UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9982
BAYOU STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-1125783
(State of incorporation) (I.R.S. Employer
Identification No.)
138 Highway 3217, P.O. Box 5000, LaPlace, Louisiana 70069
(Address of principal executive offices)
(Zip Code)
(985) 652-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at June 30, 2003
- ------------------------------------ -----------------------------------
Class A Common Stock, $.01 par value 10,619,380
Class B Common Stock, $.01 par value 2,271,127
Class C Common Stock, $.01 par value 100
----------
12,890,607
==========
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
INDEX
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets -- June 30, 2003 and 3
September 30, 2002
Consolidated Statements of Operations -- Three 5
and Nine Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows -- Nine Months 6
Ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Chapter 11 Proceedings 14
Results of Operations 15
Liquidity and Capital Resources 18
Other Comments 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Controls and Procedures 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Page 2
PART I - FINANCIAL INFORMATION
INDEPENDENT AUDITOR'S REVIEW STATUS
Due to the Company filing a voluntary petition for reorganization on
January 22, 2003, the Company was not able to obtain Bankruptcy Court approval
for the appointment of an independent auditor in time to engage such auditor to
perform the required review of the Company's December 31, 2002, March 31, 2003
or June 30, 2003 interim financial statements in accordance with professional
standards as required by Rule 10-01(d) of Regulation S-X. Accordingly, the
accompanying unaudited consolidated financial statements and notes thereto were
not subject to such independent auditor review procedures. Upon engagement of an
independent auditor, the Company will issue amended Forms 10-Q once the required
review procedures have been completed.
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited) (Audited)
June 30, September 30,
2003 2002
------------- -------------
CURRENT ASSETS:
Cash .......................................................... $ 101,890 $ 57,290
Receivables, net of allowance for doubtful accounts ........... 17,308,079 16,772,317
Inventories ................................................... 56,979,249 58,099,176
Prepaid expenses .............................................. 3,680,390 1,047,610
------------- -------------
Total current assets .................................... 78,069,608 75,976,393
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land .......................................................... 3,427,260 3,427,260
Machinery and equipment ....................................... 146,886,022 153,978,320
Plant and office building ..................................... 25,739,705 25,659,860
------------- -------------
176,052,987 183,065,440
Less-Accumulated depreciation ................................. (89,728,682) (84,097,031)
------------- -------------
Net property, plant and equipment ....................... 86,324,305 98,968,409
------------- -------------
OTHER ASSETS ..................................................... 1,978,433 2,230,894
------------- -------------
Total assets ............................................ $ 166,372,346 $ 177,175,696
============= =============
The accompanying notes are an integral part of these consolidated statements.
Page 3
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited) (Audited)
June 30, September 30,
2003 2002
------------- -------------
CURRENT LIABILITIES:
Post petition liabilities:
Accounts payable ................................................... $ 7,263,332 $ 15,139,678
Interest payable ................................................... -- 4,275,000
Accrued liabilities ................................................ 9,132,962 10,035,886
Borrowings under line of credit, including accrued
interest - in default ........................................... -- 7,695,180
Long-term debt - in default ........................................ -- 119,355,813
Debtor-in-possession financing ..................................... 20,516,958 --
------------- -------------
Total current liabilities .................................... 36,913,252 156,501,557
------------- -------------
PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE ........................ 138,968,328 --
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A: 24,271,127 authorized and 10,619,380
outstanding shares ..................................... 106,194 106,194
Class B: 4,302,347 authorized and 2,271,127
outstanding shares ..................................... 22,711 22,711
Class C: 100 authorized and outstanding shares .................. 1 1
------------- -------------
Total common stock ........................................... 128,906 128,906
Paid-in capital .................................................... 46,045,224 46,045,224
Retained deficit ................................................... (55,034,022) (24,850,649)
Accumulated other comprehensive income (loss) ...................... (649,342) (649,342)
------------- -------------
Total stockholders' equity (deficit) ......................... (9,509,234) 20,674,139
------------- -------------
Total liabilities and stockholders' equity (deficit) ......... $ 166,372,346 $ 177,175,696
============= =============
The accompany ing notes are an integral part of these consolidated statements.
Page 4
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ --------------------------------
2003 2002 2003 2002
------------ ------------ ------------- -------------
NET SALES .................................... $ 37,674,493 $ 38,863,948 $ 103,899,535 $ 104,036,616
COST OF SALES ................................ 38,017,533 42,113,620 112,525,732 109,092,956
------------ ------------ ------------- -------------
GROSS MARGIN ................................. (343,040) (3,249,672) (8,626,197) (5,056,340)
IMPAIRMENT LOSS ON LONG-
LIVED ASSETS .............................. -- 6,602,535 8,000,000 6,602,535
SELLING, GENERAL AND
ADMINISTRATIVE ............................ 1,751,239 1,760,489 5,417,340 5,072,438
REORGANIZATION EXPENSE ....................... 1,421,491 -- 4,179,972 --
------------ ------------ ------------- -------------
OPERATING LOSS ............................... (3,515,770) (11,612,696) (26,223,509) (16,731,313)
------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense .......................... (236,346) (2,947,960) (4,256,199) (8,785,076)
Interest income ........................... -- -- -- 15,771
Miscellaneous ............................. 142,095 25,595 296,335 217,127
------------ ------------ ------------- -------------
(94,251) (2,922,365) (3,959,864) (8,552,178)
------------ ------------ ------------- -------------
LOSS BEFORE
INCOME TAX ................................ (3,610,021) (14,535,061) (30,183,373) (25,283,491)
PROVISION FOR
INCOME TAX ................................ -- 7,681,824 -- 7,681,824
------------ ------------ ------------- -------------
NET LOSS ..................................... $ (3,610,021) $(22,216,885) $ (30,183,373) $ (32,965,315)
============ ============ ============= =============
Weighted average basic and diluted
common shares outstanding ................. 12,890,607 12,890,607 12,890,607 12,890,607
Net loss per basic and diluted
common share ................................. $ (.28) $ (1.72) $ (2.34) $ (2.56)
============ ============ ============= =============
The accompanying notes are an integral part of these consolidated statements.
