-----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, QxclTBu2pQlcL81k2Rv92y9vroTKspn0BhHyBBuEmusJw5O357JzttYjZUPaMhuh ByEHLJWwAuCCwS4uEgzlUg== 0000950149-99-002288.txt : 19991230 0000950149-99-002288.hdr.sgml : 19991230 ACCESSION NUMBER: 0000950149-99-002288 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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-K405 SEC ACT: SEC FILE NUMBER: 001-10459 FILM NUMBER: 99782515 BUSINESS ADDRESS: STREET 1: 10 SOUTH GENEVA ROAD CITY: VINEYARD STATE: UT ZIP: 84058 BUSINESS PHONE: 8012279000 MAIL ADDRESS: STREET 1: PO BOX 2500 CITY: PROVO STATE: UT ZIP: 84603 10-K405 1 ANNUAL REPORT FOR THE PERIOD ENDED 09-30-99 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, 1999, 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 Identification No.) of incorporation or organization) 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:
Name of each exchange on Title of each class which registered ------------------- ------------------------ CLASS A COMMON STOCK, NONE NO PAR VALUE WARRANTS TO PURCHASE NONE CLASS A COMMON STOCK
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 is not presently determinable because of the Registrant's filing of a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in February 1999 and the subsequent suspension of trading and delisting of its securities on the exchanges where the securities were previously listed. As of November 30, 1999, the Registrant had 15,008,767 and 18,451,348 shares of Class A and Class B Common Stock, respectively, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1999 are incorporated by reference in Parts II and IV of this report. ================================================================================ 2 PART I ITEM 1. BUSINESS. BACKGROUND Geneva Steel Company (the "Company" or "Geneva") owns and operates the only integrated steel mill in the western United States. The Company's mill manufactures coiled and flat plate, sheet, pipe and slabs 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, 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. Liquid iron, scrap metal and metallic alloys are combined and further refined in the Q-BOP furnaces to produce liquid steel. The liquid steel is then processed through the continuous casting facility into steel slabs. Steel slabs are either hot-charged into furnaces and then rolled, or they are allowed to cool and then reheated prior to rolling. Slabs are rolled into hot-rolled steel products (coiled and flat plate, hot-rolled sheet 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. USX operated the mill and related facilities 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 cleanup costs on an equal basis. See "Environmental Matters." Since acquiring the mill from USX, the Company has modernized most of its facilities. The mill includes the widest combination continuous rolling mill and one of the widest in-line casters in the world. Both the rolling mill and the caster are unique in the industry and enable the Company to offer an expanded range of products; shift its product mix according to market demand; and produce wide, light-gauge plate products more efficiently than many of its competitors. RECENT DEVELOPMENTS On February 1, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Utah, Central Division. The filing was made necessary by a lack of sufficient liquidity. The Company's operating results for fiscal years 1998 and 1999 were severely affected by, among other things, the dramatic surge in steel imports beginning in 1998. As a consequence of record-high levels of low-priced steel imports and the resultant deteriorating market conditions, the Company's overall price realization and shipments declined precipitously. Decreased liquidity made it impossible for the Company to service its debt and fund ongoing operations. Therefore, the Company sought protection under Chapter 11 of the Bankruptcy Code. Prior to the bankruptcy filing, the Company did not make the $9 million interest payment due January 15, 1999 under the terms of the Company's 9 1/2% senior notes due 2004. The Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition debt, including the 9 1/2% senior notes due 2004 and the 11 1/8% senior notes due 2001 (collectively, the "Senior Notes"), except pursuant to a confirmed plan of reorganization. The Company is in possession of its properties and assets and continues to manage its businesses as debtor-in-possession subject to the supervision of the Bankruptcy Court. See Item 7 "Management's Discussion and Analysis of Financial condition and Results of Operations." On February 19, 1999, the U.S. District Court for the District of Utah granted the Company's motion to approve a new, $125 million debtor-in-possession credit facility with Congress Financial Corporation (the "Credit Facility"). The Credit Facility expires on the earlier of the consummation of a plan of reorganization or February 19, 2001. The Credit Facility replaced the Company's previous revolving credit facility with a syndicate of banks led 1 3 by Citicorp USA, Inc. as agent. The Credit Facility is secured by, among other things, accounts receivable; inventory; and property, plant and equipment. Actual borrowing availability is subject to a borrowing base calculation and the right of the lender to establish various reserves, which it has done. The amount available to the Company under the Credit Facility is approximately 60%, in the aggregate, of eligible inventories, plus 85% of eligible accounts receivable, plus 80% of the orderly liquidation value of eligible equipment up to a maximum of $40 million, less reserves established by the lender. Borrowing availability under the Credit Facility is also subject to other covenants. As of November 30, 1999, the Company's eligible inventories, accounts receivable and eligible equipment supported access to $57.4 million in borrowings under the Credit Facility. As of November 30, 1999, the Company had $10.8 million available under the Credit Facility, with $44.2 million in borrowings and $2.4 million in letters of credit outstanding. There can be no assurance as to the amount of availability that will be provided in the future or that the lender will not require additional reserves. The terms of the Credit Facility include cross default and other customary provisions. As of February 1, 1999, the Company discontinued accruing interest on the Senior Notes and dividends on its redeemable preferred stock. Contractual interest on the Senior Notes for the year ended September 30, 1999 was $33.1 million, which is $22.0 million in excess of recorded interest expense included in the accompanying financial statement. Contractual dividends on the redeemable preferred stock as of September 30, 1999, was approximately $28.5 million, which is $8.4 million in excess of dividends accrued in the accompanying balance sheet. Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon any of the Company's liabilities as of the petition date or to enforce pre-petition date contractual obligations were automatically stayed. Absent approval from the Bankruptcy Court, the Company is prohibited from paying pre-petition obligations. However, the Bankruptcy Court has approved payment of certain pre-petition liabilities such as employee wages and benefits and certain other pre-petition obligations. Additionally, the Bankruptcy Court has approved the retention of legal and financial professionals. As debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by such rejections may file pre-petition claims with the Bankruptcy Court in accordance with bankruptcy procedures. The Company is currently developing a plan of reorganization (the "Plan of Reorganization") through, among other things, discussions with the official creditor committees appointed in the Chapter 11 proceedings. The objective of the Plan of Reorganization is to restructure the Company's balance sheet to (i) significantly strengthen the Company's financial flexibility throughout the business cycle, (ii) fund required capital expenditures and working capital needs, and (iii) fulfill those obligations necessary to facilitate emergence from Chapter 11. In conjunction with the Plan of Reorganization, the Company intends to file an application in January 2000 for a government loan guarantee under the Emergency Steel Loan Guarantee Program (the "Loan Guarantee Program"). The application will seek a government loan guarantee for a portion of the financing required to consummate the Plan of Reorganization, with the remaining financing being provided through other means. In connection with preparing the loan guarantee application, the Company is in the final phase of selecting and negotiating terms with a major bank to serve as the primary lender under the Loan Guarantee Program. There can be no assurance that the Company will be selected to participate in the Loan Guarantee Program or that, with or without a guarantee, the Company can obtain the necessary financing to consummate the Plan of Reorganization. Although management expects to file the Plan of Reorganization, there can be no assurance at this time that a Plan of Reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a Plan of Reorganization through February 28, 2000. While the Company intends to request further extensions of the exclusivity period if necessary, there can be no assurance that the Bankruptcy Court will grant such further extensions. If the exclusivity period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization. Although the Chapter 11 Bankruptcy filing raises substantial doubt about the Company's ability to continue as a going concern, the accompanying financial statements have been prepared on a going concern basis. This basis contemplates the continuity of operations, realization of assets, and discharge of liabilities in the ordinary course of business. The statements also present the assets of the Company at historical cost and the current intention that they 2 4 will be realized as a going concern and in the normal course of business. A plan of reorganization could materially change the amounts currently disclosed in the financial statements. The Company's financial statements do not present the amount which may ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 Bankruptcy case. Under Chapter 11, the right of, and ultimate payment by the Company to pre-petition creditors may be substantially altered. This could result in claims being paid in the Chapter 11 Bankruptcy proceedings at less (and possibly substantially less) than 100 percent of their face value. At this time, because of material uncertainties, pre-petition claims are carried at the Company's face value in the accompanying financial statements. Moreover, the interests of existing preferred and common shareholders could, among other things, be very substantially diluted or even eliminated. Further information about the financial impact of the Chapter 11 Bankruptcy filings is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Financial Statements. Management expects that a Plan of Reorganization will be completed and ready to file with the bankruptcy court during the first calendar quarter of 2000. The Plan of Reorganization will be conditioned on the Company being approved for a guarantee under the Loan Guarantee Program. There can be no assurance as to the actual timing for the filing of the Plan of Reorganization or the approval thereof by the Bankruptcy Court, if at all. As a result of various trade cases described below as well as improving market conditions in several foreign economies, market conditions for the Company's products have recently improved. Both the Company's order entry and price realization have improved significantly in recent months. The Company's shipment rate has increased from a low in February 1999 of 44,000 tons to 146,000 tons in November 1999. Similarly, overall price realization has increased by 5.7% during the same period, despite a product mix shift to lower-priced sheet. The timing and magnitude of the recent volume and pricing improvements are consistent with initial market recoveries following the success of previously-filed trade cases. The Company expects in the near term that both volume and pricing will continue to improve gradually. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." CAPITAL PROJECTS Overview The Company has spent approximately $48 million, $11 million (net of insurance claim settlement of $12.5 million) and $8 million on capital projects during the fiscal years ended September 30, 1997, 1998 and 1999, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization and capital maintenance efforts. Since fiscal year 1989, Geneva has spent approximately $645 million on plant and equipment to modernize and renovate its production facilities, as well as for ongoing capital maintenance. Geneva believes its modernization efforts have significantly strengthened the Company's capabilities by reducing costs, increasing operating flexibility, broadening its product lines, improving product quality and increasing throughput rates. The Company's modernization program was designed to take advantage of the unique features of the Company's rolling mill. Geneva's wide six stand rolling mill is differentiated from competitors' mills by its ability to roll both narrow and wide one inch entry bars into finished product in a single pass. In contrast, other producers utilize either a single-stand reversing mill or a single-stand steckel mill to roll entry bars, requiring multiple passes. Reducing the number of passes increases throughput, operating efficiencies and yields, particularly on thinner gauge product. Geneva's in-line caster further enhances the Company's production process by directly casting slabs to the required final width, up to 126 inches wide, before the slabs are directly rolled. Wide casting and direct rolling reduces heating and handling requirements and eliminates cross rolling to obtain final product width. The Company further capitalized on its ability to cast and roll wide plate products by completing a wide plate project which enables Geneva to produce coiled plate up to 122 inches in width and subsequently cut the coiled plate into flat plate. The combination of the caster, rolling mill and wide plate project has created an efficient production process for wide 3 5 products that most of Geneva's competitors do not possess. As a result, the Company believes its plate production costs are lower than many of its competitors. Capital Projects The key elements of the modernization are: (i) the replacement of Geneva's open hearth furnaces with two state-of-the-art basic oxygen process ("Q-BOP") steelmaking furnaces, improving product quality and throughput and reducing costs; (ii) the construction of one of the widest in-line casters in the world, enabling the Company to cast slabs at the desired width without cross-rolling; (iii) the completion of a wide-plate project, positioning Geneva as the only North American producer currently offering coiled plate in widths greater than 96 inches and improving plate production efficiencies; and (iv) the modernization of Geneva's rolling mill, enhancing throughput rates, quality and cost. The Company has identified several large-scale capital improvement projects that it believes would further increase the Company's production capacity, expand product offerings, improve operating efficiencies and reduce costs. With the exception of the walking beam furnace, these projects are not currently included in the Company's future capital budgets. The Company' slab heating facilities are relatively high cost operations and lack the capacity to heat slabs at the same rate as can be cast and rolled. By utilizing a combination of all the Company's slab heating facilities, the Company has substantially, but not completely, removed its slab heating bottleneck at the higher production levels achieved in the past. In the long term, the Company requires a walking beam furnace (cost of approximately $45 million) that can heat all its slabs. The walking beam furnace would reduce costs, increase prime yields and improve quality by enabling the Company to shut down multiple heating facilities and by significantly improving the temperature consistency of slabs. In addition, the walking beam would increase the Company's capacity to produce large coils, which are made from slabs longer than those that can be heated in certain existing facilities. As a result of the increased heating capacity of the walking beam furnace, the Company: (i) shifts production of slabs into a near-equal amount of hot-bands (less yield loss) and (ii) converts approximately 21.6 tons and 59.0 tons of secondary and scrap steel, respectively, into a near-equal amount of hot-bands. The Company has identified several other projects costing lesser amounts that would also significantly improve operations. Several of the projects are in the advanced-planning stage and could likely be completed as a part of future capital maintenance budgets. These include a new plate leveler, solid state electrical drives for the rolling mill and upgrades to the Company's small diameter pipe mill. 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. PRODUCTS The Company's principal products are coiled and flat plate, hot-rolled sheet, pipe and slabs. The Company also sells non-steel materials that are by-products of its steelmaking operations. The Company's 132-inch combination continuous rolling mill has the flexibility to roll either sheet or plate in response to customer demands and changing market conditions. This flexibility maximizes the Company's utilization of its facilities. Generally, the Company manufactures products in response to specific customer orders. The Company also operates a plate stocking program to reduce lead times and improve customer service. Consistent with the Company's strategic objectives, plate shipments have over time generally increased as the modernization program has been completed and various upgrades to plate processing and finishing equipment have been integrated into the production process. The Company's product sales mix as a percent of net sales for fiscal years 1995 through 1999 is shown below: 4 6
---------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Plate ................. 35% 45% 45% 62% 56% Sheet ................. 41 30 30 18 25 Pipe .................. 6 6 10 11 10 Slab .................. 15 16 12 7 6 Non-steel ............. 3 3 3 2 3 --- --- --- --- --- Total ..... 100% 100% 100% 100% 100% === === === === ===
Coiled and Flat Plate. The Company produces plate products which 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 122 inches and in thicknesses varying from .1875 of an inch to 3.5 inches. Coiled plate is produced and sold in coiled form in thickness of .1875 to .875 of an inch and widths of 42 to 122 inches. Coiled plate, once cut-to-length and leveled, can be used for cut-to-length plate applications such as spiral-welded pipe, electric resistance welded pipe and steel tubing. Coiled and flat plate can be used for heavy steel structures such as storage tanks, railroad cars, ships and bridges. Sheet. The Company produces hot-rolled sheet steel which is sold in sheet or coil form in thicknesses of .097 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 and hot-rolled bands. Sheet is used in a variety of applications such as storage tanks, light structural components and supports and welded tubing. Pipe. The Company produces electric resistance welded pipe ("ERW pipe") ranging from approximately 6 5/8 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 has sold steel slabs when market conditions were favorable and as a means of maximizing production through the continuous caster. The Company also sells various by-products resulting from its steelmaking activities. MARKETING; PRINCIPAL CUSTOMERS The Company sells its prime steel products through a sales agency arrangement 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 65% of the Company's finished product sales (excluding slabs) during fiscal year 1999. 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 has developed a broad customer base of approximately 450 customers in 40 states, and abroad through exporters to several customers in Canada and Mexico, with no concentration in any particular industry. The Company sells its ERW pipe to end-users and distributors primarily in the Western and Central United States, where demand for pipe fluctuates in partial response to oil and gas industry cycles, import levels and other factors. Export sales, which generally have lower margins than domestic sales, accounted for approximately 1.4%, 2.6% and 0.4% of the Company's net sales during fiscal years 1997, 1998 and 1999, respectively. The Company's principal marketing efforts are in the Western and Central United States. The Company believes that it holds a significant market share of the plate, hot-rolled sheet and pipe sales in the eleven western states. 5 7 The Company has also focused on expanding its share of the market in other areas of the United States. On November 2, 1998, the Company signed a new, three-year agreement with Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann markets the Company's steel products throughout the continental United States. Mannesmann previously marketed the Company's products in 15 midwestern states and to certain customers in the eastern United States. The Company's existing sales force remains Geneva employees, but are directed by Mannesmann. The Company also has made several other organization changes designed to improve product distribution and on-time delivery. The Company continues to evaluate its sales and marketing approach and may make additional changes in the future. The Company's relationship with Mannesmann began at the time the mill was acquired by the Company. At the outset, Mannesmann provided a purchase guarantee for a portion of the Company's output, which guarantee was instrumental to the Company's financing arrangements. Since then, Mannesmann has provided various other means of enhancing the Company's liquidity. The Company may in the future modify its sales and marketing approach by extending its in-house marketing efforts or expanding its approach to include additional downstream distribution functions. 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, southeast and eastern regions. 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 fluctuated widely due to substantial swings in the group's inventory levels. In view of these factors, the Company is targeting selected steel processors and various end-users as sources for additional sales, while retaining strong relationships with service center and distributor customers. The Company believes its modernization program enables the Company to produce higher quality products and to gain access to a wider range of customers. The Company's rolling mill can produce more wide, coiled plate than the Company's processing facilities can cut and level into higher margin flat plate. In addition, the Company's western location creates logistical challenges in providing on-time delivery to its midwestern and southeastern customers. Consequently, the Company has created a plate distribution and processing system intended to increase plate processing capacity and improve customer service. The facilities allow the Company to further maximize its sales of flat plate made from coils. The system utilizes a hub-and-spoke concept in which products are shipped in bulk primarily by rail from the Company to transloading centers or plate processors and thereafter delivered in smaller quantities primarily by truck to customers. The Company has established transloading centers to which plate can be shipped. These inventories are located in relative close proximity to the Company's customer base to maximize availability and on-time delivery. In addition, the Company has contracted with several processors to which coiled plate can be shipped for processing into flat plate for specific customers. Through these arrangements, the Company has significantly increased its capacity to produce and sell plate made from coils at costs comparable to processing plate on its own internal facilities. The Company generally produces steel products in response to specific orders. As of November 30, 1999, the Company had estimated total orders on hand for approximately 148,000 tons compared to approximately 74,000 tons as of November 30, 1998. See "Competition and Other Market Factors." EMPLOYEES; LABOR AGREEMENT As of November 30, 1999, the Company's workforce included approximately 1,725 full-time employees, of whom approximately 285 are salaried and approximately 1,440 are union-eligible. The Company's operating management personnel generally have 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 8 to 20 years. The Company's senior operating managers have an average of approximately 20 years of industry experience. Substantially all of the Company's union-eligible employees are represented by the United Steelworkers of America under a collective bargaining agreement. In April 1998, the Company reached a new, three-year labor agreement with the United Steelworkers of America. The negotiations were completed without any work interruptions 6 8 or labor disruption. 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, significantly limits the Company's pension obligations 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 employment service while the plant was owned by USX. As part of the Company's labor agreement, the Company and the Union reached several new understandings intended to create a cooperative partnership. The objectives of the partnership include, among others, (i) improving productivity, quality and customer service, (ii) expanding employee involvement in decision making, and (iii) creating a better work environment. The Company has made significant progress in implementing its strategy to reduce its employment costs through process redesign, workplace restructuring, modernization and severance incentives. Since December 1997, the Company's executive, administrative and operating staff has been reduced from 473 to 285. During the same period, the Company has also reduced its union-eligible workforce by 30% to 1,440 employees. The Company's labor agreement also contains a performance dividend plan intended 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 up to 1.5 million tons. As shipments increase above this level, compensation under the plan also increases. The Company also has 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. 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 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 union employee defined contribution retiree medical plan. This plan is funded through a voluntary employee beneficiary association trust ("VEBA Trust") and used to fund post retirement medical benefits for future retirees covered by the collective bargaining agreement. Company contributions to the plan are $.20 for each hour of work performed by employees covered by the collective bargaining agreement. No benefits were paid from the VEBA Trust until December 1998. Beginning in December 1998, the plan began paying COBRA payments for eligible retired participants. The Company and the Union are currently developing eligibility requirements, benefit levels and other related terms with respect to the plan. Recently, the Company discussed with the Union the possibility of amending or replacing the existing labor agreement to among other things, extend the period covered by the labor agreement. Those discussions have ended without any agreement to amend or replace the existing agreement. 