UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|_| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 |_| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b2 of the Exchange Act). Yes |_| No |_|
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 March 31, 2004
----- ------------------------------------
Common Stock, $.01 par value 2,000,000 Shares
BAYOU STEEL CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Balance Sheets -- March 31, 2004 (Successor Company),
unaudited and September 30, 2003 (Predecessor
Company), audited 3
Statements of Operations -- period from February 18, 2004
through March 31, 2004 (Successor Company), period from
January 1, 2004 through February 17, 2004 and three months
ended March 31, 2003 (Predecessor Company), period from
February 18, 2004 through March 31, 2004 (Successor Company),
period from October 1, 2003 through February 17, 2004 and six
months ended March 31, 2003 (Predecessor Company), all unaudited 5
Statements of Cash Flows -- period from February 18, 2004
through March 31, 2004 (Successor Company), period from
October 1, 2003 through February 17, 2004 and six months
ended March 31, 2003 (Predecessor Company), all unaudited 7
Statements of Stockholder's Equity - period from October 1, 2003
through February 17, 2004 (Predecessor Company) and for the
period February 18, 2004 through march 31, 2004 and September
30, 2002, respectively 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Liquidity, Financing Matters, and Bankruptcy Proceedings 19
Results of Operations 20
Liquidity and Capital Resources 23
Other Comments 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 3. Defaults Upon Senior Securities 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Page 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
BALANCE SHEETS
ASSETS
Successor Predecessor
Company Company
----------------------------------
(Unaudited) (Audited)
March 31, September 30,
2004 2003
----------------------------------
CURRENT ASSETS:
Cash ....................................................................... $ 97,890 $ 178,170
Receivables, net of allowance for doubtful accounts
of $711,697 and $831,680 respectively ...................................... 29,080,132 21,137,404
Inventories ................................................................ 47,531,160 50,228,969
Prepaid expenses ........................................................... 1,759,683 1,565,543
------------- -------------
Total current assets ................................................... 78,468,865 73,110,086
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET .............................................. 628,529 83,936,529
OTHER ASSETS .................................................................... -- 1,918,971
------------- -------------
Total assets ........................................................... $ 79,097,394 $ 158,965,586
============= =============
The accompanying notes are an integral part of these statements.
Page 3
BAYOU STEEL CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Successor Predecessor
Company Company
-------------------------------
(Unaudited) (Audited)
March 31, September 30,
2004 2003
-------------------------------
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 8,714,380 $ 6,505,980
Accrued plant turnaround costs ................................................... 1,809,071 1,814,110
Other accrued liabilities ........................................................ 7,303,861 7,672,254
Debtor-in-possession financing ................................................... -- 18,328,228
Credit Facility .................................................................. 19,801,989 --
Post-reorganization debt ......................................................... 5,792,906 --
------------- -------------
Total current liabilities .................................................... 43,422,207 34,320,572
------------- -------------
PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE ........................................ -- 138,312,386
------------- -------------
LONG-TERM DEBT ........................................................................ 30,586,884 --
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A: 24,271,127 shares authorized, 0 and 10,619,380 issued and
outstanding at March 31, 2004 and September 30, 2003, respectively ............... -- 106,194
Class B: 4,302,347 shares authorized, 0 and 2,271,127issued and
outstanding at March 31, 2004 and September 30, 2003, respectively ............... -- 22,711
Class C: 100 shares authorized, 0 and 100 issued and outstanding
at March 31, 2004 and September 30, 2003, respectively ........................... -- 1
New common equity: 5,000,000 authorized, 2,000,000 and 0 issued and
outstanding at March 31, 2004 and September 30, 2003, respectively ............... 20,000 --
------------- -------------
Total common stock ............................................................ 20,000 128,906
Paid-in-capital ....................................................................... 3,272,235 46,045,224
Retained earnings (accumulated deficit) ............................................... 1,796,068 (59,363,569)
Accumulated other comprehensive income (loss) ......................................... -- (477,933)
------------- -------------
Total common stockholders' equity (deficit) ................................... 5,088,303 (13,667,372)
------------- -------------
Total liabilities and common stockholders' equity (deficit) ................... $ 79,097,394 $ 158,965,586
============= =============
The accompanying notes are an integral part of these statements.
Page 4
BAYOU STEEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Successor
Company Predecessor Company
-------------------------------------------------------
Period from Period from
February 18, 2004 January 1, 2004 Three Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
-------------------------------------------------------
NET SALES ............................................... $ 30,014,886 $ 30,216,013 $ 37,394,347
COST OF SALES ........................................... 26,347,391 31,219,279 42,271,929
------------ ------------ ------------
GROSS MARGIN ............................................ 3,667,495 (1,003,266) (4,877,582)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS .................... -- -- 8,000,000
SELLING, GENERAL AND ADMINISTRATIVE ..................... 821,104 984,436 1,952,768
REORGANIZATION EXPENSE .................................. -- 766,769 1,809,962
------------ ------------ ------------
OPERATING INCOME (LOSS) ................................. 2,846,391 (2,754,471) (16,640,312)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ..................................... (435,756) (134,827) (1,001,185)
Miscellaneous ........................................ 585,433 (11,458) 54,177
Fresh-start adjustments .............................. -- (79,627,465) --
Gain on reorganization ............................... -- 98,922,094 --
------------ ------------ ------------
149,677 19,148,344 (947,008)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX ......................... 2,996,068 16,393,873 (17,587,320)
PROVISION FOR INCOME TAX ................................ 1,200,000 -- --
------------ ------------ ------------
NET INCOME (LOSS) ....................................... $ 1,796,068 $ 16,393,873 $(17,587,320)
============ ============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING .............................. 2,000,000 12,890,607 12,890,607
NET LOSS PER BASIC AND DILUTED
COMMON SHARE ............................................ $ 0.90 $ 1.27 $ (1.36)
============ ============ ============
The accompanying notes are an integral part of these statements.
Page 5
BAYOU STEEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Successor
Company Predecessor Company
--------------------------------------------------------------
Period from Period from
February 18, 2004 October 1, 2003 Six months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
--------------------------------------------------------------
NET SALES ..................................................... $ 30,014,886 $ 81,909,905 $ 66,225,041
COST OF SALES ................................................. 26,347,391 80,635,486 74,508,198
--------------- --------------- ---------------
GROSS MARGIN .................................................. 3,667,495 1,274,419 (8,283,157)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS .......................... -- -- 8,000,000
SELLING, GENERAL AND ADMINISTRATIVE ........................... 821,104 2,766,346 3,666,100
REORGANIZATION EXPENSE ........................................ -- 1,688,540 2,758,481
--------------- --------------- ---------------
OPERATING INCOME (LOSS) ....................................... 2,846,391 (3,180,467) (22,707,738)
--------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense ........................................... (435,756) (378,141) (4,019,853)
Miscellaneous .............................................. 585,433 102,989 154,240
Fresh-start adjustments .................................... -- (79,627,465) --
Gain on reorganization ..................................... -- 98,922,094 --
--------------- --------------- ---------------
149,677 19,019,477 (3,865,613)
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX ............................... 2,996,068 15,839,010 (26,573,351)
PROVISION FOR INCOME TAX ...................................... 1,200,000 -- --
--------------- --------------- ---------------
NET INCOME (LOSS) ............................................. $ 1,796,068 $ 15,839,010 $ (26,573,351)
=============== =============== ===============
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING ..................................... 2,000,000 12,890,607 12,890,607
NET LOSS PER BASIC AND DILUTED
COMMON SHARE .................................................. $ 0.90 $ 1.23 $ (2.06)
=============== =============== ===============
The accompanying notes are an integral part of these statements.
