<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-79587
PROSPECTUS
[LOGO OF CALIFORNIA STEEL INDUSTRIES, INC.]
$150,000,000
Offer to Exchange
All Outstanding 8 1/2% Series A Senior Notes due 2009 for 8 1/2% Series B
Senior Notes due 2009
of
California Steel Industries, Inc.
This Exchange Offer will Expire at 5:00 p.m.
New York City Time, on November 4, 1999
---------------
We will pay interest on the Series B notes on April 1 and October 1 of
each year, commencing October 1, 1999. The Series B notes will mature on April
1, 2009. We may redeem the Series B notes, in whole or in part, at any time on
or after April 1, 2004. In addition, on or before April 1, 2002, we may redeem
up to 35% of the Series B notes with the net proceeds of a public equity
offering if at least 65% of the original aggregate principal amount of the
Series B notes remain outstanding. Upon a change of control event, each holder
of Series B notes may require us to repurchase all or a portion of its Series
B notes.
The Series B notes will be unsecured and will be senior in right of
payment to all of our subordinated indebtedness and will rank equally in right
of payment to all of our existing and future indebtedness that is not by its
terms subordinated to the Series B notes. As of September 10, 1999, we had
$200.0 million in senior debt outstanding, including the notes.
Please consider carefully "Risk Factors" beginning on page 8 of this
prospectus.
---------------
The exchange offer expires at 5:00 p.m., New York City time on November
4, 1999, unless extended. All outstanding Series A notes that are validly
tendered and not validly withdrawn will be exchanged for an equal principal
amount of Series B notes that are registered under the Securities Act of 1933.
You may withdraw tenders of outstanding Series A notes at any time prior to
the expiration of this exchange offer. We will not receive any cash proceeds
from the exchange offer.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------
The date of this prospectus is October 5, 1999.
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TABLE OF CONTENTS
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Page
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SUMMARY.................................................................... 1
RISK FACTORS............................................................... 8
FORWARD-LOOKING STATEMENTS................................................. 14
THE EXCHANGE OFFER......................................................... 15
CAPITALIZATION............................................................. 23
SELECTED CONSOLIDATED FINANCIAL DATA....................................... 24
DESCRIPTION OF OTHER INDEBTEDNESS AND CAPITAL STOCK........................ 26
DESCRIPTION OF THE NOTES................................................... 29
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS............................ 61
PLAN OF DISTRIBUTION....................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 63
BUSINESS................................................................... 71
MANAGEMENT................................................................. 84
PRINCIPAL STOCKHOLDERS..................................................... 90
MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS............................ 91
LEGAL MATTERS.............................................................. 92
EXPERTS.................................................................... 92
AVAILABLE INFORMATION...................................................... 92
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
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i
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes. In addition, some statements include forward-looking statements
that involve risks and uncertainties. See "Forward-Looking Statements."
Statements of our belief in this section are based on our own internal studies
or research, estimates of members of our senior sales management team, our
knowledge of the industry or other information we have internally compiled.
The Company
We believe we are the leading producer of flat rolled steel products in
the western United States based on tonnage billed. We produce the widest range
of flat rolled products in our market, including hot rolled, cold rolled and
galvanized coil and sheet. We also produce electric resistant weld, ERW, pipe
in diameters ranging from 4.59 to 16.09. Our principal market consists of the
11 states located west of the Rocky Mountains. Within this market, we believe
we have either the number one or two market position in each of our flat rolled
product categories. We are a non-union company and as of June 30, 1999 we
employed 964 full-time employees. For the six months ended June 30, 1999, we
had net sales of $331.3 million and earnings before interest, taxes,
depreciation and amortization, as adjusted, of $59.0 million. See "Summary
Consolidated Financial Data."
Unlike integrated steel mills and mini-mills, we do not manufacture
steel. Mini-mills are steel making facilities that use an electric furnace to
convert steel scrap into liquid steel. In contrast to integrated steel mills
and mini-mills, we process steel slab manufactured by third parties. As a
result, we do not have the fixed costs associated with the manufacturing of
steel. Slab consumption costs comprise approximately 70% of our cost of goods
sold. We believe we are the largest importer and the second largest purchaser
of steel slab in the world. Our purchasing power provides us with the ability
to negotiate favorable terms and conditions for steel slab from low cost and
high quality producers throughout the world. Prices of our flat rolled steel
products have historically experienced a close correlation to the prices of
steel slab. We believe that this correlation, combined with our slab-based
business model, provides us with operating margins that are more consistent
than those of a typical flat rolled steel producer.
Consumers and end markets typically requiring small order sizes with a
wide variety of metallurgical qualities and specifications comprise most of the
western U.S. steel market. In contrast, the majority of other U.S. steel
markets primarily depend on heavy-tonnage steel consumers, such as the
automotive and durable goods manufacturing industries. We have a highly
diversified base of over 300 active customers. Sales to our 10 largest
customers represented 35% of our 1998 sales, and sales to our largest single
customer represented less than 6% of our 1998 sales. End markets for our
products include the construction, spiral pipe, tubing, aftermarket wheels and
rims, shipping container, office equipment and oil and gas transmission
industries. Our location 50 miles east of Los Angeles positions us to serve the
western U.S. steel market.
We have substantially completed a modernization program of approximately
$250.0 million, that began in 1993. We believe this program has strengthened
our competitive position by reducing operating costs, broadening our product
line, improving product quality and significantly increasing throughput
capacity of finished flat rolled steel products. Throughput capacity refers to
the maximum volume of material that can be manufactured through each step of a
production process. In addition to these benefits, we have substantially
improved overall mill efficiency, reducing man hours per ton produced from 2.02
in 1992 to 1.29 in 1998. We believe the success of our modernization program
contributes to our being a cost effective producer of flat rolled steel
products.
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Competitive Strengths
We believe that we have a strong competitive position attributable to a
number of factors, including the following:
. we believe our use of steel slab manufactured by third parties as the
principal raw material in our flat rolled products has allowed us to
maintain among the lowest operating margin variances in the United
States for flat rolled steel producers over the past five years. We
define operating margin as earnings before interest and tax.
. we believe that because of the breadth of our product offerings, we
are well equipped to provide "one-stop shopping" for our customers,
which maximizes sales opportunities and increases the convenience and
value of the services we provide to customers.
. our non-union workforce provides us with greater flexibility than the
unionized workforces of our competitors.
. located 50 miles east of Los Angeles, our position as the only flat
rolled steel producer physically located in southern California not
only gives us a significant freight cost advantage over our
competition, but also allows us to provide a more service-oriented
approach to our customers.
. we have established a solid base of long-standing customer
relationships, including relationships with 90% of our top 30
customers for over 10 years.
Business Strategy
Our objective is to maintain our leadership position and best serve our
customers by pursuing the following strategies:
. by adding a new manufacturing line, we believe we can now produce the
broadest range of thicknesses, widths and coatings of high margin,
high demand galvanized coil and sheet products in the western United
States.
. by maintaining a regional focus on the fast-growing western U.S.
market, we can most effectively service our customers and increase
product sales in higher margin value added products.
. we believe that our modernization program has provided us with
significant opportunities to continue to improve the efficiency and
productivity of our operations at low incremental cost.
. we will continue to differentiate ourselves from our competitors by
providing a full range of high quality flat rolled and coiled
products, rapid availability of products, engineering and
metallurgical advisory services and flexibility with respect to
customized features.
. we will continue to actively manage slab procurement to minimize
inventory holding and raw material costs, improve the efficiency of
our production process and opportunistically purchase slab on a
forward basis to reduce overall slab costs. See "Risk Factors--Our
profitability could be adversely affected by interruptions in supply
and our potential inability to pass on any increases in raw material
costs to our customers."
2
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The Exchange Offer
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Issuer..................... California Steel Industries, Inc.
14000 San Bernardino Avenue
Fontana, California 92335
(909) 350-6200
www.californiasteel.com
Notes Offered.............. Up to $150,000,000 aggregate principal amount of 8 1/2%
Series B Senior Notes due 2009.
The Exchange Offer......... We are offering the Series B notes in exchange for a like
principal amount of our Series A notes. You may exchange the
Series A notes only in integral multiples of $1,000.
Tenders; Expiration Date;
Withdrawal................. This exchange offer will expire at 5:00 P.M. New York City
time on November 4, 1999, or any later date and time to
which it is extended. You may withdraw your tender of Series
A notes according to this exchange offer at any time prior
to its expiration. In the event we terminate this exchange
offer and do not accept for exchange any Series A notes, we
will promptly return tendered Series A notes to their
holders.
Interest on the Notes...... The Series B notes will bear interest from and including the
date of issuance of the Series A notes.
Conditions to the Exchange
Offer...................... This exchange offer is subject to customary conditions, any
or all of which we may waive. Specifically, we may
discontinue, amend or modify the exchange offer if any
material change occurs that is likely to affect the exchange
offer including:
(1) an action or proceeding is threatened or commenced
challenging or otherwise relating to this exchange
offer; or
(2) our business is adversely affected or the exchange offer
is prohibited, restricted or delayed by:
. any development in any pending action or proceeding;
. any statute, rule or regulation that has been enacted;
or
. any actual legal impediment to completing the
transactions contemplate by the exchange offer.
We currently expect that each of the conditions will be
satisfied and that we will not need to waive any of them. If
we waive any of the conditions, we will inform our Series A
and Series B note holders in writing and we will keep the
exchange offer open for five business days after we inform
our noteholders. See "The Exchange Offer--Conditions to the
Exchange Offer."
Procedures for Tendering
Series A Notes............. Each holder wishing to tender their Series A notes in this
exchange offer must complete and sign the letter of
transmittal, in accordance with the instructions contained
therein, and submit the letter of transmittal to the
exchange agent identified below. See "The Exchange Offer--
Procedures for Tendering."
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3
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Guaranteed
Delivery
Procedures...... If you wish to tender your Series A notes and:
. your Series A notes are not immediately available, or
. you cannot deliver your Series A notes, the letter of
transmittal and other documents required by the letter of
transmittal to the exchange agent prior to the expiration
of the exchange offer,
you must tender your Series A notes according to the
guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of
Series A notes
and Delivery of
Series B notes.. We will accept for exchange any and all Series A notes that
are properly tendered in the exchange offer prior to 5:00
P.M. New York City time on November 4, 1999. See "The
Exchange Offer--Acceptance of Series A notes for Exchange;
Delivery of Series B notes."
Rights of
Dissenting
Holders......... Holders of Series A notes do not have any appraisal or
dissenters' rights under the Delaware General Corporation
Law in connection with this exchange offer.
Exchange Agent.. State Street Bank and Trust Company of California, N.A. See
"The Exchange Offer--Exchange Agent."
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Consequences of exchanging Series A notes pursuant to this exchange offer
Based on specific interpretive letters issued by the staff of the
commission to third parties in unrelated transactions, unless you are our
affiliate within the meaning of Rule 405 under the Securities Act, if you
exchange your Series A notes for Series B notes according to this exchange
offer you generally may offer for resale, resell or otherwise transfer your
Series B notes without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided that you acquired your Series B
notes in the ordinary course of your business and you have no arrangement with
any person to participate in a distribution of your Series B notes. Each
broker-dealer that receives Series B notes for its own account in exchange for
Series A notes must acknowledge that it will deliver a prospectus in connection
with any resale of the Series B notes. See "Plan of Distribution." In addition,
to comply with the securities laws of specific jurisdictions, if applicable,
the Series B notes may not be offered or sold unless they have been registered
or qualified for sale in the jurisdiction or an exemption from registration or
qualification is available and the conditions for an exemption have been met.
If a holder of the Series A or Series B notes reasonably requests in
writing, we have agreed, subject to specific limitations set forth in our
registration rights agreement, to register or qualify the Series B notes for
offer or sale under the securities or blue sky laws of the jurisdictions the
holder requests. If you do not exchange your Series A notes for Series B notes
according to this exchange offer, your Series A notes will continue to be
subject to the restrictions on transfer contained in the legend set forth on
your Series A notes. In general, the Series A notes may not be offered or sold,
unless registered under the Securities Act, except according to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. See "The Exchange Offer--Purposes of the Exchange Offer"
and "--Resales of Notes."
4
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Terms of the Series B notes
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Securities Offered............. $150.0 million aggregate principal amount of 8 1/2% Series B
senior notes due 2009. The Series B notes will be
substantially identical in all material respects, including
interest rate, maturity, security and restrictive covenants,
to the Series A notes for which they may be exchanged
according to this exchange offer.
Maturity Date.................. April 1, 2009.
Interest Payment Dates......... April 1 and October 1, commencing October 1, 1999.
Ranking........................ The Series B notes will be unsecured senior obligations and
will be senior in right of payment to all of our
subordinated indebtedness and will rank equally in right of
payment to all of our existing and future indebtedness that
is not by its terms subordinated to the Series B notes. The
Series B notes will rank junior to our current and future
secured indebtedness. In addition, the Series B notes will
rank junior to all existing and future indebtedness and
other liabilities of our subsidiaries. As of September 10,
1999, we had $150.0 million in senior unsecured notes
outstanding and $50.0 million outstanding under a $130.0
million revolving credit facility secured by a lien on our
cash, receivables and inventories.
Optional Redemption............ We may redeem the Series B notes, in whole or in part, at
any time on or after April 1, 2004 at the redemption prices
set forth in this prospectus. See "Description of the
Notes--Optional Redemption."
Public Equity Offering Optional
Redemption..................... On or before April 1, 2002, we may redeem up to 35% of the
Series B notes with the net proceeds of a public equity
offering at 108.5% of the principal amount of the notes,
plus accrued interest, if at least 65% of the original
aggregate principal amount of the Series B notes remains
outstanding. See "Description of the Notes--Optional
Redemption."
Change of Control.............. Upon change of control events, you may require us to
repurchase all or a portion of your Series B notes at a
purchase price equal to 101% of the principal amount of the
notes, plus accrued interest. We may not have sufficient
funds to repurchase the Series B notes if a change of
control or asset sale occurs. See "Description of the
Notes--Change of Control."
Covenants...................... The indenture governing the Series B notes contains
covenants that, among other things, limit our ability to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase our capital stock;
. make investments;
. create liens;
. sell assets;
. sell capital stock of restricted subsidiaries or issue or
allow any person to own preferred stock of our restricted
subsidiaries;
. engage in transactions with affiliates, and
. consolidate, merge or transfer all or substantially all
our assets and the assets of our subsidiaries on a
consolidated basis.
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These covenants are subject to a number of important
exceptions and qualifications that are described under
"Description of the Notes" in this prospectus.
The indenture governing the Series B notes provides that if
no default has occurred and is continuing, after the ratings
assigned to the Series B notes by both of the rating
agencies are investment grade and remain investment grade,
we will not be subject to specific covenants, including:
. limitation on indebtedness;
. limitation on payments that our restricted subsidiaries
make;
. limitation on liens;
. limitation on asset sales and the disposition of proceeds
from asset sales;
. limitation on the issuance and sale of capital stock of
our Restricted Subsidiaries;
. limitation on transactions with affiliates;
. limitation on dividends; and other payments affecting our
restricted subsidiaries;
. limitation on designating and investing in unrestricted
subsidiaries;
. limitation on our requirement to provide financial
statements; and
. limitations on sale and leaseback transaction.
See "Description of the Notes--Specific Covenants."
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Summary Consolidated Financial Data
The following table presents our summary consolidated financial data as of
and for the periods shown below. This data is from our consolidated financial
statements and notes and, except for the fiscal years ended December 31, 1994
and 1995, these statements are contained elsewhere in this prospectus. The
financial data as of and for the six months ended June 30, 1998 and 1999 are
derived from our unaudited consolidated financial statements. In management's
opinion, these financial statements reflect all adjustments, consisting
principally of normal, recurring amounts, necessary for the fair statement of
financial position and results of operations for the periods presented and are
not necessarily indicative of the results of any other interim period or for
the full fiscal year. Since the information in this table is only a summary,
you should read our historical financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" found elsewhere in this prospectus.
EBITDA, as adjusted represents income before income taxes, gain/loss on
sale of fixed assets, plus net interest expense, depreciation and amortization.
EBITDA, as adjusted is not intended to represent cash flows from operations,
cash flows from investing or cash flows from financing activities as defined by
generally accepted accounting principles and should not be considered as an
alternative to cash flow or a measure of liquidity or as an alternative to net
earnings as indicative of operating performance. EBITDA, as adjusted is
included because we believe that investors find it a useful tool for measuring
our ability to service our debt. EBITDA, as adjusted is not necessarily
comparable to similarly titled measures reported by other companies.
For the purpose of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges and
amortization of capitalized interest, minus capitalized interest. Fixed charges
consist of interest expensed and capitalized, an estimate of the interest
within rental expense.
<TABLE>
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Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
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Income Statement Data:
Net sales............... $637,529 $707,641 $694,444 $722,458 $673,439 $356,734 $331,258
Cost of sales, net of
LIFO reserve........... 543,293 623,874 589,531 634,804 587,859 313,363 270,213
Gross profit............ 94,236 83,767 104,913 87,654 85,580 43,371 61,045
Selling, general and
administrative
expenses............... 27,454 25,593 26,215 27,088 28,626 14,592 15,083
Income from operations.. 66,782 58,174 78,698 60,566 56,954 28,779 45,962
Interest expense, net... (8,566) (16,332) (10,145) (13,977) (16,954) (8,345) 8,086
Income before income
taxes.................. 56,648 39,059 69,866 47,671 42,570 22,029 38,677
Net income.............. 33,361 22,954 40,666 30,771 29,095 12,986 22,819
EBITDA, as adjusted
Data:
Income before income
taxes.................. $ 56,648 $ 38,057 $ 69,866 $ 48,671 $ 42,570 $ 22,029 $ 38,677
Interest expense........ 8,566 16,333 10,145 13,977 16,954 8,345 8,086
Excluding gain/loss of
fixed assets........... 2,609 2,916 2,518 1,054 308 282 (11)
Depreciation and
amortization........... 16,867 18,623 18,844 24,374 26,659 14,101 12,285
-------- -------- -------- -------- -------- -------- --------
EBITDA, as adjusted..... $ 84,690 $ 76,930 $101,373 $ 87,076 $ 86,491 $ 44,757 $ 59,037
-------- -------- -------- -------- -------- -------- --------
EBITDA, as adjusted
margin................. 13.3% 10.9% 14.6% 12.1% 12.8% 12.5% 17.8%
Other Data:
Operating margin........ 10.5% 8.2% 11.3% 8.4% 8.5% 8.1% 13.9%
Cash flows provided by
operating activities... 47,665 34,260 66,503 57,211 63,456 $ 5,986 $ 49,982
Cash flows used in
investing activities... (52,032) (21,792) (82,300) (57,954) (49,335) (26,558) (18,807)
Cash flows (used in)
provided by financing
activities............. 5,890 (14,640) 15,623 1,067 (12,502) 14,297 (32,330)
Capital expenditures.... $ 52,066 $ 21,890 $ 50,421 $ 58,296 $ 49,354 $ 26,583 $ 18,827
Total tons billed,
excluding scrap (in
thousands)............. 1,438 1,497 1,563 1,625 1,614 823 886
Number of employees at
end of period.......... 932 925 923 945 976 970 964
Man hours per ton
produced............... 1.44 1.42 1.30 1.30 1.29 1.31 1.16
Selected Ratios:
Ratio of earnings to
fixed charges.......... 6.2x 3.3x 6.4x 3.8x 3.1x 3.3 5.4x
Ratio of EBITDA, as
adjusted to interest
expense, net........... 9.9x 4.7x 10.0x 6.2x 5.1x 5.4x 7.3x
<CAPTION>
As of December 31, As of June 30,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands)
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Balance Sheet Data:
Cash and cash
equivalents............ $ 12,365 $ 10,193 $ 10,019 $ 10,343 $ 11,962 $ 4,069 $ 10,807
Property, plant and
equipment, net......... 159,817 163,073 194,615 228,795 251,163 240,971 257,696
Total assets............ 391,758 371,912 474,563 486,138 534,633 526,025 533,741
Total debt.............. 192,860 194,050 213,500 241,900 243,700 264,582 220,000
Total stockholders'
equity................. 129,105 136,229 173,068 176,506 191,299 181,107 205,488
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RISK FACTORS
You should carefully consider the following factors and the other
information in this prospectus before deciding to invest in the Series B notes.
We may not be able to repurchase the Series B notes upon a change of control
because of limitations imposed by our debt agreements and a potential lack of
funds available to repurchase the notes.
Upon a change of control event, each holder of the Series B notes will
have the right to require us to repurchase their Series B notes at 101% of
their principal amount, plus accrued interest. Our ability to repurchase the
Series B notes upon a change of control event is limited by the terms of our
debt agreements, including the new bank facility. For example, upon a change of
control event, we may be required immediately to repay the outstanding
principal, any accrued interest on and any other amounts we owe under our debt
agreements, including our new bank facility and the indenture. We may not be
able to repay amounts outstanding under our new bank facility or obtain
necessary consents under the facility to repurchase these Series B notes. In
addition, the source of funds for purchases like this would be our available
cash or cash generated from other sources. However, we may not have enough
available funds upon a change of control to make any required repurchases of
tendered Series B notes. If we do not have sufficient funds, any requirement to
offer to purchase any outstanding Series B notes may result in us having to
refinance our outstanding indebtedness, and we may not be able to do on
favorable terms or at all. See "Description of the Notes--Change of Control."
A liquid trading market for the notes may not develop and this could negatively
affect the value of the Series B notes or make the Series B notes difficult to
sell.
There has been no public market for the Series A notes and we currently
do not anticipate the development of an active public market for the Series B
notes. We currently do not intend to apply for the listing of the Series B
notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Merrill Lynch & Co., BancBoston Robertson Stephens
Inc. and NationsBanc Montgomery Securities LLC, acting as the initial
purchasers in the offering of the Series A notes, have advised us that each of
them currently intends to make a market in the Series B notes but they are not
obligated to do so. In addition, the initial purchasers may discontinue any
market making activity they commence at any time without notice.
The liquidity of any market for the Series B notes will depend upon the
number of holders of the Series B notes, our performance, the market for
similar securities, the interest of securities dealers in making a market in
the Series B notes and other factors. Based on all these factors, a liquid
trading market may not develop for the Series B notes, which may negatively
affect their value and your ability to sell them.
We are substantially leveraged and may not be able to pay principal and
interest on the Series B notes, thus lowering the value of the Series B notes.
We now have and, after this exchange offer, will continue to have a
significant amount of indebtedness, interest expense and principal repayment
obligations under our new bank facility and the Series B notes. As of September
10, 1999, we had $150.0 million in senior unsecured notes and $50.0 million
outstanding under a $130.0 million credit facility secured by a lien on our
cash, accounts receivable, inventory and other assets.
We anticipate current debt service for the year ending December 31, 1999
to be approximately $16.0 million. Subject to the limitations contained in our
new bank facility and the indenture governing the Series B notes, we may incur
additional indebtedness from time to time to finance capital expenditures or
investments or for other purposes.
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Our high level of indebtedness could have important consequences to
Series B note holders, such as:
. making it more difficult for us to satisfy our obligations with
respect to the Series B notes and our secured indebtedness;
. limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds
to fund debt service;
. limiting our ability to obtain additional financing to fund our
strategy, working capital, capital expenditures, debt service
requirements or for other purposes;
. limiting our ability to react to changing market conditions, changes
in our industry and adverse economic conditions; and
. increasing our vulnerability to interest rate increases because
borrowings under our new bank facility are at variable interest rates.
If our future operating performance is not as positive as we anticipate,
or if we cannot refinance our indebtedness when necessary, we may not be able
to pay principal and interest on the Series B notes and to satisfy our other
debt obligations. Each of these factors is to a large extent dependent on
economic, financial, competitive and other factors beyond our control. If, in
the future, we cannot generate sufficient cash from operations to make
scheduled payments on the Series B notes or to meet our other obligations, we
will need to refinance our indebtedness, reduce or delay capital expenditures,
obtain additional financing or sell assets. Our potential inability to do
these things may cause us not to pay principal and interest on the Series B
notes and may lower the value of the notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
If our lenders accelerate our debt obligations, we may not have sufficient
funds to make these accelerated payments and still have enough funds to
continue to make payments on the Series B notes.
Our new bank facility also contains a number of financial covenants that
will require us to meet financial ratios and financial condition tests. Our
ability to meet these covenants and requirements in the new bank facility and
the indenture can be affected by events beyond our control. An event of
default under the new bank facility or the occurrence of a change of control
or an event of default under the indenture, if not cured or waived, could
permit acceleration of the relevant debt and acceleration of debt and other
obligations under other instruments. We may not have, or be able to obtain,
sufficient funds to make these accelerated payments and still be able to make
the required payments on the Series B notes. See "Description of the Notes--
Events of Default" and "Description of Other Indebtedness and Capital Stock."
If our secured lenders make a claim on our assets, we may not have enough
assets remaining to fully satisfy any claims by the Series B note holders,
whose notes will be unsecured.
The Series B notes will not be secured by any of our assets. Our
obligations under the new bank facility, however, are secured by a first
priority security interest in cash, accounts receivable, inventory and other
assets. If we become insolvent or are liquidated, or if payment under the new
bank facility is accelerated, the lenders under the new bank facility would be
entitled to exercise the remedies available to a secured lender. Accordingly,
those lenders would have a claim on our cash, accounts receivable, inventory
and general intangibles that would have priority over any claim for payment
under the Series B notes. In any of these events, because the Series B notes
will not be secured by any of our assets, it is possible that there would be
no assets remaining from which claims of the holders of the Series B notes
could be satisfied or, if any assets remained, they might be insufficient to
satisfy these claims fully. See "Description of Other Indebtedness and Capital
Stock--Credit Facility."
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Deadlocks among our board of directors may result in costly delays in making
important business decisions that could put us at a competitive disadvantage.
We are owned 50% by Kawasaki Steel Holdings (USA), Inc., a Delaware
corporation and a subsidiary of Kawasaki Steel Corporation, a Japanese
corporation, and 50% by Rio Doce Limited, a New York corporation and a
subsidiary of Companhia Vale do Rio Doce, a Brazilian corporation. Our two
stockholders entered into a Shareholders' Agreement dated June 27, 1995. The
Shareholders' Agreement provides for a Consultative Council consisting of two
members, one appointed by each of the stockholders. The Consultative Council
decides on any matters submitted to it by both or either of the stockholders,
and specifically resolves any deadlock among the directors. It is unclear
whether the Consultative Council provisions are valid under Delaware
corporation law. Because no stockholder holds a majority of our stock and the
directors and members of the Consultative Council are elected by the
stockholders in proportion to each of the stockholders' holdings, there is a
possibility that a deadlock may occur on any issue voted on by the
stockholders, board of directors and Consultative Council. If a deadlock were
to occur and the Consultative Council could not resolve the issue, the last
recourse is arbitration according to the Shareholders' Agreement. Arbitration
can be costly and may result in delays in making important business decisions
that could put us at a competitive disadvantage. See "Management--Shareholders'
Agreement."
Because our two principal stockholders have the ability to elect the board of
directors, they have the ability to influence the direction of our business to
their advantage and to our possible disadvantage or to the disadvantage of our
Series A and Series B note holders.
The Shareholders' Agreement provides that our board of directors shall be
comprised of five directors. Kawasaki Steel Holdings (USA), Inc. and Rio Doce
Limited each have the right to appoint two directors and the fifth director
shall be elected by the unanimous affirmative vote of the two stockholders. In
addition, the stockholders shall jointly appoint a president, who shall appoint
other officers designated by the board of directors. Because the two
stockholders directly control the election of the directors, and indirectly
control the appointment of officers, they may be able to influence the
direction of our business to their advantage and to our possible disadvantage
or to the disadvantage of our Series A and Series B note holders. In most
cases, the actions the stockholders could take would cause us to be in
violation of the covenants of our credit agreements. If we were in breach of
those covenants and obligated to repay all of the indebtedness, we may not be
able to repay these amounts.
We contract with our stockholders and affiliates of our stockholders for slab
purchases and services and the loss of these relationships could affect our
ability to obtain slab and services.
We purchase slab from Companhia Siderurgica de Tubarao, a subsidiary of
both Companhia Vale do Rio Doce and Kawasaki Steel Corporation. During 1998, we
purchased $112,695,000 of slab from Companhia Siderurgica de Tubarao and
$60,258,000 of slab from Kawasaki Steel Corporation. We also hold a 4% interest
in Companhia Siderurgica de Tubarao. We charter vessels from Seamar Shipping
Corporation, a subsidiary of Companhia Vale do Rio Doce, for the ocean transfer
of slab to the Port of Los Angeles. During 1998, we incurred $11,825,000 in
charter fees from Seamar Shipping Corporation for their services. We also
contract with Rio Doce Pasha Terminal, a joint venture of Companhia Vale do Rio
Doce, to unload our ocean cargo from ships in the Port of Los Angeles. During
1998, we incurred $16,732,000 for Rio Doce Pasha Terminal's services. The
Shareholders' Agreement provides that we shall purchase slab from Companhia
Siderurgica de Tubarao and contract with Seamar for chartering vessels. We
entered into contracts with Seamar Shipping Corporation for 15 years ending in
May 2000 and Rio Doce Pasha Terminal ending in December 2000. If we cannot use
their services or our contracts are not renewed, we will have to find new
service providers and enter into new agreements which could delay our ability
to obtain slab and services.
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Cyclicality in the steel industry exposes us to potential downturns which could
adversely affect our business.
The steel industry is highly cyclical and is affected by general economic
conditions. The domestic steel industry has been adversely affected in recent
years by high levels of steel imports, especially from Japan, worldwide
production overcapacity, increased domestic and international competition and
other factors. We are also subject to other trends and conditions, for example,
the presence or absence of sustained economic growth and currency exchange
rates. We are particularly sensitive to trends in the construction,
agriculture, oil and gas and gas transmission industries, because these
industries are significant markets for our steel products. If there were a
downturn in one or more of these industries however, our sales volume may be
adversely affected.
Intense competition in the steel industry with larger competitors who may have
greater resources than us, foreign competitors and new types of competitors in
the industry may lower steel prices on some of our products and therefore, our
income if steel slab costs do not decrease as well.
Competition within our industry is intense. We compete with domestic and
foreign steel producers on the basis of customer service, product quality and
price. Some of our competitors are larger and may have substantially greater
capital resources, more modern technology and lower labor and raw material
costs than us. The highly competitive nature of our industry, combined with
excess production capacity in some products, may in the future exert downward
pressure on prices for some of our products.
Foreign competition historically, and especially in 1998, has adversely
affected product prices in the United States and tonnage sold by domestic
producers. Fluctuations in the value of the U.S. dollar against several other
currencies substantially affect the intensity of foreign competition. Foreign
governments control or subsidize many foreign steel producers. Decisions by
these producers concerning production and exports may be influenced, in part,
by political and social policy considerations as well as by prevailing market
conditions and profit opportunities. Moreover, existing trade laws and
regulations may be inadequate to prevent unfair trade practices concerning
these imports that could pose increasing problems for us and the rest of the
domestic steel industry.
In addition, over the past 10 years, mini-mills have been transforming
the competitive environment of the U.S. steel industry. Mini-mills are
generally smaller volume steel producers that use ferrous scrap metal as their
basic raw material and serve regional markets. While no mini-mills in our
market currently produce significant amounts of flat rolled products, at least
one mini-mill has expressed an intention to construct facilities in the western
United States to produce hot rolled coil and sheet that might compete with
products we manufacture. Manufacturing techniques have allowed mini-mills to
produce types of sheet products that have traditionally been supplied by us or
integrated producers. We also face increasing competition from producers of
materials such as aluminum, composites, plastics and concrete that compete with
steel in many markets. Furthermore, we compete with steel service and
processing centers. Steel service and processing centers, who are also our
customers, resell steel products, including our products, to end-users. The
entry of these new competitors into the steel industry could cause detrimental
pressure on steel prices. See "Business--Competition."
Because we have entered into purchase contracts at predetermined prices for
approximately 90% of our estimated 1999 slab procurement needs, our 1999
operating margin could be adversely affected if flat rolled steel prices
significantly decline.
We purchase our principal inventory from a number of primarily foreign
producers. According to the terms of the Shareholders' Agreement, we have
agreed to make purchases of some slab and shipping services from related
parties. For example, during 1999, Companhia Siderurgica de Tubarao, a
Brazilian company in which we own a 4% interest, will supply us with
approximately 40% of our slab. We also currently expect to purchase
approximately 7% of our 1999 supply from Companhia Siderurgica National, a
stockholder of Companhia Vale do Rio Doce, which is a party that is also
related to us. Broken Hill Proprietary Company
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Ltd., an Australian company, will supply us with approximately 20% of our slab.
Companhia Siderurgica de Tubarao supplied us with 30%, 44% and 37% of our total
annual slab supply in 1996, 1997 and 1998. BHP supplied us with 15%, 9% and 27%
of our total annual slab supply in 1996, 1997 and 1998.
Because we have already purchased the majority of our steel slab
requirements for 1999 at agreed upon prices, a decrease in the prices of flat
rolled steel products from the time we entered into these contracts could also
adversely affect our 1999 operating margin. See "Business--Semi-Finished Steel
Slab and Suppliers."
Our profitability could be adversely affected by interruptions in supply and
our potential inability to pass on any increases in raw material costs to our
customers.
Any interruption or reduction in the supply of slab from our suppliers
and especially our affiliated suppliers may make it difficult or impossible for
us to satisfy our customers' delivery requirements. This could have a material
adverse effect on our profitability. Our profitability could be further
adversely affected to the extent we are unable to pass on costs of any supply
interruptions to our customers. Customers may purchase products from others if
our prices increase due to supply interruptions. See "--We contract our
stockholders and affiliates of our stockholders for slab purchases and services
and the loss of these relationships could affect our ability to obtain slab and
other services."
The cost of complying with environmental laws and agreements regarding
environmental remediation and indemnification, to which we are a party, could
exceed our estimates and have an adverse effect on our financial condition and
on our ability to make required principal and interest payments on the Series B
notes or meet other obligations as they arise.
We are subject to various federal, state and local environmental laws and
regulations concerning, among other things, air emissions, waste water
discharges and solid and hazardous waste disposal. We own property and conduct
or have conducted operations at properties that are contaminated with hazardous
materials and will require investigation and remediation under federal, state
or local environmental laws and regulations. Expenditures on environmental
matters, including expenditures on pollution control equipment and remediation
activities, totaled approximately $2.9 million in 1996, $3.2 million in 1997
and $2.3 million in 1998. We plan to spend approximately $3.7 million in 1999,
with the largest component representing investigation and remediation
activities at our Fontana site.
