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 December 31, 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 December 31, 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
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- December 31, 2003 and
September 30, 2003 3
Consolidated Statements of Operations -- Three
Months Ended December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows -- Three Months
Ended December 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Liquidity, Financing Matters, and Bankruptcy Proceedings 14
Results of Operations 15
Liquidity and Capital Resources 17
Other Comments 18
Item 4. Controls and Procedures 19
Changes in Internal Controls 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 3. Defaults Upon Senior Securities 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Page 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited) (Audited)
December 31, September 30,
2003 2003
------------- -------------
CURRENT ASSETS:
Cash .......................................................... $ 101,890 $ 178,170
Receivables, net of allowance for doubtful accounts ........... 26,615,031 21,137,404
Inventories ................................................... 47,164,832 50,228,969
Prepaid expenses .............................................. 2,005,488 1,565,543
------------- -------------
Total current assets .................................... 75,887,241 73,110,086
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land .......................................................... 3,427,260 3,427,260
Machinery and equipment ....................................... 143,820,270 143,552,406
Plant and office building ..................................... 25,739,705 25,739,705
------------- -------------
172,987,235 172,719,371
Less-Accumulated depreciation ................................. (90,891,818) (88,782,842)
------------- -------------
Net property, plant and equipment ....................... 82,095,417 83,936,529
------------- -------------
OTHER ASSETS ..................................................... 1,610,460 1,918,971
------------- -------------
Total assets ............................................ $ 159,593,118 $ 158,965,586
============= =============
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)
December 31, September 30,
2003 2003
------------- -------------
CURRENT LIABILITIES:
Post petition liabilities:
Accounts payable ..................................................... $ 7,774,741 $ 6,505,980
Accrued plant turnaround costs ....................................... 1,616,603 1,814,110
Other accrued liabilities ............................................ 6,320,194 7,672,254
Debtor-in-possession financing ....................................... 19,851,686 18,328,228
------------- -------------
Total current liabilities ............................................... 35,563,224 34,320,572
------------- -------------
PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE .......................... 138,331,532 138,312,386
------------- -------------
COMMITMENTS AND CONTINGENCIES
COMMON 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 earnings (accumulated deficit) .............................. (59,918,432) (59,363,569)
Accumulated other comprehensive income (loss) ........................ (557,336) (477,933)
------------- -------------
Total common stockholders' equity (deficit) ..................... (14,301,638) (13,667,372)
------------- -------------
Total liabilities and common stockholders' equity (deficit) ..... $ 159,593,118 $ 158,965,586
============= =============
The accompanying 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
December 31,
2003 2002
------------ ------------
NET SALES ......................................... $ 51,693,892 $ 28,830,694
COST OF SALES ..................................... 49,416,207 32,236,269
------------ ------------
GROSS MARGIN ...................................... 2,277,685 (3,405,575)
SELLING, GENERAL AND ADMINISTRATIVE ............... 1,781,910 1,713,033
REORGANIZATION EXPENSE ............................ 921,771 948,819
------------ ------------
OPERATING LOSS .................................... (425,996) (6,067,427)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................................. (243,314) (3,018,668)
Miscellaneous .................................... 114,447 100,063
------------ ------------
(128,867) (2,918,605)
------------ ------------
NET LOSS .......................................... $ (554,863) $ (8,986,032)
============ ============
Weighted average basic and diluted
common shares outstanding ..................... 12,890,607 12,890,607
Net loss per basic and diluted common share ....... $ (.04) $ (.70)
============ ============
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)
Three Months Ended
December 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (554,863) $ (8,986,032)
Depreciation ............................................. 2,157,569 1,926,278
Amortization ............................................. 233,738 115,251
Provision for losses on accounts receivable .............. 53,384 30,537
Gain on sale of investments .............................. (156,629) --
Reorganization expenses .................................. 921,771 948,819
Changes in working capital:
(Increase) decrease in receivables .................... (5,531,011) 3,952,134
Decrease (increase) in inventories .................... 3,064,137 (2,028,663)
(Increase) in prepaid expenses and other assets ....... (539,945) (1,001,995)
