-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VSCamrkEIB5wvgh2gbqr+1hoI0FFNZ2JeWyGLw5JLc16L3mUMiDQ9C7uClbssAHv MB6E1ZMTLqh3z8DvoRTMOA== 0000950149-97-002284.txt : 19971230 0000950149-97-002284.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950149-97-002284 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENEVA STEEL CO CENTRAL INDEX KEY: 0000860192 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 930942346 STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10459 FILM NUMBER: 97745839 BUSINESS ADDRESS: STREET 1: 10 SOUTH GENEVA ROAD CITY: VINEYARD STATE: UT ZIP: 84058 BUSINESS PHONE: 8012279000 10-K 1 FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30,1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 1997, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to ______________. COMMISSION FILE NO. 1-10459 GENEVA STEEL COMPANY (Exact name of Registrant as specified in charter) UTAH 93-0942346 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 10 SOUTH GENEVA ROAD VINEYARD, UTAH 84058 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (801) 227-9000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE NO PAR VALUE PACIFIC STOCK EXCHANGE WARRANTS TO PURCHASE CLASS A COMMON STOCK PACIFIC STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Class A Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Class A Common Stock on the New York Stock Exchange on November 28, 1997, was approximately $34,894,898. Shares of Class A Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. As of November 28, 1997, the Registrant had 14,050,515 and 19,151,348 shares of Class A and Class B Common Stock, respectively, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference in Parts II, III and IV of this Report: (1) Registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1997 (Parts II and IV), and (2) Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998 (Part III). ================================================================================ 2 PART I ITEM 1. BUSINESS. BACKGROUND Geneva Steel Company (the "Company" or "Geneva") owns and operates the only integrated steel mill operating west of the Mississippi River. The Company's mill manufactures steel slabs and hot-rolled sheet, plate and pipe products for sale primarily in the western and central United States. The steel mill is located 45 miles south of Salt Lake City, Utah on approximately 1,400 acres. The steel mill's facilities include four coke oven batteries, three blast furnaces, a plasma-fired cupola ironmaking facility, two Basic Oxygen Process ("Q-BOP") furnaces, a continuous casting facility, a combination continuous rolling mill and various finishing facilities. The Company's coke ovens produce coke from a blend of various grades of metallurgical coal. Coke is used as the principal fuel for the Company's blast furnaces, which convert iron ore into liquid iron. The liquid iron is then blended with scrap metal and metallic alloys and further refined in the Q-BOP furnaces to produce liquid steel. The liquid steel is then processed through the continuous casting facility. Steel slabs are either direct rolled or allowed to cool and then reheated prior to rolling. Slabs are rolled into hot-rolled steel products (sheet, plate and pipe) in the Company's rolling and finishing mills. The Company also sells a portion of its slabs to other steel processors. The Company acquired the steel mill and related facilities from USX Corporation ("USX") on August 31, 1987 at a price of approximately $44.1 million plus the assumption of certain liabilities. USX had operated the mill from 1944 until 1986, when it placed the mill on hot-idle status. Pursuant to the acquisition agreement between USX and the Company, USX retained liability for retiree life insurance, health care and pension benefits relating to employee service prior to the acquisition. USX also indemnified the Company for costs due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of environmental laws or otherwise results in the imposition of environmental liability, subject to the Company's sharing the first $20 million of certain clean-up costs on an equal basis. See "Environmental Matters." Since the Company began operations, its strategy has been to be a low-cost producer of steel products and to optimize its product quality and mix. CAPITAL PROJECTS Overview The Company has spent approximately $68 million, $26 million and $48 million on capital projects during the fiscal years ended September 30, 1995, 1996 and 1997, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization efforts. Management believes that the modernization projects completed to date have resulted in production efficiencies, increased throughput capacity and improved product quality and yield. The Company's capital projects are under continuous review, and depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. There can be no assurance that the projected benefits of the capital projects will be fully achieved, sufficient product demand will exist for the Company's additional throughput capacity, or that the planned capital projects can be completed in a timely manner or for the amounts budgeted. Notwithstanding the completion of many capital projects, management believes that additional capital projects will be critical to the Company's long-term ability to compete. Capital Projects As a part of its capital plan, the Company has (i) completed a new continuous casting facility and related improvements, (ii) installed two Q-BOP furnaces, (iii) completed a direct rolling and large coil project, including installation of a coilbox and a 42-megawatt induction slab heating furnace, (iv) completed a wide coiled plate project, (v) installed a plasma-fired cupola ironmaking facility, (vi) installed various environmental projects, and (vii) completed various other projects. The following discussion highlights the major projects which remain to be completed. 1 3 Rolling Mill Finishing Stand Improvements. The Company has a six-stand 132-inch combination continuous rolling mill, the widest of its type in the world, which gives the Company the flexibility to alter its mix of sheet and plate products in response to customer demands and changing market conditions. The final phase of the rolling mill modernization includes hydraulic gauge control, roll bending and automatic roll change. These improvements are designed to enhance the shape and gauge of the Company's products and to increase throughput capacity. Substantially all of the equipment for the rolling mill finishing stand improvements was completed during fiscal year 1996. The Company elected to defer installation of that equipment until fiscal year 1997 and 1998. The Company anticipates that it may incur significant start-up and transition costs as the finishing stand equipment is installed and implemented. Development Venture. The Company has formed a limited liability company with certain unrelated parties, which in turn has entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a cokeless ironmaking facility and associated power generation and air separation facilities. As of September 30, 1997, the Company had spent approximately $0.9 million (net of DOE reimbursement) in connection with the project. Expenditures on the project are subject to government cost sharing arrangements. Completion of the project remains subject to several contingencies. Under certain circumstances, the Company will be required to repay some or all of the government cost share funds and expense other funds included in construction in progress in the event the project is terminated. PRODUCTS The Company's principal products are steel slabs and hot-rolled sheet, plate and pipe products. The Company also sells non-steel materials that are by-products of its steelmaking operations. The Company has a 132-inch combination continuous rolling mill, the widest of its type in the world, which gives the Company the flexibility to alter its mix of sheet and plate products in response to customer demands and changing market conditions and the opportunity to maximize utilization of the facilities. Generally, the Company manufactures products in response to specific customer orders. During fiscal year 1997, the Company increased its percentage of pipe products sold and reduced its percentage of slab products sold. Consistent with the Company's strategic objectives, plate shipments have increased as various upgrades to plate processing and finishing equipment have been integrated into the production process. The Company sells slabs to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. The Company expects that slab shipments will continue to gradually decrease as rolling mill throughput improves. Product mix shifts are also determined by Geneva's product mix optimization efforts. The Company's product sales mix as a percent of net sales for fiscal years 1993 through 1997 is shown below:
1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ----------- Sheet............................................ 56% 65% 41% 30% 30% Plate............................................ 31 24 35 45 45 Pipe............................................. 10 7 6 6 10 Slab............................................. -- 1 15 16 12 Non-steel........................................ 3 3 3 3 3 ---------- ---------- ---------- ---------- ----------- Total................................ 100% 100% 100% 100% 100% ========== ========== ========== ========== ===========
Sheet. The mill produces hot-rolled sheet steel which is sold in sheet or coil form in thicknesses of .096 to .230 of an inch and widths of 40 to 74 inches. Maximum widths vary according to thickness. Included in the sheet products made by the Company are cut-to-length sheet, hot-rolled bands and tempered coil. Sheet is used in a variety of applications such as storage tanks, light structural components and supports and welded tubing. Plate. The Company's plate products consist of hot rolled carbon and high-strength low alloy steel plate in coil form, cut-to-length from coil and flat rolled in widths varying from 48 to 126 inches and in thicknesses varying from .1875 of an inch to 3 inches. Plate can be used for heavy steel structures such as storage tanks, railroad cars, ships and bridges. 2 4 Pipe. The Company produces electric resistance welded pipe ("ERW pipe") ranging from approximately 7 to 16 inches in diameter. ERW pipe is manufactured by heating and fusing the edges of the steel coil to form the pipe. The Company's ERW pipe is used primarily in pipelines, including water, natural gas and oil transmission and distribution systems, and in standard and structural pipe applications. Slab and Non-Steel. The Company sells steel slabs when market conditions are favorable and as a means of maximizing production through the continuous caster. The Company also sells various by-products resulting from its steelmaking activities. MARKETING; PRINCIPAL CUSTOMERS The Company sells its sheet and plate products primarily to steel service centers and distributors, which in recent years have become one of the largest customer groups in the domestic steel industry. Service centers and distributors accounted for approximately 63% of the Company's finished product sales (excluding slabs) in fiscal year 1997. The Company also sells its products to steel processors and various end-users, including manufacturers of welded tubing, highway guardrail, storage tanks, railcars, ships and agricultural and industrial equipment. The Company believes that sales of its products, either directly or through service centers or distributors, to automotive or appliance manufacturers have been immaterial. The Company has developed a broad customer base. In fiscal year 1997, the Company sold its products domestically to approximately 250 customers in 39 states and abroad through exporters to 7 customers in Canada and Mexico. The Company sells its ERW pipe to end-users and through distributors primarily in the western and central United States, where demand for pipe fluctuates in partial response to oil and gas industry cycles. The Company also occasionally sells products in the export market. Export sales, which generally have lower margins than domestic sales, accounted for approximately 1.3%, 0.7% and 1.4% of the Company's net sales during fiscal years 1995, 1996 and 1997, respectively. The Company's principal direct marketing efforts are in the western and central United States. Five sales representatives are employed in the western market, two of whom are located in the greater Los Angeles area, the largest single market for steel in the western United States. The Company believes that it holds a significant market share of the hot-rolled sheet, plate and pipe sales in the eleven western states. In the Central United States, the Company currently has a small share of the market. Management believes, however, that there are attractive opportunities for revenue growth in this market. Substantially all of Geneva's sales in the central United States are made through a sales arrangement with Mannesmann Pipe and Steel Corporation ("Mannesmann"), the United States steel marketing subsidiary of Mannesmann A.G., a major German industrial company. The sales arrangement entitles Mannesmann to sell the Company's products in 15 central states and to certain of the Company's customers in the Eastern United States, and to receive a variable commission on its sales. Mannesmann has an exclusive right to sell the Company's products in these areas, subject to certain exceptions. The payment terms previously provided that Mannesmann make a production prepayment of up to $15 million. The prepayment arrangement was terminated during fiscal year 1997. Mannesmann accounted for approximately 31% and 33% of the Company's net sales in fiscal years 1996 and 1997, respectively. Any termination or disruption of the Company's arrangements with Mannesmann could have a material adverse effect on the Company's results of operations and financial condition. The Company's strategy is to maintain its core market in the western United States, where its market position is the strongest, and to increase growth in the Midwest and Eastern regions, while focusing on profit maximization. The Company believes that service centers and distributors account for a substantially larger proportion of its sales than of sales for the industry as a whole. Demand from this customer group historically has fluctuated widely due to substantial changes in the group's inventory levels. In view of these factors, the Company intends to develop a somewhat more diverse customer base, including selected steel processors and various end-users, while retaining strong relationships with service center and distributor customers. The Company expects its modernization efforts to play a critical role in the implementation of these strategies by enabling the Company to produce higher quality products and to gain access to a wider range of customers. The Company generally produces steel in response to specific orders. As of November 30, 1997, the Company had estimated total orders on hand for approximately 309,000 tons compared to approximately 210,000 tons as of 3 5 November 30, 1996. The Company does not believe that its orders on hand are necessarily indicative of future operating results. EMPLOYEES; LABOR AGREEMENT The Company has a workforce of approximately 2,600 full-time employees, of whom approximately 475 are salaried and approximately 2,125 are hourly. The Company's 149 operating management personnel generally have had considerable experience in the steel industry. Almost half have more than 20 years of industry experience, with most of the remaining managers ranging in experience from 10 to 20 years. The Company's senior operating managers have an average of approximately 15 years of industry experience. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under a collective bargaining agreement that expires in March 1998. The Company believes that its labor agreement is an important competitive advantage. Although the Company's wage rates under the agreement are high by local standards and comparable to regional competitors, its total hourly labor costs are substantially below recent industry averages compiled by the American Iron and Steel Institute. Unlike labor agreements negotiated by many other domestic integrated steel producers, the Company's labor agreement does not contain traditional work rules, limits the Company's financial pension obligations to a defined contribution plan and entitles the Company to reduce its profit sharing obligations by an amount equal to a portion of its capital expenditures. The Company did not assume any pension obligations or retiree medical obligations related to workers' service while the plant was owned by USX. The Company's labor agreement also contains a performance dividend plan designed to reward employees for increased shipments of steel products. Compensation under the plan includes a monthly guarantee of $.33 per hour for all union represented workers. The guaranteed payment is based on an annualized shipment rate of 1.5 million tons. As shipments increase above this level, compensation under the plan also increases. The Company has also implemented a performance dividend plan for all non-union employees that provides additional compensation as shipment levels increase. Unlike the union plan, however, there are no guaranteed payments. The Company's profit sharing obligations under the labor agreement are based on earnings before taxes, extraordinary items and profit sharing. Unlike the profit sharing arrangements of many major domestic integrated steel producers, the Company's profit sharing obligations are reduced by an amount equal to a portion of its capital expenditures. The Company is required to contribute each year to the profit sharing pool 10% of earnings before taxes, extraordinary items and profit sharing after deducting 25% of the first $50 million of capital expenditures and 30% of all additional capital expenditures in such year (including, in each case, capital maintenance). All payments made to workers under the union performance dividend plan are deducted from any profit sharing obligations otherwise required. Effective March 1, 1995, the Company established a voluntary employee beneficiary association trust ("VEBA Trust") to fund post retirement medical benefits for future retirees covered by the collective bargaining agreement. Company contributions to the VEBA Trust are ten cents for each hour of work performed by employees covered by the collective bargaining agreement. In addition, union employees provide a contribution to the VEBA Trust based on a reduction from the performance dividend plan payment. No benefits will be paid from the VEBA Trust prior to March 31, 1998. Eligibility requirements and related matters will be determined at a later date. RAW MATERIALS AND RELATED SERVICES The Company is located near major deposits of several of the principal raw materials used to make steel, including iron ore, high volatile coal, limestone and natural gas. The Company believes that, in certain instances, this proximity, together with the Company's importance as a customer to suppliers of these materials, enhances its ability to obtain competitive terms for these raw materials. As the Company evaluates emerging technologies for the production of iron and steel, it focuses on those technologies that allow increased utilization of resources available in the western United States. Iron Ore. The Company's steelmaking process can use both iron ore and iron ore pellets. In recent years, the Company has used iron ore pellets in an effort to maximize the operating efficiencies of its blast furnaces in response to increased production needs. Iron ore pellets are generally purchased from USX, as discussed below, as well as on the 4 6 spot market. The Company has iron ore deposits at mines in Utah. When used, the ore is mined by an independent contractor under claims owned by the Company and transported by railroad to the steel mill. The Company expects future costs of recovery of this ore to increase gradually as the open reserves are depleted. The Company has historically purchased iron ore pellets from USX. Pursuant to a five year agreement entered into as of September 1, 1994, the Company has commitments to purchase a minimum of 2,700,000 net tons in each of the fourth and fifth years of the agreement. The agreement also limits the maximum quantity of pellets USX is obligated to supply. The remainder of the Company's pellet requirements is generally purchased on the spot market. The Company may in the future elect to purchase additional amounts of pellets on a longer-term basis. Coal and Coke. The coke batteries operated by the Company require a blend of various grades of metallurgical coal. The Company currently obtains high volatile coal from a mine in western Colorado owned by Oxbow Carbon and Minerals, Inc. under a contract that expires in March 2004. The Company also purchases various grades of coal under short-term contracts from sources in the Eastern United States. Although the Company believes that such coal is available from several alternative eastern suppliers, the Company is subject to price volatility resulting from fluctuations in the spot market. There can be no assurance that the Company's blend of coal will not change or that its overall cost of coal will not increase. The Company is currently purchasing imported coke as a result of its increasing steel production and decreasing capacity to produce its own coke as the Company's coke ovens deteriorate. The ability of other domestic integrated steel mills to produce coke is also decreasing, thereby increasing the demand for purchased coke in the United States. The Company purchases coke from sources in Japan and China. As the Company's consumption of purchased coke increases, the Company's average cost of coke used in the manufacturing process will be higher. Energy. The Company's steel operations consume large amounts of oxygen, electricity and natural gas. The Company purchases oxygen, nitrogen and argon from three facilities located on the Company's premises. Two of the facilities were constructed by Air Liquide America Corporation ("Air Liquide") and the third by Praxair, Inc. ("Praxair"). These facilities are capable of providing approximately 275, 800 and 550 tons of oxygen per day under contracts which expire in 2002, 2012 and 2006, respectively. The Company generates a portion of its electrical requirements using a 50 megawatt rated generator located at the steel mill and currently purchases most of its remaining electrical requirements from Utah Power Company under a 110 megawatt interruptible power contract expiring in 2002. The contract provides for price increases tied to the cost of energy used by the utility to produce electricity. The Company has also entered into a firm power contract expiring in 2002 with Utah Power under which the Company purchases additional electrical needs. The firm contract provides for energy charges and price increases similar to the interruptible contract but also includes a significantly higher capacity charge. The Company also has other short-term contracts for additional power needs. Natural gas is purchased at the wellhead in the Rocky Mountain region and is transported to the steel mill by pipeline utilizing firm and interruptible transportation contracts. The Rocky Mountain region has substantial natural gas reserves. Other. The Company's mill can be served by both the Burlington Northern Santa Fe Railroad ("BNSF") and the Union Pacific Railroad Company ("UP"). The Company believes that it is one of the largest western customers of the UP railroad. The Company's location in the western United States facilitates backhauling, which reduces freight costs. In connection with the merger of the UP and Southern Pacific Transportation Company, the Company negotiated a long-term transportation contract with the UP intended to maintain a competitive rate structure. The Company has experienced and continues to experience a shortage of railcars which has adversely impacted operating results. See Management's Discussion and Analysis of Financial Condition and Results of Operations. The terms of the contract, together with certain merger conditions, permit the Company to seek bids from the BNSF for a portion of its transportation needs. The Company also owns mining claims in a limestone quarry located approximately 30 miles from the Company's plant. The limestone is mined by the Company and transported by railroad to the mill. The Company uses scrap metal obtained from its own operations and external sources in its steelmaking process. As the Company increases its production volume or improves yields, management anticipates that increased amounts of scrap will be purchased. 