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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
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Act of 1934 For the Fiscal Year Ended October 31, 1996.
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities
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Exchange Act of 1934 For the transition period from to
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Commission file Number 33-92496
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GULF STATES STEEL, INC. OF ALABAMA
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(Exact name of registrant as specified in its charter)
Alabama 63-114 1013
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
174 South 26th Street
Gadsden, Alabama 35904-1935
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(Address of principal executive offices) (Zip Code)
(205) 543-6100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained, to the best
or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
At the date of this filing, there were 3,610,000 shares of $.01 par value common
stock outstanding, all of which was owned by GSS Holding Corp. No voting stock
is held by nonaffiliates nor traded on an established public trading market.
Documents incorporated by reference:
1) Schedule 14A - PROXY STATEMENT DATED JANUARY 24, 1997, incorporates by
reference information required by Part III.
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GULF STATES STEEL, INC. OF ALABAMA
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business................................................. 1
2. Properties............................................... 8
3. Legal Proceedings........................................ 8
4. Submission of Matters to a Vote of Security Holders...... 8
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 8
6. Selected Financial Data.................................. 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
8. Financial Statements and Supplementary Data.............. 15
9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 40
PART III
10. Directors and Executive Officers of the Registrant....... 40
11. Executive Compensation................................... 40
12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 40
13. Certain Relationships and Related Transactions........... 40
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 40
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FORWARD - LOOKING STATEMENTS
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This Annual Report on Form 10-K may contain forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and are subject
to a number of factors and uncertainties which could cause results to differ
materially from those described in the forward-looking statements. There can be
no assurance that actual results or business conditions will not differ
materially from those anticipated or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the size and timing of significant orders, as well as deferral of
orders, over which the Company has little control; the variation in the
Company's sales cycles from customer to customer; increased competition posed by
other steel producers; changes in pricing policies by the Company and its
competitors; the need to secure or build manufacturing capacity in order to meet
demand for the Company's products; the Company's success in expanding its sales
programs and its ability to gain increased market acceptance for its existing
product lines; the ability to complete its capital investment program and
successfully produce its products; the potential for significant quarterly
variations in the mix of sales among the Company's products; the gain or loss of
significant customers; shortages in the availability of raw materials from the
Company's suppliers; fluctuations in price and availability of energy; the costs
of environmental compliance and the impact of government regulations; the
Company's relationship with its work force; the restrictive covenants and tests
contained in the Company's debt instruments, which could limit the Company's
operating and financial flexibility; and general economic conditions.
PART I
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ITEM 1. BUSINESS
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The Company owns and operates a fully integrated steel mill in
Gadsden, Alabama, which has been a leading producer of steel products in the
Southern United States since its inception in 1904. The Company manufactures a
wide range of hot-rolled, cold-rolled and galvanized steel sheet and plate
products and has an annual finished steel production capacity of approximately
1.1 million tons. For the fiscal year ended October 31, 1996, the Company
shipped approximately 340,000 tons of hot-rolled sheet, 170,000 tons of cold-
rolled sheet, 141,000 tons of galvanized sheet, and 424,000 tons of plate
products, resulting in sales of approximately $454.3 million, and operating
profit per ton shipped of $22.
During its over 90 years of service to the Southern market (consisting
of the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi,
North Carolina, South Carolina, Tennessee and Texas), the Company has developed
a number of long-standing customer relationships by providing quality products
and excellent customer service. The Company's relationships with many of its
approximately 350 customers, the largest of which accounted for less than 10% of
sales in fiscal 1996, span more than 25 years. Unlike large steel companies
which often sell up to 20% of their output to a single national automotive or
appliance customer, the Company sells its products to a much more diversified
customer base. Representative end users of the Company's sheet products include
manufacturers of commercial and residential building products, water heaters,
lawn and garden equipment, liquid propane tanks, recreational equipment,
furniture and culvert pipe. End users of the Company's plate products include
manufacturers of storage tanks, ships, railway cars, highway and railroad
bridges and other types of industrial and construction equipment.
Pursuant to an asset purchase agreement dated January 13, 1995, the
Company is the successor to the steelmaking business previously conducted by the
following entities: Gulf States Steel, Inc. of Alabama, Alabama Structural
Beams, Inc., DSC Equipment Associates, LTD, Will's Creek Associates and Villa II
Associates, (collectively the "Predecessor" company). On April 21, 1995, the
Company completed the acquisition of substantially all of the assets and certain
liabilities of the Predecessor company (the "Acquisition").
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The Company's principal executive offices are located at 174 South
26th Street in Gadsden, Alabama and it's telephone number is (205) 543-6100.
MANUFACTURING PROCESS
The Gadsden mill is a fully-integrated mill, i.e., the steel-making
process begins with iron ore and ends with a finished or semi-finished steel
product. To begin the process, the Company purchases iron ore pellets,
limestone and coal. The coal is subsequently processed into metallurgical coke
in the Company's multi-oven, oxygen-free coke batteries. Then, iron ore pellets
and limestone are added to the coke and are smelted together in the Company's
blast furnace resulting in the manufacture of molten iron. The molten iron is
then placed into one of the Company's basic oxygen furnace ("BOF") vessels,
together with steel scrap, where it is refined with oxygen to produce molten
steel to the chemical specifications of a particular customer. In the ladle
metallurgy facility ("LMF"), certain metallic alloys are added to the molten
steel that impart their own particular metallurgical qualities. The molten
steel is then poured into the continuous caster for casting into steel slabs or
into ingot molds for rolling into steel slabs. The liquid steel not processed
by the continuous caster is currently poured into ingot molds to produce steel
ingots and then processed in a slabbing mill to produce steel slabs. The ingot
casting and slabbing mill process is utilized primarily to maximize the
efficient usage of the Company's liquid steel production capacity. The
resulting product of both the continuous caster and the slabbing mill process is
steel slabs. These slabs are then reheated and hot-rolled into coiled sheet
products in the hot strip mill, or into flat plates in the plate mill. Coiled
hot-rolled sheets may be further processed by a variety of finishing steps,
which include cold rolling, annealing, temper rolling and galvanizing.
Substantially all of the cold rolled and galvanized products are processed
through the annealing and cold temper rolling finishing steps.
CUSTOMERS AND MARKETS
The Company produces quality products in smaller volumes, narrower
widths, and lighter gauges than its larger competitors. The Company believes
that it is the largest supplier of steel plate and a major supplier of steel
sheet products to steel service centers and original equipment manufacturers in
the Southern market. The Company has developed a base of approximately 350
customers, the largest of which accounted for under 10% of total shipments in
fiscal 1996. The Company's relationships with many of its customers span more
than 25 years, and the Company believes that it is a primary supplier to the
majority of its customers of the products it manufactures.
Although competitive pricing is a key factor in all customers'
purchasing decisions, the Company believes that many customers regard the
Company as their preferred supplier due to the levels of service and quality the
Company provides. Lower freight costs, short lead times, timely deliveries,
close proximity to certain key markets and an understanding of local markets
contribute to the Company's competitive strength and its reputation for service.
As one of only five steel sheet producers and two steel plate producers in the
Southern market, the Company believes that it enjoys a significant competitive
advantage compared to its more distant competitors which typically must absorb
between $15 and $25 per ton in extra freight costs in order to compete in the
Southern market.
The Company believes that the Southern market offers substantial long-
term prospects for steel manufacturers due to its favorable growth
characteristics. The populations of seven of the ten states in the Southern
market are projected by the U.S. Bureau of the Census to grow by more than 10%
for the decade ending in the year 1999, which would place each of them above the
U.S. average. States in the Southern market also generally maintain a lower cost
of living and lower tax burdens than the rest of the United States. The Company
believes that all of these factors will serve to attract businesses and workers
to the region, increase consumption and help to maintain the region's strong
growth characteristics.
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Several major car manufacturers have recently opened automobile plants
in the Southern market, while others are planning to do so. These include
Nissan and General Motors in Tennessee, BMW in South Carolina and Mercedes-Benz
in Alabama. Tennessee and Georgia now rank third and fifth, respectively, in
terms of United States car production. Industry experts estimate that, on
average, 1,750 pounds of steel are used in manufacturing an automobile.
Although the Company does not directly sell its products to automobile
manufacturers, the automobile plants in the Southern market contribute
dramatically to regional steel demand, including the steel products of original
equipment manufacturers and other light industrial manufacturers which the
Company supplies.
CAPITAL INVESTMENTS
Since 1986, the Company has made significant capital expenditures to
modernize facilities, increase manufacturing capacity, improve operating
efficiencies, and maintain environmental compliance. The most important of these
improvements were the installation of the single strand continuous caster and
the LMF in 1990 and a major blast furnace upgrade and reline in 1989. These
investments have allowed the Company to increase its production and shipping
capacity from 864,000 tons in fiscal 1989 to 1,075,000 tons in fiscal 1996, and
have been significant in terms of reducing manufacturing costs over this period.
Management has identified several capital investment opportunities
which it believes will allow the Company to further reduce production costs,
increase production and shipping capacity, and improve product quality. The most
significant investment opportunities include: (i) upgrading the hot strip mill
by increasing horsepower and adding new automation to improve gauge control,
(ii) upgrading the pickle line, annealing process, and temper mill to increase
production capability of cold-rolled sheet products and (iii) other projects
including the upgrading of the plate mill to improve plate product quality and
increase production capability. The Company estimates that the foregoing
investments will cost in excess of $90 million and are scheduled to be completed
by fiscal 1999. As a result of these investments, the Company believes it will
be able to increase its annual production and shipping capacity, further reduce
costs, enhance product quality and improve its product mix, and thereby increase
profitability (assuming other factors remain constant).
RAW MATERIALS, ENERGY AND RELATED SERVICES
The Company is an ore-based integrated steel producer that purchases
its raw materials in the open market from multiple sources through competitively
bid contracts.
Iron Ore. The Company uses iron ore pellets to produce the iron used in its
steel-making operations. The Company currently obtains virtually all of its
iron ore pellets from a Canadian supplier at or below prevailing world market
prices. The Company is currently evaluating additional sources of iron ore to
supplement its current supply. The pellets are shipped to Mobile, Alabama by
seagoing vessels, where they are unloaded at the Alabama State Docks. The
majority of the pellet inventory is held at this location until needed by the
Company. The pellets are then loaded into dedicated unit trains and delivered
to Gadsden by rail.
Coal. The Company's steel-making operations require a substantial amount of
high and medium volatile metallurgical grade coal. Over the years, the Company
has obtained its coal from several producers under negotiated annual supply
contracts. The Company believes that it has realized significant savings by
producing coke from coal in the Company's coke ovens as opposed to purchasing
coke directly from suppliers.
Limestone. The Company uses limestone to produce molten iron in the blast
furnace. The Company obtains its limestone, by truck, from three suppliers in
Alabama pursuant to short-term supply contracts or in spot buys. As limestone
is abundant in Alabama, the Company has not had, nor does it expect to have in
the future, any availability problems.
