ITEM 1. BUSINESS
GENERAL
Acme Metals Incorporated ("Acme Metals") was incorporated as a Delaware corporation in 1992 as the successor to the original Acme Steel Company which was a part of Interlake, Inc. from 1964 until spun off as a separate public company in 1986.
The principal business activities of Acme Metals are conducted through two separate industry segments:
Steel Making Segment
Acme Steel Company ("Acme Steel") -- integrated iron and steel producer
Steel Fabricating Segment
Acme Packaging Corporation ("Acme Packaging") -- manufacturer of steel strapping, plastic strapping, and strapping products
Alpha Tube Corporation ("Alpha Tube") -- manufacturer of welded steel tube products
Acme Metals and all of its direct and indirect subsidiaries report financial information on a consolidated basis and are together referred to as the "Company."
CHAPTER 11 BANKRUPTCY FILINGS
On September 28, 1998 ("Petition Date"), Acme Metals and its principal direct and indirect subsidiaries, Acme Steel, Acme Packaging, Alpha Tube, Alabama Metallurgical Corporation ("Alabama Metallurgical") and Acme Steel Company International, Inc. ("Acme Steel International"), filed separate voluntary petitions for protection and reorganization under Chapter 11 of Title 11 ("Chapter 11") of the United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). These reorganization cases are being jointly administered under Case Number 98-2179 pursuant to Rule 1015 (b) of the Federal Rules of Bankruptcy Procedure and are collectively referred to as "Chapter 11 Bankruptcy" herein. The Company is in possession of its properties and assets and continues to manage its businesses with its existing directors and officers as debtors-in-possession subject to the supervision of the Bankruptcy Court.
On September 28, 1998, the Company filed for Chapter 11 Bankruptcy after management determined that action was required to preserve the operational strength and assets of the Company's businesses while the Company reorganizes its business and restructures its balance sheet.
Factors contributing to the Company's decision to seek Chapter 11 Bankruptcy protection included, among others, a loss of orders from its traditional higher margin, value-added customers, which, together with the dramatic increase of imported foreign steel during the last half of 1998, resulted in a weak order book, an adverse mix of products, substantially lower average selling prices and production cost inefficiencies. These factors contributed to the Company's increased operating loss and net loss during 1998. Such losses resulted in reduced liquidity, breach of certain financial covenants in the Company's loan agreements and a projected inability to service ongoing debt obligations. The rapidly deteriorating steel market and the Company's weakening financial condition clearly limited the availability of and the time to implement other options. These factors resulted in the decision of the Board of Directors to file for Chapter 11 Bankruptcy protection.
Pursuant to the provisions of the Bankruptcy Code, all actions to collect upon any of the Company's liabilities as of the Petition Date or to enforce pre-Petition Date contractual obligations were automatically stayed. Absent approval from the Bankruptcy Court, the Company is prohibited from paying pre-petition obligations. However, the Bankruptcy Court has approved payment of certain pre-petition liabilities such as employee wages and benefits and certain specified pre-petition obligations to vendors, customers and taxing authorities. Additionally, the Bankruptcy Court has allowed for the retention of legal and financial
professionals and adequate protection payments (payments to adequately protect holders of certain secured claims against the Company).
On December 18, 1998, with the approval of the Bankruptcy Court, Acme Metals, Acme Steel, Acme Packaging, Alabama Metallurgical and Acme Steel International entered into a twenty-one month Loan and Security Agreement ("DIP Financing Agreement") with Bank of America, which provides for a maximum of $100 million of revolving credit borrowings subject to certain borrowing base limitations based on inventory and accounts receivable ($13.3 million was outstanding with $21.6 million available at December 31, 2000). Alpha Tube, whose inventory and accounts receivable are excluded from the borrowing base computation, has guaranteed the obligations incurred under the DIP Financing Agreement. Alpha Tube's guaranty obligation with respect to the DIP Financing Agreement is effectively subordinate to pre-petition trade obligations and Chapter 11 Bankruptcy administrative expenses of Alpha Tube. Further information about the DIP Financing Agreement is set forth in the Notes to the Consolidated Financial Statements.
The Company continues to evaluate alternative plans to reorganize the Company's businesses and to restructure the Company's balance sheet. Although management expects to file a plan of reorganization with the Bankruptcy Court at the earliest practical date, there can be no assurance at this time that a plan of reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization ("Exclusive Proposal Period") through April 2, 2001. The Company has filed a motion requesting the Bankruptcy Court to enter an order extending the Company's Exclusive Proposal Period for approximately 90 days to, and including, July 2, 2001; and, while the Company may request further extensions of the Exclusive Proposal Period, there can be no assurance the Bankruptcy Court will grant the requested, or any such further extensions. If the Exclusive Proposal Period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization.
The Company is diligently pursuing emergence scenarios involving a sale or other transaction involving one or both of Acme Packaging and Alpha Tube, together with a possible sale of or stand-alone recapitalization plan for Acme Steel Company.
Potential Acme Steel Transaction. In midyear 2000, the Company received an expression of interest from a third party, WCI Steel, Inc. ("WCI"), to acquire the operating assets of the Steel Segment and, on September 7, 2000, Acme Steel and WCI entered into a non-binding letter of intent (the "Letter of Intent") regarding the terms of a proposed sale of these assets. Since the date of that Letter of Intent, the domestic steel industry in general has experienced a sustained downturn. The Steel Segment, specifically, has experienced substantial operating losses and failed to meet certain conditions set forth in the Letter of Intent. On January 29, 2001, WCI informed the Company that due to the currently depressed conditions of the steel industry and the recent performance of the Steel Segment, WCI would not proceed to consummate the transaction under the terms contemplated in the Letter of Intent.
While the Company understands WCI has expressed a continuing interest in acquiring the operating assets of the Steel Segment and is continuing to explore its alternatives, the Company is unable to determine the terms and conditions of any possible future transaction with WCI. The Company has continued to explore various emergence alternatives, which include a stand-alone reorganization of all or a portion of the Company's existing businesses, a sale of some or all of the Company's assets or a combination of the two.
Potential Transactions Regarding the Steel Fabricating Segment. The Company initiated a formal process of soliciting third-party non-binding indications of interest in a possible sale of or investment in the Steel Fabricating Segment. Separate offering memoranda relating to the Steel Fabricating Segment companies were distributed in December 2000 to parties known or believed to have an interest in acquiring or investing in these businesses. The Company received indications of interest from approximately fifteen parties who received the offering memoranda. The Company has engaged in an initial due diligence process with certain of these proposed purchasers/investors to determine their financial stability and wherewithal and to cull out that initial bid and/or bids providing the most value for the Steel Fabricating Segment. As a part of this due diligence process, the Company recently distributed drafts of proposed asset purchase agreements to
certain of these prospective bidders for their comments. Once the Company has received comments on the proposed asset purchase agreements and has determined, in its business judgment, which transaction or transactions to pursue, the Company will file a motion or motions to approve certain sale and bidding procedures related to the sale or sales of or investment in the Steel Fabricating Segment. The Company believes such procedures motion will be filed in the second quarter and further believes the terms of such transaction or transactions will be presented to the Court for approval by June 2001.
Proposed Exit Financing. On September 27, 2000, the Emergency Steel Loan Guarantee Board (the "Board") extended an offer of guarantee for a $100 million loan application filed on the Company's behalf by Citicorp USA ("Citicorp"). The guarantee is subject to certain conditions, including the execution of an acceptable form of guarantee. As a result of the time lag between the original guarantee application and the Board's approval, the recent events involving the sale of the Steel Segment and the sustained significant downturn in the steel industry, documentation and credit review with Citicorp will need to be updated. With the goal of keeping alternative exit scenarios viable, the Company intends to continue its efforts to procure the proposed exit facility.
Although the Chapter 11 Bankruptcy raises substantial doubt about the Company's ability to continue as a going-concern, the accompanying financial statements have been prepared on a going-concern basis. This basis contemplates the continuity of operations, realization of assets, and discharge of liabilities in the ordinary course of business. The statements also present the assets of the Company at historical cost and the current intention that they will be realized as a going-concern and in the normal course of business. A plan of reorganization could materially change the amounts currently disclosed in the financial statements.
The statements do not present the amount which may ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 Bankruptcy. Under Chapter 11 Bankruptcy, the rights of, and ultimate payment by the Company to, pre-petition creditors may be substantially altered. This could result in claims being liquidated in the Chapter 11 Bankruptcy at less (and possibly substantially less) than 100 percent of their face value. At this time, because of material uncertainties, pre-petition claims are carried at face value in the accompanying financial statements. Further information about the financial impact of the Chapter 11 Bankruptcy is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements.
OPERATIONS -- BUSINESS SEGMENTS
The Company operates and reports its operations in two separate business segments: Steel Making (principally through Acme Metals' wholly-owned subsidiary Acme Steel), and Steel Fabricating (principally through Acme Metals' wholly-owned subsidiary, Acme Packaging, and Acme Packaging's wholly-owned subsidiary, Alpha Tube). Universal Tool & Stamping Company, Inc. ("Universal Tool") was a wholly-owned subsidiary of Acme Packaging in the Steel Fabricating Segment until March 9, 1998, when Universal Tool was sold. Financial information about the Company's business segments is contained in the Business Segments section of the Notes to the Consolidated Financial Statements beginning on page 44. Additional information about the Company's business segments is set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Steel Making Segment
Acme Steel is a fully integrated steel producer in the United States. Acme Steel's operations are located in Riverdale and Chicago, Illinois and include the following plant facilities: coke ovens, blast furnace, pigging machines, basic oxygen furnaces, ladle metallurgical facilities, a continuous thin slab caster/hot strip mill and a cold mill (effective January 1, 2001, operating and financial responsibility for the cold mill was transferred to the Steel Fabricating Segment).
In the third quarter of 1996, Acme Steel completed construction of a continuous thin slab caster/hot strip mill complex ("CSP") at its Riverdale, Illinois plant. In June 1997, Acme Steel completed the decommissioning of its ingot making operations at its Riverdale plant. Acme Steel manufactures flat-rolled carbon steel, including sheet and strip steel. Acme Steel has historically specialized in the production of mid- and
high-carbon, alloy, and high strength low alloy ("HSLA") steels. The principal markets served by Acme Steel include the automotive, agricultural, industrial fastener, pipe and tube industries, tool manufacturing industries, processors, and steel service centers.
Acme Steel accounted for approximately 53.6 percent of the Company's total sales during 2000. Acme Steel's order backlogs for its products were $34.1 million and $71.5 million at December 31, 2000 and December 26, 1999, respectively.
In 1996, Acme Steel, as a 40 percent equity participant in NACME Steel Processing, LLC ("NACME"), a limited liability company, constructed a steel coil processing plant on land owned by Acme Steel in Chicago, Illinois adjacent to Acme Steel's Riverdale, Illinois steel making operations. NACME pickles, oils, slits and packages steel coils produced at Acme Steel's CSP. Pursuant to a steel processing agreement between Acme Steel and NACME, Acme Steel has agreed to certain tonnage provisions.
Steel Fabricating Segment
Acme Packaging is one of the two major domestic producers of steel strapping and strapping tools in North America. In addition, Acme Packaging began manufacturing plastic strapping during 1998. Acme Packaging's operations are located in Riverdale, Illinois; New Britain, Connecticut; Leeds, Alabama; and Bay Point, California. The principal markets served by Acme Packaging include the agricultural, automotive, brick, construction, fabricated and primary metals, forest products, paper and wholesale industries.
Alpha Tube is a leading producer of high quality welded carbon steel tube and pipe. Alpha Tube's operations are located in Walbridge, Ohio. The principal markets served by Alpha Tube are the appliance, automotive, construction, heating and cooling equipment, household and leisure furniture, material handling, recreational products, truck exhaust industries and service centers.
Universal Tool, which was sold in March 1998, produced automotive and light truck jacks, tire wrenches and accessories for the original equipment manufacturer market in North America. Universal Tool accounted for approximately 1.6 percent of the Company's total sales during 1998.
Acme Packaging and Alpha Tube accounted for approximately 29.8 percent and 16.6 percent, respectively, of the Company's total sales during 2000. Alpha Tube's order backlogs were $15.0 million at December 31, 2000 and $13.8 million, at December 26, 1999. Due to the nature of its business, Acme Packaging does not have a significant order backlog.
EMPLOYEES
As of December 31, 2000, the Company had 1,781 active employees, of which 476 were salaried and 1,305 were hourly. All of the hourly employees are represented by unions. None of the salaried employees are represented by a union.
The current Collective Bargaining Agreement between the Company and the United Steelworkers of America covering the Chicago and Riverdale plants became effective September 1, 1993, and has been extended indefinitely. The Company and the United Steelworkers of America have negotiated a new tentative Collective Bargaining Agreement for the Chicago and Riverdale plants, with a termination date of December 31, 2005, subject to successful emergence from bankruptcy. A Collective Bargaining Agreement with a termination date of January 29, 2006, has been negotiated with the United Steelworkers of America covering the hourly employees at Alpha Tube and approved by the Bankruptcy Court.
Existing labor agreements covering Acme Packaging hourly employees at Bay Point, California; New Britain, Connecticut; and Leeds, Alabama, are scheduled to expire on October 31, 2003, March 31, 2002 and April 30, 2001, respectively.
COMPETITION
Steel Making Segment
Acme Steel faces intense competition from domestic and foreign flat-rolled carbon steel producers, steel service centers, and producers of plastics, ceramics, aluminum and other materials which can be used in place of flat-rolled steel in manufactured products. The primary competitive factors faced by Acme Steel are price, quality, reliability of supply, and timeliness of delivery and customer service.