Increase (decrease) in accounts payable ............... 1,259,347 (3,730,992)
(Decrease) increase in interest payable
and accrued liabilities .............................. (1,549,567) 123,501
------------ ------------
Net cash used in operations excluding
reorganization expenses ............................ (642,069) (8,651,162)
NET CASH USED FOR REORGANIZATION
EXPENSES ................................................. (921,771) (948,819)
------------ ------------
Net cash used in operations .............................. (1,563,840) (9,599,981)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............... (316,457) (652,739)
Proceeds from sale of investments ........................ 280,559 --
------------ ------------
Net cash used in investing activities ................. (35,898) (652,739)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under debtor-in-possession
financing facility .................................... 1,523,458 --
Net borrowings under line of credit ...................... -- 11,175,222
------------ ------------
Net cash provided by
financing activities .......................... 1,523,458 11,175,222
------------ ------------
NET (DECREASE) INCREASE IN CASH ............................. (76,280) 922,502
CASH, beginning balance ..................................... 178,170 57,290
------------ ------------
CASH, ending balance ........................................ $ 101,890 $ 979,792
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest .............................................. $ -- $ --
The accompanying notes are an integral part of these consolidated statements.
Page 6
BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
1) NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDING
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"), a rolling mill with warehousing facilities in Harriman,
TN (the "Tennessee Facility") and three additional stocking locations accessible
to both production facilities through the Inland Waterway system 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 6% 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"), Case No.
03-30816 BJH (the "Petition Date"). As debtors-in-possession under Sections 1107
and 1108 of the Bankruptcy Code, the Company remained in possession of its
properties and assets, and management continued to operate the business. 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 United States economy, have adversely affected the Company
over the past several years. The Bankruptcy Court confirmed the Second Amended
and Restated Plan of Reorganization of the Company and its subsidiaries on
February 6, 2004 (the "Plan"). The Company anticipates that the Plan will be
effective on or shortly after February 18, 2004 (the "Effective Date").
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 December 31,
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, 2003.
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 three months ended December 31, 2003 are not necessarily
indicative of the results to be expected for the fiscal year ending September
30, 2004.
The accompanying 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 Chapter 11 case raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company
Page 7
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
achieve profitable operations after confirmation, and (ii) 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 American
Institute of Certified Public Accountant's (the "AICPA") 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 7). 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 the approved plan of
reorganization or adjustments to the carrying value of assets or liability
amounts that will be necessary as a result of actions by the Bankruptcy Court.
The Company will adopt "Fresh Start Reporting" as required by the AICPA's SOP
90-7 on the Effective Date of the reorganization. The Company will then allocate
the reorganization value to its assets and liabilities in relation to their fair
value. Accordingly, the carrying values of assets and liabilities on the
Effective Date of reorganization are expected to materially differ from the
amounts shown as of December 31, 2003.
3) THE PLAN OF REORGANIZATION
On the Effective Date of the Plan, the Company will liquidate, over a
year, unsecured trade claims at 9% to 10%, possibly higher under certain
circumstances, of their face value. The existing holders of the Notes will
receive a $30 million Secured Note and 2 million shares of new common stock of
the Company. The existing common stock will be extinguished and the holders of
the stock will not receive or retain any property under the Plan. The new $30
million note will be secured by the Louisiana plant. The principal will be due
in 2011, and interest paid semi-annually at 9% per year. The
Debtor-in-Possession (DIP) credit facility will be replaced with a new credit
facility. Since the number of new shareholders will be less than 300, the
Company may elect to be a non-reporting Company under the Securities Exchange
Act of 1934.
4) INDEPENDENT AUDITOR'S REVIEW STATUS
Currently the Company has no independent auditor approved or engaged to
review its interim financial statements primarily due to administrative
constraints imposed by the current status of bankruptcy reorganization
proceedings. Upon the Company emerging from bankruptcy, its new Board of
Directors will appoint an independent auditor. As a consequence, the appointment
will not be in time to engage such auditor to perform the required review of the
Company's December 31, 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.