Page 5
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(30,183,373) $(32,965,315)
Depreciation ......................................................... 5,872,591 6,770,975
Amortization ......................................................... 529,463 405,087
Provision for losses on accounts receivable .......................... 109,411 109,274
Provision for loss on long-lived assets .............................. 8,000,000 6,602,535
Deferred income taxes ................................................ -- 7,681,824
Reorganization expenses .............................................. 4,179,972 --
Changes in working capital:
(Increase) decrease in receivables ................................ (645,173) 623,068
Decrease in inventories ........................................... 1,119,927 6,693,356
(Increase) in prepaid expenses and other assets ................... (2,718,952) (410,647)
Increase (decrease) in accounts payable ........................... 3,759,607 (385,982)
Increase (decrease) in interest payable
and accrued liabilities .......................................... 2,712,958 (1,477,193)
------------ ------------
Net cash used in operations excluding
reorganization expenses ...................................... (7,263,569) (6,353,018)
NET CASH USED FOR REORGANIZATION
EXPENSES ............................................................. (3,787,642) --
------------ ------------
Net cash used in operations .......................................... (11,051,211) (6,353,018)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........................... (1,228,487) (1,091,430)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under debtor-in-possession
financing facility ................................................ 20,516,958 --
Net borrowings (repayments) under line of credit ..................... (8,192,660) 7,444,448
------------ ------------
Net cash provided by financing activities ...................... 12,324,298 7,444,448
------------ ------------
NET INCREASE IN CASH .................................................... 44,600 --
CASH, beginning balance ................................................. 57,290 --
------------ ------------
CASH, ending balance .................................................... $ 101,890 $ --
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest .......................................................... $ -- $ 11,400,000
The accompanying notes are an integral part of these consolidated statements.
Page 6
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
1) NATURE OF OPERATIONS
Bayou Steel Corporation (the "Company") owns and operates a steel minimill
and a stocking warehouse on the Mississippi River in LaPlace, Louisiana (the
"Louisiana Facility"), three additional stocking locations accessible to the
Louisiana Facility through the Mississippi River waterway system, and a rolling
mill with warehousing facility in Harriman, Tennessee (the "Tennessee
Facility"). The Company produces light structural steel and merchant bar
products for distribution to steel service centers and original equipment
manufacturers/fabricators located throughout the United States, with export
shipments of approximately 10% to Canada and Mexico
On January 22, 2003, the Company and its subsidiaries, Bayou Steel
Corporation (Tennessee) and River Road Realty Corporation, filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. The petition requesting an order for relief was filed in United States
Bankruptcy Court, Northern District of Texas (the "Bankruptcy Court"), where the
case is now pending before the Honorable Barbara J. Houser, Case No. 03-30816
BJH (the "Petition Date"). As debtors-in-possession under Sections 1107 and 1108
of the Bankruptcy Code, the Company remains in possession of its properties and
assets, and management continues to operate the business. The Company intends to
continue normal operations and does not currently foresee any interruption in
the shipment of product to customers. The Company cannot engage in transactions
outside the ordinary course of business without the approval of the Bankruptcy
Court. The Company attributed the need to reorganize to market conditions in the
U.S. steel industry resulting from significant pressure from imported steel
products, low product pricing, and high energy costs. These factors, coupled
with the effects of a slow down in the economy, have adversely affected the
Company over the past several years.
2) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"); however, see Note 4 regarding the status of an
independent auditor's review. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. However, all adjustments, which, in the opinion of
management, are necessary for fair presentation have been included except
adjustments related to inventory. The inventory valuations as of June 30, 2003
are based on last-in, first-out ("LIFO") estimates of year-end levels and
prices. The actual LIFO inventories will not be known until year-end quantities
and indices are determined. These consolidated financial statements and
footnotes should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K filed with the SEC as of and for the year ended September 30, 2002.
The accompanying consolidated financial statements include the accounts of
Bayou Steel Corporation and its wholly-owned subsidiaries (the "Company") after
elimination of all significant intercompany accounts and transactions. The
results for the nine months ended June 30, 2003 are not necessarily indicative
of the results to be expected for the fiscal year ending September 30, 2003.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. Such financial statements have been prepared on the basis that
the Company will continue as a going concern and do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The
Company's recurring losses, negative cash flow from operations, and the
subsequent Chapter 11 case raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern and appropriateness of using the going concern basis is dependent
upon, among other things, (i) the Company's ability to comply with the
Debtor-In-Possession Agreement (see footnote 10), (ii) submission and
confirmation of a plan of reorganization under the Bankruptcy Code, (iii) the
Company's ability
Page 7
to achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations. The
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The financial statements are prepared in accordance with the AICPA's
Statement of Position (SOP) 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. SOP 90-7 requires the Company to,
among other things, (1) identify transactions that are directly associated with
the bankruptcy proceedings from those events that occur during the normal course
of business and (2) identify pre-petition liabilities subject to compromise from
those that are not subject to compromise or are post petition liabilities (see
Note 8). All liabilities arising before January 22, 2003 are subject to
compromise. In addition, in accordance with the Bankruptcy Code, the Company
discontinued accruing interest on the 9.5% first mortgage notes (the "Notes") as
of the Petition Date as this debt is subject to compromise. The
debtor-in-possession financing ("DIP Financing") is a post-petition liability
and, therefore, not subject to compromise. The financial statements do not
reflect the effect of any changes in the Company's capital structure as a result
of an approved plan of reorganization or adjustments to the carrying value of
assets or liability amounts that may be necessary as a result of actions by the
Bankruptcy Court.
3) CHAPTER 11 PROCEEDINGS
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence at the filing date ("prepetition") are stayed ("deferred"), absent
specific Bankruptcy Court authorization to pay such claims, while the Company
continues to manage the business as a debtor-in-possession. The rights of and
ultimate payments by the Company to prepetition creditors and to equity
investors may be substantially altered. That could result in claims being
liquidated in the Chapter 11 proceedings at less (possibly substantially) than
100% of their face value and the equity interests of the Company's stockholders
being diluted or canceled. The Company's prepetition creditors and stockholders
will each have votes in the plan of reorganization. The Company is in the
process of compiling information on assets and liabilities, both secured and
unsecured, that may be subject to compromise or whose balance sheet
classification might change as a result of the Chapter 11 proceedings.
Management intends to submit a plan for reorganization to the Bankruptcy Court
by October 1, 2003. For the nine months ended June 30, 2003, the Company
incurred approximately $4.2 million in professional fees and other expenses
classified as reorganization expenses related to restructuring efforts on debt
defaults that preceded the Petition Date and the bankruptcy proceedings.
It is not possible to predict the length of time the Company will operate
under the protection of Chapter 11, or the outcome of the Chapter 11 proceedings
in general, whether the Company will continue to operate under its current
organizational structure, or the effect of the proceedings on the business of
the Company or on the interests of the various creditors and security holders.
4) INDEPENDENT AUDITOR'S REVIEW STATUS
Due to the Company filing a voluntary petition for reorganization on
January 22, 2003, the Company was not able to obtain Bankruptcy Court approval
for the appointment of an independent auditor in time to engage such auditor to
perform the required review of the Company's December 31, 2002, March 31, 2003
or June 30, 2003 interim financial statements in accordance with professional
standards as required by Rule 10-01(d) of Regulation S-X. Accordingly, the
accompanying unaudited consolidated financial statements and notes thereto were
not subject to such independent auditor review procedures. Upon engagement of an
independent auditor, the Company will issue amended Forms 10-Q once the required
review procedures have been completed.