We currently expect to propose a remedial action plan regarding potential
soil contamination at our facility to the Department of Toxic Substances
Control of the California Environmental Protection Agency under an Expedited
Remedial Action Voluntary Enforceable Agreement in the spring of 2000. We
estimate remedial costs could range from $5.2 to $11.0 million. The current
estimate is an approximation based on incomplete information. These costs could
be significantly higher if substantial soil excavation is required or if the
agency requires any groundwater investigation or remediation. We expect we will
incur these costs over a period of 5 to 10 years. Our actual future
expenditures for response actions regarding environmental conditions existing
at our properties and other similar matters cannot be conclusively determined
at this time. If these expenditures are larger than we expect, they could have
a material adverse effect on our net income and on our ability to make required
principal and interest payments on the Series B notes or meet other obligations
as they arise.
We entered into a Groundwater Indemnity Agreement in 1995 with Kaiser
Ventures, Inc. that resolved issues concerning potential responsibility for
remediation of any groundwater contamination if required at a later time. Under
the Groundwater Indemnity Agreement, we agreed to indemnify Kaiser against
claims for any groundwater contamination that originated from our Fontana site
with limited exceptions. Kaiser, in turn, agreed to indemnify us against claims
for groundwater contamination that originated from the portions of the former
Kaiser Steel property that was not purchased by us and claims for limited types
of groundwater contamination attributable to former Kaiser operations
originating from our Fontana site. There are no claims pending under the
indemnity. However, it is possible that a claim for indemnity could arise in
the future and
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that the claim could be large. If we must indemnify a party for a large claim,
this could have an adverse effect on our net income and on our ability to make
required principal and interest payments on the Series B notes or meet other
obligations as they arise.
Federal and state environmental laws impose cleanup liability on
generators of hazardous waste and other hazardous substances shipped off-site
for disposal regardless of fault or the legality of the disposal activities. We
generate substantial amounts of hazardous waste and other hazardous substances
in connection with our operations, and dispose of such waste and substances at
a variety of off-site treatment and disposal facilities that we do not own or
otherwise operate. We have been named as a potentially responsible party at one
off-site disposal facility where the alleged liability to us is less than
$100,000, and we are unaware of any other threatened claim in that regard.
However, given the amounts of hazardous waste we continuously generate and
dispose of, it is possible that we could be named as a potentially responsible
party in another action in the future where the alleged liability could be much
larger. If so, our costs could increase.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. It is likely that we will be
subject to increasingly stringent environmental requirements in the future and
we may be required to make additional environmental expenditures. The
expenditures could be material. In addition, we may be subject to legal
proceedings brought by private parties or governmental agencies with respect to
environmental matters. Expenditures or proceedings of the nature described
above, or other expenditures or liabilities resulting from regulated substances
located on our property or used or generated in the conduct of our business,
could increase our costs and decrease net income and ultimately affect our
ability to make required payments on the Series B notes or to meet other
obligations as they arise. See "Business--Environmental Matters."
Because we are dependent on the Western U.S. and Southern California markets
for our customer base, a recession in these markets could adversely affect our
financial condition.
Approximately 93% of our tons billed during 1998 were made to customers
in the 11 states in the western United States: California, Oregon, Washington,
Nevada, Arizona, Utah, Idaho, New Mexico, Colorado, Wyoming and Montana. In
addition, approximately 71% of our tons billed are to customers in California.
The lack of geographic diversity in our customer base exposes us to the
negative effects of recessions in these markets. If these markets experience
economic downturns, customers may not purchase as many of our products which
would cause our revenues to decrease. See "Business--Marketing and Customer
Service."
Our financial condition and the value of the Series B notes, could be
negatively affected by uninsured earthquake risks.
All of our operations are located in Fontana, California. Our operations
are susceptible to damage from earthquakes. We are not insured against
earthquake risk. A significant loss that is not covered by insurance could have
a material adverse effect on our financial condition and, therefore, the value
of the Series B notes.
Possible disruptions in our business resulting from the potential failure of
our computer systems to recognize the year 2000 could affect our ability to pay
principal and interest on the Series B notes and harm the value of the notes.
We are highly dependent on our computer software programs and operating
systems in operating our business. We also depend on the proper functioning of
computer systems of third parties, including vendors and clients. The failure
of any of these systems to interpret appropriately the upcoming calendar year
2000 could have a material adverse effect on our financial condition, results
of operations, cash flow and business prospects. We are in the process of
identifying our own applications that will not be year 2000 compliant and are
taking steps to determine whether third parties are doing the same. Our
inability to remedy our own year 2000 problems or the failure of third parties
to do so could cause business interruptions or shutdown, financial loss,
regulatory actions, reputational harm and/or legal liability. Our year 2000
program may not be effective and our estimates about the timing and cost of
completing our program may not be accurate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about California Steel Industries, Inc.,
including, among other things:
. our anticipated business strategies;
. anticipated trends in our businesses and the steel industry;
. our ability to continue to control costs and maintain quality; and
. future expenditures for capital projects.
In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this prospectus might not occur.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
The exchange offer is designed to provide holders of Series A notes with
an opportunity to acquire Series B notes. Unlike the Series A notes, the Series
B notes will be freely tradable at all times, subject to any restrictions on
transfer imposed by state "blue sky" laws, provided that the holder is not our
affiliate within the meaning of the Securities Act and represents that the
Series B notes are being acquired in the ordinary course of the holder's
business and the holder is not engaged in, and does not intend to engage in a
distribution of the Series B notes. The outstanding Series A notes in the
aggregate principal amount of $150.0 million were originally issued and sold on
April 6, 1999 to refinance existing indebtedness. The sale of the Series A
notes to the initial purchasers was not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act. The
concurrent resale of the Series A notes to investors was not registered under
the Securities Act in reliance upon the exemption provided by Rule 144A of the
Securities Act. The Series A notes may not be reoffered, resold or transferred
other than according to a registration statement filed under the Securities Act
or unless an exemption from the registration requirements of the Securities Act
is available. According to Rule 144, Series A notes may generally be resold:
. commencing one year after their original issue date, in an amount up
to, for any three-month period, the greater of 1% of the Series A
notes then outstanding or the average weekly trading volume of the
Series A notes during the four calendar weeks immediately preceding
the filing of the required notice of sale with the commission; or
. commencing two years after the original issue date, in any amount and
otherwise without restriction by a holder who is not, and has not
been for the preceding 90 days, our affiliate.
The Series A notes are eligible for trading in the PORTAL market, and may be
resold to some qualified institutional buyers according to Rule 144A. Other
exemptions may also be available under other provisions of the federal
securities laws for the resale of the Series A notes.
In connection with the original issuance and sale of the Series A notes,
we entered into a registration rights agreement in which we agreed to file with
the commission a registration statement covering the exchange of the Series B
notes for the Series A notes. The registration rights agreement provides that:
. we will file a registration statement with the commission on or prior
to 90 days after the issue date of the Series A notes,
. we will use our best efforts to have the registration statement
declared effective by the commission on or prior to 180 days after
the issue date of the Series A notes,
. we will commence the exchange offer on or prior to 210 business days
after the issue date of the Series A notes, and
. if obligated to file a shelf registration statement covering the
Series B notes, we will use our best efforts to file the shelf
registration statement with the commission prior to the later of 270
days after the issue date of the Series A notes or 60 days after the
filing obligation arises and use our best efforts to cause the shelf
registration statement to be declared effective by the commission on
or prior to 150 days after the obligation arises.
We will pay liquidated damages to each holder of transfer restricted
securities, as described below, if any of the following occurs:
. we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for the
filing,
. the commission does not declare any of the registration statements on
or prior to the date specified for effectiveness, subject to limited
exceptions,
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. we fail to consummate this exchange offer within 30 days after the
date on which the registration statement covering the exchange of
notes for Series A notes is declared effective, or
. any registration statement filed by us according to the terms of the
registration rights agreement is declared effective but after it
becomes effective, subject to limited exceptions, it ceases to be
effective or usable in connection with resales of transfer restricted
securities during the periods specified in the registration rights
agreement.
We will pay liquidated damages to each holder of transfer restricted
securities, with respect to the first 90-day period, or portion of the 90-day
period, immediately following the occurrence of a default in an amount equal to
.25% per year of the principal amount of the Series A notes. The amount we pay
to the holders of Series A notes will increase by an additional .25% per year
of the principal amount of the Series A notes with respect to each subsequent
90-day period, or portion of each subsequent 90-day period, until all defaults
have been cured up to a maximum amount of 1.0%. Following the cure of a
particular default, the accrual of additional interest will cease with respect
to a default. "Transfer restricted securities" means each Series A note until:
. the date on which the Series A note has been exchanged by a person
other than a broker-dealer for a Series B note in the exchange offer,
. following the exchange by a broker-dealer in the offering of a Series
B note for a Series A note, the date on which the Series B note is
sold to a purchaser who receives from the broker-dealer on or prior
to the date of the sale, a copy of this prospectus,
. the date on which the Series A note has been effectively registered
under the Securities Act and disposed of in accordance with the shelf
registration statement,
. the date on which the Series A note is distributed to the public
according to Rule 144(k) under the Securities Act,
. the Series A note shall have been transferred by the holder and we
shall have delivered a new note that does not bear a legend
restricting further transfer of the note and the subsequent
disposition of the note shall not require registration or
qualification under the Securities Act or any similar state law then
in force, or
. the Series A note ceases to be outstanding.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will exchange $1,000
principal amount of Series B notes for each $1,000 principal amount of our
outstanding Series A notes. Series B notes will be issued only in integral
multiplies of $1,000 to each tendering holder of Series A notes whose Series A
notes are accepted in this exchange offer.
The Series B notes will bear interest from and including the original
issue date of the Series A notes. Accordingly, if you receive Series B notes in
exchange for Series A notes, you will forego accrued but unpaid interest on
your exchanged Series A notes for the period from and including the issue date
of the Series A notes to the date of their exchange for Series B notes, but
will be entitled to this interest under the Series B notes.
As of October 5, 1999, $150.0 million aggregate principal amount of
Series A notes were outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of Series A notes as of that date. You
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with respect to your
exchange of Series A notes in this exchange offer. We will pay all charges and
expenses, other than specific transfer taxes that may be imposed, in connection
with this exchange offer. See "--Payment of Expenses" below.
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As a holders of Series A notes, you do not have any appraisal or
dissenters' rights under the Delaware General Corporation Law in connection
with this exchange offer.
Expiration Date; Extensions; Termination
This exchange offer will expire at 5:00 P.M., New York City time, on
November 4, 1999 subject to our extension by notice to State Street Bank and
Trust Company of California, N.A., the exchange agent. We reserve the right to
extend this exchange offer until 90 days after the effective date of the
registration statement in our discretion, in which event the expiration date
shall be the time and date that this exchange offer as so extended shall
expire. We shall notify the exchange agent of any extension by oral or written
notice and shall mail to you an announcement of any extension, each prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled expiration date.
We reserve the right to extend or terminate this exchange offer and not
accept for exchange any Series A notes if any of the events set forth below
under "--Conditions to the Exchange Offer" occur and are not waived by us, by
giving oral or written notice of the delay or termination to the exchange
agent. See "--Conditions to the Exchange Offer." The rights we reserve in this
paragraph are in addition to our rights set forth below under the caption "--
Conditions to the Exchange Offer." If we do waive the conditions set forth
under "--Conditions to the Exchange Offer" we will notify our Series A and
Series B note holders in writing of the waiver and keep the exchange offer open
for five business days from the date we notify the note holders of the waiver.
Procedures for Tendering
Your tender of Series A notes according to one of the procedures set
forth below and our acceptance will constitute an agreement between you and us
in accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
Except as set forth below, if you wish to tender your Series A notes for
exchange according to this exchange offer, you must transmit a properly
completed and duly executed letter of transmittal, including all other
documents required by the letter of transmittal, to the exchange agent at the
address set forth below under "--Exchange Agent" on or prior to the expiration
date. In addition, either:
. certificates for the Series A notes must be received by the exchange
agent along with the letter of transmittal; or
. a timely confirmation of a book-entry transfer of the Series A notes,
if this procedure is available, into the exchange agent's account at
the Depository Trust Company or DTC according to the procedure of
book-entry transfer described below, must be received by the exchange
agent prior to the expiration date; or
. you must comply with the guaranteed delivery procedures described
below. Letters of transmittal and Series A notes should not be sent
to us. We are not asking you for a proxy and you are requested not to
send us a proxy.
Signatures on a letter of transmittal must be guaranteed unless the
Series A notes tendered according to the letter of transmittal are tendered
. by a registered holder of Series A notes who has not completed the
box entitled "Special Issuance and Delivery Instructions" on the
letter of transmittal, or
. for the account of any firm that is a member of a registered national
securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having
an office in the United States, sometimes referred to as an eligible
institution.
In the event that signatures on a letter of transmittal are required to be
guaranteed, the guarantee must be by an eligible institution.
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Your method of delivery of Series A notes and other documents to the
exchange agent is at your election and risk, but if delivery is by mail, we
suggest that the mailing be made sufficiently in advance of the expiration date
to permit delivery to the exchange agent before the expiration date.
If the letter of transmittal is signed by a person other than a
registered holder of any Series A note tendered with the letter of transmittal,
the Series A note must be endorsed or accompanied by appropriate bond powers,
in either case signed exactly as the name or names of the registered holder or
holders appear on the Series A note.
If the letter of transmittal or any Series A notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing, and, unless waived by
us, you must submit proper evidence satisfactory of their authority to so act.
We will resolve all questions as to the validity, form, eligibility,
including time of receipt, and acceptance of tendered Series A notes. This
determination will be final and binding. We reserve the absolute right to
reject any or all tenders that are not in proper form or the acceptance of
which would, in the opinion of our counsel be unlawful. We also reserve the
right to waive any irregularities or conditions of tender as to particular
Series A notes. Our interpretation of the terms and conditions of this exchange
offer, including the instructions in the letter of transmittal, will be final
and binding. Unless waived, any irregularities in connection with tenders must
be cured within the time that we determine. Neither the exchange agent nor we
are under any duty to give notification of defects in tenders or shall incur
liabilities for failure to give this notification. Tenders of Series A notes
will not be deemed to have been made until these irregularities have been cured
or waived. Any Series A notes received by the exchange agent that are not
properly tendered and as to which the irregularities have not been cured or
waived will be returned by the exchange agent to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
Our acceptance for exchange of Series A notes tendered according to this
exchange offer will constitute a binding agreement between the tendering person
and us upon the terms and subject to the conditions of this exchange offer.
Book-Entry Transfer
The exchange agent will make a request to establish an account with
respect to the Series A notes at DTC for purposes of this exchange offer within
two business days after the date of effectiveness of this registration
statement of which this prospectus forms a part, and any financial institution
that is a participant in DTC's systems may make book-entry delivery of Series A
notes by causing DTC to transfer the Series A notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. However,
although delivery of Series A notes may be effected through book-entry transfer
at DTC, the letter of transmittal or facsimile of the letter of transmittal
with any required signature guarantees and any other required documents must,
in any case, be transmitted to and received by the exchange agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the
expiration date or the guaranteed delivery procedures described below must be
complied with.
Guaranteed Delivery Procedures
If you wish to tender your Series A notes and your Series A notes are not
immediately available or you cannot deliver your Series A notes, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date, you may effect a tender if:
. your tender is made through an eligible institution;
. prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery by fax, mail or hand delivery setting
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forth (1) your name and address, (2) the certificate number or
numbers of your tendered Series A notes and (3) the principal amount
of your Series A notes tendered, (4) stating that the tender is being
made through the delivery and (5) guaranteeing that, within five New
York Stock Exchange trading days after the expiration date, the
letter of transmittal or fax of the letter of transmittal together
with the certificate(s) representing the Series A notes, or a book-
entry confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent within five New York Stock Exchange trading days after
the expiration date; and
. the properly completed and executed letter of transmittal or fax of
letter of transmittal, as well as the certificate(s) representing all
your tendered Series A notes in proper form for transfer, or a book-
entry confirmation, and all other documents required by the letter of
transmittal are received by the exchange agent within five New York
Stock Exchange trading days after the expiration date.
Upon request of the exchange agent, a notice of guaranteed delivery will
be sent to you if you wish to tender your Series A notes according to the
guaranteed delivery procedures set forth above.
Conditions to the Exchange Offer
Regardless of any other provisions of this exchange offer, or any
extension of this exchange offer, we will not be required to issue Series B
notes in respect of any properly tendered Series A notes not previously
accepted, and may terminate this exchange offer by oral or written notice to
the exchange agent and the holders, or at our option, modify or otherwise amend
this exchange offer, if any material change occurs that is likely to affect
this exchange offer, including, but not limited to, the following:
. there shall be instituted or threatened any action or proceeding
before any court or governmental agency challenging this exchange
offer or otherwise directly or indirectly relating to this exchange
offer or otherwise affecting us;
. there shall occur any development in any pending action or proceeding
that, in our sole judgment, would or might have an adverse effect on
our business, prohibit, restrict or delay consummation of this
exchange offer, or impair the contemplated benefits of this exchange
offer;
. any statute, rule or regulation shall have been proposed or enacted,
or any action shall have been taken by any governmental authority
that, in our sole judgment, would or might have an adverse effect on
our business, prohibit, restrict or delay consummation of this offer,
or impair the contemplated benefits of this exchange offer; or
. there exists, in our sole judgment, any actual or threatened legal
impediment including a default or prospective default under an
agreement, indenture or other instrument or obligation to which we
are a party or by which we are bound to the consummation of the
transactions contemplated by this exchange offer.
We expressly reserve the right to terminate this exchange offer and not
accept for exchange any Series A notes upon the occurrence of any of the
foregoing conditions. In addition, we may amend this exchange offer at any time
prior to 5:00 P.M., New York City time, on the expiration date if any of the
conditions set forth above occur. Moreover, regardless of whether any of these
conditions has occurred, we may amend the exchange offer in any manner that, in
our good faith judgment, is advantageous to you.
The foregoing conditions are for our sole benefit and may be waived by
us, in whole or in part, in our sole discretion. Any determination we make
concerning an event, development or circumstance described or referred to above
will be final and binding on all parties. However, if we waive any of the
foregoing conditions, we will notify the holders of our Series A and B notes of
the waiver in writing and we will keep the exchange offer open for five
business days from the date we notify the holders of the waiver.
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<PAGE>
Acceptance of Series A Notes for Exchange; Delivery of Series B Notes
Upon the terms and subject to the conditions of this exchange offer, we
will accept all Series A notes validly tendered prior to 5:00 P.M., New York
City time, on the expiration date. We will deliver Series B notes in exchange
for Series A notes promptly following the expiration date.
For purposes of this exchange offer, we shall be deemed to have accepted
validly tendered Series A notes when, as and if we have given oral or written
notice of the exchange to the exchange agent. The exchange agent will act as
agent for the tendering holders for the purpose of receiving the Series A
notes. Under no circumstances will interest be paid by us or the exchange agent
by reason of any delay in making this payment or delivery.
If any tendered Series A notes are not accepted for exchange because of
an invalid tender, the occurrence of specific other events set forth herein or
otherwise, these unaccepted Series A notes will be returned, at our expense, to
you as promptly as practicable after the expiration or termination of this
exchange offer.
Withdrawal Rights
Your tenders of Series A notes may be withdrawn at any time prior to the
expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at the address set forth below under "--Exchange
Agent." Any notice of withdrawal must specify the name of the person having
tendered the Series A notes to be withdrawn, identify the Series A notes to be
withdrawn, including the principal amount of these Series A notes, and, where
certificates for Series A notes have been transmitted, specify the name in
which these Series A notes are registered, if different from that of the
withdrawing holder. If certificates for Series A notes have been delivered or
otherwise identified to the exchange agent, then, prior to the release of these
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an eligible institution unless the holder is an
eligible institution. If Series A notes have been tendered according to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawn Series A notes and otherwise comply with the procedures of the
facility. We will determine all questions as to the validity, form and
eligibility, including time of receipt, of the notices. Our determination shall
be final and binding on all parties.
Any Series A notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of this exchange offer. Any Series A notes
that have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder of the notes without cost to the holder, or, in
the case of Series A notes tendered by book-entry transfer into the exchange
agent's account at DTC according to the book-entry transfer procedures
described above, the Series A notes will be credited to an account maintained
with DTC for the Series A notes, as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn
Series A notes may be retendered by following one of the procedures described
under "--Procedures for Tendering" above at any time on or prior to the
expiration date.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
consequences of this exchange offer. This discussion is not binding on the
Internal Revenue Service or the courts, and we cannot assure you that the IRS
will not take, and that a court would not sustain, a position contrary to that
described below. Moreover, the following discussion is for general information
only and does not constitute comprehensive tax advice to any particular holder
of Series A notes. This summary is based on the current provisions of the
Internal Revenue Code of 1986, as amended, and applicable Treasury regulations,
judicial authority and
20
<PAGE>
administrative pronouncements. The tax consequences described below could be
modified by future changes in the relevant law. These changes could have
retroactive effect. You should consult your own tax adviser as to these and any
other federal income tax consequences of this offer as well as any tax
consequences to it under foreign, state, local or other law.
Exchanges of Series A notes for Series B notes according to this exchange
offer should be treated as a modification of the Series A notes that does not
constitute a material change in their terms, and we intend to
treat the exchanges in that manner. Under that approach, a Series B note is
treated as a continuation of the corresponding Series A note. An exchanging
holder's holding period for a Series B note would include the holder's holding
period for the Series A note. The holder would not recognize any gain or loss,
and the holder's basis in the Series B note would be the same as the holder's
basis in the Series A note. This exchange offer will result in no federal
income tax consequences to a non-exchanging holder. See "Material Federal
Income Tax Considerations of the Exchange Offer."
Exchange Agent
State Street Bank and Trust Company of California, N.A. has been
appointed as exchange agent for this exchange offer. All correspondence in
connection with this exchange offer and the letter of transmittal should be
addressed to the exchange agent as follows:
State Street Bank and Trust Company of California, N.A.
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: Facsimile Transmission Number: By Hand/Overnight Delivery:
State Street Bank & Trust Attention: Kellie Mullen State Street Bank & Trust
Company of California, N.A. Corporate Trust Department Company of California, N.A.
c/o State Street Bank and (617) 662-1452 c/o State Street Bank and
Trust Company Trust Company
2 Avenue de La Fayette 2 Avenue de La Fayette
Corporate Trust Department, Corporate Trust Department,
5th Floor 5th Floor
Boston, Massachusetts 02111 Boston, Massachusetts 02111
Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
You may request additional copies of this prospectus or the letter of
transmittal from the exchange agent or us.
Payment of Expenses
We have not retained any dealer-manager or similar agent in connection
with this exchange offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of this exchange offer. We, however, will pay
reasonable and customary fees and reasonable out-of-pocket expenses to the
exchange agent in connection with the solicitation of acceptances. We will also
pay the cash expenses to be incurred in connection with this exchange offer,
including accounting, legal, printing, and related fees and expenses.
Accounting Treatment
The Series B notes will be recorded at the same carrying value as the
Series A notes, as reflected in our accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. Our expenses of this exchange offer will be capitalized for
accounting purposes.
Resales of Notes
For resales of Series B notes, based on interpretive letters issued by
the staff of the commission to third parties, we believe that a holder of
Series B notes who exchanges Series A notes for Series B notes in the ordinary
course of business and who is not participating, does not intend to
participate, and has no arrangement
21
<PAGE>
or understanding with any person to participate, in a distribution of the
Series B notes, will be allowed to resell the Series B notes to the public
without further registration under the Securities Act and without delivering to
the purchasers of the Series B notes a prospectus that satisfies the
requirements of the Securities Act, except for:
. a broker-dealer who purchases Series B notes directly from us to
resell according to Rule 144A or any other available exemption under
the Securities Act, or
. a person who is our affiliate within the meaning of Rule 405 under
the Securities Act.
However, a broker-dealer who holds Series A notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an underwriter within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act.
If any other holder is deemed to be an underwriter within the meaning of the
Securities Act or acquires Series B notes in this exchange offer for the purpose
of distributing or participating in a distribution of the Series B notes, such
holder must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. We have agreed that for a
period of 180 days from the expiration date, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with resale.
We have not requested or obtained an interpretive letter from the commission
staff with respect to this exchange offer. Neither the holders of Series A notes
nor we are entitled to rely on interpretive advice provided by the staff to
other persons. The advice was based on the facts and conditions represented in
these letters. However, this exchange offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in these
letters. If any holder of Series A notes has any arrangement or understanding
with respect to the distribution of the Series B notes to be acquired in this
exchange offer, the holder:
. could not rely on the applicable interpretations of the staff of the
commission; and
. must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
In addition, each broker-dealer that receives Series B notes for its own
accounts in exchange for the Series A notes, where the Series A notes were
acquired by the broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the Series B notes. See "Plan of Distribution."
By delivering the letter of transmittal, you will represent and warrant to us
that you are acquiring the Series B notes in the ordinary course of your
business and that your are not engaged in, and do not intend to engage in, a
distribution of the Series B notes. If you are using this exchange offer to
participate in a distribution of the Series B notes, you must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. If you do not exchange your
Series A notes according to this exchange offer, you will continue to hold
Series A notes that are subject to restrictions on transfer.
It is expected that the Series B notes will be freely transferable by their
holders, subject to the limitations described in the immediately preceding
paragraph. Sales of Series B notes acquired in this exchange offer by holders
who are our affiliates within the meaning of the Securities Act will be subject
to specific limitations on resale under Rule 144 of the Securities Act. These
persons will only be entitled to sell Series B notes in compliance with the
volume limitations set forth in Rule 144, and sales of Series B notes by
affiliates will be subject to Rule 144 requirements as to the manner of sale,
notice and the availability of our current public information. The foregoing is
a summary only of Rule 144 as it may apply to our affiliates. If you are an
affiliate, you must consult your own legal counsel for advice as to any
restrictions that might apply to the resale of your Series B notes.
The Series B notes otherwise will be substantially identical in all material
respects, including interest rate, maturity, security and restrictive covenants,
to the Series A notes for which they may be exchanged according to this exchange
offer.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999.
You should read this table in conjunction with the financial statements,
including the notes accompanying them, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of
June 30,
1999
----------
(dollars
in
thousands)
<S> <C>
Long-term debt
Credit facility.................................................... $ 70,000
8 1/2% Series A senior notes due 2009.............................. 150,000
--------
Total long-term debt............................................. 220,000
--------
Stockholders' equity:
Class A preferred stock, $10,000 par value per share;
Authorized 1,000 shares; none issued.............................. --
Class B preferred stock, $10,000 par value per share;
Authorized 2,000 shares; none issued.............................. --
Class C preferred stock, $10,000 par value per share;
Authorized 3,000 shares; issued and outstanding 3,000 shares...... 30,000
Common stock, no par value. Authorized 2,000 shares; issued
and outstanding 1,000 shares...................................... 10,000
Retained earnings.................................................. 165,488
--------
Total stockholders' equity....................................... 205,488
--------
Total capitalization........................................... $425,488
========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below as of and
for the fiscal years ended December 31, 1994, 1995, 1996, 1997 and 1998 has
been derived from our audited consolidated financial statements. Except for the
fiscal years ended December 31, 1994 and 1995, these statements are contained
elsewhere in this prospectus. The financial data as of and for the six months
ended June 30, 1998 and 1999 are derived from our unaudited consolidated
financial statements. In Management's opinion, these statements reflect all
adjustments, consisting principally of normal, recurring amounts, necessary for
the fair statement of financial position and results of operations for the
periods presented and are not necessarily indicative of the results of any
other interim period or for the full fiscal year. The selected consolidated
financial data for the six months ended June 30, 1999 are derived from our
unaudited consolidated financial statements that are contained elsewhere in
this prospectus.The following selected consolidated financial information is
qualified by reference to, and should be read in conjunction with the
historical consolidated financial statements, including notes accompanying them
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" found elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $637,529 $707,641 $694,444 $722,458 $673,439 $356,734 $331,258
Cost of sales, net of
LIFO reserve........... 543,293 623,874 589,531 634,804 587,859 313,363 270,213
Gross profit............ 94,236 83,767 104,913 87,654 85,580 43,371 61,045
Selling, general and
administrative
expenses............... 27,454 25,593 26,215 27,088 28,626 14,592 15,083
Income from operations.. 66,782 58,174 78,698 60,566 56,954 28,779 45,962
Interest expense, net... (8,566) (16,332) (10,145) (13,977) (16,954) (8,345) 8,086
Income before income
taxes.................. 56,648 39,059 69,866 47,671 42,570 22,029 38,677
Net income.............. 33,361 22,954 40,666 30,771 29,095 12,986 22,819
EBITDA, as adjusted
Data(1):
Income before income
taxes.................. $ 56,648 $ 38,057 $ 69,866 $ 48,671 $ 42,570 $ 22,029 $ 38,677
Interest expense........ 8,566 16,333 10,145 13,977 16,954 8,345 8,086
Excluding gain/loss of
fixed assets........... 2,609 2,916 2,518 1,054 308 282 (11)
Depreciation and
amortization........... 16,867 18,623 18,844 24,374 26,659 14,101 12,285
-------- -------- -------- -------- -------- -------- --------
EBITDA, as adjusted..... $ 84,690 $ 76,930 $101,373 $ 87,076 $ 86,491 $ 44,757 $ 59,037
-------- -------- -------- -------- -------- -------- --------
EBITDA, as adjusted
margin................. 13.3% 10.9% 14.6% 12.1% 12.8% 12.5% 17.8%
Other Data:
Operating margin........ 10.5% 8.2% 11.3% 8.4% 8.5% 8.1% 13.9%
Cash flows provided by
operating activities... 47,665 34,260 66,503 57,211 63,456 $ 5,986 $ 49,982
Cash flows used in
investing activities... (52,032) (21,792) (82,300) (57,954) (49,335) (26,558) (18,807)
Cash flows (used in)
provided by financing
activities............. 5,890 (14,640) 15,623 1,067 (12,502) 14,297 (32,330)
Capital expenditures.... $ 52,066 $ 21,890 $ 50,421 $ 58,296 $ 49,354 $ 26,583 $ 18,827
Total tons billed,
excluding scrap (in
thousands)............. 1,438 1,497 1,563 1,625 1,614 823 886
Number of employees at
end of period.......... 932 925 923 945 976 970 964
Man hours per ton
produced............... 1.44 1.42 1.30 1.30 1.29 1.31 1.16
Selected Ratios:
Ratio of earnings to
fixed charges(2)....... 6.2x 3.3x 6.4x 3.8x 3.1x 3.3x 5.4x
Ratio of EBITDA, as
adjusted to interest
expense, net........... 9.9x 4.7x 10.0x 6.2x 5.1x 5.4x 7.3x
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of June 30,
-------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 12,365 $ 10,193 $ 10,019 $ 10,343 $ 11,962 $ 4,069 $ 10,807
Property, plant and
equipment, net......... 159,817 163,073 194,615 228,795 251,163 240,971 257,696
Total assets............ 391,758 371,912 474,563 486,138 534,633 526,025 533,741
Total debt.............. 192,860 194,050 213,500 241,900 243,700 264,582 220,000
Total stockholders'
equity................. 129,105 136,229 173,068 176,506 191,299 181,107 205,488
</TABLE>
- --------
(1) EBITDA, as adjusted represents income before income taxes, gain/loss on
sale of fixed assets, plus net interest expense, depreciation and
amortization. EBITDA, as adjusted is not intended to represent cash flows
from operations cash flows from investing or cash flows from financing
activities as defined by generally accepted accounting principles and
should not be considered as an alternative to cash flow or a measure of
liquidity or as an alternative to net earnings as indicative of operating
performance. EBITDA, as adjusted is included because we believe that
investors find it a useful tool for measuring our ability to service our
debt. EBITDA, as adjusted is not necessarily comparable to similarly titled
measures reported by other companies.
(2) For the purpose of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges and
amortization of capitalized interest, minus capitalized interest. Fixed
charges consist of interest expensed and capitalized, an estimate of the
interest within rental expense.
25
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS AND CAPITAL STOCK
The material terms of our indebtedness and our capital stock are
summarized below.
Credit Facility
As of March 10, 1999, we entered into a new bank facility with a
syndicate of financial institutions led by BankBoston, N.A. as loan and
collateral agent, Bank of America National Trust and Savings Association, as
letter of credit agent and documentation agent, and BancBoston Robertson
Stephens Inc. and NationsBanc Montgomery Securities LLC, as arrangers. The
following description summarizes the principal terms of our new bank facility
and is qualified by reference to the terms of our new bank facility.
Our new bank facility provides for a revolving credit facility with an
aggregate principal amount of up to $130.0 million including a $25.0 million
sublimit for letters of credit, subject in all respects to a borrowing base
coverage requirement. We drew a substantial portion of the advances available
under our new bank facility on the closing date to repay an existing credit
facility provided by a syndicate of financial institutions led by The Dai-Ichi
Kangyo Bank, Limited, Los Angeles Agency. Our new bank facility has a term of
five years. Subject to the satisfaction of customary conditions and a borrowing
base, advances under our new bank facility may be made at any time prior to the
new bank facility termination date and may be used for working capital, capital
expenditures and other lawful corporate purposes.
At our election, amounts advanced under the new bank facility bear
interest at the base rate or the eurodollar rate, plus the applicable margin.
The base rate is equal to the highest of the rate of interest announced
publicly by BankBoston from time to time as BankBoston's prime rate and the
federal funds rate plus .500%, in each case as in effect from time to time. The
eurodollar rate is the applicable reserve-adjusted rate for eurodollar deposits
in the interbank eurodollar market. Until the first adjustment date, as defined
in the new bank facility, after the earlier of the quarter in which we achieve
a fixed charge coverage ratio in excess of 1:10 to 1:00 and the last day of the
fiscal quarter following the closing of this offering, the applicable margin
with respect to the eurodollar rate is 0.875%. After that time, the applicable
margin in effect from time to time will range from 0.700% to 1.00%, based on
our leverage ratio, as defined in the new bank facility. Interest payments on
advances that bear interest based upon the base rate are due monthly in arrears
and on the new bank facility termination date, and interest payments on
advances that bear interest based upon the Eurodollar rate are due on the last
day of each relevant interest period and on the new bank facility termination
date.