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. 7 9 Iron Ore. The Company's steelmaking process can use both iron ore and iron ore pellets. In recent years, the Company has used iron ore pellets exclusively in an effort to maximize the operating efficiencies of its blast furnaces. 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. When used, 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. The Company's pellet agreement with USX expires on December 31, 1999. The Company has begun discussions with USX and other potential vendors regarding a new pellet supply contract and has reached an interim understanding with USX for a short-term supply arrangement. Management believes that the Company will be able to complete a new pellet supply contract with USX or a substitute vendor. However, there can be no assurance that a new contract can be completed or that USX will continue to supply pellets to the Company. If the Company is unable to enter into a new pellet supply contract, the Company's operating results could be adversely affected. 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 operated by Oxbow Carbon and Minerals, Inc. ("Oxbow") 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. At times of full production, the Company purchases imported coke as a result of its decreasing capacity to produce its own coke as the Company's coke ovens decline in productive capacity. The ability of other domestic integrated steel mills to produce coke is also generally decreasing, thereby increasing the demand for purchased coke in the United States at times of strong steel demand. The Company has purchased coke from sources originating 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 also increases. Energy. The Company's steel operations consume large amounts of oxygen, electricity and natural gas. The Company purchases oxygen, nitrogen and argon from three facilities located on the Company's premises. Two of the facilities were constructed by Air Liquide America Corporation ("Air Liquide") and the third by Praxair, Inc. ("Praxair"). These facilities are capable of providing approximately 275, 800 and 550 tons of oxygen per day under contracts which expire in 2002, 2012 and 2006, respectively. The Company generates a portion of its electrical requirements using a 50 megawatt rated generator located at the steel mill and currently purchases its remaining electrical requirements from Pacificorp under a 110 - 150 megawatt interruptible power contract expiring in February 2002. The contract provides for fixed annual price increases through the remainder of its term. Natural gas is purchased at the wellhead in the Rocky Mountain region and is transported to the steel mill by pipeline utilizing firm and interruptible transportation contracts. The Rocky Mountain region has substantial natural gas reserves. Other. The Company's mill can be 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 can reduce freight costs. Subsequent to the merger of the UP and Southern Pacific Transportation Company, the Company negotiated a long-term transportation contract with the UP covering a large portion of the Company's rail transportation needs and intended to provide a competitive rate structure. The Company uses scrap metal obtained from its own operations and external sources in its steelmaking process. As the Company increases its production volume and improves yields, management anticipates that increased amounts of scrap will be purchased. 8 10 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 and have greater capital resources. Intense worldwide 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. However, 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 believes that its 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 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. A number of mini-mills produce plate, coil and pipe products that compete directly with the Company's products. Several domestic mini-mills have been completed that produce wide plate in coil form, thereby competing with those products produced by the Company. In addition, other mini-mills are planned. 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 significantly affected by fluctuations in the value of the United States dollar against several other currencies, the level of demand for steel in the United States economy relative to steel demand in foreign economies and world economic conditions generally. 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. Imports of the Company's primary products have historically represented approximately 16% to 25% of total U.S. consumption. Shortly after completion of the Company's modernization in early 1998, the domestic steel industry experienced an unprecedented surge in imports. During the surge, up to approximately 40% of domestic plate consumption was at times supplied by imports. Imports similarly increased in each of the Company's other product lines. The surge in imports from various Asian, South American and Eastern European countries was at least partially the result of depressed economies in those regions, causing foreign steel producers to increase dramatically exports to the United States. Many if not all of these foreign producers sold products into the U.S. market at illegally dumped prices. 9 11 While a previous import surge in 1996 primarily involved only flat plate, the more recent surge included all of the Company's products. As a result, during fiscal 1998 and early fiscal 1999 the Company's product prices and order entry rates fell dramatically. From January 1, 1998 to February 1, 1999, overall price realization for plate, pipe and coil declined by $94, $95, and $92 per ton, respectively. Even without the simultaneous reduction in volume, the decline in pricing alone would have resulted in an annualized margin loss of over $220 million. The Company was also forced to reduce production by approximately 50%, resulting in margin losses, higher costs per ton and production inefficiencies. During the year ended September 30, 1999, the Company's total shipments were approximately 1,100,300 tons, as compared to 2,003,200 tons for the previous year. The combined impact of the pricing and volume declines resulted in a significant reduction in operating results and cash flow. Decreased cash flow and liquidity made it impossible for the Company to service its debt and fund ongoing operations. On September 30, 1998, the Company and eleven other domestic steel producers filed antidumping actions against hot-rolled coiled steel imports from Russia, Japan and Brazil. The group also filed a subsidy (countervailing duty) case against Brazil (all cases described in this paragraph are referred to as the "Coiled Products Cases"). In April 1999, the Department of Commerce ("DOC") issued a final determination that imports of hot-rolled coiled sheet from Japan were dumped at margins ranging from 17% to 65%. In June 1999, the International Trade Commission (the "ITC") reached a unanimous 6-0 final determination that imports of hot-rolled sheet from Japan caused injury to the U.S. industry. As a result, an antidumping duty order has now gone into effect against imports from Japan and will last for a minimum duration of five years. During that time, the amount of antidumping duty deposits due from U.S. importers of the products may vary based upon the results of annual administrative reviews. The Company believes that the imposition of these antidumping duties will almost completely eliminate hot-rolled sheet imports from Japan, which totaled 2.7 million tons in 1998. On July 6 and 12, 1999, respectively, the DOC simultaneously issued both suspension agreements and final antidumping duty determinations as to imports of hot-rolled sheet from Brazil and Russia, and a suspension agreement and final countervailing duty determination as to imports of hot-rolled sheet from Brazil. The Brazilian countervailing duty suspension agreement provides for a quantitative limitation of no more than 290,000 metric tons annually of hot- rolled sheet from Brazil and the Brazilian antidumping suspension agreement provides that tonnage can be sold at prices no lower during the five-year period than a reference price of $327 a metric ton, ex-dock duty paid in the U.S. market. Based on the fact that these reference prices were above current domestic prices, that the agreement provided that this price was a floor price which would increase as domestic prices increased above $344 per metric ton, and that the agreement shielded the U.S. industry from the devaluations of the Brazilian currency during the five years of the agreement, the Company and certain other petitioners supported this suspension agreement. The DOC announced countervailing duty findings of approximately 7% and antidumping duties of approximately 40% as to imports from Brazil. The ITC made a final affirmative injury determination in August 1999. Therefore, if Brazilian producers violate these suspension agreements, these duty amounts would be immediately imposed. The suspension agreement on hot-rolled sheet from Russia provides for no shipments for the remainder of 1999, 325,000 metric tons for 2000, 500,000 metric tons for 2001, 675,000 metric tons for 2002, and 725,000 metric tons for 2003. It sets a minimum export price of $255 per metric ton F.O.B. Russia, which is subject to quarterly changes based on a formula relating to other import prices. All petitioners objected to this Russian suspension agreement because of the allowed continuation of dumped prices at below U.S. market prices from Russia. However, these quantitative restrictions represent a significant decrease from the 3.8 million tons of hot-rolled sheet imports from Russia in 1998. In addition to the hot-rolled sheet suspension agreement, the DOC also entered into a general steel trade agreement with Russia which provides for reduction in imports of other flat-rolled steel products. Simultaneous with the announcement of these agreements, the DOC announced final antidumping duties ranging from 57% to 157%, and the ITC made a final affirmative injury determination in August 1999. Therefore, if the hot-rolled sheet suspension agreement is violated during the next five years, these duty amounts would be immediately imposed. The success of the Coiled Products Cases will reduce imports from these three countries from seven million tons in 1998, to between 500,000 and 1,000,000 tons per year from 2000 through 2003. The Coiled Products Cases have already benefitted the Company and the domestic steel industry. The Company expects that its production levels, shipments and pricing of hot-rolled sheet products will continue to increase in the near term. This trend could, however, reverse itself if other countries significantly increase imports or if domestic demand for hot-rolled sheet declines. 10 12 On February 22, 1999, five domestic steel producers filed antidumping actions against cut-to-length plate imports from the Czech Republic, France, India, Indonesia, Italy, Macedonia, Japan and South Korea. Also, countervailing duty cases were filed against France, India, Indonesia, Italy, Macedonia and South Korea (all cases described in this paragraph are referred to as the "Cut-to-length Plate Cases"). In April 1999, the ITC made a unanimous affirmative preliminary injury determination with respect to all the respondent countries except the Czech Republic and Macedonia, which were dismissed from the cases. On July 12 and 13, 1999, the DOC announced preliminary margins in the cases ranging from 1% to 59%. Bonds in these amounts are now required on imports. The DOC issued final margin determinations on December 13, 1999 ranging from 0% to 72%. The ITC will issue final injury determinations in January 2000. On June 30,1999, the Company and seven other petitioners filed for Section 201 relief from welded line pipe imports (the "Section 201 Case"). The ITC has made an affirmative injury determination by a margin of five to one. A remedy hearing was held on November 10, 1999, and the ITC has recommended that imports be reduced by approximately 45% from 1998 levels. The recommendation was made to the President on December 22, 1999, and the President has 60 days to render a decision. There can be no assurance as to the ultimate effect of the Coiled Products Cases, Cut-to-length Plate Cases or the Section 201 Case, that imports from countries not named in previous cases will not increase or that domestic shipments or prices will rise. The Company continues to monitor imports and may file additional trade cases or take other trade action in the future. Existing trade laws and regulations may be inadequate to prevent the adverse impact of dumped and/or subsidized steel imports; consequently, such imports could pose continuing or increasing problems for the domestic steel industry and the Company. Five-year sunset reviews of various cut-to-length plate cases decided in 1994 began in September 1999. The Company and other U.S. producers are allowed to participate in those reviews in support of a five-year extension of the orders. The outcome of these reviews cannot currently be predicted, but the failure to extend such antidumping duties could have a future material adverse effect on the Company's operations and financial condition. As a result of the trade cases described above as well as improving market conditions in several foreign economies, market conditions for the Company's products have recently improved. Both the Company's order entry and price realization have improved significantly in recent months. The Company's shipment rate has increased from a low in February 1999 of 44,000 tons to 146,000 tons in November 1999. Similarly, overall price realization has increased by 5.7% over the same period, despite a product mix shift to lower-priced sheet. The timing and magnitude of the recent volume and pricing improvements are consistent with initial market recoveries following the success of previously-filed trade cases. The Company expects in the near term that both volume and pricing will continue to improve gradually. 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 $8.1 million for environmental capital improvements in fiscal years 2000 and 2001. 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. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and the amount of associated costs is reasonable determinable. Accruals for estimated losses from 11 13 environmental remediation obligations generally are recognized no later than completion of the engineering or feasibility study or the commitment to a formal plan of action. These accruals may be adjusted as further information becomes available or circumstances change. If recoveries of remediation costs from third parties are probable, a receivable is recorded. As of September 30, 1999, the Company determined that there were no environmental compliance or remediation obligations requiring accruals in the accompanying financial statements. 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. 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 the sharing arrangement described below) 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 and USX have similarly had several disagreements regarding the scope and actual application of USX's indemnification obligations. 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 be subject to litigation. 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 and the Company's iron ore mines in southern Utah. The Company also leases from the State of Utah, under a lease expiring in 2016, a 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. For information concerning the Company's Chapter 11 bankruptcy filing, see Item 1. "Business - Recent Developments." 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, with the exception of those 12 14 matters relating to the Company's Chapter 11 bankruptcy proceeding, are expected to have a material adverse effect on the Company's financial condition or results of operation. 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The following table sets forth, for the periods indicated, the high and low sales prices for the Class A Common Stock. Prices for fiscal year 1998 and the first two quarters of fiscal year 1999 were as reported on the NYSE Composite Tape. Prices for the last two quarters of fiscal year 1999 reflect quotations in the over-the-counter market maintained by the National Association of Securities Dealers, as reported by financialweb.com on the Internet. Such quotations reflect interdealer prices, without retail markup, markdown, commissions or other adjustments and may not necessarily represent actual transactions. Since the commencement of the Company's Chapter 11 bankruptcy proceedings, the market for the Class A Common has been limited and the quotations reported may not be indicative or prices that could be obtained in actual transactions. The Company makes no representation as to how reflective Internet stock quotes are of actual trading values.
Fiscal Year Ended September 30, 1998 HIGH LOW First Quarter ended December 31 $ 3 7/8 $1 15/16 Second Quarter ended March 31 3 11/16 1 15/16 Third Quarter ended June 30 4 1/4 2 1/4 Fourth Quarter ended September 30 2 5/8 1 3/16
Fiscal Year Ended September 30, 1999 HIGH LOW First Quarter ended December 31 $ 1 5/16 $ 15/32 Second Quarter ended March 31 5/8 7/16 Third Quarter ended June 30 5/8 3/16 Fourth Quarter ended September 30 13/32 7/32
As of November 30, 1999, the Company had 15,008,767 shares of Class A Common Stock outstanding, held by 698 stockholders of record, and 18,451,348 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. In connection with the Company's voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, the NYSE and the Pacific Exchange, Inc. delisted the Company from their respective exchanges. The Company's Class A common stock has been quoted under the symbol "GNVSQ" in the over-the-counter market maintained by the National Association of Securities Dealers. 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 credit facility and senior notes restrict the amount of dividends that the Company may pay. Also, the Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition items. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 3 of Notes to Consolidated Financial Statements included in this Report. 13 15 ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1999. 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 the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth information with respect to the executive officers and directors of the Company:
NAME AGE POSITION - ---- --- -------- Joseph A. Cannon ......... 50 Chairman of the Board and Chief Executive Officer Ken C. Johnsen ........... 41 Executive Vice President, General Counsel and Director Dennis L. Wanlass ........ 50 Vice President, Treasurer and Chief Financial Officer Birchel S. Brown ......... 59 Senior Vice President of Operations Timothy R. Clark ......... 35 Vice President of Customer Service Carl E. Ramnitz .......... 52 Vice President of Human Resources R. J. Shopf .............. 65 Director Alan C. Ashton ........... 56 Director K. Fred Skousen .......... 57 Director Kevin S. Flannery ........ 55 Director Gregory T. Hradsky ....... 39 Director
The following sets forth the background of each of the Company's executive officers and directors, including the principal occupation of those individuals for the past five years: JOSEPH A. CANNON has been a director of the Company since its inception in February 1987, and has served as Chairman of the Board of Directors from March 1987 to the present. Mr. Cannon served as President of the Company from July 1987 to May 1991 and as Chief Executive Officer from July 1987 to July 1991. Following an absence from July 1991 to October 1992, Mr. Cannon returned to the Company as Chief Executive Officer and has continued to serve in such capacity. From February 1985 to September 1987, Mr. Cannon was engaged in the private practice of law with Pillsbury, Madison & Sutro in its Washington, D.C. office, specializing in environmental law. From May 1981 to February 1985, he was employed in various capacities by and became Assistant Administrator of 14 16 the Environmental Protection Agency. As Assistant Administrator, Mr. Cannon was responsible for the development, implementation and enforcement of federal air quality and radiation regulations throughout the United States. KEN C. JOHNSEN has been Executive Vice President and General Counsel of the Company since November 1997 and has served as Secretary of the Company since February 1992. He served as Vice President and General Counsel from November 1991 to November 1997 and as Manager of Special Projects for the Company from February 1991 through October 1991. From 1986 to 1991, Mr. Johnsen was engaged in the private practice of law with Parr Waddoups Brown Gee & Loveless, specializing in corporate counseling and civil litigation. Mr. Johnsen received his law degree from Yale Law School and a B.A. degree in Finance from Utah State University. DENNIS L. WANLASS has been Vice President, Treasurer and Chief Financial Officer of the Company since September 1989 and was Controller of the Company from January 1988 to September 1989. Before joining the Company, Mr. Wanlass was employed by Eastman Christensen, then a joint venture of Norton Company and Texas Eastern, in various accounting and financial capacities. From 1970 to 1975, he was employed by KPMG, an international accounting and consulting firm. Mr. Wanlass has a B.S. in Accounting from the University of Utah and is a certified public accountant. BIRCHEL S. BROWN has been Senior Vice President of Operations since August 1999. Mr. Brown was Senior Vice President of Steel and Wire Operations at Northwestern Steel and Wire from April 1997 to August 1999. He served in many operating capacities at Inland Steel including Manager of several operating departments as well as Manager of the sales products office, from 1966 to 1992. Mr. Brown has a Bachelor of Science degree from Purdue University in Industrial Management and a Master of Business Administration degree from the University of Chicago. TIMOTHY R. CLARK has been Vice President of Customer Service since August 1999. From May 1997 to August 1999, he was Vice President of Manufacturing. He has been employed by the Company since 1993 and has served in several other positions, including Project Manager--Plate Finishing and Shipping, Director of Corporate Communications, Director--Delta Project and Assistant to the President. Mr. Clark obtained a B.A. from Brigham Young University, an M.A. from the University of Utah and a Ph.D. from Oxford University. CARL E. RAMNITZ has been Vice President of Human Resources since October 1988 and was Vice President of Human Resources and Public Affairs of the Company from September 1987 to September 1988. Prior to joining the Company, he was employed by USX for 18 years in various employment and labor related capacities, most recently as Manager of Employee Relations for the Geneva Steel plant before it was acquired by the Company and for USX's Pittsburgh, California steel plant. R. J. SHOPF has been a director of the Company since September 1989 and served as an independent advisor to the Company from March 1988 to September 1989. Mr. Shopf currently serves as the Chairman of the Board for companies which own and operate two Ruth's Chris Steak Houses and the Montgomery Inn Restaurant in Indianapolis. Mr. Shopf is a director of Qualitech Steel. He is also the President of Southwest Business Associates, a consulting company (a position which he previously held from 1984 to February 1988, and from January 1989 to October 1992), and has served in this capacity since August 1994. Mr. Shopf served as President and Chief Executive Officer of Pioneer Chlor Alkali, Inc. ("Pioneer") from August 1993 until August 1994. Mr. Shopf also served as President of Imperial West Chemical Company, an affiliate of Pioneer, from January 1992 until August 1994, and as President of All Pure Chemical Company, also an affiliate of Pioneer, from October 1992 until August 1994. Mr. Shopf obtained an MBA degree from the Harvard Graduate School of Business Administration in 1959. ALAN C. ASHTON has been a director of the Company since November 1996. Dr. Ashton co-founded the former WordPerfect Corporation ("WordPerfect"), a software applications company. Dr. Ashton served as an executive officer and a director of WordPerfect and its subsidiaries for over five years, including as Co-Chairman of the Board of Directors of WordPerfect from January through June 1994, and as President and Chief Executive Officer of WordPerfect from January 1993 through December 1993. He served as a director of Novell, Inc. from June 1994 until he resigned in December 1996. Dr. Ashton and his wife, Karen, are co-founders of Thanksgiving Point in Lehi, Utah. He is currently serving on the Board of Directors for Infobases, Deseret Management for Deseret Book, Brigham Young University's Lighting the Way Campaign, and the Division of Business and Economic Development and several other boards. 15 17 K. FRED SKOUSEN is currently Advancement Vice President of Brigham Young University. Formerly, he was the Dean of the Marriott School of Management at BYU for nine years. Prior to that, Dr. Skousen held the Peat Marwick Mitchell Professorship and, from 1974 to 1983, served as Director of the School of Accountancy at BYU. Dr. Skousen is a certified public accountant. KEVIN S. FLANNERY has been, since 1993, President of Whelan Financial Corp., a New York company engaged in management of investments. He previously served as Senior Managing Director of Bear Stearns, an investment banking firm, for 16 years. GREGORY T. HRADSKY is the President of Bellport Capital Corp., a private investment company, which was founded in May 1998. Mr. Hradsky was Managing Director of UBS Securities LLC, a New York based investment banking firm from 1991 to 1998. Prior to that, Mr. Hradsky was a member of the Distressed Securities Group and High Yield Research Department at The First Boston Corporation from 1988 to 1991. He began his career at T. Rowe Price Associates in 1983. Mr. Hradsky received an MBA in Finance from the Wharton School in 1988 and a BA from Loyola College in 1982. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers and directors are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the Company's executive officers and directors, the Company believes that all required forms were timely filed during the past fiscal year. ITEM 11. EXECUTIVE COMPENSATION. The compensation of Joseph A. Cannon, the Company's Chief Executive Officer, and the four other most highly paid executive officers (collectively, the "Named Executive Officers") is discussed in the following tables and in a report from the Compensation Committee of the Board of Directors. SUMMARY COMPENSATION TABLE The following table sets forth, for the fiscal years ended September 30, 1999, 1998 and 1997, the compensation paid to the Named Executive Officers.