For commercial sales, Acme Steel currently competes in the low-, mid-, high-carbon, HSLA and alloy steel markets. Acme Steel has numerous competitors composed principally of steel service centers, other small integrated mills, and mini-mills. Recently improved thin slab casting practices, such as those utilized in the CSP, have allowed mini-mill producers to enter certain sectors of the flat-rolled market, including a portion of Acme Steel's niche market, which had traditionally been supplied by integrated steelmakers.
Domestic steel producers have faced significant competition from foreign steel producers who typically have lower labor costs, currently benefit from foreign exchange rates, and may have less stringent environmental compliance regulations. Additional information is set forth in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.
During 2000, notwithstanding record levels of steel inventories, record low steel prices and weakening U.S. demand, foreign steel imports rose to 38.0 million net tons, second only to 1998's all-time record of 41.5 million net tons of imports. In addition, during 2000, imports of hot-rolled sheet products increased by 19 percent over 1999, notwithstanding restrictions resulting from various trade cases as a result of "switching" from countries and products covered by dumping duties to those which were not covered by these restrictions.
As imports increased and domestic demand slowed during 2000, steel prices began to decline in April 2000. Prices in some product lines, including the low carbon hot-rolled market in which Acme Steel competes, are now at or near 20 year lows (in some cases, even below the levels at the depth of the 1998 crisis period).
The historically high levels of traded steel imports during the 1998-2001 period (with some minor reductions during part of 1999) are a principal cause of the current crisis affecting the U.S. steel industry, including Acme Steel. High import levels continue to force domestic steel companies to reduce prices and production, thus lowering capacity utilization and increasing the costs of production.
Steel Fabricating Segment
Acme Packaging has one primary competitor in the steel strapping market. The Company believes these two steel strapping companies share approximately 80 percent of the domestic steel strapping and strapping tool market. During recent years, steel strapping has experienced competition from plastic strapping, especially high strength polyester product. Many of Acme Packaging's historical steel strapping customers also purchase plastic strapping. In 1998 Acme Packaging installed two plastic strapping extrusion lines at its Riverdale facility to strengthen its competitive position and distribution efficiencies in the marketplace.
Alpha Tube operates in a highly competitive market characterized by numerous participants with widely varying capabilities. In 1998 Alpha Tube consolidated its operations into one modern manufacturing facility and upgraded the capability of its large diameter tube mill, resulting in increased capacity and a reduction of operating costs.
RAW MATERIALS AND ENERGY SOURCES
Raw materials and energy represent a major component of production costs in the steel industry. The principal raw materials used by Acme Steel are iron ore, coal and scrap. Acme Steel obtains its iron ore requirements through Acme Steel's indirect 15.1 percent participation in Wabush Mines, an iron ore mining venture in Eastern Canada ("Wabush"), and through contracts. Acme Steel is required to pay its proportionate share of the fixed operating costs of Wabush, regardless of the quantity of ore received, plus the variable operation costs of minimum ore production by Wabush for Acme Steel. Acme Steel reimburses the
joint venture for these costs through its purchase of ore. There is currently a worldwide surplus of metallurgical coal. As a result, Acme Steel is able to satisfy its coal requirements at competitive prices through short-term contracts and purchases on the open market. Acme Steel purchases steel scrap from external sources and believes adequate supplies of steel scrap are readily available at competitive prices. The Company uses large amounts of electricity and natural gas and is able to satisfy its requirements at prevailing market rates and in adequate quantities.
Raw materials, primarily steel, for the Fabricating Segment are principally supplied by contracts with the Steel Segment and, if necessary, other outside producers or suppliers.
ENVIRONMENTAL COMPLIANCE
The operations of Acme Steel, Acme Packaging and Alpha Tube are subject to numerous federal, state and local laws and regulations providing a comprehensive program of controlling the discharge of materials into the environment and remediation of certain waste sites by responsible parties for the protection of public health and the environment. In addition, various federal and state occupational safety and health laws and regulations apply to the workplace environment. See Item 3. Legal Proceedings, Environmental.
TRADEMARKS AND PATENTS
The Company has the trademarks, patents and licenses necessary for the operation of its businesses as presently conducted. The Company does not hold any patents, trademarks or licenses which are deemed material to its businesses.
ITEM 2.
ITEM 2. PROPERTIES
The Company has facilities throughout the United States. The Company believes its manufacturing facilities are being properly maintained and their production capability is adequate to meet current customer orders.
Acme Steel
Acme Steel's principal properties are located in Chicago and Riverdale, Illinois. The facilities in Chicago include coke ovens, blast furnace and pigging machines. The facilities in Riverdale include basic oxygen furnaces, the CSP, and a cold mill (effective January 1, 2001 operating and financial responsibility for the cold mill was transferred to the Steel Fabricating Segment). The facilities in both Chicago and Riverdale are owned in fee simple, subject to mortgages held by certain secured creditors and secured by a second position under the DIP facility. In addition, Acme Steel owns the land on which NACME is located and leases it to NACME. This land, together with the improvements on it, is subject to a leasehold mortgage. (See discussion of NACME in Item 1. Business -- Operations -- Business Segments.)
Acme Packaging
Acme Packaging's principal properties consist of a steel strapping plant (which includes slitting and painting equipment) and a plastic strapping plant in Riverdale, Illinois, steel strapping plants (which include slitting and painting equipment and warehouses) in Leeds, Alabama, and Bay Point, California, and a strapping tool plant in New Britain, Connecticut. The property in Riverdale is owned in fee simple by Acme Steel, subject to a mortgage held by certain secured creditors and a second position under the DIP facility, and leased to Acme Packaging. The plastic strapping production line is secured by a third party. The properties in Leeds, Alabama; Bay Point, California; and New Britain, Connecticut, are owned in fee simple. In addition, Acme Packaging leases five regional sales offices throughout the United States.
Alpha Tube
Alpha Tube's state-of-the-art facility is located in Walbridge, Ohio, and consists of five tube mills for the production of steel tube and pipe and a steel slitting operation. This facility is owned by Acme Metals, subject to a mortgage, held by a certain secured creditor, and is leased to Alpha Tube.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
For information concerning the Company's Chapter 11 Bankruptcy, see Item 1. Business-Chapter 11 Bankruptcy Filing on page 3.
Reorganization in connection with Spin-Off. Pursuant to an Agreement and Plan of Reorganization as of March 5, 1986, the Company (prior to the Company's 1992 reorganization, the Company was Acme Steel Company, now a subsidiary and formerly called Interlake, Inc., hereinafter referred to as the "Company") and The Interlake Company ("Interlake"), its former parent company, entered into a Tax Indemnification Agreement ("TIA"). The TIA generally provides for Interlake to indemnify the Company for certain tax matters. Per the TIA, Interlake is solely responsible for any additional income taxes it is assessed for adjustments relating to all tax years prior to 1982. With respect to any additional income taxes that are finally determined to be due with respect to the tax years beginning in 1982 through the date of the "Spin-Off" (as said term is identified in the Reorganization documents), the Company is responsible for taxes relating to "Timing Differences" related to the Company's "Continuing Operations." A "Timing Difference" is defined generally as an adjustment to income, deductions or credits which is required to be reported in a tax year beginning subsequent to 1981 through the Spin-Off, but which will reverse in a subsequent year. "Continuing Operations" is defined generally as any business and operations conducted by the Company as of the Spin-Off date. Interlake is principally responsible for any additional income taxes the Company is assessed relating to all other adjustments prior to the Spin-Off. The Company currently believes amounts are owed by Interlake pursuant to the TIA.
On March 18, 1999, the U.S. Tax Court entered an opinion in the case of The Interlake Corporation, et. al. v. Commissioner of Internal Revenue. The U.S. Tax Court held the Company's authority to act for the affiliated group terminated and the Company was not an authorized recipient of a refund it received in 1987 and the Internal Revenue Service ("IRS") cannot seek recovery from Interlake of the refund issued to the Company. The statutory period for appeals expired on September 30, 1999 and the IRS did not appeal this opinion.
As a result of the Tax Court opinion, the expiration of the statutory appeals period, and the IRS advising the Company that it intends to proceed against the Company to recover the $6.8 million plus interest, the Company recognized an income tax related interest charge of $10 million as other long-term liabilities subject to compromise in the third quarter of 1999. As of the Company's Chapter 11 Bankruptcy filing, the 1981 and 1984 portion of the refund ($3.3 million plus accrued interest) has been stayed by the automatic stay provisions of the Bankruptcy Code. Similarly, efforts by the IRS to proceed against the Company for the 1985 portion of the refund ($3.5 million plus accrued interest) is also subject to the automatic stay.
The IRS filed a Proof of Claim in 1999 against Acme Steel asserting an unsecured, priority claim for certain pre-petition taxes, interest and penalties, including the 1987 $6.8 million refund. In July 2000, Acme Steel filed its objection in the Bankruptcy Court to certain of the IRS's claims (i.e., for the $6.8 million refund plus interest). In November 2000, the IRS filed a Motion for Summary Judgment Denying the Debtors Objection to the Claims of the IRS, and, Acme Steel responded and filed its cross Motion for Summary Judgment on its objection to the IRS's claim. A hearing on the IRS's and Acme Steel's respective Motions is now scheduled for April 10, 2001.
The Company believes it has defenses to the IRS's claim regarding the 1987 refund of $6.8 million and will vigorously pursue its objection to the IRS's claim; and, in the event of an unfavorable outcome in the Bankruptcy Court, will pursue all appellate remedies and remedies against third parties, including Interlake pursuant to the TIA.
Raytheon Engineers & Contractors, Inc. During the second quarter of 1999, Acme Steel made an initial draw of $9 million under an irrevocable letter of credit in the approximate amount of $32 million. The letter of credit secures performance by Raytheon Engineers & Constructors, Inc. ("Raytheon") of its obligations in connection with the CSP and other facilities at Acme Steel. Raytheon was the general contractor for the construction of the CSP facility. Raytheon filed various legal actions in the Bankruptcy Court prior to and subsequent to Acme Steel's draw on the letter of credit seeking to initially prevent Acme Steel from drawing on the irrevocable letter of credit, to impose a constructive trust upon any funds drawn, and to seek an early adjudication of the claims between the parties. The Bankruptcy Court denied Raytheon's request to enjoin Acme Steel from drawing under the irrevocable letter of credit and to impose a constructive trust on the funds drawn by Acme Steel. In May 1999, Acme Steel filed a Motion to Dismiss the underlying Amended Adversary Complaint filed by Raytheon. On April 11, 2000, the Bankruptcy Court granted Acme Steel's Motion to Dismiss Raytheon's Amended Adversary Complaint. The Bankruptcy Court held that Raytheon's claims were not properly brought in the form of an adversary proceeding as Raytheon's suit constituted a pre-petition breach of contract claim. Raytheon has appealed the Bankruptcy Court's dismissal of its Amended Complaint which is pending. Subsequent to the April 11, 2000 ruling, the Company reclassified the Raytheon liability of $9 million from Accounts Payable to Liabilities subject to compromise. In February 2000, Acme Steel filed an Adversary Complaint against Raytheon to contest a purported secured claim filed by Raytheon against Acme Steel in the approximate amount of $9 million. Acme Steel proceeded to file a Motion for Partial Summary Judgment seeking to invalidate the underlying Mechanic's Lien upon which the purported secured claim filed by Raytheon is based. On August 28, 2000, the Bankruptcy Court granted Acme Steel's Motion for Partial Summary Judgment finding that the underlying Mechanic's Lien upon which Raytheon's secured claim is based is defective. Raytheon has appealed the Bankruptcy Court's decision granting Acme Steel's Motion for Partial Summary Judgment. Acme Steel has vigorously contested and will continue to vigorously contest the appeals and claims filed by Raytheon; however, there are no assurances Acme Steel will continue to be successful in opposing Raytheon's legal actions.
Other Matters. The Company's subsidiaries also have various litigation matters pending which arise out of the ordinary course of their businesses. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company.
ENVIRONMENTAL
In addition to the general matters noted above, the operations of the Company and its subsidiary companies are subject to numerous federal, state and local laws and regulations providing a comprehensive program of controlling the discharge of materials into the environment and remediation of certain waste disposal sites by responsible parties for the protection of public health and the environment. Various federal and state occupational safety and health laws and regulations also apply to the workplace environment.
These current environmental control requirements are comprehensive and continue to reflect a long-term trend towards increasing stringency. The Company expects these requirements will continue to become even more stringent in future years. The U.S. EPA's proposal for revision of the National Ambient Air Quality Standards for particulate matter and ozone are recent examples of this trend.
The Company, principally through its operating subsidiaries is and, from time to time in the future, will be involved in administrative proceedings involving the issuance, or renewal, of environmental permits relating to the conduct of its business. The final issuance of these permits is generally resolved on terms satisfactory to the Company. In the future, the Company expects such permits will be similarly resolved on satisfactory terms; however, from time to time, the Company is required to pursue administrative and/or judicial appeals prior to achieving a resolution of the terms of such permits.
The Company, from time to time, may be involved in administrative or judicial proceedings with various regulatory agencies or private parties claiming that the Company's operations have violated certain environmental laws, conditions of existing permits, or the disposal of materials at waste disposal sites. The resolution of such matters may involve the payment of civil penalties, damages, remediation expenses and/or the expenditure of funds to add or modify pollution control equipment.