We pay a commitment fee calculated at a rate equal to the applicable
margin based upon the average daily undrawn portion of the commitments in
respect of our new bank facility, commencing on March 10, 1999, payable
quarterly in arrears. Until the first adjustment date described above, the
applicable margin with respect to the commitment fee will be 0.200%. After that
time, the applicable margin in effect from time to time will range from 0.150%
to 0.200%, based upon the leverage ratio, provided, that the applicable margin
with respect to the commitment fee will increase to .500% if, for more than
three consecutive months, less than: (1) $50.0 million on average is utilized
under the new bank facility, if the average total commitment during this period
is more than $100.0 million, or (2) $40.0 million on average is utilized under
the new bank facility, if the average total commitment during this period is
$100.0 million or less.
Our new bank facility is secured by a first priority security interest in
our cash, accounts receivable, inventory and other assets.
Our new bank facility contains customary representations and warranties.
Additionally, our new bank facility contains extensive affirmative and negative
covenants, including among others covenants relating to net worth, interest
charge coverage and fixed charge coverage and limits on, among other things,
our ability to:
. incur indebtedness;
. make capital expenditures;
26
<PAGE>
. create liens;
. engage in mergers and consolidations;
. dispose of assets;
. enter into sale and leaseback transactions;
. make investments and acquisitions;
. engage in transactions with affiliates; or
. make dividends or other restricted payments in excess of 50% of our
consolidated net income for the most recent two fiscal quarters and
preferred dividends not to exceed $3.0 million per year.
Our new bank facility contains customary events of default, including upon a
change in control.
The actual amount of our senior debt outstanding as of September 10, 1999
was $50.0 million under our new bank facility and $150.0 million under the
indenture. As of August 31, 1999, the maximum amount of additional indebtedness
we could incur under the most restrictive applicable covenants of our new bank
facility and the indenture was $50.2 million, consisting of approximately $45.2
million in excess availability under the credit facility and an additional $5.0
million for other indebtedness.
Preferred Stock
We are authorized to issue up to:
. 1,000 shares of our Class A preferred stock, $10,000 par value per
share,
. 2,000 shares of our Class B preferred stock, $10,000 par value per
share, and
. 3,000 shares of our Class C preferred stock, $10,000 par value per
share.
As of June 30, 1999, no shares of Class A preferred stock or Class B
preferred stock were issued or outstanding and 3,000 shares of the Class C
preferred stock have been issued and are outstanding. The issuance of shares of
preferred stock under some circumstances could have the affect of delaying or
preventing a change of control of our company or any corporate action. None of
the Class A, Class B or Class C preferred stock has priority over the other
with respect to the portion of dividends in which the classes have priority to
the common stock. Under the Shareholders' Agreement, the parties agreed that
the board of directors may redeem the Class A, Class B or Class C preferred
stock into any other class of stock without further stockholder approval. None
of the classes of preferred stock has any voting rights.
Class A preferred stock
Our Class A preferred stock, of which no shares are outstanding, has
priority over the common stock in the distribution of dividends and is entitled
to a dividend equivalent to 5% of the par value of the Class A preferred stock
per year, on a cumulative basis, and is then entitled to participate in the
distribution of dividends at the same rate and upon the same conditions as the
common stock.
Class B preferred stock
Our Class B preferred stock, of which no shares are outstanding, has
priority over the common stock in the distribution of dividends and is entitled
to a fixed dividend equivalent to 10% of the par value of the Class B preferred
stock per year, on a cumulative basis. The Class B preferred stock is not
entitled to participate further in the distribution of dividends beyond the
above-described annual rate.
27
<PAGE>
Class C preferred stock
Our Class C preferred stock has priority over the common stock in the
distribution of dividends and is entitled to a dividend equivalent of 10% of
the par value of the Class C preferred stock per year, on a cumulative basis,
and shall then be entitled to participate in the distribution of dividends at
the same rate and upon the same conditions as the common stock.
Common Stock
We are authorized to issue up to 2,000 shares of our common stock, no par
value, 1,000 shares of which were issued and outstanding as of June 30, 1999.
Each holder of common stock is entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the
common stock have no cumulative voting, conversion or redemption rights, but
are entitled to preemptive rights to subscribe for additional shares of common
stock in any additional issuance of common stock or any security convertible
into common stock. Subject to any preferences that may be granted to holders of
our preferred stock, each holder of common stock is entitled to receive ratably
dividends as may be declared by the board of directors out of funds legally
available for this purpose, and, in the event of our liquidation, dissolution
or winding up, is entitled to share ratably in all our assets remaining after
payment of liabilities.
28
<PAGE>
DESCRIPTION OF THE NOTES
We issued the Series A notes under an indenture between State Street Bank
and Trust Company of California, N.A., as trustee and us in a private
transaction that was not subject to the registration requirements of the
Securities Act. You can find the definitions of terms used in this description
under the heading "Definitions." The terms of the indenture apply to the Series
A notes and the Series B notes to be issued in exchange for the Series A notes
according to this exchange offer. Upon the issuance of the Series B notes, or
the effectiveness of a shelf registration statement, the indenture will be
subject to the Trust Indenture Act.
The following is a summary of the material provisions of the Series B
notes and the indenture and does not purport to be complete. We urge you to
read the indenture because it defines your rights as a holder of the Series B
notes. Copies of the proposed form of indenture and registration rights
agreement are available to prospective purchasers of the Series B notes upon
request to us.
General
The Series B notes are general unsecured senior obligations limited to
$150,000,000 aggregate principal amount. The Series B notes will be issued only
in fully registered form without coupons, in denominations of $1,000 and
integral multiples of $1,000.
Principal of, premium, if any, and interest on the Series B notes are
payable, and the Series B notes are exchangeable and transferable, at our
office or agency in The City of New York maintained for these purposes, this
office initially will be the corporate trust office of the trustee; except,
that payment of interest may be made at our option by check mailed to the
person entitled to this interest as shown on the security register.
Maturity, Interest and Principal
The Series B notes mature on April 1, 2009. Interest on the Series B
notes will accrue at the rate of 8 1/2% per year and will be payable semi-
annually on each April 1 and October 1, commencing October 1, 1999, to the
holders of record of Series B notes at the close of business on the March 15
and September 15 immediately preceding this interest payment date. Interest on
the Series B notes accrues from the most recent date to which interest has been
paid or, if no interest has been paid, from the original issue date of the
Series A notes. Interest is computed on the basis of a 360-day year of twelve
30-day months. The interest rate on the Series B notes may increase if we are
not in compliance with our obligations under the registration rights agreement.
See " -- Registration Rights; Liquidated Damages."
Optional Redemption
Optional Redemption. We may redeem the Series B notes at our option, in
whole or in part, at any time on or after April 1, 2004, at the redemption
prices, expressed as percentages of the principal amount, set forth below, plus
accrued and unpaid interest, if any, to the date of redemption, if redeemed
during the 12-month period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2004........................................................ 104.250%
2005........................................................ 102.833%
2006........................................................ 101.417%
2007 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon public equity offering. On or before April 1,
2002, we may, at our option, use the net proceeds of an underwritten public
equity offering of ours to redeem up to 35% of the originally issued aggregate
principal amount of the Series B notes, at a redemption price in cash equal to
108.500% of the principal amount, plus accrued and unpaid interest, if any, to
the redemption date; provided that at least 65% of the aggregate principal
amount of Series B notes is outstanding following this redemption. Notice of
this redemption must be given not later than 60 days after the consummation of
the public equity offering.
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Selection and Notice. In the event that less than all of the Series B
notes are to be redeemed at any time, the trustee shall select the Series B
notes for redemption in compliance with the requirements of the principal
national securities exchange, if any, on which the Series B notes are listed
or, if the Series B notes are not listed on a national securities exchange, on
a pro rata basis, by lot or by a method the trustee will deem fair and
appropriate. No Series B notes of a principal amount of $1,000 or less shall be
redeemed in part and any redemption made with the net proceeds of a public
equity offering shall be made on a pro rata basis or on as nearly a pro rata
basis as practicable, subject to the procedures of DTC or any other depositary.
Notice of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of Series B
notes to be redeemed at its registered address. If any Series B note is to be
redeemed in part only, the notice of redemption that relates to the Series B
note will state the portion of the principal amount of the Series B note to be
redeemed. A new Series B note in a principal amount equal to the unredeemed
portion of the Series B note will be issued in the name of the holder of the
Series B note upon cancellation of the original Series B note. On and after the
redemption date, interest will cease to accrue on Series B notes or portions of
Series B notes called for redemption so long as we have deposited with the
paying agent for the Series B notes funds in satisfaction of the applicable
redemption price according to the indenture.
Ranking
Our indebtedness evidenced by the Series B notes will rank senior in
right of payment to all of our subordinated indebtedness and equal in right of
payment with all of our other existing and future unsubordinated indebtedness.
As of June 30, 1999, we had $150.0 million in senior unsecured notes
outstanding and $70.0 million outstanding under a $130.0 million revolving
credit facility secured by a lien on our cash, receivables and inventory.
Change of Control
The indenture provides that, following the occurrence of a change of
control, the date of the occurrence being the change of control date, we will
be obligated, within 30 days after the change of control date, to make an offer
to purchase, a change of control offer, all of the then outstanding Series B
notes at a purchase price, the change of control purchase price, in cash equal
to 101% of the principal amount of the then outstanding Series B notes, plus
accrued and unpaid interest thereon, if any, to the purchase date. We will be
required to purchase all Series B notes properly tendered in the change of
control offer and not withdrawn.
In order to effect a change of control offer, we will, not later than the
30th day after the change of control date, be obligated to mail, or cause the
trustee to mail, to each holder of Series B notes notice of the change of
control offer. This notice will govern the terms of the change of control offer
and will state, among other things, the procedures that holders must follow to
accept the change of control offer. The change of control offer will be
required to be kept open for a period of at least 20 business days and shall be
consummated promptly after 20 business days, but in any event within 45
business days after the mailing of the notice.
If a change of control offer is made, there can be no assurance that we
will have available funds sufficient to pay the purchase price for all of the
Series B notes that might be tendered by holders of Series B notes seeking to
accept the change of control offer. If we fail to repurchase all of the Series
B notes tendered for purchase, this failure will constitute an Event of Default
under the indenture. See "--Events of Default."
We shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, and any other applicable securities laws or
regulations and any applicable requirements of any securities exchange on which
the Series B notes are listed, in connection with the repurchase of Series B
notes according to a change of control offer, and any violation of the
provisions of the indenture relating to this change of control offer occurring
as a result of this compliance shall not be deemed a default.
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Specific Covenants
The indenture, unless otherwise noted, provides that the covenants set forth
below will be applicable to us and our restricted subsidiaries; except, that if
no Default has occurred and is continuing, after the rating assigned to the
Series B notes by both of the rating agencies are Investment Grade and remain as
such, we and our restricted subsidiaries will not be subject to the provisions
of the indenture described under "Limitation on Indebtedness," "Limitation on
Restricted Payments," "Disposition of Proceeds of Asset Sales," "Limitation on
Issuances and Sale of Capital Stock of Restricted Subsidiaries," "Limitation on
Transactions with Affiliates," "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries," "Limitation on Unrestricted
Subsidiaries" and clause (3) of the first paragraph of "Consolidation, Mergers
and Sales of Assets." Once we and our restricted subsidiaries are no longer
subject to the above-mentioned provisions, all of our subsidiaries other than
California Steel Industries Foreign Sales Corporation will be restricted
subsidiaries.
Limitation on Indebtedness. The indenture provides that we will not, and
will not permit any of our restricted subsidiaries to, directly or indirectly,
create, incur, assume, issue, guarantee or in any manner become liable for or
with respect to, contingently or otherwise, in each case, to "incur", the
payment of any Indebtedness, including any Acquired Indebtedness, except, that:
. we may incur Indebtedness, including Acquired Indebtedness, and
. a restricted subsidiary may incur Acquired Indebtedness,
if, in either case, immediately after giving pro forma effect to these
instances, our Consolidated Fixed Charge Coverage Ratio is at least equal to
2.5:1.0.
Regardless of the foregoing, we and, to the extent set forth below, our
restricted subsidiaries may incur each and all of the following, Permitted
Indebtedness:
(1) Indebtedness under our credit facility in an aggregate principal
amount at any one time outstanding not to exceed $130.0 million;
(2) Indebtedness according to the Series B notes and the indenture;
(3) Indebtedness outstanding on the original issue date;
(4) Indebtedness of a wholly-owned restricted subsidiary owing to and
held by us or another wholly-owned restricted subsidiary that is
unsecured; except that:
. any disposition, pledge or transfer of any this indebtedness
to a person, other than to us or a wholly-owned restricted
subsidiary, shall be deemed to be an incurrence of this
Indebtedness by the obligor not permitted by this clause (4);
and
. any transaction according to which any wholly-owned restricted
subsidiary, which has Indebtedness owing to us or any other
wholly-owned restricted subsidiary, ceases to be a wholly-
owned restricted subsidiary shall be deemed to be the
incurrence of Indebtedness by that wholly-owned restricted
subsidiary that is not permitted by this clause (4);
(5) Indebtedness under Interest Rate Agreements not entered into for
speculative purposes covering Indebtedness; except, that the Interest
Rate Agreements do not increase our Indebtedness or other obligations
outstanding other than as a result of fluctuations in interest rates or
by reason fees, indemnities and compensation payable under the Interest
Rate Agreement;
(6) indebtedness under Currency Agreements relating to:
. Indebtedness and/or
. obligations to purchase or sell assets or properties, in each
case, incurred in our ordinary course of business; except,
that the Currency Agreements do not increase our
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Indebtedness or other obligations outstanding other than as a
result of fluctuations in foreign currency exchange rates or
by reason of fees, indemnities and compensation payable under
the Currency Agreement;
(7) Indebtedness under Commodity Price Protection Agreements relating
to Indebtedness and/or obligations to purchase or sell assets or
properties, in each case, incurred in our ordinary course of business;
except, that the Commodity Price Protection Agreements do not increase
our Indebtedness or other obligations outstanding other than as a result
of fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable under the Commodity Price
Protection Agreements;
(8) Indebtedness represented by Capitalized Lease Obligations or
Purchase Money Obligations or other Indebtedness incurred or assumed in
connection with the acquisition or development of real or personal
property in each case incurred for the purpose of financing or
refinancing all or any part of the purchase price or cost of
construction or improvement of property used in our business, whether
through the direct purchase of assets or the purchase of capital stock
of any person owning these assets and whether this Indebtedness is owed
to the seller or person carrying out this construction or improvement
or to any third party, in an aggregate principal amount according to
this clause (8) not to exceed $25.0 million outstanding at any one
time; except, that the principal amount of any indebtedness permitted
under this clause (8) did not in each case at the time of incurrence
exceed the Fair Market Value of the acquired or constructed asset or
improvement so financed;
(9) reimbursement obligations under letters of credit in the ordinary
course of business consistent with past practice, including without
limitation letters of credit in respect of workers compensation
obligations and bankers acceptances and performance bonds, surety bonds
and performance guarantees;
(10) Capital Expenditure Indebtedness not to exceed $50.0 million
outstanding at any one time in the aggregate; provided that the
principal amount of this Indebtedness incurred according to this
clause (x) does not exceed the Fair Market Value, on the date of this
incurrence, of the property acquired, constructed or leased;
(11) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course
of business; except, that this Indebtedness is extinguished within
three business days of incurrence;
(12) Indebtedness consisting of indemnities or obligations in respect
of purchase price adjustments in connection with the disposition of
assets;
(13) any renewals, extensions, substitutions, refundings,
refinancings or replacements, collectively, a "refinancing", of any
Indebtedness incurred under the first paragraph of this covenant or
clause (2) and (3) above, including any successive refinancings so long
as the aggregate principal amount of Indebtedness represented by this
refinancing is not increased by this refinancing, plus the amount of
any stated or reasonably determined prepayment premium paid in
connection with this refinancing, plus the amount of our expenses
incurred in connection with this refinancing and
. in the case of any refinancing of Indebtedness that is Subordinated
Indebtedness, this new Indebtedness is subordinated to the Series B
notes at least to the same extent as the Indebtedness being
refinanced, and
. this new Indebtedness has an Average Life to Stated Maturity equal to
or greater than the Average Life to Stated Maturity of the
Subordinated Indebtedness being repurchased, redeemed, defeased,
retired, acquired or paid; and
(14) Indebtedness in addition to that described in the above clauses
not to exceed $25.0 million outstanding at any one time in the
aggregate.
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Limitation on Restricted Payments. (a) The indenture provides that we will
not, and will not permit any restricted subsidiary to, directly or indirectly:
. declare or pay any dividend or make any other distribution or payment
on or in respect of our capital stock or any payment to the direct or
indirect holders, in their capacities as holders of capital stock,
other than dividends or distributions payable solely in shares of
Qualified Capital Stock, or in options, warrants or other rights to
acquire shares of Qualified Capital Stock; or
. purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, our capital stock or any capital stock of any
restricted subsidiary, other than any capital stock owned by us or
any wholly-owned restricted subsidiary; or
. make any principal payment on, or purchase, repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any
scheduled maturity, scheduled repayment, scheduled sinking fund
payment or other Stated Maturity, any Subordinated Indebtedness,
other than any Subordinated Indebtedness owed to and held by us or
any wholly-owned restricted subsidiary; or
. make any Investment, other than any Permitted Investment, in any
person, other than in us, any wholly-owned restricted subsidiary or a
person that as a result of this investment becomes a wholly-owned
restricted subsidiary, or is merged with or into or consolidated with
us or a wholly-owned restricted subsidiary, provided we or a wholly-
owned restricted subsidiary is the survivor, as a result of or in
connection with this Investment,
any of the foregoing actions described in the clauses above, individually
called, "a Restricted Payment." The amount of this Restricted Payment, if other
than cash, shall be the Fair Market Value of the asset(s) proposed to be
transferred by us or our restricted subsidiary, in each case, as determined by
our board of directors, whose determination shall be conclusive and evidenced
by a board resolution. A restricted subsidiary may make a Restricted Payment
if:
. immediately before and immediately after giving effect to this
Restricted Payment on a pro forma basis, no default shall have
occurred and be continuing;
. immediately before and immediately after giving effect to this
Restricted Payment on a pro forma basis, we could incur $1.00 of
additional Indebtedness, other than Permitted Indebtedness under the
provisions described under "--Limitation on Indebtedness;" and
. immediately after giving effect to the proposed Restricted Payment,
the aggregate amount of all Restricted Payments, including any
Designation Amounts, declared or made after the original issue date,
does not exceed an amount equal to the sum of without duplication:
(A) 50% of our cumulative Consolidated Net Income during the period,
treated as one accounting period, beginning on the first day of the
fiscal quarter beginning prior to the original issue date and ending on
the last day of our last fiscal quarter ending prior to the date of the
Restricted Payment, or, if the aggregate cumulative consolidated net
income shall be a deficit, minus 100% of the deficit; plus
(B) the aggregate net cash proceeds received by us after the original
issue date either (x) as capital contributions to us or (y) from the
issuance or sale, other than to any of the restricted subsidiaries, of
our Qualified Capital Stock or from the exercise of any options,
warrants or rights to purchase our Qualified Capital Stock, except, in
each case, to the extent these proceeds are used to purchase, redeem or
otherwise retire capital stock or subordinated indebtedness as set
forth in clause (2) or (3) of paragraph (b) below and excluding the net
cash proceeds from any issuance and sale of capital stock or from any
exercises, in each case, financed, directly or indirectly, using funds
borrowed from us or any restricted subsidiary of ours until and to the
extent the borrowing is repaid; plus
(C) the aggregate net cash proceeds received after the original issue
date by us from the conversion or exchange, if any, of Indebtedness of
us or our subsidiaries into or for our Qualified Capital Stock, plus,
whether or not such Indebtedness was issued prior to or after the
original issue
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date, the aggregate of Net Cash Proceeds from their original issuance,
less any principal and sinking fund payments made on the indebtedness;
plus
(D) in the case of the disposition or repayment, in whole or in part,
of any Investment constituting a Restricted Payment made after the
original issue date, an amount, to the extent not included in
Consolidated Net Income, equal to the lesser of the return of capital
with respect to this Investment and the initial amount of this
Investment that was treated as a Restricted Payment, in either case,
less the cost of disposition of this Investment and net of taxes; plus
(E) an amount in cash equal to the net cash proceeds of our sale of
all a part of our interest in Companhia Siderurgica de Tubarao to an
unaffiliated third party; except that this amount would not exceed the
lesser of (x) the book value of the portion of our interest in
Companhia Siderurgica de Tubarao being sold on our balance sheet as of
the sale date and (y) the Fair Market Value of such portion of our
interest in Companhia Siderurgica de Tubarao; plus
(F) so long as the Designation was treated as a Restricted Payment
made after the original issue date, with respect to any unrestricted
subsidiary that has been redesignated as a restricted subsidiary after
the original issue date in accordance with "--Limitations on
unrestricted subsidiaries" below, the Fair Market Value of the capital
stock of this subsidiary we own and the restricted subsidiaries,
provided that this amount shall not in any case exceed the Designation
Amount with respect to this restricted subsidiary upon its Designation;
plus
(G) $20.0 million; and minus
(H) the greater of $0 and the Designation Amount, measured as of the
date of Designation, with respect to any of our subsidiary's that has
been Designated as an unrestricted subsidiary after the original issue
date in accordance with "--Limitations on Unrestricted Subsidiaries."
(b) Regardless of the foregoing, and in the case of clauses (2) through
(5) below, so long as no Default or Event of Default shall have occurred and be
continuing or would arise from the Default or Event of Default, the foregoing
provisions shall not prohibit the following actions, each of clauses (1)
through (5) being referred to as a "Permitted Payment":
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration this payment
was permitted by the provisions of the indenture;
(2) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of our capital stock in exchange for, including
any exchange according to the exercise of a conversion right or
privilege in connection with which cash is paid in lieu of the issuance
of fractional shares or scrip, or out of the net cash proceeds of a
substantially concurrent issue and sale for cash to any person, other
than to a restricted subsidiary, of, shares of our Qualified Capital
Stock; provided that the net cash proceeds from the issuance of the
shares of Qualified Capital Stock are excluded from clause (B) of the
first paragraph (a) of this covenant;
(3) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale for cash to any person, other than to us
or any restricted subsidiary, of, any of our Qualified Capital Stock,
provided that the net cash proceeds from the issuance of the shares of
Qualified Capital Stock are excluded from clause (B) of the first
paragraph (a) of this covenant;
(4) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any of our
Subordinated Indebtedness, other than Redeemable Capital Stock, in
exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale for cash to any person, other than to a
restricted subsidiary, of, our new Subordinated Indebtedness, provided
that any new Subordinated Indebtedness:
. shall be in a principal amount that does not exceed the
principal amount so repurchased, redeemed, defeased, retired,
acquired or paid, or, if the subordinated indebtedness provides
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for an amount less than the principal amount of the Subordinated
Indebtedness to be due and payable upon a declaration of
acceleration of the Subordinated Indebtedness, then the lesser
amount as of the date of determination, plus the amount of any
stated or reasonably determined prepayment premium paid in
connection with such repurchase, redemption, defeasance,
retirement, acquisition or payment, plus the amount of our
expenses and the restricted subsidiaries incurred in connection
with this repurchase, redemption, defeasance, retirement,
acquisition or payment;
. has an Average Life to Stated Maturity equal to or greater than
the Average Life to Stated Maturity of the Subordinated
Indebtedness being repurchased, redeemed, defeased, retired,
acquired or paid; and
. is expressly subordinated in right of payment to the Series B
notes at least to the same extent as the Subordinated
Indebtedness to be repurchased, redeemed, defeased, retired,
acquired or paid; and
. the payment of dividends on our Class C preferred stock as in effect
on the original issue date not to exceed $3.0 million in any given
year.
In computing the amount of Restricted Payments previously made for
purposes of the third bullet point of the first paragraph (a) of this
covenant, Restricted Payments under the immediately preceding clause (1) shall
be included, but only to the extent the related dividend declaration is not so
included. If we make a Restricted Payment that, at the time of the making of
this Restricted Payment would in our good faith determination be permitted
under the provisions of the indenture, this restricted payment shall be deemed
to have been made in compliance with the indenture regardless of any
subsequent adjustments made in good faith to our financial statements
affecting our Consolidated Net Income for any period.
Limitation on Liens. The indenture provides that we will not, and will
not cause or permit any restricted subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien of any kind upon any of our
property or assets, whether now owned or acquired after the original issue
date, or any proceeds from our property or assets, or assign or convey any
right to receive income from our property or assets to secure either
. Subordinated Indebtedness or
. any of our Indebtedness, that is not Subordinated Indebtedness,
unless the Series B notes are equally and ratably secured with the
Liens securing this other Indebtedness, except in the case of
Permitted Liens.
Disposition of Proceeds of Asset Sales. The indenture provides that we
will not, and will not cause or permit any restricted subsidiary to, directly
or indirectly, consummate an Asset Sale unless (1) we receive at least 75% of
the consideration from this Asset Sale in cash, Cash Equivalents or Liquid
Assets, or any combination of Cash Equivalents or Liquid Assets, and (2) we or
this restricted subsidiary receives consideration at the time of this Asset
Sale at least equal to the Fair Market Value of the shares or assets subject
to this Asset Sale.
We or our applicable restricted subsidiary, shall, at our option,
(1) apply the Net Cash Proceeds from this Asset Sale within 360 days
of the receipt of the Net Cash Proceeds to repay Indebtedness under our
credit facility and elect to permanently reduce the commitments under
our credit facility by the amount of Indebtedness so repaid,
(2) apply the Net Cash Proceeds from this Asset Sale within 360 days
of our receipt to repay an amount of our other Indebtedness, other than
Subordinated Indebtedness, in an amount not exceeding the Other Senior
Debt Pro Rata Share and, if applicable, elect to permanently reduce the
amount of the commitments under the Other Senior Debt Pro Rata Share by
the amount of the Indebtedness so repaid,
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(3) apply the Net Cash Proceeds from this Asset Sale within 360 days
of our receipt of the Net Cash Proceeds to repay any restricted
subsidiary Indebtedness and, if applicable, elect to permanently reduce
the commitments under any restricted subsidiary Indebtedness by the
amount of the Indebtedness so repaid, or
(4) apply the Net Cash Proceeds within 360 days thereof, to an
investment in properties and assets that will be used in the same line
of business by us or any restricted subsidiary or in businesses
reasonably related to our business, or in capital stock and other
securities of any person that will become a restricted subsidiary as a
result of this investment to the extent this person owns properties and
assets that will be used in our business or that of our subsidiaries
existing on the original issue date or in businesses reasonably related
to our business, referred to as "Replacement Assets".
Any Net Cash Proceeds from any Asset Sale that are neither used to repay,
and permanently reduce the commitments under, any of our Indebtedness or any
restricted subsidiary Indebtedness as set forth in clauses (1), (2) or (3),
respectively, of the preceding sentence or invested in Replacement Assets
within the 360-day period as set forth in clause (4) shall constitute "Offer
Excess Proceeds."
When the aggregate amount of offer excess proceeds equals or exceeds
$10.0 million, we shall make an offer to purchase, an "Asset Sale Offer", from
all holders of the Series B notes, that aggregate principal amount of Series B
notes as can be purchased by application of the entire amount of these Offer
Excess Proceeds, and not just the amount in excess of $10.0 million, at a price
in cash equal to 100% of the principal amount of the Offer Excess Proceeds on
any purchase date, plus accrued and unpaid interest, if any, to any purchase
date. Each Asset Sale Offer shall remain open for a period of 20 business days
or any longer period as may be required by law. To the extent that the
principal amount of Series B notes tendered according to an Asset Sale Offer is
less than the Offer Excess Proceeds, we or any restricted subsidiary may use
this deficiency for any purpose consistent with other terms of the indenture.
If the principal amount of Series B notes validly tendered and not withdrawn by
holders of the Series B notes exceeds the amount of Series B notes that can be
purchased with the Offer Excess Proceeds, Series B notes to be purchased will
be selected on a pro rata basis. Upon completion of this Asset Sale Offer, the
amount of offer excess proceeds shall be reset to zero.
If we are required to make an Asset Sale Offer, we will comply with all
applicable tender offer rules, including, to the extent applicable, Section
14(e) and Rule 14e-1 under the Exchange Act, and any other applicable
securities laws and regulations.
Limitation on Issuances and Sale of Capital Stock of Restricted
Subsidiaries. The indenture provides that we will not sell and will not cause
or permit any of our restricted subsidiaries to issue, sell or transfer any
preferred stock of any restricted subsidiary, other than to us or to a wholly-
owned restricted subsidiary, or permit any person, other than a wholly-owned
restricted subsidiary or us, to own any preferred stock of any restricted
subsidiary. In addition, we will not sell or otherwise dispose of any capital
stock of a restricted subsidiary, and will not permit any restricted
subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any of our capital stock, except:
. to a wholly-owned subsidiary or us,
. if, immediately after giving effect to this issuance, sale or other
disposition, neither us nor any of our subsidiaries own any capital
stock of the restricted subsidiary and
. if, immediately after giving effect to this issuance, sale or other
disposition, the restricted subsidiary would no longer constitute a
wholly-owned restricted subsidiary and any Investment in this person
remaining after giving effect to this issuance would have been
permitted to be made, and shall be deemed to have been made, under
the covenant described under "--Limitation on Restricted Payments" on
the date of this issuance, sale or other disposition.
Limitation on Transactions with Affiliates. The indenture provides that
we will not, and will not permit, cause or suffer any restricted subsidiary to,
conduct any business or enter into any transaction or series of related
transactions that are similar or part of a common plan with or for the benefit
of any of their respective
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Affiliates or any beneficial holder of 10% or more of our common stock or any
of our officers or directors, each, an "Affiliate Transaction", unless the
terms of the Affiliate Transaction are set forth in writing, and are fair and
reasonable to us or the restricted subsidiary, as the case may be. Each
Affiliate Transaction involving aggregate payments or other Fair Market Value
in excess of $2.5 million shall be approved by a majority of our board of
directors, such approval to be evidenced by a board resolution stating that our
board of directors has determined that such transaction or transactions comply
with the foregoing provisions. In addition to the foregoing, each affiliate
transaction involving aggregate consideration of $10.0 million or more shall be
approved by a majority of the disinterested directors; provided that, in lieu
of the approval by the disinterested directors, we may obtain a written opinion
from an independent financial advisor stating that the terms of the Affiliate
Transaction to the restricted subsidiary or to us, as the case may be, are fair
from a financial point of view.
Regardless of the foregoing, the restrictions set forth in this covenant
shall not apply to:
. transactions with or among and any restricted subsidiary and us or
between or among restricted subsidiaries;
. customary directors' fees, indemnification and similar arrangements,
consulting fees, employee salaries, bonuses or employment agreements,
compensation or employee benefit arrangements and incentive
arrangements with any of our officers, directors or employees entered
into in the ordinary course of business, including customary benefits
in the ordinary course of business, and payments under any
indemnification arrangements permitted by applicable law;
. any transactions undertaken according to any other contractual
obligations in existence on the issue date, as in effect on the issue
date, and any renewals, replacements or modifications of these
obligations, according to new transactions or otherwise, with
suppliers on terms no less favorable than the supplier could receive
from an unaffiliated third party;
. any Restricted Payments made in compliance with " --Limitation on
Restricted Payments" above;
. loans, advances and reimbursements to our officers, directors and
employees and the restricted subsidiaries for travel, entertainment,
moving and other relocation expenses, in each case made in the
ordinary course of business and consistent with past business
practices;
. the pledge of any capital stock of Unrestricted Subsidiaries to
support the Indebtedness of unrestricted subsidiaries;
. the sale of products, property or services by any person to a
restricted subsidiary or us, or by any restricted subsidiary or us to
any person, in the ordinary course of business; and
. our issuance and sale of Qualified Capital Stock.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The indenture provides that we will not, and will not
cause or permit any restricted subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective or enter into any
agreement with any person that would cause to become effective, any consensual
encumbrance or restriction of any kind, on the ability of any restricted
subsidiary to
. pay dividends, in cash or otherwise, or make any other distribution
on or in respect of our or its capital stock or any other interest or
participation in, or measured by, our or its profits, to any other
restricted subsidiary or us,
. pay any Indebtedness owed to any other restricted subsidiary or us,
. make any Investment in any other restricted subsidiary or us or
. transfer any of its properties or assets to any other restricted
subsidiary or us, except for:
. any encumbrance or restriction existing under any agreement in
effect on the original issue date;
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. customary non-assignment provisions in any contract or lease
entered into in the ordinary course of business;
. any encumbrance or restriction, with respect to a subsidiary that
is not our restricted subsidiary on the original issue date, in
existence at the time this person becomes our restricted
subsidiary and not incurred in connection with, or in
contemplation of, this person becoming a restricted subsidiary;
except, that these encumbrances and restrictions are not
applicable to us or any other restricted subsidiary, or our
properties or assets or those of any other restricted subsidiary;
and
. any encumbrance or restriction existing under any agreement that
extends, renews, refinances or replaces the agreements containing
the encumbrances or restrictions in the foregoing clauses,
provided that the terms and conditions of any these encumbrances
or restrictions are no more restrictive in any material respect
than those under or according to the agreement evidencing the
Indebtedness so extended, renewed, refinanced or replaced.
Limitations on Unrestricted Subsidiaries. The indenture provides that we
will not make, and will not permit our restricted subsidiaries to make, any
investment in unrestricted subsidiaries if, at the time of the Indenture, the
aggregate amount of these Investments would exceed the amount of Restricted
Payments then permitted to be made according to the covenant described under
"--Limitation on Restricted Payments." Any Investments in unrestricted
subsidiaries permitted to be made according to this covenant
. will be treated as a Restricted Payment in calculating the amount of
Restricted Payments we make and
. may be made in cash or property.
We may designate after the original issue date any subsidiary as an
"Unrestricted Subsidiary" under the indenture, a "Designation", only if:
. no Default shall have occurred and be continuing at the time of or
after giving effect to this Designation;
. we would be permitted to make an Investment at the time of
Designation, assuming the effectiveness of this Designation,
according to the provision described under "--Limitation on
Restricted Payments" above in an amount, the "Designation Amount",
equal to the Fair Market Value of our interest in the subsidiary on
that date calculated in accordance with GAAP; and
. we would be permitted under the indenture to incur $1.00 of
additional Indebtedness, other than Permitted Indebtedness, according
to the covenant described under "--Limitation on Indebtedness" at the
time of the Designation, assuming the effectiveness of the
Designation.