LONG-TERM COMPENSATION ------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------- -------------------------- --------------------- RESTRICTED SECURITIES ALL OTHER OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN- NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS SATION PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) (#)(4) ($) ($)(5) ------------------ ---- ------ ------ ------------ ---------- ---------- ------- --------- Joseph A. Cannon 1999 482,748 -- 13,292 -- -- -- 19,563 Chief Executive 1998 487,724 44,201 12,430 -- 68,771 -- 17,980 Officer 1997 463,337 50,932 13,858 -- 100,000 -- 16,726 Ken C. Johnsen 1999 271,076 -- -- -- -- 19,453 Executive Vice President and 1998 275,010 24,455 8,859 -- 31,589 -- 16,724 General Counsel 1997 200,220 21,886 9,073 -- 50,000 -- 14,021 Dennis L. Wanlass 1999 194,505 -- 7,122 -- -- -- 18,716 Vice President and 1998 196,275 17,788 5,757 -- 29,627 -- 17,837 Chief Financial Officer 1997 186,461 20,497 9,073 -- 84,500 -- 15,650
16 18
LONG-TERM COMPENSATION ------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------- -------------------------- --------------------- RESTRICTED SECURITIES ALL OTHER OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN- NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS SATION PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) (#)(4) ($) ($)(5) ------------------ ---- ------ ------ ------------ ---------- ---------- ------- --------- Carl E. Ramnitz 1999 172,073 -- 3,466 -- -- -- 16,850 Vice President of 1998 173,838 15,615 474 -- 22,383 -- 20,391 Human Resources 1997 149,991 16,483 2,128 -- 36,600 -- 13,228 Timothy R. Clark 1999 137,598 -- -- -- -- -- 12,493 Vice President of Customer 1998 140,005 12,559 -- -- 22,000 -- 13,228 Service 1997 94,239 9,861 -- -- 20,000 -- 4,489
- ---------- (1) Includes compensation deferred or accrued at the election of the Named Executive Officer under the Company's Management Employee Savings and Pension Plan (the "Management Plan"). (2) Represents payments under the Company's Performance Dividend Plan in such years. Amounts for fiscal years 1998 and 1997 represent only Performance Dividend Payments payable to all management and union employees based upon the Company's volume of product shipments. No discretionary bonuses were paid (3) None of the Named Executive Officers received any restricted stock awards during the three years presented, nor did any of them hold any such stock as of September 30, 1999. (4) 1997 option grants represent new options granted on February 20, 1997 and the repricing on March 26, 1997 of options granted to the Named Executive Officers in fiscal year 1991. The number of replacement options reflected as 1997 grants are as follows: Robert J. Grow, 33,000; Dennis L. Wanlass, 39,500 and Carl E. Ramnitz, 6,600. (5) Includes contributions made by the Company pursuant to the Management Plan and the dollar value of premiums paid by the Company pursuant to the Company's split dollar life insurance plan. For fiscal year 1999, such amounts were as follows: Joseph A. Cannon, $15,983 Company contributions, $3,580 insurance premiums; Ken C. Johnsen, $17,129 Company contributions, $2,324 insurance premiums; Dennis L. Wanlass, $15,279 Company contributions, $3,437 insurance premiums; Carl E. Ramnitz, $12,909 Company contributions, $3,941 insurance premiums and Timothy R. Clark, $12,493 Company contributions. OPTION GRANTS IN LAST FISCAL YEAR The Company made no grants of stock options to the Named Executive Officers during the fiscal year ended September 30, 1999. The Company did not grant any stock appreciation rights during the fiscal year ended September 30, 1999. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the exercise of options to acquire shares of the Company's Class A Common Stock by the Named Executive Officers during the fiscal year ended September 30, 1999, as well as the aggregate number and value of unexercised options held by the Named Executive Officers on September 30, 1999.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT SHARES AT SEPTEMBER 30, 1999(#) SEPTEMBER 30, 1999($) ACQUIRED VALUE ---------------------------------- ---------------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- ------------ ----------- ------------- ----------- ------------- Joseph A. Cannon -- -- 126,800 65,971 $ -- $ -- Ken C. Johnsen -- -- 117,000 31,589 -- --
17 19
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT SHARES AT SEPTEMBER 30, 1999(#) SEPTEMBER 30, 1999($) ACQUIRED VALUE ---------------------------------- ---------------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- ------------ ----------- ------------- ----------- ------------- Dennis L. Wanlass -- -- 120,300 28,827 -- -- Carl E. Ramnitz -- -- 64,300 22,183 -- -- Timothy R. Clark -- -- 25,000 19,500 -- --
DIRECTOR COMPENSATION Directors who are not employees of the Company are paid a director's fee of $22,000 per year for serving on the Board of Directors, $3,000 per year for serving as chairman of any committee, $1,500 for each Board meeting attended, $750 for each telephonic board meeting, and $1,000 for each committee meeting attended. Directors may also receive a fee of between $750 and $1,000 per day for other significant service to the Company. Mr. Shopf serves as outside "lead" director for which he receives an additional $12,000 per year. All directors are also reimbursed by the Company for their out-of-pocket travel and related expenses incurred in attending all Board and committee meetings. Under the Geneva Steel Company 1996 Incentive Plan (the "Incentive Plan"), each nonemployee director is granted an option to purchase 4,000 shares of the Company's Class A Common Stock upon appointment or election and each nonemployee director who is serving on the first business day on or after January 1 of each calendar year is granted an option to purchase 2,000 shares. Options are exercisable for ten years at the fair market value of the shares on the date of grant and are subject to a vesting schedule. In addition, each nonemployee director who serves for not less than five years receives a deferred compensation payment in each of the five years after termination of service in the amount of the retainer paid to such director for services as a director during the year preceding termination of such services. If a nonemployee director's service is terminated prior to five years of service by reason of death or disability, deferred compensation is paid for a period equal to the period for which the director served. COMPENSATION COMMITTEE REPORT This Report of the Compensation Committee (the "Committee") of the Board of Directors describes the overall compensation goals and policies applicable to the executive officers of Geneva, including the bases for determination of the compensation of executive officers for fiscal year 1999. The Report also discusses the setting of 1999 compensation of Mr. Cannon. The term "Executive Officers" is used below to refer to the executive officers of Geneva other than Mr. Cannon. Composition and Functions of the Committee. The Compensation Committee of the Board of Directors of Geneva is comprised entirely of independent, nonemployee directors. Subject to any action which may be taken by the full Board of Directors, the Board has delegated to the Committee the authority: - To determine the compensation of Joseph A. Cannon, Chairman of the Board and Chief Executive Officer of Geneva, including discretionary bonuses; 18 20 - To approve, upon recommendations by Mr. Cannon, the compensation arrangements of Executive Officers of Geneva, including the Named Executive Officers identified in the Summary Compensation Table above; and - To carry out the duties and responsibilities of the Board of Directors regarding Geneva's other compensation plans, including administering and making awards under Geneva's option plans to Mr. Cannon, the Executive Officers and other managers and key employees of Geneva. Compensation Philosophy and Objectives. The Committee believes that compensation of Geneva's executive officers should be set at a competitive level and be based upon the Company's overall financial performance, achievement of strategic goals, and individual performance, with a view toward increasing the value of the Company. Within this overall philosophy, the following principles guide Geneva's compensation policies for executive officers: - Provide competitive levels of compensation that enable Geneva to attract and retain experienced, talented executive officers; - Compensate executive officers based on the Company's progress toward achievement of its short and long-term strategic and financial goals; - Compensate executive officers based on the performance of the individual executive officer, and his contribution to the Company's performance; and - Maintain and strengthen the incentive for executive officers to increase the value of the Company. The Committee believes that adherence to these objectives is essential to attracting and retaining highly-qualified officers whose contributions are necessary for the growth and success of Geneva. The Compensation Committee has also relied on compensation surveys of executives with comparable responsibilities at peer companies. These surveys have been prepared at periodic intervals by the compensation consulting firm of William E. Mercer. Information concerning the specific implementation of these policies in the 1999 compensation arrangements of the Executive Officers and Mr. Cannon is provided below. The Committee believes that the $1.0 million compensation deduction cap promulgated under the Internal Revenue Code currently has no effect on the Company's compensation policies. Annual Salaries. Salaries of Executive Officers are generally reviewed on an annual basis at the end of the fiscal year and adjustments made based on the Committee's subjective evaluation of the individual's performance and the Company's performance, taking into account both qualitative and quantitative factors. Among the factors considered by the Committee have been the recommendations of Mr. Cannon and the importance of retaining key Executive Officers. Subject to Board approval, the Committee makes compensation decisions concerning the Executive Officers. Salary levels for fiscal year 1999 were not increased because, in the Committee's judgment, increases would not be appropriate in light of the Company's financial situation. The Committee also concluded that, in light of the Company's Chapter 11 filing and the need to retain its Executive Officers through a critical period in the Company's history, a decrease in salary levels would not be appropriate despite the Company's recent financial performance. Incentive Bonuses. In fiscal 1999, Geneva made no awards under the Performance Dividend Plan (the "Performance Plan") established in June 1993. The Performance Plan provides for the monthly payment of additional cash compensation as a percentage of base compensation to all management employees based upon the Company's product shipments. Cash payments made to Executive Officers under the Performance Plan are determined according to the same formula used to determine payments to all other management employees. No discretionary bonuses were paid to any Executive Officers. Stock Options. The Company's Incentive Plan and Key Employee Plan permit the award of options to purchase Class A Common Stock to executive officers, managers and key employees. The award of stock options is intended to align the interests of Executive Officers with the shareholders by providing the Executive Officers with an incentive to bring about increases in the price of Class A Common Stock. Geneva's general policy is to award options to purchase Class A Common Stock at a price that equals or exceeds market price on the date of grant. 19 21 Accordingly, the Executive Officers derive a financial benefit from an option only if the price of Class A Common Stock increases. With one exception, options grants have not had performance contingencies, but realization of the value provided through the options has generally required the Executive Officer to remain employed by Geneva until the options vest. Historically, options have vested at the rate of 40 percent of the underlying shares at the end of two years following the grant and an additional 20 percent each year thereafter. The Committee modified the vesting schedule of options granted in fiscal 1997 and 1998 so that 50 percent become vested after one year and the balance after two years. The modification to the vesting schedule was made in recognition of the historical volatility of the Company's Common Stock and a desire to increase the incentive represented by the grant of stock options to Executive Officers. The options are generally exercisable for ten years from the date of grant at a price equal to 100 percent of the fair market value of the underlying shares on such date. Because Mr. Cannon beneficially owns more than 10 percent of the voting power of the Company, applicable tax laws require that incentive stock options granted to him must be exercisable for no more than five years at a price equal to 110 percent of the fair market value on the date of grant. In fiscal 1999, the Company made no awards of options to purchase Class A Common Stock to Executive Officers of the Company. Given the Company's Chapter 11 filing, the Compensation Committee determined that the granting of options would not be appropriate at that time. In connection with the Company's Chapter 11 proceeding, the Compensation Committee formulated and adopted a Key Employee Retention Program (the "Program"), which was approved by the Company's board of directors. The Program covers the Executive officers (which for purposes of the Program includes the corporate controller) and approximately thirty other employees. The purpose of the program is to encourage the covered employees to remain with the Company through its emergence from Chapter 11. The Committee determined that the Program is in the best interest of the Company because of the need to retain a strong management team and continuity throughout the pendency of the proceeding. The Program was designed to accomplish this purpose through payment of an emergence bonus and the provision of certain severance protection. These benefits are intended to encourage employees to remain with the Company despite the personal and career uncertainties created by the bankruptcy filing. The Program provides a severance benefit of 50% of annual salary to Executive Officers terminated without cause prior to consummation of a plan of reorganization and a benefit of 75% of annual salary if terminated within 90 days after consummation of a plan. Executive officers who remain with the Company through consummation of the Plan of Reorganization will receive an emergence bonus of 50% of annual salary, payable 50% in cash and 50% in stock of the reorganized company. (Mr. Cannon's bonus is paid 100% in stock). Employees, other than the Executive officers who remain with the Company, through consummation of a plan of reorganization will receive an emergence bonus equal to 25% of annual salary payable in cash, and are covered by the Company's pre-existing severance program. Compensation of Chief Executive Officer. For the reasons discussed above with respect to the Executive Officers, there was no increase or decrease in Mr. Cannon's base salary in fiscal 1999. During the 1999 fiscal year, Mr. Cannon did not receive additional compensation pursuant to the Performance Plan, based upon the formula applicable to all Executive Officers and management employees. Mr. Cannon was not granted options for the purchase of shares of Class A Common Stock for the reasons stated above with respect to the Executive Officers. Mr. Cannon did not receive a discretionary bonus. Other Compensation Plans. The Company maintains insurance and retirement agreements with certain of its Executive Officers and managers, including Mr. Cannon and the Named Executive Officers, which provide for payment of a death benefit (net of premiums paid and recovered by the Company) to a designated beneficiary or for payment of a retirement benefit upon reaching age 62. Geneva also has a number of other broad-based employee benefit plans in which Executive Officers participate on the same terms as other employees meeting the eligibility requirements, subject to any legal limitations on amounts that may be contributed to or benefits payable under the plans. Submitted by the Compensation Committee of the Board of Directors: R.J. Shopf K. Fred Skousen Alan C. Ashton 20 22 PERFORMANCE GRAPH The following graph shows a comparison of cumulative total shareholder return on the Company's Class A Common Stock, calculated on a dividend reinvested basis, from September 30, 1994 through September 30, 1999, compared with the S&P 500 Index and the S&P Steel Index. [GRAPH]
SEP-94 SEP-95 SEP-96 SEP-97 SEP-98 SEP-99 Geneva Steel $100 $ 44 $ 17 $ 20 $ 7 $ 1 S&P(R) 500 $100 $130 $156 $219 $239 $305 S&P(R) Iron & Steel Index $100 $ 70 $ 68 $ 78 $ 56 $ 60
21 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of November 30, 1999 with respect to the beneficial ownership of shares of the Class A Common Stock and Class B Common Stock by each person known by the Company to be the beneficial owner of more than 5 percent of either of such classes of Common Stock, by each director or nominee, by each of the Named Executive Officers, and by all directors and officers as a group. The number of Class A Shares listed below does not include Class A Shares issuable upon conversion of Class B Shares. Unless otherwise noted, each person named has sole voting and investment power with respect to the shares indicated. The percentages set forth below have been computed based on the number of outstanding securities, excluding treasury shares held by the Company, and are based on 15,008,767 shares of Class A Common Stock and 18,451,348 shares of Class B Common Stock.