The Company has made substantial capital investments in environmental control facilities to achieve compliance with these laws, incurring expenditures of $5.1 million for environmental projects (exclusive of any such expenditures related to the CSP) in the period from 1998 through 2000. The CSP was constructed under a lump sum fixed price contract of which it is estimated that $9.8 million was capitalized in 1996 for environmental compliance excluding capitalized interest. A nominal amount was expended during 1998 through 2000 to maintain environmental compliance at the CSP. The Company anticipates making nominal capital expenditures for environmental projects during 2001. In addition, maintenance, depreciation and operating expenses attributable to installed environmental control facilities are having, and will continue to have, an adverse effect upon the Company's earnings. Although all of the Company's operating subsidiary companies are affected by these laws and regulations, similar to other steel manufacturing operations, the laws and regulations have had, and are expected to continue to have, a greater impact upon the Company's steel manufacturing subsidiary than on the Company's other operating subsidiaries.
Waste Remediation Matters
Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C., Section 9601 et seq. ("Superfund") and similar state statutes, liability for remediation of property, including waste disposal sites, contaminated by hazardous materials may be imposed on present and former owners or operators of such property and generators or transporters of such materials to a waste disposal site (i.e., Potentially Responsible Parties, "PRPs"). The Company and its operating subsidiaries have been named as PRPs with respect to several such sites. In each instance, the Company's investigation has evidenced either: i) the Company had not disposed of waste materials at the site and was not properly named as a PRP; or, ii) the Company's proportion of materials disposed of at such sites is of sufficiently small volume to qualify the Company as a de minimis contributor of waste material at such sites. This de minimis status has been confirmed at essentially all of the applicable sites.
Although no assurances can be given that new information will not be uncovered which would cause the Company and its subsidiaries to lose their de minimis status at these sites, or, that the Company, or its subsidiary companies, would not be named as PRPs at additional sites, the Company presently believes its total costs for existing sites will not be material.
Administrative and Litigation Matters
The Company, or its operating subsidiaries, is currently involved in the following matters relating to administrative regulations which affect, or may affect, the operations, the permits or the issuance of permits, or litigation relating to the Company:
Removal Credits and Pretreatment. The Metropolitan Water Reclamation District of Greater Chicago ("MWRD") is a publicly owned treatment works ("POTW"). The MWRD applied to the U.S. Environmental Protection Agency ("U.S. EPA") for authority to revise categorical pretreatment standards to reflect the actual treatment provided by the MWRD for waste water discharged to the MWRD's POTW by industrial users ("Removal Credits"). These revised categorical standards, reflecting Removal Credits are essential for Acme Steel to avoid expenditures for control of 4AAP phenol found in discharges from its coke by-products plant and for control of certain other pollutants. In 1987, the MWRD's application was denied by the U.S. EPA and the denial was upheld by the United States Court of Appeals for the Seventh Circuit. The U.S. EPA maintained that, under the Clean Water Act and decisions of U.S. District Courts, it could not approve Removal Credits until it promulgated "sludge criteria" disposal regulations.
In 1993, the U.S. EPA promulgated sludge criteria, which included the possibility of granting Removal Credits for phenols in certain circumstances. Acme Steel petitioned the MWRD for Removal Credits. Following this petition, the MWRD again applied to the U.S. EPA for authority to grant Removal Credits. While this application was denied, the U.S. EPA stated that if the Agency amends its regulations with respect to phenol 4AAP, either as a result of the petition filed by the MWRD or independently, the MWRD may then resubmit its application. Acme Steel, together with a similarly situated steel company, filed Comments and a
Request for Reconsideration and Clarification concerning the 4AAP phenol component of the U.S. EPA's Standards for Disposal of Sludges with the U.S. EPA and filed a Petition for Review of the U.S. EPA's decision with the Court of Appeals for the DC Circuit. Both the Comments and Request for Reconsideration and the Petition for Review are pending. The steel companies filed a motion with the DC Circuit Court to stay the appeal pending the U.S. EPA's consideration of the Comments and Administrative Request for Reconsideration and Clarification. The Court granted this Motion on September 14, 1994. On September 10, 1996 Acme Steel filed, along with the other steel company, with the U.S. EPA a phenol risk assessment document supporting the granting of Removal Credits for 4AAP phenol. To date, there has been no decision by the U.S. EPA. Acme Steel continues to challenge the U.S. EPA's denial of the Removal Credits application and pursue administrative and legal remedies.
In December 2000, U.S. EPA proposed revised effluent guidelines, pretreatment standards, etc. for the Iron and Steel industry ("ELGs"). In the proposed ELGs, U.S. EPA has proposed to delete the effluent limitations for 4AAP phenol; however, in its proposal U.S. EPA is now proposing to impose limitations for the compound phenol with two treatment technology options. Under one of the proposed treatment technology options, the resulting phenol limits could be achieved without biological treatment. However, if the other treatment option is selected by U.S. EPA, it appears removal credits would be required and the regulations would provide the same barrier to pretreatment credits as now exist for 4AAP phenols. The Company is unable to determine which treatment option U.S. EPA may finally select and whether, if finalized, it will resolve the removal credits and pretreatment issues. Acme Steel could be subject to allegations it is in violation of currently applicable pretreatment standards and could be required to negotiate appropriate resolutions with the U.S. EPA and the MWRD resulting in the payment of penalties if its administrative and/or legal challenges are unsuccessful.
Although Acme Steel is vigorously pursuing its administrative and judicial remedies and would vigorously contest any action to assess civil penalties against Acme Steel, the Company does not have sufficient information to estimate its potential liability, if any, if Acme Steel's efforts to obtain such relief, or contest such penalty assessments, are not successful.
OTHER MATTERS
1986 Reorganization Matters. Pursuant to an Agreement and Plan of Reorganization dated as of March 5, 1986, (the "Reorganization") between the Company and Interlake (pursuant to the Spin-off), both parties entered into a Cross-Indemnification Agreement, dated May 29, 1986, (the "Agreement") more specifically described in Exhibit 10.2 to the Company's Annual Report/Form 10-K filed with the U.S. Securities and Exchange Commission for the fiscal year 1992, Securities and Exchange Commission file no. 0-14727.
Pursuant to the terms of this Agreement, for a period of ten (10) years following the date of the Spin-Off (as that term is identified in the Reorganization documents), the Company undertook to defend, indemnify and hold Interlake and its affiliates harmless from and against any and all Claims, as that term is defined in the Agreement, occurring either before or after the date of the Reorganization and which arose out of or are related to the Acme Business, as that term is defined in the Agreement. The Acme Business is more specifically defined in the Agreement as the iron and steel and domestic U.S. steel strapping business as conducted by the Company on or about May 29, 1986.
Similarly, and for the same period of time, Interlake undertook to defend, indemnify and hold the Company and its affiliates harmless from and against all Claims, as that term is defined in the Agreement, occurring either before or after the date of the Reorganization related to the operation of all businesses and properties currently owned, directly or indirectly, by Interlake or any subsidiary of Interlake (other than the Company and its affiliates) and relating to the Transferred Property, as that term is defined in the Reorganization Agreement (but excluding the Acme Business), and any business and properties discontinued or sold by Interlake Inc. prior to May 29, 1986, including any discontinued or sold businesses or property which, if continued, would be part of the Acme Business. The indemnification by Interlake with respect to any Claims incurred in connection with or arising out of or related to the Interlake Business, as that term is defined
more specifically in the Agreement, includes but is not limited to environmental matters relating to the Interlake Business whether brought by governmental agencies or private entities. These environmental matters include, without limitation, the lawsuit captioned People of the State of Illinois v. Waste Management of Illinois, Interlake, Inc. and First National Bank of Western Springs, Circuit Court of Cook County, Illinois (No. 85 L 30162); the disposal of materials at the landfill operated by Conservation Chemical located at Gary, Indiana, to the extent such materials originated at the plant of Gary Steel Company; and operation of facilities by predecessors of Interlake at Duluth, Minnesota.
Interlake also has and continues to provide indemnification to the Company for the Duluth, Minnesota, facility which has been designated as a Superfund Site pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Section 9601, et seq. (the "Duluth Site"). Interlake reported the soil remediation was substantially completed in 1997. The Minnesota environmental agency ("MPCA") also requested Interlake to investigate and evaluate remediation alternatives for the underwater sediments at the Duluth Site. Interlake reports that consultants have substantially completed an investigation of the sediments; and based on this investigation Interlake has commenced reviewing potential remediation alternatives with the MPCA and other parties. Interlake indicates it is unable to provide meaningful estimates of the potential cost estimates of such remediation, if any is deemed appropriate, until the investigation is complete and remediation alternatives are reviewed with the MPCA.
In March 1996, the MPCA named the successors of certain coal tar processors as additional parties responsible for a portion of the underwater sediments at the Duluth Site.
Merger of The Interlake Corporation and GKN North America Manufacturing Inc. On February 10, 1999, GKN North America Manufacturing Inc. ("GKN") was merged into Interlake. The Company believes the acquisition of Interlake by GKN will not alter the obligations and rights of the Company and Interlake as described herein.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the last quarter of the last fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table presents the high and low sales or bid information on a quarterly basis for the Company's Common Stock for the two fiscal years from December 27, 1998 through December 31, 2000. From December 28, 1997 through September 29, 1998, the Common Stock traded on the New York Stock Exchange under the symbol AMI. Subsequent to September 29, 1998 through December 26, 1999 (and continuing to date), the Common Stock has traded on the Bulletin Board Quotation System of the National Association of Securities Dealers under the symbols AMIIQ or AMIIQ.OB. In addition, from December 30, 1996 through December 8, 1998, the Company's Common Stock traded on the Toronto Stock Exchange
under the symbol AMK. As of March 12, 2001 there were 11,647,471 shares of Common Stock outstanding held by 4,269 shareholders of record.
No dividends have been declared or paid on the Common Stock since the Company became a public company in 1986. Special payments in 1992 and 1988 reflected the redemption of preferred stock purchase rights. Certain covenants in the Company's debt instruments and agreements have in the past limited the Company's ability to pay dividends. Currently, the Company's status under Chapter 11 of the Bankruptcy Code and the DIP Financing Agreement prohibit the payment of dividends and the repurchase of shares.
OTHER EVENTS
As previously reported, on January 20, 2000, the Bankruptcy Court denied a motion of certain equity holders of the Company to appoint an equity committee to represent the interest of the Company's equity security holders (the "Stockholders") in the Company's pending bankruptcy proceedings. In the course of the Court's consideration of this motion, the Company's financial advisor presented evidence indicating it now appears likely, under current circumstances, that at the time the final plan of reorganization is filed, there will not be sufficient reorganization value in the bankruptcy proceedings to provide a distribution to Stockholders. In denying the motion, the Court did not comment on the financial advisor's conclusion, ruling instead that the Company and its advisors were fulfilling their fiduciary duty in seeking to represent all interests and, therefore, no need for a separate equity committee to represent the Stockholders existed.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEARS IN REVIEW (dollars in thousands except for per share data) Certain amounts have been reclassified to conform with the 1999 presentation.
(1) 1998 tax charge includes a third quarter deferred tax write-off of $76.7 million resulting from the Company's bankruptcy filing. (2) Charge related to the repurchase of the 1994 Notes and the write-off of previously capitalized debt issuance costs. (3) In accordance with EITF No. 97-13, the Company changed its accounting policy for recording certain costs related to ongoing expenditures to upgrade the Company's management information systems and recorded the cumulative effect of the change. (4) Sales have not been restated to reflect the adoption of EITF No. 00-10, as the impact is not determinable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On September 28, 1998, the Company filed voluntary petitions for protection and reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. This discussion and analysis of results of operations should be read in conjunction with the financial data in the table included below and in conjunction with the consolidated financial statements and notes thereto. See Item 1. Business-Chapter 11 Bankruptcy Filing on page 3.
The Company's operations are divided into two segments, the Steel Making Segment and the Steel Fabricating Segment. The Steel Making Segment consists of Acme Steel and includes all of the facilities used in the manufacturing of hot-rolled sheet and strip steel. The Steel Fabricating Segment includes the operations of Acme Packaging, Alpha Tube and, prior to its sale, Universal Tool. Each fabricating segment company uses flat-rolled steel in their respective fabricating processes, with the exception of Acme Packaging, which uses both steel and plastic for its operations.
Acme Steel experienced increased average selling price per ton in 2000 as compared to 1999 due to the competitive pressure from steel imports lessening during the first half of 2000. However, in the second half of 2000, imports returned to a high rate and the economy weakened. This resulted in an average price erosion of $22 per ton and, when comparing the first half to the last half of 2000, nearly a 12 percent decline in shipments. Although the Steel Making Segment was able to increase its sales from the prior year on lower shipments and cut its loss from operations nearly in half, the Segment was unable to generate a profit in 2000.
During 2000, the Steel Making Segment's operations demonstrated its ability to produce higher margin products. However, intense competition from foreign producers and new domestic entrants, coupled with lower demand due to a soft economy, did not allow the Segment to materially improve its product mix.
Acme Steel's CSP operated at an average of 89 percent capacity for 2000 compared to 97 percent in 1999. This 6.9 percent reduction in production levels resulted in 6.2 percent higher hot band production costs.
The Steel Fabricating Segment recorded significantly lower operating results when compared to 1999. Results were affected by reduced sales on lower volumes and higher prices. The Fabricating Segment experienced a weaker demand in certain areas of the marketplace, including a shortfall in orders from one major customer that was lost in the second half of 2000. In addition, due to competitive pressures, higher raw material costs based on annual contracts could not be passed on to customers and resulted in lower margins. Production costs were slightly improved when compared to the prior year. The Steel Fabricating Segment was unable to offset the operating losses of the Steel Making Segment.