In the event of the Designation, we shall be deemed to have made an
Investment constituting a Restricted Payment according to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
indenture in the Designation Amount.
We shall not, and shall not cause or permit any restricted subsidiary to,
at any time
. provide credit support for or subject any of our property or assets,
other than the capital stock of any unrestricted subsidiary, to the
satisfaction of, any Indebtedness of any unrestricted subsidiary,
including any undertaking, agreement or instrument evidencing such
Indebtedness,
. be directly or indirectly liable for any Indebtedness of any
unrestricted subsidiary or
. be directly or indirectly liable for any Indebtedness, other than
Indebtedness according to our credit facility, which provides that
the holder of the Indebtedness may, upon notice, lapse of time or
both, declare a default on the Indebtedness or cause the payment of
the Indebtedness to be accelerated or payable prior to its final
scheduled maturity upon the occurrence of a default with respect to
any
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indebtedness of any unrestricted subsidiary, including any right to
take enforcement action against the unrestricted subsidiary,
except any non-recourse guarantee given solely to support the pledge by us or
any restricted subsidiary of the capital stock of an unrestricted subsidiary
and in the case of the second and third bullet points above, to the extent
permitted under "--Limitation on Restricted Payments." All subsidiaries of
unrestricted subsidiaries shall automatically be deemed to be unrestricted
subsidiaries.
We may revoke any Designation of a subsidiary as an unrestricted
subsidiary, a "Revocation", if:
. no Default shall have occurred and be continuing at the time of and
after giving effect to this Revocation;
. all Liens and Indebtedness of the unrestricted subsidiary outstanding
immediately following the Revocation would, if incurred at this time,
have been permitted to be incurred for all purposes of the indenture;
and
. any transaction, or series of related transactions, between a
subsidiary and any of its affiliates that occurred while the
subsidiary was an unrestricted subsidiary would be permitted by the
covenant described under "--Limitation on Transactions with
Affiliates" above as if this transaction, or series of related
transactions, had occurred at the time of the Revocation.
All Designations and Revocations must be evidenced by resolutions of our
board of directors delivered to the trustee certifying compliance with the
foregoing provisions.
Provision of Financial Statements. The indenture requires that for so
long as the Series B Notes are outstanding, whether or not we are subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision to
Section 13(a) or 15(d) of the Exchange Act, we will, to the extent permitted
by commission practice and applicable law and regulations, file with the
commission the annual reports, quarterly reports and other documents that we
would have been required to file with the commission according to Section
13(a) or 15(d), or any successor provision to Section 13(a) or 15(d) of the
Exchange Act, if we were so subject, such documents to be filed with the
Commission on or prior to the date, the "Required Filing Dates," by which we
would have been required so to file such documents if we were so subject.
We will also in any event
. within 15 days of each Required Filing Date, whether or not permitted
or required to be filed with the commission,
(1) transmit or cause to be transmitted by mail to all holders of
Series B notes, as their names and addresses appear in the security
register, without cost to these holders and
(2) file with the trustee, copies of the annual reports,
quarterly reports and other documents that we would have been
required to file with the commission according to Section 13(a) or
15(d) of the Exchange Act, or any successor provision to Section
13(a) or 15(d) of the Exchange Act, if we were subject to either of
these sections and
. if filing these documents by us with the commission is not permitted
under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of
these documents to any prospective holder at our cost.
In addition, for so long as any Series B notes remain outstanding, we
will furnish to the holders of Series B notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered according to Rule 144A(d)(4) under the Securities Act, and, to any
beneficial holder of Series B notes, if not obtainable from the commission,
information of the type that would be filed with the commission according to
the foregoing provisions, upon the request of any holder. If any subsidiary's
financial statements would be required to be included in the financial
statements filed or delivered in connection with this exchange
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offer if we were subject to Section 13(a) or 15(d) of the Exchange Act, we
shall include the subsidiary's financial statements in any filing or delivery
in connection with this exchange offer.
Limitation on Sale and Lease-Back Transactions. The indenture provides
that we will not, and will not permit any restricted subsidiary to, enter into
any Sale and Lease-Back Transaction unless
. the consideration received in the Sale and Lease-Back Transaction is
at least equal to the Fair Market Value of the property sold, and
. we could incur the Attributable Indebtedness in respect of the Sale
and Lease-Back Transaction in compliance with "--Limitation on
Indebtedness" above.
Consolidation, Merger, Sale of Assets, Etc.
The indenture provides that we shall not, in any transaction or series of
related transactions, merge or consolidate with or into, or sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of our
properties and assets as an entirety to, any person or persons, and we shall
not permit any of our restricted subsidiaries to enter into any one of these
transaction or series of related transactions if the transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of our restricted subsidiaries and us, taken as a
whole, to any person or persons, unless at the time and after giving effect to
one of these transactions
. either (A)(1) if the transaction or transactions is a merger or
consolidation involving us, we shall be the Surviving Person of the
merger or consolidation or (2) if the transaction or transactions is
a merger or consolidation involving a restricted subsidiary, the
restricted subsidiary shall be the Surviving Person of the merger or
consolidation, or (B)(1) the Surviving Person shall be a corporation
organized and existing under the laws of the United States of
America, any State of the United States or the District of Columbia
and (2) in the case of a transaction involving us, the Surviving
Person shall expressly assume by a supplemental indenture executed
and delivered to the trustee, in form satisfactory to the trustee,
all our obligations under the Series B notes and the indenture and
the registration rights agreement, and in each case, the indenture,
the Series B notes and the registration rights agreement shall remain
in full force and effect;
. immediately after giving effect to the transaction or series of
related transactions on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing;
. we, or the Surviving Person, as the case may be, immediately after
giving effect to the transaction or series of related transactions on
a pro forma basis, including, without limitation, any Indebtedness
incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions, could incur
$1.00 of additional Indebtedness, other than Permitted Indebtedness,
under the covenant described above under "--Specific Covenants--
Limitation on Indebtedness";
. immediately after giving effect to the transaction or series of
related transactions on a pro forma basis, we, or the Surviving
Person, as the case may be, shall have a Consolidated Net Worth not
less than our Consolidated Net Worth immediately prior to the
transaction or series of related transactions; and
. at the time of the transaction if any of the property or assets of us
or any of our restricted subsidiaries would thereupon become subject
to any Lien, the provisions described under "--Specific Covenants--
Limitation on Liens" are complied with.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, we shall deliver, or cause to be delivered, to
the trustee, in form and substance reasonably satisfactory to the trustee, an
officers' certificate and an opinion of counsel, each stating that the
consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect of the consolidation, merger, transfer, lease
or other disposition comply with the requirements under the indenture.
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Upon any consolidation or merger of us or any transfer of all or
substantially all of our assets in accordance with the foregoing, in which we
are not the surviving person, the Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, us under the
indenture and the Series B notes and the registration rights agreement, with
the same effect as if this successor corporation had been named as us; and
after this time, except in the case of a lease of substantially all of our
assets or any sale, assignment, conveyance, transfer, lease or other
disposition to our restricted subsidiary, we shall be discharged from all
obligations and covenants under the indenture and the Series B notes.
The indenture provides that for all purposes of the indenture and the
Series B notes, including the provision of this covenant and the covenants
described under "--Specific Covenants--Limitation on Indebtedness," "--Specific
Covenants--Limitation on Restricted Payments" and "--Specific Covenants--
Limitation on Liens", subsidiaries of any Surviving Person shall, upon a
transaction or series of related transactions, become restricted subsidiaries
unless and until designated as unrestricted subsidiaries according to the
provisions described under "--Specific Covenants--Limitations on Unrestricted
Subsidiaries" and all Indebtedness, and all Liens on property or assets, of us
and our restricted subsidiaries in existence immediately prior to the
transaction or series of related transactions will be deemed to have been
incurred upon the transaction or series of related transactions.
Events of Default
The following are "Events of Default" under the indenture:
(1) we default in the payment of the principal of or premium, if any,
when due and payable, on any of the Series B notes, at its Stated
Maturity, upon optional redemption, acceleration, required purchase,
sinking fund, scheduled principal payment or otherwise; or
(2) we default in the payment of an installment of interest on any of
the Series B notes, when due and payable, continued for 30 days or
more; or
(3) we fail to comply with any of our obligations described under "--
Consolidation, Merger, Sale of Assets, Etc.," "--Change of Control" or
"--Specific Covenants--Disposition on Proceeds of Asset Sales"; or
(4) we fail to perform or observe any other term, covenant or
agreement contained in the Series B notes or the indenture, other than
a default specified in the three clauses above, for a period of 45 days
after written notice of the failure requiring us to remedy the same
shall have been given (x) to us by the trustee or (y) to us and the
trustee by the holders of at least 25% in aggregate principal amount of
the Series B notes then outstanding; or
(5) we or any restricted subsidiary defaults under one or more
agreements, indentures or instruments under which we or any restricted
subsidiary then has outstanding Indebtedness in excess of $10.0 million
individually or in the aggregate and either (a) this Indebtedness is
already due and payable in full or (b) the default or defaults results
in the actual acceleration of the maturity of such Indebtedness;
except, that no default under any Interest Rate Agreement, Currency
Agreement or Commodity Price Protection Agreement shall by itself
constitute an Event of Default hereunder unless the default consists of
our failure by any restricted subsidiary or us to pay when due any net
cash amounts actually due to the counterparty to the Interest Rate
Agreement, Currency Agreement or Commodity Price Protection Agreement
and; except, that a payment default described in the immediately
preceding proviso shall not constitute an Event of Default unless and
until the payment default continues for 30 days or more, if the
acceleration or termination event giving rise to the applicable payment
obligation by us or the subsidiary was not a result of any default,
action or inaction by us or the subsidiary; or
(6) one or more judgments, orders or decrees of any court or
regulatory or administrative agency for the payment of money in excess
of $10.0 million either individually or in the aggregate shall have
been rendered against us or any restricted subsidiary or any of their
respective properties
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and shall not have been discharged and there shall have been a period
of 60 consecutive days during which a stay of enforcement of such
judgment, order or decree, by reason of a pending appeal or otherwise,
shall not be in effect; or
(7) specific events of bankruptcy, insolvency or reorganization with
respect to us or any of our material subsidiaries shall have occurred.
If an Event of Default, other than as specified in clause (7) with
respect to us or any material subsidiary, shall occur and be continuing, the
trustee, by notice to us, or the holders of at least 25% in aggregate principal
amount of the Series B notes then outstanding, by notice to the trustee and us,
may declare the principal of, premium, if any, and accrued interest on all of
the outstanding Series B notes due and payable immediately. Upon mailing this
declaration all of the amounts payable in respect of the Series B notes will
become and be immediately due and payable. If an Event of Default specified in
clause (7) above with respect to us or any material subsidiary occurs and is
continuing, then the principal of, premium, if any, and accrued interest on all
of the outstanding Series B notes will become and be immediately due and
payable without any declaration or other act on the part of the trustee or any
holder of Series B notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the holders of a
majority in aggregate principal amount of the outstanding Series B notes, by
written notice to the trustee and us, may rescind the declaration if
(a) we have paid or deposited with the trustee a sum sufficient to pay
(1) all sums paid or advanced by the trustee under the indenture and
the reasonable compensation, expenses, disbursements and advances of
the trustee, its agents and counsel,
(2) all overdue interest on all Series B notes,
(3) the principal of and premium, if any, on any Series B notes which
have become due otherwise than by the declaration of acceleration and
interest thereon at the rate borne by the Series B notes, and
(4) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the Series B notes, and
(b) all Events of Default, other than the non-payment of principal of,
premium, if any, and interest on the Series B notes that has become due solely
by such declaration of acceleration, have been cured or waived as provided in
the indenture.
No holder of any of the Series B notes has any right to institute any
proceeding with respect to the indenture or any remedy under the indenture,
unless the holders of at least 25% in aggregate principal amount of the
outstanding Series B notes have made written request, and offered reasonable
indemnity, to the trustee to institute or proceeding as trustee under the
Series B notes and the indenture, the trustee has failed to institute the
proceeding within 15 days after receipt of such notice and the trustee, within
such 15-day period, has not received directions inconsistent with the written
request by holders of a majority in aggregate principal amount of the
outstanding Series B notes. These limitations do not apply, however, to a suit
instituted by a holder of a Series B note for the enforcement of the payment of
the principal of, premium, if any, or interest on such Series B note on or
after the respective due dates expressed in such Series B note.
During the existence of an Event of Default, the trustee is required to
exercise such rights and powers vested in it under the indenture and use the
same degree of care and skill in its exercise of its rights and powers as a
prudent person would exercise under the circumstances in the conduct of that
person's own affairs. Subject to the provisions of the indenture relating to
the duties of the trustee, in case an Event of Default shall occur and be
continuing, the trustee under the indenture is not under any obligation to
exercise any of its rights or powers under the indenture at the request or
direction of any of the holders unless the holders shall have offered to the
trustee reasonable security or indemnity. Subject to provisions concerning the
rights of the trustee, the holders of a majority in aggregate principal amount
of the outstanding Series B notes have the right
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to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee, or exercising any trust or power conferred on
the trustee under the indenture.
We are required to furnish to the trustee annual and quarterly statements
as to the performance by us of our obligations under the indenture and as to
any default in performance. We are also required to notify the trustee within
five business days of any event which is, or after notice or lapse of time or
both would become, an Event of Default.
Defeasance or Covenant Defeasance of Indenture
We may, at our option and at any time, terminate our obligations with
respect to the outstanding Series B notes. This defeasance means that we will
be deemed to have paid and discharged the entire indebtedness represented by
the outstanding Series B notes, except for
. the rights of holders of outstanding Series B notes to receive
payment in respect of the principal of, premium, if any, and interest
on the Series B notes when these payments are due,
. our obligations to issue temporary Series B notes, register the
transfer or exchange of any Series B notes, replace mutilated,
destroyed, lost or stolen Series B notes and maintain an office or
agency for payments in respect of the Series B notes,
. the rights, powers, trusts, duties and immunities of the trustee and
. the defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to terminate
our obligations with respect to specific covenants that are set forth in the
indenture, some of which are described under "--Specific Covenants" above, and
any omission to comply with these obligations will not constitute a Default or
an Event of Default with respect to the Series B notes. In the event covenant
defeasance occurs, specific events, not including non-payment, bankruptcy and
insolvency events described under "--Events of Default" will no longer
constitute an Event of Default with respect to the Series B notes.
In order to exercise either defeasance or covenant defeasance,
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the Series B notes, cash in United States
dollars, U.S. government obligations, or a combination of U.S. dollars
and U.S. government obligations, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay and discharge the principal of, premium, if any,
and interest on the outstanding Series B notes at maturity;
(2) we shall have delivered to the trustee an opinion of independent
counsel in the United States to the effect that the holders of the
outstanding Series B notes will not recognize income, gain or loss for
federal income tax purposes as a result of the defeasance or covenant
defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if the defeasance or covenant defeasance had not occurred, in
the case of defeasance, the opinion must refer to and be based upon a
ruling of the IRS or a change in applicable federal income tax laws;
(3) no Default shall have occurred and be continuing on the date of
the deposit or insofar as clause (7) under the first paragraph under
"--Events of Default" is concerned;
(4) the defeasance or covenant defeasance shall not cause the trustee
to have a conflicting interest with respect to any of our securities;
(5) the defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument to which we are a party or by which it is
bound;
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(6) the defeasance or covenant defeasance shall not result in the
trust arising from the deposit constituting an investment company
within the meaning of the Investment Company Act of 1940, unless the
trust shall be registered under the Investment Company Act or exempt
from registration under the Investment Company Act;
(7) we shall have delivered to the trustee an opinion of independent
counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to Section
547 of the United States Bankruptcy Code;
(8) we shall have delivered to the trustee an officers' certificate
stating that the deposit was not made by us with the intent of
preferring the holders of the Series B notes over our other creditors
with the intent of defeating, hindering, delaying or defrauding our
creditors or others;
(9) no event or condition shall exist that would prevent us from
making payments of the principal of, premium, if any, and interest on
the Series B notes on the date of the deposit; and
(10) we shall have delivered to the trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
under the indenture to either defeasance or covenant defeasance, as the
case may be, have been complied with.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect,
except as to surviving rights or registration of transfer or exchange of the
Series B notes, as expressly provided for in the indenture, as to all
outstanding notes when
. either all the Series B notes then authenticated and delivered,
except lost, stolen or destroyed notes which have been replaced or
paid and Series B notes for whose payment money has been deposited
in trust or segregated and held in trust by us and then repaid to us
or discharged from such trust, have been delivered to the trustee
for cancellation or
. all notes not yet delivered to the trustee for cancellation have
become due and payable and we have irrevocably deposited or caused
to be deposited with the trustee funds in an amount sufficient to
pay and discharge the entire Indebtedness on the Series B notes not
yet delivered to the trustee for cancellation, for principal of,
premium, if any, and interest on the Series B notes to the date of
deposit together with irrevocable instructions from us directing the
trustee to apply such funds to the payment thereof at maturity or
redemption;
. we have paid all other sums payable under the indenture by us; and
. we have delivered to the trustee an officers' certificate and an
opinion of independent counsel each stating that
. all conditions precedent under the indenture relating to the
satisfaction and discharge of the indenture have been complied
with and
. this satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the indenture or any
other material agreement or instrument to which we or any
subsidiary is a party or by which we or any subsidiary is bound.
Amendments and Waivers
When authorized by resolutions of our board of directors, we and the
trustee may, without the consent of the holders of any outstanding Series B
notes, amend, waive or supplement the indenture or the Series B notes for
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, qualifying, or maintaining the qualification of, the
indenture under the Trust Indenture Act, or making any change that does not
materially adversely affect the legal rights of any holder; except, that we
have delivered to the trustee an opinion of counsel stating that the change
does not materially adversely affect the legal rights of
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any holder. Other amendments and modifications of the indenture or the Series B
notes may be made by the trustee and us with the consent of the holders of not
less than a majority of the aggregate principal amount of the outstanding
Series B notes; except, that no modification or amendment may, without the
consent of the holder of each outstanding Series B note affected by the
modification or amendment,
. change the maturity of the principal of, or any installment of
interest on, any Series B note or alter the optional redemption or
repurchase provisions of any Series B note or the indenture in a
manner adverse to the holders of the Series B notes;
. reduce the principal amount of, or the premium of any Series B note;
. reduce the rate of or extend the time for payment of interest on any
Series B note;
. change the place or currency of payment of principal of or premium
or interest on any such Series B note;
. modify any provisions of the indenture relating to the waiver of
past defaults, other than to add sections of the indenture or the
Series B notes subject to the indenture, or the right of the holders
of Series B notes to institute suit for the enforcement of any
payment on or with respect to any Series B note or the modification
and amendment provisions of the indenture and the Series B notes,
other than to add sections of the indenture or the Series B notes
which may not be amended, supplemented or waived without the consent
of each holder therein affected;
. reduce the percentage of the principal amount of outstanding Series
B notes necessary for amendment to or waiver of compliance with any
provision of the indenture or the Series B notes or for waiver of
any Default under the indenture;
. waive a default in the payment of principal of, premium, if any, or
interest on, or redemption payment with respect to, the Series B
notes, except a rescission of acceleration of the Series B notes by
the holders thereof as provided in the indenture and a waiver of the
payment default that resulted from such acceleration;
. modify the ranking or priority of any Series B note in any manner
adverse to holders; or
. following the occurrence of a Change of Control or an Asset Sale,
modify the provisions of any covenant, or the related definitions in
the indenture requiring us to make and consummate a change of
control offer with respect to such change of control or an asset
sale offer with respect to such Asset Sale or modify any of the
provisions or definitions with respect thereto in a manner
materially adverse to the holders of Series B notes affected thereby
otherwise than in accordance with the indenture.
The holders of a majority in aggregate principal amount of the
outstanding Series B notes, on behalf of all holders of Series B notes, may
waive compliance by us with specific restrictive provisions of the indenture.
Subject to specific rights of the trustee, as provided in the indenture, the
holders of a majority in aggregate principal amount of the Series B notes, on
behalf of all holders of the Series B notes, may waive any past default under
the indenture, including any waiver obtained in connection with a tender offer
or exchange offer for the Series B notes, except a default in the payment of
principal, premium or interest or a default arising from failure to purchase
any Series B notes tendered according to an offer to purchase the Series B
notes, or a default in respect of a provision that under the indenture cannot
be modified or amended without the consent of the holder of each Series B note
that is affected.
Governing Law
The indenture and the notes are governed by the laws of the State of New
York, without regard to the principles of conflicts of law.
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Definitions
"Acquired Indebtedness" means Indebtedness of a person
. assumed in connection with an Asset Acquisition from the person or
. existing at the time the person becomes a restricted subsidiary of
any other person, other than any Indebtedness incurred in connection
with, or in contemplation of, the Asset Acquisition or the person
becoming such a restricted subsidiary. Acquired Indebtedness shall be
deemed to be incurred on the date of the related acquisition of
assets from any person or the date the acquired person becomes a
restricted subsidiary.
"Affiliate" means with respect to any specified person:
. any other person directly or indirectly controlling or controlled
by or under direct or indirect common control with the specified
person;
. any other person that owns, directly or indirectly, 5% or more of
the specified person's capital stock or any officer or director of
any specified person or other person or, with respect to any
natural person, any person having a relationship with the person
by blood, marriage or adoption no more remote than first cousin;
or
. any other person 5% or more of the voting stock of which is
beneficially owned or held directly or indirectly by the specified
person.
For the purposes of this definition, "control" when used with respect to
any specified person means the power to direct the management and policies of
the person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means
. an Investment by us or any restricted subsidiary in any other
person according to which such person will become a restricted
subsidiary or will be merged or consolidated with or into us or
any restricted subsidiary or
. the acquisition by us or any restricted subsidiary of the assets
of any person that constitute substantially all of the assets of
that person, or any division or line of business of that person,
or which is otherwise outside of the ordinary course of business.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition including, without limitation, by way of merger, consolidation or
sale and leaseback transaction, collectively, a "transfer", directly or
indirectly, in one or a series of related transactions, of:
. any capital stock of any restricted subsidiary;
. all or substantially all of the properties and assets of any of
our divisions or lines of business or our restricted subsidiaries;
or
. any other properties or assets of ours or any restricted
subsidiary other than in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets
. that is governed by the provisions described under "--
Consolidation, Merger, Sale of Assets, Etc."; except, that any
transaction consummated in compliance with "--Consolidation,
Merger, Sale of Assets, Etc." above involving a transfer of less
than all of our properties or assets shall be deemed to be an
Asset Sale with respect to our properties or assets that are not
so transferred in the transaction,
. that is of obsolete assets in the ordinary course of business,
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. that is made the subject of an Investment consummated in
compliance with "--Specific Covenants--Limitation on Restricted
Payments" above,
. that is a transaction or series of related transactions for which
we or any of our restricted subsidiaries receive aggregate
consideration of less than $250,000,
. that is the sale by us of all or any portion of our interest in
Companhia Siderurgica de Tubarao,
. that is the sale by us or any subsidiary of ours or the
subsidiary's interest in any unrestricted subsidiary or is the
sale of any assets by an unrestricted subsidiary, or
. that is the sale by us or any subsidiary of assets that either (1)
are not used in the business of making steel or (2) are not
critical to our ability to manufacture steel products and were not
owned by us or the subsidiary on the original issue date;
provided, that any sale according to this subclause complies with
the second clause of the first paragraph of the covenant described
under "--Disposition of Proceeds of Asset Sales."
"Attributable Indebtedness" in respect of a Sale and Lease-Back
Transaction means, as at the time of determination, the greater of:
(1) the fair value of the property subject to the arrangement and
(2) the present value of the Series B notes, discounted at the rate
borne by the Series B Notes, compounded semi-annually, of the total
obligations of the lessee for rental payments during the remaining
term of the lease included in any Sale and Lease-Back Transaction,
including any period for which the lease has been extended.
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by
dividing
. the sum of the products of the number of years from the date of
determination to the date or dates of each successive scheduled
principal payment, including, without limitation, any sinking fund
requirements, of the Indebtedness multiplied by the amount of each
principal payment by
. the sum of all such principal payments.
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
person to finance a capital expenditure so long as the capital expenditure is
or should be included as an addition to "Property, Plant and Equipment" in
accordance with GAAP and the Indebtedness is incurred within 180 days of the
date the capital expenditure is made.
"Capitalized Lease Obligation" means any obligation under a lease of, or
other agreement conveying the right to use, any property, whether real,
personal or mixed, that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the indenture, the
amount of the obligation at any date shall be the capitalized amount of the
obligation at that date, determined in accordance with GAAP consistently
applied.
"Cash Equivalents" means, at any time,
(1) any evidence of Indebtedness with a maturity of not more than one
year issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality of the United
States, provided that the full faith and credit of the United States of
America is pledged in support of the Indebtedness;
(2) certificates of deposit or acceptances with a maturity of not
more than one year of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and
undivided profits of not less than $500,000,000;
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(3) commercial paper with a maturity of not more than one year issued
by a corporation that is not our affiliate organized under the laws of
any state of the United States or the District of Columbia and rated at
least A-1 by Standard & Poor's Corporation or at least P-1 by Moody's
Investors Service, Inc.; and
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (1) and (2)
above entered into with any financial institution meeting the
qualifications specified in clause (2) above.
"Change of Control" means the occurrence of any of the following events,
whether or not approved by our board of directors:
(1) (A) any "person" or "group", as those terms are used in Sections
13(d) and 14(d) of the Exchange Act, other than any one or more
Permitted Holders, is or becomes the "beneficial owner", as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that
the person has the right to acquire, whether the right is exercisable
immediately or only after the passage of time, directly or indirectly,
of a majority of the total voting power of our then outstanding voting
stock; or (B) (x) any "person" or "group," other than any one or more
Permitted Holders, is or becomes the "beneficial owner", as defined
above, directly or indirectly, of 50% or more of the total voting power
of our then outstanding voting stock, and (y) at that time, neither (I)
Companhia Vale do Rio Doce and its Subsidiaries nor (II) Kawasaki Steel
Corporation and its subsidiaries directly or indirectly own 50% or more
of the total voting power of our then outstanding voting stock;
(2) after the consummation of a public equity offering, during any
period of two consecutive years, individuals who at the beginning of
the period constituted our board of directors, together with any new
directors whose election to the board or whose nomination for election
by our stockholders was approved by a vote of a majority of the
directors then still in office who were either directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of the board of directors then in office; or
(3) we consolidate with or merge with or into any person or sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all of our assets to any person, or any corporation
consolidates with or merges into or with us, in all foregoing events
according to a transaction in which our outstanding voting stock is
changed into or exchanged for cash, securities or other property, other
than any transaction where our outstanding voting stock is not changed
or exchanged at all, except to the extent necessary solely to reflect a
change in our jurisdiction of incorporation or where (A) our
outstanding voting stock is changed into or exchanged for (x) voting
stock of the surviving corporation which is not Redeemable Capital
Stock or (y) cash, securities and other property, other than capital
stock of the surviving corporation, in an amount which could be paid
by us as a Restricted Payment as described under "--Specific
Covenants--Limitation on Restricted Payments", and the amount shall be
treated as a restricted payment subject to the provisions in the
indenture described under "--Specific Covenants--Limitation on
Restricted Payments", (B) no "person" or "group," other than Permitted
Holders, owns immediately after such transaction, directly or
indirectly, 50% or more of the total outstanding voting stock of the
surviving corporation and (C) the holders of our voting stock
immediately prior to the transaction own, directly or indirectly, not
less than a majority of the total voting power of the then outstanding
voting stock of the surviving or transferee corporation immediately
after the transaction; provided, in the case of clauses (A), (B) and
(C) of this clause (3), that one of the Permitted Holders at all times
owns 50% or more of the total voting power of our then outstanding
voting stock.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value of which is dependent upon, fluctuations
in commodity prices.
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"Consolidated Cash Flow Available for Fixed Charges" means, for any
period, (1) the sum of, without duplication, the amounts for that period, taken
as a single accounting period, of (a) Consolidated Net Income, (b) to the
extent reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to
the extent reducing Consolidated Net Income, Consolidated Interest Expense, and
(d) to the extent reducing Consolidated Net Income, Consolidated Income Tax
Expense less (2) other non-cash items increasing Consolidated Net Income for
that period.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of the
aggregate amount of our Consolidated Cash Flow Available for Fixed Charges for
the four full fiscal quarters immediately preceding the date of the
transaction, the "Transaction Date", giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio for which our consolidated financial
information is available. This four full fiscal quarter period is referred to
in this prospectus as the "four quarter period", to the aggregate amount of our
Consolidated Fixed Charges for the four quarter period.
For purposes of this definition, "Consolidated Cash Flow available for
Fixed Charges" and "Consolidated Fixed Charges" will be calculated, without
duplication, after giving effect on a pro forma basis for the period of such
calculation to
(1) the incurrence of any Indebtedness and preferred stock of ours or
any of our restricted subsidiaries during the period commencing on the
first day of the four quarter period to and including the Transaction
Date, the "Reference Period", including, without limitation, the
incurrence of the indebtedness giving rise to the need to make the
calculation, as if the incurrence occurred on the first day of the
Reference Period,
(2) any Asset Sale or Asset Acquisition, including, without
limitation, any Asset Acquisition giving rise to the need to make the
calculation as a result our or one of our restricted subsidiaries,
including any person who becomes a restricted subsidiary as a result of
the Asset Acquisition, incurring Acquired Indebtedness, incurring,
assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA, including any pro forma expense and
cost reductions as determined in accordance with Regulation S-X under
the Exchange Act, attributable to the assets that are the subject of
the Asset Acquisition or Asset Sale during the four quarter period,
occurring during the Reference Period, as if the Asset Sale or Asset
Acquisition occurred on the first day of the Reference Period and
(3) the retirement of Indebtedness during the Reference Period that
cannot thereafter be reborrowed occurring as if retired on the first
day of the Reference Period.
In calculating "Consolidated Fixed Charges" for purposes of determining
the denominator, but not the numerator, of this "Consolidated Fixed Charge
Coverage Ratio,"
(1) interest on Indebtedness determined on a fluctuating basis as of
the Transaction Date and that will continue to be so determined after
the Transaction Date will be deemed to accrue at a fixed rate per annum
equal to the rate of interest on the Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date shall be deemed to have been in effect during the
Reference Period; and
(3) regardless of clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is
covered by Interest Rate Agreements, will be deemed to accrue at the
rate per year resulting after giving effect to the operation of the
agreements.
If we or any of our restricted subsidiaries directly or indirectly
guarantees Indebtedness of a third person, the above definition will give
effect to the incurrence of the guaranteed indebtedness as if we or any
restricted subsidiary had directly incurred or otherwise assumed the guaranteed
Indebtedness.
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"Consolidated Fixed Charges" means, for any period, the sum of, without
duplication, the amounts for the period of (1) Consolidated Interest Expense;
and (2) the aggregate amount of cash dividends and other distributions paid or
accrued during the period in respect of our Redeemable Capital Stock and
preferred stock.
"Consolidated Income Tax Expense" means, for any period, the provision
for federal, state, local and foreign income taxes payable by the restricted
subsidiaries and us for the period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without
duplication, the sum of the interest expense of the restricted subsidiaries and
us for that period as determined on a consolidated basis in accordance with
GAAP, including, without limitation,
. any amortization of debt discount attributable to that period,
. the net cost under or otherwise associated with Interest Rate
Agreements, Currency Agreements and Commodity Price Protection
Agreements, in each case, including any amortization of discounts,
. the interest portion of any deferred payment obligation,
. all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and
. all capitalized interest and all accrued interest, and
all but the principal component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the restricted
subsidiaries and us during that period and as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income, or loss, of the restricted subsidiaries and us for that period on a
consolidated basis as determined in accordance with GAAP, adjusted, to the
extent included in calculating such net income, or loss, by excluding, without
duplication,
. all extraordinary gains or losses, net of all fees and expenses
relating to the consolidated amounts,
. the portion of net income, or loss, of the restricted subsidiaries
and us on a consolidated basis allocable to minority interests in
unconsolidated persons, except (a) to the extent that cash dividends
or distributions are actually received by a restricted subsidiary or
us, (b) for purposes of the covenant "Limitation on Restricted
Payments," that portion of equity in income of affiliate relating to
our interest in Companhia Siderurgica de Tubarao,
. income of the restricted subsidiaries and us derived from or in
respect of Investments in unrestricted subsidiaries, except to the
extent that cash dividends or distributions are actually received by
a restricted subsidiary or us,
. net income, or loss, of any person combined with us or any of the
restricted subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination,
. any gain or loss realized upon the termination of any employee
pension benefit plan,
. gains, or losses, net of all fees and expenses relating to the
consolidated amounts, in connection with any Asset Sales by a
restricted subsidiary or us,
. the net income of any restricted subsidiary to the extent that the
declaration of dividends or similar distributions by that restricted
subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that restricted subsidiary or
its stockholders,
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. any restoration to income of any contingency reserve except to the
extent provision for the reserve was made out of income accrued at
any time following the original issue date and
. any gain, arising from the acquisition of any securities, or the
extinguishment, under GAAP, of any of our Indebtedness.
"Consolidated Net Worth" with respect to any person means the equity of
the holders of capital stock of the person and its restricted subsidiaries,
excluding any Redeemable Capital Stock, as reflected in a balance sheet of the
person determined on a consolidated basis and in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, our aggregate
depreciation, amortization and other non-cash expenses and the restricted
subsidiaries reducing Consolidated Net Income for the period, other than any
non-cash item requiring an accrual or reserve for cash disbursements in any
future period, determined on a consolidated basis in accordance with GAAP.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
restricted subsidiaries or us against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of our board of directors who does not have
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions.
"Fair Market Value" means, with respect to any asset or property, the
price, or, in the case of a lease, the rent, which could be negotiated in an
arm's-length transaction, for cash, between an informed and willing seller or
lessor under no compulsion to sell and an informed and willing buyer or lessee
under no compulsion to buy. Fair Market Value with respect to any asset or
property of more than $1,000,000 shall be determined by our board of directors
acting in good faith evidenced by a board resolution of the board's
determination delivered to the trustee.