Page 8
5) INVENTORIES
Inventories consist of the following:
(Unaudited) (Audited)
June 30, September 30,
2003 2002
---------- -------------
Steel scrap .............................................. $3,201,320 $2,667,194
Billets .................................................. 6,819,287 6,592,189
Finished product ......................................... 37,093,284 37,731,152
LIFO adjustments ......................................... (430,707) 680,306
---------- ----------
46,683,184 47,670,841
Operating supplies ....................................... 10,296,065 10,428,335
---------- ----------
$56,979,249 $58,099,176
========== ==========
As of June 30, 2003 and September 30, 2002, $2.3 million in lower of LIFO
cost or market reserves are included as reductions of finished product
inventory.
6) REORGANIZATION EXPENSES
Reorganization expenses are expenses incurred by the Company as a result
of its decision to restructure its debt prior to Petition Date and to reorganize
under Chapter 11 of the Bankruptcy Code. The following summarizes the
reorganization expenses provided by the Company during the quarter and
nine-month period ended June 30, 2003 of which $948,819 were incurred prior to
the Petition Date, respectively.
Quarter Ended Nine Months Ended
June 30, June 30,
2003 2003
------------- -----------------
Professional and other fees .............................. $1,277,122 $3,340,944
Write-down of deferred financing costs related
to the terminated line of credit ....................... -- 392,330
Other .................................................... 144,369 446,698
---------- ----------
$1,421,491 $4,179,972
========== ==========
7) PROPERTY, PLANT AND EQUIPMENT
During fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144") which requires, among other things, that companies
recognize impairment losses on long-lived assets. SFAS 144 supersedes previous
accounting standards which contained similar provisions. SFAS 144 states that an
impairment is a condition that exists when the carrying amount of a long-lived
asset or asset group exceeds its fair value and therefore is not recoverable.
This condition is deemed to exist if the carrying amount of the asset or asset
group exceeds the sum of the undiscounted cash flow expected to be derived from
the use and eventual disposition of the asset or asset group.
As a result of recent operating losses, projections of future operating
performance, and continued negative market trends, the Company believed that the
application of the criteria established by SFAS 144 required recognition of
impairment losses on the asset group comprising its Tennessee rolling mill,
which losses were recorded in the third quarter of fiscal 2002 and the second
quarter of fiscal 2003. In determining the fair value of the Tennessee rolling
mill, the Company employed the present value technique of discounting, at a risk
free rate, multiple cash flow scenarios that reflect a range of possible
outcomes from the utilization and ultimate disposal of the Tennessee rolling
mill. The various scenarios made assumptions about key drivers of cash flow,
such as metal margin, shipments, capital expenditures, production levels, and
distribution cost. Each scenario was then assigned a probability weighting
representing management's judgment of the probability of achieving each cash
flow stream. Based on such judgment and assumptions underlying the calculation,
the Company has reduced the carrying value of the assets comprising its
Tennessee rolling mill by $8.0 million in its second quarter of fiscal 2003. The
Company also reduced the carrying value of these assets by $6.6 million in
fiscal 2002. The value was generally influenced by a longer time frame in which
margins improved toward historical levels. The Company's ability to achieve
certain liquidity levels included in the
Page 9
various cash flow scenarios may result in actions that may again change the
carrying value.
8) PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action
and further developments with respect to disputed claims or other events,
including reconciliation of claims filed with the Bankruptcy Court to amounts
recorded in the accompanying consolidated financial statements. Under a
confirmed plan of reorganization, all pre-petition claims subject to compromise
may be paid and discharged at amounts substantially less than their allowed
amounts. These liabilities have been reclassified as noncurrent because of the
automatic stay provision of the Chapter 11 proceeding and it is unlikely that
settlement of such obligations will occur prior to June 30, 2004.
On a consolidated basis, recorded pre-petition liabilities subject to
compromise under Chapter 11 Proceedings, consisted of the following:
(Unaudited) (Audited)
June 30, September 30,
2003 2002
------------ -------------
First Mortgage Notes .............................. $119,441,493 $ --
Accounts Payable .................................. 11,635,953 --
Accrued interest on First Mortgage Notes .......... 7,890,882 --
------------ ----------
Total liabilities subject to compromise ........ $138,968,328 --
============ ==========
As a result of the bankruptcy filing, principal and interest payments may
not be made on pre-petition undersecured debt without Bankruptcy Court approval
or until a plan of reorganization defining the repayment terms has been
confirmed. The total interest on the pre-petition undersecured first mortgage
notes (See Footnote 9) that was not charged to earnings for the period from
January 23, 2003 to June 30, 2003, was approximately $5.0 million. Such interest
is not being accrued as the Bankruptcy Code generally disallows the payment of
interest that accrues post- petition with respect to pre-petition unsecured or
undersecured claims.
9) LONG-TERM DEBT
As of June 30, 2003, the $120 million of 9.5% first mortgage notes, net of
the unamortized original issue discount of $558,507, is reported in the
accompanying consolidated balance sheets as a non-current liability and the
Company continues to carry the unamortized debt issue cost of $1.5 million as a
non-current asset. The principal and accrued interest up to the Petition Date
are included in pre-petition liabilities subject to compromise. Pending the
results of the Company's bankruptcy reorganization proceedings, certain
adjustments to the presentation and carrying values of the Company's debt and
related discounts and/or issue costs will likely be required in future periods.
The notes are secured by a first priority lien, subject to certain exceptions,
on existing real property, plant and equipment, and most additions or
improvements at the Louisiana Facility.
10) DEBTORS-IN-POSSESSION FINANCING
On February 28, 2003, the Bankruptcy Court approved the
Debtor-In-Possession Financing Agreement ("DIP Agreement") between the Company
and the existing lenders on its credit facility. The Company retired its
pre-petition secured credit facility in the amount of $18.6 million. In
connection with this transaction, the Company wrote off $392,330 of deferred
financing costs related to its old credit facility as a reorganization expense
and capitalized $555,100 in deferred financing cost on the DIP Agreement as
other assets. The DIP Agreement, which is a $45 million credit facility and has
a twelve month term, is secured by inventory, receivables, and certain fixed
assets previously unencumbered by other debt agreements, bears interest at prime
plus 1% or LIBOR plus 3%. Based on the borrowing base criteria, as defined,
approximately $20.4 million is available as of June 30, 2003; however, the
Company is required to maintain a minimum liquidity reserve of $12 million. This
minimum effectively reduces additional availability for borrowing to $8.4
million. The DIP Agreement required, among other things, the Company to meet
certain cash operating performance measures based on the Company's weekly budget
for a 13 week period ending which ended April 26, 2003. The Company was in
compliance throughout the period. There are no other financial performance
covenants. The maximum amount outstanding under the pre-petition secured credit
facility and the DIP Agreement
Page 10
during the nine-month period ended June 30, 2003 was $21.7 million. The average
borrowings were $16.8 million and the weighted average interest rate was 4.95%.
11) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Bayou Steel Corporation (Tennessee) and River Road Realty Corporation
(collectively the "guarantor subsidiaries"), which are wholly-owned by and which
comprise all of the direct and indirect subsidiaries of the Company, fully and
unconditionally guarantee the Notes on a joint and several basis. The Indenture
provides certain restrictions on the ability of the guarantor subsidiaries to
make distributions to the Company. The following are condensed consolidating
balance sheets as of June 30, 2003 and September 30, 2002 and condensed
consolidating statements of operations for the three and nine months ending June
30, 2003 and 2002 and condensed consolidating statements of cash flows for the
nine months ended June 30, 2003 and 2002 (in thousands).
Condensed Balance Sheets June 30, 2003 (Unaudited)
--------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Current assets ................................... $ 105,700 $ 15,999 $(43,629) $ 78,070
Property and equipment, net ...................... 74,624 11,700 -- 86,324
Other noncurrent assets .......................... (17,166) 161 18,983 1,978
--------- -------- -------- ---------
Total assets .................................. $ 163,158 $ 27,860 $(24,646) $ 166,372
========= ======== ======== =========
Current liabilities .............................. $ 35,583 $ 44,959 $(43,629) $ 36,913
Pre-Petition liabilities ......................... 137,084 1,884 -- 138,968
Equity ........................................... (9,509) (18,983) 18,983 (9,509)
--------- -------- -------- ---------
Total liabilities and equity .................. $ 163,158 $ 27,860 $(24,646) $ 166,372
========= ======== ======== =========
September 30, 2002 (Audited)
--------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Current assets ................................... $ 101,835 $ 14,847 $(40,706) $ 75,976
Property and equipment, net ...................... 78,674 20,294 -- 98,968
Other noncurrent assets .......................... (6,072) 187 8,116 2,231
--------- -------- -------- ---------
Total assets .................................. $ 174,437 $ 35,328 $(32,590) $ 177,175
========= ======== ======== =========
Current liabilities .............................. $ 153,763 $ 43,444 $(40,706) $ 156,501
Equity ........................................... 20,674 (8,116) 8,116 20,674
--------- -------- -------- ---------
Total liabilities and equity .................. $ 174,437 $ 35,328 $(32,590) $ 177,175
========= ======== ======== =========
Condensed Statements of Operations Three Months Ended June 30, 2003 (Unaudited)
--------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ........................................ $ 33,932 $ 9,148 $ (5,406) $ 37,674
Cost of sales and administrative expense ......... (35,910) (9,264) 5,406 (39,768)
Reorganization expenses .......................... (1,422) -- -- (1,422)
--------- -------- -------- ---------
Operating loss ................................ (3,400) (116) -- (3,516)
Interest and other income (expense) .............. (200) 72 44 (94)
--------- -------- -------- ---------
Net loss ...................................... $ (3,610) $ (44) $ 44 $ (3,610)
========= ======== ======== =========
Three Months Ended June 30, 2002 (Unaudited)
--------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ........................................ $ 36,206 $ 9,689 $ (7,031) $ 38,864
Cost of sales and administrative expense ......... (38,618) (18,890) 7,031 (50,477)
--------- -------- -------- ---------
Operating loss ................................ (2,412) (9,201) -- (11,613)
Interest and other income (expense) .............. (12,123) (311) 9,512 (2,922)
--------- -------- -------- ---------
Loss before income tax ........................... (14,535) (9,512) 9,512 (14,535)
Provision for income tax ......................... 7,682 -- -- 7,682
--------- -------- -------- ---------
Net loss ...................................... $ (22,217) $ (9,512) $ 9,512 $ (22,217)
========= ======== ======== =========
Page 11
Nine Months Ended June 30, 2003 (Unaudited)
----------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ........................................ $ 95,787 $ 23,477 $(15,365) $ 103,899
Cost of sales and administrative expense ......... (107,200) (34,108) 15,365 (125,943)
Reorganization expenses .......................... (4,180) -- -- (4,180)
--------- -------- -------- ---------
Operating loss ................................ (15,593) (10,631) -- (26,224)
Interest and other income (expense) .............. (14,590) (236) 10,867 (3,959)
--------- -------- -------- ---------
Net loss ...................................... $ (30,183) $(10,867) $ 10,867 $ (30,183)
========= ======== ======== =========
Nine Months Ended June 30, 2002 (Unaudited)
----------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ........................................ $ 94,854 $ 26,214 $(17,032) $ 104,036
Cost of sales and administrative expense ......... (99,736) (38,063) 17,032 (120,767)
--------- -------- -------- ---------
Operating loss ................................ (4,882) (11,849) -- (16,731)
Interest and other income (expense) .............. (20,401) (703) 12,552 (8,552)
--------- -------- -------- ---------
Loss before income tax ........................... (25,283) (12,552) 12,552 (25,283)
Provision for income tax ......................... 7,682 -- -- 7,682
--------- -------- -------- ---------
Net loss ...................................... $ (32,965) $(12,552) $ 12,552 $ (32,965)
========= ======== ======== =========
Condensed Statements of Cash Flows Nine Months Ended June 30, 2003 (Unaudited)
----------------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Cash flows from operating activities:
Net loss ...................................... $ (30,183) $(10,867) $ 10,867 $ (30,183)
Noncash items ................................. 10,035 8,656 -- 18,691
Equity in losses of subsidiaries .............. 10,867 -- (10,867) --
Changes in working capital .................... 2,018 2,211 -- 4,229
--------- -------- -------- ---------
Net cash used in operations excluding
reorganization expenses ..................... (7,263) -- -- (7,263)
Net cash used for reorganization expenses: ....... $ (3,788) $ -- $ -- $ (3,788)
--------- -------- -------- ---------
Net cash used in operations ................... (11,051) -- -- (11,051)
--------- -------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ........... (1,228) -- -- (1,228)
--------- -------- -------- ---------
Cash flows from financing activities:
Net borrowing on DIP Financing ................ 20,517 -- -- 20,517
Net borrowings under line of credit ........... (8,193) -- -- (8,193)
--------- -------- -------- ---------
Net cash provided from financing
activities ................................. 12,324 -- -- 12,324
--------- -------- -------- ---------
Net change in cash ............................ 45 -- -- 45
Cash, beginning of period ........................ 57 -- -- 57
--------- -------- -------- ---------
Cash, end of period .............................. $ 102 $ -- $ -- $ 102
========= ======== ======== =========
Page 12
Nine Months Ended June 30, 2002 (Unaudited)
----------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
Cash flows from operating activities:
Net loss ............................................ $(32,965) $(12,552) $ 12,552 $(32,965)
Noncash items ....................................... 14,057 7,512 -- 21,569
Equity in losses of subsidiaries .................... 12,552 -- (12,552) --
Changes in working capital .......................... (369) 5,412 -- 5,043
-------- -------- -------- --------
Net cash from operating activities ................ (6,725) 372 -- (6,353)
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ................. (719) (372) -- (1,091)
-------- -------- -------- --------
Cash flows from financing activities:
Net borrowings under line of credit ................. 7,444 -- -- 7,444
-------- -------- -------- --------
Net change in cash .................................. -- -- -- --
Cash, beginning of period .............................. -- -- -- --
-------- -------- -------- --------
Cash, end of period .................................... $ -- $ -- $ -- $ --
======== ======== ======== ========
12) COMMITMENTS AND CONTINGENCIES
The Company is subject to various federal, state, and local laws and
regulations concerning the discharge of contaminants that may be emitted into
the air, discharged into waterways, and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a release
of a hazardous substance generated by the Company, it could be potentially
responsible for the remediation of contamination associated with such a release.