Page 8
5) INVENTORIES
Inventories consist of the following: (Unaudited) (Audited)
December 31, September 30,
2003 2003
------------- -------------
Steel scrap ......................................... $ 2,570,302 $ 2,116,988
Billets ............................................. 7,647,088 6,444,396
Finished product .................................... 32,253,210 34,833,154
LIFO adjustments .................................... (4,010,986) (1,224,545)
------------- -------------
38,459,614 42,169,993
Operating supplies .................................. 8,705,218 8,058,976
------------- -------------
$ 47,164,832 $ 50,228,969
============= =============
As of December 31, 2003 and September 30, 2003, $2.2 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 ended
December 31, 2003 and 2002 respectively.
(Unaudited) (Unaudited)
Quarter Ended December 31,
2003 2002
------------- -------------
Professional and other fees ......................... $ 735,381 $ 737,714
Other ............................................... 186,390 211,105
------------- -------------
$ 921,771 $ 948,819
============= =============
7) 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 will be subject to future adjustments on February 18, 2004 when the
Company emerges from bankruptcy. Under the plan of reorganization, all
pre-petition claims subject to compromise will be paid and discharged at amounts
substantially less than their allowed amounts (see Note 3). These liabilities
have been reclassified as noncurrent because of the automatic stay provision of
the Chapter 11 proceeding.
On a consolidated basis, recorded pre-petition liabilities subject to
compromise under Chapter 11 Proceedings, consisted of the following:
(Unaudited) (Audited)
December 31, September 30,
2003 2003
------------- -------------
First Mortgage Notes ................................ $ 119,498,613 $ 119,470,053
Accounts Payable .................................... 11,018,403 11,027,817
Accrued interest on First Mortgage Notes ............ 7,814,516 7,814,516
------------- -------------
Total liabilities subject to compromise ......... $ 138,331,532 138,312,386
============= =============
As a result of the bankruptcy filing, principal and interest payments were
not made on pre-petition under- secured debt. The total interest on the
pre-petition under-secured first mortgage notes (See Footnote 8) that was not
charged to earnings for the period from January 23, 2003 to December 31, 2003,
was approximately $10.6 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 under-secured claims.
Page 9
8) LONG-TERM DEBT
The Notes are presented in the accompanying balance sheets net of the
original discount of $1,142,400 which is being amortized over the life of the
Notes. As of December 31, 2003 and September 30, 2003, the Notes, net of the
unamortized original issue discount of $501,387 and $529,947 respectively, are
reported in the accompanying consolidated balance sheets as a non-current
liability and the Company continues to carry the unamortized debt issue cost of
$1.4 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. On the effective date of the Plan, certain adjustments to the
presentation and carrying values of the Company's debt and related discounts
and/or issue costs will be required (See Note 3). The fair value of the Notes on
December 31, 2003 and September 30, 2003 was uncertain. 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.
9) DEBTORS-IN-POSSESSION FINANCING AND EXIT 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 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 $20.0 million is
available as of December 31, 2003; however, the Company is required to maintain
a minimum liquidity reserve of $7.5 million. This minimum effectively reduces
additional availability for borrowing to $12.5 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 DIP Agreement during the three-month period ended December
31, 2003 was $22.3 million. The average borrowings were $20.2 million and the
weighted average interest rate was 4.82%.
The DIP Agreement expires February 18, 2004. The current lender has
indicated that it would extend the term if the Plan is not effective on that
date. The Company has executed a commitment letter with a new lender. The
proposed loan agreement was submitted to the Bankruptcy Court on February 5,
2004. The Company anticipates closing on February 18, 2004. The new proposed
agreement is a $45 million credit facility and has a three year term. It is
secured by inventory, receivables, and certain fixed assets (excluding the
Louisiana plant) and bears interest at prime plus 0.5% or LIBOR plus 2.5%
adjusted periodically based on availability. Based on the borrowing base
criteria, as defined, approximately $24 million would be available on the
effective date before transactions contemplated by the Plan. The Company will
need to maintain a minimum availability of $5 million at all times. The other
maintenance covenant is a limitation on capital expenditures. This is the same
covenant as in the new Indenture under which the new $30 million secured notes
will be issued upon the effective date.