"guarantee" means, as applied to any obligation,
(1) a guarantee, other than by endorsement of negotiable instruments for
collection in the ordinary course of business, direct or indirect, in any
manner, of any part or all of the obligation and
(2) an agreement, direct or indirect, contingent or otherwise, the
practical effect of which is to assure in any way the payment or performance,
or payment of damages in the event of non-performance, of all or any part of
the obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
A guarantee shall include, without limitation, any agreement to maintain
or preserve any other person's financial condition or to cause any other person
to achieve specific levels of operating results.
"Indebtedness" means, with respect to any person, without duplication,
. all indebtedness of the person for borrowed money or for the
deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred or arising
in the ordinary course of business, but including, without
limitation, all obligations, contingent or otherwise, of the person
in connection with any letters of credit, bankers acceptance or
other similar credit transaction or in connection with any agreement
to purchase, redeem, exchange, convert or otherwise acquire for
value any capital stock of the person, or any warrants, rights or
options to acquire capital stock, now or in the future outstanding,
. all obligations of the person evidenced by bonds, notes, debentures
or other similar instruments,
. all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by
the person, even if the rights and remedies of the seller or
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lender under the agreement in the event of default are limited to
repossession or sale of such property, but excluding trade payables
arising in the ordinary course of business,
. all Capitalized Lease Obligations of the person,
. all Indebtedness referred to in the above clauses of other persons
and all dividends of other persons, the payment of which is secured
by any Lien upon or with respect to property including, without
limitation, accounts and contract rights, owned by the person, even
though the person has not assumed or become liable for the payment
of such indebtedness,
. all guarantees of Indebtedness by the person,
. all Redeemable Capital Stock issued by the person valued at the
greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends,
. all obligations under Interest Rate Agreements, Currency Agreements
or Commodity Price Protection Agreements of the person and
. any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types
referred to in the clauses above.
For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of the Redeemable Capital Stock as if
the Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined according to the indenture, and if the
price is based upon, or measured by, the Fair Market Value of the Redeemable
Capital Stock, the Fair Market Value shall be determined in good faith by the
board of directors of the issuer of the Redeemable Capital Stock.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: obligations
of any person according to any arrangement with any other person whereby,
directly or indirectly, the person is entitled to receive from time to time
periodic payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
the person calculated by applying a fixed or a floating rate of interest on
the same notional amount or any other arrangement involving payments by or to
the person based upon fluctuations in interest rates, including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements,
and/or other types of interest rate hedging agreements.
"Investment" means, with respect to any person, any direct or indirect
advance, loan or other extension of credit, including by means of a guarantee,
or capital contribution to, by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others or otherwise, or any purchase or acquisition by the person of any
capital stock, bonds, notes, debentures or other securities or evidences of
indebtedness issued by any other person and all other items that would be
classified as investments on a balance sheet prepared in accordance with GAAP.
Investments shall exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices. In addition to the
foregoing, any Currency Agreement, Interest Rate Agreement, Commodity Price
Protection Agreement or similar agreement shall constitute an Investment.
"Investment Grade" means
. with respect to S&P, BBB- and any category above BBB-, or equivalent
successor categories;
. with respect to Moody's, Baa3 and any category above Baa3, or
equivalent successor categories; and
. the equivalent of any category of S&P or Moody's used by another
rating agency.
"Lien" means any mortgage or deed of trust, charge, pledge, lien,
statutory or other, security interest, assignment for security, or other
encumbrance upon any property of any kind, including any conditional sale,
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capital lease or other title retention agreement, whether real, personal or
mixed, movable or immovable, now owned or in the future acquired. A person
shall be deemed to own subject to a Lien any property which it has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.
"Liquid Assets" shall mean any marketable securities or steel slab
immediately received by, and used in the business of, any of our subsidiaries
or us in an amount not to exceed 25% of our total consolidated assets.
"material subsidiary" means each restricted subsidiary of ours that is a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the
Securities Act and the Exchange Act, as the regulation is in effect on the
original issue date.
"Net Cash Proceeds" means with respect to any Asset Sale by any person,
the proceeds thereof, without duplication in respect of all Asset Sales, in the
form of cash or cash equivalents including payments in respect of deferred
payment obligations when received in form of, or stock or other assets when
disposed of for, cash or Cash Equivalents, except to the extent that these
obligations are financed or sold with recourse to any restricted subsidiary or
us, net of:
. brokerage commissions and other reasonable fees and expenses,
including fees and expenses of legal counsel and investment bankers,
related to the Asset Sale,
. provisions for all taxes payable as a result of the Asset Sale,
. payments made to retire indebtedness where payment of the
Indebtedness is secured by the assets or properties the subject of
the Asset Sale,
. amounts required to be paid to any person, other than any restricted
subsidiary or us, owning a beneficial interest in or having a Lien
on the assets subject to the Asset Sale and
. appropriate amounts to be provided by any restricted subsidiary or
us, in either case, as a reserve, in accordance with GAAP, against
any liabilities associated with the Asset Sale and retained by any
restricted subsidiary or us, as the case may be, after the Asset
Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations
associated with the Asset Sale, provided that the amount of any
reserves shall be deemed to constitute Net Cash Proceeds at the time
the reserves shall have been released or are not otherwise required
to be retained as a reserve, all as reflected in an officers'
certificate delivered to the trustee.
"Other Senior Debt Pro Rata Share" means the amount of the applicable
Offer Excess Proceeds obtained by multiplying the amount of the Offer Excess
Proceeds by a fraction,
(1) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all of our Indebtedness, other than
. the Series B notes,
. Subordinated Indebtedness and
. Indebtedness under our credit facility, outstanding at the time of
the applicable Asset Sale with respect to which we are required to
use Offer Excess Proceeds to repay or make an offer to purchase or
repay and
(2) the denominator of which is the sum of
. the aggregate principal amount of all Series B notes outstanding
at the time of the applicable Asset Sale and
. the aggregate principal amount or the aggregate accreted value, as
the case may be, of all of our other Indebtedness, other than
Subordinated Indebtedness and Indebtedness under our credit
facility, outstanding at the time of the applicable Asset Sale
Offer with respect to
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which we are required to use the applicable Offer Excess Proceeds
to offer to repay or make an offer to purchase or repay.
"Permitted Holders" means
. Companhia Vale do Rio Doce, Rio Doce Limited, Kawasaki Steel
Corporation and Kawasaki Steel Holdings (USA), Inc. and
. each Affiliate of each of the entities set forth above for so long
as they are Affiliates.
"Permitted Investments" means
. Cash Equivalents;
. Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance
and other similar deposits;
. loans and advances to employees made in the ordinary course of
business not to exceed $250,000 in the aggregate at any one time
outstanding;
. Investments in partnerships, joint ventures or other entities,
including unrestricted subsidiaries in an aggregate amount not to
exceed $60.0 million at any one time outstanding; provided that the
entity is in a steel related business or such Investment is made to
acquire or develop raw materials used in steelmaking.
. Interest Rate Agreements, Currency Agreements and Commodity Price
Protection Agreements permitted under clauses (5), (6) and (7) of
the second paragraph under "--Specific Covenants--Limitation on
Indebtedness";
. Investments represented by accounts receivable created or acquired
in the ordinary course of business;
. loans or advances to vendors in the ordinary course of business;
. Investments existing on the original issue date and any renewal or
replacement of these Investments on terms and conditions no less
favorable in any respect than that existing on the original issue
date;
. Investments made by any restricted subsidiary or us as a result of
consideration received in connection with an Asset Sale made in
compliance with the covenant under "--Specific Covenants--
Disposition of Proceeds of Asset Sales"; and
. stock, obligations or securities received in satisfaction of
judgments or good faith settlement of litigation, disputes or other
debts.
"Permitted Liens" means
. Liens on property of, or on shares of capital stock or debt
securities of, a person existing at the time the person
. is merged into or consolidated with any restricted subsidiary or
us or
. becomes a restricted subsidiary; except, that the Liens were in
existence prior to the contemplation of the merger,
consolidation or acquisition and do not secure any property or
assets of any restricted subsidiary or ours other than the
property or assets subject to the Liens prior to the merger,
consolidation or acquisition;
. Liens imposed by law including as landlords', carriers',
warehousemen's and mechanics' Liens and other similar Liens arising
in the ordinary course of business that secure payment of
obligations not more than 60 days past due or that are being
contested in good faith and by appropriate proceedings;
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. Liens existing on the original issue date;
. Liens securing only the Series B notes;
. Liens in favor of us or Liens on any property or assets of a
subsidiary, or on shares of capital stock or debt securities of a
subsidiary, in favor of any restricted subsidiary or us;
. Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent for more than 90 days or that are being
contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; except, that any reserve or
other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor;
. easements, reservation of rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties
or imperfections of title that in the aggregate are not material in
amount and do not in any case interfere with the ordinary conduct of
the business of the restricted subsidiaries and us;
. Liens resulting from the deposit of cash or notes in connection with
contracts, tenders or expropriation proceedings, or to secure
workers' compensation, surety or appeal bonds, costs of litigation
when required by law, public and statutory obligations, obligations
under franchise arrangements entered into in the ordinary course of
business and other obligations of a similar nature arising in the
ordinary course of business;
. Liens in existence on the issue date under our credit facility;
. Liens securing Indebtedness consisting of Capitalized Lease
Obligations, Purchase Money Obligations, other than Indebtedness
incurred to finance an Asset Acquisition, Capital Expenditure
Indebtedness, mortgage financings, industrial revenue bonds or other
monetary obligations, in each case incurred solely for the purpose
of financing all or any part of the purchase price or cost of
construction or installation of assets used in our business or that
of the restricted subsidiaries, or repairs, additions or
improvements to the assets; except, that
(1) the Liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such assets
or repair, addition or improvement thereto plus an amount equal to
the reasonable fees and expenses in connection with the incurrence
of such Indebtedness,
(2) the Liens do not extend to any other assets of our restricted
subsidiaries, and, in the case of repair, addition or improvements
to the assets, the Lien extends only to the assets, and
improvements to or on the assets, repaired, added to or improved,
(3) the incurrence of Indebtedness is permitted by "--Specific
Covenants--Limitation on Indebtedness" above and
(4) such Liens attach prior to 90 days after such purchase,
construction, installation, repair, addition or improvement;
. Liens to secure any refinancings, or successive refinancings, in
whole or in part, of any indebtedness secured by liens referred to
in the clauses above so long as the Lien does not extend to any
other property, other than improvements thereto;
. Liens securing letters of credit entered into in the ordinary course
of business and consistent with past business practice;
. Liens securing indebtedness any restricted subsidiary or us under
any Interest Rate Agreements, Currency Agreements or Commodity Price
Protection Agreements;
. Liens on and pledges of the capital stock of any unrestricted
subsidiary securing any Indebtedness of the unrestricted subsidiary;
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. Liens arising from the rendering of a final judgment or order
against any restricted subsidiary or us that does not give rise to
an Event of Default; and
. Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by any
restricted subsidiary or us in the ordinary course of business.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to our business and our restricted subsidiaries and any
additions and accessions to those assets, which we or any restricted subsidiary
purchase at any time after the original issue date; except that
(1) the security agreement or conditional sales or other title retention
contract according to which the Lien on the assets is created,
collectively a "Purchase Money Security Agreement", shall be entered
into within 180 days after the purchase or substantial completion of
the construction of the assets and shall at all times be confined
solely to the assets so purchased or acquired, any additions and
accessions to those assets and any proceeds from those assets,
(2) at no time shall the aggregate principal amount of the outstanding
secured Indebtedness be increased, except in connection with the
purchase of additions and accessions to the Indebtedness and except in
respect of fees and other obligations in respect of the Indebtedness
and
(3) (A) the aggregate outstanding principal amount of secured indebtedness,
determined on a per asset basis in the case of any additions and
accessions, shall not at the time such Purchase Money Security
Agreement is entered into exceed 85% of the purchase price to us and
our restricted subsidiaries of the assets subject to the Purchase Money
Security Agreement or (B) the Indebtedness secured by the lien shall be
with recourse solely to the assets so purchased or acquired, any
additions and accessions thereto and any proceeds from those assets.
"Qualified Capital Stock" of any person means any and all capital stock
of such person other than Redeemable Capital Stock.
"Rating Agencies" means (1) S&P and (2) Moody's and (3) if S&P or Moody's
or both shall not make a rating of the Series B notes publicly available, a
nationally recognized United States securities rating agency or agencies that
we select, which shall be substituted for S&P or Moody's or both.
"Rating Category" means (1) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D, or equivalent successor categories; (2)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D, or equivalent successor categories; and (3) the equivalent of any category
of S&P or Moody's used by another Rating Agency. In determining whether the
rating of the Series B notes has decreased by one or more gradations,
gradations within Rating Categories, + and - for S&P; 1, 2 and 3 for Moody's;
or the equivalent gradations for another Rating Agency, shall be taken into
account, e.g., with respect to S&P, a decline in rating from BB+ to BB, as well
as from BB- to B+, will constitute a decrease of one gradation.
"Rating Date" means the date that is 90 days prior to the earlier of a
Change of Control and public notice of the occurrence of a Change of Control or
of our intention to effect a Change of Control.
"Redeemable Capital Stock" means any class or series of capital stock to
the extent that, either by its terms, by the terms of any security into which
it is convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event, other than a Change of Control, or passage of time would
be, required to be redeemed prior to any Stated Maturity of the principal of
the Series B notes or is redeemable at the option of the holder thereof at any
time prior to the Stated Maturity, or is convertible into or exchangeable for
debt securities at any time prior to the Stated Maturity.
"restricted subsidiary" means any of our subsidiaries that has not been
designated by our board of directors, by a board resolution delivered to the
trustee, as an unrestricted subsidiary according to and in compliance with the
covenant described under "--Specific Covenants--Limitations on Unrestricted
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Subsidiaries." Any designation may be revoked by a board resolution of our
board of directors delivered to the trustee, subject to the provisions of the
covenant.
"restricted subsidiary Indebtedness" means Indebtedness of any restricted
subsidiary (1) that is not subordinated to any other Indebtedness of the
restricted subsidiary and (2) in respect of which we are not also obligated, by
means of a guarantee or otherwise, other than, in the case of this clause (2),
indebtedness under our credit facility.
"Sale and Lease-Back Transaction" means any arrangement with any person
providing for the leasing by a restricted subsidiary or us of any real or
tangible personal property that has been or is to be sold or transferred by us
or the restricted subsidiary to the person in contemplation of the leasing.
"Stated Maturity" means, with respect to any Series B note or any
installment of interest thereon, the dates specified in such Series B note as
the fixed date on which the principal of the Series B note or the installment
of interest is due and payable, and when used with respect to any other
Indebtedness, means the date specified in the instrument governing the
Indebtedness as the fixed date on which the principal of the Indebtedness or
any installment of interest is due and payable.
"Subordinated Indebtedness" means, with respect to us, our Indebtedness
that is expressly subordinated in right of payment to the Series B notes.
"Surviving Person" means, with respect to any person involved in any
consolidation or merger, or any sale, assignment, conveyance, transfer, lease
or other disposition of all or substantially all of its properties and assets
as an entirety, the person formed by or surviving the merger or consolidation
or the person to which such sale, assignment, conveyance, transfer or lease is
made.
"unrestricted subsidiary" means each of our subsidiaries designated as
such according to and in compliance with the covenant described under "--
Specific Covenants--Limitations on Unrestricted Subsidiaries." Any designation
may be revoked by a board resolution delivered to the trustee, subject to the
provisions of such covenant.
"wholly-owned restricted subsidiary" means any restricted subsidiary of
which we and/or another wholly-owned restricted subsidiary own 100% of the
outstanding capital stock. For purposes of this definition, any directors'
qualifying shares shall be disregarded in determining the ownership of a
restricted subsidiary.
Book-Entry; Delivery and Form
The Series B notes initially will be represented by a single, permanent
global note. The global note will be deposited on the issue date with, or on
behalf of, DTC, New York, New York and registered in the name of a nominee of
DTC.
Depository Procedures
We expect that according to procedures established by DTC
. upon the issuance of the Series B global note, DTC or its custodian
will credit, on its internal system, the principal amount of Series
B notes of the individual beneficial interests represented by the
global securities to the respective accounts of persons who have
accounts with the depositary and
. ownership of beneficial interests in the Series B global note will
be shown on, and the transfer of ownership will be effected only
through, records maintained by DTC or its nominee, with respect to
interests of participants, and the records of participants, with
respect to interests of persons other than participants.
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So long as DTC, or its nominee, is the registered owner or holder of the
Series B notes, DTC or the nominee, will be considered the sole owner or holder
of the Series B notes represented by the global note for all purposes under the
indenture governing the Series B notes. No beneficial owner of an interest in
any of the global notes will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
indenture with respect to the Series B notes.
Payments of the principal of, premium, if any, and interest, including
additional interest, as defined, on the global note will be made to DTC or its
nominee, as the registered owner of the global note. None of the trustee, any
paying agent or us will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest, including additional interest, in
respect of the global note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the global note as shown on the records of DTC or its nominee. We
also expect that payments by participants to owners of beneficial interests in
the global note held through the participants will be governed by standing
instructions and customary practice, as is now the case with securities held
for the accounts of customers registered in the names of nominees for the
customers. The payments will be the responsibility of the participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a certificated security for any reason,
including to sell notes to persons in states which require physical delivery of
the Series B notes, or to pledge the securities, the holder must transfer its
interest in the global note, in accordance with the normal procedures of DTC
and with the procedures set forth in the indenture.
DTC has advised us that it will take action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more participants to whose account the
DTC interests in the global note are credited and only in respect of the
portion of the aggregate principal amount of notes as to which the participant
or participants has or have given that direction. However, if there is an event
of default under the indenture governing the notes, DTC will exchange the
global note for certificated securities, which it will distribute to its
participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered according to the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and other organizations.
Indirect access to the DTC system is available to others including banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly, referred to as
"indirect participants".
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global note among participants of DTC, it is
under no obligation to perform the procedures, and the procedures may be
discontinued at any time. Neither the trustee nor we will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the global note and we do not appoint a successor depositary within 90 days,
certificated securities will be issued in exchange for the global note.
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Registration Rights; Liquidated Damages
The material provisions of the registration rights agreement are
summarized below. However, the summary does not purport to be complete summary
of the provisions of the agreement and is subject to, and is qualified in its
entirety by reference to, the provisions of the registration rights agreement,
a copy of which will be made available to prospective purchasers of the notes
upon request to us.
We entered into the registration rights agreement with the initial
purchasers, according to which we agreed to file with the commission the
exchange offer registration statement on an appropriate form under the
Securities Act with respect to an offer to exchange the notes. If
. we are not permitted to file the exchange offer registration
statement or to consummate the exchange offer because the exchange
offer is not permitted by applicable law or commission policy,
. the exchange offer is not for any other reason consummated within
210 days after the original issue date,
. any holder of notes notifies us within a specified time period that
due to a change in law or policy it is not entitled to participate
in the exchange offer, due to a change in law or policy it may not
resell the Series B notes acquired by it in the exchange offer to
the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for resales by the holder or it is a
broker-dealer and owns notes acquired directly from us or an
affiliate of ours, or
. the holders of a majority of the Series B notes may not resell the
Series B notes acquired by them in the exchange offer to the public
without restriction under the Securities Act and without restriction
under applicable blue sky or state securities laws,
we agree to file with the commission a shelf registration statement to cover
resales of the "transfer restricted securities" by the holders of the transfer
restricted securities. We will use our best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
commission. For purposes of the foregoing, "Transfer restricted securities"
means each note until
. the date on which the note has been exchanged by a person other than
a broker-dealer for a Series B note in the exchange offer,
. following the exchange by a broker-dealer in the exchange offer of a
Series A note for a Series B note, the date on which the Series B
note is sold to a purchaser who receives from the broker-dealer on
or prior to the date of the sale a copy of the prospectus contained
in the exchange offer registration statement,
. the date on which the note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf
registration statement,
. the date on which such note is distributed to the public according
to Rule 144(k) under the Securities Act, or any similar provision
then in force, but not Rule 144A under the Securities Act,
. the note shall have been otherwise transferred by the holder thereof
and a new note not bearing a legend restricting further transfer
shall have been delivered by us and subsequent disposition of such
note shall not require registration or qualification under the
Securities Act or any similar state law then in force, or
. such Series A note ceases to be outstanding.
Each holder of notes that wishes to exchange Series A notes for Series B
notes in the exchange offer will be required to make representations, including
representations that:
. any Series B notes to be received by it will be acquired in the
ordinary course of its business,
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. it has no arrangement with any person to participate in the
distribution of the Series B notes,
. it is not an affiliate, as defined in Rule 405 of the Securities
Act, of us, or if it is an affiliate, it will comply with the
registration and prospectus, delivery requirements of the Securities
Act to the extent applicable and
. it is not a broker-dealer tendering notes that it acquired directly
from us for its own account.
Under existing commission interpretations, the Series B notes would, in
general, be freely transferable after the exchange offer without further
registration under the Securities Act; except, that in the case of broker-
dealers participating in the exchange offer, a prospectus meeting the
requirements of the Securities Act must be delivered upon resale by the broker-
dealers in connection with resales of the Series B notes. We have agreed, for a
period of 180 days after consummation of the exchange offer, to make available
a prospectus meeting the requirements of the Securities Act to any broker-
dealer for use in connection with any resale of any Series B notes acquired in
the exchange offer. A broker-dealer that delivers a prospectus to purchasers in
connection with resales will be subject to the civil liability provisions under
the Securities Act and will be bound by the provisions of the registration
rights agreement, including indemnification rights and obligations.
If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution
of the Series B notes. If the holder is a broker-dealer that will receive
Series B notes for its own account in exchange for Series B notes that were
acquired as a result of market-making activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of the Series B notes.
We have agreed to pay all expenses incident to the exchange offer and
will indemnify the initial purchasers against liabilities, including
liabilities under the Securities Act.
The registration rights agreement provides that:
. unless the exchange offer would not be permitted by applicable law
or commission policy, we will file the exchange offer registration
statement with the commission on or prior to 90 days after the
original issue date,
. unless the exchange offer would not be permitted by applicable law
or commission policy, we will use our best efforts to have the
exchange offer registration statement declared effective by the
commission on or prior to 180 days after the original issue date,
. unless the exchange offer would not be permitted by applicable law
or commission policy, we will consummate the exchange offer within
210 days after the original issue date of the Series A notes, and
. if obligated to file the shelf registration statement, we will use
our best efforts to file prior to the later of 270 days after the
original issue date or 60 days after the filing obligation arises
and use our best efforts to cause the shelf registration statement
to be declared effective by the commission on or prior to 150 days
after the obligation arises;
except, that if we have not consummated the exchange offer within 210 days of
the original issue date, then we will file the shelf registration statement
with the commission on or prior to the 211th day after the issue date. We shall
use our best efforts to keep the shelf registration statement continuously
effective, supplemented and amended until the second anniversary of the
effective date of the shelf registration statement or a shorter period that
will terminate when all the transfer restricted securities covered by the shelf
registration statement have been sold under the shelf registration statement.
If:
. we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for
filing,
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. the commission does not declare any of the registration statements
on or prior to the date specified for effectiveness, the
effectiveness target date, subject to limited exceptions,
. we fail to consummate the exchange offer within 30 days of the
effectiveness target date with respect to the exchange offer
registration statement, or
. the shelf registration statement or the exchange offer registration
statement is declared effective but in the future, subject to
limited exceptions, ceases to be effective or usable in connection
with the exchange offer or resales of transfer restricted notes,
during the periods specified in the registration rights agreement,
each event referred to above, a registration default,
then we will pay as liquidated damages, additional interest in cash to each
holder of transfer restricted securities, with respect to the first 90-day
period, or portion of the first 90-day period, while a registration default is
continuing immediately following the occurrence of the registration default in
an amount equal to 0.25% per year of the principal amount of the Series B
notes. The amount of additional interest will increase by an additional 0.25%
per year of the principal amount of the Series B notes for each subsequent 90-
day period, or portion of the subsequent 90-day period, while a registration
default is continuing until all registration defaults have been cured, up to a
maximum amount of 1.0% of the principal amount of the Series B notes.
Additional interest shall be computed based on the actual number of days
elapsed during which any registration defaults exists. Following the cure of a
particular registration default, the accrual of additional interest with
respect to the registration default will cease.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Series A notes for Series B notes according to this
exchange offer should not be treated as a taxable transaction for U.S. federal
income tax purposes because the Series B notes will not be considered to differ
materially in kind or extent from the Series A notes. Rather, any Series B
notes you receive should be treated as a continuation of your investment in the
Series A notes. As a result, you should bear no material U.S. federal income
tax consequences due to the exchange, and you should have the same adjusted
issue price, adjusted basis and holding period in the Series B notes as you had
in the Series A notes immediately prior to the exchange.
You should consult your own tax advisor concerning the consequences,
arising from your own particular circumstances, of your exchange of Series A
notes for Series B notes, including the tax consequences to you under state,
local, foreign or other tax laws and the possible effects on you of changes in
U.S. federal or other tax laws.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B notes for its own account
according to this exchange offer, sometimes referred to a participating broker,
must acknowledge that it will deliver a prospectus in connection with any
resale of the Series B notes. This prospectus, as it may be amended or
supplemented, may be used by a participating broker in connection with any
resale of notes received in exchanged for Series A notes where the Series A
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that for a period of 180 days from the expiration of
this exchange offer, we will make this prospectus, as amended or supplemented,
available to any participating broker for use in connection with any resale. In
addition, until January 3, 2000, 90 days from the date of this prospectus, all
dealers effecting transactions in the notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of Series B notes by
broker-dealers. Series B notes received by any participating broker may be sold
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Series B notes or a
combination of the methods of
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resale, at market prices prevailing at the time of resale, at prices related to
the prevailing market prices or negotiated prices. Any resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
and/or the purchasers of any such Series B notes. Any participating broker that
resells Series B notes that were received by it for its own account according
to this exchange offer and any broker or dealer that participates in a
distribution of Series B notes may be deemed to be an underwriter within the
meaning of the Securities Act and any profit on any resale of Series B notes
and any commissions or concessions received by any persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus as required, a participating broker will not be deemed to admit that
it is an underwriter within the meaning of the Securities Act.
For a period of 180 days from the expiration of this exchange offer, we
will send a reasonable number of additional copies of this prospectus and any
amendment or supplement to this prospectus to any participating broker that
requests the documents in the letter of transmittal. We will pay all the
expenses incident to this offer, which shall not include the expenses of any
holder in connection with resales of the Series B notes. We have agreed to
indemnify holders of the Series B notes, including any participating broker,
against specific liabilities, including liabilities under the Securities Act.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the consolidated financial
statements and accompanying the notes included elsewhere in this prospectus.
Introduction
From our site in Fontana, California, we produce four steel products:
hot rolled sheet, cold rolled sheet, galvanized sheet and ERW pipe, with a
current annual finished capacity of over 1.7 million tons. We service a broad
range of customers with applications that include pipe and tubing, heating,
ventilating and air conditioning, strapping, drums, steel wheels, culverts and
a variety of construction related products. We ship our products by truck and
rail to manufacturers, contractors and distributors primarily in the 11 states
west of the Rocky Mountains.
In 1993, we began a modernization program of approximately $250.0
million to be spent over a six year period. Through 1998, we had substantially
completed the capital investments originally contemplated under our
modernization program. We believe these investments have strengthened our
competitive position by reducing operating costs, broadening our product line,
improving product quality and significantly increasing throughput capacity.
Between 1992 and 1998, our tons billed increased from 953,000 to 1,614,000, an
increase of 69%. Hot rolled tons billed increased 349,000 tons and accounted
for 53% of the volume gains during this period. Cold rolled tons billed
increased 103,000 tons, or 74%, and galvanized tons billed increased 141,000,
or 56%. We expect that recently added capacity from our 1997 5-stand revamp
project as well as the 1998 addition of the second continuous galvanizing line
will result in future increases in cold rolled and galvanized product sales
volume.
Our products are shipped via customer truck, common carrier or by rail.
We generally sell our product free on board, commonly referred to as FOB,
shipping point and title is passed when products are loaded for shipment. We
recognize revenue from product sales when products are shipped or delivered to
the customer, depending on the terms of the sale. For products shipped FOB
shipping point, revenue is recognized at the time of shipment. For products
shipped FOB destination, revenue is recognized at the time of delivery. Our
revenue is dependent on the volume, product mix and sales prices of our
products. General economic conditions as well as the supply and demand of
steel products within our market influence sales prices. We generally set our
sales prices quarterly and we maintain no long-term sales agreements.
Cost of goods sold consists primarily of cost of steel slab, labor,
natural gas, electricity and zinc.
Slab consumption costs comprise approximately 70% of our cost of goods
sold. We generally purchase steel slab in boatload quantities. Imported slab
arrives on chartered vessels in the Port of Los Angeles and is transported by
rail to our Fontana facility. We generally purchase steel slab on open
negotiated payment terms. Steel slab consumption costs include the FOB value
of steel slab, ocean transportation costs, rail freight, duties, unloading,
insurance and internal handling of the slab at our facility to the delivery of
the slab to the entrance of our furnaces. Typically, we negotiate slab FOB
costs quarterly and we negotiate other costs through contracts of varying
lengths. In 1998, however, we entered into purchase contracts for
approximately 90% of our estimated 1999 slab procurement needs. Our purchasing
power combined with attractive market conditions provided us with the
opportunity to negotiate these contracts on terms that we believe are
favorable to us. We will continue to actively manage slab procurement to
minimize costs and may opportunistically purchase slab on a forward basis.
Because we have entered into purchase contracts at predetermined prices for
approximately 90% of our estimated 1999 slab procurement needs, our 1999
operating margin could be adversely affected if flat rolled steel prices
significantly decline.
We use zinc in the production of our galvanized products. We currently
purchase zinc from several suppliers. Zinc is purchased on a monthly basis and
is priced using a formula tied to the London Metals Exchange zinc index. In
the past, we have managed our purchase price of zinc by entering into
contracts to lock in favorable prices and may continue to do so in the future.
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We purchase natural gas and electricity from local vendors active in the
California market. Rates for natural gas are based on a discount formula tied
to published indices and rates for electricity are based on market prices. In
1998, the State of California partially deregulated the electricity market.
Based on publicly available information, the electricity market is expected to
be completely deregulated by the year 2002. We believe the cost of electricity
is higher in California than in other parts of the country and, therefore, as a
major consumer of electricity we should benefit in a deregulated environment.
Selling, general and administrative expenses consist primarily of sales
and labor, various administrative expenses, materials, supplies and shipping
costs. Labor costs comprise approximately 50% of selling, general and
administrative expenses.
Results of Operations
<TABLE>
<CAPTION>
Tons Billed
---------------------------------------------
Six Months
Year Ended December 31, Ended June 30,
----------------------------- ---------------
1996 1997 1998 1998 1999
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Hot Rolled................... 918,983 941,903 841,275 446,443 442,112
Cold Rolled.................. 191,362 195,110 242,908 116,696 144,317
Galvanized................... 346,384 354,660 394,100 183,700 244,498
ERW Pipe..................... 105,935 133,201 135,753 76,228 55,293
--------- --------- --------- ------- -------
Total........................ 1,562,664 1,624,874 1,614,036 823,067 886,220
========= ========= ========= ======= =======
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales. Net sales decreased by $25,476,000, or 7.1%, from $356,734,000
for the six months ended June 30, 1998 to $331,258,000 for the six months ended
June 30, 1999. The decrease is attributable to period to period reductions in
the average selling price of our products due to the lingering effects of
import surges throughout 1998. Reduced sales prices in both the second quarter
and six months ending June 30, 1999 reduced net sales by approximately
$31,900,000 and approximately $64,900,000 when compared to the corresponding
periods in 1998. The effects of decreasing sales prices have been offset by
higher sales volumes and a better product mix emphasizing higher value added
galvanized steel. 1999 volume is higher when compared to 1998 on both a quarter
to quarter basis as well as a year to date basis. By selling more volume, we
increased both second quarter net sales by approximately $15,700,000 and year
to date 1999 net sales by approximately $28,400,000. In addition, by selling
more galvanized products as a percentage of total products sold we increased
both second quarter net sales by approximately $5,900,000 and year to date 1999
net sales by approximately $11,000,000. We have recently experienced slight
sales price increases on hot rolled products and expect this trend to continue
for the balance of the year.
Gross profit. For the second quarter of 1999, gross profit increased by
$12,638,000, or 57.8%, compared to second quarter 1998 and by $17,674,000, or
40.8%, from $43,371,000 for the six months ended June 30, 1998 to $61,045,000
for the six months ended June 30, 1999. Gross profit as a percentage of net
sales increased from 12.1% for the second quarter of 1998 to 20.3% for the same
percentage of net sales increased from 12.1% for the second quarter of 1998 to
20.3% for the same period in 1999 and from 12.2% for the six months ended June
30, 1998 to 18.4% for the same period in 1999. Our gross profit increased as a
result of (1) our slab costs decreasing at a faster rate than our unit sales
prices, (2) a product mix that included more of the higher value added
galvanized products and (3) higher sales volumes. Additionally, during the
second quarter of 1999, we recorded a $3,500,000 LIFO inventory adjustment
reflecting an increase in inventory value versus a $769,000 LIFO adjustment
during the same period in 1998 reflecting a decrease in inventory value. For
the first six months in 1999, we recorded a $10,638,000 LIFO adjustment versus
a $3,169,000 LIFO adjustment in the same period in 1998, as a result of lower
inventory costs. If we had used the FIFO method of accounting instead, gross
profit as a percentage of net sales would have increased to 12.5% for the
second quarter of 1998 and decreased to 18.2% for the second quarter of 1999.
Gross profit as a percentage of net sales
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would have decreased to 11.3% for the six-month period ended June 30, 1998 and
15.2% for the six-month period ended June 30, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $449,000 from $7,313,000 in the second
quarter of 1998 to $7,762,000 in the second quarter of 1999 and increased
slightly from $14,592,000 for the first six months of 1998 compared to
$15,083,000 for the same period in 1999. This increase resulted from a variety
of miscellaneous expenses, the majority of which consisted of an increase in
profit sharing accrual due to higher profits and an increase in shipping
expenses as a result of higher volumes.