There are various claims and legal proceedings arising in the ordinary course of
business pending against or involving the Company wherein monetary damages are
sought. It is management's opinion that the Company's liability, if any, under
such claims or proceedings would not materially affect its financial position or
results of operations. In addition, unless modified by the Bankruptcy Court,
pursuant to the automatic stay provision of Section 362 of the Bankruptcy Code,
most pre-petition litigation against the Company is currently stayed.
As of June 30, 2003, the Company has entered into forward price
commitments totaling $1.9 million for approximately 43% of the natural gas it
expects to utilize in its production over the next nine months. Although the
Company intends to fulfill its commitments under the agreements, a trading
market does exist for such commitments.
13) EARNINGS PER SHARE
The Company maintains an incentive stock award plan for certain key
employees under which there are outstanding stock options to purchase 195,000,
175,000, 75,000, and 99,000 shares of its Class A Common Stock at exercise
prices of $0.80, $3.25, $4.75, and $4.375 per share, respectively. Diluted
earnings per share amounts were determined by assuming that the outstanding
stock options were exercised and considered as additional common stock
equivalents outstanding computed under the treasury stock method.
Because the Company generated losses in the quarters and nine months ended
June 30, 2003 and 2002 respectively, there were no common stock equivalents
considered outstanding for purposes of computing diluted earnings (loss) per
share computation. Common stock equivalents excluded from the calculation of
diluted earnings (loss) per share were 544,000 in the quarters and nine months
ended June 30, 2003 and 2002.
The Company has elected to adopt the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS 123") and SFAS 148,
Accounting for Stock-Based compensation--Transition and Disclosure ("SFAS 148")
and continues to apply Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for its
stock-based compensation plans. The pro-forma net income and related pro-forma
earnings per share effect from applying SFAS 123 and 148 did not result in a
material change to the actual results and earnings per share amounts reported.
Page 13
14) INCOME TAXES
As of September 30, 2002, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $155 million available to utilize
against regular taxable income. The NOLs will expire in varying amounts through
fiscal 2022. A change of control, as defined by section 382 of the Internal
Revenue Service code, would seriously limit the Company's ability to utilize the
NOLs. The plan of reorganization, once approved by the Court, could result in
such a change of control.
The realization of a net deferred tax asset is dependent in part upon
generation of sufficient future taxable income. The Company periodically
assesses the carrying value of this asset taking into consideration many factors
including changing market conditions, historical trend information, and modeling
expected future financial performance. Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") requires, among
other things, that the Company determine whether it is "more likely than not"
that it will realize such benefits and that all negative and positive evidence
be considered (with more weight given to evidence that is "objective and
verifiable") in making the determination. SFAS 109 further indicates that
objective negative evidence, such as cumulative losses in recent years, losses
expected in early future years, and a history of potential tax benefits expiring
unused, is difficult to overcome.
After taking into consideration recent operating losses, and the continued
negative market conditions and after giving more weight to factors, such as
these that are objective and verifiable, the Company determined in the third
quarter of fiscal 2002 that the realization of its previously recorded net
deferred tax asset no longer met the more likely than not criteria established
by SFAS 109. Accordingly, the Company recorded an additional valuation allowance
of $7.7 million in the third quarter of fiscal 2002 fully reserving any future
benefits that might be derived from its NOLs as of June 30, 2002.
As a result of the bankruptcy and the Company's continued operating
losses, as of June 30, 2003, the Company has fully reserved for any future
benefit that might be derived as a result of the fiscal 2003 operating results.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the historical
consolidated financial statements of Bayou Steel Corporation and related notes
thereto included in Part I, Item 1 of this Report and the Company's audited
consolidated financial statements, footnotes, and Management's Discussion and
Analysis of Financing Condition and Results of Operation contained in the Annual
Report on Form 10-K for the fiscal year ended September 30, 2002. Unless
otherwise indicated, all references to the "Company" or "Debtors" herein are
intended to refer to Bayou Steel Corporation. This section contains statements
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers should refer to "Forward
Looking Information" included in this report and in the Annual Report on Form
10-K for the fiscal year ended September 30, 2002 for risk factors.
CHAPTER 11 PROCEEDINGS
On January 22, 2003, the Company and its subsidiaries Bayou Steel
Corporation (Tennessee), and River Road Realty Corporation, filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. The petition requesting an order for relief was filed in United States
Bankruptcy Court, Northern District of Texas (the "Bankruptcy Court"), where the
case is now pending before the Honorable Barbara J. Houser, Case No. 03-30816
BJH (the "Petition Date"). As debtors-in-possession under Sections 1107 and 1108
of the Bankruptcy Code, the Company remains in possession of its properties and
assets, and management continues to operate the business. The Company intends to
continue normal operations and does not currently foresee any interruption in
the shipment of product to customers in the near term. The Company cannot engage
in transactions outside the ordinary course of business without the approval of
the Bankruptcy Court. The Company attributed the need to reorganize to market
conditions in the U.S. steel industry resulting from significant pressure from
imported steel products, low product pricing, and high energy costs. These
factors, coupled with the effects of a slow down in the economy, have adversely
affected the Company over the past several years.
Page 14
The goal of the Chapter 11 Filing is to maximize recovery by creditors and
shareholders by preserving the Company as a viable entity with going concern
value. The protection afforded by the Chapter 11 Filing will permit the Company
to preserve cash and restructure its debt. The confirmation of a plan of
reorganization is the Company's primary objective. The Company expects to
propose a plan of reorganization to the Bankruptcy Court by October 1, 2003.