SUMMARY RESULTS OF OPERATIONS
The summary of the Company's results of operations:
Sales have been restated to reflect the adoption of EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
Fiscal 2000 as compared to fiscal 1999
The Company. For the fiscal year ended December 31, 2000, the Company's consolidated net sales increased 1.7 percent from $492.8 million in 1999 to $501.0 million in 2000. The sales increase was due to higher prices offset by lower volumes. In 2000, the Company incurred a net loss of $43.3 million, or $3.72 per diluted share. The 2000 net loss compares favorably by $19.9 million to the 1999 net loss of $63.2 million, or $5.42 per diluted share. The 1999 net loss includes a $10 million charge to interest expense due to the Tax Court decision discussed in Item 3. Legal Proceedings on page 9 and a $7.7 million charge for the abandonment of the finishing mill. The remaining improvement is attributed primarily to improved earnings in the Steel Making Segment resulting from $30 per ton higher prices, somewhat offset by lower volumes and higher operating costs.
The operating loss in 2000 was $13.0 million compared to the 1999 operating loss of $23.7 million, a 45.2 percent improvement. The 2000 operating loss improved primarily due to increased selling prices and the abandonment of the finishing mill, which resulted in a $7.7 million charge to 1999 operating loss in the Steel Making Segment. These improvements were offset by lower sales demand and higher raw material costs that could not be passed on to the marketplace in the Steel Fabricating Segment.
The 2000 and 1999 results reflect operations under Chapter 11 Bankruptcy for the entire year. Reorganization charges relate to legal and professional fees associated with the Chapter 11 Bankruptcy. Certain expenses, primarily interest expense on unsecured debt, have been reduced or eliminated since the Chapter 11 Bankruptcy filings.
Steel Making. Steel sales of $348.5 million in 2000 were up 4.2 percent over 1999 sales of $334.4 million. The increase is attributable to a $30 per ton increase in price, which occurred in the first half of the year, when imported steel levels were lower and the domestic economy remained strong. Offsetting the higher
prices was an 8.5 percent lower volume, or an 81,000 ton lower level of shipments, with a slightly improved sales mix as compared to 1999. The environment changed in the last half of the year when imported steel levels rose and the domestic economy began to weaken. Prices fell by $25 per ton when comparing the fourth quarter to the second quarter of 2000.
The CSP operated at 89 percent of capacity in 2000, the fourth full year of operation, compared to 97 percent in 1999 and 76 percent in 1998.
The 2000 loss from operations was $24.1 million compared to a loss in 1999 of $45.5 million, a 47.1 percent improvement. This improvement was primarily due to increased selling prices, higher operating costs and a slight improvement in product mix partially offset by decreased volume. The improvement also was partially the result of the absence of a $7.7 million 1999 third quarter charge for the abandonment of the Steel Making Segment's finishing operations.
Steel Fabricating. Sales of $233.0 million in 2000 were down $7.1 million, or 3.0 percent, from the $240.1 million in 1999. Acme Packaging and Alpha Tube sales were down 1.8 percent and 5.5 percent, respectively, due to lower volume on higher prices. The Segment suffered from weaker demand in certain markets and the loss of a major packaging customer in the last half of 2000.
In 2000, operating income of $11.1 million was 49.0 percent lower than 1999 operating income of $21.8 million. Higher raw material costs and the inability to pass the costs on to the marketplace, coupled with the lower demand in the last half of the year, caused the decline in earnings for Acme Packaging. The decreased shipment levels caused by a weaker demand in the last quarter of the year and a weaker sales mix, more than offset the increased prices in the tube and pipe market, as income from operations at Alpha Tube was down $4.8 million from the prior year.
Net Interest Expense. Net interest expense of $22.5 million in 2000 was $10.5 million lower than net interest expense of $33.0 million in 1999. Interest expense in 1999 included a $10 million charge due to the Tax Court decision discussed in Item 3. Legal Proceedings on page 9.
Reorganization Charges under Chapter 11 Bankruptcy. The $7.3 million of reorganization charges remained essentially flat with 1999 reorganization charges.
Income Taxes. The provision for income taxes in 2000 was $0.5 million, primarily for state income taxes. As a result of the losses incurred and its Chapter 11 Bankruptcy filings, the Company continues to record a full valuation reserve against its deferred net income tax asset.
Fiscal 1999 as compared to fiscal 1998
The Company. For the fiscal year ended December 26, 1999, the Company's consolidated net sales increased 1.7 percent from $484.8 million in 1998 to $492.8 million in 1999. The sales increase was due to stronger volume, partially offset by weaker prices. In 1999, the Company incurred a net loss of $63.2 million, or $5.42 per diluted share. The 1999 net loss compares favorably by $64.5 million to the 1998 net loss of $127.7 million, or $10.94 per diluted share. The 1999 net loss includes a $10 million charge to interest expense due to the Tax Court decision discussed in Item 3. Legal Proceedings on page 9. The 1998 net loss included an income tax provision of $55.7 million primarily related to a full valuation reserve recorded against net income tax benefits previously recognized, while 1999 recorded a $0.3 million income tax provision. The remaining improvement is primarily due to increased sales volume and decreased operating costs at the Steel Making Segment.
The operating loss in 1999 was $23.7 million compared to the 1998 operating loss of $39.5 million, a 39.9 percent improvement. The operating loss improved primarily due to increased sales volume and improved cost efficiencies, partially offset by the abandonment of the finishing mill causing a $7.7 million charge to operating loss.
The 1999 results reflect operations under Chapter 11 Bankruptcy for the entire year. Results for 1998 reflect operations prior to Chapter 11 Bankruptcy for the period December 29, 1997 through September 28,
1998 and operations under Chapter 11 Bankruptcy for the remainder of the year. Certain expenses, primarily interest expense on unsecured debt, have been reduced or eliminated since the Chapter 11 Bankruptcy filings.
Steel Making. Steel sales of $334.4 million in 1999 were up 3.1 percent over 1998 sales of $324.4 million. The increase is attributable to a 21.5 percent increase in shipment volume. Offsetting that higher level of shipments was a 12.2 percent decrease in average selling price per ton related to lower selling prices and a weaker sales mix. The lower average selling price was caused by the competition from lower priced imported steel entering the market in the first half of 1999 coupled with lower demand for Acme Steel's higher margin product.
The CSP operated at 97 percent of capacity in 1999, the third full year of operation, compared to 76 percent in 1998 and 59 percent in 1997.
The 1999 loss from operations was $45.5 million compared to a loss in 1998 of $62.1 million, a 26.7 percent improvement. This improvement is primarily due to increased sales volume, decreased operating costs and year-end improvements of price and product mix. Offsetting these improvements was the third quarter of 1999 abandonment of the Segment's finishing operations negatively impacting operations by $7.7 million.
Steel Fabricating. Sales of $240.1 million in 1999 were down $10.3 million or 4.1 percent from the $250.4 million in 1998. Acme Packaging sales were down 3.1 percent due to lower average selling prices. Alpha Tube sales were slightly above the 1998 level with higher shipment volumes.
In 1999 operating income of $21.8 million was essentially flat with 1998. Lower raw material and operating costs nearly offset the sales declines in Acme Packaging. The increased volume, richer sales mix, and lower material costs more than offset the price declines in the tube and pipe market as income from operations at Alpha Tube was up over $3.4 million from the prior year. The improvements at the Alpha Tube facility offset the elimination of operating income at Universal ($1.8 million in 1998) due to its sale in March of 1998.
Net Interest Expense. Net interest expense of $33 million in 1999 was $5 million lower than net interest expense of $38.0 million in 1998. Interest expense relating to unsecured debt was not accrued during 1999 due to the Chapter 11 Bankruptcy filings, while unsecured debt interest was accrued for the first three quarters of 1998.
Reorganization Charges under Chapter 11 Bankruptcy. The $7.4 million of reorganization charges remained essentially flat with 1998 reorganization charges. Although 1998 experienced only one fiscal quarter of reorganization charges, it incurred large one-time costs, including the unwinding of certain hedging transactions, causing 1998 charges to approximate 1999.
Income Taxes. The provision for income taxes in 1999 was $0.3 million. The Company recorded an income tax provision of $55.7 million for the year ended December 27, 1998. As a result of the losses incurred and its Chapter 11 Bankruptcy filings, the Company recorded a full valuation reserve against its deferred net income tax asset balance in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The most significant factors affecting the Company's liquidity and capital resources are the adverse market conditions for its products and operating under the protection of the Bankruptcy Code. Additional information and discussions concerning the circumstances which led to the filings under Chapter 11 Bankruptcy are contained in Item 1. Business-Chapter 11 Bankruptcy Filings, and elsewhere in this Item 7. The Company held no cash and cash equivalents balances at the end of 2000 and 1999.
The Company's current liquidity requirements include funding losses, working capital needs, Chapter 11 Bankruptcy administrative expenses, payments to adequately protect holders of certain secured claims against the Company (such payments are made pursuant to the approval of the Bankruptcy Court) and capital investments. On December 18, 1998, with approval of the Bankruptcy Court, Acme Metals, Acme Steel, Acme Packaging, Alabama Metallurgical and Acme Steel International entered into a Loan & Security
Agreement ("DIP Financing Agreement") with Bank of America (formerly BankAmerica Credit), which provides for a maximum of $100 million of borrowings subject to borrowing base limitations based on inventory and accounts receivable less reserves. Alpha Tube, whose inventory and accounts receivable are excluded from the borrowing base computation, has guaranteed the obligations incurred under the DIP Financing Agreement. Alpha Tube's guaranty obligation with respect to the DIP Financing Agreement is effectively subordinate to pre-petition trade obligations and Chapter 11 Bankruptcy administrative expenses of Alpha Tube. At December 31, 2000, $13.3 million in borrowings were outstanding with an additional $21.6 million available based on borrowing base limitations. The DIP Financing Agreement is intended to support the Company's operations during Chapter 11 Bankruptcy proceeding. The Company amended the DIP Financing Agreement to extend the Agreement through April 1, 2001. Effective March 30, 2001 the Court approved an additional extension of the DIP Financing Agreement to the earlier of July 1, 2001, or upon Bankruptcy Court approval of the Company's plan of reorganization or the sale of assets of an operating business. Based on current projections the Company anticipates complying with the DIP Financing Agreement covenants through July 1, 2001, however, there can be no assurance that the covenant tests will be met.
Capital expenditures are expected to be approximately $21 million in 2001 and will be principally for necessary replacement projects. The Company expects to make approximately $8.7 million of adequate protection payments during 2001.
Although the Company currently believes the anticipated cash provided by future operations and borrowings under the DIP Financing Agreement will provide sufficient short-term liquidity for the Company to meet its ongoing operations in Chapter 11 Bankruptcy (including required capital expenditures) there can be no assurance these or other possible sources will be adequate or that further extensions of the current DIP Financing Agreement would be obtained.
OUTLOOK
The Company currently intends to present a plan of reorganization to the Bankruptcy Court to reorganize the Company's businesses and to restructure the Company's balance sheet at the earliest practical date. Although management expects to file a plan of reorganization, there can be no assurance at this time that a plan of reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization through April 2, 2001. The Company has filed a motion requesting the Bankruptcy Court to enter an order extending the Company's Exclusive Proposal Period for approximately 90 days to, and including, July 2, 2001. While the Company anticipates requesting further extensions of the exclusivity period, there can be no assurance the Bankruptcy Court will grant such further extensions. If the exclusivity period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization.
Steel Making Segment
The Steel Making Segment continues to incur operating losses and will not achieve the sales, production, and performance levels necessary to achieve an operating profit for the year 2001. For this Outlook section, the Company is contemplating the continuation of business without restructuring its balance sheet due to its possible emergence from Chapter 11 Bankruptcy during 2001. Competition from foreign steel continues to adversely affect Acme Steel sales along with a slowing economy. Additionally, the Company believes that a structural change in the pricing of products occurred, compressing the premium received by Acme Steel for traditionally high-margin products. On the other hand, the cost position of Acme Steel has substantially improved since the CSP began operations. The Company continues to place maximum effort on optimizing the operating performance of its facilities, reducing manufacturing costs, and optimizing its mix of higher margin products to return the Steel Making Segment to profitability.
Steel Fabricating Segment
The Steel Fabricating Segment earnings in 2001 are expected to increase slightly. Acme Packaging expects to increase sales revenue based on slightly higher steel strap volume, improve overall plastic strapping sales and benefit from lower raw material costs. Alpha Tube expects slightly higher volume with lower prices, matching 2000 revenues. Operating results are expected to exceed 2000 based on increased margins, with lower raw material costs and improved operational costs.
FORWARD LOOKING STATEMENT
Actual events might materially differ from those projected in the above forward looking statements. If there are substantial unexpected production interruptions or other operating difficulties, or if failure to achieve production utilization and material yield goals, the competitive and financial position of the Company could be materially adversely affected. In addition to these uncertainties, forward looking statements regarding all of the Company's businesses, but particularly the Steel Making Segment, are based on various economic assumptions. These assumptions include projections regarding: selling prices for the Company's products, costs for labor, energy, raw materials, supplies, pensions and active and retiree medical care, volume or units of product sales, competitive developments in the marketplace by domestic and foreign competitors, including import levels, and the competitive impact of the facilities which are expected to compete with the Company's products, general economic developments in the United States or abroad affecting the business of the Company's customers, including the strength of the U.S. dollar against other currencies and similar events which may affect the costs, price or volume of products sold by the Company.
There can be no assurances the results of these factors will conform with the Company's assumptions and projections. If one or more of these factors fails to meet the Company's projections, the adverse impact on the Company's business and financial results could be significant. Similarly, in the event the Company's assumptions and projections are too conservative, the Company's performance may exceed these forecasts.
Furthermore, the Chapter 11 Bankruptcy filings introduce numerous uncertainties which may affect the Company's businesses, results of operations and prospects.