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Oxygen. The Company's steel operations consume large amounts of oxygen. The
Company purchases its oxygen from an air separation plant located on the
Company's premises (the "Oxygen Facility") that is owned and operated by the
oxygen supplier. The Company's contract to purchase oxygen from the Oxygen
Facility expires in December 1998. The Company has no reason to believe that
this contract will not be renewed on substantially similar terms.
Scrap. The Company's basic oxygen furnace consumes up to 30% of its metallic
charge in the form of scrap steel. Approximately 50% of that charge is recycled
from the Company's internal operations. The remainder is purchased through
dealers in the open market. While the growth of mini-mills has created
pressures on the availability and cost of scrap, the Company foresees no
difficulty in obtaining sufficient scrap to support its operations.
Energy. The Company purchases the majority of its electrical requirements from
Alabama Power Company under an open-ended contract. This contract provides for
price increases tied to the cost of fuels used by the utility to produce
electricity, which must be approved by the Public Service Commission of Alabama.
The Company co-generates approximately 10% of its electric power requirement.
Historically, the Company has been adequately supplied with electricity and does
not anticipate any curtailment in its operations resulting from energy
shortages.
Natural gas, which the Company uses in its reheat operations, is purchased at
spot prices at the wellhead in the Southwestern United States and is transported
to the mill through local pipeline distribution networks pursuant to
transmission contracts. Historically, the Company has been adequately supplied
with natural gas and an adequate supply is expected to be available in the
future. The winter of 1996 was unusually severe in the Southeast. As a result,
the Company did incur natural gas curtailments as well as significant higher
prices for natural gas than had been experienced historically. The combination
of the curtailments and higher prices had a significant adverse impact on the
Company's financial results. The Company believes these curtailments to be non-
recurring. The Southwest region of the United States has substantial reserves
of natural gas.
Transportation. Shipments of coal and iron ore pellets to the Gadsden mill are
made by both the Norfolk Southern and CSX railroads. The Company owns and
maintains railroad tracks on the Gadsden mill's property, on which such
shipments arrive.
COMPETITION
The Company competes with domestic and foreign steel producers on the basis
of price, proximity to market, quality and service. The Company's competitors
can be divided into four categories: (i) integrated steel mills located within
the Southern market, (ii) integrated steel mills located outside the Southern
market, (iii) mini-mills located in the Southern market and (iv) foreign steel
mills. To a lesser extent, the Company also competes with mini-mills located
outside the Southern market.
The only other integrated mill in the Southern market is the Fairfield
Works, U.S.S. Division on USX Corporation, located in Fairfield, Alabama ("USX-
Fairfield"). This mill produces galvanized, cold-rolled and hot-rolled bands
and tubular products. USX-Fairfield produces over two million tons of steel per
year and specializes in wider galvanized and cold-rolled steel products than the
Company. USX-Fairfield does not currently produce any steel plate products.
Integrated steel mills located outside the Southern market are primarily
Midwestern and Northern mills of the large domestic steel companies which are
high volume producers of wide sheet products primarily targeted at the
automotive and appliance industries. Only a small portion of the steel sheet
produced by these Midwestern and Northern mills has the same gauge and width as
the Company's sheet products. These mills compete in the Southern market to the
extent that they can offer steel products at competitive prices. However, the
Company believes that it enjoys a significant cost advantage relative to its
Midwestern and
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Northern competitors, which typically must absorb between $15 and $25 per ton in
freight costs in order to compete in the Southern market. Furthermore, the
Company believes that Southern customers prefer to purchase from local producers
assuming equivalent pricing.
The two mini-mills located in the Southern market, Nucor Corporation
("Nucor"), located in Hickman, AK and Tuscaloosa Steel Corp. ("Tuscaloosa")
located in Tuscaloosa, AL generally do not compete directly with the Company.
Nucor's Hickman mill produces approximately 1.4 million tons of hot-rolled sheet
products per year. Whereas the Company produces hot-rolled sheet in gauges of
.056 to .312 inches and with a maximum width of 48 inches, Nucor's Hickman mill
produces primarily hot-rolled sheet in gauges of .071 to .625 inches and in
widths of 48 to 61 inches. Nucor's Hickman mill does not currently produce any
steel plate products or galvanized sheet products. Nucor is building a new
mini-mill, nearing completion, in Berkeley County, South Carolina, with a
proposed capacity of approximately 1.8 million tons of sheet products. The
Company believes that this new mini-mill will have similar product range
limitations as Nucor's Hickman mill.
Tuscaloosa, owned by British Steel America Inc., has normally produced
approximately 500,000 tons of hot-rolled sheet and plate products per year. The
Company believes that its hot-rolled sheet and plate products are of higher
quality than Tuscaloosa's products. As the rolling of both hot-rolled and plate
products as well as conversion of stainless steel are performed on a single
mill, Tuscaloosa is a relatively limited supplier. The Tuscaloosa mill does not
currently produce any galvanized or cold-rolled sheet products. Tuscaloosa is
ramping up a capital expenditure program designed to allow it to produce its own
slabs and increase its annual production capacity by a minimum of 200,000 tons.
This program will also allow Tuscaloosa to reduce costs and increase capacity,
however, product scope and quality will not be substantially effected.
A new mini-mill, to be known as Trico Steel Company ("Trico"), is
under construction by a joint venture consisting of LTV, British Steel plc. and
Sumitomo Metal Industries, Ltd. This mill, according to published reports, is
due to start-up in the first half of 1997. Unlike the existing mini-mills
located in the Southern market, Trico plans to install equipment capable of
producing light-gauge hot-rolled products. The Trico mini-mill is expected to
have an annual capacity of 2.2 million tons. The Company believes that this
mini-mill will focus on a product mix that will include approximately 25% of
that currently produced by the Company.
Since purchased steel scrap represents only 15% of the Company's raw
material, compared to 100% for its mini-mill competitors, the Company's blast
furnace facility produces molten iron at a cost less than scrap, the Company
enjoys a cost advantage over mini-mills at the liquid steel stage of each
process. Management believes that, at current scrap steel price levels, the
Company's current cost structure will be competitive with its mini-mill
competitors in the Southern market.
Historically, foreign steel producers were considerable competitors
through their aggressive pricing policies. In general, the strength of foreign
competition has abated due to a relatively weak dollar, strengthening world
markets and domestic steel makers' threats of anti-competitive pricing suits
against foreign steel makers. In addition, the Company's reduced cost structure
and improved quality and service have further reduced foreign competitive
pressures. Foreign steel producers currently provide commodity products such as
hot bands and a limited range of plate products. Most of these products are
routed to service centers.
The Company differentiates itself from foreign steel makers by
offering shorter lead times and a broader range of products. However, recent
actions by steel producers in Russia, Ukraine, South Africa and China, have
prompted the Company, with another domestic producer, to file anti-dumping
actions with the International Trade Commission against those nations. Those
actions charge that steel plate is unfairly being delivered to U.S ports at a
price less than the cost to produce those products. On December 18, 1996, in a
preliminary ruling, the International Trade Commission ruled in favor of the
petitioners by an unanimous vote.
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EMPLOYEES
The Company's approximately 200 operating managers have considerable
experience in the steel industry. Over half have more than 20 years of industry
experience with most of the remaining managers ranging in experience from five
to 20 years. The Company's 22 senior operating managers have an average of over
25 years of industry experience and an average of over 20 years at the Gadsden
mill itself.
As of October 31, 1996, the Company had approximately 1,940 employees.
Since January 1991, the Company has reduced its workforce by approximately 350
employees. Substantially all of the Company's hourly employees and 45 salaried
office and clerical employees are represented by the United Steel Workers of
America (the "USWA"). In April 1993, the Company completed negotiation of a
collective bargaining agreement with the USWA which expired on April 1, 1996.
This collective bargaining agreement allowed the Company to reduce and redeploy
its hourly workforce and established a "gain-sharing" program that permits
employees to increase their compensation based upon productivity (as measured by
man hours per ton). On April 1, 1996, the Company agreed upon a contract with
the USWA which replaced the previous contract expiring on that date. The new
contract is for a term of 54 months expiring on October 1, 2000. It includes
wage increases, certain benefit increases including other post retirement
benefits, changes to local work rules, language restricting the Company from
participation in non-represented businesses and gives the USWA representation on
the Company's strategic planning committee. Although the Company experienced a
1 1/2 day work stoppage in 1989, it has not experienced any work stoppages
since, and the Company believes that it has satisfactory relationships with its
union-represented employees and the USWA.
The Company provides a defined contribution pension plan for its
hourly employees and a 401(k) savings and investment plan for both hourly and
salaried employees. The Company annually funds its obligations under the
defined contribution and 401(k) plans. There are no other pension plans. In
accordance with its collective bargaining agreement with the USWA, the Company's
profit sharing obligations are based on earnings before taxes, extraordinary
items and certain other defined adjustments. The Company is required to
contribute each year to the profit sharing pool 16.5% of earnings to its hourly
employees and 9.75% of earnings to its salaried employees. During fiscal 1996,
the Company granted profit sharing to employees of its consolidated subsidiary,
Alabama Structural Beams, Inc. Profit sharing payments were not required to be
made in fiscal 1994 under the collective bargaining agreement. Profit sharing
payment obligations for the year ended October 31, 1996 approximated $139,000
and for the year ended October 31, 1995 approximated $13,021,000. No payments
were made in 1994 according to an agreement with the USWA.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company conducts continuous environmental compliance and
monitoring programs and believes that it is currently in substantial compliance
with all known material and applicable environmental regulations except as
follows:
During 1992, the Environmental Protection Agency (EPA) asserted that a
waste water ditch system on the Company's property should be remediated an
closed. At October 31, 1994, the Predecessor had remediated a portion of the
ditch and the Company believes that the most probable course of action for the
remainder of the ditch will involve sampling soil and water and possibly
removing some contaminated soil at a nominal cost. The less likely, but more
expensive course of action would involve sampling soil and water, closing and
securing the ditch with the possibility of some contaminated soil remaining in
place, and monitoring for any migration of the contaminants. This remediation
would cost $1.1 million for closure with post-closure monitoring costs over
thirty years of $2.8 million. The Predecessor also agreed to a $1.1 million
civil penalty, of which $300,000 was to be offset by future capital
expenditures, related to this issue. At
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October 31, 1996, the $800,000 penalty has been paid, however, the $300,000 of
capital expenditures have not been approved by the EPA.
The Company had been named a Potentially Responsible Party (PRP) at
three hazardous waste sites. During the year 1996, two of these citations have
passed the statute of limitations and the third was discharged through
negotiations at a de minimis amount.
The Predecessor settled with the Alabama Department of Environmental
Management during 1994 for all outstanding air and water violations and the
Company believes that its facility now operates, as a general matter, in
substantial compliance with existing air emission regulations and its water
discharge permit.
