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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, 1998.
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
___________________ 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 Identification No.)
incorporation or organization)
174 South 26th Street
Gadsden, Alabama 35904-1935
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(Address of principal executive offices) (Zip Code)
(256) 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 February 1, 1999, incorporates by
reference information required by Part III.
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GULF STATES STEEL, INC. OF ALABAMA
FORM 10-K
TABLE OF CONTENTS
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Item Page
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Part I
1. Business...................................................................... 3
2. Properties.................................................................... 13
3. Legal Proceedings............................................................. 14
4. Submission of Matters to a Vote of Security Holders........................... 14
Part II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 14
6. Selected Financial Data....................................................... 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 16
8. Financial Statements and Supplementary Data................................... 23
9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure........................................... 48
Part III
10. Directors and Executive Officers of the Registrant............................ 47
11. Executive Compensation........................................................ 47
12. Security Ownership of Certain Beneficial Owners and Management................ 47
13. Certain Relationships and Related Transactions................................ 47
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 48
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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, both domestic and foreign; 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 Company's ability to raise
additional capital or to restructure its existing debt in order to meet its cash
flow needs and to have the funds available to implement its capital improvement
projects; the continued increase of foreign steel imports at distress level
prices; 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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Gulf States Steel, Inc. of Alabama (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 1.0 million tons. For the fiscal year
ended October 31, 1998, the Company shipped approximately 280,000 tons of hot-
rolled sheet, 128,000 tons of cold-rolled sheet, 140,000 tons of galvanized
sheet, and 390,000 tons of plate products, resulting in sales of approximately
$407.0 million, and operating profit per ton shipped of approximately $24.
However, the Company expects to experience significant declines in price and
volume during at least the first half of fiscal 1999. If the Company is unable
to increase sales and pricing, continue to reduce costs and implement
productivity improvements and maintain its borrowing ability under the New
Credit Facility (as defined), the Company may not have sufficient liquidity and
capital resources to meet its projected fiscal 1999 requirements. As a result,
the Company is developing a restructuring plan to improve operating results and
to increase its financial flexibility. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" herein.
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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 300 customers, the largest of which accounted for less than 10% of
sales in fiscal 1998, 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"). On January 30,
1998, the Company's sole subsidiary, Alabama Structural Beam Corporation (ASB),
was merged into the Company.
The Company's principal executive offices are located at 174 South 26/th/
Street in Gadsden, Alabama and its telephone number is (256) 543-6100.
Manufacturing Process
The Gadsden mill is a fully-integrated steel 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
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, which impart their own particular
metallurgical qualities, are added to the molten steel. The molten steel is
then poured into the continuous caster for casting into steel slabs. These
slabs are later 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 300 customers, the
largest of
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which accounted for less than 10% of total shipments in fiscal 1998. The
Company's relationships with many of its customers span more than 25 years.
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 competitive advantage
compared to its more distant competitors which typically must absorb between $15
and $25 per ton of extra freight costs in order to compete in the Southern
market. The markets for the Company's products have been negatively affected by
foreign steel imports. See the sections on Competition and Management's
Discussion and Analysis of Financial Conditions and Results of Operations below.
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.
Several major car manufacturers have recently opened automobile plants in
the Southern market. 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.
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 Predecessor and the Company have 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 rates from 864,000 tons in fiscal 1989 to 938,000 tons
in fiscal 1998. During fiscal 1998, the Company completed modernization of its
hot strip mill and the installation of a setup computer and other improvements
at its plate mill. In addition, the Company completed most of its business
process reengineering project and related Year 2000 systems modifications.
Total expenditures on these three projects during fiscal 1998 were approximately
$11.0 million.
The major capital project of fiscal 1999 will be an "inkind" bosh reline
and top change at the blast furnace which will require the blast furnace to be
shut down for approximately 25 days. The Company is currently evaluating when
it will commence the bosh reline project. The Company's maintenance practices
allow the bosh to be stabilized such that operating activities are not adversely
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impacted. However, should the bosh suffer further deterioration such that
relining is necessary, the Company expects to have all materials on hand to
perform the reline and hire contractors to perform the reline, provided that
financing is available and that liquidity, at the time, is sufficient. In
addition, if the repair of the bosh occurs during a period of favorable market
conditions, the Company may be unable to participate in such favorable market.
The Company expects to spend approximately $8.7 million on this project during
fiscal 1999 in addition to the $4.9 million which has already been spent. In
addition, 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) installation of additional
galvanizing capacity, (ii) new bosh technology at its blast furnace and (iii)
other projects including the reline of a stove at the blast furnace. The Company
estimates that the foregoing investments will cost in excess of $40 million. The
Company is in the process of trying to obtain the financing for these projects.
The projects will be commenced if and when financing can be obtained. 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, improve its product mix and, thereby, increase profitability
(assuming other factors remain constant). There can be no assurance, however,
that the Company will obtain such financing for these projects or that liquidity
will be available to complete the bosh reline project. If such financing is not
obtained and liquidity is not available to complete such projects, the Company
may be at risk for a major failure of the blast furnace, experience declines in
volume and experience other negative financial impacts.
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 and lump iron ore to produce the
iron used in its steel-making operations. The Company currently obtains
virtually all of its iron ore from two suppliers (one Canadian and one
Venezuelan) at or below prevailing world market prices. The iron ore is shipped
to Mobile, Alabama by seagoing vessels, where it is unloaded at the Alabama
State Docks. The majority of the pellet and lump ore inventory is held at this
location until needed by the Company. The ore is 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, any
availability problems in the future.
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") which is owned and operated by the
oxygen supplier. The Company's contract to purchase oxygen from the Oxygen
Facility expires in December 2012.