RECENTLY ISSUES ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company was required to adopt SFAS No. 133 effective January 1, 2001. The adoption is not expected to impact the consolidated financial statements, as the Company has not entered into any derivative contracts and does not have any open derivative positions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange. Until its Chapter 11 Bankruptcy filings, the Company used foreign exchange forward contracts on the Canadian dollar to hedge its exposure from changes in foreign exchange rates for the purchase of raw materials from its Wabush joint venture. Upon filing for Chapter 11 Bankruptcy protection, the Company unwound its forward positions. A 10 percent movement in the Canadian dollar could affect annual raw material costs by approximately $3.0 million.
Interest Rates. Until its Chapter 11 Bankruptcy filings, the Company used interest rate swaps to fix its exposure to interest rate movements. Upon filing for Chapter 11 Bankruptcy protection, the Company unwound its interest rate swaps.
The Company's net exposure to interest rate risk consists of floating rate debt instruments linked to LIBOR. The Company, while under Chapter 11 Bankruptcy, is prohibited from making interest payments but, with the approval of the Bankruptcy Court, has entered into adequate protection agreements with secured
lenders. The current operating environment in the steel industry will not permit the Company to make cash adequate protection payments to the senior secured bank group or the holders of the 12 1/2% and 13 1/2% Senior Secured Notes after the first quarter 2001. See footnote entitled "Debt Refinancing and Long-Term Debt" contained in the accompanying financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted in a separate section of this Annual Report on Form 10-K. See the audited Consolidated Financial Statements and Financial Statement Schedule of Acme Metals Incorporated attached hereto and listed in the index on page 37 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth, as of March 12, 2001 with respect to each director of the Company, his name and all positions held during the last five years. The directors are divided into three classes, as nearly equal in member as possible, designated Class I, Class II and Class III. At each Annual Meeting successors to the class of directors whose term expires at the Annual Meeting are elected.
CLASS II DIRECTORS TERM EXPIRING IN 2001
CLASS I DIRECTORS TERM EXPIRING IN 2002
CLASS II DIRECTORS TERM EXPIRING IN 2000
No Annual Meeting was held in 2000. These Class II Directors remain until the next Annual Meeting is held and their successors are elected.
The following table sets forth, as of March 12, 2001 with respect to each executive officer of the Company, his name and all positions held during the last five years. Executive Officers are elected annually by the Board of Directors of the Company to serve for a term of office of one year and until their successors are elected.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers during 2000 for services for all capacities in the fiscal years 1998, 1999 and 2000.
SUMMARY COMPENSATION TABLE
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(1) Except as otherwise footnoted, amounts in this column are for cash bonuses paid pursuant to the Company's 1994 Executive Incentive Compensation Plan, as amended and restated.
(2) Amounts in this column are Company contributions to the Company's (i) Salaried Employees' Retirement Savings Plan ("SERSP"), (ii) Employee Stock Ownership Plan ("ESOP"), and, (iii) until the date of the Chapter 11 Bankruptcy, where the annual compensation of the individual exceeds the IRS statutory limit for 1998 of $160,000, to the Company's Deferred Compensation Plan ("DCP"), based on amounts earned by such executive officers during 1999. The Company contributions to the SERSP, ESOP and DCP for executive officers are based on the same percentages as for all other eligible employees of the Company. The ESOP was merged into the SERSP effective March 1, 1999 and no further contributions have been made to the ESOP by the Company.
(3) Except as indicated, the dollar value of perquisites and other personal benefits for such executive officers was less than the established reporting thresholds.
(4) Mr. Howell became an executive officer of the Company on February 1, 1998. From September 1, 1997 through January 1998 he was an officer of Acme Steel Company, a subsidiary of the Company. The amount reported for Mr. Howell under Other Annual Compensation in 1998 includes $41,055 for relocation expenses and $17,151 for automobile expenses, each of which is in excess of 25 percent of the total perquisites and other personal benefits reported for Mr. Howell in 1998; the amount in 1999 includes $42,331 for relocation expenses and $19,312 for automobile expenses, each of which is in excess of 25 percent of the total perquisites and other personal benefits reported for Mr. Howell in 1999, the amount in 2000 includes $44, 072 for relocation expenses and $19,953 for automobile expenses, each of which is in excess of 25 percent of the total perquisites and other personal benefits reported for Mr. Howell in 2000.
STOCK OPTION GRANTS IN 2000
No stock options were granted during fiscal 2000.
AGGREGATED OPTION EXERCISES IN 2000 AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information concerning the exercise of options in 2000 to purchase Common Stock by the five individuals named in the Summary Compensation Table and the unexercised options to purchase Common Stock held by such individuals at December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR FISCAL YEAR END OPTION VALUE (1)
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(1) No Stock Appreciation Rights have been granted by the Company.
(2) Calculated on the basis of the fair market value of the underlying securities at fiscal year end, $0.02, minus the exercise price. No options were in-the-money at fiscal year end.
DEFINED BENEFIT PLAN
Since May 29, 1986 Acme Steel Company has maintained the "Consolidated Pension Plan for Acme Steel Company Salaried Employees and Riverdale and Chicago Plant Hourly Employees" (the "Consolidated Plan"). Effective July 31, 1994, the Acme Metals Incorporated Salaried Employees' Past Service Pension Plan, the plan which provided benefits to certain employees of the Company, including certain executive officers, was merged into the Consolidated Plan, which became the "Consolidated Pension Plan for Acme Salaried and Hourly Employees." Effective January 1, 1994, the Company adopted the Acme Metals Incorporated Supplemental Benefits Plan (the "Supplemental Benefits Plan") to pay benefits to employees of the Company, which would be payable under the Consolidated Plan, except for the limits imposed under the Internal Revenue Code of 1986 (the "Code"). The Supplemental Benefits Plan is a non-qualified plan for purposes of ERISA and is unfunded. Payments under the Supplemental Benefits Plan have been suspended
since September 28, 1998, the date on which the Company filed for protection under Chapter 11 of the United States Bankruptcy Code ("Chapter 11 Bankruptcy").
The Consolidated Plan provides benefits based on years of credited service with the Company (including prior service with Acme Steel) through December 31, 1981 and average annual earnings for the five highest twelve-month periods during the ten consecutive twelve-month periods preceding retirement. The Company and Mr. Marsden are parties to a deferred compensation agreement which entitled Mr. Marsden to a supplemental pension benefit equivalent to ten years of additional credited service under the Consolidated Plan. Corporate funds, rather than pension trust assets, have been used for payment of these supplemental benefits to Mr. Marsden and any pension benefits payable in excess of the maximum amount permitted under the Code. Mr. Marsden was deemed to have approximately 15 years of credited service at his retirement as an employee of the Company on March 1, 1997. Pension benefits payable to Mr. Marsden in excess of the maximum amounts permitted under the Code were provided under the Supplemental Benefits Plan until the date of the Chapter 11 Bankruptcy. Mr. Williams has approximately 20 years of credited service. Any pension benefits to Mr. Williams in excess of the maximum amounts permitted under the Code would be provided under the Supplemental Benefits Plan unless he experiences a "Discharge for Cause" (as defined in the Supplemental Benefits Plan). Messrs. Bennett, Dyke, Howell and Weber joined the Company after December 31, 1981 and therefore do not participate in the Consolidated Plan. The status of the Supplemental Benefits Plan and future payments from it are uncertain as a result of the Chapter 11 Bankruptcy.
The preceding table is based upon retirement at age 65, a pension payable for the life of the retiree only, and a social security offset of $11,177 per year. Different benefits under the Consolidated Plan may be payable for persons whose employment terminates prior to age 65. For purposes of the table, average annual earnings include salaries and bonuses paid or deferred during the twelve-month period.
The Consolidated Plan provides a transition pension for salaried employees, including certain executive officers, who were employed on December 31, 1981, if the benefit attributable to certain contributions by the Company after December 31, 1981 under the Company's Salaried Employees' Retirement Savings Plan (the "SERSP") is less than the benefit under the Consolidated Plan, which would be attributable to continuous service between January 1, 1982 and the earlier of December 31, 1991 or termination of employment. The amount attributable to such Company contributions from 1982 through 1988 is all Company contributions in excess of six and one-half percent of the participant's earnings and from 1989 through 1991 is all Company contributions, for each calendar quarter of continuous service, together with amounts which would have been earned had such contributions been invested and reinvested in the SERSP in the (i) Diversified Investment Fund from January 1, 1982 through August 31, 1995, and (ii) Vanguard Asset Allocation Fund commencing September 1, 1995. In the case of executive officers, earnings are the same for purposes of the SERSP as for purposes of the Consolidated Plan. Future performance of the Vanguard Asset Allocation Fund, annuity interest rates, and the earnings of participants during the ten years preceding retirement will determine whether or not any transition pension will be payable. Unless a participant becomes entitled to a transition pension, years of credited service after December 31, 1981 will have no effect on any estimated annual pension payable pursuant to the Consolidated Plan.
CHANGE IN CONTROL ARRANGEMENTS
The Company had a Key Executive Severance Pay Plan (the "Original Severance Plan") in place from January 22, 1987 until February 23, 1999. The Original Severance Plan covered designated executive officers of the Company and its subsidiaries and provided certain benefits if a designated officer's employment with the Company was terminated within three years after a "Change in Control" of the Company (as defined in the Original Severance Plan). The Original Severance Plan was terminated by order of the Bankruptcy Court on February 23, 1999 and replaced in its entirety by a section of the severance component of the Company's Key Employee Retention Plan, which was approved by the Bankruptcy Court on February 23, 1999 (the "New Plan").
The Change in Control section of the severance component of the New Plan (the "Change in Control Plan") will provide lump sum severance payments to designated participants whose employment with the
Company is terminated involuntarily and without "Cause" (as defined in the New Plan) as a consequence of the Chapter 11 Bankruptcy process or as a result of a Change in Control (as defined in the New Plan). In addition, following a Change in Control a designated participant may elect to terminate his or her employment without loss of severance benefits in certain specified contingencies, including termination of the participant's position as an officer or director; a significant adverse change in the participant's position, duties or compensation; a good faith determination by the participant that as a result of the Change in Control he or she is unable to carry out the authorities, powers, functions or duties attached to his or her position; or excessive travel requirements or the substantial relocation of the participant's place of work (such events being deemed to be "Constructive Termination"). Any amounts paid to participants pursuant to the retention payment component of the New Plan will be deducted from the amounts payable pursuant to the Change in Control Plan.
Under the New Plan, a Change in Control is deemed to have occurred if at any time from February 23, 1999 until one year following the date upon which the Bankruptcy Court approves an order confirming a Plan of Reorganization (as defined in the New Plan), (i) there occurs a consolidation, dissolution, liquidation, merger, sale, lease, exchange or other transfer of all or a significant portion of the Company's business and/or assets, or there occurs a Reorganization of the Company in which the Company is not the surviving entity or pursuant to which debt is exchanged for voting securities of the Company resulting in the holders of the Company's voting securities immediately prior to the Reorganization holding less than 75 percent of the outstanding voting securities of the surviving or acquiring entity; (ii) the Company sells, leases, exchanges or transfers all or substantially all of its business and/or assets to another entity less than 75 percent of whose outstanding voting securities are owned by the holders of the Company's voting securities immediately prior to such transfer; (iii) the Company's shareholders approve a plan for the liquidation or dissolution of the Company; (iv) a filing is made with the Securities and Exchange Commission disclosing the beneficial ownership by any person or group of 51 percent or more of the voting power of the Company; (v) during any period of two consecutive years, individuals who were directors at the beginning of such period cease to constitute a majority of the Board of Directors of the Company without the approval of two-thirds of the remaining members of the Board of Directors; (vi) prior to a confirmation of a Plan of Reorganization, an event or events occur which the Board of Directors, with the consent of the Official Committee of Unsecured Creditors of the Company or the approval of the Bankruptcy Court, determines to be a Change in Control; (vii) after the confirmation of a Plan of Reorganization, an event or events occur which the Board of Directors determines to be a Change in Control.
Participants covered by the New Plan are divided into three groups. All of the individuals named in the Summary Compensation Table are in Group I. In the event of the involuntary termination or Constructive Termination of their employment pursuant to the terms of a Change in Control, they will be entitled to receive a sum equal to one and one-half times the sum of (i) their base salary as of the date of their termination, plus (ii) an amount equal to the average of the compensation paid to them pursuant to the Company's Executive Incentive Compensation Plan or the New Plan, whichever is applicable, for the two years prior to termination. In addition, such individuals will be paid an amount to cover premiums for hospitalization, medical and accident insurance premiums for a period of eighteen months. For a period of eighteen months following termination, such individuals will be entitled to receive all benefits to which they are presently entitled as participants under the Company's Salaried Employees' Retirement Savings Plan, the Consolidated Plan or other severance compensation, deferred compensation, disability and/or retirement plans.
The net amount payable to any participant under the Change in Control Plan, taking into account payments under Other Plans, (as defined in the New Plan) as appropriate, may not exceed 2.99 times the participant's "base amount" (as defined in Section 280G of the Internal Revenue Service Code of 1986, as amended the ("Code")), which generally, is the average of the participant's taxable annual income received from the Company during the five-year period preceding the Change in Control, to avoid the special tax rules applicable to "excess parachute payments" under federal income tax legislation enacted in 1984.
To protect both the Company and any participant if the severance compensation under the Change in Control Plan, either alone or together with other payments to a participant, would constitute "excess parachute payments," as defined in Section 280G of the Code, such severance compensation payment would
be reduced to the largest amount as would result in no portion of such payments being disallowed as deductions to the Company under Section 280G of the Code and no portion of such payments subjecting a participant to the excise tax imposed by Section 4999 of the Code. The determination of such reductions will be made, in good faith, by the Company's independent accountants and will be conclusively binding upon the Company and such participant.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth as of March 12, 2001 information with respect to beneficial ownership of the Company's Common Stock by all directors and nominees, each of the executive officers named in "Executive Compensation" below, and all directors and executive officers as a group.