The Company faces a potential enforcement action under the Clean Water
Act. The U.S. Department of Justice notified the Company that it, at the request
of the U.S. E.P.A., was prepared to take "appropriate enforcement action in
federal court" against the Company for alleged violations of its water discharge
permit, and invited the Company to discuss possible settlement prior to filing
suit. The Clean Water Act provides for civil penalties of up to $ 25,000 per day
for each violation. The company opened discussions with the Justice Department
to attempt to settle these claims. Those discussions are in preliminary stages;
however, the Justice Department stated it was not seeking any penalties for time
periods prior to December 21, 1994, when the Company and the Alabama Attorney
General entered into a state court Consent Decree for alleged water discharge
exceedances. Since December 21,1994, there have been exceedances of certain of
the permit limits, but the Company asserts that these have been sporadic and
non-continuous, and the Company has been and continues to take remedial
measures. At this time it is not possible to predict what level of civil
penalties the Justice Department will seek for these exceedances, or when
agreement will be reached with the Company. The Company has accrued $750,000 at
October 31, 1996 for unresolved environmental matters.
For the fiscal year ended October 31, 1996 and during the periods
from April 21, 1995 to October 31, 1995 and from November 1, 1994 to April 20,
1995 and fiscal year 1994, capital expenditures for environmental projects were
$ 6.4 million, $4.0 million, $2.9 million, $6.1 million respectively, and
environmental compliance expenses were $5.8 million, $2.5 million, $3.1 million
and $6.0 million, respectively. The Company currently estimates that
expenditures for environmental capital projects in fiscal 1997 will be
approximately $4.3 million.
Though the Company believes that it has adequately provided for the
cost of all known environmental conditions, the applicable agencies could insist
upon different and possibly more costly remediative measures than those believed
by the Company to be adequate or required by existing law. The Company expects
that the resolution of these matters will not have a significant effect on the
Company's financial position, results of operations, or liquidity.
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ITEM 2. PROPERTIES
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The mill is located on approximately 800 acres in Gadsden, Alabama,
which is approximately 120 miles West of Atlanta, Georgia and 60 miles northeast
of Birmingham, Alabama. The mill comprises an aggregate of approximately 3.1
million square feet of floor space and primarily consists of two batteries of 65
coke ovens each, a blast furnace, two BOF vessels, the LMF, the continuous
caster, a slabbing mill, a plate mill, a 54" hot strip mill, 54" and 58" temper
mills, a 54" tandem mill, and galvanizing and pickle lines. The Company's
current iron production capacity of 90,000 tons per month ("TPM") limits the
Company's in-house slab production to 108,000 TPM, yielding an in-house capacity
of 90,000 TPM of finished steel products. Since the finishing end of the
Company's operation has a higher relative capacity (108,000 TPM) than the caster
(90,000 TPM), the Company has from time-to-time purchased steel slabs in the
open market at a higher cost than its internal production costs in order to
increase product shipments.
Although the Company will be required to make the significant capital
expenditures discussed above, the Company believes that its facilities and
equipment are well-maintained, in good operating condition and, in general,
suitable for the Company's purposes and adequate for its present operations.
ITEM 3. LEGAL PROCEEDINGS
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Other than the environmental proceedings described in Item 1 above,
the Company is not a party to any significant pending legal proceedings other
than litigation incidental to its normal business, including employee matters.
The Company believes these proceedings will not have a significant effect on
its financial position, results of operations or liquidity. The majority of
such claims against the Company are ordinarily covered by insurance. There can
be no assurance, however, that insurance will be available in the future at
reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not Applicable.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
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STOCKHOLDER MATTERS
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The Company's Common Stock, par value $.01 per share, is not traded on
an established public trading market. As of the date of this filing, there was
one stockholder of record, GSS Holding Corp. ("Holdings"). Holdings has issued
Senior Subordinated Notes ("Notes") and, although the Company has no obligation
with respect to these Notes, the sole source of funds for the repayment of these
Notes are dividends from the Company. The Notes require Holdings to cause the
Company to pay dividends to Holdings to the maximum extent allowed. No
dividends were declared during fiscal 1996.
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ITEM 6. SELECTED FINANCIAL DATA
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(dollars in millions except per share and per ton data)
<TABLE>
<CAPTION>
(Successor) (Predecessor)
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For the Period For the Period
Fiscal Year April 21, 1995 November 1, Fiscal Year Ended October 31,
Ended to October 31, 1994 to --------------------------------
October 31, 1996 1995 April 20, 1995 1994 1993 1992
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INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales $454.3 $ 255.8 $232.6 $457.4 $361.6 $374.2
Cost of goods sold, excluding
depreciation 399.5 204.3 180.4 376.4 314.1 332.4
Effect of inventory write-up - 13.2 - - - -
Depreciation 15.3 7.3 8.7 17.7 15.9 15.8
Selling, general and administrative
expenses 15.8 10.6 11.2 15.6 21.5 21.7
Profit sharing(1) .1 5.8 7.2 - - -
------ -------- ------ ------ ------ ------
Operating profit 23.5 14.6 25.1 47.7 10.1 4.3
Net interest expense 24.2 12.4 5.2 14.3 15.0 17.2
------ -------- ------ ------ ------ ------
Income (loss) before income taxes and
cumulative effect of accounting change (.7) 2.2 19.9 33.4 (4.9) (12.9)
Provision (benefit) for income taxes (.3) 1.0 7.1 12.6 (0.8) (7.2)
------ -------- ------ ------ ------ ------
Income (loss) before cumulative
effect of accounting change(2) $ (.4) $ 1.2 $ 12.8 $ 20.8 $ (4.1) $ (5.7)
====== ======== ====== ====== ====== ======
Net income (loss) per share $ (.10) $ 0.33
Dividends paid and declared per share(3) $ 1.87
BALANCE SHEET DATA:
Total assets $304.3 $ 287.9 $220.5 $217.4 $242.9 $223.6
Long-term debt (including current portion) 211.5 188.8 96.1 96.9 128.6 134.0
Stockholders' equity and partners' capital 38.0 38.3 58.6 45.8 25.3 23.9
OTHER DATA:
EBITDA(4) $ 40.6 $ 21.9 $ 34.0 $ 66.1 $ 26.9 $ 20.7
Capital expenditures 25.6 16.8 11.6 16.9 7.0 17.3
Ratio of earnings to fixed charges(5) -- 1.2x 4.5x 3.2x - -
Net cash provided (used) by operations $ 5.7 $ 5.8 $ 12.4 $ 50.1 $ (3.4) $ 30.6
Net cash used in investing activities (25.5) (218.7) (11.6) (16.6) (7.0) (17.0)
Net cash provided (used) by financing
activities 22.3 214.8 (0.8) (33.9) 10.3 (13.2)
OPERATING DATA:
Total tons shipped (000s) 1,075 602 512 1,059 928 973
Average selling price per ton shipped(6) $ 417 $ 420 $ 448 $ 421 $ 385 $ 381
Average manufacturing cost per ton shipped(6) 365 331 338 343 332 336
Operating profit per ton shipped(7) 22 46 49 45 11 4
Average rated capacity utilization(8) 93.6% 98.7% 94.6% 95.9% 95.5% 101.6%
</TABLE>
(1) Profit sharing payments are made quarterly, and total 26.25% of income
before deduction for profit sharing and income tax expense. Profit sharing
payments were not made in fiscal 1991, 1992 or 1993, which were loss years,
and were not required in fiscal 1994 under the collective bargaining
agreement. Profit sharing payment obligations resumed on November 1, 1994.
Profit sharing expenses would have been $9.5 million for fiscal 1994 had
payments been required.
(2) Excludes $11.8 million income tax expense which was recognized in 1992 as a
cumulative effect of accounting change relating to the adoption of SFAS 109.
(3) Dividends are declared and paid to the extent allowed under our Indenture
related to the First Mortgage Notes.
(4) EBITDA is defined as operating profit plus depreciation and amortization.
The Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements.
(5) Ratio of earnings to fixed charges is defined as income (loss) before income
taxes and cumulative effect of accounting change plus amortization of debt
issuance cost and interest expense divided by the sum of interest expense
plus amortization of debt issuance costs. Earnings were insufficient to
cover fixed charges in 1992, 1993 and 1996 by approximately $12.9 million,
$4.9 million and $.4 million, respectively.
(6) Excludes sales of coke by-products and sales by affiliates (Predecessor) or
subsidiary (Successor). Accordingly, average selling price and average
manufacturing cost per ton shipped are based on sales of flat rolled
products only.
(7) Excluding non-recurring effect of inventory write-up.
(8) Net tons of raw steel melted divided by the Company's estimated annual raw
steel production capacity.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
The following discussion should be read in conjunction with the financial
statements of the Company and the notes thereto included elsewhere in this Form
10-K.
RESULTS OF OPERATIONS
To facilitate a comparison of the Company's operations with the results of
the Predecessor, the following discussion and analysis is based on pro forma
statements of income prepared under the assumption that the Acquisition of the
Predecessor and related issuance of the First Mortgage Notes (the "Notes")
occurred at the beginning of each period presented.
The pro forma financial statements of income presented below are for
discussion purposes only and should not be construed to be indicative of the
Company's results of operations had the Acquisition of the Predecessor and
issuance of the Notes been consummated on the date assumed and do not project
the Company's results of operations for any future period.
The pro forma financial statements of income differ from the historical
financial statements of income of the Predecessor due to the following
adjustments: (i) inventory is costed on a FIFO basis instead of LIFO (the basis
used by the Predecessor); (ii) a non-recurring cost of $13.2 million due to the
write-up in inventory from the Predecessor's historical cost to fair value;
(iii) a change in depreciation expense resulting from the increased cost basis
of Plant and Equipment resulting from the allocation of the purchase price of
the Company; (iv) management fees are adjusted to reflect the provisions of the
Company's management agreement; (v) additional amortization expense related to
debt issuance cost of the First Mortgage Notes less the reversal of certain
Predecessor amortization expense; (vi) additional net interest expense based on
the Company's debt structure; (vii) the effect on profit sharing expense of the
above adjustments; and (viii) the effect on tax expense of the above
adjustments.
Results of operations for an interim period are not necessarily indicative
of results for the full year.
10
<PAGE>
<TABLE>
<CAPTION>
PRO-FORMA PRO-FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
OCT. 31, OCT. 31, OCT. 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(dollars in thousands)
Net sales..................................... $454.3 $488.4 $457.4
Cost of goods sold, excluding depreciation.... 399.6 384.0 372.9
Effect of inventory write-up.................. - 13.2 13.2
Depreciation.................................. 15.3 14.9 15.3
Selling, general and administrative expenses.. 15.3 19.5 16.6
Profit sharing................................ .1 12.2 -
------ ------ ------
Operating profit.............................. 24.0 44.6 39.4
Other (income) expense:
Interest expense............................ 24.7 25.1 27.7
Interest income............................. (.1) (.3) (.3)
------ ------ ------
24.6 24.8 27.4
------ ------ ------
Income (loss) before income taxes............. (.6) 19.8 12.0
Provision (benefit) for income taxes.......... (.2) 7.2 4.5
------ ------ ------
Net income (loss)............................. $ (.4) $ 12.6 $ 7.5
====== ====== ======
</TABLE>
YEAR ENDED OCTOBER 31, 1996 COMPARED TO PROFORMA YEAR ENDED OCTOBER 31, 1995
- -------------------------------------------------------------------------------
NET SALES. Net sales decreased 7.0% to $454.3 million for the year 1996 from
$488.4 million for the year 1995. This decrease is primarily caused by a
decrease in selling prices for flat rolled steel. The Company's average selling
price on flat rolled products was down 3.8% at $417 per ton in the 1996 period,
from $433 per ton in the 1995 period due to reduced transaction prices. Volume
was reduced due to several unplanned outages at the mill, primarily as a result
of the severe winter experienced in the Southeast resulting in natural gas
curtailments to the mill. Additionally, the Company had planned outages at the
Hot Strip Mill and Plate Mill during fiscal 1996 which further reduced
production. As a result, shipments fell 3.7% in flat rolled products to
1,074,910 tons in 1996 compared to 1,114,180 tons in 1995.