When filed, the plan of reorganization will set forth the means of treating
claims, including liabilities subject to compromise. The plan of reorganization
will, in all probability, result in significant dilution or even cancellation of
equity interests as a result of issuance of equity securities to creditors or
new investors. The confirmation of any plan of reorganization will require
acceptance by all classes of claimants as required under the Bankruptcy Code and
approval of the Bankruptcy Court. Under the Bankruptcy Code, post-petition
liabilities and pre-petition liabilities subject to compromise must be satisfied
before shareholders can receive any distribution. The ultimate recovery to
shareholders, if any, will not be determined until the end of the case when the
fair value of the assets is compared to the liabilities and claims against the
Company. There can be no assurance as to what value, if any, will be ascribed to
the Common Stock in the bankruptcy proceedings.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. Such financial statements have been prepared on the basis that
the Company will continue as a going concern and do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The
Company's recurring losses, negative cash flow from operations, and the
subsequent Chapter 11 case raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern and appropriateness of using the going concern basis is dependent
upon, among other things, (i) the Company's ability to comply with the DIP
Agreement, (ii) submission and confirmation of a plan of reorganization under
the Bankruptcy Code, (iii) the Company's ability to achieve profitable
operations after such confirmation, and (iv) the Company's ability to generate
sufficient cash from operations to meet its obligations. The consolidated
financial statements do not include any adjustments relating to recoverability
and classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
RESULTS OF OPERATIONS
The Company reported a net loss of $3.6 million in the third quarter of
fiscal 2003 compared to a loss of $22.2 million in the third quarter of fiscal
2002. Three major factors account for the $18.6 million favorable change. First,
a non-cash asset impairment charge of $6.6 million and a provision for income
tax of $7.7 million were recorded in the third quarter of fiscal 2002. No such
adjustments were made in the third quarter of fiscal 2003. Second, due to
rapidly rising prices for scrap, fuels, and alloys, which collectively represent
over 50% of costs, substantially all steel producers, including the Company,
raised prices $35 per ton on most products effective late in the second quarter
of fiscal 2003. As a result of the average selling price increasing more than
the price of the raw material scrap, metal margin (the difference between the
selling price of the finished product and the price of scrap) increased $28 per
ton resulting in a $3.4 million improvement in operating results. Third,
interest expense decreased $2.7 million as a result of discontinuing the accrual
of interest on the Notes as of the Petition Date. Offsetting these favorable
changes were $1.4 million in reorganization expenses in the third quarter of
fiscal 2003 and a one-time favorable tax credit in the prior year quarter in
fiscal 2002. Improved operating efficiencies of $1.5 million were completely
offset by the sharply higher fuel prices than the prior year third quarter.
The Company reported a net loss of $30.2 in the nine month period ending
June 30, 2003, million compared to $33.0 million in the nine month period of
fiscal 2002. The $2.8 million favorable change is primarily due to four factors.
First, the non-cash asset impairment charge of $8.0 million recorded in the nine
month period ended June 30,2003 was $2.6 million greater than a similar charge
recorded in the comparable period of fiscal 2002. Second, a provision for income
tax of $7.7 million was recorded in the first nine months of fiscal 2002 and no
such provision was recorded in fiscal 2003. Third, higher production costs,
primarily related to higher fuel prices and per unit fixed cost due to lower
capacity utilization levels, adversely impacted earnings by $3.5 million.
Fourth, reorganization expenses had an unfavorable impact on results of $4.5
million. The discontinued accrual of interest on the Notes impacted earnings
favorably by $4.6 million. The increase in metal margin of $6 per ton combined
with a decrease in shipment volume of 32,000 tons resulted in virtually no
impact on operating results.
Page 15
The following table sets forth shipment and sales data.
Three Months Ended
June 30,
2003 2002
-------- --------
Net Sales (in thousands) ............... $ 37,674 $ 38,864
Shipment Tons .......................... 120,100 140,951
Average Selling Price Per Ton .......... $ 310 $ 271
Metal Margin Per Ton ................... $ 200 $ 172
Nine Months Ended
June 30,
2003 2002
-------- --------
Net Sales (in thousands) ............... $103,900 $104,037
Shipment Tons .......................... 350,330 382,213
Average Selling Price Per Ton .......... $ 293 $ 268
Metal Margin Per Ton ................... $ 185 $ 179
A. Sales
Net sales for the quarter decreased by 3% on a 15% decrease in shipments
and a 14% increase in the average selling price compared to the third quarter of
fiscal 2002. The decrease in shipments is attributable to the recessionary
domestic economic conditions and some customers' concerns about the financial
condition of the Company since filing bankruptcy. The Company experienced a
higher average selling price and improved margins in the third quarter of fiscal
2003 as a result of the $35 per ton price increase late in the second quarter
mentioned above. In response to escalating scrap prices and high fuel costs in
the fourth quarter of fiscal 2003, a $15 per ton price increase has been
announced effective at the end of August. The Company's results could be
adversely impacted if the increases in selling prices continue to lag the
increases in scrap and electricity prices.
The Company has begun expanding sales on the West Coast by utilizing a
transfer location that will facilitate improved customer service at a
competitive net delivered price. The Company will also more aggressively pursue
various OEM (original equipment manufacturers) markets, such as joist, metal
building, rack, material handling, and highway safety. The Company recently
entered into a service contract with a transportation internet service that
specializes in truck dispatch automation; this will facilitate improved customer
service by providing increased truck availability at reduced cost. The objective
of these initiatives is to operate additional sales, leading to higher and more
efficient levels of capacity utilization.
Net sales for the nine month period was approximately the same compared to
the first nine months of fiscal 2002. Shipments decreased 8% and the average
selling price increased 9% compared to the comparable prior year period. These
fluctuations are the result of the market factors noted above.
B. Cost of Goods Sold
The gross margin improved by $2.9 million in the third quarter of fiscal
2003 as compared to the comparable prior year third quarter. This improvement
was due to the fact that selling price increases exceeded cost increases.
However, cost of goods sold exceeded sales for the quarter and the nine months
ended June 30, 2003 as well as those of the prior year respective periods. In
fiscal 2002, this was caused by an abnormally low selling price. In fiscal 2003,
even though selling prices improved, the higher prices for scrap and fuel and a
higher fixed cost per ton as a result of decreased production resulted in a
gross margin loss.
Scrap is used in the Company's melting operations in Louisiana and is a
significant cost component of the finished product. Scrap cost during the third
quarter increased $11 per ton or 11% compared to the same period last year which
partially offset the $39 per ton increase in average selling prices. Scrap
increased sharply during the first two quarters of fiscal 2003 as a result of an
exceptionally strong export market and a domestic market affected by steel
producers increasing their scrap inventories, and stabilized in the third
quarter. Generally and over periods of time, the average selling price of
finished product trends with scrap prices. The Company expects that, in its
fourth quarter, scrap prices will increase sharply. Additive and alloy costs
increased by $3 per ton as a result of sharply increasing prices.