- --------------- * Less than 1% of class
(1) As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition) with respect to the security through any contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, beneficial ownership consists of sole voting and investment power.
(2) The shares owned by each person or entity, or by the group, and the shares included in the total number of shares outstanding have been adjusted and the percent owned has been computed in accordance with Rule 13d-3(d)(1) under the Securities and Exchange Act of 1934.
(3) Includes 96,400 shares that not now owned but could be acquired by Mr. Bennett through exercise of vested stock options.
(4) Includes 30,850 shares that are not now owned but could be acquired by Mr. Dyke through exercise of vested stock options.
(5) Includes 11,500 shares that are not now owned but could be acquired by Mr. Howell through exercise of vested stock options.
(6) Includes 2,500 shares owned by a family member as to which shares Mr. Marsden disclaims beneficial ownership.
(7) Includes 38,250 shares that are not now owned but could be acquired by Mr. Weber through exercise of vested stock options and 50 shares held by family members.
(8) Includes 42,950 shares that are not now owned but could be acquired by Mr. Williams through exercise of vested stock options.
(9) Includes 55,350 shares that are not now owned but could be acquired through exercise of vested stock options by four executive officers that are not named in "Executive Compensation" above.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than ten percent shareowners are required by SEC regulations to furnish the Company with copies of all Forms 3, 4 and 5 filed.
Based solely on the Company's review of the copies of such forms it has filed on behalf of officers or directors or received from them and written representations from certain reporting persons that they were not required to file Forms 4 or 5 for specified fiscal years, the Company believes that all its officers, directors, and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 2000 with one exception. Mr. Davis was one month late filing forms reporting the disposition of shares of Company common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal year 2000, the Company made payments to ARAMARK Corporation ("ARAMARK") in the amount of $180,508 for food and uniform services; Mr. Sutherland, is an executive of ARAMARK. The Company paid $19,128 for professional services to Seyfarth, Shaw, Fairweather and Geraldson, a law firm of which Mr. Laidlaw is a partner. These transactions were in the ordinary course of business, at competitive prices and terms and at arm's length. In the opinion of management, in no instance have the amounts involved been material in relation to the business of the Company or, to the knowledge and belief of management of the Company, to the business of the other organizations or to the individuals concerned.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The response to this portion of Item 14 is submitted in a separate section of this report. See the audited Consolidated Financial Statements and Financial Statement Schedule of Acme Metals Incorporated attached hereto and listed on the index on page 37 of this report.
(2) Financial Statement Schedule:
The response to this portion of Item 14 is submitted in a separate section of this report. See the audited Consolidated Financial Statements and Financial Statement Schedule of Acme Metals Incorporated attached hereto and listed on the index on page 37 of this report.
(3) Exhibits
(b) Reports on Form 8-K
Form 8-K dated January 29, 2001 reported that WCI Steel, Inc. informed the Company that due to the currently depressed conditions of the steel industry, WCI would not proceed to consummate a sale transaction with the Company and Acme Steel under the terms contained in WCI's September 2000 Letter of Intent. - ------------------------- * Filed herewith.
(1) Filed pursuant to Item 14 of Form 10-K.
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.
ACME METALS INCORPORATED
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.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION)
FORM 10-K -- ITEM 8 AND ITEMS 14(a)(1) AND 14(a)(2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following Consolidated Financial Statements of Acme Metals Incorporated and the related Report of Management and Report of Independent Accountants are included in Item 8 and Item 14(a)(1):
All other schedules have been omitted because they are not applicable, or not required, or because the required information is shown in the Consolidated Financial Statements or notes thereto.
REPORT OF MANAGEMENT
The management of Acme Metals Incorporated has prepared and is responsible for the consolidated financial statements and other financial information included in this Form 10-K Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based upon informed judgments and estimates by management. The other financial information in this annual report is consistent with the consolidated financial statements.
The Company maintains a system of internal accounting controls. Management believes the internal accounting controls provide reasonable assurance that transactions are executed and recorded in accordance with Company policy and procedures and that the accounting records may be relied on as a basis for preparation of the consolidated financial statements and other financial information.
The financial statements have been audited by PricewaterhouseCoopers LLP, the Company's independent accountants, whose report is included herein. In addition, the Company has a professional staff of internal auditors who coordinate their financial audits with the procedures performed by the independent accountants and conduct operational and special audits.
The Audit Review Committee of the Board of Directors, composed of directors who are not employees of the Company, meets periodically with management, the internal auditors and the independent accountants to discuss the adequacy of internal accounting controls and the quality of financial reporting. Both the independent accountants and internal auditors have full and free access to the Audit Review Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Acme Metals Incorporated (Debtor-in-Possession)
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Acme Metals Incorporated (Debtor-in-Possession) and its subsidiaries at December 31, 2000 and December 26, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going-concern. As discussed in the Note entitled "Bankruptcy Proceedings" to the consolidated financial statements, the Company has incurred substantial losses from operations and experienced related liquidity issues resulting in the filing for Chapter 11 Bankruptcy protection on September 28, 1998 which raises substantial doubt about its ability to continue as a going-concern. Management's plans in regard to these matters are also described in the Note entitled "Bankruptcy Proceedings." The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------------------------------ PricewaterhouseCoopers LLP
Chicago, Illinois March 9, 2001, except as to the notes entitled "DIP Financing" and "Secured Debt," which are as of March 30, 2001
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of this statement.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of this statement.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of this statement.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of this statement.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANKRUPTCY PROCEEDINGS:
On September 28, 1998, Acme Metals and its subsidiary companies (Acme Steel, Acme Packaging, Alpha Tube, Alabama Metallurgical and Acme Steel International) voluntarily filed separate petitions for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These bankruptcy proceedings are collectively referred to as "Chapter 11 Bankruptcy" herein. The Chapter 11 Bankruptcy cases are being jointly administered by the Bankruptcy Court, with the Company managing its business as debtors-in-possession subject to Bankruptcy Court approval for certain of the actions that the Company takes. The Company's financial difficulties and primary reasons for the Chapter 11 Bankruptcy filings were a combination of a delay in achieving the full benefits of the Continuous Steel Making Plant ("CSP") at Acme Steel and a dramatic market weakness causing an adverse impact on operating and financial results, primarily at Acme Steel. These factors had a material negative impact on the liquidity and cash flow of the Company causing a breach of certain financial covenants in the Company's loan agreements and a projected inability to service ongoing debt obligations.
The Company intends to present a plan of reorganization to the Bankruptcy Court to reorganize the Company's businesses and to restructure the Company's balance sheet. Although management expects to file a plan of reorganization at the earliest practical date, there can be no assurance at this time that a plan of reorganization will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization ("Exclusive Proposal Period") through April 2, 2001. The Company has filed a motion requesting the Bankruptcy Court to enter an order extending the Company's Exclusive Proposal Period for approximately 90 days to, and including, July 2, 2001; and, while the Company anticipates requesting further extensions of the Exclusive Proposal Period, there can be no assurance the Bankruptcy Court will grant the requested, or any such further extensions. If the Exclusive Proposal Period were to expire or be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization.
The Company is diligently pursuing emergence scenarios involving a sale or other transaction involving one or both of Acme Packaging and Alpha Tube, together with a possible sale of or stand-alone recapitalization plan for Acme Steel Company.
Potential Acme Steel Transaction. In midyear 2000, the Company received an expression of interest from a third party, WCI Steel, Inc. ("WCI"), to acquire the operating assets of the Steel Segment and, on September 7, 2000, Acme Steel and WCI entered into a non-binding letter of intent (the "Letter of Intent") regarding the terms of a proposed sale of these assets. Since the date of that Letter of Intent, the domestic steel industry in general has experienced a sustained downturn. The Steel Segment, specifically, has experienced substantial operating losses and failed to meet certain conditions set forth in the Letter of Intent. On January 29, 2001, WCI informed the Company that due to the currently depressed conditions of the steel industry and the recent performance of the Steel Segment, WCI would not proceed to consummate the transaction under the terms contemplated in the Letter of Intent.
While the Company understands WCI has expressed a continuing interest in acquiring the operating assets of the Steel Segment and is continuing to explore its alternatives, the Company is unable to determine the terms and conditions of any possible future transaction with WCI. The Company has continued to explore various emergence alternatives, which include a stand-alone reorganization of all or a portion of the Company's existing businesses, a sale of some or all of the Company's assets or a combination of the two.
Potential Transactions Regarding the Steel Fabricating Segment. The Company initiated a formal process of soliciting third-party non-binding indications of interest in a possible sale of or investment in the Steel Fabricating Segment. Separate offering memoranda relating to the Steel Fabricating Segment companies were distributed in December 2000 to parties known or believed to have an interest in acquiring or ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investing in these businesses. The Company received indications of interest from approximately fifteen parties who received the offering memoranda. The Company has engaged in an initial due diligence process with certain of these proposed purchasers/investors to determine their financial stability and wherewithal and to cull out that initial bid and/or bids providing the most value for the Steel Fabricating Segment. As a part of this due diligence process, the Company recently distributed drafts of proposed asset purchase agreements to certain of these prospective bidders for their comments. Once the Company has received comments on the proposed asset purchase agreements and has determined, in its business judgment, which transaction or transactions to pursue, the Company will file a motion or motions to approve certain sale and bidding procedures related to the sale or sales of or investment in the Steel Fabricating Segment. The Company believes such procedures motion will be filed in the second quarter and further believes the terms of such transaction or transactions will be presented to the Court for approval by June 2001.
Proposed Exit Financing. On September 27, 2000, the Emergency Steel Loan Guarantee Board (the "Board") extended an offer of guarantee for a $100 million loan application filed on the Company's behalf by Citicorp USA ("Citicorp"). The guarantee is subject to certain conditions, including the execution of an acceptable form of guarantee. As a result of the time lag between the original guarantee application and the Board's approval, the recent events involving the sale of the Steel Segment and the sustained significant downturn in the steel industry, documentation and credit review with Citicorp will need to be updated. With the goal of keeping alternative exit scenarios viable, the Company intends to continue its efforts to procure the proposed exit facility.
Although the Chapter 11 Bankruptcy raises substantial doubt about the Company's ability to continue as a going-concern, the accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a company on a going-concern basis which contemplates the continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. As a result of the Chapter 11 Bankruptcy, realization of assets and liquidation of liabilities are subject to significant uncertainties. Specifically, the financial statements do not present the amount which will be paid to settle liabilities and contingencies which may be allowed in a Chapter 11 Bankruptcy reorganization. Also the consolidated financial statements do not reflect (a) adjustments to assets and liabilities which may occur in accordance with generally accepted accounting principles AICPA Statement of Position No. 90-7 Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) following the confirmation of a plan of reorganization or (b) the realizable value of assets which would be required to be recorded if the Company presents a plan which contemplates the disposal of all or portions of its assets and operations. The filing of a plan of reorganization could materially affect the carrying value of the assets and liabilities currently disclosed in the consolidated financial statements.
The consolidated financial statements include adjustments and reclassifications to reflect liabilities as "Liabilities Subject to Compromise" under the Chapter 11 Bankruptcy. Certain pre-petition liabilities were approved for payment by the Bankruptcy Court, such as employee wages and benefits, and specified pre-petition obligations to vendors, customers and taxing authorities.
DIP FINANCING:
On December 18, 1998, with approval of the Bankruptcy Court, Acme Metals, Acme Steel, Acme Packaging, Alabama Metallurgical and Acme Steel International entered into a Loan & Security Agreement ("DIP Financing Agreement") with Bank of America (formerly BankAmerica Credit), which provides for a maximum of $100 million of borrowings subject to borrowing base limitations based on inventory and accounts receivable less reserves. Alpha Tube, whose inventory and accounts receivable are excluded from the borrowing base computation, has guaranteed the obligations incurred under the DIP Financing Agreement. Alpha Tube's guaranty obligation with respect to the DIP Financing Agreement is effectively subordinate to
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pre-petition trade obligations and Chapter 11 Bankruptcy administrative expenses of Alpha Tube. The Company and Bank of America, with Bankruptcy Court approval, on September 22, 2000, extended the DIP Financing Agreement to December 29, 2000. The Company and Bank of America, with Bankruptcy Court approval, extended the DIP Financing Agreement through April 1, 2001 and amended certain restrictive covenants. Effective March 30, 2001, the Bankruptcy Court approved an extension of the DIP Financing Agreement through July 1, 2001. At December 31, 2000, $13.3 million in borrowings were outstanding with additional $21.6 million available based on borrowing base limitations. The DIP Financing Agreement is intended to support the Company's operations during Chapter 11 Bankruptcy proceedings and will expire on the earlier of July 1, 2001, or upon Bankruptcy Court approval of the Company's plan of reorganization or the sale of assets of an operating business.
The DIP Financing Agreement is collateralized by substantially all of the assets of the Company. Borrowings bear interest at either the prime rate or LIBOR, plus, depending on the levels of borrowings, margins of 50 basis points to 100 basis points over prime or 175 basis points to 300 basis points over LIBOR, respectively.