5 7 The cost of the Company's raw materials, including energy, has been susceptible in the past to fluctuations in price and availability and is expected to increase over time. Worldwide competition in the steel industry has frequently limited the ability of steel producers to raise finished product prices to recover higher raw material costs. The Company's future profitability will be adversely affected to the extent it is unable to pass on higher raw material costs to its customers. COMPETITION AND OTHER MARKET FACTORS The Company competes with domestic and foreign steel producers on the basis of price, quality and service. Many of the Company's competitors are larger companies, have greater capital resources and, in some cases, more modern technology than the Company. Intense worldwide sales competition exists for all the Company's products. Both the industry and the Company face increasing competition from producers of certain materials such as aluminum, composites, plastics and concrete. The Company believes that certain of its raw material arrangements, particularly with respect to energy, and its current labor contract are favorable in relation to those of the domestic steel industry as a whole. The Company currently purchases iron ore pellets and a significant portion of its coal requirements from locations in the Midwest and Eastern United States, for which it has a transportation cost disadvantage. The Company believes that its geographic location enhances its ability to compete in the western United States, although it has a transportation disadvantage in Midwestern and Eastern markets. Product quality has improved significantly as a result of the Company's modernization efforts. The Company is presently at a competitive disadvantage with respect to certain product quality factors particularly with respect to sheet products. The Company believes, however, that its ongoing modernization efforts have enhanced the competitiveness of its products, particularly with respect to plate products. Standards of quality in the steel industry are, nevertheless, rising as buyers continually expect higher quality products. Foreign and domestic producers continue to invest heavily to achieve increased production efficiencies and product quality. The steel industry is cyclical in nature and highly competitive. Moreover, overall throughput capacity and competition are increasing due primarily to construction of mini-mills and improvements in production efficiencies at existing mills. The Company, like other steel producers, is highly sensitive to price and production volume changes. Consequently, downward movements have had and will continue to have an adverse effect on the Company's results of operations. Integrated steel producers are facing increasing competitive pressures from mini-mills. Mini-mills use ferrous scrap metal as their basic raw material and serve regional markets. These operations traditionally produced lower margin, commodity type steel goods such as bars, rods and structural products. A number of mini-mills, however, produce plate, coil and pipe products that compete directly with the Company's products. Three mini-mills have been completed that produce wide plate in coil form, thereby competing with products produced by the Company. Thin slab/direct rolling techniques have also allowed mini-mills to produce some of the types of sheet products that have traditionally been supplied by integrated producers. Several competitors have constructed or are constructing mini-mill facilities that are expected to significantly increase domestic steel production and thereby further increase competition. Foreign competition is a significant factor in the steel industry and has adversely affected product prices in the United States and tonnage sold by domestic producers. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against several other currencies as well as the strength of the United States economy relative to foreign economies. In addition, many foreign steel producers are controlled or subsidized by foreign governments whose decisions concerning production and exports may be influenced in part by political and social policy considerations as well as by prevailing market conditions and profit opportunities. Domestic pricing for all of the Company's products has been adversely affected by unfairly traded imports. In November 1996, the Company, together with another domestic plate producer, filed anti-dumping petitions with the Department of Commerce and the International Trade Commission ("ITC") against imports of cut-to-length carbon plate from the Russian Federation, Ukraine, the Peoples' Republic of China and the Republic of South Africa (the "Plate Trade Cases"). The petitions alleged large dumping margins and also set forth the injury to the U.S. industry caused by dumped imports from the subject countries. The United States Department of Commerce issued a final affirmative determination of dumping for each country in 6 8 October 1997, finding substantial dumping margins on cut-to-length steel plate imports from those countries. In December 1997, the International Trade Commission ("ITC") voted unanimously that the United States industry producing cut-to-length carbon steel plate was injured due to imports of dumped cut-to-length plate from the People's Republic of China, the Russian Federation, Ukraine and South Africa. The United States has negotiated suspension agreements that have become effective due to the affirmative injury determination by the ITC. Those agreements will limit imports of cut-to-length carbon steel plate from the four countries to a total of approximately 440,000 tons per year for the next five years, a reduction of about two-thirds from 1996 import levels, and provide for an average 10-15% increase in import prices to remove the injurious impact of the imports. Any violation or abrogation of the suspension agreements will result in immediate imposition of the dumping duties found by the Commerce Department. Dumped imports from countries not covered by the Plate Trade Cases continue to suppress plate prices. The Company continues to monitor cut-to-length plate imports from other countries as well as imports of other of its products and may file additional trade cases in the future. The Company has also filed a civil lawsuit in Federal District Court against two defendants which the Company believes have facilitated the importation of dumped plate products. Existing trade laws and regulations may be inadequate to prevent unfair trade practices whereby imports could pose increasing problems for the domestic steel industry and the Company. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in the Company's business. The Company is subject to federal, state and local environmental laws and regulations concerning, among other things, air emissions, wastewater discharge, and solid and hazardous waste disposal. The Company has incurred substantial capital expenditures for environmental control facilities, including the Q-BOP furnaces, the wastewater treatment facility, the benzene mitigation equipment, the coke oven gas desulfurization facility and other projects. The Company has budgeted a total of approximately $2.3 million for environmental capital improvements in fiscal years 1998 and 1999. Environmental legislation and regulations have changed rapidly in recent years and it is likely that the Company will be subject to increasingly stringent environmental standards in the future. Although the Company has budgeted capital expenditures for environmental matters, it is not possible at this time to predict the amount of capital expenditures that may ultimately be required to comply with all environmental laws and regulations. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the U.S. Environmental Protection Agency and the states have authority to impose liability on waste generators, site owners and operators and others regardless of fault or the legality of the original disposal activity. Other environmental laws and regulations may also impose liability on the Company for conditions existing prior to the Company's acquisition of the steel mill. At the time of the Company's acquisition of the steel mill, the Company and USX identified certain hazardous and solid waste sites and other environmental conditions which existed prior to the acquisition. USX has agreed to indemnify the Company (subject to the sharing arrangements described below) for any fines, penalties, costs (including costs of clean-up, required studies, and reasonable attorneys' fees), or other liabilities for which the Company becomes liable due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of any environmental law, is otherwise required by applicable judicial or administrative action, or is determined to trigger civil liability (the "Pre-existing Environmental Liabilities"). The Company has provided a similar indemnity (but without any similar sharing arrangement) to USX for conditions that may arise after the acquisition. Although the Company has not completed a comprehensive analysis of the extent of the Pre-existing Environmental Liabilities, such liabilities could be material. Under the acquisition agreement between the two parties, the Company and USX agreed to share on an equal basis the first $20 million of costs incurred by either party to satisfy any government demand for studies, closure, monitoring, or remediation at specified waste sites or facilities or for other claims under CERCLA or the Resource Conservation and Recovery Act. The Company is not obligated to contribute more than $10 million for the clean-up of wastes generated prior to the acquisition. The Company believes that it has paid the full $10 million necessary to satisfy its obligations under the cost-sharing arrangement. USX has advised the Company, however, of its position that a portion of the amount paid by the Company may not be properly credited against Geneva's obligations. Although the Company believes that USX's position is without merit, there can be no assurance that this matter will be resolved without litigation. 7 9 The Company believes that resolution of this matter will not likely have a material adverse effect. The Company's ability to obtain indemnification from USX in the future will depend on factors which may be beyond the Company's control and may also be subject to dispute. ITEM 2. PROPERTIES. The Company's principal properties consist of the approximately 1,400-acre site on which the steel mill and related facilities are located, the Company's iron ore mines in southern Utah and the limestone quarry near the steel mill. The Company also leases from the State of Utah, under a lease expiring in 2016, a 300-acre site which includes a retention pond. The retention pond is a significant part of the Company's water pollution control facilities. Although the Company's facilities are generally suitable to its needs, the Company believes that such facilities will continue to require future improvements and additional modernization projects in order to remain competitive. See Item 1. "Business--Capital Projects" and "--Competition and Other Market Factors." ITEM 3. LEGAL PROCEEDINGS. On February 25, 1997, the Company filed a complaint in the Fourth Judicial District Court for Utah County, State of Utah, against Commerce & Industry Insurance Co. ("C&I"), a New York corporation. A First Amended Complaint was filed and served on April 9, 1997, alleging that C&I had breached its insurance contract with Geneva by failing to pay on Geneva's claim for the loss it incurred on January 25 and 26, 1996 when it lost its internal generator. C&I removed the case to the United States District Court for the District of Utah on May 1, 1997. Upon C&I's formal request for additional investigation, Geneva stipulated with C&I on June 6, 1997, to stay the litigation until October 31, 1997, to provide C&I additional time to review documents and interrogate witnesses. That investigation continued until September, 1997. During early October, Geneva had several meetings with C&I in an attempt to resolve the case and assess the strength of the case. On October 15, 1997, C&I provided a formal response to the claim in which it declined coverage as an excluded peril under the policy, relying on, among other defenses, an exclusion for "power, heating or cooling failure." Pursuant to the June 1997 stipulation, C&I answered the First Amended Complaint on October 31, 1997, denying most of the substantive factual allegations in the First Amended Complaint and asserting as an affirmative defense, among others, that Geneva's loss was excluded from coverage. On November 24, 1997, Geneva filed a Second Amended Complaint against C&I, adding claims seeking relief for breach of contractual implied covenant of good faith and fair dealing, and bad faith--intentional and outrageous tortious conduct and oppression. C&I's answer or other response to the Second Amended Complaint must be filed December 26, 1997. Geneva requested the Court to require that discovery be completed within approximately six months and the trial be held as soon thereafter as the Court's schedule would allow. C&I requested the Court to allow discovery until June 1, 1999 and require that the case be ready for trial after October 1, 1999. At a Scheduling Conference held on November 21, 1997, the Court set trial beginning July 2, 1999. The Court has set May 1, 1998 as a deadline for dispositive motions on initial coverage issues and required that all discovery be completed by January 15, 1999. The parties are presently involved in resolving discovery issues and proceeding with discovery. The Company intends vigorously to pursue its claims. In addition to the matters described under Item 1. "Business--Environmental Matters" and the insurance claim described above, the Company is a party to routine legal proceedings incidental to its business. In the opinion of management, after consultation with its legal counsel, none of the proceedings to which the Company is currently a party to are expected to have a material adverse effect on the Company's financial condition or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. 8 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock is listed and traded on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the symbol "GNV." The following table sets forth, for the periods indicated, the high and low sales prices for the Class A Common Stock as reported on the NYSE Composite Tape.
Fiscal Year Ended September 30, 1996 HIGH LOW First Quarter ended December 31 $8 $6 3/8 Second Quarter ended March 31 8 1/4 5 1/8 Third Quarter ended June 30 7 1/8 5 1/4 Fourth Quarter ended September 30 5 1/2 3 1/8 Fiscal Year Ended September 30, 1997 HIGH LOW First Quarter ended December 31 $4 1/2 $2 3/4 Second Quarter ended March 31 3 5/8 2 Third Quarter ended June 30 3 1/2 2 1/4 Fourth Quarter ended September 30 4 1/4 2 5/8
As of November 28, 1997, the Company had 14,050,515 shares of Class A Common Stock outstanding, held by 644 stockholders of record, and 19,151,348 shares of Class B Common Stock outstanding, held by five stockholders of record. Shares of Class B Common Stock are convertible into shares of Class A Common Stock at the rate of ten shares of Class B Common Stock for one share of Class A Common Stock. There is no public market for the Class B Common Stock. The Company currently anticipates that it will retain all available funds to finance its capital expenditures and other business activities, and it does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company's revolving credit facility and senior notes restrict the amount of dividends that the Company may pay. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 2 of Notes to Consolidated Financial Statements included in this Report. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference to pages 4 through 5 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference to pages 6 through 14 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1997. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference to pages 15 through 39 of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 9 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the sections entitled "Election of Directors -- Nominees for Election as Directors" and "Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998. The definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the sections entitled "Election of Directors -- Director Compensation" and "Executive Compensation" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled "Principal Holders of Voting Securities" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the section entitled, "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998. 10 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) Documents Filed: 1. Consolidated Financial Statements. The following Consolidated Financial Statements of the Company and Report of Independent Public Accountants included in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1997 are incorporated by reference in Item 8 of this Report: - Report of Independent Public Accountants - Consolidated Balance Sheets at September 30, 1997 and 1996 - Consolidated Statements of Operations for the years ended September 30, 1997, 1996 and 1995 - Consolidated Statements of Stockholders' Equity for the years ended September 30, 1997, 1996 and 1995 - Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995 - Notes to Consolidated Financial Statements 2. Financial Statement Schedule. The following Financial Statement Schedule of the Company for the years ended September 30, 1997, 1996 and 1995 is filed as part of this Report and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto: Schedule Page II - Valuation and Qualifying Accounts 17 Financial statements and schedules other than those listed are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto, or contained in this Report. (b) Reports on Form 8-K None. 11 13 (c) Exhibits
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH - ------------- ------------------------------------------------------------------------- ------------ -------- 3.1 Revised Articles of Incorporation of the Registrant (1) 3.2 Articles of Amendment dated February 17, 1993 to the Registrant's (2) Revised Articles of Incorporation 3.3 Articles of Amendment dated March 12, 1993 to the Registrant's (3) Revised Articles of Incorporation 3.4 Restated Bylaws of the Registrant dated March 12, 1993 (2) 4.1 Specimen Certificate of the Registrant's Class A Common Stock, no (1) par value 4.2 Specimen Certificate of the Registrant's Series B Preferred Stock, (4) no par value 4.3 Rights Agreement dated as of May 19, 1997, between Registrant and (5) Rights Agent 10.1 Asset Sales Agreement between USX and the Registrant dated as of (1) June 26, 1987, as Amended and Restated August 31, 1987 10.2 Registration Rights Agreement among the signatories listed on the (1) signature pages thereof and the Registrant dated November 6, 1989 10.3 License Agreement between ENSR Corporation and the Registrant (1) dated December 8, 1988 10.4 Second Amended and Restated Revolving Credit Agreement among (6) the Registrant, the Lender Parties named therein, Citicorp U.S.A., Inc. and Heller Financial Inc., dated May 14, 1996. 10.5 Second Amended and Restated Security Agreement dated May 14, (6) 1996. 10.6 Amended and Restated Sales Representation Agreement between (6) Mannesmann Pipe & Steel Corporation and the Registrant dated April 1, 1996. 10.7 Geneva Steel Key Employee Plan* (7) 10.8 Amendment to Geneva Steel Key Employee Plan dated May 12, (8) 1991* 10.9 Form of Non-Statutory Stock Option Agreement* (1) 10.10 Management Employee Savings and Pension Plan, as Amended and (9) Restated generally effective January 1, 1994, dated as of July 3, 1995* 10.11 Amendment No. 1 to the Geneva Steel Management Employee (10) Savings and Pension Plan, effective as of January 1, 1997, dated June 25, 1997. 10.12 Form of revised Executive Split Dollar Insurance Agreement* (11) 10.13 Form of revised Executive Supplemental Retirement Agreement* (11)
12 14
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH - ------------- ------------------------------------------------------------------------- ------------ -------- 10.14 Union Employee Savings and Pension Plan, as Amended and X Restated effective January 1, 1995, dated as of August 13, 1997* 10.15 Collective Bargaining Agreement between United Steelworkers of (12) America and the Registrant ("Collective Bargaining Agreement") dated March 1, 1995* 10.16 Agreement between Union Carbide Industrial Gases, Inc. and the (7) Registrant dated July 12, 1990, as amended August 3, 1990 (the "Union Carbide Agreement") 10.17 Amendment to the Union Carbide Agreement dated December 1, (11) 1992 10.18 Oxygen Supply Agreement between Air Liquide America X Corporation and the Registrant dated June 10, 1997 10.19 Coilbox License Agreement between Stelco Technical Services (1) Limited and the Registrant dated August 23, 1989 10.20 License Agreement for the K-OBM Process between (1) Klockner Contracting and Technologies GmbH and the Registrant dated November 25, 1989 10.21 Special Use Lease Agreement No. 897 between the State of Utah (11) and the Registrant dated January 13, 1992 and Amendment thereto dated June 19, 1992 10.22 Indenture dated as of January 15, 1994 between the Registrant and (13) Bankers Trust Company, as Trustee, including a form of 9 1/2% Senior Note due 2004 10.23 Indenture dated as of March 15, 1993 between the Registrant and (3) The Bank of New York, as Trustee, including a form of 11 1/8% Senior Note due 2001 10.24 License Agreement relating to the desulfurization process between (1) BS&B Engineering Company, Inc. and the Registrant dated March 1, 1990 10.25 Lo-Cat(R)Licensing Agreement between ARI Technologies, Inc. and (7) the Registrant dated April 16, 1990 10.26 Agreement relating to the closure of hazardous waste surface (7) impoundments between USX Corporation, the Registrant and Duncan Lagnese Associates, Incorporated dated October 22, 1990 10.31 Agreement for Sale and Purchase of Coke between the Registrant (14) and Pacific Basin Resources (a division of Oxbow Carbon and Minerals, Inc.) dated April 29, 1994 (the "Oxbow Coke Agreement") 10.32 First Amendment to the Oxbow Coke Agreement dated April 11, (15) 1996 10.33 Agreement for the Sale and Purchase of Coal between the Registrant (16) and Oxbow Carbon and Minerals, Inc. dated February 19, 1996, effective as of April 1, 1994 10.34 Warrant Agreement dated as of March 16, 1993 between the (2) Registrant and The Bank of New York, as Warrant Agent 10.35 Form of Indenture between the Registrant and the Trustee thereunder (3) related to the Exchange Debentures, including a form of Exchange Debenture
13 15
EXHIBIT INCORPORATED FILED NO. EXHIBIT BY REFERENCE HEREWITH - ------------- ------------------------------------------------------------------------- ------------ -------- 10.36 Taconite Pellet Sales Agreement between USX Corporation and (12) Geneva Steel dated May 31, 1995 10.37 First Amendment to Taconite Pellet Sales Agreement between USX X Corporation and the Registrant dated July 25,1997. 10.38 Industrial Gas Supply Agreement between Air Liquide America (12) Corporation and Geneva Steel dated June 8, 1995. 10.39 Geneva Steel Company 1996 Incentive Plan* (17) 10.40 Form of Employment Agreement between Registrant and Certain Executive Officers. X 13 Selected portions of the Registrant's Annual Report to Shareholders X for the year ended September 30, 1997 which are incorporated by reference in Parts II and IV of this Report 23 Consent of Arthur Andersen LLP, independent public accountants X 27 Financial Data Schedule X
- ---------- * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the Registration Statement on Form S-1 dated March 27, 1990, File No. 33-33319. (2) Incorporated by reference to the Registration Statement on Form S-3 dated June 16, 1993, File No. 33-64548. (3) Incorporated by reference to the Registration Statement on Form S-4 dated April 15, 1993, File No. 33-61072. (4) Incorporated by reference to the Registration Statement on Form S-4 dated August 9, 1993, File No. 33-61072. (5) Incorporated by reference to Exhibit 99.1 of the Registration Statement on Form 8-A filed on November 21, 1997. (6) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996. (7) Incorporated by reference to the Registration Statement on Form S-1 dated November 5, 1990, File No. 33-37238. (8) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1991. (9) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 14 16 (10) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (11) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (12) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (13) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1993. (14) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994. (15) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1996. (16) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (17) Incorporated by reference to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. (d) Financial Statement Schedule See page 17 herein. 15 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Geneva Steel Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements incorporated by reference in Item 8 of this Form 10-K, and have issued our report thereon dated October 29, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Salt Lake City, Utah October 29, 1997 16 18 GENEVA STEEL COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (Dollars in Thousands)
Additions Balance at Charged to Deductions, Balance Beginning Costs and Net of at End Description of Year Expenses Recoveries of Year - ----------- ---------- ---------- ----------- ------- Year Ended September 30, 1997 Allowance for doubtful accounts $4,031 $6,558 $(6,025) $4,564 ====== ====== ======= ====== Year Ended September 30, 1996 Allowance for doubtful accounts $2,012 $8,616 $(6,597) $4,031 ====== ====== ======= ====== Year Ended September 30, 1995 Allowance for doubtful accounts $3,113 $5,138 $(6,239) $2,012 ====== ====== ======= ======
17 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 26, 1997. GENEVA STEEL COMPANY By: /s/ Joseph A. Cannon ---------------------------------------- Joseph A. Cannon, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Joseph A. Cannon Chairman of the Board and Chief December 26, 1997 - ------------------------------------ Executive Officer (Principal executive officer) Joseph A. Cannon /s/ Robert J. Grow President and Chief Operating December 26, 1997 - ------------------------------------ Officer and Director Robert J. Grow /s/ Richard D. Clayton Senior Vice President of Marketing December 26, 1997 - ------------------------------------ and Distribution and Director Richard D. Clayton /s/ Dennis L. Wanlass Vice President, Treasurer and Chief December 26, 1997 - ------------------------------------ Financial Officer Dennis L. Wanlass (Principal financial and accounting officer) /s/ Alan C. Ashton Director December 26, 1997 - ------------------------------------ Alan C. Ashton /s/ K. Fred Skousen Director December 26, 1997 - ------------------------------------ K. Fred Skousen /s/ R. J. Shopf Director December 26, 1997 - ------------------------------------ R. J. Shopf /s/ Kevin S. Flannery Director December 26, 1997 - ------------------------------------ Kevin S. Flannery /s/ Gregory T. Hradsky Director December 26, 1997 - ------------------------------------ Gregory T. Hradsky
