10-Q 1 c58217e10-q.txt QUARTERLY REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 24, 2000 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 --------------------------- Commission file number 1-14378 ACME METALS INCORPORATED (Exact name of registrant as specified in its charter) Delaware 36-3802419 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13500 South Perry Avenue, Riverdale, Illinois 60827-1182 (Address of principal executive offices) (Zip Code) (708) 849-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ____ Number of shares of Common Stock outstanding as of November 3, 2000: 11,647,471. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data)

The accompanying notes are an integral part of this financial statement. 2 3 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (dollars in thousands)

The accompanying notes are an integral part of this financial statement. 3 4 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)

The accompanying notes are an integral part of this financial statement. 4 5 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS BANKRUPTCY PROCEEDINGS: On September 28, 1998, Acme Metals Incorporated ("Acme Metals" or the "Company") and its principal direct and indirect subsidiary companies, including Acme Steel Company ("Acme Steel"), Acme Packaging Corporation ("Acme Packaging"), Alpha Tube Corporation ("Alpha Tube"), Alabama Metallurgical Corporation, and Acme Steel Company International, Inc., filed separate voluntary petitions for protection and reorganization under Chapter 11 of Title 11 ("Chapter 11") of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware ("Bankruptcy Court") as previously described in Item I under the heading "Chapter 11 Bankruptcy Filings" on page 3 of the Company's Annual Report on Form 10-K for the year ended December 26, 1999 ("1999 Form 10-K"). These bankruptcy proceedings are collectively referred to as the "Chapter 11 Bankruptcy" herein. As a result of the Chapter 11 Bankruptcy, all of the Company's obligations were stayed. Without Bankruptcy Court approval, Acme Metals and its subsidiary companies cannot pay pre-petition obligations. Reference is made to "DIP Financing" on page 49 of the 1999 Form 10-K for a description of the Loan and Security Agreement with Bank of America ("DIP Financing Agreement") entered into on December 18, 1998. Since the filing of the 1999 Form 10-K, the Company and Bank of America, with Bankruptcy Court approval on September 22, 2000, extended the DIP Financing Agreement to December 29, 2000. At September 24, 2000, $6 million of the DIP Financing Agreement was outstanding with an additional $56 million available. The Company currently intends to present a plan to the Bankruptcy Court. That plan could include several alternatives, including reorganization of the Company's existing businesses or the sale of some or all of the Company's assets. The Bankruptcy Court has granted the Company's request to extend its exclusive right to file a plan of reorganization through January 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 to be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization. On September 7, 2000 the Company and Acme Steel entered into a non-binding letter of understanding ("Letter") with WCI Steel, Inc. ("WCI") regarding a proposed sale by Acme Steel of substantially all of the assets of its integrated coke, iron, and steel production assets to WCI for cash, the assumption of certain liabilities, and various other consideration. Pursuant to the terms of this Letter, the Company submitted a Motion seeking approval of, and on September 28, 2000 the Bankruptcy Court entered an order approving, certain bidding procedures, including expense reimbursement for WCI, over bidding procedures and breakup fees for WCI in the event a qualified competing bid for these assets is accepted by Acme Steel. In addition to the Letter, the Company has entered into confidential agreements with other potentially interested parties for conducting due diligence in connection with the purchase of the Acme Steel assets. An auction 5 6 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) is currently scheduled for November 20, 2000 (but subject to adjournment) if one or more qualified competing bids are submitted for the Acme Steel assets. In addition, as part of the Company's efforts to develop its plan of reorganization, the Company is initiating steps to establish a market value for its Fabricating Segment businesses. The Company is in the process of soliciting expressions of interest from a number of parties which the Company believes could have an interest in these businesses and preparing Confidential Offering Memoranda for distribution to parties which express such an interest. As discussed on page 58 of the Company's 1999 Form 10-K, the Company had received a valuation estimate indicating that the collateral securing the Environmental Improvement Bonds (the "EIB Bonds") may be insufficient. On September 22, 2000, the Bankruptcy Court approved an Adequate Protection Payment Stipulation related to the EIB Bonds, which established that the EIB Bonds were under secured at the date of bankruptcy. As a result of the Stipulation, the Company applied $1.4 million in adequate protection payments made by the Company as of the Stipulation date against the principal of the EIB Bonds. Additionally, the Company reclassified the unsecured portion of the EIB Bonds, $1.4 million, from Long-term Debt to Liabilities Subject to Compromise. Additionally, the Company reclassified the EIB Bonds' pre-petition interest of $0.8 million from Accrued Liabilities to Liabilities Subject to Compromise. 