10) 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. Upon the Effective Date, the guarantor
subsidiaries will merge into the Company. The following are condensed
consolidating balance sheets as of December 31, 2003 and September 30, 2003 and
condensed consolidating statements of operations for the three months ending
December 31, 2003 and 2002 and condensed consolidating statements of cash flows
for the three months ended December 31, 2003 and 2002 (in thousands).
Page 10
Condensed Balance Sheets December 31, 2003 (Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Current assets ................................. $ 102,876 $ 14,156 $ (41,145) $ 75,887
Property and equipment, net .................... 70,505 11,591 -- 82,096
Other noncurrent assets ........................ (17,453) 127 18,936 1,610
--------- --------- --------- ---------
Total assets ................................ $ 155,928 $ 25,874 $ (22,209) $ 159,593
========= ========= ========= =========
Current liabilities ............................ $ 33,776 $ 42,932 $ (41,145) $ 35,563
Pre-Petition liabilities ....................... 136,454 1,878 -- 138,332
Equity deficit ................................. (14,302) (18,936) 18,936 (14,302)
--------- --------- --------- ---------
Total liabilities and equity ................ $ 155,928 $ 25,874 $ (22,209) $ 159,593
========= ========= ========= =========
September 30, 2003 (Audited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Current assets ................................. $ 100,567 $ 15,023 $ (42,480) $ 73,110
Property and equipment, net .................... 72,226 11,711 -- 83,937
Other noncurrent assets ........................ (17,318) 144 19,093 1,919
--------- --------- --------- ---------
Total assets ................................ $ 155,475 $ 26,878 $ (23,387) $ 158,966
========= ========= ========= =========
Current liabilities ............................ $ 32,708 $ 44,093 $ (42,480) $ 34,321
Pre-Petition liabilities ....................... 136,434 1,878 -- 138,312
Equity (deficit) ............................... (13,667) (19,093) 19,093 (13,667)
--------- --------- --------- ---------
Total liabilities and equity ................ $ 155,475 $ 26,878 $ (23,387) $ 158,966
========= ========= ========= =========
Condensed Statements of Operations Three Months Ended December 31, 2003 (Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ...................................... $ 46,750 $ 13,437 $ (8,493) $ 51,694
Cost of sales and administrative expense ....... (46,424) (13,267) 8,493 (51,198)
Reorganization expenses ........................ (922) -- -- (922)
--------- --------- --------- ---------
Operating loss .............................. (596) 172 -- (426)
Interest and other income (expense) ............ 41 (14) (156) (129)
--------- --------- --------- ---------
Net loss .................................... $ (555) $ 156 $ (156) $ (555)
========= ========= ========= =========
Three Months Ended December 31, 2002 (Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales ...................................... $ 27,690 $ 5,575 $ (4,434) $ 28,831
Cost of sales and administrative expense ....... (31,671) (6,712) 4,434 (33,949)
Reorganization expenses ........................ (949) -- -- (949)
--------- --------- --------- ---------
Operating loss .............................. (4,930) (1,137) -- (6,067)
Interest and other income (expense) ............ (4,056) (243) 1,380 (2,919)
--------- --------- --------- ---------
Net loss .................................... $ (8,986) $ (1,380) $ 1,380 $ (8,986)
========= ========= ========= =========
Page 11
Condensed Statements of Cash Flows Three Months Ended December 31, 2003 (Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
Cash flows from operating activities:
Net loss .................................................... $ (555) $ 156 $ (156) $ (555)
Noncash items ............................................... 3,020 190 -- 3,210
Equity in losses of subsidiaries ............................ (156) -- 156 --
Changes in working capital .................................. (2,990) (307) -- (3,297)
---------- ---------- ---------- ----------
Net cash used in operations excluding
reorganization expenses ................................... (681) 39 -- (642)
Net cash used for reorganization expenses: ..................... $ (921) $ -- $ -- $ (921)
---------- ---------- ---------- ----------
Net cash used in operations ................................. (1,602) 39 -- (1,563)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ......................... (277) (39) -- (316)
Proceeds from sale of investments ........................... 280 -- -- 280
---------- ---------- ---------- ----------
Net cash used in investing activities ..................... 3 (39) -- (36)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net borrowing on DIP Financing .............................. 1,523 -- -- 1,523
---------- ---------- ---------- ----------
Net cash provided from financing
activities ............................................... 1,523 -- -- 1,523