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Scrap. The Company's basic oxygen furnace consumes up to 30% of its metallic
charge in the form of scrap steel. Approximately 40% 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 electric arc furnace based
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 20% 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 Southeastern 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. The Southeast region of the United States has substantial
deposits of natural gas, and the Company expects an adequate supply of natural
gas to be available.
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 of 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 cost advantage relative to its Midwestern and
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.
Three of the mini-mills located in the Southern market, Nucor Corporation
("Nucor"), located in Hickman, AK and Berkeley, SC and Tuscaloosa Steel Corp.
("Tuscaloosa") located in Tuscaloosa, AL
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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 .054 to .625 inches and in widths of 36 to 61
inches. The Hickman mill does not currently produce any steel plate products,
however, Nucor-Hickman is currently installing galvanizing and cold rolling
facilities. When online by the first quarter of 1999, Nucor-Hickman will have
500,000 to 600,000 tons of hot-dip galvanize and 700,000 to 800,000 tons of cold
rolling capacity, depending on product mix. Nucor began offering hot-rolled
pickled & oiled product in August 1998. They are scheduled to begin shipping
cold-rolled and galvanize product in February 1999. Nucor will sell the 500,000
to 600,000 tons of galvanized sheet products to the building and agricultural
markets and will consume 100,000 to 150,000 tons of cold-roll in their own
Vulcraft division.
Nucor has recently completed its Berkeley mini-mill which is now
operational. This plant has 1.8 million tons of annual capacity with expansion
capability to 2.5 million tons. Nucor's stated plan is to sell 40% of this
output as hot band down to .055 inches thick and the balance as cold rolled,
pickled and oiled or galvanized. The new capacity at Nucor-Hickman and Nucor-
Berkeley could have an adverse impact on the Company since the Company will now
be competing with both of these facilities.
In June of 1998, Nucor announced plans to build a $300 million plate mill
in Hertford County, North Carolina. This mill will have an annual capacity of
1.0 million tons and will employ more than 300 people. The Hertford mill will
produce plate from 0.25 to 2.0 inches thick and up to 120" wide. It will
concentrate on the ship building, railcar and tank markets. Market conditions
have delayed this project somewhat, however, it is now expected to start up in
the second quarter of the year 2000.
Tuscaloosa, owned by British Steel America Inc., has normally produced
approximately 500,000 tons of hot-rolled sheet and plate products per year.
Recent plans call for less production of hot roll and the production of discrete
plate up to 2.5 inches. 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. The Tuscaloosa mill does not currently produce
any galvanized or cold-rolled sheet products. Tuscaloosa has recently completed
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 fourth mini-mill in the Southern market is Trico Steel Company ("Trico")
located in Decatur, Alabama. It was recently constructed by a joint venture
consisting of LTV, British Steel plc. and Sumitomo Metal Industries, Ltd. This
mill began operations during 1997, but according to published reports, has been
slow to come up to production capacity. Unlike the existing mini-mills located
in the Southern market, the Trico mill has equipment capable of producing light-
gauge hot-rolled products. The Trico mini-mill is estimated to have an annual
capacity of 2.2 million tons, but due to continuing operating problems, it has
yet to come close to design capacity. In addition, this mill has an annual
pickling capacity of 450,000 tons. The Company believes that this mini-mill
will focus on a different product mix than that which is currently produced by
the Company.
IPSCO Inc. of Regina, Saskatchewan has announced plans to build a mini-mill
in Mobile County, Alabama which will produce coil plate .090 to .750 inches
thick and up to 96" wide along with discrete plate from .187 to 2.0 inches thick
and up to 120" wide. Planned capacity is 1.25 million tons
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annually and the plant will employ approximately 250 people. Construction is
scheduled to begin during the first quarter of 1999 and will take about 24
months to complete.
Historically, foreign steel producers were considerable competitors through
their aggressive pricing policies. 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 its foreign competitors by offering shorter lead
times and a broader range of products; however, in 1996 actions by steel
producers in Russia, the Ukraine, South Africa and China prompted the Company
and another domestic producer to file anti-dumping actions with the
International Trade Commission against those nations. Those actions charged
that steel plate was unfairly being delivered to U.S ports at prices less than
the cost to produce those products. On December 2, 1997, the International
Trade Commission ruled in favor of the petitioners by a unanimous vote and
imposed retroactive duties on future sales of foreign steel plate that could be
shipped into the United Sates from certain of these countries. However, the
ruling is not expected to alleviate the adverse financial impact on the Company
resulting from the amount and pricing of other foreign steel shipped into the
United States.
In 1998, growing economic problems in the Far East, Russia and South
America resulted in a sharp increase of foreign steel imports at distress level
prices. This "Asian Flu" began to seriously affect results of operations
particularly during the last two months of fiscal 1998. As a result, the
Company expects to continue to experience significant declines in price and
volume during at least the first six months of fiscal 1999. The Company is
currently running a $2.0 million per month operating deficit, and there can be
no assurances that the Company will be able to continue to operate while
sustaining such losses. The Company is exploring the possibility of raising
additional capital or restructuring its debt in order to increase liquidity and
minimize the operating deficit. There can be no assurances that the Company
will be able to raise additional capital or restructure its existing debt or
that such measures will improve the Company's operating performance if current
market conditions continue. In response to the dumping of foreign steel, the
Company, in conjunction with a number of other domestic steel producers, has
filed several anti-dumping actions with the International Trade Commission.
Preliminary findings have been favorable for the Company and the industry,
however, it is likely to be months before any final rulings are made. Even if
the International Trade Commission ruled in favor of the Company and the other
petitioners, there can be no assurance that such ruling would alleviate the
financial impact on the Company resulting from the amount and the pricing of
other foreign steel shipped into the United States. On January 7, 1999, the
President released a "Report to Congress on a Comprehensive Plan for Responding
to the Increase in Steel Imports," which announced measures that would be taken
if the imports are not reduced. Together with increased Congressional interest
and other industry efforts, import levels could be reduced by the end of 1999.