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 Chapter 11 Bankruptcy reorganization cases. Also the consolidated financial statements do not reflect (a) adjustments to assets and liabilities which may occur in accordance with generally accepted accounting principles Statement of Position 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 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 have been approved for payment by the Bankruptcy Court, such as employee wages and benefits, and specified pre-petition obligations to vendors, customers and taxing authorities. 6 7 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements for Acme Metals include its wholly owned operating subsidiaries, Acme Steel, Acme Packaging, and Alpha Tube, hereinafter collectively referred to as "the Company," for the periods ended September 24, 2000 and September 26, 1999. The statements should be read in conjunction with the audited financial statements included in the Company's 1999 Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such financial statements have been included. The financial statements have been subjected to a limited review by PricewaterhouseCoopers LLP, the Company's independent accountants, whose report appears on page 22 of this filing. Such report is not a "report" or "part of the Registration Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. Certain prior year amounts have been reclassified to conform to the current year's presentation. The Company's fiscal year ends on December 31, 2000 and will contain 53 weeks. Third quarter results for 2000 and 1999 each cover 13-week periods. INVENTORIES: Inventories, as determined on the last-in, first-out method: September 24, December 26, 2000 1999 ------------ ------------ (unaudited) (in thousands) Raw materials.............................. $ 18,604 $ 23,887 Semi-finished and finished products........ 54,024 51,967 Supplies................................... 7,901 6,426 -------- -------- $ 80,529 $ 82,280 ======== ======== INCOME TAXES: As discussed on page 56 of the 1999 Form 10-K, the Company has net operating losses expiring in 2012 to 2019 and has recorded a valuation allowance against its entire net deferred tax asset. The Company continued to fully reserve any net deferred tax assets generated through the third quarter of 2000. 7 8 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG-TERM DEBT: The Company's Long-term Debt not classified in "Liabilities Subject to Compromise:" September 24, December 26, 2000 1999 ------------ ------------ (unaudited) (in thousands) Senior Secured Credit Agreement................. $174,250 $174,250 12.5 percent Senior Secured Notes............... 17,623 17,623 13.5 percent Senior Secured Discount Notes...... 669 669 Environmental Improvement Bonds 7.95 percent.... 8,070 11,345 Environmental Improvement Bonds 7.90 percent.... 6,085 8,585 Walbridge Facility.............................. 14,700 14,700 Other long-term debt............................ 6,198 6,198 -------- -------- $227,595 $233,370 ======== ======== On September 28, 1998, all of the long-term debt became in default due to the Chapter 11 Bankruptcy. 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 $206 million after the petition date, as it is unlikely such interest would be paid in the plan of reorganization. Additionally, scheduled principal payments on secured debt, which have not been made for the post-petition period, totaled $4 million. The Company is prohibited from making contractual payments on its outstanding long-term debt obligations absent a Bankruptcy Court order or until the conclusion of Chapter 11 Bankruptcy and implementation of a plan of reorganization allowing for such payments. The Company has obtained Bankruptcy Court orders allowing adequate protection payments on secured debt. During the three quarters of 2000, the Company paid $19 million in adequate protection payments as ordered by the Bankruptcy Court. As discussed on page 58 of the 1999 Form 10-K, in the event the collateral underlying the secured debt is determined to be insufficient, secured debt could be settled at less than its current carrying value and not be eligible for interest during the Chapter 11 Bankruptcy. The Company also discussed its receipt of a valuation estimate that indicated the collateral securing the EIB Bonds might be insufficient. On September 22, 2000, the Bankruptcy Court approved an Adequate Protection Payment Stipulation related to the EIB Bonds which 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 8 9 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) recorded as interest expense. Additionally, the Company reclassified the $1.4 million unsecured 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 because the EIB Bonds were settled at less than face value. 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, $2.9 million, is reported in the Balance Sheet as the current portion of Long-term Debt at September 24, 2000. LIABILITIES SUBJECT TO COMPROMISE: Items classified as Liabilities Subject to Compromise:

As disclosed in the Commitments and Contingencies section of this Report on Form 10-Q, the Bankruptcy Court held that any draws against Raytheon Engineers & Constructors, Inc.'s ("Raytheon") letter of credit are considered pre-petition. Based on that holding, during the second quarter of 2000, the Company reclassified its $9 million draw on the letter of credit from Accounts Payable to Liabilities Subject to Compromise. During the third quarter of 2000, the Company reclassified the under-collateralized portion of the EIB Bonds from Long-term Debt to Liabilities Subject to Compromise. In addition to the principal portion of the EIB Bonds, the Company reclassified the accrued pre-petition interest 9 10 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) related to the EIB Bonds from Accrued expenses to Liabilities Subject to Compromise. Together, these reclassifications increased Liabilities Subject to Compromise by $2.2 million, with $1.4 million related to the principal and $0.8 million related to the interest. CASH FLOWS: Cash payments for Bankruptcy Court approved adequate protection payments on secured debt were $19 and $16 million during the first nine months of 2000 and 1999, respectively. COMMITMENTS AND CONTINGENCIES: The Company is subject to various commitments and contingencies as previously described in the Company's 1999 Form 10-K. On February 16, 2000, the Company assumed a material executory contract with NACME Steel Processing LLC ("NACME"). Acme Steel has a 40 percent equity interest in NACME. The contract requires Acme Steel to provide NACME with certain minimum flat-rolled steel tonnages, which NACME is required to process. The processing operations performed by NACME include pickling, slitting, and packaging. As reported in the 1999 Form 10-K on page 62, Raytheon filed various legal actions in the Bankruptcy Court seeking to prevent Acme Steel from drawing on an irrevocable letter of credit. On April 11, 2000, the Bankruptcy Court held that any claims Raytheon may have against Acme Steel for draws against the letter of credit are considered pre-petition and Raytheon cannot enjoin Acme Steel from future draws on the letter of credit. On April 13, 2000, Raytheon filed a notice of appeal to the U.S. District Court of Delaware appealing the April 11, 2000 Bankruptcy Court decision. Although the Company plans to vigorously oppose Raytheon in this appeal process, there can be no assurances that the Company will prevail. Subsequent to the April 11, 2000 ruling, the Company reclassified the Raytheon liability of $9 million from Accounts Payable to Liabilities Subject to Compromise. The Bankruptcy Court's decision did not address whether the claim is secured or unsecured. Raytheon also filed a secured Proof of Claim against Acme Steel for amounts alleged to be due pursuant to the 1994 contract for construction of the Continuous Strip Production facility (the "CSP"). The secured status of Raytheon's Proof of Claim was based upon certain Mechanic's Liens filed against Acme Steel's real property. The Company has filed an Adversary Complaint challenging both Raytheon's assertion of the claim having a secured status and the validity of Raytheon's underlying Mechanic's Lien. Pursuant to its Adversary Complaint the Company filed a Motion for Partial Summary Judgment regarding the validity of Raytheon's Mechanic's Liens. On August 28, 2000, the Bankruptcy Court issued its Opinion and Order granting the Company's Motion for Partial Summary Judgment. On October 23, 2000 Raytheon filed its Notice of Appeal to the U.S. District Court appealing the August 28, 2000 Bankruptcy Court Order granting Partial Summary Judgment. 10 11 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands) BUSINESS SEGMENTS: The Company presents its operations in two segments, Steel Making and Steel Fabricating. Unaudited operating segment information based on operating income:

11 12 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands) Reconciliation of the unaudited segment information to the Company's unaudited consolidated financial statements:

12 13 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUBSEQUENT EVENTS: In the first quarter of 2000, Citibank, N.A. filed an application for a $100 million loan guarantee with the Emergency Steel Guarantee Loan Program on behalf of Acme Steel. In October 2000, The Emergency Steel Guarantee Loan Board announced it had approved Citibank's application to guarantee 85 percent of the proposed $100 million loan to Acme Steel subject to certain conditions, including execution of an acceptable guarantee. In addition the syndication on the remaining non-guaranteed 15 percent portion has not been completed and there are no assurances that it will be completed. 13 14 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands) GUARANTOR'S FINANCIAL STATEMENTS In December 1997, Acme Metals, as issuer, and Acme Steel, a wholly owned subsidiary of the Company, as guarantor, entered into an offering pursuant to which $200 million of 10.875 percent Senior Unsecured Notes due 2007 were offered pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Act"). In June 1998, Acme Metals registered the Senior Unsecured Notes under the Act. Following is consolidating condensed financial information pertaining to the Company and its subsidiary guarantor and its subsidiary nonguarantors.