Page 16
Conversion cost includes labor, energy, maintenance materials, and
supplies used to convert raw materials into billets and billets into finished
product. Conversion cost per ton for the Louisiana operations was approximately
the same in the third quarter of fiscal 2003 as compared to the same period last
year despite a $1.5 million increase in electricity and natural gas prices. With
constant fuel prices, the per unit conversion cost would have decreased 8% in
the third quarter of fiscal 2003 as compared to the prior year period. The
Tennessee rolling mill experienced a 14% decrease in conversion cost largely
driven by controls on labor and overhead and maintenance materials spending. The
Company continued to reduce operating levels in the third quarter of fiscal 2003
in order to reduce inventories which had increased significantly at the end of
the first fiscal quarter. This also adversely impacted per unit production costs
for the third quarter of fiscal 2003.
Fiscal year to date conversion cost per ton exceeded the prior year period
by nearly 9% in Louisiana and . decreased in Tennessee by 10%. These year to
date fluctuations in conversion costs per ton are primarily due to the same
factors noted above.
The Company continues to critically evaluate the cost effectiveness of
certain operating assets, their mode of operation and the impact on inventories
and cost, and the general business environment in which each facility operates.
The Company's recent goal of achieving operating cash flow breakeven (loss plus
depreciation, amortization and restructuring charges) has been achieved in the
third quarter of fiscal 2003 for the first time since fiscal 1999.
C. Asset Impairment
During fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144") which requires, among other things, that companies
recognize impairment losses on long-lived assets. SFAS 144 supersedes previous
accounting standards which contained similar provisions. SFAS 144 states that an
impairment is a condition that exists when the carrying amount of a long-lived
asset or asset group exceeds its fair value and therefore is not recoverable.
This condition is deemed to exist if the carrying amount of the asset or asset
group exceeds the sum of the undiscounted cash flow expected to be derived from
the use and eventual disposition of the asset or asset group.
As a result of recent operating losses, projections of future operating
performance, and continued negative market trends, the Company believed that the
application of the criteria established by SFAS 144 required recognition of
impairment losses on the asset group comprising its Tennessee rolling mill,
which losses were recorded in the third quarter of fiscal 2002 and the second
quarter of fiscal 2003. In determining the fair value of the Tennessee rolling
mill, the Company employed the present value technique of discounting, at a risk
free rate, multiple cash flow scenarios that reflect a range of possible
outcomes from the utilization and ultimate disposal of the Tennessee rolling
mill. The various scenarios made assumptions about key drivers of cash flow,
such as metal margin, shipments, capital expenditures, production levels, and
distribution cost. Each scenario was then assigned a probability weighting
representing management's judgment of the probability of achieving each cash
flow stream. Based on such judgment and assumptions underlying the calculation,
the Company has reduced the carrying value of the assets comprising its
Tennessee rolling mill by $8.0 million in its second quarter of fiscal 2003. The
Company also reduced the carrying value of these assets by $6.6 million in
fiscal 2002. The value was generally influenced by a longer time frame in which
margins improved toward historical levels. The Company's ability to achieve
certain liquidity levels included in the various cash flow scenarios may result
in actions that may again change the carrying value.
Once the plan of reorganization is approved by the Bankruptcy Court, the
carrying value of certain plant, property, and equipment could be subject to
recorded adjustments.
D. Selling, General and Administrative
Selling, general and administrative expenses were approximately the same
in the third fiscal quarter and increased $345,000 in the nine months ended June
30, 2003 as compared to the same prior year periods. The increase in fiscal 2003
is due primarily to an increase in insurance premiums.
Page 17
E. Reorganization Expenses
Reorganization expenses in the amount of $1.4 million for the three months
ended June 30, 2003 consist of professional fees and other expenses associated
with the Chapter 11 proceedings that are approved by the Bankruptcy Court.
Reorganization expenses for the nine months ended June 30, 2003 also include
deferred financing charges associated with the pre-petition line of credit which
were expensed as a reorganization item and expenses prior to the Petition Date
related to the Company's efforts to restructure the debt in an out of court
arrangement. The Company expects the professional fees and other expense items
to approximate $0.4 to $0.5 million per month for the foreseeable future.
F. Interest Expense
Interest expense decreased by $2.7 million for the three months and $4.5
million for the nine months ended June 30, 2003 as compared to the same prior
year periods. The Company discontinued accruing interest on the $120 million of
Notes since this liability is subject to compromise in Chapter 11 proceedings.
The total interest on pre-petition Notes that was not charged to earnings for
the period from January 23, 2003 to June 30, 2003 was $5.0 million. Interest
expense on the line of credit increased relative to the prior year due to
greater borrowings.
G. Net Loss
Net loss decreased $18.6 million in the third quarter of fiscal 2003
compared to the same prior year period. This is primarily due to the asset
impairment charge and the income tax provision recognized in the third quarter
of fiscal 2002 in the amount of $6.6 million and $7.7 million, respectively, and
there were no such adjustments in the comparable period of fiscal 2003.
Additional factors in fiscal 2003 were the increase in the average selling price
of $39 per ton and the decrease in interest expense as a result of discontinuing
the accrual of interest on the Notes as of the Petition Date.
LIQUIDITY AND CAPITAL RESOURCES
A. Operating Cash Flow
For the first nine months of fiscal 2003, excluding reorganization
expenses, $7.3 million was used in operations due largely to the net loss
generated during the period. During the same period of the prior year $6.3
million was used in operations for similar reasons. During the first nine months
of fiscal 2003, inventories decreased by $1.1 million as a result of reducing
operating levels below the low shipment levels of the quarter. Accounts payable
increased due to post-petition payment terms given by many of the Company's
suppliers. During the first nine months of fiscal 2003, receivables increased by
$0.6 million as the collection rate fell slightly below the sales.
Excluding reorganization expenses and changes in working capital, the
Company reached cash flow breakeven from operations in the third quarter. The
Company's liquidity position remains its highest priority. The Company is hoping
to continue to achieve cash flow breakeven in the fourth fiscal quarter. This is
predicated on many assumptions, including maintaining current price realizations
and stabilization in the scrap prices and moderation of the recent fuel prices.
B. Capital Expenditures
Capital expenditures totaled $1.2 million in the first nine months of
fiscal 2003 compared to $1.0 million in the same period last year. Spending
during both periods has been limited to required facility maintenance capital
programs. Given current conditions and the condition of the facilities, capital
programs over the next twelve months will continue to be directed towards
maintenance programs requiring approximately $3.0 million.