Page 6
BAYOU STEEL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Successor Company Predecessor Company
--------------------------------------------------------
Period from Period from
February 18, 2004 October 1, 2003 Six Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
--------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 1,796,068 $ 15,839,010 $(26,573,351)
Gain on reorganization ........................................... -- (98,922,094) --
Fresh-start adjustments .......................................... -- 79,627,465 --
Depreciation ..................................................... 1,941 3,395,408 3,924,149
Amortization ..................................................... -- 374,777 295,724
Provision for losses on accounts receivable ...................... 30,361 84,683 69,872
Provision for income taxes ....................................... 1,200,000 -- --
Provision for loss on long-lived assets .......................... -- -- 8,000,000
Reduction in lower of cost or market inventory reserve ........... -- (621,051) --
Gain on sale of investment ....................................... -- (156,629) --
Reorganization expense ........................................... -- 1,688,540 2,758,481
Changes in working capital:
(Increase) decrease in receivables .......................... (2,259,664) (6,194,085) 1,622,093
Decrease in inventories ..................................... 407,558 5,262,809 3,796,984
(Increase) in prepaid expenses and other assets ............. (807,287) (279,424) (2,113,932)
(Decrease) increase in accounts payable ..................... (2,537) 1,996,345 3,622,202
(Decrease) increase in interest payable and
accrued liabilities ......................................... (487,191) (1,196,243) 1,292,617
------------ ------------ ------------
Net cash provided by (used in) operations excluding
reorganization expenses .......................................... (120,751) 899,511 (3,305,161)
NET CASH USED FOR REORGANIZATION EXPENSES ........................... -- (1,688,540) (2,366,151)
------------ ------------ ------------
Net cash used in operating activities ............................ (120,751) (789,029) (5,671,312)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................... (158,052) (766,768) (1,030,906)
Proceeds from sale of investment ................................. -- 280,559 --
------------ ------------ ------------
Net cash used in investing activities ............................ (158,052) (486,209) (1,030,906)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under debtor-in-possession
financing facility ............................................... -- (18,328,228) 14,939,788
Net borrowings (repayments) under line of credit ................. 238,416 19,563,573 (8,192,660)
------------ ------------ ------------
Net cash provided by financing activities ........................ 238,416 1,235,345 6,747,128
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH ..................................... (40,387) (39,893) 44,910
CASH, beginning balance ............................................. 138,277 178,170 57,290
------------ ------------ ------------
CASH, ending balance ................................................ $ 97,890 $ 138,277 $ 102,200
============ ============ ============
The accompanying notes are an integral part of these statements.
Page 7
BAYOU STEEL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Common Stock
------------------------------------------------------------------
Successor
Company
Common
Class A Class B Class C Stock
------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2003
(PREDECESSOR COMPANY) ......................... $ 106,194 $ 22,711 $ 1 $ 0
Realized gain on investment sold ................ -- -- -- --
Net income - October 1, 2003 through
February 17, 2004 ............................. -- -- -- --
Reorganization adjustments ...................... (106,194) (22,711) (1) 20,000
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 18, 2004
(SUCCESSOR COMPANY) ........................... -- -- -- 20,000
Net income ...................................... -- -- -- --
Deferred tax valuation allowance adjustment -
Predecessor Company income tax benefit ....... -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 2004
(SUCCESSOR COMPANY) ........................... $ -- $ -- $ -- $ 20,000
============ ============ ============ ============
Retained Accumulated Common
Earnings Other Stockholders'
Paid-In (Accumulated Comprehensive Equity
Capital Deficit) Income (Loss) (Deficit)
------------ ------------ ------------- -------------
BALANCE AT SEPTEMBER 30, 2003
(PREDECESSOR COMPANY) ......................... $ 46,045,224 $(59,363,569) $ (477,933) $(13,667,372)
Realized gain on investment sold ................ -- -- (79,403) (79,403)
Net income - October 1, 2003 through
February 17, 2004 ............................. -- 15,839,010 -- 15,839,010
Reorganization adjustments ...................... (43,972,989) 43,524,559 557,336 --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 18, 2004
(SUCCESSOR COMPANY) ........................... 2,072,235 -- -- 2,092,235
Net income ...................................... -- 1,796,068 -- 1,796,068
Deferred tax valuation allowance adjustment -
Predecessor Company income tax benefit ....... 1,200,000 -- -- 1,200,000
------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 2004
(SUCCESSOR COMPANY) ........................... $ 3,272,235 $ 1,796,068 $ -- $ 5,088,303
============ ============ ============ ============
The accompanying notes are an integral part of these statements
Page 8
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(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 "Petition Date"), 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. As discussed in Note 3 -
Reorganization Under Chapter 11, the Bankruptcy Court confirmed the Second
Amended and Restated Plan of Reorganization of the Company and its subsidiaries
(the "Reorganization Plan") on February 6, 2004. On February 18, 2004 (the
"Effective Date"), the Company emerged from Chapter 11 bankruptcy. Upon
emergence from Bankruptcy, the Company and its subsidiaries, Bayou Steel
Corporation (Tennessee) and River Road Realty Corporation were consolidated into
Bayou Steel Corporation ("the Company") and became one legal entity.
2) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The financial statements are prepared in accordance with the AICPA's
Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. SOP 90-7 required the Company to,
among other things, (1) segregate transactions that were directly associated
with the bankruptcy proceedings from those events that occur during the normal
course of business and (2) segregate pre-petition liabilities subject to
compromise from those that were not subject to compromise or were post-petition
liabilities and (3) apply "Fresh-Start Reporting" rules upon emergence from
Bankruptcy. See Note 3 for description of the Reorganization Plan and Note 4 for
the application of Fresh-Start Reporting. As a result of the Company's emergence
from Chapter 11 bankruptcy and the application of fresh-start reporting,
financial statements for the Company for the periods subsequent to February 18,
2004 are referred to as the "Successor Company" and are not comparable to those
for the periods prior to February 18, 2004, which are referred to as the
"Predecessor Company." The financial statements of the Predecessor Company
represent the consolidated financial statements of the Company and its
subsidiaries, Bayou Steel Corporation (Tennessee) and River Road Realty
Corporation. A black dotted line has been inserted in the unaudited financial
statements to distinguish, for accounting purposes, the periods associated with
the Successor Company and the Predecessor Company.
