priced sheet and slab products and an increase in overall average selling prices, offset in part by decreased shipments of approximately 28,300 tons for the three months ended March 31, 1998 as compared to the same period in the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of plate, pipe, sheet and slab products increased by 2.1%, 5.1%, 7.6% and 8.5%, respectively, in the three months ended March 31, 1998 compared to the same period in the previous fiscal year. The overall increase in prices was due primarily to strong steel demand and reduced flat plate imports from certain countries as well as other market factors. Shipped tonnage of plate and pipe products increased approximately 94,500 tons or 45.9% and 23,900 tons or 71.9%, respectively, while shipped tonnage of sheet and slab products decreased approximately 98,700 tons or 47.5% and 48,000 tons or 45.6%, respectively, between the two periods. Consistent with the Company's strategic objectives, plate shipments have increased as a result of expanded utilization of outside processors to level and cut plate from coils, improved operations and reduced flat plate imports from certain countries. The Company's increased pipe production was in response to strong demand. The Company continues to sell slabs to fulfill customer obligations and to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. During the quarter ended March 31, 1998, the Company completed installation of the rolling mill finishing stand upgrades, which are expected to increase rolling mill throughput capability and product quality. The Company completed the final three stands during the quarter ended March 31, 1998 without significant production disruptions; in fact, the Company achieved record quarterly production for hot-rolled tons. Nevertheless, the Company may experience operational disruptions as the project is fully integrated. Demand for the Company's plate products remains strong, although the Company's order entry rate has declined somewhat. Overall demand for pipe is being adversely affected by higher customer inventories and increased imports. Given the Company's selective approach to coiled sheet sales, price realization for coiled sheet has remained relatively firm despite recent industry price reductions caused in part by imports. Based on current orders, the Company anticipates that overall price realization will increase in the third quarter of fiscal year 1998. Future demand for the Company's products could be adversely affected by, among other things, increased imports, additions to domestic production capacity or a slowing in the U.S. economy. Imports from other countries continue to adversely affect operating results. The Company continues to monitor cut-to-length plate imports from other countries as well as imports of other of its products and may file additional trade cases in the future. Page 11 of 20 12 Domestic competition remains intense, and imported steel continues to adversely affect the market. Moreover, additional production capacity is being added in the domestic plate and sheet markets. 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. The Company intends to react to price increases or decreases in the market as required by competitive conditions. 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, decreased to 88.6% for the three months ended March 31, 1998 from 95.7% for the same period in the previous fiscal year as a result of an increase in average selling prices per ton as well as decreased product costs per ton. The overall average cost of sales per ton shipped increased approximately $8 per ton between the two periods, primarily as a result of a significant shift in product mix to higher-cost plate and pipe products from lower-cost sheet and slab products, offset in part by decreased operating costs. Operating costs decreased as a result of lower natural gas costs, reduced in-bound freight rates, lower costs associated with support personnel reductions and significantly improved production throughput rates. These lower costs were partially offset by increased depreciation expense, reduced product yields and other increased operating costs. Depreciation costs included in cost of sales increased approximately $0.9 million for the three months ended March 31, 1998 compared with the same period in the previous fiscal year. This increase was due to increases in the asset base as a result of completion of relines and repairs to two blast furnaces. On January 15, 1998, the Company announced layoffs of 100 staff and support personnel, approximately one-third of such employees. In connection with the layoffs, the Company offered severance packages, which resulted in an accrued liability of approximately $900,000 during the first quarter of fiscal year 1998. The reduction in costs associated with the reduction in staff personnel is partially offset by increased outsourcing of services. The Company anticipates additional personnel reductions among its management and hourly employees. Selling, general and administrative expenses for the three months ended March 31, 1998 increased approximately $0.2 million as compared to the same period in the previous fiscal year. These higher expenses resulted primarily from increased outside services associated with, among