14 15 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

15 16 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

16 17 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

17 18 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

18 19 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

19 20 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

20 21 ACME METALS INCORPORATED (DEBTOR-IN-POSSESSION) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands)

21 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Acme Metals Incorporated We have reviewed the accompanying consolidated balance sheet of Acme Metals Incorporated and its subsidiaries (the "Company") as of September 24, 2000, and the related consolidated statements of operations for each of the three-month and nine-month periods ended September 24, 2000 and September 26, 1999, and the consolidated statements of cash flows for the nine-month periods ended September 24, 2000 and September 26, 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 26, 1999, and the related consolidated statements of operations, of shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 23, 2000, we expressed an unqualified opinion on those consolidated financial statements. Our report included an explanatory paragraph with respect to the Company's ability to continue as a going-concern. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 26, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. On September 28, 1998, the Company filed voluntary petitions for protection and reorganization under Chapter 11 of the Bankruptcy Code. The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going-concern. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois November 3, 2000 22 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. The Company's operations are divided into two segments, Steel Making Segment and Steel Fabricating Segment. The Steel Making Segment consists of Acme Steel and includes all of the facilities used in the manufacturing of and finishing of sheet and strip steel. The Steel Fabricating Segment includes the operations of Alpha Tube and Acme Packaging. Alpha Tube uses flat-rolled steel, while Acme Packaging uses both flat-rolled steel and plastic, in their respective fabricating process. The Fabricating Segment purchases flat-rolled steel from the Steel Making Segment pursuant to a transfer price agreement determined during the first quarter of each fiscal year. The transfer price is based on the market price for the steel at the time of contract. Since the Company determined the transfer price for fiscal 2000, the market price for steel has fallen. The transfer price agreement will be adjusted in the first quarter of 2001. This discussion and analysis of results of operations should be read in conjunction with the unaudited consolidated financial statements and notes thereto. Third Quarter 2000 as compared to Third Quarter 1999 THE COMPANY. Overall, third Quarter 2000 operating results improved over the third quarter 1999 results. Consolidated net sales of $117 million in the 2000 third quarter were $2 million lower than the same period in 1999. Decreased volume shipped adversely affected sales by $12 million. However, increased prices on the lower shipments offset the unfavorable volume effect by $10 million. Although demand decreased, total sales remained virtually unaffected. Third quarter 2000 operating costs of $111 million were better than the $123 million in operating costs recorded in the third quarter of 1999 by $12 million. On a per ton produced basis, operating costs increased over the third quarter of 1999, partially due to increased energy costs at the Steel Making Segment and higher raw material costs at the Fabricating Segment. However, because both segments produced less tons, total costs of products sold improved over 1999. The current period's costs also improved because it did not include a third quarter of 1999 $8 million loss on the impairment of assets. Third quarter 2000 selling and administrative expenses dropped 10 percent from the third quarter 1999 level, from $9 million to $8 million. The Company's operating loss for the third quarter of 2000 equaled $2 million, while the 1999 third quarter loss was $14 million. The improvement in operating income was due to the decreased operating and administrative costs, the absence of the 1999 $8 million asset impairment charge, and improved margins due to higher prices, partially offset by lower sales volume. 23 24 Interest expense of $4 million for the third quarter of 2000 improved over the third quarter of 1999 interest expense of $16 million by $12 million. This improvement primarily relates to the absence of a $10 million interest charge recorded in the third quarter of 1999. The 1999 charge reflected the increased interest expense from the U.S. Tax Court's decision in The Interlake Corporation v. Commissioner of Internal Revenue discussed on page 8 of the 1999 Form 10-K. The remaining improvement is due to the reversal of the post-petition interest expense accrued on the EIB Bonds. Pursuant to a Bankruptcy Court Stipulation, the Company reversed all post-petition interest expense related to the EIB Bonds because the assets underlying the EIB Bonds did not fully collateralize the EIB Bonds. See the Long-term Debt on page 8 of this Report on Form 10-Q for more information. Due to the Stipulation, during the third quarter of 2000, the Company reversed the $2 million in post-petition interest previously paid or accrued for the EIB Bonds. During the third quarter of 2000, the Company incurred $2 million in reorganization charges, essentially flat with the same period in 1999. Reorganization charges primarily consist of