COST OF GOODS SOLD. Cost of goods sold, excluding depreciation, increased
4.1% to $399.6 million for the year 1996 from $384.0 million for the year 1995.
As a percentage of net sales, cost of goods sold, excluding depreciation,
increased to 88.0% in 1996 from 78.6% in 1995. Approximately one-third of this
increase resulted from the aforementioned planned and unplanned outages at the
mill. Higher employment costs including the results of the new labor agreement
with the USWA, natural gas prices, and raw material costs increased during
fiscal 1996 resulting in average manufacturing costs for flat rolled products
increasing to $365 per ton in 1996 from $335 in 1995. Depreciation costs on a
pro forma basis were $15.3 million in 1996 and $ 14.9 million in 1995.
EFFECT OF INVENTORY WRITE-UP. At the time of the Acquisition, the purchase
price allocated to inventory resulted in a $13.2 million write-up from the
Predecessor's historical cost. The $13.2 write-up was expensed as the inventory
was sold during the period from April 21, 1995 to July 31, 1995. This was a
non-recurring cost.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $15.3 million, or 3.4% of net sales in
1996, from $19.5 million, or 4.0% of net sales in 1995. This decrease was
primarily due to lower sales and use tax expense of approximately $3.2 million.
These reductions resulted from (1) The Companys being awarded "Enterprise Zone"
status by the State of Alabama thereby eliminating state sales and use taxes to
the Company (2) Recovery of prior periods overpayments and (3) Reduced
liabilities to city and county taxing authorities.
PROFIT SHARING. Profit sharing amounted to $.1 million in 1996 compared to $
12.2 million in 1995 . This amount was paid to employees of the Company's
consolidated subsidiary, Alabama Structural Beams, Inc. which was not covered
by a profit sharing plan in 1995. No other profit sharing payments were
required due to the consolidated net loss of the Company.
OPERATING PROFIT. As a result of the changes in net sales, cost of goods
sold, effect of inventory write-up, selling general and administrative expenses,
and profit sharing discussed above, operating profit decreased to $24.0 million,
or 5.3% of net sales, in 1996, from $44.6 million, or 9.1% of net sales, in
1995.
Excluding the effect of the above mentioned inventory write-up on a pro-forma
basis, operating profit would have been $57.6 million or 11.8% of net sales the
1995 period.
INTEREST EXPENSE. Interest expense, net of interest income, decreased to
$24.6 million in the 1996 period from $24.8 million in the 1995 period. This
was due to an increase in capitalized interest in 1996.
PRO FORMA FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO PRO FORMA FISCAL YEAR
ENDED OCTOBER 31, 1994
NET SALES. Net sales increased 6.8% to $488.4 million for fiscal year 1995
from $457.4 million for fiscal year 1994. This increase is primarily caused by
a 5.2% increase in shipments of flat rolled products to 1,114,180 tons in the
1995 period compared to 1,058,800 in the 1994 period. The increase in volume
was primarily due to the significant growth in export hot band shipments in the
1995 period. The Company's average selling price on flat rolled products
increased 2.9% to $433 per ton in the 1995 period from $421 per ton in the 1994
period. The increase in average selling price resulted form improved
transaction prices and improved product mix during the first half of fiscal 1995
on domestic steel shipments partially offset by the lower price of commodity
export products.
COST OF GOODS SOLD. Cost of goods sold, excluding depreciation, increased
3.0% to $384.0 million for fiscal year 1995 from $372.9 million for fiscal year
1994. As a percentage of net sales, costs of goods sold, excluding
depreciation, decreased to 78.6% in fiscal 1995 from 81.5% in fiscal 1994. This
decrease resulted from the improved operating performance and lower average
costs. Average manufacturing costs for flat rolled products decreased to $332
per ton in fiscal 1995 from $343 in fiscal 1994 as a result of absorbing the
Company's fixed costs over a higher volume of shipments in 1995. Depreciation
costs were $14.9 million in fiscal 1995 and $15.3 million in fiscal 1994.
EFFECT OF INVENTORY WRITE-UP. At the time of the Acquisition, the purchase
price allocated to inventory resulted in a $13.2 million write-up from the
Predecessor's historical cost. The $13.2 write-up was expensed as the inventory
was sold during the period from April 21, 1995 to July 31, 1995. This is a non-
recurring cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $19.5 million, or 4.0% of net sales in
fiscal 1995, from $16.6 million, or 3.6% of net sales in fiscal 1994 due to
higher salary expense, legal fees and reduced sales of scrap and miscellaneous
items.
12
<PAGE>
PROFIT SHARING. Profit sharing which the Company resumed on November 1, 1994
was $12.2 million in fiscal 1995. No profit sharing payments were made in
fiscal 1994 to hourly workers under the terms of the Company's collective
bargaining agreement with the USWA, and the salaried work force payment was
suspended by management policy.
OPERATING PROFIT. As a result of the changes in net sales, cost of goods
sold, effect of inventory write-up, selling general and administrative expenses,
and profit sharing discussed above, operating profit increased to $44.6 million,
or 9.1% of net sales, in fiscal 1995, from $39.4 million, or 8.6% of net sales,
in fiscal 1994. Excluding the effect of the above mentioned inventory write-up
on a pro-forma basis, operating profit would have been $57.8 million, or 11.8%
of net sales in fiscal 1995 and $52.6 million, or 11.5% of net sales in fiscal
1994.
INTEREST EXPENSE. Interest expense, net of interest income decreased to $24.8
million in 1995 period from $27.4 million in 1994. The decrease was due to a
reduction of the Predecessor's trade notes payable, assumed in the Acquisition,
in fiscal 1995 from the fiscal 1994 balance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements consist of capital expenditures and
debt service. The company incurs capital expenditures for the replacement of
existing plant and equipment, compliance with environmental regulations, and the
upgrading and improvement of manufacturing facilities. The Company's capital
expenditures in the year ended October 31, 1996 period were $25.5 million
compared to $28.4 million in the year ended October 31, 1995. For the fiscal
year of 1996, excluding capitalized interest the Company incurred replacement
and environmental capital expenditures totaling $9.2 million and expenditures
relating to upgrading and improvement of facilities totaling $14.6 million.
In connection with the acquisition on April 20, 1995, $190 million in First
Mortgage Notes were issued, upon which the Company will be required to make
semi-annual cash interest payments of approximately $12.8 million ($25.7
annually) on the first mortgage notes. Although the Company will not be
required to make principal payments on the First Mortgage Notes until maturity,
in the event of Excess Cash Flow, as defined by the first Mortgage Note
Indenture, the Company will be required to purchase First Mortgage Notes with
50% of such Excess Cash Flow.
Also, in connection with the Acquisition on April 20, 1995, the Company
entered into an agreement described as the Revolving Credit Facility which
provided the Company with a credit facility of $70 million, subject to a
borrowing availability formula applied to eligible accounts receivable and
inventory of the Company and a requirement to maintain borrowing availability of
not less than $10 million at all times. The Revolving Credit Facility was
available for working capital and other general corporate purposes upon the
closing of the sale of assets but was not drawn upon at that time. The
Revolving Credit Facility will require the Company to maintain a ratio of EBITDA
to Cash Interest of 1.0 to 1.0 for the preceding twelve month period measured
at the end of each of the Company's fiscal quarters and under certain
circumstances to meet additional financial covenants. At October 31, 1996,
approximately $20,100,000 was borrowed under the Revolving Credit Facility.
Although the Company has no obligation with respect to the Holdings Notes, the
Seller Note or Holdings Preferred Stock, Holdings is required to make payments
thereon in accordance with the respective terms thereof, for which the sole
source of funds is expected to be dividend distributions or loans from the
Company. The Holdings Notes require Holdings to cause the Company to pay
dividends to Holdings to the maximum extent allowed under the terms of the
Indenture and applicable law (until the Holdings Notes are repaid in full).
Accordingly, on October 31, 1995, the company recorded a liability to pay a
dividend to holdings in the amount of $1.749 million, which was paid in
December 1995. At October 31, 1996, no dividends were payable to Holdings.
13
<PAGE>
The Company believes that future cash flows from operations, together with
borrowings available under the Revolving Credit facility, will provide the
Company with sufficient liquidity and capital resources to conduct its future
business activities (including its capital investments) and to meet its cash
interest payment requirements.
The leveraged position of the Company and the restrictive covenants contained
in the Indenture related to the First Mortgage Notes and Revolving Credit
Facility could significantly limit the Company's ability to withstand
competitive pressures or adverse economic conditions.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
GULF STATES STEEL, INC. OF ALABAMA
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended October 31, 1996,
periods from April 21, 1995 to October 31, 1995
and from November 1, 1994 to April 20, 1995
and years ended October 31, 1994
with Report of Independent Auditors
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................... 16
Audited Consolidated Financial Statements
Balance Sheets
Consolidated as of October 31, 1996 and 1995................... 17
Statement of Income
Consolidated for the year ended October 31, 1996 and from
April 21, 1995 to October 31, 1995 (Successor)
and combined for the period November 1, 1994 to April 20, 1995
and the year ended October 31, 1994(Predecessor)............... 18
Statements of Cash Flows
Consolidated for the year ended October 31, 1996 and for the
period April 21, 1995 to October 31, 1995 (Successor)
and combined for the period November 1, 1994 to April 20, 1995
and the years ended October 31, 1994 (Predecessor)............. 19
Notes to Financial Statements.................................... 21
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Gulf States Steel, Inc. of Alabama
We have audited the accompanying consolidated balance sheets of Gulf States
Steel, Inc. of Alabama (Successor) as of October 31, 1996 and 1995, and the
related consolidated statements of income and cash flows for the year ended
October 31, 1996 and for the period April 21, 1995 to October 31, 1995, and the
combined statements of income and cash flows of Gulf States Steel, Inc. of
Alabama (Predecessor) for the period November 1, 1994 to April 20, 1995 and for
the year ended October 31, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf States Steel,
Inc. of Alabama (Successor) at October 31, 1996 and 1995, and the related
consolidated results of its operations and its cash flows for the year ended
October 31, 1996 and for the period April 21, 1995 to October 31, 1995, and the
combined statements of income and cash flows of Gulf States Steel, Inc. of
Alabama (Predecessor) for the period November 1, 1994 to April 20, 1995 and for
the year ended October 31, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Birmingham, Alabama Ernst & Young LLP
November 15, 1996
16
<PAGE>
Gulf States Steel, Inc. of Alabama
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1995
--------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,458 $ 1,897
Accounts receivable, less allowance
for doubtful accounts of $1,050 in
1996 and $1,509 in 1995 40,788 39,658
Inventories 58,383 56,675
Deferred income taxes 2,850 2,557
Prepaids and other current assets 2,873 894
-------- --------
Total current assets 109,352 101,681
Property, plant and equipment, net 186,893 176,913
Deferred charges, less accumulated
amortization of $1,864 in 1996 and
$618 in 1995 8,079 9,276
-------- --------
Total assets $304,324 $287,870
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 34,878 $ 35,570
Accrued payroll and employee benefits 5,713 4,746
Accrued interest payable 1,270 1,184
Accrued workers compensation 3,358 2,704
Accrued gain sharing 2,966 3,027
Other accrued liabilities 2,841 7,836
Income taxes payable 156 1,157
Current portion of long-term debt 643 -
-------- --------
Total current liabilities 51,825 56,224
Long-term debt 210,839 188,775
Deferred income taxes 1,469 2,310
Common stock warrants subject to put
options 2,225 2,225
Stockholder's equity:
Common stock, par value $.01 per share;
4,000,000 shares authorized, 3,610,000
shares issued and outstanding 36 36
Additional paid-in capital 39,050 39,050
Notes receivable from officers (750) (750)
Accumulated deficit (370) -
-------- --------
Total stockholder's equity 37,966 38,336
-------- --------
Total liabilities and stockholder's
equity $304,324 $287,870
======== ========
</TABLE>
See accompanying notes.