The September 30, 2003 balance sheet information has been derived from the
Predecessor Company's audited financial statements. All significant intercompany
accounts, transactions and profits have been eliminated. Certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. Aside from the effects of fresh-start reporting, the Successor Company
follows the same accounting policies as the Predecessor Company. These unaudited
financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and the results of operations for the
periods presented. Operating results for interim periods are not necessarily
indicative of the results that can be expected for a full year. These interim
financial statements should be read in conjunction with the Predecessor
Company's audited consolidated financial statements and notes thereto included
in the Predecessor Company's Annual Report on Form 10-K for the year ended
September 30, 2003.
Page 9
3) REORGANIZATION UNDER CHAPTER 11
Under the terms of the Reorganization Plan, the Company will liquidate,
over the year following the Company's emergence from bankruptcy, unsecured
convenience and trade claims at 9% to 10%, possibly higher under some
circumstances, of their face value. The Company's existing common stock, par
value $.01 per share, outstanding prior to the Effective Date (the "Old Common
Stock") was extinguished and holders of such shares did not receive or retain
any new stock or property under the Reorganization Plan. The holders of the
pre-petition 9.5% $120 million First Mortgage Notes (the "Old Notes") received
$30 million in new First Mortgage Notes (the "New Notes"), and 2 million shares
of new common stock (the "New Common Stock") of the Company. Additional shares
of New Common Stock may be issued to certain tort claimants when the tort claim
is resolved. The maximum shares that could be issued is approximately 570,000
shares or 22% of the then outstanding stock. The Debtor-in-Possession ("DIP")
credit facility was replaced with a new credit facility. See Note 7 - Debt and
Note 8 - Common Stock.
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 six
months ended March 31, 2004 and 2003 respectively (unaudited).
Predecessor Company
-------------------------------
Period from
January 1, 2004 Three Months
through Ended
February 17, March 31,
2004 2003
-------------------------------
Professional and other fees ........................ $ 553,889 $ 1,326,109
Write-down of deferred financing costs related ..... -- 392,330
to the terminated line of credit
Other .............................................. 212,880 91,523
------------ ------------
$ 766,769 $ 1,809,962
============ ============
Predecessor Company
-------------------------------
Period from
October 1, 2003 Six Months
through Ended
February 17, March 31,
2004 2003
-------------------------------
Professional and other fees ........................ $ 1,289,270 $ 2,063,824
Write-down of deferred financing costs related ..... -- 392,330
to the terminated line of credit
Other .............................................. 399,270 302,327
------------ ------------
$ 1,688,540 $ 2,758,481
============ ============
Page 10
4) FRESH-START REPORTING
The Company was required to adopt "Fresh-Start Reporting" as specified by
SOP-90-7. "Fresh-Start Reporting" is required upon a substantive change in
control and requires that the reporting entity allocate the reorganization value
of the Company to its assets in a manner similar to that which is required under
SFAS No. 141, Business Combinations, for transactions reported on the basis of
the purchase method, as of the Effective Date.
The enterprise value (debt plus equity excluding post-petition payables
and accrued liabilities) of $60 million for the Company was based on the
consideration of many factors and various valuation methods, including a
discounted cash flow analysis using projected financial information, selected
publicly traded company market multiples of certain companies operating
businesses viewed to be similar to that of the Company, and other applicable
ratios and valuation techniques believed by the Company, and its financial
advisor during the Chapter 11 proceedings, to be representative of the Company's
business and industry. The equity value of $2.1 million is equal to the
enterprise value less debt, excluding post-petition payables and accrued
liabilities. The reorganization value, which represents the amount of resources
available for the satisfaction of post petition liabilities and allowed claims
as negotiated among the Company, the Company's creditors, and its holders of
equity interests, was $76.4 million (enterprise value plus post- petition
payables and accrued liabilities).
The reorganization valuation was based upon a number of estimates and
assumptions, which are inherently subject to significant uncertainties and
contingencies beyond the control of the Company. Accordingly, there can be no
assurance that the valuation will be realized, and actual results could vary
materially and the carrying values of the Company's assets and liabilities may
differ from the amounts shown in previous periods. Moreover, the value of the
Company's Common Stock, if and when it commences trading on a national exchange,
may differ materially from the valuation.
The impact of the reorganization and the application of "Fresh-Start
Reporting" with respect to the Company's balance sheet as of February 18, 2004,
is summarized below:
Page 11
BALANCE SHEET IMPACT OF REORGANIZATION
(As of February 18, 2004)
Amounts ($000) Predecessor Adjustments to Record Effects Successor
Company of the Reorganization Plan Company
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Reorganization Fresh-Start Balance
Sheet Adjustments Adjustments Sheet
----------- ----------- ----------- -----------
Assets:
Current assets ............................................... $ 74,791 $ (843) $ 1,932 $ 75,880
Property and equipment, net .................................. 81,308 -- (80,836) 472
Other assets, net ............................................ 1,635 (908) (727) --
----------- ----------- ----------- -----------
Total assets ............................................ 157,734 (1,751) (79,631) 76,352
Liabilities:
Current Liabilities:
Post-petition accounts payable ............................... 8,537 (26) -- 8,511
Post-petition accrued liabilities ............................ 8,489 (645) (3) 7,841
DIP Financing ................................................ 19,564 (19,564) -- --
Credit Facility .............................................. -- 19,564 -- 19,564
Current portion of post-reorganization
debt ......................................................... -- 7,416 -- 7,416
----------- ----------- ----------- -----------
Total current liabilities ............................... 36,590 6,745 (3) 43,332
Long-term debt ............................................... -- 30,000 -- 30,000
Pre-petition Liabilities Subject to compromise ............... 138,347 (138,347) -- --
Post-reorganization debt ..................................... -- 928 -- 928
----------- ----------- ----------- -----------
Total liabilities ....................................... 174,937 (100,674) (3) 74,260
Stockholders' Equity (Deficit):
Common stock ................................................. 129 (129) -- --
New common equity ............................................ -- 20 -- 20
Additional paid-in capital ................................... 46,045 (43,973) -- 2,072
Retained earnings (deficit) .................................. (63,377) 143,005 (79,628) --
----------- ----------- ----------- -----------
Total stockholders' equity (deficit) ......................... (17,203) 98,923 (79,628) 2,092
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit) ........................................ $ 157,734 $ (1,751) $ (79,631) $ 76,352
=========== =========== =========== ===========
Page 12
The post-reorganization debt is composed of $3.1 million to settle claims
specified in the Reorganization Plan and $5.2 million to pay various
professional fees and other charges, approved by the Bankruptcy Court, upon
emerging from bankruptcy.