other things, certain legal proceedings and training costs relating to implementation of enterprise-wide business systems. These higher expenses were offset in part by cost savings related to the personnel reductions. Page 12 of 20 13 Interest expense increased approximately $0.7 million during the three months ended March 31, 1998 as compared to the same period in the previous fiscal year as a result of higher levels of borrowing. SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1997 Net Sales increased 6.0% due to a shift in product mix to higher-priced plate and pipe products from lower-priced sheet and slab products and an increase in overall average selling prices, offset in part by decreased shipments of approximately 4,300 tons for the six months ended March 31, 1998 as compared to the same period in the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of sheet, pipe and slab products increased by 3.3%, 5.6% and 2.7%, respectively, while the weighted average sales price of plate decreased by 0.2% in the six months ended March 31, 1998 compared to the same period in the previous fiscal year. The overall increase in prices was due primarily to strong steel demand as well as other market factors. Shipped tonnage of plate and pipe products increased approximately 180,600 tons or 46.9% and 42,400 tons or 62.0%, respectively, while shipped tonnage of sheet and slab products decreased approximately 189,900 tons or 45.1% and 37,400 tons or 20.7%, respectively, between the two periods. The Company's cost of sales, as a percentage of net sales, decreased to 91.0% for the six months ended March 31, 1998 from 94.1% for the same period in the previous fiscal year as a result of an increase in average selling prices per ton as well as decreased product costs per ton. The overall average cost of sales per ton shipped increased approximately $33 per ton between the two periods, primarily as a result of a significant shift in product mix to higher-cost plate and pipe products from lower-cost sheet and slab products, offset in part by decreased operating costs. Operating costs decreased as a result of lower natural gas costs, reduced in-bound freight rates and significantly improved production rates. These lower costs were partially offset by increased depreciation expense, reduced product yields, higher wages and benefits and other increased costs. Depreciation costs included in cost of sales increased approximately $2.7 million for the six months ended March 31, 1998 compared with the same period in the previous fiscal year. This increase was due to increases in the asset base as a result of completions of relines and repairs to two blast furnaces. Selling, general and administrative expenses for the six months ended March 31, 1998 increased approximately $0.5 million as compared to the same period in the previous fiscal year. These higher expenses resulted primarily from severance and health insurance costs associated with the Company's recent personnel reductions, training costs relating to implementation of enterprise-wide business systems and increased outside services. These higher expenses Page 13 of 20 14 were offset in part by cost savings related to the staff and support personnel reductions. Interest expense increased approximately $1.3 million during the six months ended March 31, 1998 as compared to the same period in the previous fiscal year as a result of higher levels of borrowing. 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 sale of equity, the incurrence of long-term indebtedness, including borrowings under the Company's credit facilities, equipment lease financing and cash provided by operations. As of March 31, 1998, the Company's eligible inventories and accounts receivable supported access to $125.0 million under the revolving credit facility (the "Revolving Credit Facility"). As of March 31, 1998, the Company had $94.6 million in borrowings and $9.4 million in letters of credit outstanding under the Revolving Credit Facility, leaving $21.0 million in additional borrowing availability. The terms of the Revolving Credit Facility and of the Company's 111/8% senior notes issued in March 1993 and 9 1/2% senior notes issued in February, 1994 (collectively 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, limitations 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. The Company's ability to pay cash dividends on its 14% cumulative redeemable exchangeable preferred stock (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 Senior Notes precluded payment of the quarterly preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends were approximately $19.6 million at March 31, 1998. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. As a result of the Company's inability to pay four full quarterly dividends, the holders of the Redeemable Preferred Stock elected two directors on May 30, 1997. 