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 20 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, 1998, the Company had approximately 1,840 employees.
Substantially all of the Company's hourly employees and 45 salaried office and
clerical employees are represented by the
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United Steel Workers of America (the "USWA"). In April 1993, the Predecessor
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 postretirement 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 Predecessor experienced a 1 1/2 day work stoppage in
1989, the Company has not experienced any work stoppages since, and the Company
believes that it has satisfactory relationships with its union-represented
employees and the USWA.
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 year 1998 no profit sharing payments were made. During fiscal years 1996
and 1997, the Company granted profit sharing to employees of its then
consolidated subsidiary, Alabama Structural Beams, Inc. ("ASBI"). Profit
sharing payment obligations for the years ended October 31, 1998, 1997 and 1996
approximated $-0-, $10,000 and $139,000, respectively.
The Company provides a defined contribution 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. 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.
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 environ- mental regulations, except as
follows:
The predecessor company settled with the Alabama Department of
Environmental Management ("ADEM") 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, subject, however, to the matters set forth
below.
During 1992, the U.S. Environmental Protection Agency ("EPA") asserted that
a waste water ditch system on the Company's property should be remediated and
"closed" under the Resource Conservation and Recovery Act ("RCRA"). As of
October 31, 1994, the Predecessor had remediated a portion of the ditch. 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. As of
October 31, 1996, the $800,000
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penalty had been paid. Subsequently, the $300,000 of capital expenditures were
not approved by the EPA, and during fiscal year 1997 the Company made an
additional penalty payment of that amount plus interest. On November 26, 1997,
ADEM approved the closure plan for the wastewater ditch system. The requirements
of the closure plan are: (1) sediment sampling in the ditch system and (2)
groundwater monitoring. Sixty-six sediment samples were taken throughout the
system and analyzed in March 1998. Eleven groundwater-monitoring wells were
installed and samples taken in February 1998. On September 29, 1998, closure
certification was granted by ADEM releasing the Company from providing financial
assurance of closure. The EPA has not yet responded to the closure
certification. If clean closure cannot be achieved, the Company estimates the
contingent closure costs will be $1.1 million with post-closure costs of $2.8
million ($90,000 annually for 30 years).
The Company faces an enforcement action under the Clean Water Act. The
U.S. Department of Justice ("DOJ") notified the Company that it, at the request
of the EPA, 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 a possible settlement prior to filing suit.
The Company opened discussions with the DOJ in an attempt to settle these
claims. These discussions resulted in substantial agreement as to certain
additional upgrades to the Company's waste water treatment system, and these
upgrades have now been completed. On August 28, 1997, while negotiations were
ongoing with the DOJ, a 60-day notice of intent to file a citizen suit under the
Clean Water Act was sent by one Johnny Williams, a resident of Rainbow City,
Alabama. Prior to expiration of the 60-day period, the DOJ filed its action
under the Clean Water Act, thus precluding the citizen suit. On October 27,
1997, Mr. Williams moved to intervene in the government's action, and this
intervention was allowed by the court. On April 21, 1998, a second motion to
intervene was filed by L.E. McGriff and Herbert Patterson, and this motion was
also allowed by the court. Despite the filing of this litigation, the Company
and the DOJ continued to explore a possible settlement. As a result of these
discussions, an agreement in principle was reached with the EPA and DOJ on
September 1, 1998 pursuant to the terms of which the Company will pay $500,000
as a cash civil penalty and will agree to implement $4.0 million in facility
improvements as Supplemental Environmental Projects ("SEPs") which offer
environmental benefits. On December 27, 1998, DOJ decided to reduce the SEP
expenditures required from $4 million to $3,175,000, which was accepted by the
Company, on the condition that additional minor language modifications be made
in the proposed consent decree. On January 4, 1999, however, settlement
discussions terminated because DOJ required the Company to agree to waive
certain defenses to any and all future actions of any nature that the United
States might initiate in the future against the Company. The Company declined
to agree to this unconditional waiver. On January 8, 1999, the United States
District Court for the Northern District of Alabama convened a Status
Conference, at which time a Pretrial Conference was set for October 25, 1999.
On January 22, 1999, the court issued a scheduling order regarding dispositive
motions and discovery, which are to be completed by September 30, 1999. The
Clean Water Act provides for civil penalties of up to $25,000 per day for
violations occurring before January 30, 1997 and $27,500 per day for violations
occurring on or after January 30, 1997. DOJ has alleged that over 4,000
potential violations of the Clean Water Act have occurred. Many of these
alleged violations concern temperature and dissolved oxygen limitations, which
are exceeded because of the extreme hot weather that occurs during certain
months of the year in Alabama. Therefore, on December 11, 1998, the Company
filed an expedited petition with the Alabama Department of Environmental
Management for a modification of its NPDES permit. If granted, the Company will
be in a position to be in compliance with the Clean Water Act at all times of
the year.
11
<PAGE>
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, individually and as a representative of a
putative class of downstream property owners, seeking unspecified damages and
injunctive relief on a variety of theories for the alleged diminution of
downstream property values and unspecified health hazards as a result of the
Company's waste water discharges. The Company believes the claims of Mr.
Williams are without merit, and that no class should be certified. On motion of
the Company, this action has been stayed pending possible resolution of the
Clean Water Act enforcement action.
During negotiations with the DOJ over the Clean Water Act matter described
above, the DOJ raised remediation of Black Creek as a possible issue. The EPA
investigated Black Creek and performed sampling in Black Creek and Lake Gadsden.