5) INVENTORIES
Inventories consist of the following:
Successor Predecessor
Company Company
------------------------------------
(Unaudited) (Audited)
March 31, September 30,
2004 2003
------------------------------------
Steel scrap ..................................... $ 5,432,825 $ 2,116,988
Billets ......................................... 3,953,827 6,444,396
Finished product ................................ 31,173,614 34,833,154
LIFO adjustments ................................ -- (1,224,545)
------------ ------------
40,560,266 42,169,993
Operating supplies .............................. 6,970,894 8,058,976
------------ ------------
$ 47,531,160 $ 50,228,969
============ ============
Billets and finished product are accounted for using the last-in,
first-out ("LIFO") method of accounting for inventories. Scrap and operating
supplies are accounted for using the average cost method.
In connection with adopting "Fresh-Start Reporting", the Company recorded
an adjustment of approximately $2.3 million to increase inventory as of the
Effective Date. This is primarily due to adjusting the inventories to a new base
which is current market less reasonable margin.
6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
Successor Predecessor
Company Company
------------------------------------
(Unaudited) (Audited)
March 31, September 30,
2004 2003
------------------------------------
Land ............................................ $ 472,418 $ 3,427,260
Machinery and equipment ......................... 158,052 143,552,406
Plant and office building ....................... -- 25,739,705
------------ ------------
Total property, plant and equipment ........ 630,470 172,719,371
Less - accumulated depreciation ................. (1,941) (88,782,842)
------------ ------------
Net property, plant and equipment ............ $ 628,529 $ 83,936,529
============ ============
Page 13
The carrying value of property, plant and equipment was reduced by $80.8
million as a result of the "Fresh- Start Reporting" as specified by SOP 90-7.
7) DEBT
Successor Predecessor
Company Company
-------------------------------
(Unaudited) (Audited)
March 31, September 30,
2004 2003
-------------------------------
(in millions) (in millions)
-------------------------------
DIP Agreement ............................................................. $ -- $ 18.3
New Credit Agreement ...................................................... 19.8 --
9.5% First Mortgage Notes (Old Notes) and Accrued Interest ................ -- 127.3
9% First Mortgage Notes ................................................... 30.0 --
Pre-petition trade payables ............................................... -- 11.0
Post-reorganization debt .................................................. 6.4
------------ ------------
Total debt ........................................................ 56.2 156.6
Less - current portion of long-term debt .................................. 25.6 156.6
------------ ------------
Total long-term portion of debt ................................... $ 30.6 $ 0.0
============ ============
As of September 30, 2003,the Old Notes, accrued interest on the Old Notes,
and pre-petition trade payables were included in pre-petition liabilities
subject to compromise which totaled $138.3 million. Post reorganization debt
includes the discharge of prepetition secured and unsecured trade debt as well
as professional fees ordered by the Bankruptcy Court to be paid.
Credit Agreements
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 was a $45
million credit facility and had a twelve month term expiring on February 18,
2004. It was secured by inventory, receivables, and certain fixed assets
previously unencumbered by other debt agreements and bore interest at prime plus
1% or London Interbank Borrowing Rate (LIBOR) plus 3%. The DIP Agreement
established a lending arrangement for the Company under certain conditions while
in bankruptcy. The DIP Agreement expired on February 18, 2004.
On the Effective Date, the Company entered into a new line of credit
agreement (the "New Credit Agreement"), with a new lender replacing the previous
DIP credit agreement. The terms of the new agreement call for available
borrowings up to $45 million, including outstanding letters of credit, using a
borrowing base of accounts receivable and inventory. Based on the borrowing base
criteria, $24.9 million was available as of March 31, 2004. The three-year
agreement, which expires on February 17, 2007, is secured by accounts
receivable, inventory, and all fixed assets except for the Louisiana Facility.
The line of credit bears interest at Prime plus 0.50% or LIBOR plus 2.50%
through the period ending February 17, 2005. Thereafter, loans bear interest at
Prime plus 0% to 1.0% or LIBOR plus 2.0% to 3.0% based on excess availability.
The terms of the agreement require the Company to, among other things, maintain
a minimum excess availability of $5 million, limit additional indebtedness, and
limit capital expenditures. As of March 31, 2004, $19.8 million was drawn under
the revolving credit facility.
Page 14
The maximum amount outstanding under the DIP Agreement during the period
from October 1, 2003 through February 17, 2004 was $22.3 million. The average
borrowings were $19.9 million and the weighted average interest rate was 4.85%.
The maximum amount outstanding under the New Credit Agreement during the period
from February 18, 2004 through March 31, 2004 was $22.6 million. The average
borrowings were $20.9 million and the weighted average interest rate was 4.39%.
Under the terms of the New Credit Agreement, the lender may establish
certain "availability reserves", as defined, which, if imposed, must be
established in good faith by the lender, the result of which could reduce the
amount of availability under the line of credit below the amount that would
otherwise be established under the borrowing base determination. Generally the
lender's rights to impose such reserves must be supported by events, conditions,
contingencies or risks which, as determined by the lender in good faith, do or
may affect the underlying collateral. No such availability reserves have been
established by the lender, and management is unaware of any conditions that
currently exist that would result in the establishment of such availability
reserves.
New Notes
On the Effective Date, the Old Notes, which had a face value of $120
million and had a 9.5% coupon, were cancelled and replaced with the New Notes.
The New Notes, which have a face value of $30 million, are senior obligations of
the Company, secured by a first priority lien, subject to certain exceptions, on
existing real property, plant and equipment, and most additions or improvements
thereto at the Louisiana Facility. The indenture under which the New Notes are
issued contains covenants which restrict the Company's ability to incur
additional indebtedness (excluding borrowings under the New Credit Agreement),
make certain levels of dividend payments, exceed certain levels of capital
expenditures, or place liens on the assets acquired with such indebtedness.
The New Notes, which bear interest at the stated rate of 9% per annum, are
due March 31, 2011 with semi- annual interest payments due March 31 and
September 30 of each year. The Company may redeem the New Notes at any time
without penalty. The fair value of the New Notes on March 31, 2004 was
approximately par value.
8) COMMON STOCK
Under the terms of the Reorganization Plan, the holders of the Old Notes
received 2 million of the 5 million authorized shares of New Common Stock of the
Company, par value $.01 per share. Additional shares of New Common Stock may be
issued to certain tort claimants under the Reorganization Plan. The maximum
shares that could be issued is approximately 570,000 shares or 22% of the then
outstanding shares. This would dilute earnings per share. The Old Common Stock
was extinguished.
9) STOCK OPTION PLANS
On the Effective Date the stock option plan of the Predecessor Company was
terminated. The Reorganization Plan established the 2004 Stock Option Plan (the
"Key Employee Plan") of the newly reorganized Company. The purpose of the Key
Employee Plan is to increase stockholder value by furnishing stock options
designed to attract, retain, reward, and motivate key employees and to
strengthen the mutuality of interests between such employees and the Company's
stockholders. The maximum number of shares of New Common Stock, subject to
certain adjustments, that may be delivered to participants under the Key
Employee Plan is 105,000 shares. On April 5, 2004, the Board of Directors
granted to certain key employees 105,000 incentive stock options to purchase the
Company's New Common Stock, exercisable at the estimated market price on the
grant date of $11.00 per share. The options vest in three equal installments
over a two-year period as follows: one-third vest immediately on the date of the
grant , one-third vest on the first anniversary of the grant date and one-third
shall vest on the second anniversary of the grant date. Pursuant to the Key
Employee Plan, all options vest automatically upon a Change of Control (as
defined in the Plan). The options expire ten years from the grant date. As of
March 31, 2004, there were no options outstanding under the Key Employee Plan.