17
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Income
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 21, 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
---------------------------------- -----------------------------------
(SUCCESSOR) (Predecessor)
<S> <C> <C> <C> <C>
Net sales $ 454,283 $ 255,821 $232,618 $457,379
Cost of goods sold,
excluding depreciation 399,547 204,341 180,367 376,423
Effect of inventory
write-up - 13,195 - -
Depreciation 15,345 7,261 8,683 17,712
Selling, general and
administrative expenses 15,249 10,639 11,213 15,520
Profit sharing 139 5,824 7,197 -
---------------------------------- --------------------------------
Operating profit 24,003 14,561 25,158 47,724
Other (income) expense:
Interest expense 24,685 12,668 5,234 14,664
Interest income (42) (262) (4) (315)
---------------------------------- --------------------------------
24,643 12,406 5,230 14,349
---------------------------------- --------------------------------
Income (loss) before
income taxes (640) 2,155 19,928 33,375
Provision (benefit) for
income taxes (270) 910 7,126 12,583
Net income (loss) $ (370) $ 1,245 $ 12,802 $ 20,792
================================== ================================
Net income (loss) per share (.10) .33
==================================
Weighted average common and
common equivalent shares
outstanding 3,610,000 3,799,838
==================================
</TABLE>
See accompanying notes.
18
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 21, 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
--------------------------------- ------------------------------------
(SUCCESSOR) (Predecessor)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (370) $ 1,245 $ 12,802 $ 20,792
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation,
including amounts capitalized in
inventories 15,485 6,870 8,994 17,630
Amortization 1,663 618 415 706
Deferred income taxes (1,134) (247) 1,824 4,790
Changes in operating assets
and liabilities:
Accounts receivable (1,130) (4,218) 3,899 (4,551)
Inventories (1,708) (497) (871) 20,494
Effect of inventory write-up - 13,195 - -
Income taxes refundable and
prepaid - - - 5,928
Prepaids and other current assets (1,979) 284 - -
Deferred charges (49) (9,894) (1,547) (180)
Accounts payable (692) (2,174) (10,175) (10,202)
Accrued payroll and employee benefits 967 (1,628) 1,946 272
Accrued interest payable 86 1,184 (33) (213)
Other accrued liabilities (4,402) (93) 1,913 (1,924)
Income taxes payable (1,001) 1,157 (6,790) (3,432)
------------------------------ -----------------------------
Net cash provided by operations 5,736 5,802 12,377 50,110
INVESTING ACTIVITIES:
Acquisition of Predecessor
company - (201,954) - -
Building and equipment purchases (25,535) (16,792) (11,611) (16,856)
Proceeds from disposal
of equipment 70 - - 255
------------------------------ -----------------------------
Net cash used in investing
activities (25,465) (218,746) (11,611) (16,601)
</TABLE>
19
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Cash Flows (continued)
(dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED APRIL 21, 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
--------------------------------- -----------------------------------
(SUCCESSOR) (Predecessor)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from first mortgage notes $ - $190,000 $ - $ -
Proceeds from long-term debt 3,525 - - -
Payments of long-term debt (329) - (18,839) (27,127)
Net borrowings (payments) on
revolving credit agreement 19,094 1,000 18,079 (6,564)
Payment of dividends - (5,013) - -
Distribution to partners - - - (218)
Capital contribution - 28,853 - -
Net cash provided (used)
by financing activities 22,290 214,840 (760) (33,909)
--------------------------------- ----------------------------------
Net increase (decrease) in
cash and cash equivalents 2,561 1,896 6 (400)
Cash and cash equivalents
at beginning of period 1,897 1 179 579
Cash and cash equivalents at
end of period $ 4,458 $ 1,897 $ 185 $ 179
================================= ==================================
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $26,817 $ 12,511 $ 5,267 $ 14,609
Income taxes 1,865 - 12,092 11,225
SUPPLEMENTAL SCHEDULE OF
NON-CASH OPERATING AND
FINANCING ACTIVITIES:
Transfer from accounts
payable to notes payable $ - $ - $ - $ 1,956
Dividends declared and payable - 1,749 - -
See accompanying notes.
</TABLE>
20
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
The Company owns and operates a fully integrated steel mill in Gadsden, Alabama,
which has been a leading producer of steel products in the Southern United
States since its inception in 1904. Approximately 80% of the Company's
employees are covered under a contract with the United Steelworkers of America (
the "USWA") which expires on October 1, 2000.
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Gulf States Steel, Inc. of
Alabama (GSS) and its wholly-owned subsidiary, Alabama Structural Beams, Inc.
(ASB) (collectively the Company or Successor) since the Acquisition (see Note 2)
on April 21, 1995. GSS is a wholly-owned subsidiary of GSS Holding Corp.
(Holding), a Delaware corporation, which is controlled by Watermill Ventures,
Ltd. The accompanying Predecessor financial statements present the combined
financial position, results of operations and cash flows of GSS, ASB, DSC
Equipment Associates, LTD. (DSC), Will's Creek Associates (WCA) and Villa II
Associates (VA).
All material intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS
Investments with maturities of three months or less at the time of purchase are
considered to be cash equivalents.
INCOME TAXES
The Company (GSS and ASB) is included in the consolidated federal income tax
return of its parent. Under terms of a federal tax sharing agreement with its
parent, federal income tax expense is allocated to GSS and ASB on a separate
return basis.
INVENTORIES
The Company's inventories are valued at the lower of cost, as determined by the
first-in, first-out (FIFO) method, or market. The Predecessor's inventories
were valued at the lower of cost, as determined by the last-in, first-out (LIFO)
method, or market.
21
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment for the Predecessor is stated at Acquisition cost
and for the Company at an amount which represents the remaining portion of the
purchase price after allocation of fair value to other acquired current assets
and assumed liabilities and which is not in excess of the fair value.
Depreciation is computed using the straight-line method over estimated useful
lives of 3 to 12 years.
DEFERRED CHARGES
The Company's deferred charges include debt issuance costs which are expected to
benefit future periods and are being amortized over eight years. The
Predecessor's deferred charges included organization, preoperating and prepaid
lease costs which were expected to benefit future periods and were being
amortized over five years. Financing costs for the Predecessor's restructured
senior secured notes were also being amortized over five years.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common shares
outstanding and the dilutive common equivalent shares. The Company has
outstanding common stock warrants subject to put options to purchase 190,000
shares of common stock. The warrants are considered common equivalent shares
and if dilutive, are included in the average shares outstanding using the
treasury stock method. Earnings per share data for the Predecessor for the
periods prior to the Acquisition has been omitted because its capital structure
is not comparable to that of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
22
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
2. ACQUISITION
On April 21, 1995, the Company, (f/k/a Gulf States Steel Acquisition Corp.)
completed an Acquisition of substantially all of the assets and certain
liabilities of the Gadsden, Alabama facilities of Gulf States Steel, Inc. of
Alabama and other affiliates, collectively referred to as the Predecessor (the
Acquisition). Funds for the Acquisition were obtained from the net proceeds of
the sale of 190,000 units, each consisting of a $1,000 face amount of 13 1/2%
First Mortgage Note and a Warrant to purchase one share of common stock, and a
capital contribution from Holding to the Company of $28.9 million in cash and a
$15 million note issued by Holding to the seller.
The Acquisition was accounted for using the purchase method of accounting and is
included in the Company's financial statements from the date of the Acquisition.
In connection with the Acquisition of the Predecessor for approximately $202
million cash (including direct Acquisition expenses) plus a note of $15 million,
the Company acquired assets with a fair value of $273 million and assumed
liabilities of $56 million.
During December 1996, the Company agreed to pay the seller $1 million in
settlement of certain liabilities related to the purchase of the Company. This
settlement was less than the estimated liability recorded in connection with the
acquisition and resulted in a gain of $893,000 which is reflected in the results
of operations for the year ended October 31, 1996.
The following unaudited pro forma information presents the results of operations
as though the aforementioned Acquisition, which occurred on April 21, 1995, had
occurred as of the beginning of each of the periods presented below (dollars in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1994 YEAR ENDED
TO APRIL 20, 1995 OCTOBER 31, 1994
-------------------------------------------
(PREDECESSOR)
<S> <C> <C>
Net sales $232,618 $457,379
Net income 11,378 15,702
</TABLE>
23
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
3. INVENTORIES
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1995
--------------------
<S> <C> <C>
Raw materials $ 16,920 $ 11,254
Work-in-process 11,803 18,351
Finished goods 29,660 27,070
--------------------
$ 58,383 $ 56,675
====================
</TABLE>
At the time of the Acquisition, the purchase price allocated to inventories
resulted in a $13.2 million write-up from the Predecessor's historical cost.