Sampling results thus far indicate levels of metals, primarily lead and zinc, in
the sediment of Black Creek and in certain locations in Lake Gadsden. The
levels of metals in the sediment generally increase with depth, indicating
historical discharges are a greater contributor to the elevated levels. The EPA
has made no determination of what remediation, if any, will be necessary,
although the EPA indicated that another round of sampling would be performed to
define the scope of the potential remediation. On December 23, 1998, as a
result of a routine file review at the Alabama Department of Environmental
Management, the Company was provided with the initial page of a "CERCLA Site
Investigation Report," prepared for EPA on September 30, 1998, under the
supervision of a EPA Task Monitor, together with a November 30, 1998 e-mail
message from the EPA Task Monitor addressed to a member of the public. That e-
mail reported that the Gulf States Steel Site Investigation Report was referred
from EPA's Emergency Response and Removal Branch to the EPA Superfund Remedial
Program for evaluation and potential remediation, but reported that "the time
frame for this is uncertain." Since the time that core samples were taken at
Lake Gadsden almost one year ago, EPA has initiated no further communications
with the Company regarding this matter. The Company was informed that when the
EPA's Site Investigation Report was completed, the Company would have an
opportunity to discuss the findings with EPA prior to the time that EPA made any
future decisions regarding this matter. Instead, the Company learned about
these events through the above-referenced file review. The Company informed the
EPA that its contribution, if any, to the sediment findings is divisible, and
that apportioned, rather than joint and several liability, is appropriate.
Additionally, the Company's relative contribution, if any, to the sediment
results must be further reduced to the extent that it is the result of a
federally permitted discharge. The combined effect of the Company's analysis is
that any potential liability that is assignable to it is so small as to be de
minimis. Given current information, it is not possible to predict the scope or
cost of any potentially required remediation of Black Creek and/or Lake Gadsden,
nor is it known whether the Company's analysis regarding its potential liability
will be accepted. The Company has requested an immediate meeting with the
relevant EPA officials and is waiting on a responsive date.
On February 20, 1996, ADEM issued a Notice of Violation ("NOV") to the
Company for continuing violation of opacity limits from the combustion stacks of
the coke ovens, and included in the NOV a requirement that the Company install
continuous opacity monitors in the stacks. The Company appealed this
requirement, and it was subsequently withdrawn by ADEM on the condition that the
Company employ an independent contractor to conduct visible emission readings on
the stacks. The Company complied with this condition. While there has been no
renewed request by ADEM that the Company install opacity monitors, ADEM has, in
subsequent NOV's, identified such monitors as a possible future requirement.
The Company has taken the position in its communications with ADEM that the
installation of such monitors on its existing stacks is not feasible; however,
it is not currently
12
<PAGE>
possible to predict whether ADEM will again attempt to require that continuous
opacity monitors be installed in the coke oven combustion stacks.
On April 22, 1998, the EPA issued an NOV to the Company relating to alleged
violations of the Toxic Substance Control Act ("TSCA") based on an inspection
conducted on May 16, 1996. The conditions cited in the NOV had been promptly
addressed following the May 16, 1996 inspection. On December 31, 1998 the
Company and the EPA reached an administrative settlement of these allegations
for a penalty payment of $31,813 and the voluntary replacement of four PCB
transformers at an estimated total cost of $149,500.
As a result of a September 1997 inspection, ADEM determined that certain
violations of hazardous waste rules had occurred at the Company's facility and
had resulted in the release of hazardous waste from a secondary containment area
on site. The Company is addressing assessment and possible remediation of this
site area with ADEM. In August 1998, ADEM proposed a Consent Order with an
administrative penalty of $80,000. On September 28, 1998, ADEM issued a second
NOV regarding the same issue. These matters have been consolidated. The
Company has responded and has entered settlement discussions with ADEM on this
matter.
The solid waste permit for the on-site landfill at the facility expired on
December 31, 1988, and a renewal application has been pending since that time.
On April 21 and October 9, 1998, the Company received NOV's regarding the
submission of necessary data for renewal of the solid waste permit. The
requested data was submitted, and on November 10, 1998, ADEM issued public
notice of the application for modification and renewal of the solid waste
permit. On January 4, 1999, the Company received an NOV alleging that non-
approved garbage had been placed on the landfill, and that all material was not
being covered, in violation of the solid waste permit. These matters are being
corrected.
For the fiscal years ended October 31, 1998, 1997 and 1996, capital
expenditures for environmental projects were $4.2 million, $4.1 million and $6.4
million, respectively, and environmental compliance expenses were $5.5 million,
$6.0 million and $5.8 million, respectively. The Company currently estimates
that expenditures for environmental capital projects in fiscal year 1999 will be
approximately $4.6 million.
As of October 31, 1998, the Company has accrued $2.0 million for unresolved
environmental remediation matters. However, the ultimate resolution of the above
matters may have a material adverse effect on the Company's financial position,
results of operations and liquidity.