EX-10.14 2 AM #1 TO UNION EMPLOYEE SAVINGS & PENSION PLAN 1 EXHIBIT 10.14 AMENDMENT NO. 1 TO THE GENEVA STEEL UNION EMPLOYEE SAVINGS AND PENSION PLAN The Geneva Steel Union Employee Savings and Pension Plan (the "Plan"), as amended and restated generally effective January 1, 1995, is hereby amended effective (unless otherwise provided below) as of January 1, 1997 as follows: 1. The first sentence of Section 6.1 shall be amended to read as follows: 6.1 Limitation on Contributions. The Annual Additions allocated or contributed to a Participant for any Plan Year shall not exceed the lesser of the following: (a) $30,000; or (b) 25% of the Participant's Compensation for such year. 2. Effective August 1, 1997, the first sentence of Section 7.1 shall be amended to read as follows: The Trust Fund shall be comprised of those Investment Funds described in Section 7.2. 3. Effective August 1, 1997, Section 7.2 shall be amended to read as follows: 7.2 Investment Funds. The Trust Fund established under the Plan shall consist of the Balanced Fund, the Equity Fund, the Short-Term Income Fund, the Bond Fund, and the Geneva Stock Fund. The Company may change the available Investment Funds at any time in its sole discretion by adding Investment Funds, removing Investment Funds, or changing Investment Funds. The Balanced, Equity, Short-Term Income, Bond, and Geneva Stock Funds shall be invested and reinvested as follows: (a) The Balanced Fund shall be invested in those investments selected by the Company that are designed to achieve a balance between capital appreciation and preservation of capital and generation of income. -1- 2 (b) The Equity Fund shall be invested primarily in equity securities or in such other types of equity investments as are authorized by the Trust Agreement. (c) The Short-Term Income Fund shall be invested in short term fixed-income investments as are authorized by the Trust Agreement. (d) The Bond Fund shall be invested primarily in debt instruments or other types of debt investments as are authorized by the Trust Agreement. (e) The Geneva Stock Fund shall be invested primarily in Geneva Stock, except that small amounts in the Stock Fund may be invested in interest-bearing short-term debt obligations, money market instruments, savings accounts or similar investments. The Geneva Stock Fund shall consist of all Stock Fund investments held by the Trustee and all cash held by the Trustee which is derived from dividends on Geneva Stock, interest and other income from Stock Fund investments, Company Contributions to be invested in the Geneva Stock Fund and proceeds from sales of Geneva Stock and Stock Fund investments. 4. Effective August 1, 1997, Section 7.4 shall be amended to read as follows: 7.4 Investment of Accounts. A Participant's Pension Contribution Account shall be invested in the Balanced Fund, which may consist of a Balanced Fund that is different from the Balanced Fund for other Accounts. A Participant's Geneva Stock Account shall be invested solely in the Geneva Stock Fund, provided, however, that a Participant may, in accordance with Section 7.5, elect to transfer an amount from the Geneva Stock Fund to those Investment Funds selected under this Section. A Participant's Salary Deferral Account, Discretionary Contribution Account, Matching Contribution Account and Rollover Account, if any, shall be apportioned among one or more of the Investment Funds in such whole percentages as the Participant may specify pursuant to the election procedures prescribed by the Company. If the Company receives no valid investment directions from the Participant, such Accounts shall be invested entirely in the Short-Term Income Fund. A Participant may change the investment instructions with respect to future contributions with such frequency as shall be established by the Company. Any such change shall be made in the manner prescribed by the Company; however, any such rules established by the Company shall permit changes to investment elections to be effective at -2- 3 least as frequent as the first payday in any calendar quarter. 5. Effective August 1, 1997, Section 7.5 shall be amended to read as follows: 7.5 Transfers Among Accounts. With such frequency as shall be established by the Company (but no less frequently than once each quarter), a Participant may elect to transfer all or any part of his or her Accounts (except for his or her Pension Contribution Account and Geneva Stock Account) to one or more of the Investment Funds in the manner prescribed by the Company. Any such transfer shall be applicable as soon administratively feasible pursuant to the procedure established by the Company. With respect to the Geneva Stock Account, prior to the end of each Plan quarter, a Participant may elect to transfer ten percent (10%) of the vested portion of his or her Geneva Stock Account to one or more of the Investment Funds as elected under Section 7.4. Such a transfer from the Geneva Stock Account shall be effective as soon as administratively feasible following the end of the Plan quarter in which the election is made. Upon attainment of age 55, a Participant may elect prior to the end of each Plan quarter to transfer all (or any portion in 10% increments) of his or her Geneva Stock Account to one or more of the Investment Funds as elected under Section 7.4. Any transfer from the Geneva Stock Fund shall be made in accordance with the requirements of this Section 7.5 and such additional rules as may be prescribed by the Company. 6. Effective August 1, 1997, Section 7.6 shall be amended to read as follows: Each Account shall be revalued at fair market value and adjusted each Valuation Date for contributions, distributions and other items since the last Valuation Date, to reflect the Participant's share of any realized or unrealized investment income, gains, losses and investment expenses of the Fund or Funds in which such Account was invested that have accrued since the prior Valuation Date. A Participant's share shall be proportionate to the ratio that the adjusted balance in his or her Account bears to the total adjusted balances of all Accounts invested in the Funds determined as of the Valuation Date. For purposes of this Section 7.6, the Company shall establish a Valuation Date at least as frequent as the last day of each calendar quarter. -3- 4 7. Section 9.4 shall be amended by deleting the third sentence thereof, and inserting the following in its place: Notwithstanding any other provision of the Plan to the contrary, distribution of the Plan Benefit of a Participant shall be made no later than April 1 of the calendar year following the later of (a) the calendar year in which the Participant attains age 70 1/2 or (b) the calendar year in which the employee retires. Notwithstanding the above, Section 9.4(b) shall not apply to any Participant who is a "5-percent owner" (as defined in section 416 of the Code) with respect to the Plan Year ending in the calendar year in which the Participant attains age 70 1/2. To the extent that the Commissioner of the Internal Revenue Service determines in a ruling, notice or other document of general authority, that the required beginning date set forth in the Plan prior to January 1, 1997 for distributions with respect to Participants who remain Employees on or after attaining age 70 1/2 constitutes a "protected benefit" within the meaning of section 411(d)(6) of the Code, the provisions of the Plan in effect as of December 31, 1996 shall continue to apply, as elected by the Participant. 8. Effective October 12, 1996, Section 15.8 shall be added to the Plan as follows: 15.8 Military Service Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with section 414(u) of the Code. Loan payments will be suspended under this Plan as permitted under section 414(u)(4) of the Code. 9. Section 17.8 shall be amended by deleting the last sentence thereof. 10. Section 17.16 shall be deleted in its entirety and the remaining sections of the Plan renumbered accordingly. Former Section 17.17 (renumbered Section 17.16) shall be amended to read as follows: 17.16 "Investment Funds" means the Funds established under the Trust Fund pursuant to Section 7.2. -4- 5 11. Section 1.2 of Appendix I shall be amended by replacing "3.1(c)" with "3.1(d)." 12. Section 1.3 of Appendix I shall be amended by replacing "2.1(c)" with "2.1(d)." 13. Section 1.8 of Appendix I shall be amended to read as follows: 1.8 "Highly Compensated Employee" means an active Employee who: (a) During the look-back year received Total Compensation of more than $80,000 (or such larger amount as may be adopted by the Commissioner of Internal Revenue to reflect a cost-of-living adjustment) and was a member of the Top-Paid Group; or (b) At any time during the look-back year or the determination year was a five-percent owner (as defined in section 416(i)(1) of the Code). For purposes of this Section, the determination year shall be the Plan Year. The look-back year shall be the 12-month period immediately preceding the determination year. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the Top-Paid Group and the Total Compensation that is considered, will be made in accordance with section 414(q) of the Code and regulations thereunder. The term "Highly Compensated Employee" shall also include a former Employee who separated from service (or is deemed to have separated) prior to the determination year, performs no service for any member of the Affiliated Group during the determination year, and was a Highly Compensated Employee as an active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. 14. Section 1.11(e) of Appendix I shall be amended by replacing "402(a)(8)" with "402(e)(3)." 15. Section 1.12 of Appendix I shall be amended by the addition of the following at the end thereof: -5- 6 The Company may elect, in a consistent and uniform manner, to apply one or more of the age-and-service- based exclusions above by substituting a younger age or shorter period of service, or by not excluding individuals on the basis of age or service. 16. Section 2.1 of Appendix I shall be amended to read as follows: 2.1 Percentage Limitations. The Plan shall satisfy the average deferral percentage test, as provided in section 401(k)(3) of the Code and the regulations issued thereunder. Subject to the special rules described in this Appendix, the Salary Deferral Contributions of Highly Compensated Employees shall not exceed the limits described below: (a) A "Deferral Percentage" shall be determined for each Highly Compensated Employee who, at any time during the Plan Year, is a Participant or is eligible to participate in the Plan, which Deferral Percentage shall be the ratio, computed to the nearest one-hundredth of one percent, of the Highly Compensated Employee's Salary Deferral Contributions for the Plan Year to the Highly Compensated Employee's Section 414(s) Compensation for the Plan Year; (b) For Plan Years beginning prior to January 1, 1997, a Deferral Percentage shall be determined for each Nonhighly Compensated Employee who, at any time during the Plan Year, is a Participant or is eligible to participate in the Plan, which Deferral Percentage shall be the ratio, computed to the nearest one-hundredth of one percent, of the Nonhighly Compensated Employee's Salary Deferral Contributions for the Plan Year to the Nonhighly Compensated Employee's Section 414(s) Compensation for the Plan Year; (c) For Plan Years beginning after December 31, 1996, and except to the extent that the Company elects (in accordance with applicable law) to apply Subsection (b) rather than this Subsection (c), a Deferral Percentage shall be determined for each Nonhighly Compensated Employee who, at any time during the preceding Plan Year, was a Participant or who was eligible to participate in the Plan, which Deferral Percentage shall be the ratio, calculated to the nearest one-hundredth of one percent, of the Nonhighly Compensated Employee's Salary Deferral Contributions for the preceding Plan Year to the Nonhighly Compensated Employee's Section 414(s) Compensation for the preceding Plan Year; -6- 7 (d) The Aggregate 401(k) Contributions of Highly Compensated Employees shall constitute Excess Before- Tax Contributions and shall be reduced, pursuant to Section 2.2 of this Appendix I, to the extent that the average Deferral Percentage (the "Before-Tax Percentage") of Highly Compensated Employees exceeds the greater of (i) 125 percent of the Before-Tax Percentage of Nonhighly Compensated Employees or (ii) the lesser of (A) 200 percent of the Before-Tax Percentage of Nonhighly Compensated Employees or (B) the Before-Tax Percentage of Nonhighly Compensated Employees plus two percentage points. 17. Section 2.2 of Appendix I shall be amended to read as follows: 2.2 Reduction of Salary Deferred Contributions. The reduction of the Salary Deferral Contributions of Highly Compensated Employees as required by Section 2.1(d) of this Appendix I shall be made on the basis of the amount of contributions by or on behalf of each Highly Compensated Employee. Such reductions in Before-Tax Contributions shall be made in accordance with applicable regulations and shall constitute "Excess Before-Tax Contributions." For all affected Highly Compensated Employees such Excess Before-Tax Contributions shall be eliminated as provided for in Article 5 of this Appendix I. 18. Section 3.1 of Appendix I shall be amended to read as follows: 3.1 Percentage Limitations. To the extent Matching Contributions are not treated as Salary Deferral Contributions and tested under Article 2 of this Appendix I, the Aggregate 401(m) Contributions of Highly Compensated Employees for any Plan Year shall not exceed the limits described below: (a) A "Contribution Percentage" shall be determined for each Highly Compensated Employee who, at any time during the Plan Year, is a Participant or is eligible to participate in the Plan, which Contribution Percentage shall be the ratio, computed to the nearest one-hundredth of one percent, of the Highly Compensated Employee's Aggregate 401(m) Contributions for the Plan Year to the Highly Compensated Employee's Section 414(s) Compensation for the Plan Year; (b) For Plan Years beginning prior to January 1, 1997, a Contribution Percentage shall be determined -7- 8 for each Nonhighly Compensated Employee who, at any time during the Plan Year, is a Participant or is eligible to participate in the Plan, which Contribution Percentage shall be the ratio, computed to the nearest one-hundredth of one percent, of the Nonhighly Compensated Employee's Aggregate 401(m) Contributions for the Plan Year to the Nonhighly Compensated Employee's Section 414(s) Compensation for the Plan Year; (c) For Plan Years beginning after December 31, 1996, and except to the extent that the Company elects (in accordance with applicable law) to apply Subsection (b) rather than this Subsection (c), a Contribution Percentage shall be determined for each Nonhighly Compensated Employee who, at any time during the preceding Plan Year, was a Participant or who was eligible to participate in the Plan, which Contribution Percentage shall be the ratio, calculated to the nearest one-hundredth of one percent, of the Nonhighly Compensated Employee's Aggregate 401(m) Contributions for the preceding Plan Year to the Nonhighly Compensated Employee's Section 414(s) Compensation for the preceding Plan Year; and (d) The Aggregate 401(m) Contributions of Highly Compensated Employees shall constitute Excess Aggregate 401(m) Contributions and shall be reduced, pursuant to Section 3.2 of this Appendix I, to the extent that the average of the Contribution Percentages (the "Aggregate 401(m) Percentage") of Highly Compensated Employees exceeds the greater of (1) 125 percent of the Aggregate 401(m) Percentage of Nonhighly Compensated Employees or (2) the lesser of (A) 200 percent of the Aggregate 401(m) Percentage of Nonhighly Compensated Employees or (B) the Aggregate 401(m) Percentage of Nonhighly Compensated Employees plus two percentage points. 19. Section 3.2 of Appendix I shall be amended to read as follows: 3.2 Reduction of Aggregate 401(m) Contributions. The reduction in the Aggregate 401(m) Contributions of Highly Compensated Employees as required by Section 3.1(d) of this Appendix I shall be made on the basis of the amount of contributions by or on behalf of each Highly Compensated Employee. Such reductions shall be made in accordance with applicable regulations and shall constitute "Excess Aggregate 401(m) Contributions." For all affected Highly Compensated Employ- -8- 9 ees, such Excess Aggregate 401(m) Contributions shall be eliminated as provided for in Article 5 hereof. IN WITNESS WHEREOF, the Company hereby adopts this First Amendment this 13th day of August, 1997. GENEVA STEEL By /s/ Carl E. Ramnitz ------------------------------ As Its Vice President -------------------------- -9- EX-10.18 3 OXYGEN SUPPLY AGREEMENT 1 EXHIBIT 10.18 OXYGEN SUPPLY AGREEMENT BETWEEN GENEVA STEEL COMPANY AND AIR LIQUIDE AMERICA CORPORATION Effective as of June 10, 1997 2 TABLE OF CONTENTS ARTICLE 1. - DEFINITIONS................................................. 1 ARTICLE 2. - EXISTING FACILITY........................................... 2 2.1 Existing Facility............................................. 2 2.2 Tie-In With Oxygen Distribution System........................ 3 2.3 Safety Standards; Restricted Access........................... 3 2.4 Liens......................................................... 3 2.5 Compliance with Law........................................... 3 2.6 Argon Production Prohibition.................................. 3 2.7 Other Product Prohibition..................................... 3 2.8 Power Credit.................................................. 4 ARTICLE 3. - UTILITIES................................................... 4 3.1 Site Utilities................................................ 4 ARTICLE 4. - QUANTITY.................................................... 5 4.1 Oxygen Quantities............................................. 5 4.2 Operation Level............................................... 5 4.3 Reduced Demand................................................ 5 4.4 Title......................................................... 5 ARTICLE 5. - PRICES...................................................... 5 5.1 Monthly Facility Charge....................................... 5 5.1.1 Adjustment...................................... 5 5.1.2 Required Documentation.......................... 6 5.1.3 Definitions..................................... 6 5.2 Payment....................................................... 6 5.3 Disputes...................................................... 6 ARTICLE 6. - SPECIFICATION............................................... 7 6.1 Oxygen Specification.......................................... 7 6.2 Non-conforming Oxygen......................................... 7 6.3 Limitation.................................................... 7 ARTICLE 7. - DELIVERY PRESSURE........................................... 7 ARTICLE 8. - SELLER'S SHUTDOWN........................................... 7 8.1 Ordinary Downtime............................................. 7 8.2 Vaporization.................................................. 7 8.3 Right to Alternate Supply..................................... 8 ARTICLE 9. - METERING EQUIPMENT.......................................... 8 9.1 Oxygen Metering............................................... 8 i 3 9.1.1 Calibration...................................... 8 9.1.2 Buyer Tests...................................... 8 9.2 Electric Metering Equipment................................... 9 ARTICLE 10. - TAXES...................................................... 9 10.1 Sales and Other Taxes......................................... 9 10.2 Property Taxes................................................ 9 ARTICLE 11. - CONTINGENCIES.............................................. 9 11.1 Contingencies................................................. 9 11.2 Reduced Delivery or Taking.................................... 10 11.3 No Production................................................. 10 11.4 Operational Inefficiency...................................... 10 ARTICLE 12. - LIABILITY.................................................. 11 12.1 Acknowledgement............................................... 11 12.2 Indemnity by Buyer............................................ 11 12.3 Indemnity by Seller........................................... 11 ARTICLE 13. - ATMOSPHERIC CONTAMINANTS................................... 12 ARTICLE 14. - ENVIRONMENTAL CONDITIONS AND PERMITS....................... 12 14.1 Site Condition................................................ 12 14.2 Permitting.................................................... 12 ARTICLE 15. - FAIR LABOR STANDARDS ACT................................... 12 ARTICLE 16. - DEFAULT.................................................... 12 16.1 Default by Seller............................................. 12 16.2 Default by Buyer.............................................. 12 ARTICLE 17. - ASSIGNMENT................................................. 13 ARTICLE 18. - APPLICABLE LAW............................................. 13 ARTICLE 19. - RESOLUTION OF DISPUTES..................................... 13 ARTICLE 20. - TERM....................................................... 13 20.1 Term.......................................................... 13 ARTICLE 21. - NOTICE..................................................... 14 ARTICLE 22. - ENTIRE AGREEMENT........................................... 14 ii 4 ARTICLE 23. - MISCELLANEOUS.............................................. 15 23.1 Confidentiality............................................... 15 23.2 Severability.................................................. 15 23.3 Waiver........................................................ 15 23.4 Power Rates................................................... 15 iii 5 OXYGEN SUPPLY AGREEMENT THIS OXYGEN SUPPLY AGREEMENT (the "Agreement") is entered into September 10, 1997, effective as of June 10, 1997 (the "Effective Date"), between AIR LIQUIDE AMERICA CORPORATION, a Delaware corporation ("Seller") and GENEVA STEEL COMPANY, a Utah corporation ("Buyer"). RECITALS: A. Buyer is currently supplied a portion of the oxygen consumed at its steel mill located in Vineyard, Utah (the "Geneva Works") from an air separation facility which is owned and operated by Seller and has a rated capacity of 275 tons per day of oxygen production (the "Existing Facility"). B. Seller and Buyer desire to continue the supply to Buyer of oxygen from the Existing Facility pursuant to the terms and conditions set forth herein. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing, the promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller, intending to be legally bound, agree as follows: ARTICLE 1. - DEFINITIONS When used in this Agreement, each term below or defined elsewhere herein shall have the indicated meaning unless such meaning is clearly precluded by the context in which the term is used. Unless the context otherwise expressly requires, the words "herein," "hereto," "hereunder," and other words of similar import refer to this Agreement as a whole and not to a particular Article or portion thereof. 1.1 "ARGON" means liquid argon produced at the Existing Facility. 1.2 "EXISTING FACILITY" means the air separation facility owned and operated by Seller on the Facility Site at the Geneva Works, and all modifications, improvements and expansions made to such facilities during the term hereof, for the production, compression, storage and vaporization of Oxygen and the production and storage of Argon. 1.3 "FACILITY SITE" means that parcel of real property at the Geneva Works depicted on Exhibit 1.2 hereto leased to Seller pursuant to the Ground Lease and upon which the Existing Facility is located. 1.4 "GENEVA WORKS" means Buyer's plant located in Vineyard, Utah, and any additions or modifications thereto. 6 1.5 "GROUND LEASE" means that certain Amended and Restated Lease of even date herewith executed by Seller and Buyer attached hereto as Exhibit 1.5 and any modifications or amendments thereto. 1.6 "MONTHLY FACILITY CHARGE" shall have the meaning set forth in Article 5 hereof. 1.7 "OXYGEN" means oxygen produced at the Existing Facility meeting the specifications for oxygen set forth in Article 6 and delivered in gaseous form hereunder up to the applicable maximum respective production rates specified in Article 4. 1.8 "OXYGEN DELIVERY POINT" means the location on the battery limits of the Facility Site depicted on Exhibit 1.2 hereto. 1.9 "OXYGEN DISTRIBUTION SYSTEM" means the system of trunk and service pipelines currently existing at the Geneva Works to transport Oxygen from the Oxygen Delivery Point to the various use points within the Geneva Works. 1.10 "PSIG" means pounds per square inch gauge. 1.11 "SCF" used as a measure of Oxygen means that quantity of Oxygen which in gaseous form would occupy a volume of one cubic foot at 70 degrees Fahrenheit temperature and 14.696 pounds per square inch absolute pressure. 1.12 "TON" means 2,000 pounds avoirdupois or 24,160 SCF of Oxygen. ARTICLE 2. - EXISTING FACILITY 2.1 Existing Facility. Seller, at its sole expense, shall operate, own, maintain and repair the Existing Facility on the Facility Site during the term hereof pursuant to the Ground Lease. The Existing Facility shall be and remain the personal property of Seller at all times. The Existing Facility shall at all times during the term hereof include, but not be limited to, the equipment, systems and facilities set forth on Exhibit 2.1 hereto. During the term of this Agreement, Buyer shall not cause the Existing Facility or the Facility Site to be sold, seized or encumbered in any way whatsoever, and Buyer shall cooperate with Seller in any reasonable manner, without cost or expense to Buyer, including the making of public filings or recordations, to ensure that no such sale, seizure or encumbrance of the Existing Facility or the Facility Site takes place; provided, however, that Buyer shall have the rights to encumber the Facility Site as set forth in the Ground Lease. Seller reserves the right to make changes, modifications, improvements, or expansions of the Existing Facility, at any time during the term hereof provided that (i) Seller's obligations hereunder are not diminished, (ii) the production capacities of the Existing Facility as set forth herein are not diminished, (iii) the costs or taxes to be paid or utilities to be furnished by Buyer hereunder are not increased by such changes, modifications, improvements or expansions, and (iv) such changes, modifications, improvements, or expansions do not adversely affect Buyer, the Geneva Works or Buyer's operations. 2 7 2.2 Tie-In With Oxygen Distribution System. Seller, at its expense, will perform and provide all work, piping, valves, controls, racks and supports necessary to maintain the connection of the Existing Facility to the Oxygen Distribution System, all pursuant to specifications prepared by Seller and approved by Buyer. 