Covenants of the DIP Financing Agreement generally restrict creating additional liens on assets, creating any claims superior to those of the DIP Financing Agreement, paying pre-petition obligations, merging or consolidating with any person, selling assets, incurring new debt or paying certain reclamation claims. The Company is required to maintain a financial covenant of minimum operating cash flow, defined in the DIP Financing Agreement as EBITDA less capital expenditures, reorganization costs, certain cash interest payments (including adequate protection payments to secured lenders), and reclamation claims. The Company must also provide weekly progress reports to the Lenders on the sale of each of its Fabricating Segment units, such progress which shall be satisfactory to the Lenders. In addition, Alpha Tube must maintain a ratio of eligible inventory and receivables as defined in the DIP Financing Agreement equal to 110 percent of the sum of Alpha Tube's pre- and post-petition debt plus accrued and unpaid Chapter 11 Bankruptcy administrative expenses. The recent DIP Financing amendment adjusted the minimum Operating Cash Flow target to a monthly basis from a quarterly basis.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Acme Metals Incorporated and its wholly-owned subsidiaries (the "Company" or "Acme Metals"). Investments in associated companies are accounted for by the equity method. All intercompany transactions have been eliminated.
The Company's fiscal year ends on the last Sunday in December. Fiscal year 2000 contained 53 weeks and 1999 and 1998 fiscal years each contained 52 weeks.
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.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products. Accounts receivable from sales to customers are unsecured. In accordance with the adoption of EITF No. 00-10, "Accounting for Shipping and
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Handling Fees and Costs," sales and cost of sales have been restated to reflect shipping and handling costs within cost of sales. This had no impact on reported gross profit.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash balances and highly liquid investments with an original maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market using the last-in, first-out ("LIFO") method to determine inventory costs.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of plant and equipment is computed principally on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of plant and equipment range from 3 to 50 years with the majority of assets having 18-year lives. Expenditures for maintenance, repairs and minor renewals and betterments are charged to expense as incurred. Furnace relines and major renewals and betterments are capitalized.
Upon disposition of property, plant and equipment, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is recognized.
CONSTRUCTION IN PROGRESS
Construction in progress includes all costs related to capital projects which were not completed at the end of the reporting period.
RETIREMENT BENEFIT PLANS
Pension costs include service cost, interest cost, return on plan assets and amortization of unrecognized gains and losses. The Company's policy is to fund not less than the minimum funding required under ERISA, if permitted under Chapter 11 Bankruptcy.
The Company has unfunded post-retirement health care and life insurance plans. Provisions for post-retirement costs are determined pursuant to the provisions of Financial Accounting Standard ("FAS") No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions."
INCOME TAXES
Income taxes are determined pursuant to the provisions of FAS No. 109, "Accounting for Income Taxes." Under this standard, the benefit for deferred income taxes represents the tax effect of temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. All net deferred tax assets were fully reserved in 2000, 1999 and 1998.
OTHER COMPREHENSIVE INCOME
During 1998, the Company adopted FAS No. 130, "Reporting Comprehensive Income," which requires the Company to disclose, in financial statement format, all non-owner changes in equity. As of December 31, 2000, all such changes in equity resulted from changes in the minimum pension liability.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company's operations are divided into two segments: the Steel Making Segment and the Steel Fabricating Segment. Segment definitions are based on management decisions as to resource allocation. The
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Steel Making Segment includes all of the facilities used in the manufacturing of flat-rolled steel. The Steel Fabricating Segment includes the conversion and fabrication of the flat-rolled steel.
REORGANIZATION CHARGES UNDER CHAPTER 11 BANKRUPTCY
During 2000, 1999 and 1998, the Company recorded $7.3 million, $7.4 million and $6.7 million, respectively, of reorganization charges resulting from its Chapter 11 Bankruptcy filings. The charges primarily represent professional fees related to the reorganization. The 1998 amount includes $2.9 million in one-time charges for the unwinding of an interest rate swap and a Canadian dollar hedge. Actual cash payments for expenses related to the Chapter 11 Bankruptcy amounted to $4.9 million, $6.1 million and $3.5 million for 2000, 1999 and 1998, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified or restated to conform to the current year's presentation.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FAS No. 121, the Company reviews the carrying value of long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future net cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future net cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In accordance with SFAS No. 133, the Company will be required to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is required to adopt SFAS No. 133 effective January 1, 2001. The adoption is not expected to impact the consolidated financial statements, as the Company has not entered into any derivative contracts and does not have any open derivative positions.
LOSS PER SHARE:
Basic loss per share excludes the dilutive effect of stock options and is computed by dividing the loss by the weighted average number of common shares outstanding during each period. As a result of net losses incurred, the effect of stock options is not included in the diluted loss per share calculation as they are antidilutive (i.e., to include them would reduce the net loss per share).
INVENTORIES:
Inventories as calculated on the LIFO method:
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 31, 2000 and December 26, 1999, inventories valued on the LIFO method were less than the current costs of such inventories by $52.1 million and $54.8 million, respectively.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment:
The difference between depreciation expense presented in the Consolidated Statements of Cash Flows and the Consolidated Statements of Operations represents the portion of depreciation expense classified in selling and administrative expense on the Consolidated Statements of Operations.
In July 1999, Acme Steel reached an agreement with its labor unions to close down substantially all of its finishing operations in Riverdale. During the third quarter of 1999, management approved and committed to a plan for the abandonment of the related assets. This decision resulted in a loss of $7.7 million included in cost of products sold. Historical annual depreciation and amortization on the equipment, buildings and assets abandoned aggregated approximately $0.9 million.
During the first quarter of 1999, Acme Packaging sold a building for $1.9 million of proceeds, which resulted in a gain of $1.2 million.
In March 1998, the Company completed the sale of Universal Tool, through a stock sale, generating proceeds to the Company of $18.0 million and a gain of $12.0 million, ($7.2 million net of tax), which is included in Other Income on the Statement of Operations.
INVESTMENTS IN ASSOCIATED COMPANIES:
The Company has an indirect 15.1 percent participation in an iron ore-mining venture. The Company's carrying value of the venture is $6.7 million at December 31, 2000 and $14.3 million at December 26, 1999. In 2000, 1999 and 1998 the Company made iron ore purchases of $29.0 million, $24.2 million and $28.2 million, respectively, from the venture. At December 31, 2000 the Company advanced the venture $3.4 million and at December 26, 1999, $4.1 million was owed to the venture for iron ore purchases.
The Company has invested $3.5 million, representing a 40 percent interest in NACME which performs processing of certain of the Company's steel products. The investment is accounted for by the equity method of accounting and has a carrying value of $3.8 million at December 31, 2000 ($6.6 million at December 26, 1999). The Company's share of NACME's equity income was $0.7 million and $1.8 million for the fiscal years 2000 and 1999, respectively. The Company received distributions totaling $3.2 million from NACME in fiscal 2000. The Company provides nearly all NACME's processing volume.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company has various retirement benefit plans covering substantially all salaried and hourly employees. Salaried employees who joined the Company prior to December 31, 1981 and certain hourly employees participate in defined benefit retirement plans which provide benefits based upon either years of service and final average pay or fixed amounts for each year of service. All salaried employees with one full calendar quarter of service are eligible to participate in the Company's defined contribution plan ("SERSP"). In 2000, the Company expensed $1.6 million under the SERSP plan, while the Company expensed $1.4 million and $1.8 million in 1999 and 1998, respectively, under both the SERSP and ESOP plans. The Company permanently discontinued the ESOP contributions as of June 1, 1998 and merged the ESOP into the SERSP on March 1, 1999. During 2000, the Company contributed 5.5 percent of eligible compensation into the SERSP.
CHANGE IN BENEFIT OBLIGATION
CHANGE IN PLAN ASSETS
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECONCILIATION OF PREPAID (ACCRUED) BENEFIT COST
AMOUNTS RECOGNIZED IN THE CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
WEIGHTED-AVERAGE ASSUMPTIONS AT END OF YEAR
For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefit was assumed for 2001. The rate was assumed to decrease 0.5 percent each year until the rate reaches 5 percent in 2005. The rate was assumed to remain at 5 percent thereafter.
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME)
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension plans with accumulated benefit obligations in excess of plan assets:
As a result of the Chapter 11 Bankruptcy filings, the Company cannot make pension contributions relating to the pre-petition period without Bankruptcy Court approval. Failure to make minimum funding contributions would be a Reportable Event under ERISA; additionally the PBGC could create a lien in favor of the plan against the Company, and the IRS may assess a pre-petition excise tax equal to 10 percent of the accumulated fund deficiency. The Company has not been prevented from making any such contributions to date. The Company has no funding requirements in 2001.
The health care plan is contributory. The life insurance plan is noncontributory. On September 1, 1998, the Company increased deductibles, co-insurance, and participant contributions to its post-retirement health care plan for salaried retirees. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend would have the following effects:
ACCRUED EXPENSES:
Accrued expenses (not included within "Liabilities Subject to Compromise") at December 31, 2000 and December 26, 1999:
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES:
Provision (benefit) for income taxes:
At December 31, 2000, the Company had net operating losses of approximately $435 million expiring in 2012 through 2020. The carryforwards will be available for the reduction of future income tax liabilities of the Company and its subsidiaries. A valuation allowance has been recorded against all of these carryforwards because utilization is uncertain. If certain substantial changes in the Company's ownership should occur, there could be an annual limitation on the amount of the carryforwards otherwise available to the Company.
As a result of the losses incurred to date, the related negative effect on the Company's overall liquidity position, and the Chapter 11 Bankruptcy Filings on September 28, 1998, the Company recorded a valuation allowance against its entire net deferred tax assets. The Company continued to fully reserve any net deferred tax assets incurred in 2000 and 1999. The difference between the federal statutory tax rate of 34 percent and the effective tax rate recorded in the financial statements relates principally to state income taxes and the recording of a full valuation allowance against any net deferred tax assets in 1998, 1999 and 2000.
DEFERRED TAX LIABILITIES:
Significant components of the Company's deferred tax liabilities and assets at December 31, 2000 and December 26, 1999:
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURED DEBT:
The Company's secured debt, including current maturities, but excluding interest payable at date of bankruptcy not recorded as "Liabilities Subject to Compromise" at December 31, 2000 and December 26, 1999:
As a result of the Chapter 11 Bankruptcy filings on September 28, 1998, all of the secured debt was in default as of the filing date. Without a Bankruptcy Court order, the Company cannot pay or restructure pre-petition debt until the conclusion of the Chapter 11 Bankruptcy.
In accordance with SOP 90-7, the Company has not accrued interest on its unsecured debt of $204.2 million after the Petition Date, as it is unlikely such interest would be paid in the plan of reorganization. The amount of such unaccrued nondefault interest at December 31, 2000 aggregated $49.7 million ($22.2 million, $22.0 million and $5.5 million in 2000, 1999 and 1998, respectively). Additionally, scheduled principal payments on secured debt, which have not been made for the post-petition period, totaled $4.4 million. The Company has obtained Bankruptcy Court orders allowing adequate protection payments on secured debt. During 2000, the Company paid $28.6 million in adequate protection payments as ordered by the Bankruptcy Court.
Secured debt has not been classified as subject to compromise in the consolidated balance sheet; however, in the event the collateral underlying the secured debt is determined to be insufficient, secured debt is not eligible for interest during bankruptcy.
A. Senior Secured Credit Agreement -- In December 1997, the Company entered into a $175 million Senior Secured Credit Agreement due December 2005. At the option of the Company, the Senior Secured Credit Agreement provides for interest at prime plus a margin ranging from 1.25 percent to 2.25 percent, or LIBOR plus a margin ranging from 2.25 percent to 3.25 percent determined by the leverage ratio of debt to earnings before interest, taxes and depreciation. The Company accrued interest under the Senior Secured Credit Agreement at a rate of 8.9 percent at December 31, 2000 and 8.8 percent at December 26, 1999. Each of the Company's subsidiaries is a guarantor under the Senior Secured Credit Agreement. The Company did not make principal payments of $2.5 million during the post-petition period. The Senior Secured Credit Agreement ranks pari passu and shares collateral with the 12.5 percent Senior Secured Notes and the 13.5 percent Senior Secured Discount Notes.
B. 12.5 percent Senior Secured Notes, due August 2002 -- The Company issued $125 million of 12.5 percent Senior Secured Notes in 1994. Of that original issue of Senior Secured Notes, 85.9 percent were retired in connection with the refinancing in December 1997. The Senior Secured Notes rank pari passu and share collateral and guarantees with the Senior Secured Credit Agreement and the 13.5 percent Senior Secured Discount Notes.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. 13.5 percent Senior Secured Discount Notes, due August 2004 -- The Company issued $117.9 million of 13.5 percent Senior Secured Discount Notes in 1994. Of the Senior Secured Discount Notes issued in 1994, 99.4 percent were retired in connection with the refinancing in December 1997. The Senior Secured Discount Notes rank pari passu and share collateral and guarantees with the Senior Secured Credit Agreement and the 12.5 percent Senior Secured Notes.
D. DIP Financing Agreement, expires in July 1, 2001 -- The Company has secured a DIP Financing Agreement with BankAmerica Credit allowing the Company to meet its operating needs while in Chapter 11 Bankruptcy proceedings. For further information, see footnote entitled "DIP Financing." At the end of 2000, the effective interest rate equaled 8.4 percent, on outstanding prime borrowings.