The $13.2 write-up was expensed as the inventories were sold during the period
from April 21, 1995 to July 31, 1995. This is a non-recurring cost.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1995
--------------------
<S> <C> <C>
Land $ 1,268 $ 1,268
Buildings 6,055 6,047
Machinery and equipment 186,943 157,112
Construction in progress 14,982 19,356
--------------------
209,248 183,783
Accumulated depreciation (22,355) (6,870)
--------------------
$186,893 $176,913
====================
</TABLE>
24
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt of the Company consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1995
---------------------
<S> <C> <C>
Revolving credit facility $ 20,094 $ 1,000
First mortgage notes 188,192 187,775
Equipment notes 3,196 -
211,482 188,775
Less current portion (643) -
=====================
$ 210,839 $ 188,775
=====================
</TABLE>
Revolving Credit Facility
The Company has a $70 million revolving credit facility with two banks which
expires on April 21, 2000. Available borrowings are subject to limits based on
eligible accounts receivable and inventories, less outstanding letters of
credit. The Company has committed to maintain a minimum availability at all
times of $10 million. Borrowings under the facility bear interest, at the
Company's option, at either the bank's Eurodollar rate plus an applicable
margin, which is initially 3.25%, or the prime rate plus 1%. The interest rate
in effect at October 31, 1996 was 8.73%. Obligations under the revolving credit
facility are secured by inventories and accounts receivable. Under the
revolving credit facility, the Company is required to maintain a ratio of
consolidated EBITDA (earnings before interest, income taxes, depreciation and
amortization, as defined) to interest expense plus consolidated current
maturities of long-term liabilities, as defined, of 1.0 to 1.0. Additionally,
if the revolving loan balance exceeds $45 million or borrowing availability
under the facility is less than $20 million at the end of any fiscal quarter,
certain other financial covenants apply.
First Mortgage Notes
The First Mortgage Notes (Notes) mature April 15, 2003. Interest on the Notes
accrues at 13.5% per annum with semiannual interest payments due on April 15 and
October 15.
25
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
Under the Notes, the Company is required to make excess cash flow payments, as
defined, beginning with the fiscal year ending October 31, 1996. The Company
did not have excess cash flow, as defined, in the fiscal year ending October 31,
1996, therefore no payment is required. The Notes are senior obligations of the
Company and are secured by substantially all of the assets of the Company except
accounts receivable and inventories. The Notes are redeemable at the option of
the Company on or after April 15, 1999 at amounts ranging from 106.75% of face
value in 1999 to 100.00% of face value in 2001 and thereafter. The Company is
required to purchase all of the outstanding Notes in the event of a change of
control and to offer to purchase a portion of the Notes in the event of one or
more public equity offerings. The Notes impose certain limitations on the
Company including the ability to incur additional indebtedness, pay dividends,
make certain other restricted payments, create liens, consummate certain mergers
or consolidations, or sell substantially all of the Company's assets.
The Company has 190,000 warrants outstanding, which were included with the Notes
in the units sold by the Company. Each warrant entitles the holder thereof to
purchase one share of common stock, subject to certain adjustments, at a price
of $.01 per share. The warrants are exercisable upon the occurrence of an
Exercise Event (as defined in the warrant agreement) and expire 180 days after
becoming exercisable, but in any event no later than April 15, 2003. Pursuant
to the warrant agreement, under certain circumstances the Company or Holding is
required to make an offer to purchase all outstanding warrants and warrant
shares in cash at a price equal to the current market value, as defined,
thereof. The warrants have been assigned a value resulting in a debt discount
of $2,225,000 at issuance, which is being amortized over the term of the Notes.
The warrants are reflected as common stock warrants subject to put options in
the Company's accompanying consolidated balance sheet.
Equipment Notes
Principle and interest payments are made monthly, with the interest rates from
3.65% above the LIBOR rate to prime plus 0.75%. The Notes mature from April 1,
2001 to October 1, 2001. The Equipment Notes are secured by a security interest
in equipment that is purchased with the proceeds of these notes.
26
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 643
1998 643
1999 643
2000 20,738
2001 623
Thereafter through 2003 190,000
--------
213,290
Less unamortized discount on the Notes (1,808)
--------
$211,482
========
</TABLE>
For the year ended October 31, 1996, interest of $2.2 million was capitalized.
6. STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT)
Changes in stockholder's equity (Successor) and stockholders' equity and
partners' capital (deficit) (Predecessor) were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 21, PERIOD FROM
YEAR ENDED 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
--------------------------------- -------------------------------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 38,336 $ - $ 45,841 $ 25,267
Net income (loss) (370) 1,245 12,802 20,792
Dividends paid and payable - (6,762) - -
Capital contributions - 43,853 - -
Partners' distribution - - - (218)
--------------------------------- -------------------------------------
Balance at end of period $ 37,966 $ 38,336 $ 58,643 $ 45,841
================================= =====================================
</TABLE>
27
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
7. STOCK OPTION PLAN
Holding's 1995 Employee, Director and Consultant Stock Option Plan (Holding
Stock Option Plan) provides for the grant of incentive stock options and non-
qualified stock options (for Holding's Class C common stock) to key employees,
directors and consultants of Holding and its subsidiaries (including the
Company).
The options vest 40% on April 21, 1997, and 20% per annum for the next three
years. Options expire ten years after the grant date unless the employee owns
more than 10% of the total combined value of all classes of capital stock of the
Company or an affiliate whereby the options will expire in five years. The
Company accounts for its stock options in accordance with APB Opinion No. 25 and
related interpretations, and intends to continue to do so.
Options granted pursuant to the Holdings Stock Option Plan become immediately
exercisable upon the occurrence of a Change in Control (as defined). The
purchase price for shares as to which an option is exercised may be payable,
among other things, by delivery of a personal, interest bearing recourse note.
At the election of an employee, the Company is required to repurchase, in any
fiscal year, up to 20% of the options granted to such employee (or 20% of the
shares acquired pursuant to the exercise of options), up to an aggregate of 60%
of the options and or the shares.
Information relating to options granted to key employees of the Company under
the Holding Stock Option Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, 1996
OPTIONS PRICE RANGE
-------------------------------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 41,000 0.01
Exercised - -
Canceled (2,400) -
-----------
Outstanding at end of year 38,600
===========
Exercisable at end of year -
Shares available for granting at end of year 11,400
</TABLE>
28
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
8. EMPLOYEE PROFIT SHARING
GSS is required by the terms of an agreement, which expires October 1, 2000,
between GSS and the United Steelworkers of America (the Union), to make
quarterly profit sharing payments to its union employees. Such payments are
16.5% of profits excluding extraordinary items, pre-tax income or loss from
significant sales of property, plant and equipment, income and investments
applicable to affiliates, cumulative effect on prior years of changes in
accounting principle, pre-tax income or loss from increases or decreases in
value of equipment permanently taken out of service, and deferred costs arising
out of permanent closure of any department of substantial portion. In addition,
GSS makes quarterly profit sharing payments to salaried administrative personnel
equivalent to 9.75% of profits before deduction for profit sharing and income
tax expense, with inventories valued on the basis of the lower of cost, on a
first-in, first-out basis, or market. Profit sharing payments were not required
in fiscal 1994 under the collective bargaining agreement and profit sharing
payments resumed on November 1, 1994.
ASB is required by the terms of an agreement with the Union to make quarterly
profit sharing payments to its Union employees. Such payments are 10% of
profits before taxes and before deduction for profit sharing.
9. INCOME TAXES
The Company is included in the consolidated federal income tax return of its
parent. The federal tax sharing agreement with its parent requires the Company
to pay to its parent (or receive benefit therefrom) an amount equivalent to its
federal income tax expense or benefit, as if they were filing separate tax
returns.
29
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The components of net deferred tax amounts recognized in the balance sheets are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1996 1995
--------------------
<S> <C> <C>
Deferred tax liabilities:
Basis of building and equipment $13,858 $2,310
Accrued gain sharing 96 -
Allowance for doubtful accounts 171 -
--------------------
Total deferred tax liabilities 14,125 2,310
Deferred tax assets:
Net operating loss carryforward 10,009 1,106
Alternative minimum tax credit carryforward 2,048 1,086
Accrued employee benefits 2,613 365
Environmental 279 -
Inventories 557 -
--------------------
Total deferred tax assets 15,506 2,557
Valuation allowance - -
--------------------
Net deferred tax liability (asset) $(1,381) $ (247)
====================
</TABLE>
At October 31, 1996, the Company has net operating loss carryforwards of
$26,941,000 that expire in the year 2011.
30
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The Company' effective tax rate differs from the applicable U.S. federal
statutory rate for the period due to the following:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 21, PERIOD FROM
YEAR ENDED 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
------------------------------ ------------------------------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Tax expense (benefit) at
the federal statutory rate (35.0)% 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes (3.3) 3.3 2.1 0.8
Expenses not tax deductible 3.8 0.7 - 0.2
(Income) loss from affiliates
with no associated (tax - - (.01) 0.6
benefit) tax
Increase in deferred taxes due to
change in federal tax rate - - - 1.8
Benefit of AMT credit - - (2.5) -
Other (7.7) 3.2 1.3 (0.7)
---------------------------- -----------------------------------
Effective rate (42.2)% 42.2% 35.8% 37.7%
============================ ===================================
</TABLE>
31
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 21, PERIOD FROM
YEAR ENDED 1995 TO NOVEMBER 1, YEAR ENDED
OCTOBER 31, OCTOBER 31, 1994 TO APRIL 20, OCTOBER 31,
1996 1995 1995 1994
------------------------------------- --------------------------------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Current:
Federal $ 864 $1,151 $4,831 $ 7,417
State - 6 471 376
------------------------------------- --------------------------------------
864 1,157 5,302 7,793
Deferred:
Federal (1,037) (329) 1,662 4,393
State (97) 82 162 397
------------------------------------- --------------------------------------
(1,134) (247) 1,824 4,790
------------------------------------- --------------------------------------
$ (270) $ 910 $7,126 $12,583
===================================== ======================================
</TABLE>
Income taxes payable include amounts for federal income taxes of $156,000 due
Holding under a tax sharing agreement.
10. RELATED PARTIES
The Company has separate management agreements with two affiliates and an
insurance service agreement with another affiliate. The management agreements
obligate the Company to pay annual fees totaling $1,250,000. The insurance
agreement calls for fees equal to 15% of the total annual cost of the Company's
insurance program. All agreements contain provisions for reimbursement of
expenses in addition to the annual fees. Total amounts paid to affiliates for
services under management agreements for the year ended October 31, 1996 and for
the period April 21, 1995 to October 31, 1995 were $1,378,000 and $722,000,
respectively, including $128,000 and $66,000 in reimbursed expenses. Total fees
paid to an affiliate under the insurance services agreement for the year ended
October 31, 1996 and for the period April 21, 1995 to October 31, 1995 totaled
$175,000 and $127,000, respectively. Fees totaling $3 million were paid to
related parties and affiliates
32
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
10. RELATED PARTIES (CONTINUED)
for services rendered and as reimbursement for expenses incurred in connection
with the Acquisition and the offering of the Notes.
Notes receivable from officers of $750,000 at October 31, 1995 are evidenced by
promissory notes bearing interest at 6.5% and becoming due on April 15, 2015, or
on such earlier date upon the occurrence of certain events as stated in each
such promissory note, including upon termination of employment for cause. The
indebtedness is secured by a pledge of the officers' interest in a limited
partnership.
The Predecessor had significant transactions with its parent, primarily related
to management services provided to the Predecessor. Management fees and other
expenses charged to the Predecessor by its parent for the period from November
1, 1994 to April 20, 1995 and for the year ended October 31, 1994 were
approximately $3.4 million and $1.1 million, respectively.