2.3 Safety Standards; Restricted Access. Seller shall comply with all of Buyer's safety and security standards and rules applicable generally to the Geneva Works; provided, however, that such standards and rules shall not relieve Seller of its responsibility for the safety of the Facility Site. Buyer will use reasonable efforts to prevent Buyer's employees from entering the Facility Site or altering, repairing, adjusting or otherwise tampering with the Existing Facility without the prior consent of Seller. Buyer will prohibit smoking and the use of open flames by its employees within fifty (50) feet of the Existing Facility; provided, however, that Seller shall be and remain responsible for all emergency response fire protection required for the Existing Facility. 2.4 Liens. In express consideration of the terms, covenants and undertakings set forth herein, and for other valuable consideration, Seller knowingly and intentionally waives any and all rights it may have, now or in the future, to assert liens or claims of liens against the Facility Site or the Geneva Works; provided, however, that the foregoing shall not be a waiver of Seller's right to payment hereunder but only the right to assert liens against Buyer's property related thereto. Seller will cause all persons providing equipment, materials or labor for the Existing Facility to similarly waive their lien rights prior to performing any work on or for the Existing Facility. Buyer shall indemnify, defend and hold Seller harmless from and against liens against the Existing Facility due solely to its location on Buyer's premises. Seller shall indemnify, defend and hold Buyer harmless from and against liens and claims arising from the acts or omissions of Seller or its subcontractors, employees, agents and invitees or due to the failure of Seller or its contractors to timely pay amounts owed to contractors, subcontractors, suppliers, materialmen or others. 2.5 Compliance with Law. The Existing Facility shall at all times during the term hereof conform with all applicable statutes, regulations, ordinances, rules, standards and codes including, but not limited to, OSHA requirements related to noise levels. 2.6 Argon Production Prohibition. Seller agrees that it will not produce or sell any Argon from the Existing Facility during any period when Seller has not produced argon at the maximum possible levels from the facility which is the subject of that certain Industrial Gas Supply Agreement dated as of June 6, 1995, as amended (the "1995 Agreement") and for which Buyer has provided certain argon credits as outlined in the 1995 Agreement. Seller shall reimburse Buyer for any power and utility costs incurred by Buyer as a result thereof, the power cost to be calculated as set forth in Section 2.8 hereof. 2.7 Other Product Prohibition. Unless so requested by Buyer to fill the liquid oxygen storage tank that is a part of the New Facility, Seller agrees that it will not produce or sell any liquid oxygen or gaseous or liquid nitrogen from the Existing Facility unless otherwise approved in writing by Buyer, such approval not to be unreasonably withheld, and Seller pays to Buyer 3 8 any power and utility costs incurred by Buyer as a result thereof, the power cost to be calculated as set forth in Section 2.8 hereof. 2.8 Power Credit. The Power Credit ("PC") used by Seller to produce liquidous product (including Argon) shall be calculated as follows: PC = ((D/730) + E) R Where: E = average price paid by Buyer for the energy portion of the power purchased from PacificCorp for a demand rate in excess of 90 MW, expressed in dollars per kwh; and PC= credit per 100 SCF of liquidous product produced for Seller's account. D = the demand charge (expressed in $ per kw) under Utah Power's Schedule 9 rate or, if Schedule 9 is no longer available, a successor tariff of Utah Power generally available to industrial customers like Seller. R = 3.2 kilowatt hours per 100 SCF. ARTICLE 3. - UTILITIES 3.1 Site Utilities. Buyer will provide at no charge to Seller at the locations depicted on Exhibit 1.2 hereto the following utilities and services and in the estimated quantities shown for Seller's use: Sanitary Sewer ........................ Domestic sewage that has been pumped to Buyer's system by Seller Storm Drain and Waste Water Runoff1.... Storm and wastewater runoff that has been piped by Seller to Buyer's existing storm drainage system All other water, except fire water which shall be provided by Buyer, and water delivery systems for the Existing Facility, including potable, treated and make-up water, shall be obtained by Seller from other sources without cost to Buyer. In the event of a utility interruption, Buyer shall use reasonable commercial efforts to minimize and eliminate such interruption as soon as reasonably practicable. Notwithstanding the foregoing, Buyer shall not be liable for any interruption of utility service to the Existing Facility. - -------- Discharges to Buyer's 36" culvert shall be comprised of only cooling tower blowdown containing no heavy metals, intermittent surface run-off from scuppers around equipment which may contain only traces of oil, building floor drains which may contain only traces of oil and detergents, and hub drains containing only clean condensate. 4 9 ARTICLE 4. - QUANTITY Seller shall sell and deliver to Buyer, and Buyer will purchase and receive from Seller, the following Oxygen: 4.1 Oxygen Quantities. Seller will sell and deliver into the Oxygen Distribution System such Oxygen from the Existing Facility as Buyer may from time to time reasonably notify Seller it desires up to a maximum instantaneous delivery rate at the Oxygen Delivery Point of 276,800 standard cubic feet per hour (SCFH), such production and delivery rates adjusted for the design conditions of 70 degrees Fahrenheit dry bulb, relative humidity of 24%, barometric pressure of 12.4 PSIA, and cooling water temperature of 72 degrees Fahrenheit. 4.2 Operation Level. Under normal operating conditions, that is when no contingency exists under Article 11 and no shutdown has been taken pursuant to Section 8.1 hereof, Seller will operate the Existing Facility at the delivery level for Oxygen of which Seller has received the notice specified in this Article 4. 4.3 Reduced Demand. Seller will take the Existing Facility out of operation if so requested by Buyer to accommodate any reduction in oxygen demand at the Geneva Works; provided, however, that such periods of non-operation at the request of Buyer shall not exceed one hundred twenty (120) days during any twenty-four (24) month period and shall not exceed an aggregate of three hundred twenty (320) days during the term of this Agreement without Seller's consent, which consent shall not be unreasonably withheld. 4.4 Title. Title to Oxygen shall pass to Buyer upon delivery by Seller of into the Oxygen Distribution System at the Oxygen Delivery Point. ARTICLE 5. - PRICES 5.1 Monthly Facility Charge. As promptly as practicable after the end of each calendar month, Seller will invoice Buyer and Buyer will pay Seller a monthly facility charge (the "Monthly Facility Charge") in the amount of SEVENTY-FIVE THOUSAND DOLLARS ($75,000). The Monthly Facility Charge is intended to fully compensate Seller for the Existing Facility and all Oxygen that Seller is obligated to deliver to Buyer pursuant to this Agreement. During periods of reduced demand, as contemplated in Section 4.3 hereof, the Monthly Facility Change shall be reduced on a pro rata basis to FIFTY THOUSAND DOLLARS ($50,000) for each month, or portion thereof, of reduced demand. The Monthly Facility Charge shall be further adjusted pursuant to Sections 5.1.1, 5.1.2 and 5.1.3 below. 5.1.1 Adjustment. The Monthly Facility Charge will be adjusted (the "Adjusted Monthly Facility Charge") semi-annually on January 1 and July 1 (each an "Adjustment Date"), commencing January 1, 1998, in accordance with the following formula. 5 10 Adjusted Monthly Facility Charge = C(0) [0.40 L/16.32 + 0.40 P/127.2 + .20] where: C(0) = Monthly Facility Charge determined pursuant to Section 5.1 without adjustments. L = Earnings Index, as hereinafter defined. P = PPI, as hereinafter defined. 5.1.2 Required Documentation. At the time Seller makes any adjustment pursuant to this Section 5.1.1, it shall deliver to Buyer adequate documentation (including mathematical calculations) supporting such adjustment. 5.1.3 Definitions. As used herein, the term (a) "Earnings Index" means the average of the Average Hourly Earnings for workers in Chemical and Allied Industries for each of the three (3) months immediately preceding the Adjustment Date, and (b) "PPI" means the average of the Producers Price Index for Industrial Commodities, based upon 1982=100, for each of the three (3) months immediately preceding the Adjustment Date, both of which indices are published by the United States Department of Labor, Bureau of Labor Statistics. If the computation of either or both of such indices is changed so that the base year differs from that at the time the beginning index is first published, the such index will be converted in accordance with the conversion factor published by the Department of Labor, Bureau of Labor Statistics. If either or both such indices are discontinued or revised, such government indices or computation with which they are replaced shall be used in order to obtain substantially the same result as would be obtained if the indices had not been terminated or revised. 5.2 Payment. The terms of payment will be net twenty (20) days following receipt of invoice. Buyer shall remit payments to Seller hereunder to the address indicated on Seller's invoice. Seller shall have the right to charge Buyer a late payment fee on any past due amount, such fee to be computed from the date such payment was due at an interest rate of 3% above the prevailing prime rate of interest of Texas Commerce Bank, N.A., Houston, Texas (or any successor principal bank of Seller). Any billing dispute or claim must be made in writing within thirty (30) days after receipt of invoice, otherwise the amount indicated on such invoice shall be considered by both parties to be final and binding. The first Monthly Facility Charge, prorated for any partial month, shall commence on the Effective Date provided, that Buyer shall receive credit against the Monthly Facility Charge for any amounts paid to Seller pursuant to that certain letter of intent dated July 10, 1997 (the "Letter of Intent") between Seller and Buyer. 5.3 Disputes. In the event Buyer disputes, in good faith, any invoice of Seller, Buyer shall timely pay the undisputed portion of such invoice and include therewith a reasonably detailed explanation in writing of the reasons Buyer disputes the balance of such invoice. If Seller disagrees with Buyer's explanation, the matter shall be referred for dispute resolution pursuant to Article 19. 6 11 ARTICLE 6. - SPECIFICATION 6.1 Oxygen Specification. Seller guarantees that Oxygen delivered at the Oxygen Delivery Point shall be at least 99.5% pure by volume. 6.2 Non-conforming Oxygen. Any Oxygen delivered hereunder by Seller which does not conform to the specifications set forth in Section 6.1 hereof may be rejected by Buyer by providing Seller with verbal notice within twenty-four (24) hours and subsequent written confirmation within twenty (20) days after delivery thereof, and the Monthly Facility Charge shall be reduced by the ratio of non-conforming Oxygen delivered in Tons per day to 275. Buyer reserves the right to review Seller's records and to confirm Oxygen conformity with the requirements of this Agreement. 6.3 Limitation. THERE ARE NO EXPRESS WARRANTIES BY SELLER OTHER THAN THOSE SPECIFIED IN THIS AGREEMENT. NO OTHER WARRANTIES BY SELLER (OTHER THAN WARRANTY OF TITLE AS PROVIDED IN THE UNIFORM COMMERCIAL CODE) SHALL BE IMPLIED OR OTHERWISE CREATED UNDER THE UNIFORM COMMERCIAL CODE, INCLUDING BUT NOT LIMITED TO, THE WARRANTY OF MERCHANTABILITY AND THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. ARTICLE 7. - DELIVERY PRESSURE Oxygen shall be delivered by Seller into the Oxygen Distribution System at a minimum pressure of 450 PSIG at the Oxygen Delivery Point. ARTICLE 8. - SELLER'S SHUTDOWN 8.1 Ordinary Downtime. Seller will have the right from time to time to shut down the production portion of the Existing Facility for such periods of time as may be necessary for Seller to perform scheduled ordinary repairs for maintenance and/or thawing necessary or consistent with proper operation, not in any event to exceed twenty-one (21) days during any two consecutive contract years during the term hereof; provided, however, that the foregoing period is not intended to limit Seller's rights in the event of a contingency under Article 11 hereof. Buyer and Seller will coordinate to the extent practicable Seller's scheduled shutdowns under this Article 8 with Buyer's periods of reduced Oxygen needs and when other oxygen production facilities at the Geneva Works are on-line, and shall minimize any resulting downtime or reduced production impacts on Buyer's operations. Insofar as possible, maintenance will be completed during periods in which the Existing Facility is not in operation during periods of reduced oxygen demand at the Geneva Works as contemplated in Section 4.3 hereof. 8.2 Vaporization. In the event from time to time Seller is unable to supply all or part of the applicable quantities of Oxygen set forth in Article 4 by reason of shutdown under Section 8.1 or a contingency under Article 11, and Buyer requires the use of Seller's storage and vaporization equipment for Oxygen purchased from third parties, Seller, without charge to 7 12 Buyer, shall permit such storage, and shall also vaporize and deliver such oxygen to the Oxygen Distribution System. Buyer hereby agrees to hold Seller harmless and indemnify Seller against any loss or damage to its equipment, or injury, illness or death of persons arising out of or incident to any deliveries by another industrial gas supplier. Buyer's exercise of the rights specified in this Section 8.2 shall not entitle Buyer to recover from Seller any part of the purchase price paid to such other industrial gas supplier, including but not limited to the difference between the price for Oxygen(s) charged by such other industrial gas supplier and the price(s) specified in this Agreement; provided, however, that if (a) such downtime under Section 8.1 exceeds eight (8) consecutive days, (b) Seller is unable to supply to Buyer the required quantities of Oxygen hereunder, and (c) Buyer is required to obtain Oxygen from sources (including from third parties or Seller) other than the Existing Facility to supply all or part of the applicable quantities of Oxygen set forth in Article 4, then the Monthly Facility Charge specified under Section 5.1 will be reduced by the costs incurred by Buyer in obtaining such Oxygen from sources other than the Existing Facility and the term of this Agreement will be extended for a period equal to twice the duration of such shutdown. Upon written notice from Seller that the shutdown or contingency is concluded, Buyer's right to obtain Oxygen from a third party and Seller's obligation to accept deliveries and vaporize Oxygen obtained from third parties shall cease with respect to such shutdown or contingency and the entire Monthly Facility Charge for subsequent periods shall thereafter be paid to Seller by Buyer pursuant to the terms of this Agreement. If the Monthly Facility Charge is reduced pursuant to this Section 8.2, then any days of downtime under Sections 6.3 or 8.1 in excess of eight (8) consecutive days shall not be counted for purposes of Seller's twenty-one (21) days of ordinary downtime pursuant to Section 8.1. 8.3 Right to Alternate Supply. When Seller is unable to supply all or part of the applicable quantities of Oxygen set forth in Article 4 by reason of shutdown under Section 8.1 or a contingency under Article 11, Buyer shall have the independent right to purchase Oxygen, or any part thereof, from another industrial gas supplier; provided, however, that except as specified in Section 8.2 all such deliveries of Oxygen made by such other industrial gas supplier shall be made into equipment provided by such other industrial gas supplier. ARTICLE 9. - METERING EQUIPMENT 9.1 Oxygen Metering. Seller, at its expense, shall install and maintain a gas-phase oxygen flow rate meter as a part of the Existing Facility at locations within the Facility Site mutually acceptable to the parties for the purpose of accurately measuring the quantities and instantaneous flow rates of Oxygen delivered to Buyer hereunder. The meter shall be a billing quality meter of a brand and type mutually agreed upon by Buyer and Seller. 9.1.1 Calibration. Seller, at its expense, shall, upon notice to Buyer, calibrate such metering equipment at six month intervals, and Buyer may have its representatives present during any such tests. 9.1.2 Buyer Tests. At any time requested by Buyer, but not more often than once a year, Seller will test such metering equipment in the presence of Buyer's representative, 8 13 and if the metering equipment is found on such test to be accurate as specified above, then the cost and expense of such test will be borne by Buyer but if the metering equipment is found on such test to be inaccurate as specified above, then the cost and expense of such test and of correcting the inaccuracy in the metering equipment will be borne by Seller. 9.2 Electric Metering Equipment. Seller, at its expense, shall install and maintain electricity meters of a mutually acceptable quality, brand and type as a part of the Existing Facility at a location mutually acceptable to the parties for the purpose of accurately measuring the power consumption of the Existing Facility. ARTICLE 10. - TAXES 10.1 Sales and Other Taxes. If at any time during the term of this Agreement any tax (other than a net income or excess profits tax, general franchise tax imposed on corporations on account of their right to do business within the state as a foreign corporation) is imposed on Seller by any governmental authority upon, or measured by, the production, delivery, or use of the Oxygen supplied to Buyer, which directly increases Seller's costs incurred in the production, sale or delivery of any Oxygen to Buyer hereunder, Buyer will reimburse Seller therefor to the extent that Seller can reasonably demonstrate that its costs of production, sale or delivery hereunder are directly increased thereby. Buyer shall pay any sales or use taxes imposed on the purchase and sale of Oxygen hereunder. 10.2 Property Taxes. Seller shall pay all real and personal property taxes or assessments which may now or hereafter be levied on the Facility Site or the Existing Facility, respectively, during the term of this Agreement. ARTICLE 11. - CONTINGENCIES 11.1 Contingencies. Neither party hereto will be liable to the other for default or delay in the performance of any of its obligations hereunder due to an act of God, accident, fire, flood, storm, riot, war, sabotage, explosion, strike, work stoppage, concerted acts of workers, national defense requirement, governmental law, ordinance, rule or regulation, whether valid or invalid, extraordinary failure of equipment or inability to obtain sufficient quantities of electrical power, steam, water or other utilities or type of energy, raw material, labor, equipment or transportation or any similar or different contingency beyond its reasonable control which would make performance commercially impracticable whether or not the contingency is of the same class as those enumerated above, it being expressly agreed that such enumeration shall be non-exclusive; provided, however, that neither business downturn nor economic conditions will qualify as a contingency within the meaning of this Article 11. The party so prevented from performance shall, upon prompt, written notice to the other party, be excused to the extent that its obligations are prevented, interfered with or restructured because of such contingency event. Notwithstanding the occurrence of such contingency, each party shall exert all reasonable efforts to continue in the performance of its obligations hereunder and bring any period of contingency to an end and as expeditiously as possible; provided that any strike or 9 14 labor disturbance or similar difficulty of any kind shall be deemed to be beyond the reasonable control of the party whose performance is affected thereby. 11.2 Reduced Delivery or Taking. If, for any period, a contingency covered by Section 11.1 reduces the delivery or taking of Oxygen from the Existing Facility, the party affected thereby will give prompt notice to the other party of the reduction or interruption, and the Monthly Facility Charge will be reduced pursuant to the following formula: Reduction Amount = 0.80 x Monthly Facility Fee A --------------------------- x ----- x N 30.4 275 where: A = Average Oxygen delivered in Tons per day during such time of reduced delivery or taking. N = Number of days of reduced delivery or taking. Buyer will accept and pay for any Oxygen, delivered before said notice is given. Upon receiving said notice from Seller, Buyer will advise Seller to discontinue said deliveries or request that they be continued. If advised by Buyer, Seller shall deliver any Oxygen reasonably available from the Existing Facility and shall use reasonable efforts to deliver in accord with Buyer's demand any Oxygen which Seller has reasonably available for Buyer from other locations. Seller will continue said deliveries, if so requested, to the extent and for as long as Seller in its reasonable discretion determines that its own needs for consumption of Oxygen and its pre-existing contract commitments to others will permit. Buyer will pay for any Oxygen delivered by Seller from other locations pursuant to this Section 11.2 at the price negotiated between the parties at the time plus any additional costs related to special purchase, freight or handling. Buyer shall have the right to obtain Oxygen from other suppliers during the existence of any contingency under Section 11.1. 11.3 No Production. During any period that no Oxygen is delivered or taken from the production of the Existing Facility due to the occurrence of a contingency covered by Section 11.1, Buyer will be fully relieved of its obligation to pay the Monthly Facility Charge. 11.4 Operational Inefficiency. Seller agrees to maintain and repair all equipment at the Existing Facility in a manner to ensure that there is no material degradation in the operational efficiency of such equipment. Seller agrees to reimburse Buyer for any excess electrical consumption over the Base Rate, as hereinafter defined, which results from Seller's failure to so maintain and repair the equipment. As used herein, the term "Base Rate" means 3.2 kwh per 100 SCF when the Existing Facility is producing liquidous product, and an electrical consumption factor ("ECF") in kwh per 100 SCF when the Existing Facility is producing only gaseous product. The ECF will be established during a 24 hour test to be completed prior to November 30, 1997 according to the following formula. (It is understood that the test will not include the impact of a future instrument air compressor which will be installed by Seller approximately one 10 15 year from the Effective Date. Subsequent to such installation, the ECF will then be recalculated pursuant to the following formula to account for such installation.) ECF = e x 1.05 --- v Where: ECF = KWH Electrical Consumption Rate per 100 SCF e = Electricity Consumed v = 100 SCF of Gaseous Oxygen Produced ARTICLE 12. - LIABILITY 12.1 Acknowledgement. Buyer acknowledges that there are hazards associated with the use of the Oxygen. Buyer agrees that its personnel concerned with the Oxygen are aware of the hazards and assumes all responsibility for the warning of its employees and independent contractors of all hazards to persons and property in any way connected with Buyer's use, storage and handling of the Oxygen. Buyer also assumes all responsibility for the suitability and the results of using the Oxygen alone or in combination with other articles or substances and in any manufacturing or other processes or procedures. Neither Seller nor Buyer shall be liable under this Agreement for any incidental, consequential, indirect, or special damages of any kind, including, but not limited to, loss of profits, loss of use or loss of business, unless caused by the willful or intentional acts of such party. 12.2 Indemnity by Buyer. Buyer hereby covenants and agrees to indemnify and hold Seller harmless from and against any and all claims, losses, damages, actions, and causes of action, costs or expenses (including reasonable attorneys' fees) of any nature or kind, brought against Seller arising from or incidental to Buyer's activities or presence, including that of its employees, contractors, agents, representatives, and invitees on or about the Facility Site or Existing Facility; provided, however, that Buyer shall not be liable for, and this indemnity shall not extend to, any such liability, loss, demand, action, or cause of action to the extent that it results from or is attributable to the negligent acts or omissions of Seller, or its employees, contractors, agents, representatives and invitees. 12.3 Indemnity by Seller. Subject to Section 12.1, Seller hereby covenants and agrees to indemnify and hold Buyer harmless from and against any and all claims, losses, damages, actions, and causes of actions, costs or expenses (including reasonable attorneys' fees) of any nature or kind, brought against Buyer arising from or incidental to Seller's activities or presence, including that of its employees, contractors, agents, representatives, and invitees on or about the Geneva Works; provided, however, that Seller shall not be liable for, and this indemnity shall not extend to, any such liability, loss, demand, action, or cause of action to the extent that it results from or is attributable to the negligent acts or omissions of Buyer, or its employees, contractors, agents, representatives and invitees. 11 16 ARTICLE 13. - ATMOSPHERIC CONTAMINANTS Buyer agrees to notify and consult with Seller concerning any process or facility changes by Buyer at the Geneva Works which would cause an increase in atmospheric contaminants at or near the Existing Facility. ARTICLE 14. - ENVIRONMENTAL CONDITIONS AND PERMITS 14.1 Site Condition. In the event any hazardous or toxic materials or substances are discovered on, in or under the Facility Site which would prevent, delay or increase the cost of operation of the Existing Facility, Seller shall promptly notify Buyer. 