Equity in income (loss) of affiliate. During the second quarter of 1999,
we recognized $88,000 of equity earnings from our investment in Companhia
Siderurgica de Tubarao, which consists of our pro-rata share of Companhia
Siderurgica de Tubarao's loss, which amounted to $512,000 based on our 1.5%
ownership interest offset by $600,000 of amortized negative goodwill. Our
investment in Companhia Siderurgica de Tubarao is accounted for under the
equity method of accounting. Companhia Siderurgica de Tubarao is a publicly-
traded Brazilian company engaged in the production of steel slab. Approximately
95% of Companhia Siderurgica de Tubarao's products are exported outside of
Brazil and sold predominantly in U.S. dollars. This high percentage of U.S.
dollar denominated cash flow tends to lessen the impact of market risks related
to fluctuations in currency exchange rates. For the same period in 1998, we
recognized income of $1,406,000.
Interest expense. For the second quarter of 1999, our interest expense
decreased by $106,000 compared to the second quarter of 1998. Interest expense
decreased $259,000, or 3.1%, from $8,345,000 for the first six months in 1998,
to $8,086,000 for the same period in 1999. The decrease in interest expense
resulted from a slight decrease in our average outstanding debt during the
first six months of 1999 compared to the first six months of 1998. Interest
expense figures are net of interest income and capitalized interest of $324,000
for the three months and $529,000 for the six months ended June 30, 1999 and
$581,000 for three months and $946,000 for the six months ended June 30, 1998.
Income taxes. Income taxes increased $6,815,000 from $9,043,000 for the
six month period ended June 30, 1998 to $15,858,000 for the six month period
ending June 30, 1999. Income taxes increased as a result of higher income
before tax.
Net income. Net income for the three and six month periods ended June 30,
1999 was $13,665,000 and $22,819,000, respectively as compared to $6,705,000
and $12,986,000 for the three and six month periods ended June 30, 1998, for
period to period increases of 103.8% and 75.7%, respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales decreased $49,019,000, or 6.8%, from $722,458,000
for the year ended December 31, 1997 to $673,439,000 for the year ended
December 31, 1998. We experienced lower net sales due to a 0.6% decrease in
tons billed and a 7.5% decrease in the average unit price of our products. We
realized lower unit prices as prices on all flat rolled products were
negatively impacted by a significant increase in competition from low priced
imports. The impact of imports was somewhat offset by a shift in mix from hot
rolled products to galvanized products. We generally sell galvanized products
at higher prices than hot rolled products.
Gross profit. Gross profit for 1998, including an adjustment for LIFO of
$15,754,000 was $85,580,000 or 12.7% of net sales. Our gross profit for 1997,
including a LIFO adjustment of $3,355,000 was $87,654,000 or 12.1% of net
sales. We experienced a lower gross profit principally from a decrease in net
sales. Additionally, depreciation expense for the year ended December 31, 1998
increased $2,285,000 due to the start of our second continuous galvanizing line
in September 1998. If we had used the FIFO method of accounting instead, gross
profit as a percentage of net sales would have been reduced to 11.7% in 1997
and 10.4% in 1998.
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In 1998 we made two changes in accounting estimates. The first accounting
estimate changed the estimated useful lives of the hot strip mill reheat
furnace, five stand cold reduction mill, continuous pickling line and the
second galvanizing line from 10 to 15 years. We made this change following an
investigation our engineers conducted and our operations staff concluded the
economic useful lives of the listed equipment ranged from 12 to 18 years. We
adopted 15 years representing the midpoint within the range. Changing the
useful life of this equipment increased 1998 gross profit by approximately
$2,300,000.
The second accounting estimate changed the estimated useful life of our
rolls from 1 year to three years and 10 years for back-up rolls. We made
changes to better reflect how these assets are expected to be used over time,
to provide a better matching of revenues and expenses and to be consistent with
industry practice. Changing the useful life of this equipment increased our
1998 gross profit by approximately $2,900,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1,538,000, or 5.7%, from $27,088,000 for the
year ended December 31, 1997 to $28,626,000 for the year ended December 31,
1998. Selling, general and administrative expenses as a percentage of net sales
increased from 3.7% in 1997 to 4.3% in 1998. We experienced the increase in
expenses primarily from an increase in doubtful accounts, outside legal
services and directors' fees.
Interest expense. Interest expense increased $2,977,000, or 21.3%, from
$13,977,000 for the year ended December 31, 1997 to $16,954,000 for the year
ended December 31, 1998. We experienced this increase from $2,100,000 in
interest expense paid to the Internal Revenue Service as a result of a review
of its audits for the years ended December 31, 1992 and 1993. Interest expense
figures are net of interest income and capitalized interest of $1,952,000 in
1997 and $1,940,000 in 1998.
Income taxes. Income taxes decreased $3,425,000, or 20.3%, from
$16,900,000 for the year ended December 31, 1997 to $13,475,000 for the year
ended December 31, 1998. Income tax expense is net of a state manufacturing
investment credit of $1,755,000 in 1997 and $2,515,000 in 1998.
Net Income. Net income was $29,095,000 for the year ended December 31,
1998, as compared to $30,771,000, for the prior year. If we had not made an
accounting estimate change extending the useful lives of the hot strip mill
reheat furnace, five stand cold reduction mill, continuous pickling line and
the second continuous galvanizing line from 10 to 15 years, the net income for
the year ended December 31, 1998 would have been reduced to approximately
$27,495,000. If we had not made an accounting estimate change extending the
useful lives of the rolls and back-up rolls, the net income for the year ended
December 31, 1998 would have been reduced to approximately $27,095,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales. Net sales increased $28,014,000, or 4.0%, from $694,444,000
for the year ended December 31, 1996 to $722,458,000 for the year ended
December 31, 1997. We experienced higher net sales from a 4.0% increase in tons
billed and a 0.7% increase in the average unit price of our products.
Gross profit. Gross profit decreased $17,259,000, or 16.5%, from
$104,913,000 for the year ended December 31, 1996 to $87,654,000 for the year
ended December 31, 1997. Gross profit as a percentage of net sales decreased
from 15.1% in 1996 to 12.1% in 1997. We experienced this decrease primarily
from an increase in slab costs and increases in natural gas prices and zinc
prices. Additionally, depreciation expense for the year ended December 31, 1997
increased due to capital improvements in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $873,000, or 3.3%, from $26,215,000 for the
year ended December 31, 1996 to $27,088,000 for the year ended December 31,
1997. Selling, general and administrative expenses as a percentage of net sales
remained constant.
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Interest expense. Interest expense increased $3,832,000, or 37.8%, from
$10,145,000 for the year ended December 31, 1996 to $13,977,000 for the year
ended December 31, 1997. We experienced the increase due to an increase in our
average debt outstanding. Interest expense figures are net of interest income
and capitalized interest of $1,667,000 in 1996 and $1,952,000 in 1997.
Income taxes. Income taxes decreased $12,300,000, or 42.1%, from
$29,200,000 for the year ended December 31, 1996 to $16,900,000 for the year
ended December 31, 1997. Income tax expense is net of a state manufacturing
investment credit of $0 in 1996 and $1,755,000 in 1997.
Net income. Net income was $30,771,000 for the year ended December 31,
1997, as compared to $40,666,000, for the prior year.
Liquidity and Capital Resources
At June 30, 1999, we had $10,807,000 in cash and cash equivalents and
$38,000,000 available under our credit facility. During the six months ended
June 30, 1999, cash flows from operations generated $49,982,000, which
consisted of $22,819,000 in net income, $12,285,000 in depreciation and
amortization expense and a net cash flow increase of $14,878,000 due to changes
in assets and liabilities, the majority of which were a $18,010,000 decrease in
inventories, a $7,551,000 increase in accounts receivables and a $10,624,000
increase in income taxes payable. Cash flows for investing activities during
the six months ended June 30, 1999 consisted predominately of $18,827,000 of
capital expenditures. Cash flows for financing activities during the six months
ended June 30, 1999 consisted of net repayments under both short-term and long-
term lines of credit and a dividend payment of $8,630,000.
As of March 10, 1999, we entered into a new $130,000,000 five-year bank
facility of which $100,300,000 was outstanding as of March 31, 1999. The new
bank facility is collateralized by cash, accounts receivable, inventory and
other assets. Subject to the satisfaction of customary conditions and a
borrowing base, advances under the new bank facility may be made at any time
prior to the new bank facility termination date. The termination date is the
earlier to occur of March 10, 2004 or the date that is 60 days prior to the
maturity of the 8.5% senior notes. Advances may be used for working capital,
capital expenditures and other lawful corporate purposes, including the
refinancing of existing debt.
We currently have approximately $4.1 million in material commitments for
capital investments expected to be completed during fiscal 1999. At any one
time we are involved in 50 to 70 individual capital projects designed to
maintain or enhance operational performance. We estimated 1999 total capital
expenditures to be approximately $45.0 million.
We anticipate that our primary liquidity requirements will be for working
capital, capital expenditures, debt service and the payment of dividends. We
believe that cash generated from operations and available borrowings under the
new bank facility will be sufficient to enable us to meet our liquidity
requirements for fiscal 1999.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to fluctuations in interest rates
on our notes and on our $130.0 million floating rate bank facility. We do not
currently use interest rate swaps or other types of derivative financial
instruments.
For fixed rate debt like the notes, changes in interest rates generally
affect the fair value of the debt instrument. For variable rate debt like our
bank facility, changes in interest rates generally do not affect the fair value
of the debt, but do affect earnings and cash flow. We do not have an obligation
to repay our notes prior to maturity in 2009 and, as a result, interest rate
risk and changes in fair value should not have a significant impact on us. We
believe that the interest rate on the notes approximates the current rates
available for similar types of financing and as a result the carrying amount of
the notes approximates fair value. The carrying value
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of the floating rate bank facility approximates fair value as the interest rate
is variable and resets frequently. The bank facility bears interest at LIBOR
plus 70 to 100 basis points and we estimate that average outstandings under the
facility for the year will be $80.0 million. Therefore, a one percentage point
increase in interest rates would result in an increase in interest expense of
$800,000 for the year.
We do not believe that the future market rate risk related to the notes
and the floating rate bank facility will have a material impact on our
financial position, results of operations or liquidity.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The FASB has proposed extending the effective date of SFAS 133
for one year. Application of this accounting standard is not expected to have a
material impact on our financial position, results of operations or liquidity.
Year 2000
The year 2000 problem is the result of computer programs being written
using two digits rather than four digits to define the applicable year. In
1997, we began to examine our business for year 2000 compliance. The results of
our analysis and status of our year 2000 compliance are summarized below.
Information and Non-Information Technology Systems
Our significant non-information technology systems include water,
electric, telephones, sewer and waste water discharge systems. Our engineering
department is currently analyzing all of the non-information technology systems
that support our business to determine whether they are year 2000 compliant and
to develop contingency plans, as necessary, to deal with any year 2000
problems. We expect this assessment, repair and the development of any related
contingency plans, to be completed by September 30, 1999. To date, testing has
not revealed year 2000 exposure in our non-information technology systems.
We have three information technology systems that help us run our
business, including an administrative system, a production control system and a
process control system. In the two years since we began to examine our systems
for year 2000 compliance, we have developed a comprehensive program to address
potential year 2000 problems with our information technology systems. This
program includes three phases: assessment, remediation and testing.
Assessment--This phase entails a comprehensive assessment of each of our
information technology systems with respect to year 2000 problems. Based on
testing we have undertaken since 1997, we have concluded that each of our three
information systems utilizes some date sensitive data. Our administrative
system includes our accounting, human resources, purchasing, sales and shipping
functions. Diagnostic testing by a third party vendor revealed that the
accounting, human resources and purchasing functions were purchased from an
outside vendor and were not year 2000 compliant. The other parts of our
administrative system were developed by us and our tests revealed that they are
year 2000 compliant. Testing conducted in 1998 revealed that our production
control system, which was developed in-house and is used to schedule production
at our mills and to manage production data as it relates to sales order entry,
is year 2000 compliant. Our process control system, a computer system that runs
the production lines at each of our mills, was tested in 1998 and 1999 and the
testing revealed that two pieces of production equipment have minor year 2000
problems.
Remediation--This phase involves reprogramming or replacing our systems
that are exposed to year 2000 problems. We have purchased a year 2000 compliant
software system known as an enterprise resource planning or ERP system. We
purchased the ERP system to replace the portions of our administrative
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system that are not year 2000 compliant and to modernize several aspects of our
non-production systems technology. We have also developed remedial measures for
the two pieces of production equipment that we identified as having minor year
2000 exposure. We expect that we will complete remediation efforts on these two
pieces of equipment prior to October 1999.
Testing--This phase involves testing the effects of our remediation
efforts. During June 1999, we implemented and tested the accounting, human
resources and purchasing modules of the ERP system and found that they are
fully operational and year 2000 compliant. We expect to test the year 2000
compliance of the two pieces of equipment that are part of our process control
system prior to October when we expect our remediation efforts to be complete.
Year 2000 Costs
As of June 30, 1999, we have incurred approximately $1.5 million in costs
related to implementing the ERP system. We currently estimate that complete
implementation of the ERP system will cost approximately $1.95 million and
these costs will be capitalized to the extent permitted under generally
accepted accounting principles. We expect that we will incur the $450,000
balance of the cost related to this project in the third quarter of 1999. We
expect to incur an additional $200,000 in the third quarter of 1999 to make our
process control system year 2000 compliant.
Third Party Relationships
Our material third party relationships are with slab suppliers, including
foreign suppliers. We have contacted our three largest suppliers and they have
confirmed to us that they are all year 2000 compliant. We are also in the
process of acquiring data to determine the preparedness of our other slab
suppliers and we expect to complete this analysis by the end of the third
quarter of 1999.
We have also sent surveys to the vendors from which we made 85% of our
1998 purchases to determine their preparedness for the year 2000. Of the 104
surveys we sent, we have received 72 responses. These responses are currently
being evaluated to determine whether these suppliers are year 2000 compliant.
We also expect to complete this analysis by the end of the third quarter of
1999.
We have not contacted our customers to assess their year 2000 compliance
and we do not intend to do so. Because no single customer represents more than
10% of our total sales, we do not anticipate material problems with any
potential year 2000 exposure our customers might have. Our sales to foreign
customers amount to less than one percent of our total sales, therefore, we are
not exposed to material risks from foreign customers' potential year 2000
problems.
We have not independently verified or validated the accuracy of third
parties' assessments of their year 2000 risk and cost estimates.
Worst Case Scenario and Contingency Plan
We believe we have taken and continue to take all prudent steps to
identify and remediate our year 2000 exposure and that we have an effective
program in place to address any year 2000 problems in a timely manner. Our
expectations regarding our year 2000 efforts, however, are subject to various
uncertainties that could cause actual results to differ from those discussed
here. Those uncertainties include our success in identifying systems that are
not year 2000 compliant and the success of vendors, suppliers, customers and
other third parties we interact with in addressing any year 2000 problems they
might have. We believe that our most reasonable worst case scenario is that
there could be some interruptions in deliveries from our third party vendors
and possibly in our interactions with customers, to the extent that they have
their own year 2000 problems.
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We have not developed a specific contingency plan to deal with the year
2000 problem because, in the ordinary course of business, we maintain a general
contingency plan for emergencies. In this regard, each of our departments is
responsible for ensuring that they have back-up capabilities to eliminate or
minimize the negative effects of emergencies. In addition, we maintain
inventories capable of supporting sales activities for approximately 60 days
with an additional 30 days of inventory in transit to our facilities at any
given time. We will consider developing a more specific contingency plan as we
complete assessment of our non-information systems and our third party exposure
over the next few months.
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BUSINESS
Statements of our belief in this section are based on our own internal
studies or research, estimates of members of our senior sales management team,
our knowledge of the industry or other information we have internally compiled.
Introduction
We believe we are the leading producer of flat rolled steel in the
western United States based on tonnage billed. We produce the widest range of
flat rolled steel products in the region, including hot rolled, cold rolled and
galvanized coil and sheet. We also produce electric resistant weld pipe. Unlike
integrated steel mills and mini-mills, we do not manufacture steel. Rather, we
process steel slab manufactured by third parties. Our principal market consists
of the 11 states located west of the Rocky Mountains. We have four main
competitors located in the western United States. Some steel product is also
supplied to the western United States via imports from foreign companies and
from smaller companies. We estimate that total shipments of hot rolled, cold
rolled and galvanized steel products made to the western United States in 1998
represented approximately 7.3% of total shipments of these products throughout
the United States. We believe our slab-based business model, breadth of
products, non-union work environment, southern California location and
long-standing customer relationships provide us with significant advantages
over our competition.
Industry Overview
The steel industry is highly cyclical in nature. It is influenced by a
combination of factors including periods of economic growth or recession,
strength or weakness of the U.S. dollar, worldwide production capacity, levels
of steel imports and tariffs. Other factors including the failure to adapt to
technological change, plant inefficiencies and high labor costs have affected
the industry. Steel, regardless of product type, responds to forces of supply
and demand, and prices have been volatile and have fluctuated in reaction to
general and industry-specific economic conditions.
There are generally two types of steel producers: "integrated mills" and
"mini-mills." Steel manufacturing by an integrated producer includes ironmaking
from raw materials, like iron ore and coal in a blast furnace, followed by
steelmaking, slab making, reheating and further rolling into coil or other
shapes. A mini-mill is generally a smaller volume steel producer that uses an
electric arc furnace rather than a blast furnace to create steel from ferrous
scrap metal. Mini-mills typically service regional markets.
Unlike integrated steel mills and mini-mills, we do not manufacture
steel. Rather, we process steel slab manufactured by third parties. As a
result, we do not have the fixed costs associated with the manufacturing of
steel. Slab consumption costs comprise approximately 70% of our cost of goods
sold. We believe we are the largest importer and the second largest purchaser
of steel slab in the world. Our purchasing power provides us with the ability
to negotiate favorable terms and conditions for steel slab from low cost and
high quality producers throughout the world. Prices of our flat rolled steel
products have historically experienced a close correlation to the prices of
steel slab. Although we remain subject to the cyclicality inherent in the steel
industry, we believe this correlation, combined with our slab-based business
model, provides us with operating margins that are more consistent than those
of a typical flat rolled steel producer. Because we have entered into purchase
contracts at predetermined prices for approximately 90% of our estimated 1999
slab procurement needs, our 1999 operating margin could be adversely affected
if flat rolled steel prices significantly decline.
Recent Industry Conditions
Over the past 18 months many foreign steel producers, particularly those
located in Asia and Russia, have experienced difficult financial and economic
conditions in their domestic markets. Economic weakness within their home
borders has caused a significant decrease in local demand for steel and other
industrial materials. Thus, many foreign steel producers have been forced to
export to countries like the United States that have more stable economic
conditions. In addition, the substantial weakness in value of their local
currencies
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relative to the U.S. dollar has enabled many exporters to drive prices
substantially lower in the U.S. steel market. Some industry experts have
estimated that these prices are below these producers' reasonable cost of
production. This increase in foreign steel supply and commensurate pricing
pressure has negatively affected all U.S. steel producers. Because of its
proximity to Asia, the western United States was one of the first regions to be
targeted by the additional export steel supply. We believe that our market
began to experience significant export intrusion in the fourth quarter of 1997.
On September 30, 1998, we joined 11 other major domestic steel producers
in filing with the International Trade Commission of the U.S. Department of
Commerce and the U.S. International Trade Commission a petition charging Japan,
Russia and Brazil with unfair and anti-competitive trade practices in relation
to their export of hot rolled band product into the United States. At issue was
whether Japan, Brazil and Russia committed unfair and anti-competitive trade
practices in relation to their export of hot rolled band products into the
United States. As a result of this petition the USITC voted to impose anti-
dumping duties ranging from 17% to 67%. Additionally, agreements have been
concluded between the U.S. government and the governments of Brazil and Russia
to limit hot rolled shipments into the United States for a period of five years
in exchange for the United States suspending tariffs and ending its
investigation into whether Brazilian and Russian carbon hot-rolled steel has
been subsidized. We believe that this measure of relief against the significant
supply of hot rolled products entering the U.S. market, through clearly defined
limits on imports or additional tariffs, will help serve as a stabilizing force
to domestic steel prices.
Under this determination Kawasaki Steel Corporation, the parent of one of
our stockholders, is subject to the 67% anti-dumping duty on any hot rolled
steel products it exports to the United States. We do not believe that this
will cause Kawasaki Steel Corporation to raise the prices of the steel slab it
sells to us because Kawasaki Steel Corporation sells a variety of other steel
products, both within and outside the United States. In addition, the
determination does not prevent Kawasaki Steel Corporation from selling hot
rolled steel in any other part of the world. Furthermore, we have not purchased
any hot-rolled steel products from Kawasaki Steel Corporation this year and do
not intend to unless the prices Kawasaki Steel Corporation charges are
competitive. We do not plan on violating covenants in our credit agreements by
purchasing products at higher prices from Kawasaki which would occur if we were
to purchase such products. Companhia Vale do Rio Doce is not affected by this
determination because it was not a party to the petition as it does not produce
or sell steel products.
Products and Customers
Our principal product lines are hot rolled coil and sheet, cold rolled
coil and sheet, galvanized coil and sheet and electric resistant weld pipe. The
following table sets forth our sales by product category as a percentage of
total shipments for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
----------------------------- -----------
1994 1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Hot rolled coil and sheet........... 60.8% 59.7% 58.8% 58.0% 52.1% 54.2% 49.9%
Cold rolled coil and sheet.......... 11.8% 11.8% 12.2% 12.0% 15.1% 14.2% 16.3%
Galvanized coil and sheet........... 20.9% 21.6% 22.2% 21.8% 24.4% 22.3% 27.6%
ERW pipe............................ 6.5% 6.9% 6.8% 8.2% 8.4% 9.3% 6.2%
----- ----- ----- ----- ----- ----- -----
Total........................... 100% 100% 100% 100% 100% 100% 100%
===== ===== ===== ===== ===== ===== =====
Total tons billed, excluding scrap
(in thousands)..................... 1,438 1,497 1,563 1,625 1,614 823 886
</TABLE>
The western U.S. steel market is comprised of many consumers typically
requiring small order sizes with a wide variety of metallurgical qualities and
specifications. In contrast, the majority of other U.S. steel markets primarily
depend on heavy-tonnage steel consumers like the automotive and durable goods
manufacturing industries. We believe that the western United States' smaller
and more diverse customer base helps shift pricing power away from the consumer
and to the supplier. Instead of competing solely on price, we
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benefit from having customers that place greater value on our competitive
strengths, including integrated service, timeliness of delivery and ability to
meet unique customer needs. We benefit from our strategic location in Fontana,
California.
We have over 300 active customers, with no single customer accounting for
more than 6% of our 1998 sales. Our customers include service and processing
centers, construction and building material companies, roofing and decking
manufacturers, structural tubing concerns, oil and gas producers and
distributors, wheel and rim manufacturers, packaging and container companies as
well as various other industries. Based on our knowledge of the industry and
the western U.S. market as well as selected third party sources, the following
sets forth our internally generated market share data for each of our products.
We do not actively pursue sales in foreign markets and we make foreign
sales only when they are economically advantageous to us. In 1998, we sold
approximately 12,900 tons of steel product to customers in Mexico and Canada.
This amount represented less than 1% of our total 1998 tons billed. Year to
date 1999 foreign sales are following a pattern similar to 1998 foreign sales.
Hot Rolled Coil and Sheet
We believe we are the leading supplier of hot rolled products in the
western U.S. market and we estimate that our market share in 1998 was
approximately 40%. Hot rolled coil and sheet is our largest product category as
measured by tons sold per year. Our customers use hot rolled steel for a
variety of manufacturing applications, including the production of spiral weld
pipe, shipping containers, auto wheels and rims, strapping, tubing and a
variety of construction related products. Service and processing centers, which
serve as wholesale centers for smaller manufacturers, purchased approximately
40% of our hot rolled shipments in 1998. In 1998, we directed approximately 50%
of our hot rolled production to our customers and we further processed
approximately 50% internally for our own product needs.
Cold Rolled Coil and Sheet
We believe we are the second leading supplier of cold rolled products in
the western U.S. market and we estimate that our market share in 1998 was
approximately 20%. Cold rolled coil and sheet are used in exposed steel
applications where high surface quality is important. Typically, cold rolled
material is coated or painted. Applications for our cold rolled products
include electronic cabinetry, lighting fixtures, metal office furniture, water
heaters, container manufacturers, tubing, appliances, galvanized containers and
a variety of construction related products. Service and processing centers
purchased approximately 45% of our cold rolled shipments in 1998. In 1998, we
directed approximately 40% of our cold rolled production to our customers and
we further processed approximately 60% internally for our own product needs.
Galvanized Coil and Sheet
We believe we are the leading supplier of galvanized rolled products in
the western U.S. market. We estimate that our market share in 1998 was
approximately 30%. Galvanized coil and sheet is produced by adding zinc to cold
rolled steel for additional corrosion resistance. We believe we offer the
broadest range of thicknesses, widths and coatings of galvanized products in
the western U.S. market. Applications for our galvanized coil product include
tubing, drums, tanks, culvert and a variety of construction related products.
In 1998, we shipped approximately 394,000 tons of galvanized products in the
western U.S. market. Our objective is to ship approximately 550,000 tons of
galvanized products in 2000.
Electric Resistant Weld Pipe
We supply ERW pipe with diameters ranging from 4.59 to 16.09 in the
western U.S. markets. The principal end-users of our ERW pipe production are
oil and gas transmission companies. Selected service and processing centers
purchased approximately 65% of our production. We also sell standard pipe to
industrial accounts for load bearing and low-pressure applications.
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<PAGE>
Operations
The following flowchart illustrates our production flow:
[CHART APPEARS HERE]
Modernization Program
In 1993, we began a capital expenditure program of approximately $250.0
million to be spent over a six year period. Through June 30, 1999, we had
substantially completed the capital investments originally contemplated under
the modernization program. We believe that these investments have strengthened
our competitive position by reducing operating costs, broadening our product
line, improving product quality and significantly increasing our throughput
capacity of flat rolled steel products.
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<PAGE>
The following table describes the primary investments made under our
modernization program:
<TABLE>
<CAPTION>
Major Investment Amount Completion Benefit
---------------- ------ ---------- -------
(in millions)
<C> <C> <C> <S>
Continuous pickling line.. $68 1994 . Replaced two pickling lines and
increased annual continuous pickling
capacity from 780,000 to 1.2 million
tons
. Increased overall efficiency,
productivity and product quality
Five-stand cold rolling
mill modernization........ $64 1997 . Revamped five-stand cold rolling mill
and increased throughput capacity and
improved overall product quality
. Increased maximum width of coils
produced from 429 to 629, allowing for a
commensurate increase in coil weight
from 18 to 35 tons (increased width
matches width capacity on new continuous
pickling line)
Reheat furnace............ $28 1997 . Walking beam furnace substantially
replaced 3 pusher furnaces
. Reduced emissions from reheating process
and decreased energy costs
Second continuous
galvanizing line.......... $73 1998 . Increased annual capacity from 375,000
to 550,000 tons
. Provided ability to produce a broader
product range (we believe the widest
range in the western United States)
. Improved efficiency by allowing each
galvanizing line to focus on either high
or low gauge product
. Investment includes a capital
expenditure of $38.5 million and an
operating lease of $34.5 million
Coil handling system...... $14 1999 . Reduced hot coil cooling times from 3
days to 6-8 hours
. Improved product quality and efficiency
by eliminating manual coil handling
system
</TABLE>
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<PAGE>
We believe the success of our modernization program contributes to our being
a low cost producer of flat rolled steel products. We believe that the full
benefits of the modernization program have yet to be achieved as production
efficiencies continue to be gained through improved operating and maintenance
practices, targeted capital investments and enhanced production planning and
quality control procedures. As the chart below highlights, two of the principal
achievements realized from the modernization program have been increased
production capacity and a continued shift to higher margin, value added
products.
[GRAPHIC APPEARS HERE]
Hot Rolled Coil and Sheet
We produce hot rolled coil and sheet from slab in the hot strip mill. A
walking beam furnace reheats slab, directs it to a multi-stand rolling mill to
reduce thickness and rolls it into coil. Equipped with an automatic gauge
control system and technologically advanced computer controls, the hot strip
mill currently possesses a throughput capacity of over 1.7 million tons and can
produce hot rolled coil in gauges from .0539 to .759.
The hot strip mill facility is primarily composed of the following:
. a walking beam furnace with a capacity of 5,820 tons of slab per day
supported by one pusher type reheat furnace that can be used to
provide incremental production needs and increase capacity by 310
tons per day; and
. the 869 mill which consists of five roughing stands, a scale breaker,
six finishing stands and two downcoilers. This mill is illustrated in
the schematic on the next page.
In addition, the hot strip finishing lines are composed of the following:
. an 809 coil slitter line that can trim product up to 0.3759 in
thickness and can be easily adjusted to meet a variety of customer-
specified widths;
. one shear line using a synchronized flying shear;
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<PAGE>
. a skin pass line that uses one 2-hi mill with 329 diameter x 869
rolls which is used for surface improvements; and
. a build-up line that is used to increase coil sizes to customers
specifications.
Hot Strip Mill
[GRAPHIC APPEARS HERE]
Continuous Pickle Line
We can further process hot rolled coil on the 629 continuous pickle line
for direct sales to our customers or for cold rolled and subsequent galvanizing
production. The continuous pickle line is a conventional horizontal design with
a coil entry section, welder, hot water preheat tanks, acid tanks, water rinse,
dryer, looper, side trimmer, coiler, oiling equipment and scale. The line can
currently yield up to approximately 1.2 million tons per year.
Continuous Pickle Line
[GRAPHIC APPEARS HERE]
Cold Rolled Coil and Sheet
Cold rolled sheet is hot rolled steel that has been further processed
through the continuous pickle line and then successively passed through a
rolling mill without reheating until the desired gauge and other physical
properties have been achieved. Cold rolling reduces gauge and hardens the steel
and, when further processed through an annealing furnace and temper mill,
improves uniformity, ductility and formability. Cold rolling can also impart
various surface finishes and textures. Cold rolled steel is used in
applications that demand higher quality or finish. The thinner coil is usually
annealed to increase ductility, while some coil is cut into sheet.
The cold rolled facility, with a current annual finished capacity of
approximately 1.1 million tons, includes the following:
. a five-stand reduction mill;
. an electrolytic cleaning line; and
. nine single stack annealing furnaces.
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<PAGE>
The five-stand reduction mill reduces pickled steel strip from a gauge
range of .0759 to .2259 to a range of .0109 to .1729 in thickness, with a
maximum width of 609. After cold reduction, coil is cleaned in a 2008 to 1,0008
per minute electrolytic cleaning line, producing smut-free steel which is then
batch annealed before final production in the 609 temper mill, where the steel
is tempered to specified finish and gauge.
Five-Stand Cold Mill
[GRAPHIC APPEARS HERE]
Galvanized Coil and Sheet
Galvanized coil and sheet represent our highest value added products,
requiring the greatest degree of processing and quality controls. We produce
galvanized sheet by taking cold rolled coil, heating it in an annealing furnace
and dipping the coil, while still hot, into a pot of molten zinc. As the coil
leaves the pot, coating controls insure product specifications match customer
requirements. The steel's corrosion resistance makes it ideal for applications
like air conditioning units, air ducts, metal ties, studs, siding, decking,
roofing and culverts.
With the addition of our second continuous galvanizing line that started
production in August 1998, we believe that our galvanizing facilities can
produce the full range of coated steel. The combined current capacity of our
galvanizing lines is approximately 550,000 tons per year. The first galvanizing
line is horizontally configured and produces gauges from .0129 to .1749. The
second continuous galvanizing line is vertically configured and produces gauges
from .019 to .069.
Galvanizing Line
[GRAPHIC APPEARS HERE]
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<PAGE>
Electric Resistant Weld (ERW) Pipe
We produce ERW pipe by rollforming hot rolled coil into a pipe shape,
welding the edges together with a high frequency welder, annealing the weld and
cutting the finished product to length on a continuous line. The ERW pipe may
then undergo additional testing and/or finishing operations like hydrotesting
and end beveling.
The pipe mill produces pipe with outside diameters ranging from 4.59 to
169 and wall thickness ranging from .1569 to .3759, with lengths available up
to 638 without mid-weld. Process coating is available through local coating
applicators, several of whom lease space on our property. The ERW pipe mill has
a current capacity of approximately 150,000 tons per year.
ERW Pipe Mill
[GRAPHIC APPEARS HERE]
Semi-Finished Steel Slab and Suppliers
Steel slab is a semi-finished steel product in rectangular form and is
generally the first form taken by molten steel after it solidifies. The
principal users of steel slab are steel producers or processors that roll slab
into finished products like plate or coil.
Steel slab consumption costs comprise approximately 70% of our cost of
goods sold. We are the largest importer and the second largest purchaser of
slab in the world. We purchase slab from a diverse group of foreign suppliers
and one U.S. supplier to obtain high quality steel at low cost through reliable
sources. Our foreign vendors are located in Brazil, Australia, Japan, Germany,
Netherlands, Russia, Mexico, South Korea, Venezuela and Sweden.
We have historically made our slab purchases on a quarterly basis. During
1998, however, we entered into purchase contracts for approximately 90% of our
estimated 1999 slab procurement needs. Our purchasing power combined with
attractive market conditions provided us with the opportunity to negotiate
these contracts with terms and conditions we believe are favorable to us.
Although we are not reliant on any one single vendor, we currently expect to
purchase approximately 40% of our estimated 1999 supply from Companhia
Siderurgica de Tubarao. Located in Brazil, we believe that Companhia
Siderurgica de Tubarao is the largest producer and exporter of slab in the
world. We also currently expect to purchase 20% of our supply from Broken Hill
Proprietary Company Ltd. Both of these mills have been our traditional
suppliers for over 10 years. Further, we currently expect to purchase
approximately 7% of our 1999 supply from Companhia Siderurgica National. All of
our existing contracts with our parent or affiliated companies are negotiated
on an "arm's length" basis and in accordance with market conditions.
We are related to both Companhia Siderurgica de Tubarao and Companhia
Siderurgica National. Companhia Siderurgica de Tubarao is a subsidiary of both
Companhia Vale de Rio Doce and Kawasaki Steel Corporation, our stockholders'
parent companies. Companhia Siderurgica National is a stockholder of Companhia
Vale do Rio Doce. We are not related to Broken Hill Proprietary Company Ltd. We
also charter vessels from Seamar Shipping Corporation, a subsidiary of
Companhia Vale do Rio Doce.