BENEFICIAL OWNERSHIP AS OF NOVEMBER 30, 1999* -------------------------------------- NUMBER OF PERCENTAGE OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS OUTSTANDING ------------ ---------------------- CLASS A COMMON STOCK: Joseph A. Cannon.................................................... 129,956(3) ** Ken C. Johnsen...................................................... 117,000(1) ** Carl E. Ramnitz..................................................... 64,300(1) ** Timothy R. Clark.................................................... 25,000(1) ** Dennis L. Wanlass................................................... 120,300(1) ** Alan C. Ashton...................................................... 52,800 ** R. J. Shopf......................................................... 17,800(2) ** K. Fred Skousen..................................................... 5,300(2) ** Kevin S. Flannery................................................... 2,800(2) ** Gregory T. Hradsky.................................................. 2,800(2) ** All directors and officers as a group (11 persons).................. 535,556(4) CLASS B COMMON STOCK(5): Joseph A. Cannon.................................................... 9,442,204(6) 51.2 Robert J. Grow...................................................... 8,855,319 48.0 All directors and officers as a group (1 persons)................... 9,442,204 99.2
- ---------- * Beneficial ownership as a percentage of the class for each person holding options exercisable within 60 days has been calculated as though shares subject to such options were outstanding, but such shares have not been deemed outstanding for the purpose of calculating the percentage of the class owned by any other person. ** Less than 1% of outstanding shares. (1) Subject to presently exercisable options. (2) Includes 2,800 shares subject to presently exercisable options. (3) Includes 3,156 shares held by Riverwood Limited Partnership, of which Joseph A. Cannon is general partner, and 126,800 shares subject to presently exercisable options. (4) Includes 467,400 shares subject to presently exercisable options. (5) The Class B Common Stock is convertible into Class A Common Stock at a rate of ten shares of Class B Common Stock for one share of Class A Common Stock. If they were to convert their shares of Class B Common Stock into shares of Class A Common Stock, Mr. Cannon would beneficially own 1,074,176 shares of Class A Common Stock (including shares owned by Riverwood Limited Partnership). In the event of such conversions, Mr. Cannon would own 5.9% of the outstanding Class A Common Stock. (6) Includes 828,013 shares held by Riverwood Limited Partnership, of which Joseph A. Cannon is general partner. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 27, 1996, the Company entered into an agreement to loan up to $500,000 to Joseph A. Cannon, its Chief Executive Officer. On September 27, 1996, October 4, 1996 and December 23, 1996, the Company loaned $250,000, $210,000 and $40,000, respectively. On February 13, 1997, the Company authorized an increase in the loan amount to $700,000 and advanced an additional $200,000. The loans were evidenced by promissory notes bearing interest at the rate of 8.53% and payable at the earlier of September 27, 1997 or demand 22 24 for repayment by the Company. The loans were secured by interests in real and personal property owned by the Chief Executive Officer and an affiliated entity. On October 17, 1997, the Chief Executive Officer paid $240,000 on the loans and the payment date of the loans was extended to April 30, 1998. On December 17, 1997, the Chief Executive Officer paid an additional $400,000 on the loans. On November 24, 1998, the remaining balance was paid by the Chief Executive Officer. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) Documents Filed: 1. Financial Statements. The following 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, 1999 are incorporated by reference in Item 8 of this Report: - Report of Independent Public Accountants - Balance Sheets at September 30, 1999 and 1998 - Statements of Operations for the years ended September 30, 1999, 1998 and 1997 - Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1999, 1998 and 1997 - Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 - Notes to Financial Statements 2. Financial Statement Schedule. The following Financial Statement Schedule of the Company for the years ended September 30, 1999, 1998 and 1997 is filed as part of this Report and should be read in conjunction with the Company's Financial Statements and Notes thereto: Schedule Page II - Valuation and Qualifying Accounts 29 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 Financial Statements or Notes thereto, or contained in this Report. (b) Reports on Form 8-K None. 23 25 (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 (2) Registrant's 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 (4) 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, (5) no par value 4.3 Rights Agreement dated as of May 19, 1997, between Registrant (6) and Rights Agent 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 Amended and Restated Sales Representation Agreement between (4) Mannesmann Pipe & Steel Corporation and the Registrant dated October 30, 1998 10.5 Geneva Steel Key Employee Plan (7) 10.6 Amendment to Geneva Steel Key Employee Plan dated May 12, (8) 1991 10.7 Form of Non-Statutory Stock Option Agreement (1) 10.8 Management Employee Savings and Pension Plan, as Amended (9) and Restated generally effective January 1, 1994, dated as of July 3, 1995 10.9 Amendment No. 1 to the Geneva Steel Management Employee (10) Savings and Pension Plan, effective as of January 1, 1997, dated June 25, 1997 10.10 Form of revised Executive Split Dollar Insurance Agreement (11) 10.11 Form of revised Executive Supplemental Retirement Agreement (11) 10.12 Union Employee Savings and Pension Plan, as Amended and (12) Restated effective January 1, 1995, dated as of August 13, 1997 10.13 Collective Bargaining Agreement between United Steelworkers of (4) America and the Registrant ("Collective Bargaining Agreement") dated May 1, 1998
24 26
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH ------- ------- ------------ -------- 10.14 Agreement between Union Carbide Industrial Gases, Inc. and the (7) Registrant dated July 12, 1990, as amended August 3, 1990 (the "Union Carbide Agreement") 10.15 Amendment to the Union Carbide Agreement dated December 1, (11) 1992 10.16 Oxygen Supply Agreement between Air Liquide America (12) Corporation and the Registrant dated June 10, 1997 10.17 Coilbox License Agreement between Stelco Technical Services (1) Limited and the Registrant dated August 23, 1989 10.18 License Agreement for the K-OBM Process between (1) Klockner Contracting and Technologies GmbH and the Registrant dated November 25, 1989 10.19 Special Use Lease Agreement No. 897 between the State of Utah (11) and the Registrant dated January 13, 1992 and Amendment thereto dated June 19, 1992 10.20 Indenture dated as of January 15, 1994 between the Registrant and (13) Bankers Trust Company, as Trustee, including a form of 9 1/2% Senior Note due 2004 10.21 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 10.22 License Agreement relating to the desulfurization process between (1) BS&B Engineering Company, Inc. and the Registrant dated March 1, 1990 10.23 Lo-Cat(R) Licensing Agreement between ARI Technologies, Inc. (7) and the Registrant dated April 16, 1990 10.24 Agreement relating to the closure of hazardous waste surface (7) impoundments between USX Corporation, the Registrant and Duncan Lagnese Associates, Incorporated dated October 22, 1990 10.25 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") 10.26 First Amendment to the Oxbow Coke Agreement dated April 11, (15) 1996 10.27 Agreement for the Sale and Purchase of Coal between the (16) Registrant and Oxbow Carbon and Minerals, Inc. dated February 19, 1996, effective as of April 1, 1994 10.28 Warrant Agreement dated as of March 16, 1993 between the (2) Registrant and The Bank of New York, as Warrant Agent 10.29 Form of Indenture between the Registrant and the Trustee (3) thereunder related to the Exchange Debentures, including a form of Exchange Debenture
25 27
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH ------- ------- ------------ -------- 10.30 Industrial Gas Supply Agreement between Air Liquide America (17) Corporation and Geneva Steel dated June 8, 1995 10.31 Geneva Steel Company 1996 Incentive Plan (18) 10.32 Form of Employment Agreement between Registrant and Certain (12) Executive Officers 10.33 Loan and Security Agreement by and between Congress Financial (19) Corporation and Geneva Steel Company as Debtor and Debtor-in- Possession as Borrower, dated February 19, 1999 10.34 Amendment No. 1 to Loan and Security Agreement by and (20) between Congress Financial Corporation and Geneva Steel Company as Debtor and Debtor-in-Possession as Borrower, dated July 31, 1999 10.35 Letter Agreement between USX Corporation and Registrant X related to Taconite Pellet Supply, dated December 16, 1999 13 Selected portions of the Registrant's Annual Report to X Shareholders for the year ended September 30, 1999 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
---------- (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 Annual Report on Form 10-K for the year ended September 30, 1998. (5) Incorporated by reference to the Registration Statement on Form S-4 dated August 9, 1993, File No. 33-61072. (6) Incorporated by reference to Exhibit 99.1 of the Registration Statement on Form 8-A filed on November 21, 1997. (7) Incorporated by reference to the Registration Statement on Form S-1 dated November 5, 1990, File No. 33-37238. (8) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1991. (9) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 26 28 (10) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (11) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1997. (13) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (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 Annual Report on Form 10-K for the fiscal year ended September 30, 1996. (16) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (17) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (18) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. (19) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1998 (20) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999 (d) Financial Statement Schedule See page 29 herein. 27 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Geneva Steel Company: We have audited in accordance with generally accepted auditing standards, the financial statements incorporated by reference in Item 8 of this Form 10-K, and have issued our report thereon dated December 20, 1999. 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 December 20, 1999 28 30 GENEVA STEEL COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (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, 1999 Allowance for doubtful accounts ...... $ 6,411 $ 8,775 $(4,274) $10,912 ======= ======= ======= ======= Year Ended September 30, 1998 Allowance for doubtful accounts ..... $ 4,564 $ 6,923 $(5,076) $ 6,411 ======= ======= ======= ======= Year Ended September 30, 1997 Allowance for doubtful accounts .... $ 4,031 $ 6,558 $(6,025) $ 4,564 ======= ======= ======= =======
29 31 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 28, 1999. 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 28, 1999 - ---------------------------- Executive Officer (Principal executive officer) Joseph A. Cannon /s/ Ken C. Johnsen Executive Vice President, Secretary December 28, 1999 - ---------------------------- and General Counsel Ken C. Johnsen /s/ Dennis L. Wanlass Vice President, Treasurer and Chief December 28, 1999 - ---------------------------- Financial Officer Dennis L. Wanlass (Principal financial and accounting officer) /s/ Alan C. Ashton - ---------------------------- Alan C. Ashton Director December 28, 1999 /s/ K. Fred Skousen - ---------------------------- K. Fred Skousen Director December 28, 1999 /s/ R. J. Shopf - ---------------------------- R. J. Shopf Director December 28, 1999 /s/ Kevin S. Flannery - ---------------------------- Kevin S. Flannery Director December 28, 1999 /s/ Gregory T. Hradsky - ---------------------------- Gregory T. Hradsky Director December 28, 1999
24 32
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 (2) Registrant's 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 (4) 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, (5) no par value 4.3 Rights Agreement dated as of May 19, 1997, between Registrant (6) and Rights Agent 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 Amended and Restated Sales Representation Agreement between (4) Mannesmann Pipe & Steel Corporation and the Registrant dated October 30, 1998 10.5 Geneva Steel Key Employee Plan (7) 10.6 Amendment to Geneva Steel Key Employee Plan dated May 12, (8) 1991 10.7 Form of Non-Statutory Stock Option Agreement (1) 10.8 Management Employee Savings and Pension Plan, as Amended (9) and Restated generally effective January 1, 1994, dated as of July 3, 1995 10.9 Amendment No. 1 to the Geneva Steel Management Employee (10) Savings and Pension Plan, effective as of January 1, 1997, dated June 25, 1997 10.10 Form of revised Executive Split Dollar Insurance Agreement (11) 10.11 Form of revised Executive Supplemental Retirement Agreement (11) 10.12 Union Employee Savings and Pension Plan, as Amended and (12) Restated effective January 1, 1995, dated as of August 13, 1997 10.13 Collective Bargaining Agreement between United Steelworkers of (4) America and the Registrant ("Collective Bargaining Agreement") dated May 1, 1998
33
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH ------- ------- ------------ -------- 10.14 Agreement between Union Carbide Industrial Gases, Inc. and the (7) Registrant dated July 12, 1990, as amended August 3, 1990 (the "Union Carbide Agreement") 10.15 Amendment to the Union Carbide Agreement dated December 1, (11) 1992 10.16 Oxygen Supply Agreement between Air Liquide America (12) Corporation and the Registrant dated June 10, 1997 10.17 Coilbox License Agreement between Stelco Technical Services (1) Limited and the Registrant dated August 23, 1989 10.18 License Agreement for the K-OBM Process between (1) Klockner Contracting and Technologies GmbH and the Registrant dated November 25, 1989 10.19 Special Use Lease Agreement No. 897 between the State of Utah (11) and the Registrant dated January 13, 1992 and Amendment thereto dated June 19, 1992 10.20 Indenture dated as of January 15, 1994 between the Registrant and (13) Bankers Trust Company, as Trustee, including a form of 9 1/2% Senior Note due 2004 10.21 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 10.22 License Agreement relating to the desulfurization process between (1) BS&B Engineering Company, Inc. and the Registrant dated March 1, 1990 10.23 Lo-Cat(R)Licensing Agreement between ARI Technologies, Inc. (7) and the Registrant dated April 16, 1990 10.24 Agreement relating to the closure of hazardous waste surface (7) impoundments between USX Corporation, the Registrant and Duncan Lagnese Associates, Incorporated dated October 22, 1990 10.25 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") 10.26 First Amendment to the Oxbow Coke Agreement dated April 11, (15) 1996 10.27 Agreement for the Sale and Purchase of Coal between the (16) Registrant and Oxbow Carbon and Minerals, Inc. dated February 19, 1996, effective as of April 1, 1994 10.28 Warrant Agreement dated as of March 16, 1993 between the (2) Registrant and The Bank of New York, as Warrant Agent 10.29 Form of Indenture between the Registrant and the Trustee (3) thereunder related to the Exchange Debentures, including a form of Exchange Debenture
34
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH ------- ------- ------------ -------- 10.30 Industrial Gas Supply Agreement between Air Liquide America (17) Corporation and Geneva Steel dated June 8, 1995 10.31 Geneva Steel Company 1996 Incentive Plan (18) 10.32 Form of Employment Agreement between Registrant and Certain (12) Executive Officers 10.33 Loan and Security Agreement by and between Congress Financial (19) Corporation and Geneva Steel Company as Debtor and Debtor-in- Possession as Borrower, dated February 19, 1999 10.34 Amendment No. 1 to Loan and Security Agreement by and (20) between Congress Financial Corporation and Geneva Steel Company as Debtor and Debtor-in-Possession as Borrower, dated July 31, 1999 10.35 Letter Agreement between USX Corporation and Registrant X related to Taconite Pellet Supply, dated December 16, 1999 13 Selected portions of the Registrant's Annual Report to X Shareholders for the year ended September 30, 1999 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
---------- (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 Annual Report on Form 10-K for the year ended September 30, 1998. (5) Incorporated by reference to the Registration Statement on Form S-4 dated August 9, 1993, File No. 33-61072. (6) Incorporated by reference to Exhibit 99.1 of the Registration Statement on Form 8-A filed on November 21, 1997. (7) Incorporated by reference to the Registration Statement on Form S-1 dated November 5, 1990, File No. 33-37238. (8) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1991. (9) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 35 (10) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (11) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1997. (13) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (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 Annual Report on Form 10-K for the fiscal year ended September 30, 1996. (16) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (17) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (18) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. (19) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1998 (20) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999 EX-10.35 2 LETTER AGREEMENT 1 EXHIBIT 10.35 December 16, 1999 VIA FACSIMILE - 412-433-3624 Richard M. Efkeman Director Raw Materials USX Corporation 600 Grant Street Pittsburgh, PA 15219-2749 Re: Geneva Steel Company ("Geneva"); Taconite Pellet Supply Dear Mr. Efkeman: As you know, December 31, 1999 is the stated expiration date of that certain Taconite Pellet Sales Agreement effective September 1, 1994, as amended July 25, 1997, and September 30, 1998 (the "Agreement"). This will confirm our understanding that pursuant to this letter agreement, to be effective January 1, 2000 through March 31, 2000 (the "first quarter 2000"), and thereafter as provided below, USX Corporation will continue to sell and Geneva will continue to purchase fluxed taconite ("Fluxtac") pellets on the same terms and conditions as are set forth in the Agreement in the event that a new supply agreement is not completed prior to the expiration of the Agreement. Geneva declares its Fluxtac pellet requirement for the first quarter 2000 will be between 700,000 and 750,000 net tons, which shall constitute the respective purchase and sale obligation of the parties. Deliveries shall be scheduled at as uniform a rate as practicable throughout the quarter. The purchase price per net ton of Fluxtac pellets will be $0.4542 per natural net ton iron unit (approximately $28.24 per net ton), FOB Minntac price as provided in the Agreement for the last quarter of calendar year 1999. This letter agreement shall remain in effect as herein provided while the parties attempt to negotiate in good faith a new supply agreement to supply all of Geneva's requirements for Fluxtac pellets and shall not constitute an amendment or extension of the Agreement, reference to which is made solely for the purpose of defining the terms and conditions of this letter agreement. The new supply agreement may provide for superseding this letter agreement in any manner as may be agreed upon by the parties. Effective April 1, 2000, this letter agreement will automatically be extended and shall remain in effect unless or until either party serves upon the other written notice of 2 Richard M. Efkeman December 16, 1999 Page 2 termination no less than forty five (45) days prior to the effective termination date specified in such notice. The respective purchase and sale obligations of the parties during such an extension of this letter agreement shall be a pro rata portion of the quantity range specified in the second paragraph above, and all other terms of this of this letter agreement, including the price specified above, shall remain in effect. The parties acknowledge that Geneva is a debtor and debtor-in-possession in a Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court of the District of Utah (the "Bankruptcy Court"). The fact that Geneva is involved in such proceeding shall not excuse either USX Corporation or Geneva from performing pursuant to the provisions of this letter agreement and applicable provisions of bankruptcy law. Geneva acknowledges and agrees that the current trade credit terms and conditions as presently established and governing pellet shipments shall continue to apply to this letter agreement. USX Corporation reserves the right to withhold shipments of pellets and/or to revise said credit terms and conditions without being in default of this letter agreement in the event Geneva fails to comply with such credit terms and conditions. Nothing set forth in this letter agreement is or is intended to be an assumption of the Agreement, such assumption to be effected, if at all, through applicable proceedings in the Bankruptcy Court. GENEVA STEEL COMPANY, Debtor and Debtor-in-Possession /s/ Dale K. Poulson --------------------------------------- Dale K. Poulson, Director Raw Materials ACCEPTED AND AGREED TO this 20th day of December, 1999. USX CORPORATION By: /s/ Richard M. Efkeman -------------------------------- 3 Richard M. Efkeman December 16, 1999 Page 3 Richard M. Efkeman Its: Director, Raw Materials Planning, Procurement, Distribution & Sales EX-13 3 SELECTED PORTIONS OF THE ANNUAL REPORT 1 EXHIBIT 13 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) SELECTED FINANCIAL DATA (Dollars in thousands, except per share and per ton data)
OPERATING STATISTICS 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Net sales $ 314,726 $ 720,453 $ 726,669 $ 712,657 $ 665,699 Gross margin (107,086) 61,321 60,691 50,350 71,508 Income (loss) from operations (128,902) 21,394 38,204 25,729 47,713 Net income (loss) (185,107) (18,943) (1,268) (7,238) 11,604 Net income (loss) applicable to common shares (189,936) (30,715) (11,608) (16,327) 3,606 Diluted net income (loss) per common share (11.33) (1.90) (.74) (1.07) .24 BALANCE SHEET STATISTICS Cash and cash equivalents $ -- $ -- $ -- $ 597 $ 12,808 Working capital (8,567) (298,416) 67,063 71,065 33,045 Current ratio .91 .39 1.66 1.64 1.29 Net property, plant and equipment 373,017 411,174 458,315 454,523 470,390 Total assets 474,716 605,165 646,070 657,386 628,797 Long-term debt -- -- 399,906 388,431 342,033 Redeemable preferred stock 56,001 56,917 56,169 55,437 51,031 Stockholders' equity (deficit) (133,979) 53,208 82,603 92,827 108,074 Long-term debt as a percentage of stockholders' equity -- -- 484% 418% 316% ADDITIONAL STATISTICS Operating income (loss) per ton shipped $ (117.15) $ 10.68 $ 17.90 $ 12.00 $ 24.99 Capital expenditures (1) 8,025 10,893 47,724 26,378 68,025 Depreciation and amortization 50,625 44,182 44,959 44,415 39,308 Cash flows from operating activities 8,095 25,847 32,070 (19,520) 84,130 Cash flows from investing activities (3,341) (10,859) (46,465) (37,526) (52,948) Cash flows from financing activities (4,754) (14,988) 13,798 44,835 (18,374) Raw steel production (tons in thousands) 1,101 2,390 2,460 2,428 2,145 Steel products shipped (tons in thousands) 1,100 2,003 2,135 2,145 1,909
(1) Capital expenditures for the year ended September 30, 1998 included an offset of $12.5 million relating to an insurance claim settlement. Absent the offset, capital expenditures were approximately $23.4 million for the year ended September 30, 1998. 2 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) SELECTED FINANCIAL DATA (continued) 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. Prices for fiscal year 1998 and the first two quarters of fiscal year 1999 were as reported on the NYSE Composite Tape. Prices for the last two quarters of fiscal year 1999 reflect quotations in the over-the-counter market maintained by the National Association of Securities Dealers, as reported by financialweb.com on the Internet. Such quotations reflect interdealer prices, without retail markup, markdown, commissions or other adjustments and may not necessarily represent actual transactions. Since the commencement of the Company's Chapter 11 bankruptcy proceedings, the market for the Class A common stock has been limited and the quotations reported may not be indicative of prices that could be obtained in actual transactions. The Company makes no representation as to how reflective Internet stock quotes are of actual trading values.