14.2 Permitting. Seller, without cost to Buyer, will obtain all necessary permits relating to air emissions and the modification, operation, and maintenance of the Existing Facility and the delivery of Oxygen to the Geneva Works. ARTICLE 15. - FAIR LABOR STANDARDS ACT Seller represents that Oxygen delivered to Buyer hereunder will have been produced in compliance with the Fair Labor Standards Act of 1938, as amended. ARTICLE 16. - DEFAULT 16.1 Default by Seller. If a voluntary or involuntary petition should be filed by or against Seller under any bankruptcy law (including a petition for reorganization, extension of payment, composition or adjustment of liabilities), or if a receiver should be appointed for Seller, or if an attachment or execution should be levied against all or part of the Existing Facility, or if Seller should materially default in the performance of any material covenant or obligation to be performed by it under this Agreement, and within ninety (90) days after receipt of written notification thereof from Buyer, should Seller not cure such default or if such default is not curable within ninety (90) days and Seller has not commenced and is diligently pursuing such cure, then Buyer may, without prejudice to any other right or remedy, terminate this Agreement by written notice without further responsibility or liability. 16.2 Default by Buyer. If a voluntary or involuntary petition should be filed by or against Buyer under any bankruptcy law (including a petition for reorganization, extension of payment, composition or adjustment of liabilities), or if a receiver should be appointed for Buyer, or if an attachment or execution should be levied against all or part of the Geneva Works, or if Buyer should materially default in the performance of any material covenant or obligation to be performed by it under this Agreement, and within ninety (90) days after receipt of written notification thereof from Seller, should Buyer not cure such default or if such default is not curable within ninety (90) days and Buyer has not commenced and is diligently pursuing such cure, then Seller may, without prejudice to any other right or remedy, terminate this Agreement by written notice without further responsibility or liability. 12 17 ARTICLE 17. - ASSIGNMENT Any assignment of this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld, shall be void. ARTICLE 18. - APPLICABLE LAW This Agreement will be governed by and construed in accordance with the laws of the State of Utah and any action seeking to enforce or interpret the terms hereof, or arising out of the breach hereof, shall be commenced and maintained in the State of Utah. ARTICLE 19. - RESOLUTION OF DISPUTES In the event that a party to this Agreement has reasonable grounds to believe that the other party hereto has failed to fulfill any obligation hereunder, such party will promptly notify the other party in writing of the substance of its belief. Unless otherwise agreed in writing, the party receiving such notice must respond in writing within fifteen (15) days of receipt of such notice by (a) providing either evidence of cure of the condition specified or an explanation of why it believes that its performance is in accordance with the terms and conditions of this Agreement, and (b) specifying three (3) dates, all of which must be within fifteen (15) days from the date of its response, unless otherwise agreed in writing, for a meeting to resolve the dispute. The claiming party will then select one (1) of the three (3) dates, and a dispute resolution meeting will be held. At the conclusion of such meeting, the parties shall have the right to pursue any remedy otherwise permitted in law or in equity. Notwithstanding anything in this Agreement to the contrary, but subject to Article 11 and Section 8.1, Seller agrees that it will provide uninterrupted supply of Oxygen during any such dispute so long as all contractually required payments are made. ARTICLE 20. - TERM 20.1 Term Subject to the provisions of Section 11.4, the term of this Agreement will commence as of the Effective Date and expire sixty-four (64) months after the Effective Date, and will continue in effect thereafter until terminated by either party upon giving not less than twelve (12) months prior written notice of such termination to the other party. Notwithstanding the foregoing, Buyer shall have the right to terminate this Agreement at any time after the expiration of thirty-six (36) months from the Effective Date if Buyer determines it can no longer benefit from the use of oxygen from the Existing Facility as a result of changed technology or obsolescence of equipment or technology utilized at the Geneva Works, such termination to be effected by Buyer giving written notice to Seller at least one hundred twenty (120) days prior to termination. Buyer further agrees to use reasonable efforts to communicate any decision by Geneva's senior officers to terminate this Agreement pursuant to the immediately foregoing sentence if such decision is made prior to such notice period but within one (1) year of the anticipated effective date of such termination; provided, however, that the failure to communicate such decision shall not be a default hereunder or affect in any way Geneva's right to continue with or terminate this Agreement upon written notice as otherwise provided herein. 13 18 Upon the expiration of the initial term of this Agreement, both parties agree to renegotiate in good faith for a contract extension with terms which will reflect capital depreciation, plant efficiency, technical obsolescence, expected plant life, additional maintenance requirements, reasonable profit to Seller, and other factors reasonably related to the production and price of Oxygen provided, that neither party shall be obligated to enter into any such agreement or extension. ARTICLE 21. - NOTICE Any notice required to be given by either party to the other under any provisions of this Agreement shall be in writing and shall be considered as having been delivered on the date of personal delivery or by an acknowledged facsimile transmission, addressed to the other party as follows: SELLER: AIR LIQUIDE AMERICA CORPORATION 2121 N. California Blvd. Walnut Creek, California 94596 Attention: Area Director On-Sites Facsimile No.: 510-977-6519 BUYER: GENEVA STEEL COMPANY 10 South Geneva Road Vineyard, Utah 84058 Attention: General Counsel Facsimile No.: 801-227-9198 With a required copy to: KIMBALL, PARR, WADDOUPS, BROWN & GEE 185 South State Street, Suite 1300 Salt Lake City, Utah 84111 Attention: Roger D. Henriksen, Esq. Facsimile No.: 801-532-7750 or to such other party or such other address as either party shall from time to time designate for that purpose. Any notice by letter under this Agreement will be deemed to be given as of the date such letter is received by the other party hereto. ARTICLE 22. - ENTIRE AGREEMENT This Agreement comprises the entire agreement between the parties hereto and supersedes all previous and contemporaneous writings, oral understandings, negotiations, and previous agreements with reference to the subject matter hereof, including but not limited to the Letter of Intent, Section 2.10 of the 1995 Agreement (but no other provision of the 1995 Agreement), that certain Oxygen Supply Agreement dated September 27, 1988, as amended, and that certain 14 19 Lease dated April 17, 1968, as amended. There are no other promises, representations or warranties affecting this Agreement. There shall be no modification or recision of this Agreement except by a writing signed by both Buyer and Seller. Any terms and conditions appearing in any purchase orders, even if signed by Seller and/or Buyer, shall be deemed null and void. ARTICLE 23. - MISCELLANEOUS 23.1 Confidentiality. Neither this Agreement nor any information relating to this Agreement or the Existing Facility shall be publicized or disclosed by Seller or Buyer without the prior written consent of the other party in each instance, except as otherwise required by law. 23.2 Severability. Whenever possible, each provision of this Agreement shall be interpreted to be valid under applicable law. In the event that any condition, covenant or other provision herein contained is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Agreement and shall in no way affect any other covenant or condition herein contained. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such provision shall be deemed valid to the extent of the scope or breadth permitted by law. 23.3 Waiver. Either party may, by notice signed by an officer of such party and delivered in the manner provided in this Agreement, but shall be under no obligation to, waive any of its rights or conditions to its rights hereunder, or any duty, obligation or covenant of the other party. To be effective, such waiver shall specifically state the intention of the waiving party to waive such rights or conditions to its rights. Such a written waiver shall not affect or alter the other provisions of this Agreement. 23.4 Power Rates. Upon the request of Buyer, Seller agrees to use reasonable efforts to assist Buyer in obtaining the most favorable electrical power rates possible for power to be utilized at the Existing Facility, including but not limited to providing documentation, information and consultation in connection therewith, and, if necessary, restructuring the ownership of the Existing Facility and other provisions of this Agreement in a mutually acceptable manner to take advantage of any available lower power rates. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. AIR LIQUIDE AMERICA CORPORATION, GENEVA STEEL COMPANY, a Delaware corporation a Utah corporation By: /s/ Michael J. Smith By: /s/ Ken C. Johnsen ----------------------------- ------------------------------ Its: Area Vice President Its: Vice President ------------------------- -------------------------- 15 20 EXHIBIT 1.2 to Oxygen Supply Agreement --------------------------------------------------------------------------- FACILITY SITE AND BATTERY LIMITS The "Facility Site" and battery limits referred to in the foregoing Agreement are located in Utah County, Utah and are more particularly described as follows: [See attached Exhibit A] 21 [OXYGEN PLANT SITE MAPPING] 22 EXHIBIT 1.5 to Oxygen Supply Agreement --------------------------------------------------------------------------- GROUND LEASE The "Ground Lease" referred to in the foregoing Agreement is attached hereto. 2 EX-10.37 4 1ST AMENDMENT TO TACONITE PELLET SALES AGMT 1 EXHIBIT 10.37 FIRST AMENDMENT TO TACONITE PELLET SALES AGREEMENT THIS FIRST AMENDMENT TO TACONITE PELLET SALES AGREEMENT (the "Amendment") is made and entered into this 25 day of July, 1997 by and between GENEVA STEEL COMPANY, a Utah corporation (hereinafter referred to as "Buyer"), and USX CORPORATION, a Delaware corporation (hereinafter referred to as "Seller"). WITNESSETH: WHEREAS, Buyer and Seller heretofore entered into a certain TACONITE PELLET SALES AGREEMENT, effective (by its terms) as of September 1, 1994 (hereinafter referred to as the "Agreement") covering Buyer's purchase and Seller's sale of taconite pellets in accordance with the terms and conditions as provided under the Agreement; and WHEREAS, Buyer and Seller, for various business-related reasons, mutually desire to amend the quantity and payment terms of the Agreement as hereinafter provided. NOW, THEREFORE, in consideration of the foregoing premises and the covenants herein contained, Buyer and Seller, intending to be legally bound, hereby agree as follows: 1. Article II. QUANTITY of the said Agreement is hereby amended by substituting the following table of Minimum Tons and Maximum Tons for each Contract Year of the Agreement at the end of Article II.A, in replacement in its entirety of the table originally set forth therein: "II QUANTITY A. * * *
Minimum Tons Maximum Tons September 1, 1994 through August 31, 1995: 2,700,000 3,000,000 September 1, 1995 through August 31, 1996: 2,700,000 3,000,000 September 1, 1996 through August 31, 1997: 2,700,000 3,000,000 September 1, 1997 through August 31, 1998: 2,700,000 3,000,000 September 1, 1998 through August 31, 1999: 2,700,000 3,000,000"
2 2. Article VI. PAYMENT of the Agreement is hereby amended by revising Article VI.A thereof to read in its entirety as follows: "VI. PAYMENT A. Seller shall invoice Buyer weekly for each shipment of Product hereunder. Invoices shall be faxed to Buyer. Each invoice shall be for all unbilled Product that has been delivered to Buyer prior to such invoice date. Buyer shall pay Seller by wire transfer of funds due hereunder to Seller within eleven (11) days following receipt of such invoice. If Buyer pays such invoice within ten (10) days, Buyer shall be entitled to a one-half-of-one-percent (1/2%) discount on the total amount due on such invoice. However, if Buyer does not remit full payment by the close of business on the eleventh (11th) day, Buyer shall be considered to be in default of the Agreement in accordance with Article X.B hereof. Such wire transfers shall be made to an account to be designated by Seller from time to time by written notice to Buyer. Invoices sent during any Contract Year before the Product Prices are available shall reflect the Product Prices in effect immediately preceding the date which a new Product Price would become effective. When the Product Prices for such Contract Year become available, Seller shall issue an invoice for any balance due as a result of a price increase or issue a credit for any over payment due to a price decrease. Interest shall accrue on all past due payments daily at the rate of twelve percent (12%) per annum. Seller's invoice(s) covering shipment(s) hereunder will be issued on Friday of each week unless such day falls on a holiday; in which latter event, Seller's invoice(s) shall be issued on the next succeeding business day. In the event payment for Seller's invoice falls due on a holiday or weekend, Buyer shall make payment on the next succeeding business day and Buyer's account shall be credited as though payment had occurred on the exact due date. Buyer agrees that certified weights for all Product received by Buyer shall be provided to Seller promptly following Buyer's receipt of each shipment at the Geneva Works." 3. All other terms and conditions of the Agreement between Buyer and Seller shall remain in full force and effect. 3 IN WITNESS WHEREOF, Buyer and Seller have caused this Amendment to be executed by their respectively authorized representatives, effective on the day and year first above written. GENEVA STEEL COMPANY a Utah corporation By: /s/ Ken C. Johnsen ------------------------------------ Ken C. Johnsen Vice President & General Counsel USX CORPORATION a Delaware corporation By: /s/ Peter Moller ------------------------------------ Peter Moller Director Planning, Procurement, Distribution & Sales 3 EX-10.40 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.40 EMPLOYMENT AGREEMENT AGREEMENT by and between Geneva Steel Company, a Utah corporation (the "Company") and ___________________________________ (the "Executive"), dated as of _____ day of May, 1997. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. The Board of Directors further believes it is appropriate to provide for severance payments and benefits for the Executive in the event of termination of employment not related to a Change of Control under the circumstances hereinafter set forth. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. A G R E E M E N T : NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the earlier of the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs or the termination of an Executive's employment unrelated to a Change of Control as provided in Section 5 hereof. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control; or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate two years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"); or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control (i) any acquisition directly from the Company; (ii) any acquisition by the Company; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same 2 3 proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any tune during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and tune during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. 3 4 (b) Compensation. (i) Base Salary. During the Employment Period the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's average annual cash bonus for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Average Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any tune during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance 4 5 with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any tune during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure results form incapacity due to physical mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies 5 6 the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the wilful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. 6 7 (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall not be more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of the receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any, and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"; and 7 8 (B) the amount equal to the sum of (x) the Executive's Annual Base Salary and (y) the Average Annual Bonus; and (ii) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the 8 9 Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (e) Other than in Connection with a Change in Control. If the Executive's employment is terminated other than in connection with a Change of Control and other than for Cause, Death or Disability, or by the Executive for Good Reason, the Company shall pay or provide to the Executive the payments and benefits set forth in subparagraph (a)(i)(A) and (B) of this paragraph 6. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. [The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others.] In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Confidential Information. The executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any 9 10 of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such success had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumed and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Utah, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------------------- -------------------------------- -------------------------------- -------------------------------- 10 11 If to the Company: Geneva Steel Company 10 South Geneva Road Vineyard, UT 84058 Attention: Ken C. Johnsen, General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall be not be deemed to be a waiver of such provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in it name on its behalf, all as of the date and year first-above written. -------------------------------- [Executive] GENEVA STEEL COMPANY By ------------------------------ Its ----------------------------- 11 EX-13 6 SELECTED PORTIONS OF THE ANNUAL REPORT 1 EXHIBIT 13 SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- OPERATING STATISTICS Net sales............ $726,669 $712,657 $665,699 $486,062 $465,181 Gross margin......... 60,691 50,350 71,508 15,514 21,723 Income (loss) from operations......... 38,204 25,729 47,713 (6,791) 1,102 Income (loss) before extraordinary item............... (1,268) (7,238) 11,604 (16,696) (8,606) Net income (loss).... (1,268) (7,238) 11,604 (26,230) (8,606) Net income (loss) applicable to common shares...... (11,608) (16,327) 3,606 (33,276) (12,072) Net income (loss) per common share before extraordinary item............... (.74) (1.07) .24 (1.57) (.80) Net income (loss) per common share....... (.74) (1.07) .24 (2.20) (.80) BALANCE SHEET STATISTICS Cash and cash equivalents........ $ -- $ 597 $ 12,808 $ -- $ 64,267 Working capital...... 67,063 71,065 33,045 46,797 89,167 Current ratio........ 1.66 1.64 1.29 1.49 2.04 Net property, plant and equipment...... 458,315 454,523 470,390 453,286 314,590 Total assets......... 646,070 657,386 628,797 606,815 498,384 Long-term debt....... 399,906 388,431 342,033 357,348 224,991 Redeemable preferred stock.............. 56,169 55,437 51,031 43,032 35,986 Stockholders' equity............. 82,603 92,827 108,074 103,664 135,775 Long-term debt as a percentage of stockholders' equity............. 484% 418% 316% 345% 166% ADDITIONAL STATISTICS Operating income (loss) per ton shipped............ $ 17.90 $ 12.00 $ 24.99 $ (4.63) $ .73 Capital expenditures....... 47,724 26,378 68,025 164,918 82,534 Depreciation and amortization....... 44,959 44,415 39,308 29,870 23,150 Cash flows from operating activities......... 32,070 (19,520) 84,130 (28,018) 64,394 Raw steel production (tons in thousands)......... 2,460 2,428 2,145 1,890 2,000 Steel products shipped (tons in thousands)......... 2,135 2,145 1,909 1,467 1,511
4 2 SELECTED FINANCIAL DATA -- CONTINUED PRICE RANGE OF COMMON STOCK The following table sets forth, for the periods indicated, the high and low sales prices for the Class A common stock as reported on the NYSE Composite Tape. Fiscal Year Ended September 30, 1996............... HIGH LOW -------- -------- First Quarter ended December 31.................. $ 8 $ 6 3/8 Second Quarter ended March 31.................... 8 1/4 5 1/8 Third Quarter ended June 30...................... 7 1/8 5 1/4 Fourth Quarter ended September 30................ 5 1/2 3 1/8 Fiscal Year Ended September 30, 1997............... HIGH LOW -------- -------- First Quarter ended December 31.................. $ 4 1/2 $ 2 3/4 Second Quarter ended March 31.................... 3 5/8 2 Third Quarter ended June 30...................... 3 1/2 2 1/4 Fourth Quarter ended September 30................ 4 1/4 2 5/8
As of November 28, 1997, the Company had 14,050,515 shares of Class A common stock outstanding, held by 644 stockholders of record, and 19,151,348 shares of Class B common stock outstanding, held by five stockholders of record. 5 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth the percentage relationship of certain cost and expense items to net sales for the years indicated:
YEAR ENDED SEPTEMBER 30, ------------------------- 1997 1996 1995 ----- ----- ----- Net sales...................................... 100.0% 100.0% 100.0% Cost of sales.................................. 91.6 92.9 89.3 ----- ----- ----- Gross margin................................... 8.4 7.1 10.7 Selling, general and administrative expenses... 3.1 3.5 3.5 ----- ----- ----- Income from operations......................... 5.3 3.6 7.2 Other income (expense): Interest and other income.................... 0.0 0.1 0.1 Interest expense............................. (5.6) (5.1) (4.6) Other expense................................ -- (0.2) (0.4) ----- ----- ----- Income (loss) before provision (benefit) for income taxes................................. (0.3) (1.6) 2.3 Provision (benefit) for income taxes........... (0.1) (0.6) 0.6 ----- ----- ----- Net income (loss).............................. (0.2)% (1.0)% 1.7% ===== ===== =====
The following table sets forth the sales product mix as a percentage of net sales for the years indicated:
YEAR ENDED SEPTEMBER 30, ------------------------- 1997 1996 1995 ----- ----- ----- Plate.......................................... 45.4% 45.0% 35.1% Sheet.......................................... 30.2 29.7 40.7 Pipe........................................... 9.6 6.6 6.4 Slab........................................... 11.9 15.9 15.0 Non-steel...................................... 2.9 2.8 2.8 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Fiscal Year Ended September 30, 1997 Compared With Fiscal Year Ended September 30, 1996 Net sales increased 2.0% due to a shift in product mix to higher-priced pipe and plate products from lower-priced slab products offset in part by a decrease in shipments of approximately 10,200 tons and a decrease in overall average selling prices for the year ended September 30, 1997 as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of plate, pipe and slab products decreased by 2.4%, 1.6% and 0.6%, respectively, while the weighted average sales price of sheet products increased by 3.5% in the year ended September 30, 1997 compared to the previous fiscal year. The decrease in plate prices was due to continued pricing pressure from unfairly traded imports and other market factors. Shipped tonnage of plate and pipe increased approximately 44,900 tons or 5.4% and 56,300 tons or 50.2%, respectively, while shipped 6 4 tonnage of sheet and slab products decreased approximately 200 tons or 0.03% and 111,200 tons or 23.3%, respectively, between the two periods. During the third and fourth quarters a shortage of railcars increased costs and caused shipments to be slightly lower than expected. Although the Company's primary rail carrier is building additional railcars over the next several months to meet the Company's needs and is taking other steps to improve its service to the Company, the shortage is expected to adversely affect future operations until corrected. Consistent with the Company's strategic objectives, plate shipments have increased, in part through utilization of outside processors to level and cut plate from coils. The Company is currently experiencing increased demand for pipe and is increasing its production of pipe. The Company continues to sell slabs to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. The Company is currently in the process of installing the rolling mill finishing stand upgrades, which are expected to increase rolling mill throughput and product quality. Upgrades on three of six finishing stands have been substantially completed. In light of recent disruptions to operations caused by work on the upgrades, the Company has elected to extend the schedule for completion of future work over several months to limit the ongoing impact. In November 1996, the Company, together with another domestic plate producer, filed anti-dumping petitions with the Department of Commerce and the International Trade Commission against imports of cut-to-length carbon plate from the Russian Federation, Ukraine, the People's Republic of China and the Republic of South Africa (the "Plate Trade Cases"). The petitions alleged large dumping margins and also set forth the injury to the U.S. industry caused by dumped imports from the subject countries. The United States Department of Commerce issued a final affirmative determination of dumping for each country in October 1997, finding substantial dumping margins on cut-to-length steel plate imports from those countries. In December 1997, the International Trade Commission ("ITC") voted unanimously that the United States industry producing cut-to-length carbon steel plate was injured due to imports of dumped cut-to-length plate from the People's Republic of China, the Russian Federation, Ukraine and the Republic of South Africa. The United States has negotiated suspension agreements that were effective upon the affirmative injury determination by the ITC in December 1997. Those agreements will limit imports of cut-to-length carbon steel plate from the four countries to a total of approximately 440,000 tons per year for the next five years, a reduction of about two-thirds from 1996 import levels, and provide for an average 10-15% increase in import prices to remove the injurious impact of the imports. Any violation or abrogation of the suspension agreements will result in immediate imposition of the dumping duties found by the Commerce Department. Dumped imports from countries not covered by the Plate Trade Cases continue to suppress plate prices. The Company continues to monitor cut-to-length plate imports from other countries as well as imports of other of its products and may file additional trade cases in the future. Domestic competition remains intense and imported steel continues to adversely affect the market. Moreover additional production capacity is being added in the domestic 7 5 plate and sheet markets. The Company sells substantially all of its products in the spot market at prevailing market prices. The Company believes its percentage of such sales is significantly higher than that of most of the other domestic integrated producers. Consequently, the Company may be affected by price increases or decreases more quickly than many of its competitors. The Company intends to react to price increases or decreases in the market as required by competitive conditions. Cost of sales includes raw materials, labor costs, energy costs, depreciation and other operating and support costs associated with the production process. The Company's cost of sales, as a percentage of net sales, decreased to 91.6% for the year ended September 30, 1997 from 92.9% for the previous fiscal year as a result of an increase in net sales in fiscal year 1997. The overall average cost of sales per ton shipped increased approximately $3 per ton between the two periods primarily as a result of the shift in product mix to higher-cost plate and pipe products from lower-cost slab products as well as an increase in operating costs. Operating costs increased as a result of increased natural gas and other fuel costs, increased hot metal costs associated with blast furnace reline and repairs, production disruptions associated with the rolling mill finishing stand upgrades, higher wages and benefits and other increased costs. The increases in costs were partially offset by significant improvements in production yield and throughput rates. These operating improvements have, however, regressed late in the year. The Company expects fuel prices to increase during the winter months. Depreciation costs included in cost of sales increased approximately $1.0 million for the year ended September 30, 1997 compared with the previous fiscal year. This increase was due to increases in the asset base resulting primarily from the No. 1 blast furnace reline and repair. Selling, general and administrative expenses for the year ended September 30, 1997 decreased approximately $2.1 million as compared to the previous fiscal year. These lower expenses resulted primarily from Company efforts to reduce administrative staff, to decrease outside services and to reduce other costs. Interest expense increased approximately $4.5 million during the year ended September 30, 1997 as compared to the previous fiscal year, as a result of significantly lower capitalized interest and higher levels of borrowing. The higher levels of borrowing resulted, in part, from the termination of the Company's receivables securitization facility and the termination of the Company's prepayment arrangement with Mannesmann. In May 1996, the Company terminated its receivables securitization facility in connection with an amendment to and restatement of the Company's revolving credit facility. As a result, other expense decreased approximately $1.7 million for the year ended September 30, 1997, as compared with the previous fiscal year. 8 6 Fiscal Year Ended September 30, 1996 Compared With Fiscal Year Ended September 30, 1995 Net sales increased 7.1% due to increased shipments of approximately 235,600 tons, offset in large part by decreased overall average selling prices for the year ended September 30, 1996 as compared to the previous fiscal year. The weighted average sales price (net of transportation costs) per ton of sheet, plate, pipe and slab products decreased by 8.5%, 2.0%, 0.9% and 11.8%, respectively, in the year ended September 30, 1996, as compared to the previous fiscal year. The decrease in prices was due to pricing pressure resulting from unfairly traded imports and an increase in domestic hot-rolled capacity as well as other market factors. Shipped tonnage of plate, pipe and slabs increased approximately 239,300 tons or 40.1%, 11,900 tons or 11.9% and 106,500 tons or 28.8%, respectively, while shipped tonnage of sheet decreased approximately 122,100 tons or 14.5% between the two years. The overall average selling price realization per ton was favorably affected by a shift in product mix to higher-priced plate and pipe products from lower-priced sheet products, offset in part by a shift in product mix to lower-priced slab products. Consistent with the Company's strategic objectives, plate shipments increased as various upgrades to plate processing and finishing equipment were integrated into the production process. The Company sold slabs to maximize production from the continuous caster while efforts to increase rolling mill throughput continue. The Company's cost of sales, as a percentage of net sales, increased to 92.9% for the year ended September 30, 1996 from 89.3% for the previous fiscal year primarily as a result of lower average selling prices, offset in part by lower average operating costs. The overall average cost of sales per ton shipped decreased approximately $2 per ton between the years primarily as a result of lower operating costs, offset in part by a shift in product mix to higher-cost plate and pipe products from lower-cost sheet products. Operating costs decreased as a result of improved production yields and throughput rates, offset in part by higher depreciation expense, the adverse impact of the plant-wide power outage discussed below, increased raw materials costs, higher wages and benefits, and other increased costs. A plant-wide power outage caused by unusual weather conditions in late January 1996 had a significant effect on operating results during the fiscal year. The Company maintains insurance for both property damage and business interruption, subject to a deductible of $1 million per occurrence. The Company recorded a portion of the expected loss recovery during the second and third quarters of the fiscal year. The Company's new plasma-fired cupola ironmaking facility became available for operation during the year ended September 30, 1996. The cupola is used to supplement blast furnace iron production during the reline of the Company's blast furnaces and may also be used during periods requiring supplementary ironmaking capacity. The facility lease cost of the cupola adds approximately $2 per ton to finished product cost, effective July 1, 1996. The impact of the cupola facility on 9 7 finished product cost is significantly dependent on raw material costs and consumption rates, particularly with respect to scrap and coke, and the level of use of the cupola. Depreciation costs included in cost of sales increased approximately $5.1 million for the year ended September 30, 1996 as compared with the previous fiscal year. This increase was due to increases in the asset base resulting from capital expenditures. Selling, general and administrative expenses for the year ended September 30, 1996 increased approximately $0.8 million as compared to the previous fiscal year. These higher expenses resulted primarily from increased outside services. Interest expense increased approximately $5.6 million during the year ended September 30, 1996, as compared to the previous fiscal year as a result of significantly lower capitalized interest and higher levels of borrowing. The higher levels of borrowing resulted from the termination of the Company's receivables securitization facility discussed below. In May 1996, the Company terminated its receivables securitization facility in connection with an amendment to and restatement of the Company's revolving credit facility. Deferred fees of approximately $550,000 associated with establishing the receivables securitization facility were expensed to other expense during the year ended September 30, 1996. Liquidity and Capital Resources The Company's liquidity requirements arise from capital expenditures and working capital requirements, including interest payments. The Company has met these requirements principally from the sale of equity, the incurrence of long-term indebtedness, including borrowings under the Company's credit facilities, equipment lease financing and cash provided by operations. In March 1993, the Company issued in a public offering $135 million principal amount of 11 1/8% senior notes (the "11 1/8% Senior Notes" and, together with the 9 1/2% Senior Notes discussed below, the "Senior Notes"). The 11 1/8% Senior Notes mature in 2001, are unsecured and require interest payments semi-annually on March 15 and September 15. After March 1998, the 11 1/8% Senior Notes are redeemable, in whole or in part, at the option of the Company, subject to certain redemption premiums. A portion of the proceeds from the 11 1/8% Senior Notes offering was used to repurchase, at par value, approximately $70 million aggregate principal amount of term debt. In connection with the offering of the 11 1/8% Senior Notes, the Company issued $40 million of 14% cumulative redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") at a price of $100 per share and warrants to purchase an aggregate of 1,132,000 shares of Class A common stock. The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a liquidation preference of approximately $151 per share as of September 30, 1997. Dividends accrue at a rate equal to 14% per annum of the liquidation preference and, except as provided below, are payable quarterly in cash from funds legally available 10 8 therefor. For dividend periods ending before April 1996, the Company had the option to add dividends to the liquidation preference in lieu of payment in cash. Prior to April 1996, the Company elected to add the dividends to the liquidation preference. The Redeemable Preferred Stock is exchangeable, at the Company's option, into subordinated debentures of the Company due 2003 (the "Exchange Debentures"). The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally available therefor. The Company's ability to pay cash dividends on the Redeemable Preferred Stock is subject to the covenants and tests contained in the indentures governing the Senior Notes and in the Company's revolving credit facility. Restricted payment limitations under the Company's Senior Notes precluded payment of the quarterly preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends were approximately $14.3 million at September 30, 1997. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. As a result of the Company's inability to pay four full quarterly dividends, the holders of the Redeemable Preferred Stock elected two directors on May 30, 1997. The right of such holders to elect directors continues until the Company has paid all dividends in arrears and has paid the dividends due for two consecutive quarters thereafter. After March 1998, both the Redeemable Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's option, subject to certain redemption premiums. While not affecting net income (loss), dividends and the accretion required over time to amortize the original issue discount associated with the Redeemable Preferred Stock will negatively impact quarterly earnings per share by approximately $.18 per share. The warrants to purchase the Company's Class A common stock are exercisable at $11 per share, subject to adjustment in certain circumstances, and expire in March 2000. In February 1994, the Company completed a public offering of $190 million principal amount of 9 1/2% senior notes (the "9 1/2% Senior Notes"). The 9 1/2% Senior Notes mature in 2004, are unsecured and require interest payments semi-annually on January 15 and July 15. After January 1999, the 9 1/2% Senior Notes are redeemable, in whole or in part, at the option of the Company, subject to certain redemption premiums. A portion of the proceeds from the 9 1/2% Senior Notes offering was used to repay the Company's remaining outstanding term debt of approximately $90 million aggregate principal amount and to pay contractual prepayment premiums of approximately $12.3 million. On May 14, 1996, the Company amended and restated its revolving credit facility (the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA, Inc., as agent. The Revolving Credit Facility is used primarily for the working capital and capital expenditure needs of the Company. The Revolving Credit Facility, in the amount of up to $125 million, is secured by the Company's inventories, accounts receivable, general intangibles, and proceeds thereof, and expires on May 14, 2000. Interest is payable monthly at the defined base rate (8.50% at September 30, 1997) plus 1.50% or the defined LIBOR rate (5.69% at September 30, 1997) plus 2.75%. The Company pays a monthly commitment fee based on an annual rate of 11 9 .50% of the average unused portion of the borrowing limit under the Revolving Credit Facility. The amount available to the Company under the Revolving Credit Facility ranges between 50 to 60 percent, in the aggregate, of eligible inventories plus 85 percent of eligible accounts receivable. Borrowing availability under the Revolving Credit Facility is also subject to other financial tests and covenants. The Company's receivables securitization facility was terminated in connection with the amendment. As of September 30, 1997, the Company's eligible inventories and accounts receivable supported access to $106.0 million under the Revolving Credit Facility. As of September 30, 1997 the Company had $74.9 million in borrowings and $9.9 million in letters of credit outstanding under the Revolving Credit Facility, leaving $21.2 million in additional borrowing availability. The terms of the Revolving Credit Facility and of the Company's Senior Notes include cross default and other customary provisions. Financial covenants contained in the Revolving Credit Facility and/or the Senior Notes also include, among others, a limitation on dividends and distributions on capital stock of the Company, a tangible net worth requirement, a cash interest coverage requirement, a cumulative capital expenditure limitation, limitations on the incurrence of additional indebtedness unless certain financial tests are satisfied, a limitation on mergers, consolidations and dispositions of assets and limitations on liens. In the event of a change in control, the Company must offer to purchase all Senior Notes then outstanding at a premium. Prior to the amendment and restatement of the Revolving Credit Facility on May 14, 1997, the Company entered into various amendments modifying or waiving the financial covenants and tests contained in the revolving credit facility. Besides these financing activities, the Company's major source of liquidity has been cash provided by operating activities. Net cash provided by operating activities was $32.1 million for the year ended September 30, 1997, as compared with net cash used for operating activities of $19.5 million and net cash provided by operating activities of $84.1 million for the years ended September 30, 1996 and 1995, respectively. The sources of cash provided by operating activities during the year ended September 30, 1997, included depreciation and amortization of $45.0 million, a decrease in accounts receivable of $16.4 million and an increase in accrued liabilities of $3.0 million. These sources of cash flow were offset in part by an increase in inventories of $6.9 million, a decrease in accounts payable of $13.2 million, a decrease in production prepayments of $9.8 million when the Company's production prepayment arrangement with Mannesmann was terminated, a decrease in the net deferred tax liability of $0.8 million and a net loss of $1.3 million. Capital expenditures were $47.7 million, $26.4 million and $68.0 million for fiscal years 1997, 1996 and 1995, respectively. Capital expenditures for 1997 were higher than expected due in part to costs associated with the reline and repairs of the No. 1 and No. 2 blast furnaces and the related stoves. Capital expenditures for fiscal year 1998 are estimated at approximately $39 million, which includes completion of the rolling mill finishing stand modernization project, implementation of new business and financial software and various other projects designed to reduce costs and 12 10 increase product quality and throughput. The Company anticipates that it may incur significant start-up and transition costs as the remaining rolling mill finishing stand equipment is installed and implemented. The Company has selected and started the implementation of SAP software, an enterprise-wide business system. The Company expects to benefit significantly from such implementation, including through addressing the year 2000 issue inherent in its legacy systems. The implementation is currently estimated to cost $8 to $10 million with portions being implemented during a two year period. Depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. In addition, the Revolving Credit Facility contains certain limitations on capital expenditures. The Company has formed a limited liability company with certain unrelated parties, which in turn has entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a cokeless ironmaking facility and associated power generation and air separation facilities. As of September 30, 1997, the Company had spent (net of DOE reimbursement) approximately $0.9 million in connection with the project, which has been included in construction in progress in the accompanying consolidated financial statements. Expenditures on the project are subject to government cost sharing arrangements. Completion of the project remains subject to several contingencies. Under certain circumstances, the Company will be required to repay some or all of the government cost share funds and expense other funds included in construction in progress in the event the project is terminated. The Company is required to make substantial interest and dividend payments on the Senior Notes, its Redeemable Preferred Stock and outstanding balances under the Revolving Credit Facility. Currently, the Company's annual cash interest expense is approximately $39.4 million and its annual preferred stock dividends are approximately $10.4 million. Factors Affecting Future Results This annual report contains a number of forward-looking statements, including, without limitation, statements contained in this report relating to the Company's ability to obtain railcars, to increase shipments to the expected levels, the Company's objective to increase higher-margin plate and pipe product mix while reducing lower-margin slab sales, the successful implementation of the rolling mill finishing stands upgrade which is expected to increase production throughput and product quality, the Company's ability to compete with the additional production capacity being added in the domestic plate and sheet markets, the Company's ability to monitor and control the level of unfairly traded imports and their effect on the domestic market, the expected adequacy of cash resources including additional borrowing availability and any other statements contained herein to the effect that the Company or its management "believes", "expects", "anticipates", "plans" and similar expressions. There are a number of important factors that could cause actual events or the 13 11 Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below. The Company's future operations will be impacted by, among other factors, pricing, product mix, throughput levels, production efficiencies and railcar availability. The Company has efforts underway to increase throughput and production efficiencies and to continue shifting its product mix to higher-margin products. There can be no assurance that the Company's efforts will be successful or that sufficient demand will exist to support the Company's additional throughput capacity. Pricing in future periods is a key variable to the Company's future operating results that remains subject to significant uncertainty. Future pricing will be affected by several factors including the level of imports, future capacity additions, product demand and other market factors such as the increased domestic plate production capacity currently coming on line. The short-term and long-term liquidity of the Company also is dependent upon several other factors, including availability of capital, foreign currency fluctuations, competitive and market forces, capital expenditures and general economic conditions. Moreover, the United States steel market is subject to cyclical fluctuations that may affect the amount of cash internally generated by the Company and the ability of the Company to obtain external financing. Although the Company believes that the anticipated cash from future operations and borrowings under the Revolving Credit Facility will provide sufficient liquidity for the Company to meet its debt service requirements and to fund ongoing operations, including required capital expenditures, there can be no assurance that these or other possible sources will be adequate. Moreover, because of the Company's current leverage situation, its financial flexibility is limited. The Company also faces labor negotiations with the expiration of its union labor agreement on March 31, 1998. The Company is currently unable to predict the effect such negotiations will have on the Company's operations and financial condition. Inflation can be expected to have an effect on many of the Company's operating costs and expenses. Due to worldwide competition in the steel industry, the Company may not be able to pass through such increased costs to its customers. 14 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Geneva Steel Company: We have audited the accompanying consolidated balance sheets of Geneva Steel Company (a Utah corporation) and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Geneva Steel Company and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. Arthur Anderson LLP Salt Lake City, Utah October 29, 1997 (except with respect to the matter discussed in Note 9 as to which the date is December 17, 1997) 15 13 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ----------------------- 1997 1996 --------- --------- ASSETS Current Assets: Cash and cash equivalents.................... $ -- $ 597 Accounts receivable, less allowance for doubtful accounts of $4,564 and $4,031, respectively.............................. 60,163 76,527 Inventories.................................. 100,081 93,139 Deferred income taxes........................ 3,059 7,637 Prepaid expenses and other................... 5,291 3,160 Related party receivable..................... 753 250 -------- -------- Total current assets................. 169,347 181,310 -------- -------- Property, Plant and Equipment: Land......................................... 1,990 1,990 Buildings.................................... 16,109 16,109 Machinery and equipment...................... 645,807 600,290 Mineral property and development costs....... 8,425 8,425 -------- -------- 672,331 626,814 Less accumulated depreciation................ (214,016) (172,291) -------- -------- Net property, plant and equipment......... 458,315 454,523 -------- -------- Other Assets................................... 18,408 21,553 -------- -------- $ 646,070 $ 657,386 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 16 14 CONSOLIDATED BALANCE SHEETS -- CONTINUED (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ------------------- 1997 1996 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................. $ 46,348 $ 59,575 Accrued liabilities.............................. 23,671 18,353 Accrued payroll and related taxes................ 11,715 10,867 Accrued dividends payable........................ 14,290 4,682 Production prepayments........................... -- 9,763 Accrued interest payable......................... 4,559 4,746 Accrued pension and profit sharing costs......... 1,701 2,259 -------- -------- Total current liabilities..................... 102,284 110,245 -------- -------- Long-Term Debt..................................... 399,906 388,431 -------- -------- Deferred Income Tax Liabilities.................... 5,108 10,446 -------- -------- Commitments and Contingencies (Note 5) Redeemable Preferred Stock, Series B, no par value; 400,000 shares authorized, issued and outstanding, with a liquidation value of $60,443.......................................... 56,169 55,437 -------- -------- Stockholders' Equity: Preferred stock, no par value; 3,600,000 shares authorized for all series, excluding Series B, none issued................................... -- -- Common stock- Class A, no par value; 60,000,000 shares authorized, 14,705,265 shares issued........ 87,979 87,979 Class B, no par value; 50,000,000 shares authorized, 19,151,348 shares issued and outstanding................................ 10,110 10,110 Warrants to purchase Class A common stock........ 5,360 5,360 Retained earnings (deficit)...................... (11,399) 5,077 Less 719,042 and 1,194,897 Class A common stock treasury shares, respectively, at cost........ (9,447) (15,699) -------- -------- Total stockholders' equity.................... 82,603 92,827 -------- -------- $646,070 $657,386 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 17 15 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1996 1995 -------- -------- -------- Net sales............................... $726,669 $712,657 $665,699 Cost of sales........................... 665,978 662,307 594,191 -------- -------- -------- Gross margin.......................... 60,691 50,350 71,508 Selling, general and administrative expenses.............................. 22,487 24,621 23,795 -------- -------- -------- Income from operations................ 38,204 25,729 47,713 -------- -------- -------- Other income (expense): Interest and other income............. 412 552 520 Interest expense...................... (40,657) (36,199) (30,579) Other expense......................... -- (1,749) (2,386) -------- -------- -------- (40,245) (37,396) (32,445) -------- -------- -------- Income (loss) before provision (benefit) for income taxes...................... (2,041) (11,667) 15,268 Provision (benefit) for income taxes.... (773) (4,429) 3,664 -------- -------- -------- Net income (loss)....................... (1,268) (7,238) 11,604 Less redeemable preferred stock dividends and accretion for original issue discount........................ 10,340 9,089 7,998 -------- -------- -------- Net income (loss) applicable to common shares................................ $(11,608) $(16,327) $ 3,606 ======== ======== ======== Net income (loss) per common share...... $ (.74) $ (1.07) $ .24 ======== ======== ======== Weighted average common shares outstanding........................... 15,660 15,309 15,330 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