ITEM 2. PROPERTIES
- ------- ----------
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 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 limits the Company's in-house slab
production to 96,000 tons per month ("TPM"), yielding an in-house capacity of
82,000 TPM of finished steel products. Since the finishing end of the Company's
operation has a higher relative capacity (96,000 TPM) than the caster (90,000
TPM), the Company has from time-to-time purchased
13
<PAGE>
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 including the repairs to the blast furnace which
will have to be shut down for approximately 25 days, 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
- ------- -----------------
In addition to the environmental proceedings described in Item 1 above, the
Company has from time to time been a party to legal proceedings relating to
personal injuries sustained by employees. The Company has made settlement
payments in three employee personal injury cases. The Company believes,
however, that such settlement payments have not had a material effect on its
financial position, results of operations or liquidity. The Company is not a
party to any significant pending legal proceedings other than litigation
incidental to its normal business. The Company believes that these proceedings
will not have a material effect on its financial position, results of operations
or liquidity. The majority of such non-environmental claims, including employee
matters, against the Company are ordinarily covered by insurance although the
Company does have significant deductibles. 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
- ------- ---------------------------------------------------
Not Applicable.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
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 1998.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ---------- -----------------------
(dollars in millions except per share and per ton data)
<TABLE>
<CAPTION>
(Successor)
-------------------------------------------------
For the Period
Fiscal Year Ended April 21, 1995
October 31, to October 31,
----------------------------- ---------------
Income Statement Data: 1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 407.0 $ 436.5 $ 454.3 $ 255.8
Cost of goods sold, excluding depreciation 346.4 389.8 399.6 204.3
Effect of inventory write-up - - - 13.2
Depreciation 19.9 18.4 15.3 7.3
Selling, general and administrative expenses 18.6 16.2 15.3 10.6
Write-off of blooming mill - 1.8 - -
Profit sharing(1) - - .1 5.8
------- ------- ------- -------
Operating profit 22.2 10.3 24.0 14.6
Write-off of common stock warrants 2.2 - - -
Net interest expense 27.5 26.9 24.7 12.4
------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect of accounting change (3.1) (16.6) (.7) 2.2
Provision (benefit) for income taxes 1.5 (.8) (.3) 1.0
------- ------- ------- -------
Income (loss) before cumulative effect of ac-
counting change(2) and extraordinary item(3) $ (4.6) $ (15.8) $ (.4) $ 1.2
======= ======= ======= =======
Net income (loss) per share $ (1.57) $ (5.12) $ (0.10) $ 0.33
Dividends paid and declared per share - - - $ 1.87
Balance Sheet Data:
Total assets $ 300.9 $ 305.4 $ 304.3 $ 287.9
Long-term debt (including current portion) 231.1 228.2 211.5 188.8
Stockholders' equity and partners' capital 13.8 19.5 38.0 38.3
Other Data:
EBITDA(4) $ 45.2 $ 33.8 $ 41.3 $ 21.9
Capital expenditures 23.1 31.1 25.6 16.8
Ratio of earnings to fixed charges(5) - - - 1.2x
Net cash provided by operations $ 20.9 $ 12.5 $ 5.7 $ 5.8
Net cash used in investing activities (23.1) (31.1) (25.5) (218.7)
Net cash provided by financing activities 1.9 16.4 22.3 214.8
Operating Data:
Total tons shipped (000s) 938 1,014 1,075 602
Average selling price per ton shipped(6) $ 427 $ 423 $ 417 $ 420
Average manufacturing cost per ton shipped(6) 361 375 365 331
Operating profit per ton shipped(7) 23 10 22 46
Average rated capacity utilization(8) 93.3% 95.4% 93.6% 98.7%
</TABLE>
<TABLE>
<CAPTION>
(Predecessor)
--------------------------------
For the Period Fiscal Year
Nov. 1, 1994 Ended
to April 20, October 31,
------------ -----------
Income Statement Data: 1995 1994
---- ----
<S> <C> <C>
Net sales $ 232.6 $ 457.4
Cost of goods sold, excluding depreciation 180.4 376.4
Effect of inventory write-up - -
Depreciation 8.7 17.7
Selling, general and administrative expenses 11.2 15.6
Write-off of blooming mill - -
Profit sharing(1) 7.2 -
------- -------
Operating profit 25.1 47.7
Write-off of common stock warrants - -
Net interest expense 5.2 14.3
-------- -------
Income (loss) before income taxes and
cumulative effect of accounting change 19.9 33.4
Provision (benefit) for income taxes 7.1 12.6
-------- -------
Income (loss) before cumulative effect of ac-
counting change(2) and extraordinary item(3) $ 12.8 $ 20.8
======== =======
Net income (loss) per share
Dividends paid and declared per share
Balance Sheet Data:
Total assets $ 220.5 $ 217.4
Long-term debt (including current portion) 96.1 96.9
Stockholders' equity and partners' capital 58.6 45.8
Other Data:
EBITDA(4) $ 34.0 $ 66.1
Capital expenditures 11.6 16.9
Ratio of earnings to fixed charges(5) 4.5x 3.2x
Net cash provided by operations $ 12.4 $ 50.1
Net cash used in investing activities (11.6) (16.6)
Net cash provided by financing activities (0.8) (33.9)
Operating Data:
Total tons shipped (000s) 512 1,059
Average selling price per ton shipped(6) $ 448 $ 421
Average manufacturing cost per ton shipped(6) 338 343
Operating profit per ton shipped(7) 49 45
Average rated capacity utilization(8) 94.6% 95.9%
</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 1997 and 1998, 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 and $0.3 million for fiscal
1994 and the first quarter of fiscal 1994, respectively, had payments been
required.
(2) Excludes $2.6 million of previously capitalized costs incurred for process
reengineering which were written off in 1997 as the cumulative effect of an
accounting change relating to the adoption of EITF 97-13. The effect of
this accounting change was not material for years prior to 1997.
(3) Excludes $0.9 million of previously incurred debt issuance costs which were
written off in 1998 as an extraordinary item.
(4) EBITDA is defined as operating profit plus depreciation and amortization.
In addition, it includes the FASB 106 non-cash accrual for the Company's
postretirement health benefit plans. In addition it includes an FASB-106
non-cash accrual for the Company's post-retirement health benefit plans.
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 1996, 1997 and 1998 by approximately $0.7 million,
$16.6 million and $5.7 million, respectively.
(6) Excludes sales of coke by-products and sales by affiliates (Predecessor) and
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
15
<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 and the provision for forward
looking statements included elsewhere in this Form 10-K.