E. Environmental Improvement Bonds -- The Environmental Improvement Bonds were issued in April and September of 1996, with the Company receiving gross proceeds of $11.3 million and $8.6 million at interest rates of 7.95 percent and 7.90 percent, respectively. The April 1996 issue is due April 2025, while the September 1996 issue is due April 2024. The gross proceeds of the Environmental Improvement Bonds were reduced by debt issuance costs of $0.6 million that are being amortized over the lives of the respective notes. The Environmental Improvement Bonds are secured by a lien on certain personal property and fixtures of Acme Steel. On September 22, 2000, the Bankruptcy Court approved an Adequate Protection Payment Stipulation related to the EIB Bonds that established the amount by which the EIB Bonds were unsecured at the date of bankruptcy. As a result of the Stipulation the Company applied the $1.4 million in adequate protection payments made by the Company as of September 22, 2000 against the principal of the EIB Bonds. Such payments were previously recorded as interest expense. Additionally, the Company reclassified the $1.4 million unsecured portion of the EIB Bonds from Long-term Debt to Liabilities Subject to Compromise. The Company ceased accruing interest on the EIB Bonds as of December 26, 1999 and reversed all unpaid post-petition accrued interest of $0.6 million and reclassified $0.8 million of pre-petition accrued interest related to the EIB Bonds to Liabilities Subject to Compromise. The current portion of the EIB Bonds, $1.9 million, is reported in the Balance Sheet as the Current Portion of Long-term Debt at December 31, 2000.
F. Other Long-Term Debt -- The other long-term debt is primarily for, and collateralized by, Acme Packaging's plastic strapping line and computer related equipment. The Company accrued interest for the plastic line and the computer related equipment at an interest rate of 8.0 percent and 7.5 percent, respectively. At December 31, 2000, the Company was delinquent in its principal payments by $1.9 million for the plastic line and computer related equipment.
G. Walbridge Facility, due October 2002 -- As a result of its Chapter 11 Bankruptcy filings on September 28, 1998, the Company recorded an obligation for future payments under a financial agreement for property used by Alpha Tube. The debt is collateralized by the related assets. The Company accrued interest at an interest rate of LIBOR plus 2 percent (8.9 percent and 7.6 percent at December 31, 2000 and December 26, 1999, respectively).
The debt instruments contain certain restrictive covenants that limit the Company's ability to incur additional indebtedness, lease property, create liens, pay dividends, repurchase capital stock, engage in transactions with affiliates, purchase or sell assets, make capital expenditures, engage in sale or leaseback transactions and engage in mergers or consolidations. However, the ability of the Company to engage in any such activities is subject to Bankruptcy Court approval.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LIABILITIES SUBJECT TO COMPROMISE:
"Liabilities Subject to Compromise" as of December 31, 2000 and December 26, 1999:
A. Note Payable -- The Note Payable is an unsecured obligation assumed by Acme Steel on May 29, 1986 as a result of the reorganization of Interlake. The assumed debt was incurred in connection with the financing of certain facilities, which were retained by the Company in the Spin-off of Acme Steel from Interlake. Due to the unsecured nature of this Note, the Note has been classified as a "Liabilities Subject to Compromise."
B. 10.875 percent Senior Unsecured Notes -- In December 1997, the Company issued $200 million of 10.875 percent Senior Unsecured Notes at a discount (0.749 percent) to yield 11 percent, due December 15, 2007. The Senior Unsecured Notes are guaranteed on a senior, unsecured basis by the Company's subsidiary, Acme Steel. Because these notes are unsecured, they are no longer classified as a long-term debt as of the Chapter 11 Bankruptcy filing date and are recorded as a "Liability Subject to Compromise."
FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value.
LONG-TERM DEBT
Because of the Chapter 11 Bankruptcy, the fair value of the long-term debt cannot be determined.
STOCK COMPENSATION PLANS:
The Company has a 1986 and a 1994 Stock Incentive Program which have reserved shares of common stock for issuance to officers and employees of the Company and its subsidiaries. No stock options or stock awards have been granted from the 1986 Program since April 1994. Through December 31, 2000, all but 600 stock options and stock awards have been canceled and returned to the 1994 Stock Incentive Program. In addition, the Company has a Non-Employee Directors' Stock Option Plan whereby each non-employee director is granted 2,000 options at the Annual Meeting of the Board of Directors. Under this plan 150,000 shares were reserved for issuance and through December 31, 2000, 62,000 stock options have been granted.
The Company has adopted the disclosure-only provisions of FAS No. 123 "Accounting for Stock-Based Compensation." No compensation cost has been recognized under the provisions of FAS No. 123 for the fixed stock options granted under its Stock Incentive Program. Had compensation cost for options granted under the program been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consistent with the provisions of FAS No. 123, the Company's net income (loss) and net income (loss) per share would not have been materially affected.
COMMITMENTS AND CONTINGENCIES:
OUTSIDE INVESTMENTS
The Company's indirect interest in an iron ore mining joint venture requires payment of its proportionate share of all fixed operating costs, regardless of the quantity of ore received, plus the variable operating costs of minimum ore production for the Company's account. The Company reimburses the joint venture for these costs through its purchase of ore. Pursuant to a steel processing agreement between Acme Steel and NACME, Acme Steel has agreed to certain tonnage provisions.
INTERLAKE CORPORATION
In connection with the Company's Spin-Off from Interlake on May 29, 1986, the Company entered into certain indemnification agreements with Interlake. Pursuant to the terms of the indemnification agreements, Interlake undertook to defend, indemnify and hold the Company harmless from any claims, as defined, relating to the Company's operations or predecessor operations occurring before May 29, 1986, the Spin-Off. The indemnification agreements cover certain environmental matters including certain litigation and Superfund Sites in Duluth, Minnesota, and Gary, Indiana, for which either Interlake or the Company's predecessor operations have been named as defendants or PRPs, as applicable. To date, Interlake has met its obligations under the indemnification agreements and has provided the defense and paid all costs related to these environmental matters. The Company does not have sufficient information to determine the potential liability, if any, for the matters covered by the indemnification agreements in the event Interlake fails to meet its obligations thereunder in the future. In the event that Interlake, for any reason, was unable to fulfill its obligations under the indemnification agreements, the Company could have increased future obligations which could be significant.
On March 18, 1999, the U.S. Tax Court entered an opinion in the case of The Interlake Corporation, et. al. v. Commissioner of Internal Revenue. The U.S. Tax Court held the Company's authority to act for the affiliated group terminated and the Company was not an authorized recipient of the $6.8 million refund it received in 1987 and the Internal Revenue Service ("IRS") cannot seek recovery from Interlake of the refund issued to the Company. The statutory period for appeals expired on September 30, 1999 and the IRS did not appeal this opinion.
As a result of the Tax Court opinion, the expiration of the statutory appeals period, and the IRS advising the Company that it intends to proceed against the Company to recover the $6.8 million plus interest, in the third quarter of 1999 the Company recognized an income tax related interest charge of $10 million to increase its total reserve in light of these recent events. Such reserves are included as other long-term liabilities subject to compromise. The Company believes it has defenses against this claim and will defend itself against any such action by the IRS. In the event of an unfavorable outcome with the IRS, the Company will vigorously pursue all remedies against third parties, including Interlake, pursuant to the 1986 TIA. In the first quarter of 2000 the Company received an assessment of $3.5 million plus accrued interest for a portion of the 1987 refund related to the 1985 tax year. The remaining $3.3 million of the refund relates to 1981 and 1984 both years which are before the Tax Court and stayed by the Company's Chapter 11 Bankruptcy status.
Upon Spin-Off from Interlake in 1986, the Company entered into a TIA with Interlake, which generally provides tax sharing arrangements related to pre Spin-Off taxes. The Company currently believes amounts are owed by Interlake to the Company pursuant to the TIA in relation to this case.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Merger of The Interlake Corporation and GKN North America Manufacturing Inc. On December 5, 1998, GKN North America Manufacturing Inc. (the "Purchaser") and Interlake entered into an agreement and plan of merger ("Merger Agreement"). The Purchaser is a wholly owned subsidiary of GKN North America Inc. which, in turn, is an indirect subsidiary of KGKNplc of the United Kingdom ("GKNplc").
The Company believes the acquisition of Interlake by GKNplc through its direct and indirect subsidiary will not alter the obligations and rights of the Company and Interlake as described herein.
ENVIRONMENTAL
The Company is subject to various federal, state and local environmental statutes and regulations which provide a comprehensive program for controlling the release of materials into the environment and require responsible parties to remediate certain waste disposal sites. In addition, various health and safety statutes and regulations apply to the workplace environment. Administrative, civil and criminal penalties may be applicable for failure to comply with these laws. These environmental laws and regulations are subject to periodic revision and modification. The United States Environmental Protection Agency, for example, is currently evaluating changes to the National Air Quality Standards for particulate matter and ozone.
From time to time, the Company is also involved in administrative proceedings involving the issuance, or renewal, of environmental permits relating to the conduct of its business. The final issuance of these permits has been resolved on terms satisfactory to the Company; and, in the future, the Company expects such permits will similarly be resolved on satisfactory terms.
Although management believes it will be required to make further expenditures for pollution abatement facilities in future years, because of the continuous revision of these regulatory and statutory requirements, the Company is not able to reasonably estimate the specific pollution abatement requirements, or the amount or timing of such expenditures to maintain compliance with these environmental laws. While such expenditures in future years may be substantial, management does not presently expect they will have a material adverse effect on the Company's future ability to compete within its markets.
In those cases where the Company has been identified as a PRP or is otherwise made aware of a possible exposure to incur costs associated with an environmental matter, management determines (i) whether, in fact, the Company has been properly named or is otherwise obligated, (ii) the extent to which the Company may be responsible for costs associated with the site in question, (iii) an assessment as to whether another party may be responsible under various indemnification agreements or insurance policies the Company is a party to, and (iv) an estimate, if one can be made, of the costs associated with the clean-up efforts or settlement costs. It is the Company's policy to make provisions for environmental clean-up costs at the time that a reasonable estimate can be made. While it is not possible to predict the ultimate costs of resolving environmental related issues facing the Company, based upon information currently available, they are not expected to have a material effect on the consolidated financial condition or results of operations of the Company.
RAYTHEON ENGINEERS & CONTRACTORS, INC.
During the second quarter of 1999, Acme Steel made an initial draw of $9 million under an irrevocable letter of credit in the approximate amount of $32 million. The letter of credit secures performance by Raytheon Engineers & Constructors, Inc. ("Raytheon") of its obligations in connection with the CSP and other facilities at Acme Steel. Raytheon was the general contractor for the construction of the CSP facility. Raytheon filed various legal actions in the Bankruptcy Court prior to and subsequent to Acme Steel's draw on the letter of credit seeking to initially prevent Acme Steel from drawing on the irrevocable letter of credit, to impose a constructive trust upon any funds drawn, and to seek an early adjudication of the claims between the parties. The Bankruptcy Court denied Raytheon's request to enjoin Acme Steel from drawing under the
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
irrevocable letter of credit and to impose a constructive trust on the funds drawn by Acme Steel. In May 1999, Acme Steel filed a Motion to Dismiss the underlying Amended Adversary Complaint filed by Raytheon. On April 11, 2000, the Bankruptcy Court granted Acme Steel's Motion to Dismiss Raytheon's Amended Adversary Complaint. The Bankruptcy Court held that Raytheon's claims were not properly brought in the form of an adversary proceeding as Raytheon's suit constituted a pre-petition breach of contract claim. Raytheon has appealed the Bankruptcy Court's dismissal of its Amended Complaint which is pending. Subsequent to the April 11, 2000 ruling, the company reclassified the Raytheon liability of $9 million from Accounts Payable to Liabilities subject to compromise. In February 2000, Acme Steel filed an Adversary Complaint against Raytheon to contest a purported secured claim filed by Raytheon against Acme Steel in the approximate amount of $9 million. Acme Steel proceeded to file a Motion for Partial Summary Judgment seeking to invalidate the underlying Mechanic's Lien upon which the purported secured claim filed by Raytheon is based. On August 28, 2000, the Bankruptcy Court granted Acme Steel's Motion for Partial Summary Judgment finding that the underlying Mechanic's Lien upon which Raytheon's secured claim is based is defective. Raytheon has appealed the Bankruptcy Court's decision granting Acme Steel's Motion for Partial Summary Judgment. Acme Steel has vigorously contested and will continue to vigorously contest the appeals and claims filed by Raytheon; however, there are no assurances Acme Steel will continue to be successful in opposing Raytheon's legal actions.
OTHER MATTERS
The Company also has various litigation matters pending which arose out of the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the financial position of the Company.
BUSINESS SEGMENTS:
The Company presents its operations in two segments, Steel Making and Steel Fabricating.
Steel Making operations include the manufacture of sheet, strip and semifinished steel in low-, mid-, and high-carbon alloy, HSLA and specialty grades. Principal markets include agricultural, automotive, industrial equipment, industrial fasteners, welded steel tubing industries, and tool manufacturing industries, processors and steel service centers.
The Steel Fabricating Segment processes and distributes steel strapping, strapping tools and industrial packaging (Acme Packaging), and welded steel tubing (Alpha Tube). The Steel Fabricating Segment sells to a number of markets.
All sales between Segments are recorded at an annual fixed price.
The products and services of the Steel Making and Steel Fabricating Segments are distributed through their own respective sales organizations which have sales offices at various locations in the United States. Export sales are insignificant for the years presented.
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is divided into Steel Making and Steel Fabricating operating segments based on the value-added production in making the product. Sales reflect the adoption of EITF No. 00-10. Operating segment information based on operating income is as follows (dollars in thousands):
ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of the operating segment information to the Company's consolidated financial statements is as follows (dollars in thousands):
QUARTERLY RESULTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) During the third quarter of 1999, the Company recorded a $7.7 million charge to income from operations due to the abandonment of its finishing mill facilities and a $10.0 million charge to interest expense relating to the Tax Court decision relating to Interlake.
(2) In the fourth quarter of 1999 Acme Steel recorded $1.1 million income from operations from reversal of certain NACME charges recorded previous periods.
(3) Sales have been restated for all periods presented to reflect the adoption of EITF No. 00-10.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
- ------------------------- (a) Consists principally of recoveries of accounts charged off in prior years.
(b) Uncollectable accounts charged off.
(c) Consists of a charge to accumulated other comprehensive loss.