Fiscal Year Ended September 30, 1998 HIGH LOW First Quarter ended December 31 $ 3 7/8 $1 15/16 Second Quarter ended March 31 3 11/16 1 15/16 Third Quarter ended June 30 4 1/4 2 1/4 Fourth Quarter ended September 30 2 5/8 1 3/16
Fiscal Year Ended September 30, 1999 HIGH LOW First Quarter ended December 31 $1 5/16 $ 15/32 Second Quarter ended March 31 5/8 7/16 Third Quarter ended June 30 5/8 3/16 Fourth Quarter ended September 30 13/32 7/32
As of November 30, 1999, the Company had 15,008,767 shares of Class A common stock outstanding, held by 698 stockholders of record, and 18,451,348 shares of Class B common stock outstanding, held by five stockholders of record. The Class B common stock is convertible into Class A common stock at a rate of ten shares of Class B for one share of Class A. In connection with the Company's voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, the NYSE and the Pacific Exchange, Inc. delisted the Company from their respective exchanges. The Company's Class A common stock has been quoted under the symbol "GNVSQ" in the over-the-counter market maintained by the National Association of Securities Dealers. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview 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 significantly affected by fluctuations in the value of the United States dollar against several other currencies, the level of demand for steel in the United States economy relative to steel demand in foreign economies and world economic conditions generally. 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. Imports of the Company's primary products have historically represented approximately 15% to 25% of total U.S. consumption. Shortly after completion of the Company's modernization in early 1998, the domestic steel industry experienced an unprecedented surge in imports. During the surge, up to approximately 40% of domestic plate consumption was at times supplied by imports. Imports similarly increased in each of the Company's other product lines. The surge in imports from various Asian, South American and Eastern European countries was at least partially the result of depressed economies in those regions, causing foreign steel producers to increase dramatically exports to the United States. Many if not all of these foreign producers sold products into the U.S. market at illegally dumped prices. While a previous import surge in 1996 primarily involved only flat plate, the more recent surge included all of the Company's products. As a result, during fiscal 1998 and early fiscal 1999 the Company's product prices and order entry rates fell dramatically. From January 1, 1998 to February 1, 1999, overall price realization for plate, pipe and coil declined by $94, $95, and $92 per ton, respectively. Even without the simultaneous reduction in volume, the decline in pricing alone would have resulted in an annualized margin loss of over $220 million. The Company was also forced to reduce production by approximately 50%, resulting in margin losses, higher costs per ton and production inefficiencies. During the year ended September 30, 1999, the Company's total shipments were approximately 1,100,300 tons, as compared to 2,003,200 tons for the previous year. The combined impact of the pricing and volume declines resulted in a significant reduction in operating results and cash flow. Decreased cash flow and liquidity made it impossible for the Company to service its debt and fund ongoing operations. On September 30, 1998, the Company and eleven other domestic steel producers filed antidumping actions against hot-rolled coiled steel imports from Russia, Japan and Brazil. The group also filed a subsidy (countervailing duty) case against Brazil (all cases described in this paragraph are referred to as the "Coiled Products Cases"). In April 1999, the Department of Commerce ("DOC") issued a final determination that imports of hot-rolled coiled sheet from Japan were dumped at margins ranging from 17% to 65%. In June 1999, the International Trade Commission (the "ITC") reached a unanimous 6-0 final determination that imports of hot-rolled sheet from Japan caused injury to the U.S. industry. As a result, an antidumping duty order has now gone into effect against imports from Japan and will last for a minimum duration of five years. During that time, the amount of antidumping duty deposits due from U.S. importers of the products may vary based upon the results of annual administrative reviews. The Company believes that the imposition of these antidumping duties will almost completely eliminate hot-rolled sheet imports from Japan, which totaled 2.7 million tons in 1998. On July 6 and 12, 1999, respectively, the DOC simultaneously issued both suspension agreements and final antidumping duty determinations as to imports of hot-rolled sheet from Brazil and Russia, and a suspension agreement and final countervailing duty determination as to imports of hot-rolled sheet from Brazil. The Brazilian countervailing duty suspension agreement provides for a quantitative limitation of no more than 290,000 metric tons annually of hot-rolled sheet from Brazil and the Brazilian antidumping suspension agreement provides that tonnage can be sold at prices no lower during the five-year period than a reference price of $327 a metric ton, ex-dock duty paid in the U.S. market. Based on the fact that these reference prices were above current domestic prices, that the agreement provided that this price was a floor price which would increase as domestic prices increased above $344 per metric ton and that 4 the agreement shielded the U.S. industry from the devaluations of the Brazilian currency during the five years of the agreement, the Company and certain other petitioners supported this suspension agreement. The DOC announced countervailing duty findings of approximately 7% and antidumping duties of approximately 40% as to imports from Brazil. The ITC made a final affirmative injury determination in August 1999. Therefore, if Brazilian producers violate these suspension agreements, these duty amounts would be immediately imposed. The suspension agreement on hot-rolled sheet from Russia provides for no shipments for the remainder of 1999, 325,000 metric tons for 2000, 500,000 metric tons for 2001, 675,000 metric tons for 2002, and 725,000 metric tons for 2003. It sets a minimum export price of $255 per metric ton F.O.B. Russia, which is subject to quarterly changes based on a formula relating to other import prices. All petitioners objected to this Russian suspension agreement because of the allowed continuation of dumped prices at below U.S. market prices from Russia. However, these quantitative restrictions represent a significant decrease from the 3.8 million tons of hot-rolled sheet imports from Russia in 1998. In addition to the hot-rolled sheet suspension agreement, the DOC also entered into a general steel trade agreement with Russia which provides for reduction in imports of other flat-rolled steel products. Simultaneous with the announcement of these agreements, the DOC announced final antidumping duties ranging from 57% to 157%, and the ITC made a final affirmative injury determination in August 1999. Therefore, if the hot-rolled sheet suspension agreement is violated during the next five years, these duty amounts would be immediately imposed. The success of the Coiled Products Cases will reduce imports from these three countries from seven million tons in 1998, to between 500,000 and 1,000,000 tons per year from 2000 through 2003. The Coiled Product Cases have already benefitted the Company and the domestic steel industry. The Company expects that its production levels, shipments and pricing of hot-rolled sheet products will continue to increase in the near-term. This trend could, however, reverse itself if other countries significantly increase imports or if domestic demand for hot-rolled sheet declines. On February 22, 1999, five domestic steel producers filed anti-dumping actions against cut-to-length plate imports from the Czech Republic, France, India, Indonesia, Italy, Macedonia, Japan and South Korea. Also, countervailing duty cases were filed against France, India, Indonesia, Italy, Macedonia and South Korea (all cases described in this paragraph are referred to as the "Cut-to-length Plate Cases"). In April 1999, the ITC made a unanimous affirmative preliminary injury determination with respect to all the respondent countries except the Czech Republic and Macedonia, which were dismissed from the cases. On July 12 and 13, 1999, the DOC announced preliminary margins in the cases ranging from 1% to 59%. Bonds in these amounts are now required on imports. The DOC issued final margin determinations on December 13, 1999 ranging from 0% to 72%. The ITC will issue final injury determinations in January 2000. On June 30,1999, the Company and seven other petitioners filed for Section 201 relief from welded line pipe imports (the "Section 201 Case"). The ITC has made an affirmative injury determination by a margin of five to one. A remedy hearing was held on November 10, 1999, and the ITC has recommended that imports be reduced by approximately 45% from 1998 levels. The recommendation was made to the President on December 22, 1999, and the President has 60 days to render a decision. There can be no assurance as to the ultimate effect of the Coiled Products Cases, Cut-to-length Plate Cases or the Section 201 Case, that imports from countries not named in previous cases will not increase or that domestic shipments or prices will rise. The Company continues to monitor imports and may file additional trade cases or take other trade action in the future. Existing trade laws and regulations may be inadequate to prevent the adverse impact of dumped and/or subsidized steel imports; consequently, such imports could pose continuing or increasing problems for the domestic steel industry and the Company. Five-year sunset reviews of various cut-to-length plate cases decided in 1994 began in September 1999. The Company and other U.S. producers are allowed to participate in those reviews in support of a five-year extension of the orders. The outcome of these reviews cannot currently be predicted, but the failure to extend such antidumping duties could have a future material adverse effect. 5 On February 1, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Utah, Central Division. The filing was made necessary by a lack of sufficient liquidity. The Company's operating results for fiscal years 1998 and 1999 were severely affected by, among other things, the dramatic surge in steel imports beginning in 1998. As a consequence of record-high levels of low-priced steel imports and the resultant deteriorating market conditions, the Company's overall price realization and shipments declined precipitously. Decreased liquidity made it impossible for the Company to service its debt and fund ongoing operations. Therefore, the Company sought protection under Chapter 11 of the Bankruptcy Code. Prior to the bankruptcy filing, the Company did not make the $9 million interest payment due January 15, 1999 under the terms of the Company's 9 1/2% senior notes due 2004. The Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition debt, including the 9 1/2% senior notes due 2004 and the 11 1/8% senior notes due 2001 (collectively, the "Senior Notes"), except pursuant to a confirmed plan of reorganization. The Company is in possession of its properties and assets and continues to manage its businesses as debtor-in-possession subject to the supervision of the Bankruptcy Court. The Company has a $125 million debtor-in- possession credit facility in place (See Liquidity and Capital Resources). As of February 1, 1999, the Company discontinued accruing interest on the Senior Notes and dividends on its redeemable preferred stock. Contractual interest on the Senior Notes for the year ended September 30, 1999 was $33.1 million, which is $22.0 million in excess of recorded interest expense included in the accompanying financial statements. Contractual dividends on the redeemable preferred stock as of September 30, 1999, was approximately $28.5 million, which is $8.4 million in excess of dividends accrued in the accompanying balance sheet. Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon any of the Company's liabilities as of the petition date or to enforce pre-petition contractual obligations were automatically stayed. Absent approval from the Bankruptcy Court, the Company is prohibited from paying pre-petition obligations. However, the Bankruptcy Court has approved payment of certain other pre-petition liabilities such as employee wages and benefits and certain other pre-petition obligations. Additionally, the Bankruptcy Court has approved for the retention of legal and financial professionals. As a debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by such rejections may file pre-petition claims with the Bankruptcy Court in accordance with bankruptcy procedures. The Company is currently developing a plan of reorganization (the "Plan of Reorganization") through, among other things, discussions with the official creditor committees appointed in the Chapter 11 proceeding. The objective of the Plan of Reorganization is to restructure the Company's balance sheet to (i) significantly strengthen the Company's financial flexibility throughout the business cycle, (ii) fund required capital expenditures and working capital needs, and (iii) fulfill those obligations necessary to facilitate emergence from Chapter 11. In conjunction with the Plan of Reorganization, the Company intends to file an application in January 2000 for a government loan guarantee under the Emergency Steel Loan Guarantee Program (the "Loan Guarantee Program"). The application will seek a government loan guarantee for a portion of the financing required to consummate the Plan of Reorganization, with the remaining financing being provided through other means. In connection with preparing the loan guarantee application, the Company is in the final phase of selecting and negotiating terms with a major bank to serve as the primary lender under the Loan Guarantee Program. There can be no assurance that the Company will be selected to participate in the Loan Guarantee Program or that, with or without a guarantee, the Company can obtain the necessary financing to consummate the Plan of Reorganization. Although management expects to file the Plan of Reorganization, there can be no assurance at this time that a Plan of Reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a Plan of Reorganization through February 28, 2000. While the Company intends to request further extensions of the exclusivity period if necessary, there can be no assurance that the Bankruptcy Court will grant such further extensions. If the exclusivity period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization. 6 Although the Chapter 11 Bankruptcy filing raises substantial doubt about the Company's ability to continue as a going concern, the accompanying financial statements have been prepared on a going concern basis. This basis contemplates the continuity of operations, realization of assets, and discharge of liabilities in the ordinary course of business. The statements also present the assets of the Company at historical cost and the current intention that they will be realized as a going concern and in the normal course of business. A plan of reorganization could materially change the amounts currently disclosed in the financial statements. The statements do not present the amount which may ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 bankruptcy cases. Under Chapter 11 bankruptcy, the right of, and ultimate payment by the Company to pre-petition creditors may be substantially altered. This could result in claims being paid in the Chapter 11 bankruptcy proceedings at less (and possibly substantially less) than 100 percent of their face value. At this time, because of material uncertainties, pre-petition claims are carried at the Company's face value in the accompanying financial statements. Moreover, the interests of existing preferred and common shareholders could, among other things, be very substantially diluted or even eliminated. Further information about the financial impact of the Chapter 11 bankruptcy filings is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Financial Statements. Management expects that a Plan of Reorganization will be completed and ready to file with the bankruptcy court during the first calendar quarter of 2000. The Plan of Reorganization will be conditioned on the Company being approved for a guarantee under the Loan Guarantee Program. There can be no assurance as to the actual timing for the filing of the Plan of Reorganization or the approval thereof by the Bankruptcy Court, if at all. As a result of the various trade cases described above as well as improving market conditions in several foreign economies, market conditions for the Company's products have recently improved. Both the Company's order entry and price realization have improved significantly in recent months. The Company's shipment rate has increased from a low in February 1999 of 44,000 tons to 146,000 tons in November 1999. Similarly, overall price realization has increased by 5.7% during the same period, despite a product mix shift to lower-priced sheet. The timing and magnitude of the recent volume and pricing improvements are consistent with initial market recoveries following the success of previously-filed trade cases. The Company expects in the near term that both volume and pricing will continue to improve gradually. 7 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, ------------------------------------ 1999 1998 1997 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 134.0 91.5 91.6 ------ ------ ------ Gross margin (34.0) 8.5 8.4 Selling, general and administrative expenses 6.9 3.0 3.1 Write-down of impaired assets -- 2.5 -- ------ ------ ------ Income (loss) from operations (40.9) 3.0 5.3 Other income (expense): Interest and other income 0.3 -- -- Interest expense (6.2) (5.9) (5.6) Gain on sale of assets 1.5 -- -- ------ ------ ------ Loss before reorganization items and benefit for income taxes (45.3) (2.9) (0.3) Reorganization items 13.5 -- -- ------ ------ ------ Loss before benefit for income taxes (58.8) (2.9) (0.3) Benefit for income taxes -- (0.3) (0.1) ------ ------ ------ Net loss (58.8)% (2.6)% (0.2)% ====== ====== ======
The following table sets forth the sales product mix as a percentage of net sales for the years indicated:
Year Ended September 30, --------------------------------------------- 1999 1998 1997 ------ ------ ------ Plate 55.9% 62.1% 45.4% Sheet 24.4 18.2 30.2 Pipe 10.4 10.5 9.6 Slab 6.4 7.0 11.9 Non-steel 2.9 2.2 2.9 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
8 Fiscal Year Ended September 30, 1999 Compared With Fiscal Year Ended September 30, 1998 Net sales decreased 56.3% primarily due to decreased shipments of approximately 902,900 tons and significantly lower average selling prices for the year ended September 30, 1999 as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of plate, pipe, sheet and slab products decreased by 20.8%, 17.6%, 18.9% and 23.7%, respectively, in the year ended September 30, 1999 compared to the previous fiscal year. Shipped tonnage of plate, pipe, sheet and slab products decreased approximately 598,900 tons or 50.3%, 84,300 tons or 47.4%, 118,600 tons or 27.9% and 101,100 tons or 48.0%, respectively, between the two years The decreases in prices and volumes were primarily a result of increased supply from imports as discussed above, as well as other market factors. As discussed above, the Company's overall price realization and shipments have recently begun to increase. The Company has recently either implemented or announced several price increases. As of November 30, 1999, the Company had estimated total orders on hand of approximately 148,000 tons compared to approximately 74,000 tons as of November 30, 1998. Domestic competition, however, remains intense and imported steel continues to adversely affect the market. Moreover, additional production capacity is being added in the domestic 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 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. There can be no assurance that the Company will achieve price increases it announced. In response to improving market conditions, the Company started a second blast furnace in September 1999, and expects to return to more normal operating levels in the second quarter of fiscal year 2000. Higher operating levels associated with a two-blast furnace operation have created additional working capital needs for the Company. These working capital needs will increase over the first and second quarters of fiscal year 2000 as production and inventory levels increase. There can be no assurance that market conditions will continue to justify a two-blast furnace operation, that pricing and order volumes will continue to improve, that the Company will be able to obtain the requisite working capital from vendor credit, expanded borrowing capacity, or other sources to support increased production levels. 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 134.0% for the year ended September 30, 1999, as compared to 91.5% for the previous fiscal year. The overall average cost of sales per ton shipped increased approximately $53 per ton between the two years, primarily as a result of production inefficiencies associated with operating at production levels significantly less than full capacity. As described above, the recent surge in steel imports and resulting low level of orders, together with other market factors, caused production levels to decline. Operating costs per ton increased in part because fixed costs were allocated over fewer tons. In addition, the Company, in response to falling prices and higher costs, wrote-down the cost of its inventories to market prices, resulting in an adjustment of approximately $3.5 million, which increased cost of sales in the year ended September 30, 1999, as compared to the previous year. The Company has undergone several rounds of personnel reductions and other cost cuts in an attempt to at least partially offset the adverse cost effects of lower production rates. The Company's total headcount as of November 30, 1999 is approximately 1,725, as compared to approximately 2,530 as of the same date two years ago. During most of fiscal year 1999, the Company also attempted to minimize production inefficiencies by limiting its production to a full, one-blast furnace level. The Company's pellet agreement with USX expires on December 31, 1999. The Company has begun discussions with USX and other potential vendors regarding a new pellet supply contract and has reached an interim understanding with USX for a short-term supply arrangement. Management believes that the Company will be able to complete a new pellet supply contract with USX or a substitute vendor. However, there can be no assurance that a new contract can 9 be completed or that USX will continue to supply pellets to the Company. If the Company is unable to enter into a new pellet supply contract, the Company's operating results could be adversely affected. Depreciation costs included in cost of sales decreased approximately $1.7 million for the year ended September 30, 1999, compared with the previous fiscal year. This decrease was due to a lower asset base as a result of a write-down at the end of fiscal year 1998 of approximately $16.3 million for impaired fixed assets. Selling, general and administrative expenses for the year ended September 30, 1999 decreased approximately $0.3 million as compared to the same period in the previous fiscal year. These lower expenses were due in part to cost savings related to staff and support personnel reductions. These reductions were offset by an increase in the allowance for doubtful accounts of approximately $4.0 million associated with the depressed steel market that is negatively affecting certain of the Company's customers. Interest expense decreased approximately $22.9 million during the year ended September 30, 1999 as compared to the previous fiscal year. As of February 1, 1999, the Company discontinued accruing interest on the Senior Notes. Contractual interest on the Senior Notes for the year ended September 30, 1999 was $33.1 million, which is $22.0 million in excess of recorded interest expense on the Senior Notes. In addition, lower production volumes resulting in lower working capital needs decreased the average borrowings outstanding under the Company's revolving credit facility as compared to the previous fiscal year. Subsequent to the Company's filing of its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 1, 1999, the Company has recorded approximately $6.0 million in professional fees and expenses related to its Chapter 11 reorganization efforts. These include the professional fees and expenses of the bondholders' and unsecured creditors' committees. These expenses have not been included in selling, general and administrative expenses, but are set out separately in the statement of operations. In addition, the Company also recorded other reorganization expenses of approximately $36.3 million for the write-off of deferred loan fees on the Senior Notes and a provision for certain executory contracts expected to be rejected. Fiscal Year Ended September 30, 1998 Compared With Fiscal Year Ended September 30, 1997 Net sales decreased 0.9% due to decreased shipments of approximately 131,500 tons, mostly offset by an increase in overall average selling prices and a net shift in product mix to higher-priced plate and pipe products from lower-priced sheet and slab products for the year ended September 30, 1998 as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of plate, pipe, sheet and slab products increased by 0.5%, 2.4%, 1.2% and 2.0%, respectively, in the year ended September 30, 1998 compared to the previous fiscal year. The increases in prices were due primarily to strong steel demand through the first three quarters of the 1998 fiscal year as well as other market factors. Selling prices on all products declined significantly during the fourth quarter of the 1998 fiscal year primarily as a result of increased supply from imports as discussed above. Shipped tonnage of plate and pipe products increased approximately 308,400 tons or 35.0%, and 9,300 tons or 5.5%, respectively, while shipped tonnage of sheet and slab products decreased approximately 294,400 tons or 40.9%, and 154,800 tons or 42.4%, respectively, between the two periods. Consistent with the Company's strategic objectives, plate shipments increased as a result of expanded utilization of outside processors to level and cut plate from coils, improved operations of the Company's cut-to-length facilities and strong demand through June 30, 1998. Customer claims generally