Results of Operations
Fiscal Year Ended October 31, 1998 Compared to Fiscal Year Ended October 31,
1997
Net Sales. Net sales decreased 6.8% to $407.0 million for fiscal year 1998
from $436.5 million for fiscal 1997. This decrease in revenues was primarily
caused by a 7.4% decrease in shipments of flat rolled products from 1,013,970
net tons in fiscal year 1997 to 937,944 net tons in fiscal 1998. This decrease
in sales volume was due to the closing the blooming mill during the last quarter
of fiscal year 1997, several unplanned outages at other production facilities
and the surge imported steel sold into the United States as discussed below.
The decrease in revenues due to lower sales volume was partially offset by an
increase in the average selling price for flat rolled steel from $423 per ton in
the 1997 period to $427 per ton in the 1998 period. This 0.9% increase in
average selling price primarily resulted from an improved product mix.
During the fourth quarter of fiscal 1998, orders, shipments and pricing for
the Company's products were adversely affected by, among other things, increased
imports. As a result of such increased imports and its effect on the domestic
steel market, the Company anticipates that orders, shipments and pricing will
continue to decrease significantly into fiscal 1999 and remain at low levels
throughout much of the year. This will have a negative impact on the financial
performance of the Company during such period. As of October 31, 1998, the
Company had approximately 156,000 tons and $6.2 million of orders compared to
approximately 212,000 tons and $8.8 million of orders at October 31, 1997.
Foreign competition is a significant factor in the U.S. steel industry and
it has adversely affected prices in the United States and tonnage sold by
domestic producers. The intensity of foreign competition has been driven by
fluctuations in the value of the U.S. dollar against foreign currencies and the
support and subsidies provided by foreign governments. In the summer of 1998,
the U.S. steel industry began experiencing an unprecedented surge of foreign
steel saturating the domestic market at extremely low prices. This surge in
imports is, in part, the result of the economic crises in various regions such
as Asia, Russia and Eastern Europe and Brazil. The depressed economies in these
regions have greatly reduced the demand for steel causing foreign steel
producers to dramatically increase imports to the United States. Market
conditions in the United States have caused several competitors of the Company
to declare bankruptcy or undertake a restructuring of their debt and /or capital
structure.
Most of the Company's products have been negatively affected by the
increase in imports. The Company's product prices fell by an average of 5.7%
during the fourth quarter of fiscal 1998, and the total shipments for the fourth
quarter of fiscal 1998 were approximately 215,300 tons compared to 258,800 tons
for the same period in fiscal 1997. As a result, the Company has been forced to
decrease production by approximately 15%, resulting in higher costs per ton due
to production inefficiencies and a corresponding decline in operating results
and cash flow.
16
<PAGE>
The Company, as well as other domestic steel producers, believe that
foreign steel producers are selling products into the U.S. market at dumped
prices. In response to this dumping of foreign steel, the Company, in
conjunction with a number of other domestic steel producers, has filed several
anti-dumping actions with the U.S. International Trade Commission. Preliminary
findings have been favorable for to the domestic steel industry; however, it is
likely to be months before any final rulings are made. Consequently, the Company
believes that its production levels, shipments and prices will increase as
imports decline and excess inventory levels decrease. There can be no
assurance, however, that the trade cases will be decided in favor of U.S.
producers, that meaningful duties will be imposed, that imports from countries
not named in the trade cases will not increase, that violators will not avoid
the restrictions by shipping through third countries or that domestic shipments
and orders will rise as a result. Existing trade laws and regulations have
often proven to be inadequate in similar cases. Consequently, imports could be a
continuing or increasing problem for the Company and the domestic steel industry
in general.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
11.1% to $346.4 million for fiscal year 1998 from $389.8 million for the year
1997, and as a percentage of net sales, cost of goods sold, excluding
depreciation, decreased to 85.1% in fiscal 1998 compared to 89.3% in 1997.
While much of the overall decrease in costs is a result of the decrease in sales
volume described above, the decrease in cost of goods sold as a percentage of
net sales resulted from benefits of the Company's cost reduction programs,
better productivity at the mills and stable raw materials prices and energy
costs. Average manufacturing costs for flat rolled products declined $14 per
ton shipped from $375 in 1997 to $361 in 1998. Depreciation expense was $19.9
million for the 1998 period compared to $18.4 million in the 1997 period. This
increase was primarily due to continuing expenditures for the Company's capital
improvement projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $18.6 million, or 4.6% of net sales in
1998, from $16.2 million, or 3.7% of net sales in 1997. This increase was
primarily due to higher staffing costs, increased employee benefit plan costs
and costs relating to the Company's business process reengineering and Year 2000
project initiatives.
Write-off of Common Stock Warrants. At the end fiscal 1998, the Company
decided to reduce the value assigned to the common stock warrants due to
continuing losses by the Company and the erosion of any fair market value that
these warrants may have had.
Write-off of Blooming Mill Assets. During the third quarter of fiscal
1997, the Company closed its blooming mill operation as part of its capital
improvement program and upgrading of facilities. This closing resulted in a non-
recurring charge of $1.8 million for the write-off of non-salvageable fixed
assets associated with the blooming mill.
Profit Sharing. No profit sharing payments were required in fiscal 1998
due to the net loss of the Company. Profit sharing payments in the amount of
$10,000 were made in fiscal 1997 to employees of ASB.
Operating Profit. As a result of the changes in net sales, cost of goods
sold, depreciation, selling, general and administrative expenses, write-off of
blooming mill assets and profit sharing discussed above, operating profit
increased to $22.2 million, or 5.4% of net sales, in 1998, from $10.3 million,
or 2.4% of net sales, in 1997. Excluding the non-recurring effect of the write-
off of blooming mill assets, operating profit for 1997 would have been $12.1
million, or 2.8% of net sales.