---------- ---------- ---------- ----------
Net change in cash .......................................... (76) -- -- (76)
Cash, beginning of period ...................................... 178 -- -- 178
---------- ---------- ---------- ----------
Cash, end of period ............................................ $ 102 $ -- $ -- $ 102
========== ========== ========== ==========
Three Months Ended December 31, 2002 (Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
Cash flows from operating activities:
Net loss .................................................... $ (8,986) $ (1,380) $ 1,380 $ (8,986)
Noncash items ............................................... 2,799 222 -- 3,021
Equity in losses of subsidiaries ............................ 1,380 -- (1,380) --
Changes in working capital .................................. (3,844) 1,158 -- (2,686)
---------- ---------- ---------- ----------
Net cash used in operations excluding
reorganization expenses: ................................. (8,651) -- -- (8,651)
Net cash used for reorganization expenses: .................. (949) -- -- (949)
---------- ---------- ---------- ----------
Net cash used in operations ............................... (9,600) -- -- (9,600)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ......................... (652) -- -- (652)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit ......................... 11,175 -- -- 11,175
---------- ---------- ---------- ----------
Net change in cash .......................................... 923 -- -- 923
Cash, beginning of period ...................................... 57 -- -- 57
---------- ---------- ---------- ----------
Cash, end of period ............................................ $ 980 $ -- $ -- $ 980
========== ========== ========== ==========
Page 12
11) 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.
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. Upon the Effective Date of the Plan,
the stay will be lifted.
As of December 31, 2003, the Company has entered into forward price
commitments totaling $1.1 million for approximately 55% of the natural gas it
expects to utilize in its production over the next three months. Although the
Company intends to fulfill its commitments under the agreements, a trading
market does exist for such commitments.
12) EARNINGS PER SHARE
The Company maintains an incentive stock award plan for certain key
employees under which there are outstanding stock options to purchase 185,000,
165,000, 75,000, and 89,000 shares of its Class A Common Stock at exercise
prices of $0.80, $3.25, $4.75, and $4.375 per share, respectively. Upon the
effective date of the Plan, these stock options will be canceled. The Plan
provides for the creation of a new stock option plan.
Because the Company generated losses in the quarters ended December 31,
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 three-months ended December 31,
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.
13) INCOME TAXES
As of December 31, 2003, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $175 million available to utilize
against regular taxable income. The NOLs will expire in varying amounts through
fiscal 2023. 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 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
Page 13
overcome. As a result of the bankruptcy and the Company's continued operating
losses, as of December 31, 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, 2003. 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, 2003 for risk factors.
Currently the Company has no independent auditor approved or engaged to
review its interim financial statements primarily due to administrative
constraints imposed by the current status of bankruptcy reorganization
proceedings. Upon the Company emerging from bankruptcy, its new Board of
Directors will appoint an independent auditor. As a consequence, the appointment
will not be in time to engage such auditor to perform the required review of the
Company's December 31, 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.
LIQUIDITY, FINANCING MATTERS, AND BANKRUPTCY PROCEEDINGS
During the past several years, the domestic steel market has experienced
significant downward economic pressure largely due to declines in market prices
and shipments that initially were influenced by high volumes of foreign steel
imported into the United States at prices which challenged the domestic
industry's ability to viably compete. More recently, the industry has been
negatively affected by the weakened United States economy in general following a
period of significantly higher costs of production due to increased electricity,
natural gas, and oxygen cost experienced in 2000 and into 2001 and again in
2003. These forces have led to negative operating economics for certain domestic
producers. As a result, many steel manufacturers have curtailed production
and/or ceased operations, and a number of steel industry producers have sought
protection under the United States Bankruptcy Code.