11. COMMITMENTS AND CONTINGENCIES
Commitments
In May 1994, the Company entered into a three-year purchase agreement with a
supplier whereby agreed-upon volumes of ore pellets will be supplied exclusively
by the supplier. Contract volumes are established six months prior to the
beginning of each contract year with a minimum of 1,360,000 natural metric tons.
Prices established in the first year will be adjusted in subsequent years based
on a formula in the agreement. At October 31, 1996, the Company has a minimum
obligation of approximately $27.8 million relating to the remainder of the third
contract year. Amounts paid under the contract, excluding freight charges,
totaled $46.6 million for the year ended October 31, 1996, $24.7 million for the
period from April 21, 1995 to October 31, 1995, $19.9 million for the period
from November 1, 1994 to April 20, 1995, and $16.6 million for the year ended
October 31, 1994.
The Company has commitments for construction projects related to plant expansion
and environmental improvements of approximately $8.7 million at October 31,
1996.
33
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Although the Company has no obligation with respect to the senior subordinated
notes, the seller note or redeemable preferred stock of Holding, the sole source
of funds for these obligations is expected to be dividend distributions or loans
from the Company. The Holding's senior subordinated notes require Holding to
cause the Company to pay dividends to Holding to the maximum extent permitted
under the indenture for the Notes and applicable law. Accordingly, on September
6, 1995, the Company's Board of Directors approved a dividend to Holding in the
amount of $5,013,000, or $1.39 per share. Effective October 31, 1995, a
dividend of $1,749,000, or $0.48 per share, was declared and paid on December
14, 1995. No dividends were declared for the year ended October 31, 1996.
Contingencies
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company conducts continuous environmental compliance and
monitoring programs and believes that it is currently in substantial compliance
with all known material and applicable environmental regulations except as
follows:
During 1992, the Environmental Protection Agency (EPA) asserted that a waste
water ditch system on the Company's property should be remediated and closed.
At October 31, 1994, the Predecessor had remediated a portion of the ditch and
the Company believes that the most probable course of action for the remainder
of the ditch will involve sampling soil and water and possibly removing some
contaminated soil at a nominal cost. The less likely, but more expensive course
of action would involve sampling soil and water, closing and securing the ditch
with the possibility of some contaminated soil remaining in place, and
monitoring for any migration of the contaminants. This remediation would cost
$1.1 million for closure with post-closure monitoring costs over thirty years of
$2.8 million. The Predecessor also agreed to a $1.1 million civil penalty, of
which $300,000 was to be offset by future capital expenditures, related to this
issue. At October 31, 1996, the $800,000 penalty has been paid, however, the
$300,000 of capital expenditures have not been approved by the EPA.
34
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has been contacted by the U. S. Department of Justice, at the
request of the U.S. Environmental Protection Agency, about alleged violations of
its water discharge permit. Since December 21, 1994, there have been
exceedences of certain of the permit limits, but the Company asserts these have
been sporadic and non-continuous, and the Company has taken, and continues to
take, remedial measures.
Although the Company believes that it has adequately provided for the cost of
all known environmental conditions, the applicable agencies could insist upon
different, and possibly more costly, remediative measures than those believed by
the Company to be adequate or required by existing law. The Company has accrued
$750,000 at October 31, 1996 for unresolved environmental matters and does not
expect that the final resolution of these matters will have a significant effect
on the Company's financial position, results of operations or liquidity.
During fiscal year 1996, during the periods from April 21, 1995 to October 31,
1995 and from November 1, 1994 to April 20, 1995, and the fiscal year 1994,
capital expenditures for environmental projects were $6.4 million, $4.0 million,
$2.9 million and $6.1 million, respectively, and environmental compliance
expenses were $5.8 million, $2.5 million, $3.1 million and $6.0 million,
respectively. The Company currently estimates that expenditures for
environmental capital projects in fiscal 1997 will be approximately $4.3
million.
In October 1996, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 96-1 Environmental Remediation Liabilities.
This SOP, which is effective for fiscal years beginning after December 15, 1996,
provides authoritative guidance on the recognition, measurement, display, and
disclosure of environmental remediation liabilities. The Company does not
believe that the adoption of this SOP in fiscal 1997 will have a significant
effect on its financial statement amounts or disclosures.
The Company is involved in litigation arising from its normal operations,
including employee matters, the resolution of which is not expected to have a
significant effect on the Company's financial position, results of operations or
liquidity.
35
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
12. PENSION PLAN
The Company has a defined contribution pension plan covering all employees
represented by the Union. During fiscal years 1996, 1995 and 1994, the
Company's required contribution to the plan was $.60 per hour for all paid
qualified hours for each eligible participant. Pension expense for the year
ended October 31, 1996, for the periods from April 21, 1995 to October 31, 1995,
November 1, 1994 to April 20, 1995 and the year ended October 31, 1994 was $2.1
million, $1.1 million, $1.0 million and $1.9 million, respectively.
13. POSTRETIREMENT BENEFIT PLAN
Effective April 1, 1996, the Company initiated and sponsors a defined benefit
health care plan that provides postretirement medical benefits to full-time
employees who have worked 30 years, or have reached the age of 60 with 15 years
of service or have reached the age of 65 while in service with the Company. The
plan is contributory and contains other cost-sharing features such as
deductibles and coinsurance. The accounting for the plan anticipates future
cost-sharing changes to the written plan that are consistent with the Company's
expressed intent to increase the retiree contribution rate annually for the
expected general inflation rate for that year. The Company's policy is to fund
the cost of medical benefits in amounts determined at the discretion of
management.
36
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
13. POSTRETIREMENT BENEFIT PLAN (CONTINUED)
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's statement of financial position:
<TABLE>
<CAPTION>
OCTOBER 31,
1996
-------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ (185,000)
Fully eligible active plan participants (2,948,000)
Other active plan participants (7,301,000)
------------
(10,434,000)
Plan assets at fair value 3,373,000
Accumulated postretirement benefit obligation
in excess of plan assets (7,061,000)
Unrecognized obligation (asset):
Unrecognized prior service cost 6,356,000
Unrecognized net (gain) or loss (74,000)
------------
Accrued postretirement benefit cost $ (779,000)
============
Net periodic postretirement benefit cost
includes the following components:
Service cost $ 282,000
Interest cost 464,000
Actual return on assets (244,000)
Net amortization and deferral 277,000
------------
Net periodic postretirement benefit cost $ 779,000
============
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is 8% for pre-65 medical costs and 6.5% for
post-65 medical costs for 1996 and is assumed to decrease gradually to 5% for
2002 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
37
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
13. POSTRETIREMENT BENEFIT PLAN (CONTINUED)
October 31, 1996 by $3,057,000, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1996 by
$391,000. The unrecognized prior service cost resulting from the Plan
initiation is being amortized on a straight-line basis over seventeen years,
which is the average remaining years of service of the Plan participants.
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.25% at November 31, 1996. The trust holding the plan assets is
subject to federal income taxes at a 34% tax rate. The Plan assets are invested
in U.S. Treasury Obligations. The expected long-term rate of return on plan
assets, after estimated income taxes, was 6.8% at November 31, 1996.
14. CONCENTRATION OF CREDIT RISK
The Company is one of the largest steel coil and plate producers in the Southern
United States, where most of its customers are located. Approximately 35% of
its sales are to wholesalers and the remaining 65% are to miscellaneous
manufacturers and end users. No customer accounted for as much as 10% of the
Company's net sales. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximates their fair value.
The carrying value of the revolving credit agreement approximates its fair
value. The fair market value of the First Mortgage Notes at October 31, 1996 is
$179,550,000.
38
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements (continued)
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (dollars
in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
OCTOBER 31, JULY 31, APRIL 30, JANUARY 31,
1996 1996 1996 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(SUCCESSOR)
Net sales $ 123,285 $ 114,540 $ 104,676 $ 111,782
Operating profit (loss) 11,630 7,497 (721) 5,597
Net income (loss) 3,196 733 (4,149) (150)
Net income (loss) per share .84 .19 (1.15) (.04)
</TABLE>
<TABLE>
<CAPTION>
PERIOD PERIOD
THREE MONTHS FROM FROM THREE MONTHS
ENDED APRIL 21, 1995 FEBRUARY 1, 1995 ENDED
OCTOBER 31, TO JULY 31, TO APRIL 20, JANUARY 31, 1995
1995 1995 1995
---------------------------------------------- --------------------------------------------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Net sales $ 114,255 $141,566 $105,540 $127,078
Operating profit 11,325 3,236 10,865 14,293
Net income (loss) 3,408 (2,163) 5,423 7,379
Net income (loss) per
share .90 (.60) - -
</TABLE>
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- -------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained on pages 4, 5 and 6 of Gulf States Steel,
Inc. of Alabama's Proxy Statement dated January 24, 1997, with respect to
directors and executive officers of the Company, is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained on pages 7 and 8 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 24, 1997, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -------- -----------------------------------------------
AND MANAGEMENT
--------------
The information contained on pages 2 and 3 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 24, 1997, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information contained on pages 9 and 10 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 24, 1997, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
- -------- ----------------------------------------------------
ON FORM 8-K
-----------
40
<PAGE>
ITEM 14 (a)1. INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT
- ------------- -----------------------------------------------
OF INDEPENDENT AUDITORS
-----------------------
The Financial Statements of Gulf States Steel, Inc. of Alabama are included in
Item 8:
Balance Sheets
Consolidated as of October 31, 1996 and 1995
Statement of Income
Consolidated for the year ended October 31, 1996 and the period
April 21, 1995 to October 31, 1995 (Successor) and combined
for the period November 1, 1994 to April 20, 1995 and the
year ended October 31, 1994 (Predecessor)
Statements of Cash Flows
Consolidated for the year ended October 31, 1996 and the period April 21,
1995 to October 31, 1995 (Successor) and combined for the period November 1,
1994 to April 20, 1995 (Predecessor) and the year ended October 31, 1994
(Predecessor)
Notes to Financial Statements
ITEM 14 (a)2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
SCHEDULES
---------
The following financial statement schedules of Gulf States Steel, Inc. of
Alabama are included in Item 14 (d):
Form 10-K Schedules Description Page Number
------------------- ----------- -----------
II Valuation and Qualifying Accounts 46
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 14 (A) 3. EXHIBITS
- -------------- --------
The Exhibits listed on the Exhibit Index below are filed or incorporated by
reference as part of this report and such Exhibit Index is hereby incorporated
herein by reference.
EXHIBIT INDEX
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 --Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496
filed with the Securities and Exchange Commission on May 19,
1995.)
3.2 --By-Laws of the Registrant (Incorporated by reference to Exhibit
3.2 to the Registrant's registration statement on Form S-1,
Registration No. 33-92496 filed with the Securities and Exchange
Commission on May 19, 1995.)
4.1 --Indenture, dated as of April 21, 1995 (the "Indenture") by and
between the Registrant and Shawmut Bank Connecticut, National
Association, as Trustee. (Incorporated by reference to Exhibit
4.1 to the Registrant's registration statement on Form S-1,
Registration No. 33-92496 filed with the Securities and Exchange
Commission on May 19, 1995.)