C. Liquidity & Financing Matters
On February 28, 2003, the Bankruptcy Court approved the
Debtor-In-Possession Financing Agreement ("DIP Agreement") between the Company
and the existing lenders on its credit facility. The Company retired its
pre-petition secured credit facility in the amount of $18.6 million. In
connection with this transaction, the Company wrote off $392,330 of deferred
financing costs related to its old credit facility as a reorganization expense
and capitalized
Page 18
$555,100 in deferred financing cost on the DIP Agreement as other assets. The
DIP Agreement, which is a $45 million credit facility and has a twelve month
term, is secured by inventory, receivables, and certain fixed assets previously
unencumbered by other debt agreements, bears interest at prime plus 1% or LIBOR
plus 3%. Based on the borrowing base criteria, as defined, approximately $20.4
million is available as of June 30, 2003; however, the Company is required to
maintain a minimum liquidity reserve of $12 million. This minimum effectively
reduces additional availability for borrowing to $8.4 million. The DIP Agreement
required, among other things, the Company to meet certain cash operating
performance measures based on the Company's weekly budget for a 13 week period
ending which ended April 26, 2003. The Company was in compliance throughout the
period. There are no other financial performance covenants. The maximum amount
outstanding under the pre-petition secured credit facility and the DIP Agreement
during the nine-month period ended June 30, 2003 was $21.7 million. The average
borrowings were $16.8 million and the weighted average interest rate was 4.95%.
OTHER COMMENTS
Forward-Looking Information, Inflation and Other
This document contains various "forward-looking" statements which
represent the Company's expectation or belief concerning future events.
Statements regarding the Company's ability to complete its bankruptcy
reorganization proceedings timely, the outcome of the reorganization plan, the
Company's ability to sustain current operations during the pendency of the
reorganization including its ability to maintain normal relationships with
customers, the ability of the Company to establish normal terms and conditions
with suppliers and vendors, costs of the reorganization process, the adequacy of
financing arrangements during the reorganization period, future market prices,
operating results, synergies, future operating efficiencies, future governmental
actions and the results of such actions, cost savings and other statements which
are not historical facts contained in this Quarterly Report on Form 10-Q are
forward-looking statements.
The Company cautions that a number of important factors could,
individually or in the aggregate, cause actual results to differ materially from
those included in the forward-looking statements. These include but are not
limited to statements relating to future actions, prospective products, future
dealings with the noteholders or senior credit lenders, future performance or
results of current and anticipated new products, sales efforts, availability of
raw materials, expenses such as fuel and scrap cost, the outcome of
contingencies, the cost of environmental compliance and financial results. From
time to time, the Company also may provide oral or written forward-looking
statements in other materials released to the public. Any or all of the
forward-looking statements in this report and in any other public statements may
turn out to be wrong, and can be affected by inaccurate assumptions by known or
unknown risks and uncertainties. Many factors mentioned in the discussion above
will be important in determining future results. Consequently, no
forward-looking statements can be guaranteed. Actual future results may vary
materially. The Company undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are advised, however, to consult any further
disclosures on related subjects in the Company's other reports to the Securities
and Exchange Commission.
The Company is subject to increases in the cost of energy, supplies,
salaries and benefits, additives, alloys, and steel scrap due to inflation.
Finished goods prices are influenced by supply, which varies with steel mill
capacity and utilization, import levels, and market demand.
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings, with exception to the events discussed in
"Liquidity and Capital Resources," would not materially affect its financial
position.
The Company provides the following cautionary discussion of risks,
uncertainties, and possibly inaccurate assumptions relevant to our businesses.
These are factors that could cause actual results to differ materially from
expected and historical results. Other factors besides those listed here could
also adversely affect future operating results. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
Page 19
o General economic conditions in the United States.
o Potential additional military conflicts in the Persian Gulf area or
other parts of the world pursuant to the United States efforts to
combat domestic and global terrorism.
o The imports into the United States that have affected the steel
market.
o The highly cyclical and seasonal nature of the steel industry.
o The possibility of increased competition from other minimills.
o The Company's ability to expand its product lines and increase
acceptance of existing product lines.
o The Company's ability to rationalize its products without adversely
impacting other products.
o Additional capacity in the Company's product lines.
o Running shorter production cycles in a cost effective manner.
o The availability of raw materials such as steel scrap.
o The cost and availability of fuels, specifically natural gas and
electricity.
o The costs of environmental compliance and the impact of government
regulations.
o The Company's relationship with its workforce.
o The restrictive covenants and tests contained in the Company's
existing and future debt instruments that could limit its operating
and financial flexibility.
o The risk that the Company will not have the liquidity required to
meet its commitments either through utilization of existing and
future credit agreements, alternative agreements or internally
generated funds.
o The cost of restructuring charges.
o The inability to get the Company's plan of reorganization approved.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On January 22, 2003, the Company voluntarily filed for relief under
Chapter 11 of the U.S. Bankruptcy Code. The petition was filed in the Bankruptcy
court, Case No. 03-30816BJH. The Company continues to operate business as
debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code.
The Company is involved in a variety of claims, lawsuits and other
disputes arising in the ordinary course of business. The Company believes the
resolution of these matters and the incurrence of their related costs and
expenses should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity. In addition, unless modified by
the Bankruptcy Court, pursuant to the automatic stay provision of Section 362 of
the Bankruptcy Code, most pre-petition litigation against the Company is
currently stayed.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Prior to the Company's filing for protection under Chapter 11 of the U.S.
Bankruptcy Code on January 22, 2003, the Company was unable to make the $5.7
million semiannual interest payment due under its Notes. As a result, on
December 16, 2002 the Company was in default of the Notes and, due to cross
default provisions, the Company was also in default of its $50 million line of
credit agreement. The total arrearages of interest payments is $7.9 million.
Item 4. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedure
(as is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act") as of a date within 90 days before the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
Page 20
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls.
Item 5. OTHER INFORMATION
The Company's common stock has been suspended from trading on the American
Stock Exchange ("AMEX") since January 22, 2003, and it is expected that AMEX
will take action on August 19, 2003 to delist the stock. An alternative trading
system does not appear to be available at this time or for the foreseeable
future.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarter ended March 31,
1996).
3.2 Amended Restated By-laws of the Company (incorporated
herein by reference to the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 2000).
4.1 Indenture (including form of First Mortgage Note and
Subsidiary guarantee between each recourse subsidiary of
the Company and the Trustee), dated May 22, 1998,
between the Company, Bayou Steel Corporation
(Tennessee), River Road Realty Corporation and Bank One,
as trustee (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended September
30, 1998.
4.2 Debtor-In-Possession Loan and Security Agreement by and
among Congress Financial Corporation as Lender and Bayou
Steel Corporation and Bayou Steel Corporation
(Tennessee) as Debtors-In-Possession and Borrower dated
February 28, 2003.
31.1 Certification of Howard M. Myers pursuant to Rule 13a-14
under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Richard J. Gonzalez pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Howard M. Myers pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Richard J. Gonzalez pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Page 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYOU STEEL CORPORATION
By /s/ Richard J. Gonzalez
----------------------------------------
Richard J. Gonzalez
Vice President, Chief Financial Officer,
Treasurer, and Secretary
Date: August 19, 2003
Page 22