As a result of these conditions, the Company has experienced sharp
declines in shipment volumes and operating margins resulting in negative cash
flow from operations and the generation of significant net losses over the past
four years. Such conditions have significantly deteriorated the Company's
liquidity and constrained its ability to meet certain obligations under its debt
agreements.
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"), Case No.
03-30816 BJH (the "Petition Date"). As debtors-in-possession under Sections 1107
and 1108 of the Bankruptcy Code, the Company remained in possession of its
properties and assets, and management continued to operate the business. 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 United States economy, have adversely affected the Company
over the past several years. The Bankruptcy Court confirmed the Second Amended
and Restated Plan of Reorganization of the Company and its subsidiaries on
February 6, 2004 (the "Plan"). The Company anticipates that the Plan will be
effective on or shortly after February 18, 2004.
Page 14
On the Effective Date of the Plan, the Company will liquidate, over a
year, unsecured trade claims at 9% to 10%, possibly higher under certain
circumstances, of their face value. The existing holders of the Notes will
receive a $30 million Secured Note and 2 million shares of new common stock of
the Company. The existing common stock will be extinguished and the holders of
the stock will not receive or retain any property under the Plan. The new $30
million note will be secured by the Louisiana plant. The principal will be due
in 2011, and interest paid semi-annually at 9% per year. The
Debtor-in-Possession (DIP) credit facility will be replaced with a new credit
facility. Since the number of new shareholders will be less than 300, the
Company may elect to be a non-reporting Company under the Securities Exchange
Act of 1934.
The accompanying unaudited interim 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 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 achieve profitable operations after such
confirmation, and (ii) 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 American
Institute of Certified Public Accountant's (the "AICPA") 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 7). 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 the approved plan of
reorganization or adjustments to the carrying value of assets or liability
amounts that will be necessary as a result of actions by the Bankruptcy Court.
The Company will adopt "Fresh Start Reporting" as required by the AICPA's SOP
90-7 on the Effective Date of the reorganization. The Company will then allocate
the reorganization value to its assets and liabilities in relation to their fair
value. Accordingly, the carrying values of assets and liabilities on the
Effective Date of reorganization are expected to materially differ from the
amounts shown as of December 31, 2003.
RESULTS OF OPERATIONS
The Company reported a net operating loss of $0.4 million in the first
quarter of fiscal 2004 (or the three months ended December 31, 2003) compared to
a net operating loss of $6.1 million in the first quarter of fiscal 2003 (or the
three months ended December 31, 2002). Three major factors account for the $5.7
million favorable change. First, due to rapidly rising prices for scrap, fuels,
and alloys, which collectively represent over 50% of costs, all steel producers,
including the Company, raised prices on most products several times during the
first quarter of fiscal 2004. 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. Second, shipments increased 52% in the first
quarter of fiscal 2004 compared to the same period in the prior year. These two
factors resulted in a $22.9 million increase in net sales. Third, per unit
conversion costs decreased $9 per ton in the first quarter of fiscal 2004
compared to the same period in the prior year despite an increase of $1.3
million, or $8 per ton in fuel prices. This reduction, coupled with the increase
in shipments, resulted in an increase in cost of sales of $15.9 million. These
favorable variances were offset by a $1.3 million increase in the price of fuel
in the first quarter of fiscal 2004 compared to the same period in the prior
year.
Page 15
The following table sets forth shipment and sales data.
Three Months Ended
December 31,
2003 2002
-------- --------
Net Sales (in thousands) ............ $ 51,694 $ 28,831
Shipment Tons ....................... 151,184 99,550
Average Selling Price Per Ton ....... $ 339 $ 285
Metal Margin Per Ton ................ $ 211 $ 183
A. Sales
Net sales for the quarter increased by 79% on a 52% increase in shipments
and a 19% increase in the average selling price compared to the first quarter of
fiscal 2003. The increase in shipments is attributable to a recent improvement
of market conditions, which began in the fourth quarter of fiscal 2003, and
several sales initiatives implemented during the reorganization. Shipments in
the first quarter of fiscal 2004 were 14% higher than the average of the prior
three quarters. The first quarter shipments were the highest in twelve prior
quarters. Backlog and shipment levels continue to be solid. Generally, as a
result of higher domestic demand and lower imports, there has been a higher
utilization of capacity in the industry.