41
<PAGE>
4.2 --Form of New Note (included as part of Exhibit 4.1 hereto)
(Incorporated by reference to Exhibit 4.2 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
4.3 --Intercreditor Agreement dated as of April 21, 1995, by and among GSS
Holding Corp., the Registrant, ASB Acquisition Corp., NationsBank of
Georgia, as Agent and Shawmut Bank Connecticut, National Association,
as Trustee. (Incorporated by reference to Exhibit 4.3 to the
Registrant's registration statement on Form S-1, Registration No. 33-
92496 filed with the Securities and Exchange Commission on May 19,
1995.)
4.4 --Mortgage, Assignment of Leases, Security Agreement and Fixture Filing
dated as of April 21, 1995 by the Registrant to Shawmut Bank
Connecticut, National Association, as Trustee. (Incorporated by
reference to Exhibit 4.4 to the Registrant's registration statement
on Form S-1, Registration No. 33-92496 filed with the Securities and
Exchange Commission on May 19, 1995.)
4.5 --Security Agreement dated as of April 21, 1995, by the Registrant in
favor of Shawmut Bank Connecticut, National Association, as Trustee.
(Incorporated by reference to Exhibit 4.5 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
4.6 --Securities Pledge Agreement dated as of April 21, 1995, by the
Registrant in favor of Shawmut Bank Connecticut, National
Association. (Incorporated by reference to Exhibit 4.6 to the
Registrant's registration statement on Form S-1, Registration No. 33-
92496 filed with the Securities and Exchange Commission on May 19,
1995.)
10.1 --Asset Purchase Agreement dated January 13, 1995, by and among Gulf
States Steel, Inc. of Alabama, GSS Acquisition Corp. and GSS Holding
Corp., together with (i) Real Estate Purchase Agreement dated January
13, 1995 by and between Wills Creek Associates, Ltd. and GSS
Acquisition Corp. (ii) Caster Purchase Agreement dated January 13,
1995, between DSC Equipment Associates, Ltd. and GSS Acquisition
Corp. and (iii) Asset Purchase Agreement dated January 13, 1995,
between Alabama Structural Beams, Inc. and Alabama Structural Beams
Acquisition Corp. (Incorporated by reference to Exhibit 10.1 to the
Registrant's registration statement on Form S-1, Registration No. 33-
92496 filed with the Securities and Exchange Commission on May 19,
1995.)
10.2 --Assignment Agreement dated as of March 30, 1995, by and among GSS
Acquisition Corp. and the Registrant. (Incorporated by reference to
Exhibit 10.2 to the Registrant's registration statement on Form S-1,
Registration No. 33-92496 filed with the Securities and Exchange
Commission on May 19, 1995.)
10.3 --Assignment Agreement dated as of March 30, 1995, by and among Alabama
Structural Beams Acquisition Corp., a Delaware corporation, and
Alabama Structural Beams Acquisition Corp., an Alabama corporation.
(Incorporated by reference to Exhibit 10.3 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
10.4 --Loan and Security Agreement dates as of April 21, 1995, between the
Registrant, Alabama Structural Beams Acquisition Corp., NationsBank
of Georgia, N.A., as Agent, and the financial institutions named
therein. (Incorporated by reference to Exhibit 10.4 to the
Registrant's registration statement on Form S-1, Registration No. 33-
92496 filed with the Securities and Exchange Commission on May 19,
1995.)
10.5 --Tax Sharing Agreement dated as of April 21, 1995, among GSS Holding
Corp. the Registrant and Alabama Structural Beam Acquisition Corp.
(Incorporated by reference to Exhibit 10.5 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
10.6 --Management Consulting Services Agreement dated April 21, 1995,
between the Registrant and Spectrum Management Company, Inc.
(Incorporated by reference to Exhibit 10.6 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
42
<PAGE>
10.7 --Management Consulting Services Agreement dated April 21, 1995,
between the Registrant and Hancock Venture Partners, Inc.
(Incorporated by reference to Exhibit 10.7 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
10.8 --Insurance Services Agreement dated April 21, 1995, between the
Registrant and Risk Management Solutions, Inc. (Incorporated by
reference to Exhibit 10.8 to the Registrant's registration statement
on Form S-1, Registration No. 33-92496 filed with the Securities and
Exchange Commission on May 19, 1995.)
10.9 --GSS Holding Corp. 1995 Employee, Director and Consultant Stock Option
Plan. (Incorporated by reference to Exhibit 10.9 to the Registrant's
registration statement on Form S-1, Registration No. 33-92496 filed
with the Securities and Exchange Commission on May 19, 1995.)
10.10 --Iron Ore Sales Agreement dated as of May 5, 1994 by and between
Quebeq Cartier Mining Company and the Registrant. (Incorporated by
reference to Exhibit 10.10 to the Registrant's registration statement
on Form S-1, Registration No. 33-92496 filed with the Securities and
Exchange Commission on May 19, 1995.)
10.11 --Employment contracts with named executive officers. (Incorporated by
reference to the Registrant's annual report on Form 10-K for the
fiscal year ended October 31, 1995 filed with the Securities and
Exchange Commission on January 27, 1996.)
11 --Computation of earnings per share.
12 --Computation of ratios.
21 --Subsidiaries of the Registrant (Incorporated by reference to Exhibit
21 to the Registrant's registration statement on Form S-1,
Registration No. 33-92496 filed with the Securities and Exchange
Commission on May 19, 1995.)
43
<PAGE>
ITEM 14 (B). REPORTS ON FORM 8-K
- ------------ -------------------
No reports on Form 8-K were filed during the fourth quarter ended October
31, 1996.
ITEM 14 (C). EXHIBITS
- ------------ --------
The response to this portion of item 14 is submitted as a separate section
of this report.
ITEM 14 (D). CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
- ------------ -----------------------------------------
Schedule II
GULF STATES STEEL, INC. OF ALABAMA
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deductions- End
Description of Period Expenses Write-offs(a) of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful accounts
Year ended October 31, 1996 $1,509,000 (234,520) 224,480 $1,050,000
Period from April 21, 1995 to
October 31, 1995 (Successor) 1,509,000 $ (8,893) $ (8,893) $1,509,000
Period from November 1, 1994 to
April 20, 1995 (Predecessor) 1,509,000 4,987 4,987 1,509,000
Year ended October 31, 1994
(Predecessor) 1,509,000 (187,772) (187,772) 1,509,000
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
44
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GULF STATES STEEL, INC. OF ALABAMA
(Registrant)
1/23/97 /s/ John D. Lefler
- ------------------ ----------------------------------------------
Date John D. Lefler, President and Chief Executive
Officer (Principal Executive Officer)
1/23/97 /s/ Jack R. Collins
- ------------------ -----------------------------------------------
Date Jack R. Collins, Senior Vice President and CFO
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity and on the dated indicated.
1/23/97 /s/ Steven E. Karol
- ------------------ -----------------------------------------------
Date Steven E. Karol, Chairman of the Board, Director
1/23/97 /s/ John D. Lefler
- ------------------ -----------------------------------------------
Date John D. Lefler, Director
1/23/97 /s/ Robert W. Ackerman
- ------------------ -----------------------------------------------
Date Robert W. Ackerman, Director
1/23/97 /s/ Dale S. Okonow
- ------------------ -----------------------------------------------
Date Dale S. Okonow, Director
1/23/97 /s/ William S. Karol
- ------------------ -----------------------------------------------
Date William S. Karol, Director
1/23/97 /s/ Howard H. Stevenson
- ------------------ -----------------------------------------------
Date Howard H. Stevenson, Director
1/23/97 /s/ Robert M. Wadsworth
- ------------------ -----------------------------------------------
Date Robert M. Wadsworth, Director
1/23/97 /s/ Alexander S. McGrath
- ------------------ -----------------------------------------------
Date Alexander S. McGrath, Director
45
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
GULF STATES STEEL, INC. OF ALABAMA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE PERIOD
OCTOBER 31, 1996 APRIL 21, 1995 TO
------------------ OCTOBER 31, 1995
-----------------
<S> <C> <C>
Net income (loss) $ (370,000) $1,245,000
========== ==========
Shares:
Weighted average common shares
outstanding 3,610,000 3,610,000
Net effect of dilutive put warrants
and stock options - based on
the treasury stock method N/A 189,838
---------- ----------
Weighted average common and common
equivalent shares outstanding 3,610,000 3,799,838
========== ==========
Net income (loss) per share $ (.10) $ .33
========== ==========
</TABLE>
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
GULF STATES STEEL, INC. OF ALABAMA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(Successor) (Predecessor)
----------- ----------------------------------------------
Fiscal Year For the period For the period
Ended April 21, 1995 November 1,
October 31, to October 31, 1994 to April Fiscal Year Ended October 31,
1996 1995 20, 1995 1994 1993 1992
---- ---- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CALCULATION OF FIXED CHARGES:
Net interest expense $24,118 $12,406 $ 5,230 $14,349 $14,998 $ 17,166
Amortization expense 1,663 618 415 706 956 673
-----------------------------------------------------------------------------
Fixed charges $25,781 $13,024 $ 5,645 $15,055 $15,954 $ 17,839
=============================================================================
CALCULATION OF EARNINGS:
Fixed charges $25,781 $13,024 $ 5,645 $15,055 $15,954 $ 17,839
Net income (loss) before tax (640) 2,155 19,928 33,375 (4,945) (12,892)
-----------------------------------------------------------------------------
Earnings $25,141 $15,179 $ 25,573 $48,430 $11,009 $ 4,947
=============================================================================
RATIO OF EARNINGS TO FIXED CHARGES (a) 1.2x 4.5x 3.2x (a) (a)
=============================================================================
</TABLE>
(a) Earnings are inadequate to cover fixed charges in 1996, 1993 and 1992 by
$640, $4,945 and $12,892, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1995
<PERIOD-START> NOV-01-1995 APR-21-1995
<PERIOD-END> OCT-31-1996 OCT-31-1995
<CASH> 4,458 1,897
<SECURITIES> 0 0
<RECEIVABLES> 41,838 41,167
<ALLOWANCES> 1,050 1,509
<INVENTORY> 58,383 56,675
<CURRENT-ASSETS> 109,352 101,681
<PP&E> 209,248 183,783
<DEPRECIATION> 22,355 6,870
<TOTAL-ASSETS> 304,324 287,870
<CURRENT-LIABILITIES> 51,825 56,224
<BONDS> 187,775 187,775
36 36
0 0
<COMMON> 0 0
<OTHER-SE> 37,930 38,300
<TOTAL-LIABILITY-AND-EQUITY> 304,324 287,870
<SALES> 454,283 255,821
<TOTAL-REVENUES> 454,283 255,821
<CGS> 414,892 224,797
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 15,388 16,463
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 24,643 12,406
<INCOME-PRETAX> (640) 2,155
<INCOME-TAX> (270) 910
<INCOME-CONTINUING> (370) 1,245
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (370) 1,245
<EPS-PRIMARY> (.10) .35
<EPS-DILUTED> (.10) .33
</TABLE>