17
<PAGE>
Interest Expense. Interest expense, net of interest income, rose to $27.5
million in the 1998 period from $26.9 million in the 1997 period. This increase
was primarily due to a higher average revolving credit facility loan balance in
fiscal 1998.
Income Taxes. The Company recognized income tax expense in increasing its
valuation allowance for deferred tax assets. At the same time, due to
continuing losses, the Company eliminated any remaining income taxes payable on
its books. The deferred tax benefits of the Company's losses were being
recorded in a valuation allowance account until such time as the Company
returned to profitability. The Company had recorded a benefit from income taxes
of $0.8 million in fiscal 1997, which represented an effective rate for the
Company's tax benefit of 4.6% in 1997.
Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31,
1996
Net Sales. Net sales decreased 3.9% to $436.5 million for the year 1997
from $454.3 million for the year 1996. This decrease was primarily caused by a
5.7% decrease in shipments of flat rolled products from 1,074,910 net tons in
fiscal year 1996 to 1,013,970 net tons in fiscal 1997. Sales volume was lower
due to planned outages for upgrades at the Hot Strip Mill in April, May and June
of 1997, as well as several unplanned outages at other production facilities.
The decrease in revenues due to lower sales volume was partially offset by an
increase in the average selling price for flat rolled steel from $417 per ton in
the 1996 period to $423 per ton in the 1997 period. This 1.4% increase in
average selling price resulted from an improved product mix as well as a slight
increase in transaction prices.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
2.5% to $389.8 million for the year 1997 from $399.6 million for the year 1996,
however, as a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 89.3% in 1997 compared to 88.0% in 1996. Most of
this increase resulted from the aforementioned planned and unplanned outages at
the mill, however, higher hourly labor costs, high natural gas prices, and
higher raw materials prices, especially zinc, were only partially offset by
benefits resulting from the Company's cost reduction programs. Average
manufacturing costs for flat rolled products rose $10 per ton shipped from $365
in 1996 to $375 in 1997. Depreciation expense was $18.4 million in the 1997
period compared to $15.3 million in the 1996 period. This increase was
primarily due to continuing expenditures for the Company's capital improvement
projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.2 million, or 3.7% of net sales in
1997, from $15.3 million, or 3.4% of net sales in 1996. This increase was
primarily due to higher staffing costs, increased employee benefit plan costs
and costs relating to the Company's Year 2000 project initiatives.
Write-off of Blooming Mill Assets. During the third quarter of fiscal
1997, the Company closed its blooming mill operation as part of its capital
improvement program and upgrading of facilities. This closing resulted in a
non-recurring charge of $1.8 million for the write-off of non-salvageable fixed
assets associated with the blooming mill.
Profit Sharing. Profit sharing amounted to $10,000 in 1997 compared to
$139,000 in 1996. This amount was paid to employees of the Company's then
consolidated subsidiary, ASBI. 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, depreciation, selling, general and administrative expenses, write-off of
blooming mill assets and profit sharing
18
<PAGE>
discussed above, operating profit decreased to $10.3 million, or 2.4% of net
sales, in 1997, from $24.0 million, or 5.3% of net sales, in 1996. Excluding
the non-recurring effect of the write-off of blooming mill assets, operating
profit for 1997 would have been $12.1 million, or 2.8% of net sales.
Interest Expense. Interest expense, net of interest income, increased to
$26.9 million in the 1997 period from $24.7 million in the 1996 period. This
was primarily due to an increase in the average revolving credit facility loan
balance in fiscal 1997.
Income Taxes. The benefit for income taxes increased from $0.3 million in
fiscal 1996 to $0.8 million in fiscal 1997. This represents a drop in the
effective rate of the Company's tax benefit from 42.2% in 1996 to 4.6% in 1997.
This drop in the effective tax rate was primarily due to the establishment of a
valuation allowance for the Company's deferred tax assets which reduced the tax
benefit rate by 32.5%. The valuation allowance was established to recognize
uncertainties in the full realization of the recorded deferred tax assets.
Liquidity and Capital Resources
The Company's current liquidity requirements include working capital needs,
cash for debt service and capital expenditures. The Company intends to finance
its current operations and investing activities with cash from operations,
existing cash balances and borrowing under the New Credit Facility (as defined).
As of October 31, 1998, the Company had a cash balance of $1.99 million
compared to $2.36 million on October 31, 1997. The Company's net cash provided
by operations was $20.9 million for fiscal year 1998 compared to $12.5 million
for fiscal 1997. The primary reasons for the increase in cash provided by
operations were the decrease in cost of goods sold as percentage of sales in
fiscal year 1998 compared to fiscal 1997 and a decrease in the prepaid ore and
shipping accounts during the 1998 period compared to an increase in these
accounts during the 1997 period, all of which was partially offset by the use of
cash to build inventory and to pay down accounts payable during the 1998 fiscal
year.
During fiscal year 1998 the Company made capital expenditures for the
replacement of existing plant and equipment, compliance with environmental
regulations, the upgrading and improvement of manufacturing facilities and to
complete its business process reengineering and Year 2000 compliance projects.
The Company's capital expenditures for the year ended October 31, 1998 were
$23.1 million compared to $31.1 million for the year ended October 31, 1997.
For fiscal year 1998, the Company incurred capital expenditures, excluding
capitalized interest, totaling $4.0 million for environmental projects and
expenditures totaling $16.9 million for the replacement, upgrading and
improvement of facilities and equipment. Although the Company expects to
benefit from improved operating performance related to its capital investments,
there can be no assurance that any or all of these potential cost savings will
be realized.