involve quality issues such as metallurgical composition, flatness, dimension, surface quality, rust and damage during shipment. At September 30, 1998, the reserves for estimated customer claims increased by approximately $1.9 million as compared to the previous year, primarily as a result of the Company's customers becoming more aggressive in pursuing claims during a soft steel market. As the steel market weakened in late fiscal year 1998, the Company's customers became more demanding of steel quality resulting in an increase in claims. During the fourth quarter of 1998, order entry, shipments and pricing for all of the Company's products were adversely affected by, among other things, increased imports. As of November 30, 1998, the Company had estimated total orders on hand of approximately 74,000 tons, compared to approximately 309,000 tons as of November 30, 1997. The Company's cost of sales, as a percentage of net sales, remained relatively constant at 91.5% for the year ended September 30, 1998, as compared to the previous fiscal year, as a result of an increase in average selling prices per ton offset by increased product costs per ton. The overall average cost of sales per ton shipped increased 10 approximately $17 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 and increased operating costs. Operating costs increased as a result of reduced product yields, lower overall production volume, increased depreciation expense, increased wages and benefits and other increased operating costs. These higher costs were partially offset by increased production throughput rates for most products and reduced inbound freight rates. In an effort to reduce labor costs, the Company implemented a voluntary resignation program and an early retirement option during the fiscal year for union-eligible employees. In return for voluntary resignations (excluding retirements), the program provided each of up to 200 active union-eligible employees that submitted their resignations on or prior to July 31, 1998 a one-time, lump-sum payment of $10,000, full vesting in the Company's 401-k and defined contribution pension plans and two-months of additional medical and dental insurance benefits. With respect to voluntary retirements, the program provided for a one-time, lump-sum payment of $10,000 to each of up to 150 active union-eligible employees who voluntarily retired prior to December 31, 1998. This benefit was in addition to any other benefits payable under the collective bargaining agreement. The Company recognized charges in the fourth fiscal quarter of 1998 to reflect the cost of the foregoing programs. Depreciation costs included in cost of sales decreased approximately $0.7 million for the year ended September 30, 1998 compared with the previous fiscal year. This decrease was due to offsets for depreciation expense previously taken on equipment reimbursed as part of the settlement of an insurance claim relating to a January 1996 power outage (the "Insurance Settlement"). This decrease was partially offset by increases in the asset base as a result of completion of the rolling mill finishing stand upgrades and a reline and repairs to a blast furnace. Selling, general and administrative expenses for the year ended September 30, 1998 decreased approximately $0.4 million as compared to the previous fiscal year. These lower expenses resulted primarily from selling, general and administrative offsets of $2.1 million recorded as a result of the Insurance Settlement and cost savings related to staff and support personnel reductions. These lower expenses were offset in part by increased outside services associated with, among other things, training costs relating to implementation of an enterprise-wide business system. Interest expense increased approximately $1.8 million during the year ended September 30, 1998 as compared to the same period in the previous fiscal year as a result of higher average levels of borrowing. For the years ended September 30, 1998 and 1997, the Company recognized a benefit for income taxes by carrying back the loss against income from a prior period. For the year ended September 30, 1998, the Company was only able to carryback a portion of its loss. As of September 30, 1998, the Company had a net operating loss carryforward for financial reporting purposes of approximately $6.1 million. Liquidity and Capital Resources The Company's liquidity requirements arise from operating expenses, capital expenditures and working capital requirements, including interest payments. In the past, the Company's principal sources of capital have been from the sale of equity; the incurrence of long-term indebtedness, including borrowings under the Company's credit facilities; equipment lease financing; asset sales and cash provided by operations. On February 19, 1999, the U.S. District Court for the District of Utah granted the Company's motion to approve a new, $125 million debtor-in-possession credit facility with Congress Financial Corporation (the "Credit Facility"). The Credit Facility expires on the earlier of the consummation of a Plan of Reorganization or February 19, 2001. The Credit Facility replaced the Company's previous revolving credit facility with a syndicate of banks led by Citicorp USA, Inc. as agent. The Credit Facility is secured by, among other things, accounts receivable; inventory; and property, plant and equipment. Actual borrowing availability is subject to a borrowing base calculation and the right of the lender to establish various reserves, which it has done. The amount available to the Company under the Credit Facility is approximately 60%, in the aggregate, of eligible inventories, plus 85% of eligible accounts receivable, plus 80% of the orderly liquidation value of eligible equipment up to a maximum of $40 million, less reserves established by the lender. Borrowing availability under the Credit Facility is also subject to other covenants. As of 11 November 30, 1999, the Company's eligible inventories, accounts receivable and eligible equipment supported access to $57.4 million in borrowings under the Credit Facility. As of November 30, 1999, the Company had $10.8 million available under the Credit Facility, with $44.2 million in borrowings and $2.4 million in letters of credit outstanding. There can be no assurance as to the amount of availability that will be provided in the future or that the lender will not require additional reserves. The terms of the Credit Facility include cross default and other customary provisions. 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. In January 1999, the Company did not make a $9.0 million interest payment due on the 9 1/2% Senior Notes. In March 1993, the Company completed a public offering of $135 million principal amount of 11 1/8% senior notes (the "11 1/8% 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. The Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition debt, including the Senior Notes, except pursuant to a confirmed plan of reorganization. The Company has not been accruing interest on the Senior Notes since February 1, 1999, the date the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In connection with the offering of the 11 1/8% Senior Notes issued in March 1993, 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. As of September 30, 1999, the Redeemable Preferred Stock consisted of 388,358 shares, no par value, with a liquidation preference of approximately $151 per share. Pursuant to the Redeemable Preferred Stock Agreement, 11,642 shares of Redeemable Preferred Stock have been used by the holders thereof to pay for the exercise of warrants to purchase 233,502 shares of Class A common stock. 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. At September 30, 1999, warrants to purchase 898,498 shares of Class A common stock were outstanding. Dividends on the redeemable preferred stock accrue at a rate equal to 14% per annum of the liquidation preference and are payable quarterly in cash from funds legally available therefor. The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally available therefor. Restricted payment limitations under the Senior Notes precluded payment of the quarterly preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. As of February 1, 1999, the Company discontinued recording dividends on the Redeemable Preferred Stock. Unpaid contractual dividends as of September 30, 1999, were approximately $36.8 million, which is $8.4 million in excess of dividends accrued on the Company's balance sheet. The Company will not pay dividends on the Redeemable Preferred Stock during the pendency of its Chapter 11 proceeding and any payments will be subject to a confirmed plan of reorganization. Besides the above-described financing activities, the Company's major source of liquidity over time has been cash provided by operating activities, the Mannesmann agreement described below, and asset sales. Net cash provided by operating activities was $8.1 million for the year ended September 30, 1999, as compared with net cash provided by operating activities of $25.8 million for the year ended September 30, 1998. The sources of cash for operating activities during the year ended September 30, 1999 included depreciation and amortization of $50.6 million, a decrease in accounts receivable of $48.2 million associated primarily with reduced sales volume and the implementation of the Mannesmann agreement, a decrease in inventories of $58.3 million primarily as a result of lower production levels and the implementation of the Mannesmann agreement, an increase in accrued interest payable of $10.3 million and an increase in accounts payable of $35.2 million. These sources of cash were substantially offset by a net loss of $185.1 million, an increase in prepaid expenses of $1.4 million, a decrease in accrued liabilities of $1.9 million and a decrease in accrued payroll and related taxes of $1.8 million. On November 2, 1998, the Company signed a three-year agreement with Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann markets the Company's prime steel products throughout the continental United States. Mannesmann previously marketed the Company's steel products in fifteen midwestern states and to certain customers in the eastern United States. The Company's existing sales force remains Company 12 employees, but are directed by Mannesmann. The Company has also made several other organizational changes designed to improve product distribution and on-time delivery. The Mannesmann agreement requires Mannesmann to purchase and pay for the Company's finished goods inventory as soon as it has been assigned to or otherwise identified with a particular order. This requirement was implemented beginning in April 1999. Mannesmann sells the Company's products to end customers at the same sales price Mannesmann pays the Company plus a variable commission. As of September 30, 1999, the Company had received $9.5 million from Mannesmann for the purchase of finished goods inventory assigned to discrete orders. When the funds are received for inventory prior to shipment, the Company defers the revenue recognition until the inventory is shipped. Therefore, until shipment occurs the Company records the receipt of funds and the corresponding deferred revenue liability and/or inventory reduction for the cost of the inventory in its financial statements. The Company remains responsible for customer credit and product quality. Since the bankruptcy filing, the Company has supplemented its liquidity by the sale of certain non-core assets. During the fourth quarter of fiscal year 1999, the Company completed the sale of its large diameter pipe mill for $4.5 million. The large diameter pipe mill equipment has been idled for many years. Subsequent to September 30, 1999, the Company finalized an agreement to sell its quarry for $10.0 million ($1.5 million of which is contingent upon the future issuance, by the relevant governmental entity, of a conditional use permit) and received $8.5 million in October 1999. There can be no assurance that the conditional use permit will be issued or that the Company will receive the additional $1.5 million of the sale price. Pursuant to the sale, the Company entered into a contract with the buyer of the quarry for the purchase of limestone to meet its production requirements at a per ton price that is lower than the Company's historical production cost. Capital expenditures were $8.0 million, $10.9 million (net of $12.5 million insurance claim settlement), and $47.7 million for fiscal years 1999, 1998 and 1997, respectively. Capital expenditures for 1999 and 1998 were lower than previously expected because the Company reduced its capital expenditures to preserve liquidity in light of market conditions. Capital expenditures for fiscal year 2000 are estimated at approximately $30 million, which includes a blast furnace reline, maintenance items and various projects designed to reduce costs and increase product quality and throughput. Additional spending on capital could be incurred as part of the plan of reorganization. Given the Company's Chapter 11 bankruptcy proceedings, current market conditions and the uncertainties created thereby, the Company is continuing to closely monitor its capital spending levels. Depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. Year 2000 Issues The Company believes it has substantially addressed its year 2000 information system issues in the following areas: (i) the Company's information technology systems; (ii) the Company's non-information technology systems (i.e., machinery, equipment and devices which utilize built in or embedded technology); and (iii) third party suppliers and customers. The Company has completed its year 2000 project in all of the following phases: awareness (education and sensitivity to the year 2000 issue), identification (identifying the equipment processes or systems which are susceptible to the year 2000 issue), assessment (determining the potential impact of year 2000 on the equipment, processes and systems identified during the previous phase and assessing the need for testing and remediation), testing/verification (testing to determine if an item is year 2000 ready or the degree to which it is deficient), and implementation (carrying out necessary remedial efforts to address year 2000 readiness, including validation of upgrades, patches or other year 2000 fixes). In September 1997, the Company started the implementation of SAP software, a year 2000 compliant enterprise-wide business system. This system affects nearly every aspect of the Company's business processes and operations. On February 1, 1999, the Company completed the last phase of the SAP implementation. The SAP implementation includes software applications for financial accounting, purchasing, accounts payable, human resources, payroll, sales distribution, materials management, production planning, quality assurance, product costing, and other management information. In conjunction with the implementation, new Hewlett Packard hardware and operating systems that are year 2000 compliant were installed. 13 The Company has identified other hardware, operating systems and applications software used in its process control and other information systems and has obtained year 2000 compliance information from the providers of such hardware, operating systems and applications software. The Company has completed the review and remediation with vendors to ensure readiness of such hardware, operating systems and software application systems. In the areas where dates are critical in the process control and other information systems, these systems have been made year 2000 compliant. In a few situations in which dates are not critical in the process control or other information systems, other remediation efforts have been completed. The Company has also reviewed, tested and corrected internally developed software applications to facilitate year 2000 compliance. Although the Company believes that all year 2000 issues have been addressed and determined to be compliant, the Company is continuing to review and test the systems to assure year 2000 compliance. The Company has contingency plans for critical areas to address any unexpected year 2000 failures. The Company's contingency plans target worse case scenarios and include items such as maintaining an inventory buffer, providing for manual operations of information technology systems and establishing alternative, third-party logistics. The Company's contingency plans are based in part on the results of third-party supplier questionnaires. The Company has prepared a production schedule for several days before and after January 1, 2000, which contemplates suspending certain operations shortly before calendar year-end with a sequenced, transitioned start-up of such operations subsequent to year end. The Company believes this approach will reduce the risk of potential damage to equipment from any unexpected year 2000 problems. The Company has significant relationships with various third parties, and the failure of any of these third parties to achieve year 2000 compliance could have a material adverse impact on the Company's business, operating results and financial condition. These third parties include energy and utility suppliers, financial institutions, material and product suppliers, transportation providers, and the Company's significant customers. The Company has reviewed major third-party relationships to assess year 2000 readiness and, where necessary and possible, is attempting to have contingency plans in place to mitigate any adverse consequences. Through September 30, 1999, the Company had capitalized approximately $9.0 million in costs to improve the Company's information technology systems and for year 2000 readiness efforts. The costs include consulting, implementing and transitioning to new computer hardware and software for the SAP enterprise-wide business systems. Costs for training and re-engineering efforts have been expensed. The foregoing discussion of the Company's year 2000 readiness includes forward-looking statements. No assurance can be given that the Company will not be materially adversely affected by year 2000 issues. There can be no assurance that actual events and results could differ materially from those anticipated. The Company may experience material unanticipated problems and costs caused by undetected errors or defects in its internal information technology and non-information technology systems. In addition, the failure of third-parties to timely address or successfully complete their year 2000 issues could have a material adverse impact on the Company's business, operations and financial condition. If, for example, third party suppliers are unable to deliver necessary materials, parts or other supplies, the Company would be unable to timely manufacture products. Similarly, if shipping and freight carriers are unable to ship product, the Company would be unable to deliver product to customers. Quantitative And Qualitative Disclosures About Market Risk The Company's earnings are affected by changes in interest rates related to the Company's credit facility. Variable interest rates may rise and increase the amount of interest expense. At September 30, 1999 and 1998, the Company had variable rate credit facilities totaling $55.5 million and $60.8 million, respectively. The impact of market risk is estimated using a hypothetical increase in interest rates of one percentage point for the Company's variable rate credit facility. Based on this hypothetical assumption, the Company would have incurred approximately an additional $600,000 in interest expense for the year ended September 30, 1999. Factors Affecting Future Results 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 prices, shift its product mix and improve throughput rates and production efficiencies. There can be no assurance that the Company's efforts will be successful or that sufficient demand will exist to support the Company's efforts. Pricing and shipment levels in future periods are key variables to the Company's future operating results that remain subject to significant uncertainty. These variables will be affected by several factors including the level of imports, future capacity additions, product demand and other competitive and market conditions. Furthermore, the Chapter 11 bankruptcy filing introduces numerous uncertainties which may affect the Company's businesses, results of operations and prospects. Because of the Company's bankruptcy filing and liquidity position, the Company's financial flexibility is limited. Many of the 14 foregoing factors, of which the Company does not have complete control, may materially affect the performance and financial condition of the Company. Until recently, the Company's production activities were consuming cash. During the two months of October and November 1999, the Company's operations generated slight positive cash flow. Further improvement in market conditions will likely be necessary for the Company's production activities to become significantly cash flow positive. A reversal in the current market trend or a disruption in the Company's operations would likely cause the Company to return to negative cash flow. The short-term and long-term liquidity of the Company also is dependent upon several other factors, including continued access to the Credit Facility; vendor credit support; cash needs to fund working capital as volume increases; availability of capital; foreign currency fluctuations; capital expenditure requirements 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. 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 report contains a number of forward-looking statements, including, without limitation, statements contained in this report relating to the Company's ability to compete against imports and the effect of imports and trade cases on the domestic market, the outcome of trade cases, the Company's ability to improve and optimize operations as well as on-time delivery and customer service, the Company's ability to compete with the additional production capacity being added in the domestic market, the Company's ability to successfully reorganize under Chapter 11 of the Bankruptcy Code (including the development of the Plan of Reorganization), the outcome of the Company's application under the Loan Guarantee Program, the Company's expectation that prices and shipments will improve, the production efficiencies to be gained by a two-blast furnace operation, the Company's ability to obtain a new pellet supply contract, the Company's objective to increase higher-margin sales, the Company's continued access to and adequacy of the Credit Facility, the commercial and liquidity benefits of the Mannesmann agreement, the effect of SAP implementation, the Company's level of preparedness with respect to year 2000 issues and the likely impact on the Company of such issues, the level of future required capital expenditures, the effect of inflation and any other statements contained herein to the effect that the Company or its management "believes," "expects," "anticipates," "plans" or other 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 described herein. 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Geneva Steel Company: We have audited the accompanying balance sheets of Geneva Steel Company (a Utah corporation) as of September 30, 1999 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended September 30, 1999. 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 financial statements referred to above present fairly, in all material respects, the financial position of Geneva Steel Company as of September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, on February 1, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Utah, Central Division. The filing was made necessary by a lack of sufficient liquidity. The Company has experienced recurring net losses applicable to common shares of $189.9 million, $30.7 million and $11.6 million during the years ended September 30, 1999, 1998 and 1997, respectively. Additionally, as of September 30, 1999, the Company had a stockholders' deficit of $134.0 million. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are partially described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Salt Lake City, Utah December 20, 1999 16 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) BALANCE SHEETS (Dollars in thousands)
September 30, --------------------------- ASSETS 1999 1998 --------- --------- Current Assets: Cash $ -- $ -- Accounts receivable, less allowance for doubtful accounts of $10,912 and $6,411, respectively 15,196 63,430 Inventories 55,460 113,724 Deferred income taxes 14,609 8,118 Prepaid expenses and other 4,584 2,964 Related party receivable -- 270 --------- --------- Total current assets 89,849 188,506 --------- --------- Property, Plant and Equipment: Land 1,990 1,990 Buildings 16,119 16,119 Machinery and equipment 645,943 640,363 Mineral property and development costs 1,000 1,000 --------- --------- 665,052 659,472 Less accumulated depreciation (292,035) (248,298) --------- --------- Net property, plant and equipment 373,017 411,174 --------- --------- Other Assets 11,850 5,485 --------- --------- $ 474,716 $ 605,165 ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. 17 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) BALANCE SHEETS (Continued) (Dollars in thousands)
September 30, -------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998 --------- --------- Liabilities Not Subject to Compromise: Senior notes $ -- $ 325,000 Revolving credit facility 55,466 60,769 Accounts payable 16,334 34,117 Accrued liabilities 18,209 25,005 Accrued payroll and related taxes 7,444 9,454 Accrued dividends payable -- 25,315 Accrued interest payable -- 5,080 Accrued pension and profit sharing costs 963 2,182 --------- --------- Total current liabilities 98,416 486,922 --------- --------- Liabilities Subject to Compromise: Senior notes 325,000 -- Accounts payable 56,633 -- Accrued dividends payable 28,492 -- Accrued interest payable 15,409 -- Accrued liabilities 3,404 -- --------- --------- 428,938 -- --------- --------- Long-Term Employee Defined Benefits 10,731 -- --------- --------- Deferred Income Tax Liabilities 14,609 8,118 --------- --------- Commitments and Contingencies (Notes 1 and 6) Redeemable Preferred Stock, Series B, no par value; 388,358 shares and 400,000 shares authorized, issued and outstanding, respectively, with a liquidation value of $58,684 and $60,443, respectively 56,001 56,917 --------- --------- Stockholders' Equity (Deficit): 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, 15,008,767 and 14,705,265 shares issued, respectively 92,022 87,979 Class B, no par value; 50,000,000 shares authorized, 18,451,348 and 19,151,348 shares issued and outstanding, respectively 9,741 10,110 Warrants to purchase Class A common stock 4,255 5,360 Accumulated deficit (239,997) (47,749) Less 189,667 Class A common stock treasury shares at September 30, 1998, at cost -- (2,492) --------- --------- Total stockholders' equity (deficit) (133,979) 53,208 --------- --------- $ 474,716 $ 605,165 ========= =========