Page 15
The Board of Directors approved the 2004 Stock Option Plan for Directors
(the "Directors' Plan") for the purpose of increasing shareholder value and to
strengthen the mutuality of interests between such directors and the Company's
stockholders. The maximum number of shares of New Common Stock, subject to
certain adjustments, that may be delivered to participants is 42,000 shares. On
April 5, 2004, the Board of Directors granted to certain non- employee directors
42,000 non-qualified stock options, to purchase the New Company's Common Stock,
exercisable at the market price on the grant date of $11.00 per share. The
options vest in three equal installments over a three-year period as follows:
one-third vest on the first anniversary of the grant date, one-third vest on the
second anniversary of the grant date and one-third vest on the third anniversary
of the grant date. Pursuant to the Directors' Plan, all options vest
automatically upon a Change of Control. As of March 31, 2004, there were no
options outstanding under the Directors' Plan.
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock- Based Compensation" ("SFAS 123") and SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of SFAS No. 123" ("SFAS 148"),which, among other provisions,
established an optional fair value method of accounting for stock-based
compensation, including stock option awards. The Company has elected to adopt
the disclosure only provisions of SFAS 123 and SFAS 148, and continues to apply
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations including FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" 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 to the Predecessor Company stock options and stock
options was immaterial for all periods presented in the accompanying financial
statements.
10) EARNINGS PER SHARE
Basic and diluted earnings per common share are based upon the weighted
average number of common shares outstanding during the respective periods. Basic
EPS is calculated based on earnings available to common shareholders and the
weighted average number of common shares outstanding during the reported period.
Diluted EPS includes additional dilution from the potential exercise of stock
options. The incremental shares from the exercise of stock options were not
included in computing diluted EPS for all periods presented, since the effect of
such was antidilutive. Common stock equivalents excluded from the calculation of
diluted earnings (loss) per share were approximately 500,000 shares subject to
options outstanding for all periods presented for the Predecessor Company. For
the period of February 18, 2004 through March 31, 2004 (Successor Company),
there were no common stock equivalents for the purposes of the diluted earnings
per share computation.
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.
12) EMPLOYEE RETIREMENT BENEFITS
The components of net periodic pension costs of the Company's employee
defined benefit plans recognized within the accompanying statements of
operations follow:
Page 16
Successor
Company Predecessor Company
-----------------------------------------------------
Period from Period from
February 18, 2004 January 1, 2004 Three Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
-----------------------------------------------------
Service cost ...................................... $ 55,193 $ 61,907 $ 119,556
Interest cost ..................................... 46,067 51,671 90,755
Expected return on plan assets .................... (43,574) (53,944) (169,890)
Recognized net actuarial (gain) loss .............. -- 3,429 13,284
Amortization of prior service cost ................ -- 1,641 84,976
------------- ------------- -------------
Net periodic pension cost ................... $ 57,686 $ 64,704 $ 138,681
============= ============= =============
Successor
Company Predecessor Company
-----------------------------------------------------
Period from Period from
February 18, 2004 October 1, 2003 Six Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
-----------------------------------------------------
Service cost ...................................... $ 55,193 $ 179,006 $ 239,111
Interest cost ..................................... 46,067 149,408 181,509
Expected return on plan assets .................... (43,574) (155,982) (339,780)
Recognized net actuarial (gain) loss .............. -- 10,287 26,567
Amortization of prior service cost ................ -- 4,373 169,952
------------- ------------- -------------
Net periodic pension cost ................... $ 57,686 $ 187,092 $ 277,359
============= ============= =============
In connection with the application of fresh-start reporting discussed in
Note 4, the Company recorded adjustments totaling approximately $600,000 to
fully accrue for the difference between the fair value of assets held within its
defined benefit plans and the plans' respective projected benefit obligations.
During fiscal 2004, the Company has contributed $95,291 to its defined
benefit plans and additional contributions of $397,384 are expected to be funded
within the latter half of fiscal 2004.
13) INCOME TAXES
As of September 30, 2003, the company had approximately $175 million in
pre-reorganization net operating loss (the "NOL") carryforward. Upon
reorganization, there is a cancellation of debt income (the "COD"), as defined
by the Internal Revenue Code of 1986, as amended (the "Code" or "IRC").
Depending on whether or not there has been a change of control (within the
meaning of IRC Section 382), the COD calculation differs. As required by the
Code, the NOL carryforwards were reduced by the COD. As of the Effective Date,
NOL carryforwards would be reduced to approximately $75 million if there was not
an ownership change and $109.2 million if there was an ownership change. The
Company has fully reserved for any future benefits that might be derived from
its NOLs as of March 31, 2004.
Page 17
A change of control, would severely limit the Company's ability to utilize
the NOLs and other pre- reorganization built-in losses, e.g. tax depreciation,
to reduce taxes. A change of control is deemed to have occurred if more than 50%
of the Company's previously outstanding 9.5% First Mortgage Notes were traded
during the period extending from eighteen months prior to the petition date
(January 22, 2003) and through the Effective Date of the Company's
reorganization (February 17, 2004). The Company is currently studying this
decision and will make a timely decision on the best course of action. While
this process has not yet been completed, management believes that it is likely
that a change of control, as defined, did occur, which under this assumption
would result in annual limitations of approximately $1.7 million with respect to
the level of prior NOL's and certain other tax benefits that would be available
to offset future taxable income
Even if there is not a change of control, the Company can elect, upon
filing its fiscal 2004 income tax return with the Internal Revenue Service, to
be treated as if a change of control occurred. The Company has until June 15,
2005 to make its election (if available) and to file the fiscal 2004 income tax
return.
The accompanying statement of operations for the period from February 18,
2004 through March 31, 2004 (Successor Company) includes the recognition of
income tax expense at an effective rate of approximately 40%. In addition, a
positive adjustment of $1.2 million was recorded as an increase to stockholders'
equity during the same period reflecting adjustment to the deferred tax asset
valuation allowance previously established by the Predecessor Company prior to
the Effective Date of the Reorganization.
14. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the respective periods
presented follow (000's):
Successor
Company Predecessor Company
-----------------------------------------------------
Period from Period from
February 18, 2004 January 1, 2004 Three Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
-----------------------------------------------------
Net income (loss) ......................................................... $ 1,796 $ 16,394 $ (17,587)
Changes in Accumulated Other Comprehensive Income:
Minimum pension liability adjustments .................................. -- 557 --
------------- ------------- -------------
Comprehensive income (loss) ............................................... $ 1,796 $ 16,951 $ (17,587)
============= ============= =============
Successor
Company Predecessor Company
-----------------------------------------------------
Period from Period from
February 18, 2004 October 1, 2003 Six Months
through through Ended
March 31, February 17, March 31,
2004 2004 2003
-----------------------------------------------------
Net income (loss) ......................................................... $ 1,796 $ 15,839 $ (26,573)
Changes in Accumulated Other Comprehensive Income:
Realized gain on investment sold
-- (79) --
Minimum pension liability adjustments .................................. -- 557 --
------------- ------------- -------------
Comprehensive income (loss) ............................................... $ 1,796 $ 16,317 $ (26,573)
============= ============= =============
Page 18
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 the Company and related notes thereto
included in Part I, Item 1 of this Report and the Predecessor 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.
LIQUIDITY, FINANCING MATTERS, AND BANKRUPTCY PROCEEDINGS
As discussed in Note 3 of the notes to financial statements in Item 1.
"Financial Statements", on February 18, 2004 (the "Effective Date"), the Company
emerged from Chapter 11 bankruptcy. Upon emergence from Bankruptcy, the Company
and its subsidiaries, Bayou Steel Corporation (Tennessee) and River Road Realty
Corporation were merged into Bayou Steel Corporation ("the Company") and became
one legal entity.
Under the terms of the Reorganization Plan, the Company will liquidate,
over a year, pre-petition unsecured convenience and trade claims at 9% to 10%,
possibly higher under some circumstances, of their face value. The Company's
existing common stock, par value $.01 per share, outstanding prior to the
Effective Date (the "Old Common Stock") was extinguished and holders of such
shares did not receive or retain any New Common Stock or property under the
Reorganization Plan. The holders of the pre-petition 9.5% $120 million First
Mortgage Notes (the "Old Notes") received $30 million in new 9% First Mortgage
Notes (the "New Notes"), and 2 million shares of new common stock (the "New
Common Stock") of the Company. The Debtor-in-Possession (DIP) credit facility
was replaced with a new credit facility. See Notes 7 and 8 of notes to financial
statements in Item 1. "Financial Statements".
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The financial statements are prepared in accordance with the AICPA's
Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. SOP 90-7 required the Company to,
among other things, (1) identify transactions that were 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 were not subject to compromise or were post-petition liabilities and
(3) apply "Fresh-Start Reporting" rules upon emergence from Bankruptcy. See Note
3 of notes to financial statements in Item 1. "Financial Statements" for
description of the Reorganization Plan and Note 4 of notes to financial
statements in Item 1. "Financial Statements" for the application of Fresh-Start
Reporting. As a result of the Company's emergence from Chapter 11 bankruptcy and
the application of Fresh-Start Reporting, financial statements for the Company
for the periods subsequent to February 18, 2004 are referred to as the
"Successor Company" and are not comparable to those for the periods prior to
February 18, 2004, which are referred to as the "Predecessor Company." A black
line has been drawn in the unaudited financial statements to distinguish, for
accounting purposes, the periods associated with the Successor Company and the
Predecessor Company.
However, for purposes of this discussion, the Predecessor Company's
results for the period from January 1, 2004 through February 17, 2004 have been
combined with the Successor Company's results for the period from February 18,
2004 through March 31, 2004. These combined results are compared to the
Predecessor Company's results for the three months ended March 31, 2003. In
addition, these results have been combined with the Predecessor Company's
results for the three months ended December 31, 2003 and compared to the
Predecessor Company's results for the six months ended March 31, 2003.
Page 19
RESULTS OF OPERATIONS
The following financial information reflects the Predecessor and Successor
Companies' combined financial statements for the three and six months ended
March 31, 2004 compared to the same prior year periods (in thousands).
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
-----------------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------------
Net sales .................................................. $ 60,231 $ 37,394 $ 111,925 $ 66,225
Cost of sales .............................................. 57,566 42,272 106,982 74,508
----------- ----------- ----------- -----------
Gross margin ............................................ 2,665 (4,878) 4,943 (8,283)
Impairment loss on long-lived asset ........................ -- 8,000 -- 8,000
Selling, general and administrative
expense ................................................... 1,806 1,952 3,588 3,666
Reorganization expense ..................................... 767 1,810 1,689 2,759
----------- ----------- ----------- -----------
Operating income (loss) .................................... 92 (16,640) (334) (22,708)
Other income (expense):
Interest expense ........................................ (570) (1,001) (813) (4,020)
Fresh-start adjustments ................................. (79,627) -- (79,627) --
Gain on reorganization .................................. 98,922 -- 98,922 --
Miscellaneous ........................................... 574 54 689 154
----------- ----------- ----------- -----------
19,299 (947) 19,171 (3,866)
----------- ----------- ----------- -----------
Income (loss) before income tax ............................ 19,391 (17,587) 18,837 (26,574)
Provision for income tax ................................... 1,200 -- 1,200 --
----------- ----------- ----------- -----------
Net income (loss) .......................................... $ 18,191 $ (17,587) $ 17,637 $ (26,574)
=========== =========== =========== ===========
The Company reported operating income of $92,000 in the second quarter of
fiscal 2004 (or the three months ended March 31, 2004) compared to a net
operating loss of $16.6 million in the second quarter of fiscal 2003 (or the
three months ended March 31, 2003). Several major factors account for the $16.7
million favorable change. First, due to rapidly rising prices for scrap, fuels,
and alloys, which collectively represent over 50% of costs, steel producers,
including the Company, raised prices on most products several times during the
second 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 30% in the second quarter of fiscal 2004 compared to the same
period in fiscal 2003. The improvement in average selling price for the
Company's products reflected improving domestic demand and a more favorable
pricing environment due to fewer viable competitors. Second, shipments increased
12% in the second quarter of fiscal 2004 compared to the same period in the
prior year. These two factors resulted in a $8.9 million improvement in
operating income. Third, an impairment loss of $8 million was recorded in the
second quarter of fiscal 2003 and no such impairment loss was recognized in
fiscal 2004. Fourth, per unit conversion costs increased $6 per ton in the
second quarter of fiscal 2004 compared to the same period in the prior year
primarily due to an increase in fuel prices; this adversely affected operating
income by $0.9 million. And finally, reorganization expenses decreased $1.1
million as the company emerged from bankruptcy on February 18, 2004.
Page 20
The Company reported a loss from operations for the first six months of
fiscal 2004 of $334,000 compared to $22.7 million in the same period of fiscal
2003. A non-cash impairment charge of $8 million was recorded in fiscal 2003,
and there was no such charge in fiscal 2004. Excluding the non-cash impairment
charge, the $14.4 million improvement is primarily due to increased shipments
and improved metal margins.
The following table sets forth the combined shipment and sales data.