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<PAGE>
According to the Shareholders' Agreement, we have agreed to continuously
purchase slabs from Companhia Siderurgica de Tubarao as raw material for our
operations according to basic terms and conditions we agree upon from time to
time. In addition, our stockholders have agreed to maintain the existing
contracts between us and Companhia Siderurgica de Tubarao and Seamar Shipping
Corporation in accordance with their respective terms and conditions.
We negotiate directly with a variety of shipping companies to deliver our
slab directly to the Port of Los Angeles. The vessels are loaded following a
specific stowage plan that we developed. The plan ensures high productivity
rates at both the loading and unloading sites. Our agents are on site for the
loading of each shipment. After unloading, the slab is transported to our
facility by rail using the services of the Burlington Northern Santa Fe
Railroad. A recently renewed long-term contract with Burlington Northern covers
our transportation service at fixed rates through 2003.
We believe that our integrated slab procurement system allows us to
manage our slab inventory levels, ensuring optimal tonnage levels as well as
the slab quality necessary to meet our customers' order specifications. As of
July 1999, we had what we believed to be firm backlog orders of approximately
309,000 tons. Based on our average sales price at that time, the backlog value
was approximately $114,477,000. As of July 1998, we had what we believed to be
firm backlog orders of approximately 124,600 tons. Based on our average sales
price at that time, the backlog value was $52,490,000.
We made or intend to make the following purchases of steel slab in metric
tons, except as noted, during 1999:
<TABLE>
<CAPTION>
Supplier Volume in Metric Tons Price Total
-------- --------------------- ----- -----
<S> <C> <C> <C>
CST............................. 700,000 $155.00 $108,500,000
Kawasaki........................ 200,000 160.00 32,000,000
BHP............................. 70,000 163.00 11,410,000
BHP............................. 280,000 165.00 46,200,000
CSN............................. 100,000 150.00 15,000,000
Ekostal......................... 50,000 166.90 8,345,000
Hoogovens....................... 35,000 147.00 5,145,000
Novolipets...................... 20,000 135.00 2,700,000
Geneva.......................... 15,000 (net tons) 185.50 2,782,500
--------- ------------
Total........................... 1,470,000 $232,082,500
</TABLE>
We are committed to purchase these amounts of steel slab from these
suppliers for the 1999 calendar year.
We entered into contracts to purchase zinc at specific monthly volumes in
1999. We set the price on a monthly basis based on an average of the daily
prices of zinc as quoted on the London Metals Exchange. Because the current
pricing structure is floating, we believe that we are not exposed to price
declines. The price we have paid for zinc in the past year has ranged from
approximately $0.48 to $0.52 per pound.
Marketing and Customer Service
We believe that we provide the highest level of customer service and
product support in the western U.S. market. Our emphasis on customer service
and product quality has enabled us to establish long-standing relationships
with our customers. Our relationships with 90% of our top 30 customers extend
beyond 10 years. We attribute this customer loyalty, in large part, to our
strategy of delivering superior customer service as well as the in-depth market
knowledge of our salesforce. Each member of our senior sales team has in excess
of 25 years of experience selling to our western U.S. customer base.
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<PAGE>
Our marketing and customer service strategies emphasize three principal
objectives:
.To provide a broad range of products;
.To provide consistent service and on time product availability; and
.To provide ancillary, value added services.
We are the only producer of flat rolled steel products located in the
western United States which can supply hot rolled, cold rolled and galvanized
coil and sheet. We also produce ERW pipe in diameters ranging from 4.59 to
16.09. We believe that we are well equipped to provide "one-stop shopping" for
our customers and we believe that this maximizes sales opportunities and
increases the convenience and value of the service we provide to customers. We
will continue to invest in the quality of our products across all product lines,
allowing us to market ourselves as a full-service provider of flat rolled steel
in the region.
Our location in southern California not only gives us a significant freight
cost advantage over our competition, but also allows us to provide a more
service-oriented approach to our customers. Our operating structure allows us to
respond quickly to changes in the timing of customer requirements, adjust
schedules, source stock inventory and meet specialized shipping needs. Our
ability to deliver made-to-order products in a timely manner allows our
customers to maximize their inventory turns and meet production targets. By
maintaining a regional focus, we believe that we can most effectively service
our customers and achieve our goal of increasing market share in higher margin
value added products.
As part of our strategy to provide superior customer service, we offer our
customers ancillary services such as engineering and metallurgical advice. A
substantial portion of our customers are small to medium-sized businesses. As a
result, many do not have the resources to employ a sophisticated metallurgical
engineering staff. Our metallurgical engineers work with our customers on a
daily basis, often on site, providing advisory services focused on reducing
procurement costs and improving overall production efficiency. In addition to
ancillary services, we also provide "service center" like operations including
slitting, shearing, coating and single-billing for third party processing. We
believe that these value added services help to further differentiate us from
our competitors.
Competition
The steel industry is cyclical in nature and highly competitive. We compete
with domestic and foreign steel producers on the basis of customer service,
product quality and price. We believe that the competitive landscape within the
steel industry will continue to evolve, especially as new technologies and
production methods are introduced. We believe that because of our slab-based
business model, breadth of products, non-union work environment, southern
California location and long-standing customer relationships, we are well
positioned to meet competitive threats.
U.S. Competition
We compete with western U.S. based producers of steel sheet products
including steel processors, one integrated producer and, to a lesser extent,
service centers. Historically, high transportation costs have deterred
midwestern steel manufacturers from accessing the western U.S. market. We
believe non-western U.S. steel sheet producers supply approximately 10% of the
hot rolled coil and sheet, 3% of the cold rolled coil and sheet and 6% of the
galvanized coil and sheet in the western U.S. market. Many of our competitors
have invested in new plants and equipment, that have improved their product
quality and increased their production efficiencies. In the hot rolled segment
our principal domestic competitor is Geneva Steel, located in Provo, Utah.
Geneva, the only integrated mill to produce hot rolled products located in the
western United States, has traditionally concentrated its production on heavy
plate steel products. UPI, located in Pittsburgh, California, is our principal
competitor in galvanized and cold rolled products. We also compete in the
galvanized market with Broken Hill Proprietary Company Ltd., located in Kalama,
Washington, and MSC Pinole-Point Steel, located in Richmond, California.
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<PAGE>
Service and processing centers serve as both our customers as well as
competitors. Service centers serve as wholesale distributors for a broad line
of sheet products and also provide value added services including slitting,
shearing and coating.
Foreign Competition
We compete with foreign producers in all of our product categories. Some
foreign producers benefit from low labor costs, weakened local currencies and
government subsidies. We have experienced increased
competition from importers primarily within the hot rolled products sector over
the last 18 months. Although imported steel has relatively long lead times to
reach the western U.S. market, economic and currency dislocations in foreign
markets have forced many importers to target the United States with excess
capacity at aggressive prices. See "--Industry Overview--Recent Industry
Conditions."
Employee Relations
At June 30, 1999, we had 964 full-time employees. We have the largest
non-union workforce located at any one steel facility in the United States. We
provide our employees with supplemental work training and education programs.
Our officers also routinely discuss our business plan with them. We believe
that we have a good relationship with our employees.
Property
We are located on approximately 380 acres in Fontana, California. Our
facilities are situated on approximately 115 acres of this space. The property
includes a 22 mile railroad system serviced by Burlington Northern Santa Fe and
Southern Pacific rail lines.
Environmental Matters
Compliance with environmental laws and regulations is a significant
factor in our business. We are subject to various federal, state, and local
environmental laws and regulations concerning, among other things, air
emissions, waste water discharges and solid and hazardous waste disposal. We
own property and conduct or have conducted operations at properties that are
contaminated with hazardous materials and will require investigation and
remediation according to federal, state or local environmental laws and
regulations. Expenditures on environmental matters, including expenditures on
pollution control equipment and remediation activities, totaled approximately
$2.9 million in 1996, $3.2 million in 1997 and $2.3 million in 1998. We plan to
spend approximately $3.7 million in 1999, with the largest component
representing investigation and remediation activities at our Fontana site.
In 1996, we entered into an Expedited Remedial Action Voluntary
Enforceable Agreement with the California Environmental Protection Agency,
Department of Toxic Substances Control. This agreement superseded a Voluntary
and Enforceable Agreement and Imminent and/or Substantial Endangerment Order
issued by the Department in 1992 and amended in 1994. According to the
agreement, we are conducting an investigation of potential soil contamination
at approximately 28 areas of concern at our facility in Fontana, California. We
currently expect to propose a remedial action plan to the Department in the
spring of 2000. We estimate remedial costs could range from $5.2 to $11.0
million. The current estimate is an approximation based on incomplete
information. This estimate is less than earlier estimates and could be further
reduced as more information becomes available. On the other hand, these costs
could be significantly higher if substantial soil excavation is required or if
the agency requires any groundwater investigation or remediation. Our actual
future expenditures for response actions regarding environmental conditions
existing at our properties and other similar matters cannot be conclusively
determined at this time. There can be no guarantee that these expenditures will
not have a material adverse effect on our financial condition or results of
operations.
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<PAGE>
In October 1998, we received a Notice of Violation of Waste Discharge
Requirements from the California Regional Water Quality Control Board, Santa
Ana Region, relating to stormwater discharges at our Fontana facility. We have
proposed actions to correct the alleged non-compliance which we believe should
not cost in excess of $375,000. However, we cannot assure you that the cost of
compliance will not exceed this amount or that the agency will accept our
proposal.
Legal Proceedings
We are from time to time in the ordinary course of business, subject to
various pending or threatened legal actions. We believe that any ultimate
liability arising from pending or threatened legal actions should not have a
material adverse effect on our financial condition. On September 30, 1998, we
joined 11 major domestic steel producers in filing a Petition for the
Imposition of Antidumping Duties and Countervailing Duties according to
Sections 701, 702, 731 and 732(b) of the Tariff Act of 1930, as amended, before
the International Trade Commission of the U.S. Department of Commerce and the
U.S. International Trade Commission (Case Nos. C-351-829, A-588-846, A-821-809
and A-351-828) in connection with hot rolled carbon steel flat products from
Japan, Brazil and the Russian Federation. At issue was whether Japan, Brazil
and Russia committed unfair and anti-competitive trade practices in relation to
their export of hot rolled band products into the United States. As a result of
this petition the USITC voted to impose anti-dumping duties ranging from 17% to
67%. Additionally, agreements have been concluded between the U.S. government
and the governments of Brazil and Russia to limit hot rolled shipments into the
United States for a period of five years in exchange for the United States
suspending tariffs and ending its investigation into whether Brazilian and
Russian carbon hot-rolled steel has been subsidized. As a result of the
petition, Kawasaki Steel Corporation, the parent of one of our stockholders, is
subject to the 67% duty on any hot rolled products it exports to the United
States. We do not believe that this will affect the price of steel slab we
purchase from Kawasaki Steel Corporation as hot rolled products are only one of
a variety of products the company sells around the world and Kawasaki Steel
Corporation may still sell hot rolled products in any other part of the world.
Companhia Vale do Rio Doce is not affected by this petition because it was not
a party to the petition as it does not produce or sell steel products. See "--
Industry Overview--Recent Industry Conditions."
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth our directors and executive officers as of
June 30, 1999. All directors hold their positions until their terms expire and
until their respective successors are elected and qualified. Executive officers
are elected by and serve at the discretion of the board of directors until
their terms expire and their successors are duly chosen and qualified.
<TABLE>
<CAPTION>
Name Age Position
------------------------------- ----- -------------------------------------
<C> <C> <S>
Tatsuhiko Hamamoto............. 58 Chairman of the board of directors
Hajime Bada.................... 50 Director
Francisco Povoa................ 49 Director
Nadim Sareyed-Dim.............. 57 Director
C. Lourenco Goncalves.......... 40 President and Chief Executive Officer
James E. Declusin.............. 56 Senior Executive Vice President,
Commercial
Junsuke Takasaki............... 49 Executive Vice President, Operations
Vicente Wright................. 46 Executive Vice President, Finance
Donald Duffy................... 64 Vice President, Operations
Brett Guge..................... 44 Vice President, Administration and
Corporate Secretary
</TABLE>
- --------
Tatsuhiko Hamamoto has served as Chairman of the board of directors since
July 1998. From 1995 to 1998, Mr. Hamamoto was Corporate Auditor on the Board
of Kawasaki Steel Corporation. From 1993 to 1995, Mr. Hamamoto was Executive
Vice President of KLI, an aviation leasing company. From 1990 to 1992,
Mr. Hamamoto served as Vice President, Technology and Finance at Armco Steel.
From 1987 to 1989, Mr. Hamamoto was General Manager of the Overseas Steel
Business Department at Kawasaki Steel Corporation and our Executive Vice
President. He graduated from Kobe University with a Bachelor of Arts Degree in
Economics.
Hajime Bada has served as a director since March 1998. He has been
employed by Kawasaki Steel Corporation since 1973 where he has held positions
as Chiba Works Steelmaking Shop No. 1 Manager, Mizushima Works Steelmaking Shop
No. 2 Manager, Steel Business Planning Manager, General Manager of the Steel
Business Planning Department and General Manager of the Corporation Planning
Department. He graduated from Tokyo University with a Master's Degree in
Metallurgy.
Francisco Povoa has served as a director since March 1998. He has worked
at Companhia Vale do Rio Doce since February 1972 and has held positions as
Superintendent of Technology, Mining Superintendent and General Manager of the
South System, Industrial Engineering General Manager. From 1991 to 1993, Mr.
Povoa served as the Executive Director of Rio Doce International in Brussels.
Since 1997, he has served as both the Chairman of the board of directors and
the President of Companhia Vale do Rio Doce's Employees Investment Club, a
shareholder of Companhia Vale do Rio Doce. He served as President of SIBRA-
Eietwosiderivagica Brasileina S.A. and Companhia Paulista de Ferro-Ligas, a
Brazilian maganese producer, from 1997 to 1998. He has served as a member of
the board of directors of Companhia Vale do Rio Doce since 1997, Societe
Europeenne D'Alliages Pour La Siderurgie (SEAS), French ferro-alloy producers,
since 1998, Nova Era Silicon, a Brazilian ferro-silicon company, since 1998,
and Companhia Vale do Rio Doce's pension fund since 1993. Mr. Povoa graduated
from Universidade Federal de Minas Gerais with a Mining Engineering Degree.
Nadim Sareyed-Dim has been a member of the board since August 1997 and
served as the Chairman of the board from August 1997 to March 1998. Mr.
Sareyed-Dim has been a Director, the President and Executive Vice President of
Rio Doce America Inc. (USA), a subsidiary of Companhia Vale do Rio Doce, since
1996, and the President of the Board and Chief Executive Officer of Rio Doce
Ltd. (USA), also a
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<PAGE>
subsidiary of Companhia Vale do Rio Doce, since 1997. From 1989 to 1995, he
served as President, Vice President and Commercial Director of Vale do Rio Doce
Navegacao SA Docenave, a subsidiary of Companhia Vale do Rio Doce. Mr. Sareyed-
Dim also served as Marketing and Planning Director and General Manager of
Technical Studies at Companhia Vale do Rio Doce from 1985 to 1989. Mr. Sareyed-
Dim has also been a member of the board of directors of SEAS, a French ferro-
maganese company, and a Member of the Administration Board of Rio Doce Pasha
Terminal, a cargo terminal in the Port of Los Angeles. He received his Ph.D in
Metallurgy from Monash University, Melbourne, Australia.
C. Lourenco Goncalves has served as President and Chief Executive Officer
since March 1998. From 1981 to 1998, he was employed by Companhia Siderurgica
National, the largest steel company in Brazil, where he held positions as a
Managing Director, General Superintendent of Volta Redonda Works, Hot Rolling
General Manager, Cold Rolling and Coated Products General Manager, Hot Strip
Mill Superintendent, Continuous Casting Superintendent and Quality Control
Manager. Mr. Goncalves graduated from the Federal University of Minas Gerais
State with a Master's Degree in Metallurgy.
James E. Declusin has served as the Senior Executive Vice President,
Commercial since July 1998. He has been with us since 1984 and has held
positions as Vice President, Commercial and Chief Operating Officer. Prior to
joining us, Mr. Declusin spent 17 years in various management positions in the
commercial area of Kaiser Steel Corporation. Mr. Declusin graduated from
University of Santa Clara with a Bachelor of Science Degree in Commerce.
Junsuke Takasaki has served as Executive Vice President, Operations since
June 1998. Prior to joining us, he was employed by Kawasaki Steel Corporation
from 1973 to 1998 where he held positions as Cold Rolling Department General
Manager and Quality Department Manager at Chiba Works and Kawasaki Steel
Corporation's New York and Detroit offices. Mr. Takasaki graduated from Kyushu
University with a Master's Degree in Metallurgy.
Vicente Wright has served as Executive Vice President, Finance since
February 1998. Mr. Wright was the Steel Division General Manager, from 1992 to
1998, and Iron Ore Sales General Manager from 1991 to 1992 of Companhia Vale do
Rio Doce. From 1987 to 1988, Mr. Wright served as Iron Ore Sales General
Manager for Rio Doce Asia Ltd., a subsidiary of Companhia Vale do Rio Doce. In
1986 and 1987, he was the assistant to the our President in charge of slab
procurement and all of its related logistics. From 1978 to 1986, Mr. Wright
served as Purchasing Executive and Slab Marketing Manager at Companhia
Siderurgica de Tubarao. Mr. Wright was a member of the Board of Directors of
Companhia Siderurgica National, the largest steel company in Brazil, from 1993
to 1997, Acominas, a Brazilian steel mill, from 1994 to 1998, Siderar, an
Argentine steel mill, from 1994 to 1997, Chairman of Nova Era Silicon, a
Brazilian ferro-silicon company mill, from 1994 to 1997 and SEAS from 1994 to
1998. He graduated from Marquette University, Milwaukee, Wisconsin with a
Bachelor's Degree in Business Administration.
Donald Duffy has served as Vice President, Operations since 1986. Mr.
Duffy has been with us since 1986 and held the positions of Maintenance
Coordinator and Major Project Manager prior to becoming the Vice President of
Operations. From 1952 through 1985, Mr. Duffy was employed by Kaiser Steel
Corporation where he held positions as Machinist, Planning Department
Supervisor, Machine Shop General Foreman, General Foreman Maintenance of
Continuous Caster, Superintendent of Maintenance and Superintendent of
Operations and Maintenance. Mr. Duffy received a Certificate in Mechanical
Engineering and Industrial Supervision from Chaffey College.
Brett Guge has served as Vice President, Administration and Corporate
Secretary since May 1997. From 1994 to 1997, he served as the Manager of
Administration of Gallatin Steel. From 1983 to 1994, he was employed by Alcoa
where he held positions as the Superintendent of Industrial Relations and
Employment, Supervisor of Employee Relations and Superintendent of Industrial
Relations and Training. Mr. Guge graduated from Xavier University with a
Master's Degree in Business Administration.
85
<PAGE>
Board Committees
Our board of directors has a compensation committee and a finance
committee. The board established the compensation committee in March 1998 and
appointed four members: former director Masatoshi Nakamura, Director Nadim
Sareyed-dim, Mr. Toshiro Kabasawa of Kawasaki Steel Corporation and Mrs. Carla
Grasso of Companhia Vale do Rio Doce. Mr. Nakamura resigned from the board in
June 1998 and Mr. Hamamoto replaced him on the compensation committee. The
compensation committee met twice during 1998. The compensation committee
reviews compensation packages for our officers and other key management,
reviews policies for salary, wages and benefits for our employees and prepares
the compensation proposal to the board.
The board also established the finance committee in March 1998. This
committee is comprised of four members including Directors Nadim Sareyed-Dim
and Hajime Bada, and Mrs. Gloria Serra of Companhia Vale do Rio Doce and
Mr. Eiji Hayashida of Kawasaki Steel Corporation. This committee met twice
during 1998. The finance committee mainly reviews our investment plans,
business plan, annual operating plan and budget. The committee is also
responsible for reviewing our operating results and performance.
Director Compensation
For their service as our directors for fiscal year 1998, between January
1, 1998 and August 1, 1998 all directors received $1,500 per month payable on a
quarterly basis. From August 1, 1998 to December 31, 1998, all directors,
except the Chairman, received $3,000 per month and committee members received
$1,000 per month, each payable on a monthly basis. Mr. Hamamoto, Chairman of
the board of directors, is paid a salary of $310,000 as our employee. During
1998, he received $159,853 in salary, $566 in profit sharing, $333 for car
expenses and $5,899 in matching contributions to his account in our 401(k)
Plan.
86
<PAGE>
Executive Compensation
The following summary compensation table sets forth information regarding
compensation earned in the fiscal year ended December 31, 1998 by our Chief
Executive Officer, each of our other four most highly compensated executive
officers whose salary and bonus exceeded $100,000 in the 1998 fiscal year, and
our former President and Chief Executive Officer, Executive Vice President
Operations and Vice President Commercial, each of whom resigned during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Name and Principal Other Annual All Other
Position Salary Bonus Compensation LTIP Payouts Compensation
- ------------------------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
C. Lourenco Goncalves $238,889(2) -- $ 45,888(3) -- $ 9,218(4)
(1)....................
President and Chief
Executive Officer
Marcus A. Mota-Silva $ 48,675(2) $126,000 $134,066(6) -- $ 3,504(7)
(5)....................
President and Chief
Executive Officer
James E. Declusin (8)... $329,186 $116,000 $ 53,958(9) $130,000 $ 10,655(10)
Senior Executive Vice
President Commercial
Vicente Wright (11)..... $160,799(2) -- $ 18,353(12) -- $ 9,308(13)
Executive Vice
President Finance
Donald Duffy............ $171,763 $ 36,000 (14) $ 30,000 $ 10,313(15)
Vice President
Operations
Brett J. Guge........... $155,421 $ 24,000 (14) -- $ 10,098(16)
Vice President
Administration
Yasuo Ogawa (17)........ $ 90,753(2) $ 80,000 $ 31,677(18) -- $ 6,133(19)
Executive Vice
President Operations
David Catterlin (20).... $101,809(2) $ 37,000 $ 21,904(21) $ 40,000 $353,946(22)
Vice President
Commercial
</TABLE>
- --------
(1) Mr. Goncalves began serving as President and Chief Executive Officer
effective March 11, 1998.
(2) These salaries represent the actual amounts paid to the officer as the
officer was not employed by us for the entire calendar year. Mr. Goncalves'
reported compensation is for the period beginning March 11, 1998 through
December 31, 1998. Mr. Mota-Silva's reported compensation is for the period
beginning January 1, 1998 through March 13, 1998. Mr. Wright's reported
compensation is for the period beginning February 1, 1998 through December
31, 1998. Mr. Ogawa's reported compensation is for the period beginning
January 1, 1998 through June 13, 1998. Mr. Catterlin's reported
compensation is for the period beginning January 1, 1998 through July 17,
1998.
(3) Includes moving expenses of $25,431.
(4) Represents payments of $1,232 made under our profit sharing plan and
matching contributions of $7,986 to Mr. Goncalves' account in our 401(k)
plan.
(5) Mr. Mota-Silva resigned as President and Chief Executive Officer effective
as of March 13, 1998.
(6) Includes $42,866 for reimbursement of tax payments and $42,778 in moving
expenses.
(7) Represents matching contributions to Mr. Mota-Silva's account in our 401(k)
Plan.
(8) Mr. Declusin served as Chief Operating Officer until July 1, 1998 and began
to serve as Executive Vice President, Commercial on July 1, 1998.
(9) Includes $41,487 in unused vacation pay.
(10) Represents $2,384 paid under our profit sharing plan and matching
contributions of $8,271 to Mr. Declusin's account in our 401(k) Plan.
(11) Mr. Wright began serving as Executive Vice President, Finance effective
February 1, 1998.
(12) Includes $6,119 for rent payments and $8,961 for car expenses.
(13) Represents payments of $1,670 made under our profit sharing plan and
matching contributions of $7,638 to Mr. Wright's account in our 401(k)
Plan.
87
<PAGE>
(14) We provide perquisites to our officers which are not disclosed in
accordance with SEC regulations because the value of the perquisites is
less than 10% of the officer's total salary and bonus.
(15) Represents payments of $2,384 made under our profit sharing plan and
matching contributions of $7,929 to Mr. Duffy's account in our 401(k)
Plan.
(16) Represents payments of $2,384 made under our profit sharing plan and
matching contributions of $7,714 to Mr. Guge's account in our 401(k) Plan.
(17) Mr. Ogawa resigned as Executive Vice President, Operations effective as of
June 13, 1998.
(18) Includes $11,145 for moving expenses, $10,432 for reimbursement of tax
payment and $9,350 for medical payments.
(19) Represents payments of $1,440 under our profit sharing plan and matching
contributions of $4,693 to Mr. Ogawa's account in our 401(k) Plan.
(20) Mr. Catterlin resigned as Vice President, Commercial effective as of June
15, 1998.
(21) Includes $15,665 in unused vacation pay.
(22) Represents separation amount of $346,632, see "--Supplemental Executive
Retirement Plans and Separation Agreement", $1,440 paid under our profit
sharing plan and matching contributions of $5,874 to Mr. Catterlin's
account in our 401(k) Plan.
Supplemental Executive Retirement Plans and Separation Agreement
On August 7, 1998, we entered into a Supplemental Executive Retirement
Plan with James E. Declusin, Senior Executive Vice President, Commercial. The
plan reduces Mr. Declusin's annual base salary effective July 1, 1998 from
$360,000 to $282,000, based on reassignment from his position of Chief
Operating Officer, and grants him retirement payments in order to induce him to
remain in our employ. Upon Mr. Declusin's retirement, we will pay Mr. Declusin
a monthly benefit for 180 months calculated as follows: one-twelfth of the
product of 2.5% multiplied by the number of years he is employed with us,
limited to 16 years, multiplied by his average annual compensation, multiplied
by a vested percent, currently standing at 16%, and which increases as follows
if Mr. Declusin continuously remains employed by us: on October 30, 1999, an
increase to 24%; and on October 30, 2000, an increase to 100%.
On February 24, 1997, we entered into a Supplemental Executive Retirement
Plan with Donald W. Duffy, Vice President, Operations, intended to induce Mr.
Duffy to remain in our employ. If Mr. Duffy remains a full time employee until
his retirement, we will pay Mr. Duffy a monthly benefit for 180 months
calculated as follows: one-twelfth of the product of 2.5% multiplied by the
number of years he is employed with us limited to 18 years, multiplied by his
average annual compensation. If Mr. Duffy remains a full time employee until
his retirement, 100% of the benefit will vest. No partial vesting applies.
On June 12, 1998, we entered into a Separation Agreement with David
Catterlin, Vice President, Commercial. According to this agreement, following
his termination of employment on June 15, 1998, we have paid and will pay Mr.
Catterlin as follows: we paid him wages through July 17, 1998, continued his
medical plan coverage through July 31, 1998, paid him $173,316 in 1999, and
will pay him $86,658 in each of 2000 and 2001.
Shareholders' Agreement
We are owned 50% by Kawasaki Steel Holdings (USA), Inc., a Delaware
corporation and a subsidiary of Kawasaki Steel Corporation, a Japanese
corporation, and 50% by Rio Doce Limited, a New York corporation and a
subsidiary of Companhia Vale do Rio Doce, a Brazilian corporation. Our two
stockholders entered into a Shareholders' Agreement dated June 27, 1995,
replacing a Shareholders' Agreement dated June 1, 1987. According to the
Shareholders' Agreement, the stockholders agreed to subscribe for additional
shares of our stock in proportion to their respective ownership if any new
stock is issued. According to the Shareholders' Agreement, increases in our
capital stock from time to time shall be allocated between our common stock and
preferred stock as agreed upon by the stockholders. Each of the stockholders
has the right and obligation to subscribe and pay fully for the new shares in
proportion to its respective ownership of our
88
<PAGE>
common stock. In addition, either stockholder may let its Affiliated
Corporations, as defined the Shareholders' Agreement, subscribe, in whole or in
part, to the new shares to be issued to it under the terms described below.
The Shareholders' Agreement provides that the Board of Directors shall be
constituted of five directors, one of whom shall be chairman, as elected by and
among the directors. Each stockholder shall have the right to appoint two
directors and the fifth director shall be elected by unanimous affirmative vote
of the shareholders. In addition, the stockholders shall jointly appoint a
president, who shall appoint other officers designated by the Board of
Directors. The Shareholders' Agreement also provides for a Consultative Council
consisting of two members, one appointed by each of the stockholders. It is
unclear whether the Consultative Council provisions are valid under Delaware
corporation law. The Consultative Council decides on all relevant matters
submitted to it by both or either of the stockholders and specifically resolves
any deadlock among the directors. Because no stockholder holds a majority of
our stock and the directors and members of the Consultative Council are elected
by the stockholders in proportion to each of the stockholders' holdings, there
is a possibility that a deadlock may occur on any issue voted on by the
stockholders, Board of Directors and Consultative Council. If a deadlock were
to occur and the Consultative Council could not resolve the issue, the last
recourse is arbitration according to the Shareholders' Agreement. Furthermore,
according to the Shareholders' Agreement, we have agreed to purchase slab from
Companhia Siderurgica de Tubarao and use Seamar Shipping Corporation for ocean
transportation of slab at negotiated prices.
The Shareholders' Agreement provides that, subject to any limitation on
the payment of dividends contained in any agreement we are a party to, the
stockholders shall cause us to distribute from our profits as many dividends as
possible that may be distributed under the applicable laws and regulations,
provided that the profits shall first be applied to the payment of dividends on
the preferred stock. We have historically paid dividends of 50% of our net
income per year.
If either one of the stockholders wishes to transfer or assign their
shares of our stock to a third party, other than to one of its affiliated
corporations, the stockholder must first offer to sell those shares to the
other stockholder upon the same terms and conditions that the third party has
offered to purchase the shares. Any stockholder who sells, transfers, assigns,
or creates a pledge or other encumbrance on its shares in favor a third party,
other than its affiliated corporations, is obligated to obtain an undertaking
letter from the third party according to which the third party undertakes
unconditionally and irrevocably the obligations of the transferring stockholder
under the Shareholders' Agreement in proportion to the number of shares
transferred. Either stockholder may sell, transfer or assign to its affiliated
corporations all or any part of its shares or preemptive rights to subscribe
for new shares of our stock by giving written notice to the other stockholder,
provided that the affiliated corporation has agreed to become a party to the
Shareholders' Agreement. In this case, both the transferor and the affiliated
corporation shall jointly assume all of the obligations of the transferor under
the Shareholders' Agreement.
401(k) Plan
We maintain the California Steel Industries, Inc. 401(k) Savings Plan, a
tax qualified cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan provides the participants
with benefits upon retirement, death, disability or termination of employment
with us. Employees are eligible to participate in the salary reduction portion
of the plan on the first day of the calendar month following their date of
hire.
Participants may authorize us to contribute to the 401(k) Plan on their
behalf a percentage of their compensation, not to exceed legally permissible
limits, including an overall dollar limit of $10,000 for 1999. The 401(k) Plan
provides for our discretionary matching and profit sharing contributions. We
currently match 100% of the first 4% of the participant's deferral under the
401(k) Plan each year and 50% of the next 2% of the participant's deferral
under the 401(k) Plan each year. Each plan year we may also make an additional
contribution to the 401(k) Plan. This discretionary employer contribution, if
we make it, is allocated to each participant's account based on the
participant's compensation for the year relative to the compensation of all
89
<PAGE>
participants for that year. In order to share in the allocation of the
discretionary employer contribution, if any, a participant must complete 1,000
hours of service in the plan year.
Profit-Sharing Plan
We maintain a profit sharing plan under which bonuses are awarded based
on a pool amount, equal to 8% of our income before taxes and gain or loss on
disposition of fixed assets. The basis for determining the profit sharing pool
is subject to review and approval of our Board of Directors. The employee's
share in the pool amount is based on his or her length of service with us
during the profit sharing period. Employees who voluntarily terminate their
employment for reasons others than retirement before the end of the profit
sharing period and employees whose employment is involuntarily terminated are
not eligible to receive any profit sharing award.
Compensation Committee Interlocks and Inside Participation
Masatoshi Nakamura, Nadin Sareyed-Dim, Toshiro Kabasawa, Carla Grasso and
Tatsuhiko Hamamoto served as members of our compensation committee in 1998. Mr.
Nakamura resigned from the board in June 1998 and Mr. Hamamoto replaced him on
the compensation committee at that time. None of the members of the
compensation committee was, during 1998, an officer, employee or formerly an
officer or employee of ours or our subsidiary.
Mr. Hamamoto served as Corporate Auditor on the Board of Kawasaki Steel
Corporation in 1998. Mr. Kabasawa served as Staff Manager, Steel Business
Planning of Kawasaki Steel Corporation during 1998. Kawasaki Steel
Corporation's subsidiary, Kawasaki Steel Holdings (USA), Inc. is one of our
stockholders. In 1998, Mr. Nakamura served as President of Kawasaki Steel
Holdings (USA), Inc. During 1998, we purchased $60,258,000 of slab from
Kawasaki Steel Corporation. In 1998, Mr. Sareyed-Dim served as the President of
the Board and Chief Executive Officer of Rio Doce Ltd. (USA), one of our
stockholders, and also a subsidiary of Companhia Vale do Rio Doce. In 1988,
Mrs. Grasso served as Director of Human Resources and Corporate Administration
of Companhia Vale do Rio Doce, the parent of one of our stockholders, Rio Doce
Limited.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1999, information
regarding the shares of our common stock and Class C preferred stock
beneficially owned by each stockholder that beneficially owns in excess of 5%
of the outstanding shares of our common stock and Class C preferred stock. No
director or named executive officer beneficially owns any shares of our common
stock or Class C preferred stock.
<TABLE>
<CAPTION>
Common Class C Preferred
----------------- -----------------
Name of Beneficial Owner Number % of Class Number % of Class
- ------------------------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Rio Doce Limited.......................... 500 50% 1,500 50%
546 5th Avenue, 12th Floor
New York, New York 10036
Kawasaki Steel Holdings (USA), Inc. ...... 500 50% 1,500 50%
c/o Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
</TABLE>
Rio Doce Limited is a subsidiary of Companhia Vale do Rio Doce, a Brazilian
corporation, and Kawasaki Steel Holdings (USA), Inc. is a subsidiary of
Kawasaki Steel Corporation, a Japanese corporation.