SHARES ISSUED AMOUNT WARRANTS ----------------------- ------------------ TO PURCHASE RETAINED COMMON COMMON COMMON COMMON COMMON EARNINGS TREASURY CLASS A CLASS B CLASS A CLASS B CLASS A (DEFICIT) STOCK TOTAL ---------- ---------- ------- -------- ----------- --------- -------- -------- Balance at September 30, 1994...................... 14,556,431 20,639,688 $87,193 $ 10,896 $ 5,360 $ 19,266 $(19,051) $103,664 Conversion of Class B common stock into Class A common stock.......... 138,834 (1,388,340) 733 (733) -- -- -- -- Issuance of Class A common stock to employee savings plan............ -- -- -- -- -- (118) 922 804 Redeemable preferred stock dividends............... -- -- -- -- -- (7,296) -- (7,296) Redeemable preferred stock accretion for original issue discount.......... -- -- -- -- -- (702) -- (702) Net income................ -- -- -- -- -- 11,604 -- 11,604 ---------- ---------- ------- ------- ------ -------- -------- -------- Balance at September 30, 1995...................... 14,695,265 19,251,348 87,926 10,163 5,360 22,754 (18,129) 108,074 Conversion of Class B common stock into Class A common stock.......... 10,000 (100,000) 53 (53) -- -- -- -- Issuance of Class A common stock to employee savings plan............ -- -- -- -- -- (1,350) 2,430 1,080 Redeemable preferred stock dividends............... -- -- -- -- -- (8,372) -- (8,372) Redeemable preferred stock accretion for original issue discount.......... -- -- -- -- -- (717) -- (717) Net loss.................. -- -- -- -- -- (7,238) -- (7,238) ---------- ---------- ------- ------- ------ -------- -------- -------- Balance at September 30, 1996...................... 14,705,265 19,151,348 87,979 10,110 5,360 5,077 (15,699) 92,827 Issuance of Class A common stock to employee savings plan............ -- -- -- -- -- (4,868) 6,252 1,384 Redeemable preferred stock dividends............... -- -- -- -- -- (9,608) -- (9,608) Redeemable preferred stock accretion for original issue discount.......... -- -- -- -- -- (732) -- (732) Net loss.................. -- -- -- -- -- (1,268) -- (1,268) ---------- ---------- ------- ------- ------ -------- -------- -------- Balance at September 30, 1997...................... 14,705,265 19,151,348 $87,979 $ 10,110 $ 5,360 $ (11,399) $ (9,447) $ 82,603 ========== ========== ======= ======= ====== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 19 17 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Increase (Decrease) in Cash and Cash Equivalents
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net income (loss)................. $ (1,268) $ (7,238) $ 11,604 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation................... 43,048 42,077 37,293 Amortization of loan fees...... 1,911 2,338 2,015 Deferred income tax provision (benefit).................... (760) (3,569) 6,378 (Gain) loss on asset disposal..................... 863 (46) -- (Increase) decrease in current assets -- Accounts receivable, net..... 16,364 (41,349) 12,729 Inventories.................. (6,942) (3,230) (3,900) Prepaid expenses and other... (2,634) (749) 177 Increase (decrease) in current liabilities -- Accounts payable............. (13,227) (8,364) 10,918 Accrued liabilities.......... 2,991 (692) 3,572 Accrued payroll and related taxes..................... 2,232 1,279 2,293 Production prepayments....... (9,763) (237) -- Accrued interest payable..... (187) 136 30 Accrued pension and profit sharing costs............. (558) 124 1,021 -------- -------- -------- Net cash provided by (used for) operating activities.............. 32,070 (19,520) 84,130 -------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment...................... (47,724) (26,378) (68,025) Proceeds from sale of property, plant and equipment............ 21 213 15,966 Change in other assets............ 1,238 (11,361) (889) -------- -------- -------- Net cash used for investing activities........................ $(46,465) $(37,526) $(52,948) -------- -------- --------
20 18 CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt................. $ 51,987 $ 59,752 $ -- Payments on long-term debt........ (40,513) (13,354) (15,315) Payments for deferred loan costs and other assets............... (4) (1,563) (1,724) Change in bank overdraft.......... 2,328 -- (1,341) Other............................. -- -- 6 -------- -------- -------- Net cash provided by (used for) financing activities.............. 13,798 44,835 (18,374) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.................. (597) (12,211) 12,808 Cash and cash equivalents at beginning of year................. 597 12,808 -- -------- -------- -------- Cash and cash equivalents at end of year.............................. $ -- $ 597 $ 12,808 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized)................. $ 38,934 $ 34,386 $ 28,683 Income taxes................... -- 367 250
Supplemental schedule of noncash financing activities: For the years ended September 30, 1996 and 1995, the Company increased the redeemable preferred stock liquidation preference by $3,690 and $7,296, respectively, in lieu of paying cash dividends. In addition, for the years ended September 30, 1997, 1996 and 1995, redeemable preferred stock was increased by $732, $717 and $702, respectively, for the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. As of September 30,1997, accrued dividends of $14,290 were unpaid. The accompanying notes to consolidated financial statements are an integral part of these statements. 21 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company's steel mill manufactures steel slabs and hot-rolled sheet, plate and pipe products for sale to various distributors, steel processors or end-users primarily in the western and central United States. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Geneva Steel Company and its wholly-owned subsidiaries (collectively, the "Company"). Intercompany balances and transactions have been eliminated in consolidation. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid income-earning securities with an initial maturity of ninety days or less to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates fair market value. The Company's cash management system utilizes a revolving credit facility with a syndicate of banks (see Note 2). INVENTORIES Inventories include costs of material, labor and manufacturing overhead. Inventories are stated at the lower of cost (using a weighted-average method) or market value. The composition of inventories as of September 30, 1997 and 1996 was as follows (dollars in thousands):
1997 1996 -------- ------- Raw materials.................... $ 26,783 $31,064 Semi-finished and finished goods.......................... 65,406 53,604 Operating materials.............. 7,892 8,471 -------- ------- $100,081 $93,139 ======== =======
Operating materials consist primarily of production molds, platforms for the production molds and furnace lining refractories. 22 20 INSURANCE CLAIM RECEIVABLE A plant-wide power outage associated with unusual weather conditions and an operator error in January 1996 had an effect on operating results during the fiscal years ended September 30, 1997 and 1996. The Company is continuing to assess the full financial impact of the outage and has recorded a portion of the expected loss recovery in the accompanying fiscal year 1997 and 1996 consolidated financial statements. During fiscal years 1997 and 1996, the Company recorded $12.3 million and $3.7 million, respectively, as an offset to cost of goods sold in the accompanying consolidated financial statements. As of September 30, 1997 and 1996, the Company has an insurance claim receivable of $11.0 million and $12.3 million included in other assets in the accompanying consolidated financial statements. The Company continues to work with the insurance Company to resolve this claim and is continuing to pursue legal remedies available to the Company (see Note 5). PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives as follows: Buildings.................................... 31.5 years Machinery and Equipment...................... 2-30 years
Interest related to the construction or major rebuild of facilities is capitalized and amortized over the estimated life of the related asset. Capitalization of interest ceases when the asset is placed in service. The Company capitalized approximately $.5 million, $2.1 million and $5.7 million of interest during the years ended September 30, 1997, 1996 and 1995, respectively. Maintenance and repairs are charged to expense as incurred and costs of improvements and betterments are capitalized. Upon disposal, related costs and accumulated depreciation are removed from the accounts and resulting gains or losses are reflected in income. Major spare parts and back-up facilities for machinery and equipment are capitalized and included in machinery and equipment in the accompanying consolidated financial statements. Major spare parts are depreciated using the straight-line method over the useful lives of the related machinery and equipment. Costs incurred in connection with the construction or major rebuild of facilities are capitalized as construction in progress. No depreciation is recognized on these assets until placed in service. As of September 30, 1997 and 1996, approximately $43.7 million and $39.2 million, respectively, of construction in progress was included in machinery and equipment in the accompanying consolidated financial statements. Mineral property and development costs are depleted using the units of production method based upon estimated recoverable reserves. Accumulated depletion is included in accumulated depreciation in the accompanying consolidated financial statements. The Company experienced minimal mining activity in fiscal year 1997. 23 21 OTHER ASSETS Other assets consist primarily of an insurance claim receivable described above and deferred loan costs incurred in connection with obtaining long-term financing. The deferred loan costs are being amortized on a straight-line basis over the term of the applicable financing agreement. Accumulated amortization of deferred loan costs totaled $6.6 million and $4.7 million at September 30, 1997 and 1996, respectively. PRODUCTION PREPAYMENTS The Company's production prepayment arrangement with a major customer was terminated in May 1997. The arrangement previously provided for up to $15 million in production prepayments upon entry of new orders. Prepayments are recorded as a production prepayment liability until the product is shipped, at which time the sale is recorded. As of September 30, 1996, production prepayments of $9.8 million are included in the accompanying consolidated financial statements. REVENUE RECOGNITION Sales are recognized when the product is shipped to the customer. Sales are reduced by the amount of estimated customer claims. As of September 30, 1997 and 1996, reserves for estimated customer claims of $2.9 million and $2.5 million, were included in the allowance for doubtful accounts in the accompanying consolidated financial statements. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which was issued in March 1995. SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book 24 22 value of the asset may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. In accordance with SFAS No. 121, the Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. SFAS No. 121 was adopted in fiscal year 1997 and did not have a material impact on the Company's financial position or results of operations. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is based upon the weighted average number of common and common equivalent shares outstanding during the periods presented. Common equivalent shares consist of warrants and options to purchase Class A common stock which have a dilutive effect when applying the treasury stock method. Class B common stock is included in the weighted average number of common shares outstanding at one share for every ten shares outstanding as the Class B common stock can be converted into Class A common stock at this same rate. Also, the Class B common stock is entitled to one-tenth of the dividends and other distributions paid to Class A common stockholders. The holders of both classes of common stock are entitled to one vote per share. The net income (loss) for the years ended September 30, 1997, 1996 and 1995 was adjusted for the redeemable preferred stock dividends and the accretion required over time to amortize the original issue discount on the redeemable preferred stock incurred at the time of issuance. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, SFAS No. 128 "Earnings Per Share" was issued. This statement specifies requirements for computation, presentation and disclosure of earnings per share ("EPS") for all periods ending after December 15, 1997. Early adoption is prohibited and upon adoption, all prior period EPS data must be restated. SFAS No. 128 simplifies the standards for computing EPS and replaces the presentations of Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company will adopt SFAS No. 128 in fiscal year 1998 and believes it will not have a material impact. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. Under current reporting requirements, extraordinary and non-recurring gains and losses are excluded from income from current operations. SFAS No. 130 requires an "all- inclusive" approach which specifies that all revenues, expenses, gains and losses recognized during the period be reported in income, regardless of whether they are considered to be results of operations of the period. The statement is effective for fiscal years beginning after December 15, 1997. 25 23 RECLASSIFICATIONS Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the current year presentation. 2. LONG-TERM DEBT The aggregate amounts of principal maturities of long-term debt as of September 30, 1997 and 1996 consisted of the following (dollars in thousands):
1997 1996 -------- -------- Senior term notes issued publicly, interest payable January 15 and July 15 at 9.5% principal due January 15, 2004, unsecured..... $190,000 $190,000 Senior term notes issued publicly, interest payable March 15 and September 15 at 11.125%, principal due March 15, 2001, unsecured....... 135,000 135,000 Revolving credit facility from a syndicate of banks, interest payable monthly at the defined base rate (8.50% at September 30, 1997) plus 1.50% or the defined LIBOR rate (5.69% at September 30, 1997) plus 2.75%, due May 14, 2000 (see discussion below), secured by inventories and accounts receivable........... 74,906 63,431 -------- -------- $399,906 $388,431 ======== ========
The aggregate amounts of principal maturities of long-term debt as of September 30, 1997 were as follows (dollars in thousands):
YEAR ENDING SEPTEMBER 30, --------------------------------------------- 1998.................................... $ -- 1999.................................... -- 2000.................................... 74,906 2001.................................... 135,000 2002.................................... -- Thereafter.............................. 190,000 -------- $ 399,906 ========
On May 14, 1996, the Company amended and restated its revolving credit facility (the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA, Inc., as agent, which is used primarily for the working capital and capital expenditure needs of the Company. The Revolving Credit Facility, in the amount of up to $125 million is secured by the Company's inventories, accounts receivable, general intangibles, and proceeds thereof, and expires on May 14, 2000. Interest is payable monthly at the defined base rate (8.50% at September 30, 1997) plus 1.50%, or the defined LIBOR rate (5.69% at September 30, 1997) plus 2.75%. The Company pays a monthly commitment fee based on an annual rate of .50% of the average unused portion of the borrowing limit under the Revolving Credit Facility. The amount available to the Company under the Revolving Credit Facility currently ranges between 50 and 60 percent, in the aggregate, of eligible inventories plus 85 percent of eligible accounts receivable. Borrowing availability under the Revolving Credit 26 24 Facility is also subject to other financial tests and covenants. As of September 30, 1997, the Company's eligible inventories and accounts receivable supported access to $106.0 million under the Revolving Credit Facility. As of September 30, 1997, the Company had $74.9 million in borrowings and $9.9 million in letters of credit outstanding under the Revolving Credit Facility, leaving $21.2 million in additional borrowing availability. The Company's receivables securitization facility was terminated in connection with the amendment. Certain deferred fees associated with establishing the Company's receivables securitization facility were expensed during the year ended September 30, 1996. During the year ended September 30, 1995, the Company retired its revolving credit facility. Deferred loan costs applicable to debt retired were expensed by the Company and are included in the accompanying consolidated financial statements. The terms of the Revolving Credit Facility and the Company's $190 million 9 1/2% Senior Notes issued in January 1994 (the "9 1/2% Senior Notes") and $135 million 11 1/8% Senior Notes issued in March 1993 (the "11 1/8% Senior Notes" and together with the 9 1/2% Senior Notes the "Senior Notes") include cross default and other customary provisions. Financial covenants contained in the Revolving Credit Facility and/or the Senior Notes also include, among others, a limitation on dividends and distributions on capital stock of the Company, a tangible net worth requirement, a cash interest coverage requirement, a cumulative capital expenditure limitation, a limitation on the incurrence of additional indebtedness unless certain financial tests are satisfied, a limitation on mergers, consolidations and dispositions of assets and limitations on liens. Based on such covenants, as of September 30, 1997, the Company was restricted from payment of cash dividends. In the event of a change in control, the Company must offer to purchase all Senior Notes then outstanding at a premium. The Company is in compliance with the covenants and tests contained in the Revolving Credit Facility and the Senior Notes. The Company estimates that the aggregate fair market value of its debt and related obligations was approximately $380.9 million as of September 30, 1997. These estimates were based on quoted market prices or current rates offered for debt with similar terms and maturities. 3. MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES During the years ended September 30, 1997, 1996, and 1995, the Company derived approximately 33%, 31% and 36%, respectively, of its net sales through one customer, which is a distributor to other companies. International sales during the years ended September 30, 1997, 1996 and 1995 did not exceed 10%. 27 25 4. INCOME TAXES The provision (benefit) for income taxes as of September 30, 1997, 1996 and 1995 consisted of the following (dollars in thousands):
1997 1996 1995 ----- ------- ------- Current income tax benefit Federal............................... $ (11) $ (752) $(2,375) State................................. (2) (108) (339) ---- ------ ------ (13) (860) (2,714) ---- ------ ------ Deferred income tax provision (benefit) Federal............................... (665) (3,123) 4,543 State................................. (95) (446) 649 Change in valuation allowance......... -- -- 1,186 ---- ------ ------ (760) (3,569) 6,378 ---- ------ ------ Provision (benefit) for income taxes.... $(773) $(4,429) $ 3,664 ==== ====== ======
The provision (benefit) for income taxes as a percentage of income (loss) for the years ended September 30, 1997, 1996 and 1995 differs from the statutory federal income tax rate due to the following:
1997 1996 1995 ----- ----- ---- Statutory federal income tax rate............. (35.0)% (35.0)% 35.0% State income taxes, net of federal income tax impact...................................... (3.3) (3.3) 3.3 Change in valuation allowance................. -- -- (7.8) Reassessment of deferred liabilities.......... -- -- (8.0) Other......................................... 0.4 0.3 1.5 ----- ----- ---- Effective income tax rate..................... (37.9)% (38.0)% 24.0% ===== ===== ====
The components of the net deferred income tax assets and liabilities as of September 30, 1997 and 1996 were as follows (dollars in thousands):
SEPTEMBER 30, --------------------- 1997 1996 -------- -------- Deferred income tax assets: Net operating loss carryforward................ $ 35,257 $ 26,019 Inventory costs capitalized.................... 5,442 4,604 Alternative minimum tax credit carryforward.... 6,464 6,464 Accrued vacation............................... 1,847 1,836 Allowance for doubtful accounts................ 1,023 1,248 General business credits....................... 2,754 2,978 Other.......................................... 328 188 -------- -------- Total deferred income tax assets............ 53,115 43,337 -------- -------- Deferred income tax liabilities: Accelerated depreciation....................... (45,237) (41,323) Insurance claim receivable..................... (4,217) -- Mineral property development costs............. (2,465) (2,467) Operating supplies............................. (3,245) (2,356) -------- -------- Total deferred income tax liabilities....... (55,164) (46,146) -------- -------- Net deferred income tax liabilities.... $ (2,049) $ (2,809) ======== ========