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
---------------------------------
Net Sales (in thousands) ........................................... $ 60,231 $ 37,394
Shipment Tons ...................................................... 146,695 130,680
Average Selling Price Per Ton ...................................... $ 406 $ 282
Six Months Six Months
Ended Ended
March 31, March 31,
2004 2003
---------------------------------
Net Sales (in thousands) ........................................... $ 111,925 $ 66,225
Shipment Tons ...................................................... 297,879 230,230
Average Selling Price Per Ton ...................................... $ 372 $ 283
A. Sales
Net sales for the quarter increased by 61% on a 12% increase in shipments
and a 43% increase in the average selling price compared to the second quarter
of fiscal 2003. The increase in shipments is attributable to a continued
improvement in domestic demand, which began in the fourth quarter of fiscal
2003, and several sales initiatives implemented during the reorganization.
Shipments in the first quarter of the prior year were adversely affected by
filing for bankruptcy in that quarter. Shipments in the second quarter of fiscal
2004 were slightly lower than the first quarter of 2004 but still 5% higher than
the average of the prior three quarters. Sales would have been higher if not for
the lack of billets to run the finishing operations at higher levels of
utilization. Backlog and shipment levels continue to be solid. However, in the
summer of 2004, Steel Dynamics will begin producing products in their Pittsboro,
Indiana mill which compete with the Company's Louisiana and Tennessee
facilities, and this competitive development may have an effect on pricing.
The selling price increased compared to both the prior year comparable
quarter as well as the immediate preceding quarter. In the second fiscal quarter
of 2004, selling prices improved $124 per ton from the lowest price per ton of
the previous four quarters. The selling price increase in the second fiscal
quarter of 2004 was $67 per ton. Subsequent to March 31, 2004, there have been
two additional price increases totaling $50 per ton. These price increases have
generally been related to the sharply escalating prices for scrap and the
increasing prices for alloys and fuel as well as stronger demand for the
Company's products. Additionally, there are fewer competitors than several years
ago, leading to a more favorable pricing climate. Scrap prices are declining
which may result in declining selling prices in the next few months.
Net sales for the six month period ended March 31, 2004 increased $46
million or 69% compared to the first six months of 2003, primarily due to a 29%
increase in shipments coupled with a 31% increase in average selling price.
These fluctuations are the result of the market factors noted above and the
reaction of customers in 2003 to the Company's bankruptcy filing.
Page 21
B. Cost of Goods Sold
Cost of goods sold increased $15.3 million or 36% for the quarter compared
to the prior year quarter due to a higher volume of shipments and higher prices
for scrap metal, alloys and energy. However, due to the continued increases in
average selling price and shipments, the Company had a gross profit margin of
$2.7 million for the quarter compared to a gross margin loss of $4.9 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 second quarter increased 65% compared to the same period
last year. The cost of scrap was 57 % higher in the second 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, particularly to the Republic of China. Scrap prices peaked in May of
2004 and are expected to decline over the next few months; this may impact
selling prices. The prices for additives and alloys have also increased
significantly and have increased again in the spring of 2004.
As part of Fresh-Start Accounting, the Company switched from using the
last-in, first-out ("LIFO") method of accounting for steel scrap inventories to
the average cost method. Scrap inventories represent 11% of the total
inventories as of March 31, 2004. The change resulted in an increase in scrap
inventory values of $1.2 million in fresh- start accounting. For the period from
February 18, 2004 through March 31,2004, this adjustment had an approximately
$900,000 favorable effect on results of operations. Going forward, this will
have a negative impact on gross margins as these inventories are sold, if scrap
prices continue to decline, as expected.
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 increased 4.5% in
the second quarter of fiscal 2004 compared to the same period last year
primarily due to a $1.1 million, or $4 per ton increase in electricity, natural
gas, and oxygen prices. Prices have continued to be high and may continue to be
high for some time. The Tennessee rolling mill experienced a 9% decrease in
conversion cost largely driven by increased production, lower fixed costs, and a
decrease in depreciation expense due to the reorganization.
The Company anticipates that finishing capacity will be constrained in the
remaining two fiscal quarters 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 been able to purchase adequate quantities of billets at economical prices.
However, the Company has not been able to obtain purchased billets at economical
prices in the last few months. The Company is hopeful that some billets will be
available in the summer to supplement internally supplied billets. The Company
expects that availability will be tighter in the future as compared to the past.
If purchased billets are not available, production of finished product could be
limited, resulting in potential lost sales opportunities provided business
conditions remain the same.
As part of Fresh-Start Reporting, the Company adjusted inventories on the
Effective Date to current market less a reasonable profit margin. Market prices
are at an all time high for the Company's products due to record high scrap
costs and a robust economy. As market prices decline with declines in scrap
prices, the market price may exceed the new, higher inventory basis on the
Effective Date. This would lead to a lower of cost or market charge to cost of
goods sold sometime in the future. The market prices over the past ten years
have, in many periods, been lower than the new basis on the Effective Date.
C. Selling, General and Administrative and Reorganization Expenses
Selling, general and administrative expenses decreased slightly in the
second quarter of fiscal 2004 compared to the second quarter of the prior fiscal
year, primarily due to a decrease in the cost of certain insurance policies.
Reorganization expenses decreased approximately $1 million during the three and
six months ended March 31, 2004, respectively, compared to the same prior year
periods, as the Company emerged from bankruptcy midway through the second
quarter of 2004 and did not incur additional reorganization expense subsequent
to the Effective Date.
Page 22
D. Interest Expense
Interest expense decreased $0.4 million and $3.2 million respectively
during the quarter and six months ended March 31, 2004 as compared to the same
prior year periods. This is due to the elimination of interest expense on the
pre-petition Old Notes after the Petition Date which was partially offset by the
interest expense on the New Notes after the Effective Date.
E. Miscellaneous Income (Expense)
Miscellaneous income increased $520,000 and $535,000 for the three and six
months ended March 31, 2004, respectively, compared to the same prior year
periods. This increase is due primarily to the settlement of a lawsuit in March
2004, related to the Company's claim against a former supplier that participated
in a price fixing arrangement against the steel industry in previous years.
F. Fresh-Start and Gain on Reorganization
Upon emerging from bankruptcy on February 18, 2004, the Company recorded
fresh-start accounting related charges totaling $79.6 million and a gain on the
reorganization, primarily related to the discharge of pre-petition liabilities,
of $98.9 million.
G. Income Taxes
The accompanying statement of operations for the period from February 18,
2004 through March 31, 2004 (Successor Company) includes the recognition of
income tax expense at an effective rate of approximately 40%. In addition, a
positive adjustment of $1.2 million was recorded as an increase to stockholders'
equity during the same period reflecting adjustment to the deferred tax asset
valuation allowance previously established by the Predecessor Company prior to
the Effective Date of the Reorganization. No net income tax expense (benefit)
was provided for any period presented with respect to the Statement of
Operations of the Predecessor Company.