The selling price increased compared to both the prior year comparable
quarter as well as the immediate preceding quarter. In the fourth fiscal quarter
of 2003, selling prices improved $30 per ton from the lowest quarter during that
year. The selling price continued to improve in the first fiscal quarter of 2004
rising $28 per ton. Subsequent to quarter end, there have been several price
increases and an announced price increase of $44 per ton, effective March 10,
2004. These price increases have generally been related to the sharply
escalating prices for scrap and the increasing prices for alloys and fuel.
B. Cost of Goods Sold
Cost of goods sold increased $17 million or 53% for the quarter compared
to the prior year quarter. However, due to the continued increases in average
selling price and shipments, the Company had a gross profit margin of $2.3
million for the quarter compared to a gross margin loss of $3.4 million for the
same quarter in the prior year.
Scrap is used in the Company's melting operations in Louisiana and is a
significant component of the cost of billets utilized by its rolling mills.
Scrap cost during the first quarter increased $26 per ton or 26% compared to the
same period last year. The cost of scrap was $19 per ton or 17 % higher in the
first quarter of fiscal 2004 than the average of the prior four quarters. The
sharp increase in the price of scrap appears to be due to increased domestic
demand as steel producers began operating at higher levels of capacity
utilization and due to high levels of exports. Scrap prices continued to rise
rapidly in January and February of 2004. The prices for additives and alloys
have also increased significantly and are anticipated to increase again in the
spring of 2004.
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 decreased 6% in
the first quarter of fiscal 2004 compared to the same period last year despite a
$1.3 million, or $8 per ton increase in electricity, gas, and oxygen prices.
This is primarily due to an increase in production and capacity utilization that
resulted in lower fixed cost per ton. The Tennessee rolling mill experienced a
16% decrease in conversion cost largely driven by increased production, lower
fixed costs, and cost control initiatives.
The Company anticipates that finishing capacity will be constrained in
the second fiscal quarter due to the availability of billets. The future plans
for fiscal 2004 and forward are to purchase substantial quantities of billets
for the Tennessee Facility on the open market. In the past the Company has not
experienced any shortages or significant delays in delivery of these materials.
However, the Company has not been able to obtain billets in the last few months.
Page 16
The Company is hopeful that an adequate supply of raw materials will continue to
be available to supplement internally supplied billets. The Company does expect
that availability will be tighter in the future as compared to the past. If
billets are not available, it could impact the Company's ability to meet future
plans.
In efforts to stabilize natural gas cost, the Company entered into certain
forward commitments to purchase a portion of its future natural gas
requirements. As of December 31, 2003, the Company has entered into forward
price commitments for approximately 55% of the natural gas it expects to utilize
in its production over the next three months. Although the Company intends to
fulfill its commitments under the agreements, a trading market does exist for
such commitments.
C. Selling, General and Administrative and Reorganization Expenses
Selling, general and administrative expenses increased slightly in the
first quarter of fiscal 2004 compared to the first quarter of the prior fiscal
year, primarily due to an increase in the cost of certain insurance policies.
Reorganization expenses were approximately the same.
D. Net Loss
Net loss decreased $8.4 million in the first quarter of fiscal 2004
compared to the first quarter of fiscal 2003 due to three factors. First metal
margin increased $28 per ton due to the selling price of the finished product
increasing more that the price of scrap. Second, shipments increased 52% in the
first quarter of fiscal 2004. These two factors resulted in a $22.9 million
increase in net sales. Third, conversion costs decreased in both the Louisiana
operations and the Tennessee rolling mill. These reductions, coupled with the
increase in shipments resulted in an increase in cost of sales of $14.6 million.