administrative, professional, and legal fees associated with the Chapter 11 Bankruptcy. Net loss for the third quarter of 2000 improved $24 million, or 76 percent, over 1999. The components discussed above resulted in a consolidated net loss of $7 million, or $0.63 per share. The same period in 1999 generated a $31 million loss, or $2.64 per share. Per share amounts are based on weighted average number of common shares calculated on both the basic and fully diluted method, which are equivalent in amount. THE STEEL MAKING SEGMENT. Net sales in the current period were $82 million, essentially flat with the third quarter of 1999. Price improvements over the third quarter of 1999 were offset by decreased volume. Commercial sales increased by $2 million, while sales to affiliates decreased $3 million. The CSP operated at an average of 87 percent of capacity for the third quarter of 2000, versus 99 percent in 1999. The quantity of foreign steel imports continued to rise during the third quarter, which, combined with historically high levels of steel market inventories, has created less demand for Acme Steel's product. The third quarter 2000 operating loss of $4 million is a $14 million improvement from the $18 million loss in the comparable period of 1999. In the third quarter of 1999, the Segment incurred a $8 million loss from impairment of its finishing facilities. The remaining improvement over 1999 is due to better cost control at a lower level of production, stronger sales mix, and increased price, partially offset by decreased volume. Increased uncontrollable costs, such as energy prices, partially offset the Segment's cost improvements. THE STEEL FABRICATING SEGMENT. In the third quarter of 2000, the Steel Fabricating Segment experienced a decrease in volume from the comparable period in 1999. The decline in volume was offset by improvements in price. Net sales for the three-month period of 2000 were $54 million, essentially flat with the third quarter of 1999. 24 25 In the third quarter of 2000, the Steel Fabricating Segment generated operating income of $3 million, a $2 million decrease from 1999. This decrease is because of decreased sales volume and an increase in raw material costs--$26 per ton over the same period of 1999. Nine Months ended September 24, 2000 as compared to Nine Months ended September 26, 1999 THE COMPANY. Consolidated net sales of $373 million for the first nine months of 2000 were $26 million higher than the same period in the prior year, reflecting increased sales in the first two quarters. Increased prices and a higher margin sales mix contributed to the sales increase. The increase in sales, together with lower operating costs, led to a $32 million improvement over 1999 loss from operations. Year-to-date 2000 operating income is $5 million, while the first three quarters of 1999 generated a $28 million loss. Of the $32 million improvement, $20 million occurred in the first half of the year. Selling and administrative expense was $26 million in the first three quarters of 2000, $2 million lower than the prior year. Interest expense of $16 million in the nine months ended September 24, 2000 was lower than the first nine months of 1999 by $12 million. This improvement primarily relates to the third quarter adjustments discussed above. During the first nine months of 2000, the Company incurred reorganization charges of $5 million, $1 million lower than the prior year. These costs primarily consist of administrative, professional, and legal fees associated with the Chapter 11 Bankruptcy proceedings. The Company recorded a net loss of $16 million, or $1.42 per share in the first three quarters of 2000, versus a loss of $60 million, or $5.14 per share, recorded in the first nine months of the prior year. Per share amounts for 2000 and 1999 are based on the weighted average number of common shares calculated on both the basic and fully diluted methods, which are equivalent in amount. STEEL MAKING SEGMENT. In the first nine months of 2000, net sales for the Steel Making Segment were $263 million, a $27 million or 11 percent increase from the comparable period last year. Of the $27 million increase, $24 million and $3 million is attributable to higher prices/improved mix and increased volume, respectively. Sales to unaffiliated customers increased 15 percent or $26 million, while intersegment sales of $60 million were flat with the first three quarters of 1999. The Steel Making Segment recorded a $5 million loss from operations in the first three quarters of 2000, which was nearly $38 million better than the $43 million loss recorded in the comparable period in 1999. The decreased loss in the first nine months of 2000 was primarily due to increased sales, improved product mix, improved costs, and the absence of an $8 million asset impairment charge in the third quarter of 1999. 25 26 STEEL FABRICATING SEGMENT. The Steel Fabricating Segment recorded net sales of $171 million in 2000, essentially flat with the comparable period in the prior year. Despite flat sales, the Segment's operating income of $10 million for the first three quarters of 2000 was $5 million lower than in last year's comparable period due primarily to increased raw material costs and lower sales volume. LIQUIDITY AND CAPITAL RESOURCES The most significant factor affecting the Company's liquidity and capital resources is operating under the protection of the Bankruptcy Code. Additional information and discussions concerning the circumstances which led to the Chapter 11 Bankruptcy are contained in Item 1. Business--Chapter 11 Bankruptcy Filings on page 3 of the 1999 Form 10-K. The Company's current liquidity requirements include working capital needs, Chapter 11 Bankruptcy administrative