The accompanying notes to financial statements are an integral part of these balance sheets. 18 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended September 30, ------------------------------------------- 1999 1998 1997 --------- --------- --------- Net sales $ 314,726 $ 720,453 $ 726,669 Cost of sales 421,812 659,132 665,978 --------- --------- --------- Gross margin (107,086) 61,321 60,691 Selling, general and administrative expenses 21,816 22,116 22,487 Write-down of impaired assets -- 17,811 -- --------- --------- --------- Income (loss) from operations (128,902) 21,394 38,204 --------- --------- --------- Other income (expense): Interest and other income 996 326 1,275 Interest expense (total contractual interest of $41,643 in 1999) (19,597) (42,483) (40,657) Gain (loss) on asset sales 4,666 30 (863) --------- --------- --------- (13,935) (42,127) (40,245) --------- --------- --------- Loss before reorganization items and benefit for income taxes (142,837) (20,733) (2,041) --------- --------- --------- Reorganization items: Provision for rejected executory contracts 32,815 -- -- Professional fees 6,025 -- -- Write-off of deferred loan fees 3,430 -- -- --------- --------- --------- 42,270 -- -- --------- --------- --------- Loss before benefit for income taxes (185,107) (20,733) (2,041) Benefit for income taxes -- (1,790) (773) --------- --------- --------- Net loss (185,107) (18,943) (1,268) Less redeemable preferred stock dividends and accretion for original issue discount 4,829 11,772 10,340 --------- --------- --------- Net loss applicable to common shares $(189,936) $ (30,715) $ (11,608) ========= ========= ========= Basic and diluted net loss per common share $ (11.33) $ (1.90) $ (.74) ========= ========= ========= Weighted average common shares outstanding 16,759 16,155 15,660 ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. 19 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
SHARES ISSUED AMOUNT --------------------------- ---------------------------- WARRANTS TO PURCHASE COMMON COMMON COMMON COMMON COMMON CLASS A CLASS B CLASS A CLASS B CLASS A ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1996 14,705,265 19,151,348 $ 87,979 $ 10,110 $ 5,360 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, 1997 14,705,265 19,151,348 87,979 10,110 5,360 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, 1998 14,705,265 19,151,348 87,979 10,110 5,360 Issuance of Class A common stock to employee savings plan -- -- -- -- -- Exercise of Warrants to purchase Class A common stock 233,502 -- 3,674 -- (1,105) Conversion of Class B common stock to Class A common stock 70,000 (700,000) 369 (369) -- Redeemable preferred stock dividends -- -- -- -- -- Redeemable preferred stock accretion for original issue discount -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1999 15,008,767 18,451,348 $ 92,022 $ 9,741 $ 4,255 =========== =========== =========== =========== ===========
RETAINED EARNINGS TREASURY (DEFICIT) STOCK TOTAL ----------- ----------- ----------- Balance at September 30, 1996 $ 5,077 $ (15,699) $ 92,827 Issuance of Class A common stock to employee savings plan (4,868) 6,252 1,384 Redeemable preferred stock dividends (9,608) -- (9,608) Redeemable preferred stock accretion for original issue discount (732) -- (732) Net loss (1,268) -- (1,268) ----------- ----------- ----------- Balance at September 30, 1997 (11,399) (9,447) 82,603 Issuance of Class A common stock to employee savings plan (5,635) 6,955 1,320 Redeemable preferred stock dividends (11,025) -- (11,025) Redeemable preferred stock accretion for original issue discount (747) -- (747) Net loss (18,943) -- (18,943) ----------- ----------- ----------- Balance at September 30, 1998 (47,749) (2,492) 53,208 Issuance of Class A common stock to employee savings plan (2,312) 2,492 180 Exercise of Warrants to purchase Class A common stock -- -- 2,569 Conversion of Class B common stock to Class A common stock -- -- -- Redeemable preferred stock dividends (3,986) -- (3,986) Redeemable preferred stock accretion for original issue discount (843) -- (843) Net loss (185,107) -- (185,107) ----------- ----------- ----------- Balance at September 30, 1999 $ (239,997) $ -- $ (133,979) =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 20 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) STATEMENTS OF CASH FLOWS (Dollars in thousands) Increase (Decrease) in Cash
Year Ended September 30, ------------------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net loss $(185,107) $ (18,943) $ (1,268) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 44,679 42,272 43,048 Amortization and write-off of deferred loan fees 5,946 1,910 1,911 Deferred income tax benefit -- (2,049) (760) (Gain) loss on asset sales (4,666) (30) 863 Write-down of impaired assets -- 17,811 -- Provision for write-off of leasehold improvements related to rejected executory contracts 1,485 -- -- (Increase) decrease in current assets - Accounts receivable, net 48,234 (3,267) 16,364 Inventories 58,264 (15,143) (6,942) Prepaid expenses and other (1,350) 13,821 (2,634) Increase (decrease) in current liabilities - Accounts payable 35,243 (12,231) (13,227) Accrued liabilities (1,914) 1,635 2,991 Accrued payroll and related taxes (1,829) (941) 2,232 Production prepayments -- -- (9,763) Accrued interest payable 10,329 521 (187) Accrued pension and profit sharing costs (1,219) 481 (558) --------- --------- --------- Net cash provided by operating activities 8,095 25,847 32,070 --------- --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment (8,025) (10,893) (47,724) Proceeds from sale of property, plant and equipment 4,684 34 21 Change in other assets -- -- 1,238 --------- --------- --------- Net cash used for investing activities $ (3,341) $ (10,859) $ (46,465) --------- --------- ---------
The accompanying notes to financial statements are an integral part of these statements. 21 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except per share amounts) Increase (Decrease) in Cash
Year Ended September 30, ---------------------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from financing activities: Borrowings from credit facilities $ 19,794 $ 25,649 $ 51,987 Payments on credit facilities (25,097) (39,785) (40,513) Payments for deferred loan fees and other assets (1,580) -- (4) Change in bank overdraft 2,129 (852) 2,328 -------- -------- -------- Net cash provided by (used for) financing activities (4,754) (14,988) 13,798 -------- -------- -------- Net decrease in cash -- -- (597) Cash at beginning of year -- -- 597 -------- -------- -------- Cash at end of year $ -- $ -- $ -- ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 9,268 $ 40,052 $ 38,934 Income taxes -- -- --
Supplemental schedule of noncash financing activities: For the years ended September 30, 1999, 1998 and 1997, the Company increased the redeemable preferred stock by $843, $747, and $732, 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 September 30, 1999, the Company had accrued dividends payable of $28,492 (total contractual dividends of $36,861). During the year ended September 30, 1999, warrants to purchase 233,502 shares of Class A common stock were exercised at $11 per share. The exercise price was paid to the Company with 11,642 shares of redeemable preferred stock as provided for in the redeemable preferred stock agreement. The accompanying notes to financial statements are an integral part of these statements. 22 GENEVA STEEL COMPANY (DEBTOR-IN-POSSESSION) NOTES TO FINANCIAL STATEMENTS 1 NATURE OF OPERATIONS AND BUSINESS CONDITIONS The Company's steel mill manufactures a wide range of coiled and flat plate, sheet, pipe and slabs for sale to various distributors, steel processors or end-users primarily in the western and central United States. On February 1, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Utah, Central Division. The filing was made necessary by a lack of sufficient liquidity. The Company's operating results for fiscal years 1998 and 1999 were severely affected by, among other things, the dramatic surge in steel imports beginning in 1998. As a consequence of record-high levels of low-priced steel imports and the resultant deteriorating market conditions, the Company's overall price realization and shipments declined precipitously. Decreased liquidity made it impossible for the Company to service its debt and fund ongoing operations. Therefore, the Company sought protection under Chapter 11 of the Bankruptcy Code. Prior to the bankruptcy filing, the Company did not make the $9 million interest payment due January 15, 1999 under the terms of the Company's 9 1/2% senior notes due 2004. The Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition debt, including the 9 1/2% senior notes due 2004 and the 11 1/8% senior notes due 2001 (collectively, the "Senior Notes"), except pursuant to a confirmed plan of reorganization. The Company is in possession of its properties and assets and continues to manage its businesses as debtor-in-possession subject to the supervision of the Bankruptcy Court. The Company has a $125 million debtor-in- possession credit facility in place (See Note 3). As of February 1, 1999, the Company discontinued accruing interest on the Senior Notes and dividends on its redeemable preferred stock. Contractual interest on the Senior Notes for the year ended September 30, 1999 was $33.1 million, which is $22.0 million in excess of recorded interest expense included in the accompanying financial statement. Contractual dividends on the redeemable preferred stock as of September 30, 1999, was approximately $36.9 million, which is $8.4 million in excess of dividends accrued in the accompanying balance sheet. Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon any of the Company's liabilities as of the petition date or to enforce pre-petition date contractual obligations were automatically stayed. Absent approval from the Bankruptcy Court, the Company is prohibited from paying pre-petition obligations. However, the Bankruptcy Court has approved payment of certain pre-petition liabilities such as employee wages and benefits and certain other pre-petition obligations. Additionally, the Bankruptcy Court has approved for the retention of legal and financial professionals. As debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by such rejections may file pre-petition claims with the Bankruptcy Court in accordance with bankruptcy procedures. The Company is currently developing a plan of reorganization (the "Plan of Reorganization") through, among other things, discussions with the official creditor committees appointed in the Chapter 11 proceeding. The objective of the Plan of Reorganization is to restructure the Company's balance sheet to (i) significantly strengthen the Company's financial flexibility throughout the business cycle, (ii) fund required capital expenditures and working capital needs, and (iii) fulfill those obligations necessary to facilitate emergence from Chapter 11. In conjunction with the Plan of Reorganization, the Company intends to apply in January 2000 for a government loan guarantee under the Emergency Steel Loan Guarantee Program (the "Loan Guarantee Program"). The application will seek a government loan guarantee for a portion of the financing required to consummate the Plan of Reorganization with the remaining financing being provided through other means. In connection with preparing the loan guarantee application, the Company is in the final phase of selecting and negotiating terms with a major bank to serve as the primary lender under the Loan Guarantee Program. There can be no assurance that the Company will be accepted to participate in the Loan Guarantee Program or that, with or without a guarantee, the Company can obtain the necessary financing to consummate the Plan of Reorganization. 23 Although management expects to file the Plan of Reorganization, there can be no assurance at this time that a Plan of Reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a Plan of Reorganization through February 28, 2000. While the Company intends to request further extensions of the exclusivity period if necessary, there can be no assurance that the Bankruptcy Court will grant such further extensions. If the exclusivity period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization. Although the Chapter 11 Bankruptcy filing raises substantial doubt about the Company's ability to continue as a going-concern, the accompanying financial statements have been prepared on a going concern basis. This basis contemplates the continuity of operations, realization of assets, and discharge of liabilities in the ordinary course of business. The statements also present the assets of the Company at historical cost and the current intention that they will be realized as a going concern and in the normal course of business. A plan of reorganization could materially change the amounts currently disclosed in the financial statements. The accompanying financial statements do not present the amount which may ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 Bankruptcy cases. Under Chapter 11 Bankruptcy, the right of, and ultimate payment by the Company to pre-petition creditors may be substantially altered. This could result in claims being paid in the Chapter 11 Bankruptcy proceedings at less (and possibly substantially less) than 100 percent of their face value. At this time, because of material uncertainties, pre-petition claims are carried at the Company's face value in the accompanying financial statements. Moreover, the interests of existing preferred and common shareholders could, among other things, be very substantially diluted or even eliminated. Further information about the financial impact of the Chapter 11 Bankruptcy filings is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management expects that a Plan of Reorganization will be completed and ready to file with the bankruptcy court during the first calendar quarter of 2000. The Plan of Reorganization will be conditioned on the Company being approved for a guarantee under the Loan Guarantee Program. There can be no assurance as to the actual timing for the filing of the Plan of Reorganization or the approval thereof by the Bankruptcy Court, if at all. As a result of favorable outcomes to various trade cases as well as improving market conditions in several foreign economies, market conditions for the Company's products have recently improved. Both the Company's order entry and price realization have improved significantly in recent months. The Company's shipment rate has increased from a low in February 1999 of 44,000 tons to 146,000 tons in November 1999. Similarly, overall price realization has increased by 5.7% during the same period, despite a product mix shift to lower-priced sheet. The timing and magnitude of the recent volume and pricing improvements are consistent with initial market recoveries following the success of previously-filed trade cases. The Company expects in the near term that both volume and pricing will continue to improve gradually. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Bankruptcy Accounting Since the Chapter 11 bankruptcy filing, the Company has applied the provisions in Statement of Position ("SOP") 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." SOP 90-7 does not change the application of generally accepted accounting principles in the preparation of financial statements. However, it does require that the financial statements for periods including and subsequent to filing the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. 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. 24 Inventories Inventories include costs of material, labor and manufacturing overhead. Inventories are stated at the lower of cost (using a standard costing method) or market value. The composition of inventories as of September 30, 1999 and 1998 was as follows (dollars in thousands):
1999 1998 -------- -------- Raw materials $ 17,081 $ 29,250 Semi-finished and finished goods 33,762 78,746 Operating materials 4,617 5,728 -------- -------- $ 55,460 $113,724 ======== ========
Operating materials consist primarily of production molds, platforms for the production molds and furnace lining refractories. Insurance Claim Receivable In August 1998, the Company settled its insurance claim related to a January 1996 plant-wide power outage associated with unusual weather conditions and an operator error. The Company received $24.5 million in September 1998 to resolve the claim. The Company's carrier under the primary layer of insurance previously paid the Company $5.0 million in the fall of 1996. During fiscal years 1997 and 1996, the Company recorded $3.7 million and $12.3 million, respectively, as an offset to cost of goods sold in the accompanying financial statements. Upon settlement of the claim, the Company recorded a $2.1 million offset to selling, general, and administrative expense, a reduction in property, plant and equipment of approximately $12.5 million and operating cost offsets of approximately $3.0 million primarily for depreciation expense previously taken on the reimbursed equipment in the accompanying financial statements. 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 $0.1 million, $0.3 million and $0.5 million of interest during the years ended September 30, 1999, 1998 and 1997, 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 for machinery and equipment are capitalized and included in machinery and equipment in the accompanying financial statements. Major spare parts 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, 1999 and 1998, approximately $6.2 million and $13.6 million, respectively, of construction in progress was included in machinery and equipment in the accompanying financial statements. 25 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 financial statements. The Company wrote-down certain impaired mineral property development costs during fiscal year 1998 by approximately $6.6 million (see discussion below). Other Assets Other assets consist primarily of a long-term defined benefit plan intangible asset of $10.7 million, at September 30, 1999. Other assets also include deferred loan fees incurred in connection with obtaining long-term financing. The deferred loan fees are being amortized on a straight-line basis over the term of the applicable financing agreement. As a result of the bankruptcy filing, the Company wrote-off approximately $3.4 million of unamortized deferred loan fees on its Senior Notes during fiscal year 1999. Accumulated amortization of deferred loan fees totaled $0.5 million and $8.5 million at September 30, 1999 and 1998, respectively. Revenue Recognition Sales are recognized when the product is shipped to the customer. Sales are reduced by the amount of estimated customer claims. As of September 30, 1999 and 1998, reserves for estimated customer claims of $4.2 million and $4.8 million, respectively, were included in the allowance for doubtful accounts in the accompanying financial statements. In April 1999, the Company implemented the practice allowed by its contract with Mannesmann Pipe and Steel ("Mannesmann") to bill Mannesmann and receive payment for inventory that could be assigned to Mannesmann orders prior to actually shipping the product. When the funds are received for such inventory prior to shipment, the Company defers the revenue recognition until the inventory is shipped. Until the product is shipped, the amount of the payment is reflected as a deferred revenue liability and/or inventory reserve. At September 30, 1999, the Company had received approximately $9.5 million from Mannesmann for inventory assigned to Mannesmann orders prior to shipment of the product. This $9.5 million was deferred revenue included in the inventory reserve in the accompanying financial statements as of September 30, 1999. 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 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. Accounting for the Impairment of Long-Lived Assets The Company accounts for impairment of long-lived assets in accordance with 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," which was issued in March 1995, SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. In accordance with SFAS No. 121, the Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. During fiscal year 1998, the Company wrote-down approximately $17.8 million of impaired long-lived assets. The write-down included $8.5 million of in-line scarfing equipment, $6.6 million of mineral property development costs and $2.7 million of other machinery and equipment. The in-line scarfing equipment was originally built to continuously condition the surface of slabs which allowed the Company to direct roll slabs through its manufacturing 26 process. Prior to the implementation of the Company's slab caster, it was anticipated that 10% to 15% of the Company's slabs would have to be conditioned. Based on the continued operating performance of the Company's continuous caster, the Company determined that sustained use of the in-line scarfing equipment is not necessary. Because of its specialized nature and limited utility, this equipment has nominal resale value or alternative use. Accordingly, the equipment was written-down to a zero carrying value and will be retained by the Company as an idled facility. In order to improve blast furnace productivity and maximize production of hot metal, the Company shifted to the utilization of 100 percent iron ore pellets, rather than using a blend of pellets and lump ore from its mines in Southern Utah. Because the Company has determined to maintain this practice into the future, the Company decreased the estimated value of the mineral development costs associated with mining its Southern Utah ore to $1 million. The estimated value was based on fair value of the mineral property less estimated costs to sell. The Company will hold the mining properties and their remaining development costs with the objective to use lump ore as new technologies are developed that allow the Company in future years to utilize the iron ore reserves from these mines or in the event that the productivity needs from its blast furnaces change. The Company is uncertain as to when the reserves will be utilized, if ever. However, the mineral property is carried at fair market value. The $2.7 million of other machinery and equipment included iron ingot molds and engineering costs related to a COREX cokeless ironmaking development project. The iron ingot molds are no longer used by the Company in the steelmaking process. The iron ingot molds have been valued at the iron scrap price less costs to break the iron molds into a size to be melted in the steelmaking furnace. When the price of iron scrap dropped with weaker steel demand in 1998, the Company concluded that the value of the iron ingot molds had been impaired for the foreseeable future. The engineering costs related specifically to the COREX cokeless ironmaking project have been written-off because the Company has elected to pursue a different cokeless ironmaking technology. Basic and Diluted Net Income (Loss) Per Common Share In February 1997, 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 basic net loss per common share for the years ended September 30, 1998 and 1997, presented in the accompanying statements of operations. 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 years ended September 30, 1999, 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 year ended September 30, 1999, 1,240,973 common stock equivalents 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 loss for the years ended September 30, 1999, 1998 and 1997 was adjusted for redeemable preferred stock dividends through February 1, 1999 and the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. Defined Benefit Pension Plan The Company has a defined benefit pension plan covering all of its union employees, effective January 1, 1999. The plan provides benefits that are based on average monthly earnings of the participants. The Company's funding policy provides that payments to the plan shall be at least equal to the minimum funding requirements as actuarially determined by an independent consulting firm. As required, the Company has adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits." 27 Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that public enterprises report certain information about operating segments. The statement specifies disclosure requirements about the products and services of a company, the geographic areas in which it operates, and its major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, and accordingly, the Company adopted this statement in fiscal year 1999. Adoption of SFAS No. 131 did not have a material impact on the Company's financial statements. Management believes that the company consists of a single operating segment engaged in the production and sale of steel products. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. This statement is effective for fiscal years beginning after June 15, 1999, and is not expected to have a material impact on the Company's financial statements. Reclassifications Certain reclassifications were made to the fiscal years 1998 and 1997 presentation to conform to the fiscal year 1999 presentation. 3 LONG-TERM DEBT The aggregate amounts of principal maturities of long-term debt as of September 30, 1999 and 1998 consisted of the following (dollars in thousands):
1999 1998 --------- --------- 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 Debtor-in-possession credit facility from a syndicate of lenders, interest payable monthly at LIBOR (5.383% at September 30, 1999), plus 2.25%, due on the earlier of the consummation of a plan of reorganization or February 19, 2001 (see discussion below), secured by inventories, accounts receivable and property, plant and equipment 55,466 -- Revolving credit facility from a syndicate of banks, interest payable monthly at the defined base rate (8.50% at September 30, 1998), plus 1.50% or the defined LIBOR rate (5.00% at September 30, 1998) plus 2.75%, paid in February 1999 from proceeds from the debtor-in-possession credit facility -- 60,769 --------- --------- 380,466 385,769 Less current portion (380,466) (385,769) --------- --------- $ -- $ -- ========= =========