90
<PAGE>
MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS
Our stockholders, Kawasaki Steel Holdings (USA), Inc., a subsidiary of
Kawasaki Steel Corporation, and Rio Doce Limited, a subsidiary of Companhia
Vale do Rio Doce, are parties to a Shareholders' Agreement. According to the
Shareholders' Agreement, the stockholders control the election of the board of
directors. The stockholders also indirectly control the appointment of officers
through their right to jointly elect the president, who is entitled to appoint
our other officers.
The Shareholders' Agreement also provides for a Consultative Council,
comprised of two members. Each stockholder is entitled to elect one member. The
Consultative Council decides on all matters submitted to it by either or both
of the stockholders and resolves deadlocks among the board of directors. We
have transactions in the normal course of business with affiliated companies.
For example, we purchase slab from Companhia Siderurgica de Tubarao, a
subsidiary of both Companhia Vale do Rio Doce and Kawasaki Steel Corporation.
During 1998, we purchased $112,695,000 of slab from Companhia Siderurgica de
Tubarao and $60,258,000 of slab from Kawasaki Steel Corporation. We expect to
purchase approximately 40% of our estimated 1999 supply of steel slab from
Companhia Siderurgica de Tubarao. We also hold a 4% interest in Companhia
Siderurgica de Tubarao.
We conducted arms-length negotiations with Companhia Siderurgica de
Tubarao on a quarterly basis in 1998 and on a yearly basis for 1999. We also
negotiated with Companhia Siderurgica National on the same basis for 1999. The
Shareholders' Agreement provides that we shall continuously purchase slabs from
Companhia Siderurgica de Tubarao under terms and conditions as agreed upon by
Companhia Siderurgica de Tubarao and us. We negotiate rates annually on an
arms-length basis and are committed to purchase slabs through the end of 1999
from them. The executive officer negotiating the market price for the steel
slab was our Executive Vice President--Finance. In 1998, we paid Companhia
Siderurgica de Tubarao $112,695,000 for approximately 560,000 tons of steel
slab. In 1999, we paid or expect to pay Companhia Siderurgica de Tubarao
$108,000,000 for approximately 775,000 tons of steel slab. In 1999, we paid or
expect to pay Companhia Siderurgica National $13,000,000 for approximately
100,000 tons of steel slab.
We charter vessels from Seamar Shipping Corporation, a subsidiary of
Companhia Vale do Rio Doce, for the ocean transfer of slab to the Port of Los
Angeles. During 1998, we incurred $11,825,000 in charter fees from Seamar
Shipping Corporation for their services. The Shareholders' Agreement provides
that we shall charter vessels from Seamar. We entered into a 15-year contract
with Seamar for shipping services that expires on May 31, 2000. We negotiate
rates annually on an arms-length basis. The contract specifies that Seamar is
our sole supplier of shipping services for all slab shipped from Port Praia
Mole, Brazil. Under the agreement, we have agreed to ship a minimum of 600,000
metric tons of material per year. Volume in 1998 exceeded this amount and we
expect the same in 1999. Approximately 50% of our chartering services are
provided by Seamar Shipping Corporation. The executive officer negotiating the
price for shipping services was our Executive Vice President--Finance.
We contract with Rio Doce Pasha Terminal, a joint venture of Companhia
Vale do Rio Doce, to unload our ocean cargo from ships at the Port of Los
Angeles. During 1998, we incurred $16,732,000 for Rio Doce Pasha Terminal's
services. The Shareholders' Agreement provides that we shall contract with Rio
Doce Pasha Terminal for their unloading services. We have a five-year contract
with Rio Doce for terminal unloading services that expires on December 31,
2000. We negotiate rates annually on an arms-length basis. The contract
specifies that we will process a minimum of 1.0 million tons of steel slab
through Rio Doce per year. The price per ton may be renegotiated July 1 of each
year to reflect a change in union labor contracts. If we ship more than 1.0
million tons per year, we will receive a discount per ton for the unloading of
any slabs after 1.0 million tons of slabs have been unloaded. Approximately
100% of our unloading services are provided by Rio Doce Pasha Terminal. The
executive officer negotiating the price for unloading services was our
Executive Vice President--Finance.
91
<PAGE>
LEGAL MATTERS
Gibson, Dunn & Crutcher LLP, Los Angeles, California will opine on the
validity of the Series B notes for us.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998,
have been included in the registration statement and this prospectus, in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing in this prospectus upon the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
Upon effectiveness of this registration statement, we will be subject to
the informational requirements of the Exchange Act, and in accordance with the
Exchange Act we file reports, proxy and information statements and other
information with the commission. You can inspect and copy these reports, proxy
and information statements and other information at:
. the public reference facilities maintained by the commission at 450
Fifth Street, N.W., Washington, DC 20549, and
. the regional offices of the commission located at:
. 500 West Madison Street, Room 1400, Chicago, Illinois 60606, and
. 7 World Trade Center, 13th Floor, New York, New York 10048.
You also can obtain copies of these materials from the public reference
section of the commission at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. You may obtain information on the operation of the public
reference room by calling the commission at 1-800-SEC-0336. You can obtain
electronic filings made through the electronic data gathering, analysis and
retrieval system at the commission's web site, http://www.sec.gov.
Whether or not required by the rules and regulations of the commission,
so long as any Series B notes are outstanding, we will furnish to the holders
of Series B notes within 15 days after we are or would have been required to
file with the commission:
. all quarterly and annual financial information that would be required
to be contained in a filing with the commission on Forms 10-Q and 10-
K if we were required to file these Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" and, with respect to the annual information only, a report
thereon by our certified independent accountants; and
. all current reports that would be required to be filed with the
commission on Form 8-K if we were required to file these reports.
In addition, whether or not required by the rules and regulations of the
commission, at any time after we file a registration statement with respect to
the exchange offer or a shelf registration statement, we will file a copy of
all information and reports with the commission for public availability, unless
the Commission will not accept such a filing, and make the information
available to securities analysts and prospective investors upon request. In
addition, we have agreed that, for so long as any Series B notes remain
outstanding, it will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered according to Rule 144A(d)(4) under the Securities Act.
92
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996........................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 .................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Condensed Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998....................................................... F-15
Consolidated Condensed Statements of Income for the six months ended June
30, 1999 and 1998 (unaudited)........................................... F-16
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited)...................................... F-17
Notes to Consolidated Condensed Financial Statements (unaudited)......... F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Steel Industries, Inc.:
We have audited the accompanying consolidated balance sheets of California
Steel Industries, Inc. and subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Steel
Industries, Inc. and subsidiary as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Costa Mesa, California
January 20, 1999
F-2
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (note 7)....................... $ 11,962 $ 10,343
Trade accounts receivable, less allowance for doubtful
receivables of $720,000 in both 1998 and 1997 (note
10)..................................................... 53,630 58,280
Inventories (notes 3 and 7).............................. 173,396 147,500
Deferred income taxes (note 11).......................... 4,545 5,051
Other receivables and prepaid expenses................... 5,211 2,586
----------- -----------
Total current assets............................... 248,744 223,760
Investment in affiliated company (note 6)................. 34,726 33,583
Property, plant and equipment, net (notes 4, 7 and 13).... 251,163 228,795
----------- -----------
Total assets....................................... $ 534,633 $ 486,138
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Notes payable to banks (note 7).......................... $ 103,700 $ 96,900
Current installments of long-term debt (note 7).......... 20,000 15,000
Accounts payable......................................... 50,550 31,384
Other accrued expenses................................... 22,344 16,031
----------- -----------
Total current liabilities.......................... 196,594 159,315
----------- -----------
Long-term debt, excluding current installments (note 7)... 120,000 130,000
Deferred income taxes (note 11)........................... 26,740 20,317
Stockholders' equity (note 8):
Class A preferred stock, $10,000 par value per share.
Authorized 1,000 shares; none issued.................... -- --
Class B preferred stock, $10,000 par value per share.
Authorized 2,000 shares; none issued.................... -- --
Class C preferred stock, $10,000 par value per share.
Authorized 3,000 shares; issued and outstanding 3,000
shares.................................................. 30,000 30,000
Common stock, no par value. Authorized 2,000 shares;
issued and outstanding 1,000 shares..................... 10,000 10,000
Retained earnings........................................ 151,299 136,506
----------- -----------
Total stockholders' equity......................... 191,299 176,506
Commitments and contingencies (notes 5, 7, 8, 9, 10, 11
and 12)
----------- -----------
Total liabilities and stockholders' equity......... $ 534,633 $ 486,138
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Net sales........................................ $673,439 $722,458 $694,444
Costs of sales, net of LIFO reserve (note 3)..... 587,859 634,804 589,531
-------- -------- --------
Gross profit............................... 85,580 87,654 104,913
Selling, general and administrative expenses..... 28,626 27,088 26,215
-------- -------- --------
Income from operations..................... 56,954 60,566 78,698
Other income (expense)
Equity in income of affiliate................... 1,932 1,477 1,082
Interest expense, net........................... (16,954) (13,977) (10,145)
Other, net...................................... 638 (395) 231
-------- -------- --------
Income before income taxes................. 42,570 47,671 69,866
Income taxes (note 11)........................... 13,475 16,900 29,200
-------- -------- --------
Net income................................. $ 29,095 $ 30,771 $ 40,666
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and
1996
-----------------------------------------
Class C Total
preferred Common Retained stockholders'
stock stock earnings equity
--------- ------- -------- -------------
(dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Balance at December 31, 1995......... $30,000 $10,000 $96,229 $136,229
Net income for the year ended
December 31, 1996................... -- -- 40,666 40,666
Cash dividends (note 8):
Class C Preferred Stock, $1,207 on
3,000 shares...................... -- -- (3,621) (3,621)
Common Stock, $206 on 1,000
shares............................ -- -- (206) (206)
------- ------- -------- --------
Balance at December 31, 1996......... 30,000 10,000 133,068 173,068
Net income for the year ended
December 31, 1997................... -- -- 30,771 30,771
Cash dividends (note 8):
Class C Preferred Stock, $7,333 on
3,000 shares...................... -- -- (21,999) (21,999)
Common Stock, $5,334 on 1,000
shares............................ -- -- (5,334) (5,334)
------- ------- -------- --------
Balance at December 31, 1997......... 30,000 10,000 136,506 176,506
Net income for the year ended
December 31, 1998................... -- -- 29,095 29,095
Cash dividends (note 8):
Class C Preferred Stock, $3,826 on
3,000 shares...................... -- -- (11,478) (11,478)
Common Stock, $2,824 on 1,000
shares............................ -- -- (2,824) (2,824)
------- ------- -------- --------
Balance at December 31, 1998......... $30,000 $10,000 $151,299 $191,299
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $29,095 $30,771 $40,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 26,659 24,374 18,844
Loss on disposition of property, plant and
equipment...................................... 308 433 18
Loss on disposition and write-down of idle plant
and equipment.................................. -- 621 2,500
Undistributed earnings of affiliate............. (1,932) (1,477) (1,082)
Dividends received from affiliate............... 789 872 --
Changes in assets and liabilities:
Trade accounts receivable, net................. 4,650 (1,486) (7,092)
Inventories.................................... (25,896) 23,969 (38,609)
Other receivables and prepaid expenses......... (2,625) (1,123) 6,496
Accounts payable............................... 19,166 (17,082) 31,223
Income taxes payable........................... -- (4,982) 4,982
Other accrued expenses......................... 6,313 (1,279) 7,957
Deferred income taxes.......................... 6,929 3,600 600
------- ------- -------
Net cash provided by operating activities..... 63,456 57,211 66,503
------- ------- -------
Cash flows from investing activities:
Additions to property, plant and equipment........ (49,354) (58,296) (50,421)
Proceeds from sale of property, plant and
equipment........................................ 19 250 17
Proceeds from sale of idle assets................. -- 92 --
Investment in affiliate........................... -- -- (31,896)
------- ------- -------
Net cash used in investing activities......... (49,335) (57,954) (82,300)
------- ------- -------
Cash flows from financing activities:
Net advances (repayments) under line-of-credit
agreement with banks............................. 6,800 (1,600) 9,800
Proceeds from issuance of long-term debt.......... 10,000 30,000 105,000
Repayment of long-term debt....................... (15,000) -- (95,350)
Dividends paid.................................... (14,302) (27,333) (3,827)
------- ------- -------
Net cash (used in) provided by financing
activities................................... (12,502) 1,067 15,623
------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. 1,619 324 (174)
Cash and cash equivalents at beginning of year.... 10,343 10,019 10,193
------- ------- -------
Cash and cash equivalents at end of year.......... $11,962 $10,343 $10,019
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)............. $18,254 $13,638 $12,974
Income taxes..................................... 7,050 18,976 18,463
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Organization and Nature of Operations
California Steel Industries, Inc. (the Company) was incorporated in the
state of Delaware on November 3, 1983. Its stockholders consist of two
U.S. companies, Kawasaki Steel Holdings (USA), Inc., a Delaware
corporation, and Rio Doce Limited, a New York corporation, which each own
50% of the stock of the Company. From its site in Fontana, California, the
Company manufactures four major products: hot rolled sheet, cold rolled
sheet, galvanized sheet and ERW pipe.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of the statements of cash flows, all highly liquid debt
instruments purchased with an original maturity of three months or
less are considered to be cash equivalents. The statement of cash
flows is prepared using the indirect method.
(c) Inventories
Inventories are stated at the lower of cost determined under the last-
in, first-out method of accounting, or market value, determined using
net realizable value.
(d) Investment in Affiliated Company
Investment in affiliated company consists of 4% of the common stock of
Companhia Siderurgica de Tubarao, a Brazilian steel slab manufacturer.
The investment is accounted for by the equity method, since combined
investments in Companhia Siderurgica de Tubarao by related companies
allows significant influence on the financing and operating activities
of Companhia Siderurgica de Tubarao. The Company's share of earnings
or losses from this investment is reflected in income. Dividends are
credited against the investment when received. The excess of the
Company's share of the net assets of Companhia Siderurgica de Tubarao
over the cost of the stock is being amortized straight-line over a
five year period.
(e) Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciation is
computed on the straight-line method over the estimated useful lives
of the respective assets as follows:
<TABLE>
<S> <C>
Plant and equipment 3 to 25 years
Plant refurbishment costs 10 years
</TABLE>
Assets under construction are not depreciated until placed into
service.
F-7
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(f)Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 12,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement requires that long-lived
assets and specific identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If the assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the asset.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(g)Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h)Environmental
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures are capitalized
if they meet one of the following criteria: (1) extend the life,
increase the capacity or improve the safety or efficiency of the
property, (2) mitigate or prevent environmental contamination that has
yet to occur and that otherwise may result from future operations or
activities, (3) incurred in preparing property currently held for
sale. The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably
estimable. Accruals for estimated losses from environmental
remediation obligations are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental
remediation costs from other parties are recorded as assets when their
receipt is deemed probable.
(i)Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(j)Reclassifications
Reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
F-8
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(k) Fair Value of Financial Instruments
The carrying value of cash, trade accounts receivable, other accounts
receivable, accounts payable and other accrued expenses are measured
at cost which approximates their fair value because of the short
maturity of those instruments.
(l) Revenue Recognition
The Company recognizes revenue when products are shipped or delivered
to the customer, depending on the terms of the sale. For products
shipped FOB shipping point, revenue is recognized at the time of
shipment. For products shipped FOB destination, revenue is recognized
at the time of delivery.
(3) Inventories
Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in
thousands)
<S> <C> <C>
Finished goods......................................... $ 45,641 $ 34,189
Work in process........................................ 25,503 20,282
Raw materials.......................................... 96,552 88,131
Supplies............................................... 5,700 4,898
-------- --------
Total inventories.................................. $173,396 $147,500
======== ========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, changes in the
prices of steel slab resulted in decreases of $15,754,000, $3,355,000 and
$2,141,000, respectively, in cost of sales as compared to what would have
been reported under the first-in, first-out (FIFO) method of accounting.
If the FIFO method had been used instead, inventories would have decreased
by $1,741,00 at December 31, 1998 and increased by $14,013,000 at December
31, 1997.
(4) Property, Plant and Equipment
The following is a summary of property, plant and equipment at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Land............................................... $ 17,422 $ 17,422
Plant and equipment................................ 380,314 328,646
Plant refurbishment costs.......................... 22,219 22,219
Construction in progress........................... 17,260 22,854
--------- ---------
437,215 391,141
Less accumulated depreciation...................... (186,052) (162,346)
--------- ---------
Total property, plant and equipment............ $ 251,163 $ 228,795
========= =========
</TABLE>
Capitalized interest was $1,940,000, $1,952,000 and $1,667,000 for 1998,
1997 and 1996, respectively.
F-9
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Leases
The Company is obligated under various leases for equipment that expires at
various dates during the next five years. At December 31, 1998, the future
minimum lease payments under noncancelable operating leases with
commitments of at least one year are as follows:
<TABLE>
<CAPTION>
(dollars
in
Year ending December 31: thousands)
------------------------ ----------
<S> <C>
1999 $ 5,396
2000 5,062
2001 4,824
2002 4,657
2003 4,525
Thereafter 20,824
-------
$45,288
=======
</TABLE>
Lease expense totaled approximately $2,300,000, $1,125,000 and $781,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
(6) Investment in Affiliated Company
The investment in the net assets of Companhia Siderurgica de Tubarao
accounted for under the equity method amounted to $34,726,000 and
$33,583,000 at December 31, 1998 and 1997, respectively.
The unamortized portion of the excess of the Company's share of net assets
over the cost of the stock is $3,960,000 at December 31, 1998 and
$4,950,000 at December 31, 1997.
The Company and its parents purchased their investment in Companhia
Siderurgica de Tubarao at a premium over the market price of the shares
which was paid in order to obtain significant influence over Companhia
Siderurgica de Tubarao.
(7) Notes Payable and Long-Term Debt
Notes payable to banks consist of advances under a $130,000,000 line of
credit agreement, as amended on March 13, 1998, with a group of seven
financial institutions with principal and interest due at various dates
through March 12, 1999. The applicable interest rate is the London
InterBank Offered Rate (LIBOR) plus 0.6% if it is a LIBOR Advance or the
Federal Funds Rate (FFR) plus 0.6% if it is a FFR Advance. Commitment fee
is applied on the daily unused amount at 0.15% per annum. All notes are
secured by accounts receivable, inventories and cash and cash equivalents.
As of December 31, 1998, all amounts outstanding under the line of credit
agreement consisted of advances on other notes payable at the applicable
LIBOR rate. As of December 31, 1998, the LIBOR rate was 5.38%.
Amounts available under this agreement are limited based on a formula that
considers receivables and inventory balances. The Company had $26,300,000
available under this line of credit at December 31, 1998.
The agreement requires that the Company maintain specific financial ratios
and other financial conditions. The Company was in compliance with all of
these debt covenants at December 31, 1998.
F-10
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Term loan payable to banks in $5,000,000 quarterly
principal installments from June 15, 1998 through March
29, 2003 bearing interest at LIBOR plus 0.65%, payable
quarterly and secured by specific property, plant and
equipment.............................................. $ 85,000 $100,000
Term loan payable to banks on September 21, 2000,
bearing interest at LIBOR plus 0.375% through September
21, 1998 and LIBOR plus 0.475% from September 22, 1998
through September 21, 2000, payable semiannually....... 10,000 10,000
Notes payable to banks consist of advances under a
$50,000,000 line of credit agreement with principal
payable to banks no later than March 15, 2003 bearing
interest at LIBOR plus 0.425%, payable quarterly,
secured by property, plant and equipment. A facility
fee of 0.225% applies to the entire $50,000,000 bank
commitment, payable quarterly.......................... 45,000 35,000
-------- --------
140,000 145,000
Less current installments............................... 20,000 15,000
-------- --------
Long-term debt, excluding current installments...... $120,000 $130,000
======== ========
</TABLE>
Maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
----------------------
<S> <C>
1999............ $ 20,000
2000............ 30,000
2001............ 20,000
2002............ 20,000
2003............ 50,000
--------
$140,000
========
</TABLE>
The term bank loans contain various covenants that specify minimum levels
of interest coverage, fixed charge coverage, working capital, tangible net
worth and limitations of debt, sale of fixed assets and capital
expenditures. The Company was in compliance with all of these debt
covenants at December 31, 1998.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-
term debt approximates the carrying amount.
(8) Stockholders' Equity
The Class C preferred stock is redeemable by the Company at its option, in
whole or in part, at par value. Class C preferred stock has priority over
the common stock in the distribution of dividends and is entitled to a
dividend equivalent to 10% of the par value per annum on a cumulative basis
and is thereafter entitled to participate in the distribution of dividends
at the same rate and upon the same conditions as the common stock.
During the years ended December 31, 1998, 1997 and 1996, $14,304,000,
$27,333,000 and $3,827,000, respectively, in dividends on Class C preferred
stock and common stock were declared and paid. For the year ended December
31, 1996, dividends in arrears on Class C preferred stock totaled
$3,000,000.
F-11
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(9) Related Party Transactions
The Company has transactions in the normal course of business with
affiliated companies. The Company is 50% owned by Kawasaki Steel Holdings
(USA), Inc., a subsidiary of Kawasaki Steel Corporation, a Japanese
corporation, and 50% owned by Rio Doce Limited, a subsidiary of Companhia
Vale do Rio Doce, a Brazilian corporation.
The Company purchases steel slab from Companhia Siderurgica de Tubarao, an
investee, and from Kawasaki Steel Corporation. The Company charters vessels
from Seamar Shipping Corporation, a subsidiary of Companhia Vale do Rio
Doce, for the ocean transfer of slab to the Port of Los Angeles. The
Company also contracts with Rio Doce Pasha Terminal, a joint venture of
Companhia Vale do Rio Doce, to unload ocean cargo from ships in the Port of
Los Angeles. The following represents amounts paid to the various
affiliated companies for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Companhia Siderurgica de Tubarao............ $112,695 $130,600 $85,582
Kawasaki Steel Corporation.................. 60,258 -- --
Seamar Shipping Corporation................. 11,825 11,791 13,221
Rio Doce Pasha Terminal..................... 16,732 16,345 12,191
-------- -------- -------
</TABLE>
(10) Commitments and Contingencies
At December 31, 1998, the Company is committed, in the form of open
purchasing contracts, to purchase approximately $230,000,000 in steel
slab, of which $140,000,000 is from related parties.
The Company has been contacted by various governmental agencies regarding
specific environmental matters, at its operating facility. During September
1990, the Company reached a preliminary agreement with the California
Regional Department of Health Services, which allows the Company to draft
its own remediation agreement and move forward with its own plan of action,
at its operating facility. In November 1992, the Company entered into a
Voluntary and enforceable Agreement with the California Department of Toxic
Substances Control which sets forth specific terms and conditions related
to the remediation of hazardous substances at the Company's operating
facility. The agreement also preserves the Company's right as to future
assignment and apportionment costs to other parties.
The Company is addressing environmental concerns caused by the former
occupant at the Company's Fontana site and is currently in the remedial
investigation stage. The Company is unable to reasonably estimate the range
of liability until completion of a remedial feasibility study. The site
investigation is expected to be completed over the next two years.
Although the level of future expenditures for environmental matters cannot
be reasonably estimated, based on the facts presently known to management,
it does not believe that the costs will have a material effect on the
Company's financial position, results of operations, or liquidity.
The Company is involved in legal actions and claims arising in the ordinary
course of business. It is the opinion of management, based on advice of
legal counsel, that this litigation will be resolved without material
effect on the Company's financial position, results of operations, or
liquidity.
F-12
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(11) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Current:
Federal.................................... $ 3,546 $13,300 $23,200
State...................................... 3,000 -- 5,400
------- ------- -------
6,546 13,300 28,600
------- ------- -------
Deferred:
Federal.................................... 11,519 3,000 (700)
State...................................... (4,590) 600 1,300
------- ------- -------
6,929 3,600 600
------- ------- -------
Total...................................... $13,475 $16,900 $29,200
======= ======= =======
</TABLE>
Actual tax expense differs from the "expected" expense, computed by
applying the U.S. Federal corporate tax rate of 35% to income before
income taxes, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Computed "expected" tax expense................ $14,900 $16,685 $24,453
State income taxes, net of Federal benefit..... 1,481 2,145 4,223
State manufacturing investment credit, net of
Federal benefit............................... (2,515) (1,755) --
Other.......................................... (391) (175) 524
------- ------- -------
$13,475 $16,900 $29,200
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in
thousands)
<S> <C> <C>
Deferred tax assets:
Inventory........................................... $ 2,517 $ 1,383
State taxes......................................... 3,260 3,003
Reserves............................................ 401 665
Accrued expenses.................................... 737 618
Other............................................... 11 126
-------- --------
Total gross deferred tax assets................... 6,926 5,795
Less valuation allowance.............................. -- --
-------- --------
Net deferred tax assets........................... 6,926 5,795
-------- --------
Deferred tax liabilities:
Property, plant and equipment....................... (22,428) (19,706)
Idle plant and equipment............................ -- (534)
Change in inventory valuation....................... (5,371) --
Undistributed earnings of affiliate................. (1,240) (744)
Other............................................... (82) (77)
-------- --------
Total gross deferred tax liabilities.............. (29,121) (21,061)
-------- --------
Net deferred tax liability........................ $(22,195) $(15,266)
======== ========
</TABLE>
F-13
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on the Company's historical pretax earnings, adjusted for
significant items including nonrecurring charges, management believes it
is more likely than not that the Company will realize the benefit of
deferred tax assets existing at December 31, 1998. Management believes the
existing deductible temporary differences will reverse during periods in
which the Company generates net taxable income. Nevertheless, certain tax
planning or other strategies will be implemented, if necessary, to
supplement income from operations to fully realize recorded tax benefits.
The Company's U.S. Federal income tax returns for the years 1992 and 1993
are currently under examination by the Internal Revenue Service.
Management of the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's
consolidated financial statements.
(12) 401(k) Plan
The Company sponsors a 401(k) plan covering all employees of the Company
who were full-time employees as of November 1, 1986 and who elected to
participate in the plan.
Participants may make contributions to the plan on a pretax basis from 1%
to 16% of their annual salary. Company contributions, when made, will
match 100% of employee contributions up to 4% of employees' salaries and
50% of employee contributions for the next 2% of employees' salaries.
Participants are immediately 100% vested in both their contributions and
Company contributions plus actual earnings thereon. Company contributions
are accrued as participant contributions are withheld, and are paid in
full to the Trustee of the plan on a pay period basis.
Plan expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $2,084,000, $2,002,000 and $1,930,000, respectively.
(13) Profit Sharing
The Company has a profit sharing plan under which bonuses are awarded
based on a pool amount, equal to 8% of the Company's income before taxes
and gain or loss on disposition of fixed assets. The basis for determining
the profit sharing pool is subject to review and approval of the Company's
Board of Directors. The employee's share in the pool amount is based on
his or her length of service with the Company during the profit sharing
period. Employees who voluntarily terminate their employment for reasons
others than retirement before the end of the profit sharing period and
employees whose employment is involuntarily terminated are not eligible to
receive any profit sharing award.
(14) Changes in Accounting Estimates
In fiscal 1998, the Company made changes in the estimated useful lives of
the hot strip mill reheat furnace, five stand cold reduction mill,
continuous pickling line, and the galvanized line from 10 to 15 years.
This change increased 1998 net income by $1,500,000. Also, effective in
fiscal 1998, the Company changed the estimated useful life of its rolls
from 1 year to 3 years for rolls and 10 years for backup rolls. This
change increased 1998 net income by $2,000,000. These changes were made to
better reflect how these assets are expected to be used over time, to
provide a better matching of revenues and expenses, and to be consistent
with industry practice.
F-14
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Condensed Balance Sheets (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
-------- ------------
Audited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 10,807 $ 11,962
Trade accounts receivable, less allowance for doubtful
receivables of $1,080,000 and $720,000 in 1999 and
1998................................................... 61,181 53,630
Inventories............................................. 155,386 173,396
Deferred income taxes................................... 4,545 4,545
Other receivables and prepaid expenses.................. 4,554 5,211
-------- --------
Total current assets............................... 236,473 248,744
-------- --------
Investment in affiliated company......................... 34,814 34,726
Other assets............................................. 4,758 --
Property, plant and equipment, net....................... 257,696 251,163
-------- --------
Total assets....................................... $533,741 $534,633
======== ========
Liabilities and Stockholders' equity
Current liabilities:
Notes payable to banks.................................. $ -- $103,700
Current installments of long-term debt.................. -- 20,000
Accounts payable........................................ 52,261 50,550
Income tax payable...................................... 10,624 --
Other accrued expenses.................................. 18,628 22,344
-------- --------
Total current liabilities.......................... 81,513 196,594
-------- --------
Long-term debt, excluding current installments........... 220,000 120,000
Deferred income taxes.................................... 26,740 26,740
Stockholders' equity:
Class C preferred stock, $10,000 par value per share.
Authorized 3,000 shares; issued and outstanding 3,000
shares 30,000 30,000
Common stock, no par value. Authorized 2,000 shares;
issued and outstanding 1,000 shares.................... 10,000 10,000
Retained earnings....................................... 165,488 151,299
-------- --------
Total stockholders' equity......................... 205,488 191,299
Commitments and contingencies............................ -- --
-------- --------
Total liabilities and stockholders' equity......... $533,741 $534,633
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-15
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Condensed Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Net sales................................................... $331,258 $356,734
Cost of sales, net of LIFO reserve.......................... 270,213 313,363
-------- --------
Gross profit............................................ 61,045 43,371
Selling, general and administrative expenses................ 15,083 14,592
-------- --------
Income from operations.................................. 45,962 28,779
Other income (expense):
Equity in income of affiliate............................. 88 1,406
Interest expense, net..................................... (8,086) (8,345)
Other, net................................................ 713 189
-------- --------
Income before income taxes.............................. 38,677 22,029
Income taxes................................................ 15,858 9,043
-------- --------
Net income.............................................. $ 22,819 $ 12,986
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-16
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 22,819 $ 12,986
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 12,285 14,101
Loss (Gain) on disposition and write-down of idle plant
and equipment.......................................... (11) 282
Undistributed (earnings) losses of affiliate............ (88) (1,316)
Dividends received from affiliate....................... -- 558
Change in assets and liabilities:
Trade accounts receivable, net......................... (7,551) (10,472)
Inventories............................................ 18,010 (19,564)
Other receivables and prepaid expenses................. 657 (3,192)
Other assets........................................... (4,758) --
Accounts payable....................................... 1,711 1,830
Income taxes payable................................... 10,624 5,443
Other accrued expenses................................. (3,716) 5,330
--------- --------
Net cash provided by operating activities............. 49,982 5,986
--------- --------
Cash flows from investing activities:
Additions to property, plant and equipment............... (18,827) (26,583)
Proceeds from sale of property, plant and equipment...... 20 25
--------- --------
Net cash used in investing activities................. (18,807) (26,558)
--------- --------
Cash flows from financing activities:
Net repayments under line-of-credit agreement with
banks................................................... (103,700) 17,682
Repayment of notes payable to banks...................... (140,000) --
Proceeds from issuance of long-term debt................. 220,000 5,000
Dividends paid........................................... (8,630) (8,385)
--------- --------
Net cash (used in) provided by financing activities... (32,330) 14,297
--------- --------
Net decrease in cash and cash equivalents............. (1,155) (6,275)
Cash and cash equivalents at beginning of period......... 11,962 10,343
--------- --------
Cash and cash equivalents at end of period............... $ 10,807 $ 4,068
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).................... $ 6,079 $ 8,221
Income taxes............................................ 5,235 3,600
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-17
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of
California Steel Industries, Inc. and its subsidiary as of and for the
three and six months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, the information
reflects all adjustments, consisting only of normal recurring adjustments,
that, in the opinion of management, are necessary to present fairly the
financial position and results of operations for the periods indicated.
The accompanying consolidated condensed financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the years ending December 31, 1998 and 1997 contained in
California Steel Industries, Inc.'s Registration Statement on Form S-4
(File number 333-79587) filed with the Securities and Exchange Commission
on May 28, 1999.
2. New Accounting Pronouncements
In June 1998, the Financial Accounts Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Application of this accounting standard is not
expected to have a material impact on our financial position, results of
operations or liquidity.
3. Inventories
Inventories are stated at the lower of cost (determined under the last-in,
first-out method of accounting) or market value.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(In thousands) (In thousands)
-------------- --------------
<S> <C> <C>
Finished goods............................... $ 38,419 $ 45,641
Work-in-process.............................. 21,926 25,503
Raw materials................................ 89,652 96,552
Other........................................ 5,389 5,700
-------- --------
Total...................................... $155,386 $173,396
======== ========
</TABLE>
4. Long-Term Debt
On April 6, 1999, we issued an aggregate of $150,000,000 of ten-year 8.5%
senior unsecured notes. Interest is payable on the notes on April 1 and
October 1, commencing October 1, 1999. The notes are senior in right of
payment to all of our subordinated indebtedness and equal in right of
payment to all of our existing and future indebtedness that is not by its
terms subordinated to the notes. We may redeem the notes at any time after
April 1, 2004. The indenture governing the notes contains covenants that
limit our ability to incur additional indebtedness, pay dividends on,
redeem or repurchase capital stock and make
F-18
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
investments, create liens, sell assets, sell capital stock of certain of
our subsidiaries, engage in transactions with affiliates and consolidate,
merge or transfer all or substantially all of our assets and the assets of
certain of our subsidiaries on a consolidated basis.
Proceeds from the notes were used to permanently repay outstanding bank
debt under a $10,000,000 term loan provided by The Dai-Ichi Kangyo Bank,
Netherlands, and a $50,000,000 revolving credit facility and a $80,000,000
term loan, both provided by a syndicate of institutions led by the
Industrial Bank of Japan, Ltd., Los Angeles Agency.
5. Dividend Payments
The Company's board of directors approved and declared a dividend in the
amount of $8,630,000 for common and preferred stockholders. On April 30,
1999, $6,848,000 was paid to holders of preferred stock and $1,783,000 to
common stockholders.
F-19
<PAGE>
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Until January 3, 2000, all dealers that effect transactions in the Series B
notes, whether or not participating in this exchange offer, may be required to
deliver a prospectus. This is in addition to the dealer(s) obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
$150,000,000
[LOGO OF CALIFORNIA STEEL INDUSTRIES, INC.]
CALIFORNIA STEEL INDUSTRIES, INC.
8 1/2% Series B Senior Notes due 2009
--------------------------
PROSPECTUS
--------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal.
October 5, 1999
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