expenses, payments to adequately protect holders of certain secured claims, and capital investments. The Company held $3 million in cash or cash equivalents at September 24, 2000 and no cash or cash equivalents at December 26, 1999. To fund liquidity requirements, the Company entered into a DIP Financing Agreement with Bank of America as discussed in Liquidity and Capital Resources on page 18 of the Company's 1999 Form 10-K. The DIP Financing Agreement provides for a maximum of $100 million of revolving credit borrowings subject to borrowing base limitations. At September 24, 2000, $6 million of the DIP Financing Agreement was outstanding with an additional $56 million available based on borrowing base limitations. The DIP Financing Agreement originally expired on September 27, 2000, however, the Bankruptcy Court approved an extension until December 29, 2000. Capital expenditures are expected to approximate $13 million during 2000. At September 24, 2000, the Company has spent $10 million on capital projects. During the first nine months of 2000, the Company made $19 million in Bankruptcy Court approved adequate protection payments. Although the Company believes the anticipated cash from future operations and borrowings under the DIP Financing Agreement will provide sufficient liquidity for the Company to fund on-going operations, to meet its adequate protection payments, and to finance its Chapter 11 Bankruptcy administrative costs, the Company cannot assure that these or other possible resources will be adequate. OUTLOOK The Company currently intends to present a plan to the Bankruptcy Court to reorganize the Company's businesses. That plan could include several alternatives including, reorganization of the Company's existing businesses or the sale of some or all of the Company's assets. Although management expects to file a plan, there can be no assurance at this time that a plan will be proposed by the Company, approved or confirmed by the Bankruptcy Court, or that such plan will be consummated. The Company is currently drafting an Offering Memorandum on the Fabricating businesses to be released in the near future. The Bankruptcy Court has granted the 26 27 Company's request to extend its exclusive right to file a plan of reorganization through January 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 to be terminated, other interested parties, such as creditors of the Company, would have the right to propose alternative plans of reorganization. A plan will most likely result in the elimination of the equity of existing shareholders of the Company as a result of the issuance of equity to creditors or new investors. Steel Making Segment The Steel Making Segment continues to incur operating losses and is not expected to achieve the sales, production, and cost performance levels necessary to achieve an operating profit for the year 2000. 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 2000. Steel imports continue to adversely affect price in addition to demand. The Company continues to place maximum effort on improving the operating performance of its facilities, reducing cash manufacturing costs, and optimizing its mix of higher margin products to return the Steel Making Segment to profitability. Steel Fabricating Segment Steel Fabricating Segment earnings for the remainder of 2000 are expected to remain relatively steady. Acme Packaging plans to increase the utilization of the plastic strapping lines in this second full year of operations. Alpha Tube expects to generate somewhat lower earnings for the balance of 2000 due to weakness in demand in the truck exhaust and service center markets. FORWARD LOOKING STATEMENT Actual events might materially differ from those projected in the above outlook statements. If there are substantial unexpected production interruptions or other operating difficulties, or if the CSP fails to maintain production utilization and material yield goals, the competitive and financial position of the Company could be materially adversely affected. In addition to uncertainties with respect to the CSP, 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 material, supplies, pensions, active and retiree medical care, volume or units of product sales, competitive developments in the marketplace by domestic and foreign competitors, 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 27 28 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 that may affect the Company's businesses, results of operations and prospects. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange. The Company has exposure from changes in foreign exchange rates for the purchase of raw materials from its Wabush joint venture. A 10 percent unfavorable movement in the Canadian Dollar would affect raw material costs by approximately $3 million on an annual basis. Interest Rates. The Company's net interest rate risk exposure 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 or expects to enter into adequate protection agreements with secured lenders. 28 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS (a) Exhibit 15 - Letter regarding unaudited interim financial information Exhibit 27 - Financial data schedule Exhibit 99 - Non-binding Letter of understanding and term sheet between Acme Steel Company and WCI 29 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACME METALS INCORPORATED Date: November 6, 1999 By: /s/ Jerry F. Williams ------------------------------------- Jerry F. Williams Vice President - Finance and Administration and Chief Financial Officer (Principal Financial Officer) By: /s/ Derrick T. Bay ------------------------------------- Derrick T. Bay Controller and Chief Accounting Officer (Principal Accounting Officer) 30

ACME METALS INC /DE/ 10-Q