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. While not affecting net Page 14 of 20 15 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 $.18 per share. Besides these financing activities, the Company's major source of liquidity over time has been cash provided by operating activities. Net cash used for operating activities was $6.8 million for the six months ended March 31, 1998, as compared with net cash provided by operating activities of $11.4 million for the six months ended March 31, 1997. The uses of cash for operating activities during the six months ended March 31, 1998, included an increase in inventories of $13.8 million, an increase in accounts receivable of $19.5 million, and a decrease in accrued liabilities of $4.6 million. These uses of cash were offset in part by depreciation and amortization of $24.3 million, an increase in accounts payable of $3.6 million, a decrease in prepaid expenses of $2.1 million and net income of $0.7 million. Finished goods inventories have increased as a result of increased rail transit times, use of outside processors and transloading centers and increased volumes. The Company is attempting to reduce the finished goods inventory levels by addressing production scheduling, shipping and distribution processes. Capital expenditures were $11.8 million for the six months ended March 31, 1998. Capital expenditures for fiscal year 1998 are estimated at approximately $39.0 million, which includes completion of the rolling mill finishing stand modernization project, implementation of new business and financial software and various other projects designed to reduce costs and increase product quality and throughput. The Company anticipates that it may incur start-up and transition costs as the rolling mill finishing stand equipment is integrated. The Company has selected and started the implementation of SAP software, an enterprise-wide business system. The Company expects to benefit significantly from such implementation, including addressing the year 2000 issues inherent in its mainframe legacy systems. The project is currently estimated to cost $8.0 to $10.0 million with implementation completed in 1999. Review is underway to assess and subsequently address any impact of year 2000 issues on process control programs and hardware. Depending on market, operational, liquidity and other factors, the Company 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 has formed a limited liability company with certain unrelated parties, which in turn has entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a cokeless ironmaking facility and associated power generation and air separation facilities. As of March 31, 1998, the Company had spent (net of DOE reimbursement) approximately $1.1 million in connection with the project, which has been included in construction in progress in the accompanying consolidated financial statements. Expenditures on the project are subject to government cost sharing arrangements. Completion of the project remains subject to Page 15 of 20 16 several contingencies. Under certain circumstances, the Company will be required to repay some or all of the government cost share funds and expense other funds included in construction in progress 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 $41.4 million and its annual preferred stock dividends are approximately $10.8 million. On April 17, 1998, the United Steelworkers of America and the Company reached tentative agreement on a new, three year labor contract. The labor agreement includes improvements in wages, pensions, and other benefits that are expected to increase the Company's labor costs by slightly more than three percent a year. As a part of the contract, the parties also agreed upon several initiatives intended to improve profitability and assist the Company in restructuring its workforce. The agreement was ratified by the local bargaining unit in May 1998. FACTORS AFFECTING FUTURE RESULTS This report contains a number of forward-looking statements, including, without limitation, statements contained in this report relating to the Company's ability to increase shipments to the expected levels, the Company's objective to increase higher-margin plate and pipe product sales while reducing lower-margin slab sales, the successful integration of the rolling mill finishing stands upgrade which is expected to increase production throughput and product quality, the Company's ability to compete with the additional production capacity being added in the domestic plate and sheet markets, the Company's ability to monitor and control the level of unfairly traded imports and their effect on the domestic market, the Company's ability to realize higher prices in the third fiscal quarter of 1998, the Company's anticipated additional personnel reductions among the management and hourly employees, the Company's ability to reduce finished goods inventories, the expected adequacy of cash resources including additional borrowing availability, the Company's plan to become year 2000 compliant, and any other statements contained herein to the effect that the Company or its management "believes", "expects", "anticipates", "plans" or similar expressions. There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth herein. The Company's future operations will be impacted by, among other factors, pricing, product mix, throughput levels and production efficiencies. The Company has efforts underway to increase throughput and production efficiencies and to continue shifting its product mix to higher-margin products. There can Page 16 of 20 17 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 to the