28 26 As of September 30, 1997, the Company had a net operating loss carryforward and an alternative minimum tax credit carryforward for tax reporting purposes of approximately $92.9 million and $6.5 million, respectively. The net operating loss carryforward begins expiring in 2009. 5. COMMITMENTS AND CONTINGENCIES CAPITAL PROJECTS The Company has incurred substantial capital expenditures to modernize its steelmaking, casting, rolling and finishing facilities, thereby reducing overall operating costs, broadening the Company's product line, improving product quality and increasing throughput capacity. The Company spent $47.7 million and $26.4 million on capital projects during the fiscal years ended September 30, 1997 and 1996, respectively. These expenditures were made primarily in connection with the Company's ongoing modernization and capital maintenance efforts. Capital expenditures for fiscal year 1997 were higher than expected due in part to costs associated with the reline and repair of the No. 1 and No. 2 blast furnaces and the related stoves. Capital expenditures for fiscal year 1998 are estimated at $39 million, which includes completion of the rolling mill finishing stand modernization project, implementation of new business and financial software and various other projects designed to reduce costs and increase product quality and throughput. The Company has selected and started the implementation of SAP software, an enterprise-wide business system. It's expected that the Company will benefit significantly from such implementation, including addressing the year 2000 issue inherent in its legacy systems. The implementation is estimated to cost $8 to $10 million with portions being implemented during a two year period. Depending on market, operational, liquidity and other factors, the Company may elect to adjust the design, timing and budgeted expenditures of its capital plan. The Company has formed a limited liability company with certain unrelated parties, which in turn has entered into a cooperative agreement with the United States Department of Energy ("DOE") for the demonstration of a cokeless ironmaking facility and associated power generation and air separation facilities. As of September 30, 1997, the Company had spent (net of DOE reimbursement) approximately $0.9 million in connection with the project, which has been included in construction in progress in the accompanying consolidated financial statements. Expenditures on the project are subject to government cost sharing arrangements. Completion of the project remains subject to several contingencies. Under certain circumstances, the Company may be required to repay some or all of the government cost share funds and expense other funds included in construction in progress in the event the project is terminated. LEGAL MATTERS On February 25, 1997, the Company filed a complaint in the Fourth Judicial District Court for Utah County, State of Utah, against Commerce & Industry Insurance Co. 29 27 ("C&I"), a New York corporation. A First Amended Complaint was filed and served on April 9, 1997, alleging that C&I had breached its insurance contract with Geneva by failing to pay on Geneva's claim for the loss it incurred on January 25 and 26, 1996 when it lost its internal generator. C&I removed the case to the United States District Court for the District of Utah on May 1, 1997. Upon C&I's formal request for additional investigation, Geneva stipulated with C&I on June 6, 1997, to stay the litigation until October 31, 1997, to provide C&I additional time to review documents and interrogate witnesses. That investigation continued until September, 1997. During early October, Geneva had several meetings with C&I in an attempt to resolve the case and assess the strength of the case. On October 15, 1997, C&I provided a formal response to the claim in which it declined coverage as an excluded peril under the policy, relying on, among other defenses, an exclusion for "power, heating or cooling failure." Pursuant to the June 1997 stipulation, C&I answered the First Amended Complaint on October 31, 1997, denying most of the substantive factual allegations in the First Amended Complaint and asserting as an affirmative defense, among others, that Geneva's loss was excluded from coverage. On November 24, 1997, Geneva filed a Second Amended Complaint against C&I, adding claims seeking relief for breach of contractual implied covenant of good faith and fair dealing, and bad faith--intentional and outrageous tortious conduct and oppression. C&I's answer or other response to the Second Amended Complaint must be filed December 26, 1997. Geneva requested the Court to require that discovery be completed within approximately six months and the trial be held as soon thereafter as the Court's schedule would allow. C&I requested the Court to allow discovery until June 1, 1999 and require that the case be ready for trial after October 1, 1999. At a Scheduling Conference, the Court set trial beginning July 2, 1999. The Court has set May 1, 1998 as a deadline for dispositive motions on initial coverage issues and required that all discovery be completed by January 15, 1999. The parties are presently involved in resolving discovery issues and proceeding with discovery. The Company intends vigorously to pursue its claims. In addition, to the insurance claim described above, the Company is subject to various legal matters, which it considers normal for its business activities. Management, after consultation with the Company's legal counsel, believes that these matters will not have a material impact on the financial condition or results of operations of the Company. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in the Company's business. The Company is subject to federal, state and local environmental laws and regulations concerning, among other things, air emissions, wastewater discharge, and solid and hazardous waste disposal. The Company has incurred substantial capital expenditures for environmental control facilities, including the Q-BOP furnaces, the wastewater treatment facility, the ben- 30 28 zene mitigation equipment, the coke oven gas desulfurization facility and other projects. The Company has budgeted a total of approximately $2.3 million for environmental capital improvements in fiscal years 1998 and 1999. Environmental legislation and regulations have changed rapidly in recent years and it is likely that the Company will be subject to increasingly stringent environmental standards in the future. Although the Company has budgeted for capital expenditures for environmental matters, it is not possible at this time to predict the amount of capital expenditures that may ultimately be required to comply with all environmental laws and regulations. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the EPA and the states have authority to impose liability on waste generators, site owners and operators and others regardless of fault or the legality of the original disposal activity. Other environmental laws and regulations may also impose liability on the Company for conditions existing prior to the Company's acquisition of the steel mill. At the time of the Company's acquisition of the steel mill, the Company and USX Corporation ("USX") identified certain hazardous and solid waste sites and other environmental conditions which existed prior to the acquisition. USX has agreed to indemnify the Company (subject to the sharing arrangements described below) for any fines, penalties, costs (including costs of clean-up, required studies and reasonable attorneys' fees), or other liabilities for which the Company becomes liable due to any environmental condition existing on the Company's real property as of the acquisition date that is determined to be in violation of any environmental law, is otherwise required by applicable judicial or administrative action, or is determined to trigger civil liability (the "Pre-existing Environmental Liabilities"). The Company has provided a similar indemnity (but without any similar sharing arrangement) to USX for conditions that may arise after the acquisition. Although the Company has not completed a comprehensive analysis of the extent of the Preexisting Environmental Liabilities, such liabilities could be material. Under the acquisition agreement between the two parties, the Company and USX agreed to share on an equal basis the first $20 million of costs incurred by either party to satisfy any government demand for studies, closure, monitoring, or remediation at specified waste sites or facilities or for other claims under CERCLA or the Resource Conservation and Recovery Act. The Company is not obligated to contribute more than $10 million for the clean-up of wastes generated prior to the acquisition. The Company believes that it has paid the full $10 million necessary to satisfy its obligations under the cost-sharing arrangement. USX has advised the Company, however, of its position that a portion of the amount paid by the Company may not be properly credited against the Company's obligations. Although the Company believes that USX's position is without merit, there can be no assurance that this matter will be resolved without litigation. The Company believes that resolution of this matter will not likely have a material adverse effect. The Company's ability to obtain indemnification from USX in the future will depend on factors which may be beyond the Company's control and may also be subject to dispute. 31 29 PURCHASE COMMITMENTS On February 10, 1989, the Company entered into an agreement which was subsequently amended on July 1, 1997, to purchase interruptible and firm back-up power through February 28, 2002. For interruptible power, the Company pays an energy charge adjusted annually to reflect changes in the supplier's average energy costs and a facilities charge, based on a minimum of 110,000 kilowatts, adjusted annually to reflect changes in the supplier's per megawatt fixed transmission investment and expenses. Effective July 12, 1990, the Company entered into an agreement, which was subsequently amended in April 1992, to purchase 100% of the oxygen, nitrogen and argon produced at a facility located at the Company's steel mill which is owned and operated by an independent party. The contract expires in September 2006 and specifies that the Company will pay a base monthly charge that is adjusted semi- annually each January 1 and July 1 based upon a percentage of the change in the PPI. Effective January 1, 1994, the Company entered into a nine-year agreement to purchase metallurgical coke, which was subsequently amended on April 11, 1996. The Company has committed to purchase approximately 275,000 and 229,000 net tons of coke at specified prices in the fourth and fifth contract years, respectively. The quantity and price for subsequent years will be as agreed by the parties. Effective September 1, 1994, the Company entered into a five year agreement, which was amended on July 25, 1997, to purchase taconite pellets. The Company has commitments to purchase 2,700,000 net tons in each of the fourth and fifth years of the contract. Prices are adjusted each year based on an index related to the "Cartier Pellets Price." Effective June 6, 1995, the Company entered into an agreement to purchase 800 tons a day of oxygen from a new plant constructed at the Company's steel mill which will be owned and operated by an independent party. The new plant was completed in mid 1997. The Company pays a monthly facility charge which is adjusted semi-annually each January 1 and July 1 based on an index. The contract continues through mid 2012. Effective June 10, 1997, the Company entered into an agreement to purchase 100% of the oxygen, nitrogen and argon produced at a facility that is owned and operated by an independent party. The contract expires in September 2002 and specifies that the Company will pay a monthly facility charge that is adjusted semi-annually each January 1 and July 1 based upon a percentage of the change in the PPI. During the period from September 1, 1997 through December 1, 1997, the Company entered into various agreements to purchase in the aggregate, 39,500 MMBtu's per day of firm natural gas. The agreements expire between August 1998 and October 1998. The Company expects to extend or replace these agreements as they expire. The price for most of such gas is adjusted monthly based on the index price as reported by "Inside FERC Gas Market Report." 32 30 Effective November 1, 1997, the Company entered into an agreement to purchase firm natural gas transportation service for 35,000 decatherms per day for November 1997 through March 1998 and thereafter from the startup of new facilities being constructed by an independent party for a period of five years. LEASE OBLIGATIONS The Company leases certain facilities and equipment used in its operations. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The aggregate commitments under noncancelable operating leases at September 30, 1997, were as follows (dollars in thousands):
YEAR ENDING SEPTEMBER 30, - ------------------------- 1998 $ 9,106 1999 8,587 2000 7,615 2001 7,386 2002 5,269 Thereafter 26,582 ------- $64,545 =======
Total rental expense for non-cancelable operating leases was approximately $9.9 million, $6.0 million and $3.9 million for the years ended September 30, 1997, 1996 and 1995, respectively. LETTERS OF CREDIT As of September 30, 1997, the Company had outstanding letters of credit totaling approximately $9.9 million. 6. REDEEMABLE PREFERRED STOCK In March 1993, the Company issued $40 million of 14% cumulative redeemable exchangeable preferred stock (the "Redeemable Preferred Stock") and related warrants to purchase an aggregate of 1,132,000 shares of Class A common stock. The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a liquidation preference of approximately $151 per share as of September 30, 1997. Dividends accrue at a rate equal to 14% per annum of the liquidation preference and, except as provided below, are payable quarterly in cash from funds legally available therefor. For dividend periods ending before April 1996, the Company had the option to add dividends to the liquidation preference in lieu of payment in cash. Prior to April 1996, the Company elected to add the dividends to the liquidation preference. As of September 30, 1997 and 1996, the liquidation value of the Redeemable Preferred Stock was $60.4 million. The Redeemable Preferred Stock is exchangeable, at the Company's option, into subordinated debentures of the Company due 2003 (the "Exchange Debentures"). The Company is obligated to redeem all of the Redeemable Preferred Stock in March 2003 from funds legally 33 31 available therefor. The Company's ability to pay cash dividends on the Redeemable Preferred Stock is subject to the covenants and tests contained in the indentures governing the Senior Notes and in the Revolving Credit Facility. Restricted payment limitations under the Company's Senior Notes precluded payment of the quarterly preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid dividends were approximately $14.3 million at September 30, 1997. Unpaid dividends accumulate until paid and accrue additional dividends at a rate of 14% per annum. As a result of the Company's inability to pay four full quarterly dividends, the holders of the Redeemable Preferred Stock elected two directors on May 30, 1997. The right of such holders to elect directors continues until the Company has paid all dividends in arrears and has paid the dividends due for two consecutive quarters thereafter. After March 1998, both the Redeemable Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's option, subject to certain redemption premiums. The warrants to purchase the Company's Class A common stock are exercisable at $11 per share, subject to adjustment in certain circumstances, and expire in March 2000. The Company estimates that the aggregate fair market value of its Redeemable Preferred Stock was approximately $32 million at September 30, 1997. The Company estimates that the aggregate fair market value of its warrants to purchase Class A common stock was approximately $1.1 million at September 30, 1997. The Company's estimates for the Redeemable Preferred Stock and warrants to purchase Class A common stock were based on quoted market prices. 7. STOCK OPTIONS Effective January 2, 1990, the Company granted options to purchase 330,000 shares of Class A common stock to key employees at an exercise price of $10.91 per share. On March 26, 1997, certain of these stock options were repriced at $7.75 per share. The stock options became fully exercisable on January 2, 1995. The stock options remain exercisable until the earlier of 90 days after the employee's termination of employment or ten years from the date such stock options were granted. Effective July 20, 1990, the Company's Board of Directors adopted a Key Employee Plan (the "Employee Plan") which was approved by the Company's stockholders in January 1991. The Employee Plan provides that incentive and nonstatutory stock options to purchase Class A common stock and corresponding stock appreciation rights may be granted. The Employee Plan provides for issuance of up to 1,000,000 shares of Class A common stock, with no more than 750,000 shares of Class A common stock cumulatively available upon exercise of incentive stock options. The Employee Plan Committee (the "Committee"), consisting of outside directors, determines the time or times when each incentive or nonstatutory stock option vests and becomes exercisable; provided no stock option shall be exercisable within six months of the date of grant (except in the event of death or disability) and no incentive stock option shall be exercisable after the expiration of ten years from the date of grant. The exercise price of incentive stock options to purchase Class A 34 32 common stock shall be at least the fair market value of the Class A common stock on the date of grant. The exercise price of nonstatutory options to purchase Class A common stock is determined by the Committee. Effective December 18, 1996, the Company's Board of Directors adopted the Geneva Steel Company 1996 Incentive Plan (the "Incentive Plan") which was approved by the Company's shareholders in February 1997. The Incentive Plan provides that 1,500,000 shares of class A common stock will be available for the grant of options or awards. The Incentive Plan is administered by a committee consisting of at least two non-employee directors of the company (the "Committee"). The Committee determines, among other things, the eligible employees, the number of options granted and the purchase price, terms and conditions of each award, provided that the term does not exceed ten years. The per share purchase price may not be less than 80 percent of the fair market value on the date of grant. The Incentive Plan also provides for the non-discretionary grant of options to each of its non-employee directors ("Director Options"). Each non-employee director who becomes a director after January 1, 1997 shall be granted a Director Option of 4,000 shares upon election or appointment. In addition, annually on the first business day on or after January 1 of each calendar year that the Incentive Plan is in effect, all non-employee directors who are members of the Board at that time shall be granted a Director Option of 2,000 shares; provided, however, that a director shall not be entitled to receive an annual grant during the year elected or appointed. Director Options will be granted at a purchase price equal to the fair market value of the shares on the date of grant. Director Options vest at 40 percent on the second anniversary of the date of grant and an additional 20 percent on the third, fourth and fifth anniversaries of the date of grant, provided that the director remains in service as a director on each date. The Director Options generally have a ten year term. Stock option activity for the years ended September 30, 1997, 1996 and 1995 consisted of the following:
WEIGHTED NUMBER OF AVERAGE SHARES PRICE PER SHARE --------- --------------- Outstanding at September 30, 1994............ 621,400 $8.24 Granted.................................... 129,700 7.75 Cancelled.................................. (1,200) 7.82 --------- ----- Outstanding at September 30, 1995............ 749,900 8.15 Granted.................................... 173,438 3.80 Cancelled.................................. (15,825) 7.80 --------- ----- Outstanding at September 30, 1996............ 907,513 7.33 Granted.................................... 810,000 2.25 Cancelled.................................. (90,850) 4.97 --------- ----- Outstanding at September 30, 1997............ 1,626,663 $4.93 ========= =====
Options to purchase 565,275, 459,320 and 356,920 shares of Class A common stock were exercisable on September 30, 1997, 1996 and 1995, respectively. As of 35 33 September 30, 1997, 999,087 shares of Class A common stock are available for grant under the plans. The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation expense for the Company's stock option plans been determined in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
YEAR ENDED SEPTEMBER 30, ------------------- 1997 1996 ------- ------- Net loss as reported............................... $(1,268) $(7,238) Net loss pro forma................................. (1,650) (7,292) Net loss per common share as reported.............. $ (.74) $ (1.07) Net loss per common share pro forma................ (.77) (1.07)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation expense may not be representative of that to be expected in future years. The fair value of each option grant has been estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997 and 1996, in calculating compensation cost: expected stock price volatility of 60.8% for both years, an average risk free interest rate of approximately 6.25 percent and expected lives ranging between three years to seven years for 1997 and seven years for 1996. The weighted average fair value of options granted during fiscal years 1997 and 1996 was $2.25 and $3.80. At September 30, 1997, the 1,626,663 options outstanding have exercise prices between $2.25 and $10.91 with a weighted average exercise price of $4.93 and a weighted average remaining contractual life of 7.1 years. 565,275 of these options are exercisable with a weighted average exercise price of $8.26. 8. EMPLOYEE BENEFIT PLANS UNION SAVINGS AND PENSION PLAN The Company has a savings and pension plan which provides benefits for all eligible employees covered by the collective bargaining agreement. This plan is comprised of two qualified plans; (1) a union employee savings 401(k) plan with a cash or deferred compensation arrangement and matching contributions and (2) a noncontributory defined contribution pension plan. Participants may direct the investment of funds related to their deferred compensation in this plan. On March 1, 1996, the Company began to match participants' contributions to the savings plan in shares of class A common stock at 25% up to 4% 36 34 of their compensation. For the pension plan, the Company contributed 5% of each participant's compensation to this plan from March 1, 1996 through September 30, 1997 and contributed 4 1/2% of each participant's compensation to this plan from March 1, 1995 through February 29, 1996. For the period from October 1, 1994 through February 28, 1995 the Company contributed 4% of each participant's compensation to this plan. Total contributions by the Company for both plans for the years ended September 30, 1997, 1996 and 1995 were $5.1 million, $4.5 million and $3.5 million, respectively. The participants vest in these contributions at 20% for each year of service until fully vested after five years. VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION TRUST Effective March 1, 1995, the Company established a voluntary employee beneficiary association trust ("VEBA Trust") to fund post-retirement medical benefits for future retirees covered by the collective bargaining agreement. Company cash contributions to the VEBA Trust are ten cents for each hour of work performed by employees covered by the collective bargaining agreement. In addition, union employees provide a contribution to the VEBA Trust based on a reduction from their performance dividend plan payment. No benefits will be paid from the VEBA Trust prior to March 31, 1998. Eligibility requirements and related matters will be determined at a later date. MANAGEMENT EMPLOYEE SAVINGS AND PENSION PLAN The Company has a savings and pension plan which provides benefits for all eligible employees not covered by the collective bargaining agreement. This plan is comprised of two qualified plans: (1) a management employee savings 401(k) plan with a cash or deferred compensation arrangement and discretionary matching contributions and (2) a noncontributory defined contribution pension plan. Participants may direct the investment of funds related to their deferred compensation in this plan. The employee savings plan provides for discretionary matching contributions as determined each plan year by the Company's Board of Directors. The Board of Directors elected to match participants' contributions to the employee savings plan in shares of Class A common stock up to 4% of their compensation during fiscal years 1997, 1996 and 1995. For the pension plan, the Company contributed 5% of each participant's compensation to this plan from March 1, 1996 through September 30, 1997 and contributed 4 1/2% of each participant's compensation to this plan from March 1, 1995 through February 29, 1996. For the period from October 1, 1994 through February 28, 1995, the Company contributed 4% of each participant's compensation to this plan. During the years ended September 30, 1997, 1996 and 1995, total contributions by the Company were $2.2 million, $2.1 million and $2.0 million, respectively. The participants vest in the Company's contributions at 20% for each year of service until fully vested after five years. 37 35 PROFIT SHARING AND BONUS PROGRAMS The Company has a profit sharing program for full-time union eligible employees. Participants receive payments based upon operating income reduced by an amount equal to a portion of the Company's capital expenditures. No profit sharing was accrued in the years ended September 30, 1997, 1996 and 1995. The Company also has implemented a performance dividend plan designed to reward employees for increased shipments. As shipments increase above an annualized rate of 1.5 million tons, compensation under this plan increases. Payments made under the performance dividend plan are deducted from any profit sharing obligations to the extent such obligations exceed the performance dividend plan payments in any given fiscal year. During the years ended September 30, 1997, 1996 and 1995, performance dividend plan expenses were $9.6 million, $9.2 million and $6.4 million, respectively. SUPPLEMENTAL EXECUTIVE PLANS The Company maintains insurance and retirement agreements with certain of the management employees and executive officers. Pursuant to the insurance agreements, the Company pays the annual premiums and receives certain policy proceeds upon the death of the retired management employee or executive officer. Pursuant to the retirement agreements, the Company provides for the payment of supplemental benefits to certain management employees and executive officers upon retirement. 9. RELATED PARTY TRANSACTIONS On September 27, 1996, the Company entered into an agreement to loan up to $500,000 to its Chief Executive Officer. On September 27, 1996, October 4, 1996 and December 23, 1996 the Company loaned $250,000, $210,000 and $40,000, respectively. On February 13, 1997, the Company authorized an increase in the loan amount to $700,000 and advanced an additional $200,000. The loan is evidenced by a promissory note which bears interest at the rate of 8.53% and was payable at the earlier of September 27, 1997 or demand for repayment by the Company. On October 17, 1997, the Chief Executive Officer paid $240,000 on the note and the payment date of the note was extended to April 30, 1998. On December 17, 1997, the Chief Executive Officer paid an additional $400,000 on the note. The loan is secured by interests in real and personal property owned by the Chief Executive Officer and an affiliated entity. 38 36 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly financial information for the years ended September 30, 1997 and 1996 is as follows (dollars in thousands):
1997 QUARTERS FIRST SECOND THIRD FOURTH - ------------------------ -------- -------- -------- -------- Net sales............... $169,741 $182,961 $194,089 $179,878 Gross margin............ 12,930 7,921 20,732 19,108 Net income (loss)....... (1,410) (5,504) 3,962 1,684 Net income (loss) applicable to common shares................ (3,871) (8,046) 1,337 (1,028) Net income (loss) per common share.......... (.25) (.52) .08 (.06)
1996 QUARTERS FIRST SECOND THIRD FOURTH - ------------------------ -------- -------- -------- -------- Net sales............... $167,090 $159,131 $183,105 $203,331 Gross margin............ 12,202 7,805 9,420 20,923 Net income (loss)....... (1,332) (4,685) (4,360) 3,139 Net income (loss) applicable to common shares................ (3,496) (6,920) (6,655) 744 Net income (loss) per common share.......... (.23) (.45) (.43) .05
39 EX-23 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8, File No. 33-40867 and the Company's previously filed Registration Statement on Form S-3, File No. 33-64548. ARTHUR ANDERSEN LLP Salt Lake City, Utah December 26, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO. 1,000 U.S. DOLLARS YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 1 0 0 60,163 4,564 100,081 169,347 672,331 (214,016) 646,070 102,284 399,906 56,169 0 88,642 (6,039) 646,070 726,669 726,669 665,978 665,978 22,487 6,558 40,245 (2,041) (773) (1,268) 0 0 0 (1,268) (.74) (.74)
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