H. Net income (loss)
Net income (loss) improved $35.8 million in the second quarter of fiscal
2004 compared to the second quarter of fiscal 2003 due to several factors. Other
income (expense) increased approximately $20.2 million primarily due to the gain
on reorganization offset by the fresh-start adjustments. Income tax expense in
the second quarter was $1.2 million compared to zero in the comparable prior
year quarter. Additionally, an impairment loss of $8 million was recorded in
fiscal 2003 and no such loss occurred in fiscal 2004. The remaining $7.6 million
improvement is due to market conditions, particularly a higher metal margin and
more shipments.
For the six months ended March 31, 2004, net income (loss) improved $44.2
million primarily due to the same factors noted above.
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 was a $45
million credit facility and expired on February 18, 2004. It was secured by
inventory, receivables, and certain fixed assets previously unencumbered by
other debt agreements and bore interest at Prime plus 1% or London Interbank
Borrowing Rate (LIBOR) plus 3%.
On the Effective Date, the Company entered into a new line of credit
agreement (the "New Credit Agreement"), with a new lender replacing the previous
DIP credit agreement. The terms of the new agreement call for available
borrowings up to $45 million, including outstanding letters of credit, using a
borrowing base of accounts receivable and inventory. Based on the borrowing base
criteria, $24.9 million was available as of March 31, 2004. The three-year
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agreement, which expires on February 17, 2007, is secured by accounts
receivable, inventory, and all fixed assets except for the Louisiana Facility.
The line of credit bears interest at Prime plus 0.50% or LIBOR plus 2.50%
through the period ending February 17, 2005. Thereafter, loans bear interest at
Prime plus 0% to 1.0% or LIBOR plus 2.0% to 3.0% based on excess availability.
The terms of the agreement require the Company to maintain a minimum excess
availability of $5 million. As of March 31, 2004, $19.8 million was borrowed
under the revolving credit facility.
The maximum amount outstanding under the DIP Agreement during the period
from October 1, 2003 through February 17, 2004 was $22.3 million. The average
borrowings were $19.9 million and the weighted average interest rate was 4.85%.
The maximum amount outstanding under the New Credit Agreement during the period
from February 18, 2004 through March 31, 2004 was $22.6 million. The average
borrowings were $20.9 million and the weighted average interest rate was 4.39%.
Under the terms of the New Credit Agreement, the lender may establish
certain "availability reserves", as defined, which, if imposed, must be
established in good faith by the lender, the result of which could reduce the
amount of availability under the line of credit below the amount that would
otherwise be established under the borrowing base determination. Generally the
lender's rights to impose such reserves must be supported by events, conditions,
contingencies or risks which, as determined by the lender in good faith, do or
may affect the underlying collateral. No such availability reserves have been
established by the lender, and management is unaware of any conditions that
currently exist that would result in the establishment of such availability
reserves.
The Company believes that its internally generated funds and its
availability under its line of credit will be adequate to meet its foreseeable
short-term and long-term liquidity needs, as the Company exists today. Any
future expansion may require the Company to pursue other, additional sources of
liquidity.
B. Operating Cash Flow
For the six months ended as of March 31, 2004, the Company had minimal
cash on hand and $19.8 million drawn on its credit facility. For the first six
months of fiscal 2004, net cash used in operations before reorganization
expenses improved significantly as cash used in operations was reduced from $3.3
million in the first six months of fiscal 2003 to net cash provided of $0.7
million in the first six months of fiscal 2004. The $0.7 million provided by
operations was due largely to inventories decreasing by $5.7 million as a result
of demand exceeding production which was constrained by a lack of billets.
During the same period of the prior year $3.8 million was provided by operations
due to a decrease in inventory as a result of reducing operating levels.
Excluding reorganization expenses and changes in working capital, the
Company continues to achieve 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, for the remainder of 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 $0.6 million in the first six months of
fiscal 2004 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 six months will continue to be directed towards
maintenance programs requiring approximately $1.8 million. As of March 31, 2004
there were no significant commitments remaining to complete authorized projects
under construction.
OTHER COMMENTS
Forward-Looking Information, Inflation and Other
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,
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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 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
capacities 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 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 Steel imports into the United States.
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 alloys.
o The ability to purchase additional billets at economical prices.
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.
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 Bankruptcy court confirmed the Second Amended
and Restated Plan of Reorganization of the Company and its subsidiaries on
February 6, 2004. The Company emerged from Bankruptcy on February 18, 2004, the
Effective Date.
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The Company is involved in a variety of claims, lawsuits and other
disputes arising in the ordinary course of business. Some of these are part of
the reorganization plan and will be discharged through the issuance of
additional New Common Stock. 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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 5. OTHER INFORMATION
In connection with the Bankruptcy, the Company was delisted from the
American Stock Exchange. Presently, the Company is not officially listed.
However, the Company's stock is trading on the Nasdaq pink sheets under BYUA.PK.
The Company will continue to be a publicly reporting company and will address
whether or not to officially list itself on a trading system in the future. Upon
the Effective Date of the Plan, the Company's Old Common Stock was canceled. New
Common Stock was issued to the holders of the Old Notes.
On March 10, 2004, Bayou Steel Properties Limited ("BSPL"), an unrelated
company, launched a tender offer for all outstanding shares of the Company's New
Common Stock at a price of $2.50 per share. The offer was scheduled to expire at
5:00 p.m., New York City time, on April 21, 2004. To date, no communication has
been received by the Company regarding this offer, therefore the Company
considers the offer expired.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Debtors' Second Amended Joint Plan of Reorganization dated
February 4, 2004 (incorporated by reference to the Company's
Form 8-K filed February 18, 2004).
2.2 Delaware Certificate of Merger for River Road Realty
Corporation and the Company dated February 18, 2004.
2.3 Louisiana Certificate of Merger for River Road Realty
Corporation and the Company dated February 18, 2004.
2.4 Certificate of Merger for the Bayou Steel Corporation
(Tennessee) and the Company dated February 18, 2004.
3.1 Amended and Restated Certificate of Incorporation of the
Company dated February 18, 2004.
3.2 Amended and Restated Bylaws of the Company dated February 17,
2004.
4.1 Indenture between the Company and J.P. Morgan Trust Company,
N.A., as Trustee dated February 18, 2004.
4.2 Loan and Security Agreement between the Company and Fleet
Capital Corporation as lender and agent and the other lenders
thereto, dated as of February 18, 2004.
4.3 9% First Mortgage Notes due 2011 of the Company.
4.4 Registration Rights Agreement by and among the Company and the
Holders party thereto, dated February 18, 2004.
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(b) Reports on Form 8-K
(a) The Company filed a Form 8-K, dated February 18, 2004,
reporting under Item 1 that the Company completed all required
transactions and satisfied all remaining conditions for its
Second Amended and Restated plan of Reorganization and Item 3
that the Company completed all required transactions and
satisfied all remaining conditions for its Plan to emerge from
Chapter 11 bankruptcy.
(b) The Company filed a Form 8-K, dated March 10, 2004, reporting
under Item 5 that the Company received an unsolicited tender
offer from Bayou Steel Properties Limited.
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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: May 24, 2004
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