Cost of sales also increased $1.3 million due to the increase in the price of
fuels. Lastly, other income (expense) decreased $2.8 million as the Company
discontinued accruing interest on the $120 million of First Mortgage Notes (the
"Notes") since this liability is subject to compromise in Chapter 11
proceedings.
LIQUIDITY AND CAPITAL RESOURCES
A. Liquidity and 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 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 $20.0 million is
available as of December 31, 2003; however, the Company is required to maintain
a minimum liquidity reserve of $7.5 million. This minimum effectively reduces
additional availability for borrowing to $12.5 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 DIP Agreement during the three-month period ended December
31, 2003 was $22.3 million. The average borrowings were $20.2 million and the
weighted average interest rate was 4.82%.
The DIP Agreement expires February 18, 2004. The current lender has
indicated that it would extend the term if the Plan is not effective on that
date. The Company has executed a commitment letter with a new lender. The
proposed loan agreement was submitted to the bankruptcy court on February 5,
2004. The Company anticipates closing on February 18, 2004. The new proposed
agreement is a $45 million credit facility and has a three year term. It is
secured by inventory, receivables, and certain fixed assets (excluding the
Louisiana plant) and bears interest at prime plus 0.5% or LIBOR plus 2.5%
adjusted periodically based on availability. Based on the borrowing base
criteria, as defined, approximately $24 million would be available on the
effective date before transactions contemplated by the Plan. The Company will
need to maintain a minimum availability of $5 million at all times. The other
maintenance covenant is
Page 17
a limitation on capital expenditures. This is the same covenant as in the new
Indenture under which the new $30 million secured notes will be issued upon the
effective date.
B. Operating Cash Flow
As of December 31, 2003, the Company had minimal cash on hand and $19.8
million drawn on its DIP facility. For the first three months of fiscal 2004,
cash from operations improved significantly as cash used in operations was
reduced from $9.6 million in the first quarter of fiscal 2003 to $1.6 million in
the first quarter of fiscal 2004. The $1.6 million used in operations was due
largely to the increase in receivables which reflects the higher selling prices
and improving business environment. During the first quarter of fiscal 2004,
inventories decreased by $3.0 million in order to reduce inventory levels
commensurate with aggressive capital management. During the same period of the
prior year $9.6 million was used in operations for similar reasons.
Excluding reorganization expenses and changes in working capital, the
Company continues to reach cash flow breakeven from operations which began in
the third quarter of fiscal 2003. The Company's liquidity position remains its
highest priority. The Company has projected to achieve operating cash flow
breakeven, before changes in working capital and reorganization expenses,
throughout fiscal 2004. This is predicated on many assumptions, including
maintaining current price realizations and stabilization in the scrap prices and
moderation of the recent fuel prices.
C. Capital Expenditures
Capital expenditures totaled $0.3 million in the first three months of
fiscal 2004 compared to $0.7 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 $3.2 million. As of December 31,
2003 there were no significant commitments remaining to complete authorized
projects under construction.
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 obtain suitable debtor
in-possession financing and 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 and billets, 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
Page 18
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.
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 and AAF.
o The availability to obtain additional billets.
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 of the Company to implement its plan of
reorganization.
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 19
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.
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
Bankruptcy court confirmed the Second Amended and Restated Plan of
Reorganization of the Company and its subsidiaries on February 6, 2004. The
Company anticipates the Plan will be effective on or shortly after February 18,
2004.
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. Upon the Effective Date, the stay will be lifted.
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 interest on the Notes not charged to earnings for
the period from January 23, 2003 to December 31, 2003 was approximately $10.6
million.
Item 5. OTHER INFORMATION
The Company has been delisted from the American Stock Exchange. An
alternative trading system does not appear to be available at this time or for
the foreseeable future. Upon the Effective Date of the Plan, the Company's
common stock will be canceled. New stock will be issued to the holders of the
notes.
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.
Page 20
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.
(b) Reports on Form 8-K
No reports were filed on Form 8-K by the Registrant during the first
quarter of fiscal year 2004.
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: February 17, 2004
Page 22