Company's future operating results that remains subject to significant uncertainty. Future pricing will be affected by several factors including the level of imports, future capacity additions, product demand and other market factors such as the increased domestic plate production capacity currently coming on line. The short-term and long-term liquidity of the Company also is dependent upon several other factors, including availability of capital, 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. Page 17 of 20 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 25, 1997, the Company filed a complaint in the Fourth Judicial District Court for Utah County, State of Utah, against Commerce & Industry Insurance Co. ("C&I"), a New York Corporation. A First Amended Complaint was filed and served on April 9, 1997, alleging that C&I had breached its insurance contract with Geneva by failing to pay on Geneva's claim for the losses it incurred on January 25 and 26, 1996 and subsequent thereof when it lost it's internal generator. C&I removed the case to the United States District Court for the District of Utah on May 1, 1997. Upon C&I's formal request for additional investigation, Geneva stipulated with C&I on June 6, 1997, to stay the litigation until October 31, 1997, to provide C&I additional time to review documents and interrogate witnesses. That investigation continued until September, 1997. During early October, Geneva had several meetings with C&I in an attempt to resolve the case and assess the strength of the case. On October 15, 1997, C&I provided a formal response to the claim in which it declined coverage as an excluded peril under the policy, relying on, among other defenses, an exclusion for "power, heating or cooling failure." Pursuant to the June 1997 stipulation, C&I answered the First Amended Complaint on October 31, 1997, denying most of the substantive factual allegations in the First Amended Complaint and asserting as an affirmative defense, among others, that Geneva's loss was excluded from coverage. On November 24, 1997, Geneva filed a Second Amended Complaint against C&I, adding claims seeking relief for breach of contractual implied covenant of good faith and fair dealing, and bad faith--intentional and outrageous tortious conduct and oppression. On December 24, 1997, C&I moved to dismiss the entire Second Amended Complaint for failure to state a claim because the loss was caused by a power failure which is excluded from coverage and to dismiss the claim for bad faith tortious conduct on the ground that such a claim is not recognized under Utah law. On March 19, 1998, the Court denied the motion to dismiss the complaint, but granted the motion to dismiss only the count for bad faith tortious conduct. Geneva requested the Court to require that discovery be completed within approximately six months and the trial be held as soon thereafter as the Court's schedule would allow. C&I requested the Court to allow discovery until June 1, 1999 and require that the case be ready for trial after October 1, 1999. At a Scheduling Conference held on November 21, 1997, the Court set trial beginning June 2, 1999. The Court set May 1, 1998 as a deadline for dispositive motions on initial coverage issues and required that all discovery be completed by January 15, 1999. Upon C&I's request that it needed additional time to conduct its factual investigation, the Court, on April 29, 1998, extended the deadline for dispositive motions on initial coverage issues until Page 18 of 20 19 July 1, 1998. All other dates on the trial schedule remain unchanged. The parties are presently involved in resolving discovery issues and proceeding with discovery. The Company intends vigorously to pursue its claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The registrant held its Annual Meeting of Shareholders on February 25, 1998. The shareholders elected the following Directors to serve until the next annual meeting of shareholders: Joseph A. Cannon, Robert J. Grow, Ken C. Johnsen, R. J. Shopf, Alan C. Ashton, and K. Fred Skousen. The shareholders also ratified the appointment of Arthur Andersen LLP as independent auditors for fiscal year 1998 by a vote of 31,301,805 shares for, 196,939 shares against, 122,528 shares abstained and 0 broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
Exhibit Filed Number Exhibit Herewith ------ ------- -------- 27 Financial Data Schedule X
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the three months ended March 31, 1998. Page 19 of 20 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENEVA STEEL COMPANY By: /s/ Dennis L. Wanlass ------------------------------------------- Vice President, Treasurer and Chief Financial Officer Dated: May 15, 1998 Page 20 of 20 21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE - -------------- ----------- ---- 27 Financial Data Schedule 19
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1988 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO. 1,000 6-MOS SEP-30-1998 OCT-01-1997 MAR-31-1998 0 0 79,625 4,733 113,839 207,540 683,687 (236,900) 671,779 104,883 419,616 56,541 0 92,194 (13,933) 671,779 373,918 373,918 340,123 340,123 11,539 3,451 20,931 1,325 648 677 0 0 0 677 (.31) (.31)
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