On February 19, 1999, the U.S. District Court for the District of Utah granted the Company's motion to approve a new, $125 million debtor-in-possession credit facility with Congress Financial Corporation (the "Credit Facility"). The Credit Facility expires on the earlier of the consummation of a plan of reorganization or February 19, 2001. The Credit Facility replaced the Company's previous revolving credit facility with a syndicate of banks led by Citicorp 28 USA, Inc. as agent. The Credit Facility is secured by, among other things, accounts receivable; inventory; and property, plant and equipment. Actual borrowing availability is subject to a borrowing base calculation and the right of the lender to establish various reserves, which it has done. The amount available to the Company under the Credit Facility is approximately 60%, in the aggregate, of eligible inventories, plus 85% of eligible accounts receivable, plus 80% of the orderly liquidation value of eligible equipment up to a maximum of $40 million, less reserves on the various collateral established by the lender. Borrowing availability under the Credit Facility is also subject to other covenants. As of September 30, 1999, the Company's eligible inventories, accounts receivable and eligible equipment supported access to $66.5 million under the Credit Facility. As of September 30, 1999, the Company had $8.6 million available under the Credit Facility, with $55.5 million in borrowings and $2.4 million in letters of credit outstanding. There can be no assurance as to the amount of availability that will be provided in the future or that the lender will not require additional reserves in the future. The terms of the Credit Facility include cross default and other customary provisions. Prior to the bankruptcy filing, the Company did not make the $9 million interest payment due January 15, 1999 under the terms of the Company's 9 1/2% senior notes due 2004 (the "9 1/2% Senior Notes"). The Bankruptcy Code generally prohibits the Company from making payments on unsecured, pre-petition debt, including the 9 1/2% Senior Notes due 2004 and the 11 1/8% senior notes due 2001 (the "11 1/8% Senior Notes and together with the 9 1/2% Senior Notes, the "Senior Notes"), except pursuant to a confirmed plan of reorganization. As of February 1, 1999, the Company discontinued accruing interest on the Senior Notes. Contractual interest on the Senior Notes for the year ended September 30, 1999 was $33.1 million, which is $22.0 million in excess of recorded interest expense included in the accompanying financial statement. In connection with the Company's filing of its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 1, 1999, the Company wrote-off approximately $3.4 million of unamortized deferred loan fees on its Senior Notes during fiscal year 1999. The Company estimates that the aggregate fair market value of its Senior Notes was approximately $42.3 million as of September 30, 1999. These estimates were based on quoted market prices or current rates offered for debt with similar terms and maturities. 4 MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES During the years ended September 30, 1999, 1998, and 1997, the Company derived approximately 72%, 33% and 33%, respectively, of its net sales through one customer, which is a distributor to other companies. International sales during the years ended September 30, 1999, 1998 and 1997 did not exceed 10%. 29 5 INCOME TAXES The provision (benefit) for income taxes as of September 30, 1999, 1998 and 1997 consisted of the following (dollars in thousands):
1999 1998 1997 -------- -------- -------- Current income tax provision (benefit) Federal $ -- $ 227 $ (11) State -- 32 (2) -------- -------- -------- -- 259 (13) -------- -------- -------- Deferred income tax provision (benefit) Federal 51,418 3,461 (665) State 7,345 495 (95) Change in valuation allowance (58,763) (6,005) -- -------- -------- -------- -- (2,049) (760) -------- -------- -------- Benefit for income taxes $ -- $ (1,790) $ (773) ======== ======== ========
The benefit for income taxes as a percentage of loss for the years ended September 30, 1999, 1998 and 1997 differs from the statutory federal income tax rate due to the following:
1999 1998 1997 ------ ------ ------ 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 38.3 29.7 -- Other -- -- 0.4 ------ ------ ------ Effective income tax rate -- % (8.6)% (37.9)% ====== ====== ======
30 As of September 30, 1999, the Company had deferred income tax assets of $112.9 million. The deferred income tax assets have been reduced by a $64.8 million valuation allowance. This valuation allowance was established during the years ended September 30, 1999 and 1998, for a portion of the Company's net operating loss carryforward. The components of the net deferred income tax assets and liabilities as of September 30, 1999 and 1998 were as follows (dollars in thousands):
September 30, -------------------------- 1999 1998 --------- --------- Deferred income tax assets: Net operating loss carryforward $ 89,214 $ 36,439 Write-down of impaired assets -- 6,144 Inventory costs capitalized 9,481 4,987 Alternative minimum tax credit carryforward 6,464 6,464 Accrued vacation 1,168 1,543 Allowance for doubtful accounts 4,179 2,333 General business credits 2,064 2,440 Other 374 326 --------- --------- Total deferred income tax assets 112,944 60,676 Valuation allowance (64,768) (6,005) --------- --------- 48,176 54,671 --------- --------- Deferred income tax liabilities: Accelerated depreciation (46,181) (49,427) Mineral property development costs -- (2,476) Operating supplies (1,995) (2,768) --------- --------- Total deferred income tax liabilities (48,176) (54,671) --------- --------- $ -- $ -- ========= =========
As of September 30, 1999, the Company had a net operating loss carryforward for financial reporting purposes of approximately $201.1 million. As of September 30, 1999, the Company had a net operating loss carryforward and an alternative minimum tax credit carryforward for tax reporting purposes of approximately $233.2 million and $6.5 million, respectively. Net operating loss carryforwards of $45.7 million, $36.7 million, $16.4 million, $39.0 million and $95.4 million expire on December 31, 2009, 2011, 2012, 2018 and 2019, respectively. The alternative minimum tax credit carryforward of $6.5 million at September 30, 1999 currently does not expire. 6 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 lines, improving product quality and increasing throughput rates. The Company spent $8.0 million and $10.9 million (net of a $12.5 million insurance claim settlement for capital expenditures covered by the January 1996 power outage insurance claim settlement described in Note 2) on capital projects during the fiscal years ended September 30, 1999 and 1998, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization and capital maintenance efforts. Capital expenditures for fiscal year 2000 are estimated at approximately $30 million, which includes a blast furnace reline, maintenance items and various projects designed to reduce costs and increase product quality and throughput. Given the Company's Chapter 11 bankruptcy proceedings, current market conditions and the uncertainties created thereby, the Company is continuing to closely monitor its capital spending levels. Depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. 31 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, with the exception of matters relating to the Chapter 11 proceeding, these matters will not have a material impact on the financial condition or results 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 $8.1 million for environmental capital improvements in fiscal years 2000 and 2001. 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. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and the amount of associated costs is reasonably determinable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the engineering or feasibility study or the commitment to a formal plan of action. These accruals may be adjusted as further information becomes available or circumstances change. If recoveries of remediation costs from third parties are probable, a receivable is recorded. As of September 30, 1999, the Company determined that there were no environmental compliance or remediation obligations requiring accruals in the accompanying financial statements. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the 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 the sharing arrangement described below) 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 32 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 and USX has similarly had several disagreements regarding the scope and actual application of USX's indemnification obligations. 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 litigation. Purchase Commitments On February 10, 1989, the Company entered into an agreement, which has subsequently been amended, to purchase interruptible and firm back-up power through February 28, 2002. 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 110,000 kilowatts, adjusted annually to reflect changes in the supplier's per megawatt fixed transmission investment. The Company's minimum purchase commitment is $2.5 million, $2.6 million and $1.1 million for fiscal years 2000, 2001 and 2002, respectively. The Company recently reached an agreement (subject to Public Service Commission approval) to fix the price escalation rate under the agreement at 3 3/4%, 4% and 5%, respectively, for the final three years of the agreement. 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. The annual base charge is approximately $5.1 million. Effective June 6, 1995, the Company entered into an agreement to purchase 800 tons a day of oxygen from a new plant constructed at the Company's steel mill which is owned and operated by an independent party. The new plant was completed June 20, 1997. The Company pays a monthly facility charge which is adjusted semi-annually each January 1 and July 1 based on an index. The contract continues through July 2012 and includes a minimum annual facility charge of approximately $5.3 million. Effective June 10, 1997, the Company entered into an agreement to purchase 100% of the oxygen, nitrogen and argon produced at a facility that is owned and operated by an independent party. The contract expires in September 2002 and specifies that the Company will pay a monthly facility charge that is adjusted semi-annually each January 1 and July 1 based upon a percentage of the change in PPI. The minimum annual facility charge is approximately $1.0 million. Effective September 1, 1998, the Company entered into an agreement to purchase 35,000 MMBtu per day of firm natural gas with provisions to offsell any unusable volumes to offset other agreements with the expiration date of June 30, 2000. The price is adjusted monthly based on the index price as reported by "Inside FERC Gas Market Report." The Company's minimum purchase commitment is approximately $22.6 million for fiscal year 2000. On September 12, 1997, the Company entered into an agreement to purchase natural gas transportation service for 35,000 decatherms per day commencing October 1, 1998 and continuing through September 30, 2003. The Company's minimum purchase commitment is approximately $1.48 million per year. The Company has historically purchased iron ore pellets from USX. The Company's pellet agreement with USX expires on December 31, 1999. The Company has begun discussions with USX and other potential vendors regarding a new pellet supply contract and has reached an interim understanding with USX for a short-term supply arrangement. Management believes that the Company will be able to complete a new pellet supply contract with USX or a substitute vendor. However, there can be no assurance that a new contract can be completed or that USX will continue to supply pellets to the Company. If the Company is unable to enter into a new pellet supply contract, the Company's operating results could be adversely affected. 33 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 exclude executory lease contracts expected to be rejected as part of the Chapter 11 proceedings. The aggregate commitments under non-cancelable operating leases at September 30, 1999, were as follows (dollars in thousands):
Year Ending September 30, ------------------------- 2000 $ 3,405 2001 3,125 2002 809 2003 139 2004 7 Thereafter 86 ------- $ 7,571 =======
Total rental expense for non-cancelable operating leases was approximately $8.7 million, $9.2 million and $9.9 million for the years ended September 30, 1999, 1998 and 1997, respectively. Letters of Credit As of September 30, 1999, the Company had outstanding letters of credit totaling approximately $2.4 million. 7 REDEEMABLE PREFERRED STOCK In March 1993, the Company issued $40 million of 14% cumulative redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") at a price of $100 per share and related warrants to purchase an aggregate of 1,132,000 shares of Class A common stock. As of September 30, 1999, the Redeemable Preferred Stock consisted of 388,358 shares, no par value, with a liquidation preference of approximately $151 per share. Pursuant to the Redeemable Preferred Stock Agreement, 11,642 shares of Redeemable Preferred Stock have been used by the holders thereof to pay for the exercise of warrants to purchase 233,502 shares of Class A common stock. 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. At September 30, 1999, warrants to purchase 898,498 shares of Class A common stock were outstanding. Dividends on the Redeemable Preferred Stock accrue at a rate equal to 14% per annum of the liquidation preference and are payable quarterly in cash from funds legally available therefor. The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally available therefor. Restricted payment limitations under the Senior Notes precluded payment of the quarterly preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. As of February 1, 1999, the Company discontinued recording dividends on the Redeemable Preferred Stock. Unpaid contractual dividends as of September 30, 1999, were approximately $36.8 million, which is $8.4 million in excess of dividends accrued in the Company's balance sheet. The Company will not pay dividends on the Redeemable Preferred Stock during the pendency of its Chapter 11 proceeding and any payments will be subject to a confirmed plan of reorganization. Both the Redeemable Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's option, subject to certain redemption premiums. The Company estimates that its Redeemable Preferred Stock had nominal fair market value at September 30, 1999. The Company estimates that the aggregate fair market value of its warrants to purchase Class A common stock had no value at September 30, 1999. The Company's estimates for the Redeemable Preferred Stock and warrants to purchase Class A common stock were based on management's estimates. 34 8 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. On March 26, 1997, certain of these stock options were repriced at $7.75 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. Effective December 18, 1996, the Company's Board of Directors adopted the Geneva Steel Company 1996 Incentive Plan (the "Incentive Plan") which was approved by the Company's shareholders in February 1997. The Incentive Plan provides that 1,500,000 shares of class A common stock will be available for the grant of options or awards. The Incentive Plan is administered by a committee consisting of at least two non-employee directors of the Company (the "Committee"). The Committee determines, among other things, the eligible employees, the number of options granted and the purchase price, terms and conditions of each award, provided that the term does not exceed ten years. The per share purchase price may not be less than 80 percent of the fair market value on the date of grant. The Incentive Plan also provides for the non-discretionary grant of options to each of its non-employee directors ("Director Options"). Each non-employee director who becomes a director after January 1, 1997 shall be granted a Director Option of 4,000 shares upon election or appointment. In addition, annually on the first business day on or after January 1 of each calendar year that the Incentive Plan is in effect, all non-employee directors who are members of the Board at that time shall be granted a Director Option of 2,000 shares; provided, however, that a director shall not be entitled to receive an annual grant during the year elected or appointed. Director Options will be granted at a purchase price equal to the fair market value of the shares on the date of grant. Director Options vest at 40 percent on the second anniversary of the date of grant and an additional 20 percent on the third, fourth and fifth anniversaries of the date of grant, provided that the director remains in service as a director on each date. The Director Options generally have a ten year term. 35 Stock option activity for the years ended September 30, 1999, 1998 and 1997 consisted of the following:
Exercise Weighted Number of Price per Average Exercise Shares Share Range Price Per Share ---------- ------------- ---------------- Outstanding at September 30, 1996 907,513 $3.75 - 10.91 $ 7.33 Granted 810,000 2.25 2.25 Canceled (90,850) 2.25 - 8.66 4.97 ---------- ------------- ------- Outstanding at September 30, 1997 1,626,663 2.25 - 10.91 4.93 Granted 304,486 2.06 - 2.44 2.76 Canceled (40,010) 2.25 - 8.66 7.19 ---------- ------------- ------- Outstanding at September 30, 1998 1,891,139 2.06 - 10.91 4.54 Granted 10,000 0.56 0.56 Canceled (660,166) 2.25 - 7.75 4.30 ---------- ------------- ------- Outstanding at September 30, 1999 1,240,973 $0.56 - 10.91 $ 4.63 ========== ============= =======
Options to purchase 1,003,772, 1,032,606 and 565,275 shares of Class A common stock were exercisable on September 30, 1999, 1998 and 1997, respectively. As of September 30, 1999, 661,776 shares of Class A common stock are available for grant under the plans. The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation expense for the Company's stock option plans been determined in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based compensation," the Company's net loss and diluted net loss per common share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
Year Ended September 30, ------------------------------------------------ 1999 1998 1997 ----------- ----------- ----------- Net loss as reported $ (185,107) $ (18,943) $ (1,268) Net loss pro forma (185,254) (19,166) (1,650) Diluted net loss per common share as reported $ (11.33) $ (1.90) $ (.74) Diluted net loss per common share pro forma (11.34) (1.92) (.77)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation expense may not be representative of such expenses in future years. The fair value of each option grant has been estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997, in calculating compensation cost: expected stock price volatility of 89.6%, 71.6% and 60.8% for 1999, 1998 and 1997, respectively, an average risk free interest rate of approximately 5.30%, 5.75% and 6.25% for 1999, 1998 and 1997, respectively, and expected lives ranging between three years to seven years for 1999 and 1998 and for seven years for 1997. The weighted average fair value of options granted during fiscal years 1999, 1998 and 1997 was $0.29, $1.65 and $1.24 per share, respectively. At September 30, 1999, the 1,240,973 options outstanding have exercise prices between $0.56 and $10.91 per share with a weighted average exercise price of $4.63 and a weighted average remaining contractual life of 4.9 years. 1,003,772 of these options are exercisable with a weighted average exercise price of $4.97. 36 9 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. The Company matches participants' contributions not to exceed 1% of their compensation. Beginning in December 1999, the Company match is made in cash. Prior to December 1999, the Company matched participants' contributions to the savings plan in shares of class A common stock. For the pension plan, the Company contributed 5% of each participant's compensation to this plan for the years ended September 30, 1999, 1998 and 1997. Total contributions by the Company for both plans for the years ended September 30, 1999, 1998 and 1997 were $2.9 million, $5.1 million and $5.1 million, respectively. The participants vest in these contributions at 20% for each year of service until fully vested after five years. Union Employee Defined Benefit Pension Plan The Company provides a union employee defined benefit pension plan. The plan covers all of the Company's union employees and is effective January 1, 1999. The plan provides benefits that are based on average monthly earnings of the participants. At the retirement date, the calculated defined benefit is reduced by the amount of pension benefits provided by the USX pension plan and amounts included in the retirees defined contribution pension and 401k plans. The following provides a reconciliation of the change in benefit obligation for fiscal year 1999 (dollars in thousands): Benefit obligation as of January 1, 1999 $ 12,047 Service cost 201 Interest cost 621 Actual distributions (486) Actuarial gains (701) -------- Benefit obligation as of September 30, 1999 $ 11,682 ========
The following provides a reconciliation for plan assets for the fiscal year 1999 (dollars in thousands): Fair value of plan assets as of January 1, 1999 $ -- Company contributions 600 Benefits paid from plan assets (486) Actual return on plan assets 2 ----- Fair value of plan assets as of September 30, 1999 $ 116 =====
37 The following provides the funded status of the plan as of September 30, 1999 (dollars in thousands): Funded status $(11,566) Unrecognized prior service cost 11,434 Unrecognized net actuarial loss (703) -------- Preliminary accrued benefit liability (835) Additional liability (10,731) -------- Funded Status of plan as of September 30, 1999 $ 11,566 ========
Net periodic pension cost includes the following components for the year ended September 30, 1999 (dollars in thousands): Service cost $ 201 Interest cost 621 Amortization of prior service cost 613 ------ $1,435 ======
The assumptions as of September 30, 1999 are as follows: Discount rate 8.00% Long-term rate of return on plan assets 8.00% Rate of compensation increase 3.00%
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 retirees covered by the collective bargaining agreement. Company cash contributions to the VEBA Trust are $.20 from May 1, 1999 through May 1, 2000, $.15 from May 1, 1998 through May 1, 1999 and $.10 prior to May 1, 1998 for each hour of work performed by employees covered by the collective bargaining agreement. In addition, union employees provided a contribution to the VEBA Trust based on a reduction from their performance dividend plan payment until April 30, 1998. Beginning January 1, 1999, the Plan began paying a portion of the COBRA payments for eligible retired participants. Eligibility requirements and related matters currently are being determined based on the current plan assets and level of Company contribution. 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 in shares of Class A common stock up to 4% of their compensation. Beginning in December 1999, the Company began matching participants' contributions in cash. Prior to December 1999, the Company matched participants' contributions to the savings plan in shares of Class A common stock. For the pension plan, the Company contributed 5% of each participant's compensation to this plan for the years ended September 30, 1999, 1998 and 1997. During the years ended September 30, 1999, 1998 and 1997, total contributions by the Company were $1.4 million, $1.9 million and $2.2 million, respectively. The participants vest in the Company's contributions at 20% for each year of service until fully vested after five years. 38 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 or paid in the years ended September 30, 1999, 1998 and 1997. 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 year ended September 30, 1999, there were no performance dividend plan expenses. During the years ended September 30, 1998 and 1997, performance dividend plan expenses were $8.5 million and $9.6 million, 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. 10 RELATED PARTY 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, October 4, 1996 and December 23, 1996 the Company loaned $250,000, $210,000 and $40,000, respectively. On February 13, 1997, the Company authorized an increase in the loan amount to $700,000 and advanced an additional $200,000. The loan was evidenced by a promissory note bearing interest at the rate of 8.53% and was payable at the earlier of September 27, 1997 or demand for repayment by the Company. On October 17, 1997, the Chief Executive Officer paid $240,000 on the note and the payment date of the note was extended to April 30, 1998. On December 17, 1997, the Chief Executive Officer paid an additional $400,000 on the note. On November 24, 1998, the remaining balance was paid by the Chief Executive Officer. 11 SUBSEQUENT EVENT Subsequent to September 30, 1999, the Company finalized an agreement to sell its quarry for $10.0 million ($1.5 million of which is contingent upon the future issuance, by the relevant governmental entity, of a conditional use permit) and received $8.5 million in October 1999. There can be no assurance that the conditional use permit will be issued or that the Company will receive the additional $1.5 million of the sale price. Pursuant to the sale, the Company entered into a contract with the buyer of the quarry for the purchase of limestone to meet its production requirements at a per ton price that is lower than the Company's historical production cost. 39 12 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly financial information for the years ended September 30, 1999 and 1998 is as follows (dollars in thousands):
1999 Quarters First Second Third Fourth - ------------- ----- ------ ----- ------ Net sales $ 78,699 $ 59,345 $ 87,000 $ 89,682 Gross margin (29,538) (31,559) (21,535) (24,454) Net loss (49,818) (42,279) (29,491) (63,519) Net loss applicable to common shares (53,008) (43,545) (29,677) (63,706) Basic and diluted net loss per common share (3.30) (2.68) (1.76) (3.78)
1998 Quarters First Second Third Fourth - ------------- ----- ------ ----- ------ Net sales $ 181,513 $192,405 $ 188,735 $ 157,800 Gross margin 11,793 22,002 20,146 7,380 Net income (loss) (2,715) 3,392 2,013 (21,633) Net income (loss) applicable to common shares (5,516) 498 (976) (24,721) Basic and diluted net income (loss) per common share (.35) .03 (.06) (1.51)
EX-23 4 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 Salt Lake City, Utah December 28, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE REGISTRANT'S BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO. 1,000 U.S. DOLLARS YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 1 0 0 15,196 10,912 55,460 89,849 665,052 (292,035) 474,716 98,416 325,000 56,001 0 106,018 (239,997) 474,716 314,726 314,726 421,812 421,812 64,086 8,775 (19,597) (185,107) 0 (185,107) 0 0 0 (185,107) (11.33) (11.33)
-----END PRIVACY-ENHANCED MESSAGE-----