On November 13, 1997, the Company retired its previous $70 million credit
facility and entered into a new $80 million credit facility (the "New Credit
Facility"). The New Credit Facility includes a $70 million revolving credit
line and a $10 million equipment financing facility. Available borrowings are
subject to limits based on eligible accounts receivable and inventories. The
New Credit Facility has an original term of three years through November 13,
2000, at which time the agreement will automatically renew itself for successive
one-year terms, unless terminated by either party. Obligations under the New
Credit Facility are secured by inventories and accounts receivable, and the
Company is required to maintain a defined amount of consolidated adjusted
tangible net worth at all times. During
19
<PAGE>
November 1997, the Company recorded an extraordinary expense of $1.0 million in
connection with the refinancing, however, $0.9 million was a non-cash
transaction consisting of the write-off of prior unamortized debt issuance
costs. As of October 31, 1998, approximately $39.4 million was borrowed under
the New Credit Facility, and the remaining availability per the terms of the
credit facility was $20.5 million. In December 1998, the Company obtained an
amendment to its debt covenant which decreased the minimum consolidated adjusted
tangible net worth from $(11.6) million to $(20.0) million. The Company's
minimum consolidated tangible net worth at October 31, 1998, was $8.7 million.
The Company has used borrowing under its credit facilities to cover
outstanding commitments and to fund operating losses. As a consequence of
reduced production and sales volume, the Company's inventory and accounts
receivable borrowing base has declined since the end of the third quarter of
fiscal 1998. As a result of the Company's recent financial performance and
operating results, the Company may need to seek amendments, waivers or
forbearance of the terms of the New Credit Facility. There can be, however, no
assurance that the Company will receive such waivers or forbearance, that the
lenders will not require other changes to the terms upon which borrowings under
the New Credit Facility are made or that the lenders will continue to permit
borrowings thereunder. If the Company is unable to borrow under the New Credit
Facility, the Company's operations and financial condition would be materially
adversely affected.
On April 21, 1995 the Company completed the Acquisition (see the Business
section of Item 1 of this Form 10-K) of substantially all the assets and certain
liabilities of the Gadsden, Alabama facilities of Gulf States Steel, Inc. of
Alabama (Predecessor) from the Brenlin Group. In connection with this
acquisition, $190 million in First Mortgage Notes were issued. The Company is
required to make semi-annual cash interest payments of approximately $12.8
million ($25.7 annually). The next interest payment date under the First
Mortgage Notes Indenture is April 15, 1999. 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. The First Mortgage Notes are senior obligations
of the Company and are secured by substantially all the assets of the Company
except accounts receivable and inventories. The Notes impose certain
limitations on the Company including restricting the ability to incur additional
indebtedness, pay dividends, make certain restricted payments, create liens or
sell substantially all of the Company's assets.
At the time of the Acquisition, GSS Holdings Corp. issued certain
promissory notes to Capital Resource Lenders II, L.P. as a part of a related
transaction. Although the Company has no obligation with respect to the
promissory notes, GSS Holdings is required to make payments thereon in
accordance with the respective terms thereof, for which the source of funds is
expected to be dividend distributions or loans from the Company. The promissory
notes require GSS Holdings to cause the Company to pay dividends to Holdings to
the maximum extent allowed under the terms of the First Mortgage Notes Indenture
and applicable law until the GSS Holdings notes are repaid in full. No
dividends were declared by the Company during fiscal year 1998. In addition, in
connection with the Acquisition, GSS Holdings issued a promissory note to the
seller for which the source of funds for repayment is also expected to be
dividend distributions or loans from the Company. There have been no cash
payments required or made on the seller note through October 31, 1998.
20
<PAGE>
The Company has incurred losses, in the current and prior years.
Considering these losses, the Company has established a valuation allowance of
$9.2 million relating to the net deferred tax assets. The Company will evaluate
the possible realization of its net deferred tax assets upon its return to
profitability.
There are several factors in the first half of fiscal 1999 which may
negatively impact the Company's liquidity and financial condition. The Company
is evaluating when it will commence the bosh reline project.
Given current market conditions, required capital expenditures and
improvements and the potential realization of loss contingencies, the Company
believes that it will continue to incur losses in fiscal 1999. If the level of
foreign imports is not reduced and if the Company is unable to increase sales
and pricing, continue to reduce costs and implement productivity improvements
and maintain its borrowing availability under the New Credit Facility, the
Company may not have sufficient liquidity and capital resources to meet its
projected fiscal year 1999 requirements. Although no determination has been
made, the Company may not have sufficient cash to make its April 15, 1999
interest payment on the First Mortgage Notes and continue operations. As a
result, the Company is evaluating when it will commence the Bosh reline project,
as discussed under "Capital Investments" in Item 1, Part 2 and is developing a
restructuring plan to improve operating results and to increase its financial
flexibility.
The Company has retained financial and legal advisors to assist it in
reviewing financial alternatives available to the Company, including without
limitation, raising additional capital and a possible debt restructuring.
The Company has held discussions with certain of its trade creditors and
representatives of certain government agencies with respect to outstanding
accounts payable balances and tax payments. The terms of a plan have not been
finalized, however, these trade creditors are continuing to supply the Company
and the Company is continuing discussions with representations of the government
agencies.
There can be no assurance that a restructuring is possible or that it will
be successful in addressing the Company's liquidity and capital resource needs.
The Company's failure to achieve its cost reduction initiatives or improve
operating performance through capital investments could also have a material
adverse effect on the financial results or liquidity of the Company in the
future. In addition, external factors affect the Company's market and related
transaction prices for its products as well as its cost structure for outside
purchases (i.e., ore, natural gas, electricity, etc.). Unfavorable price
movements for outside purchases and the impact of the Asian and eastern European
economic problems, among others, could have a material adverse effect on the
Company's financial results and its ability to maintain compliance with the
restrictive covenants in the Company's borrowing agreements. In the event that
the Company's financial results and/or borrowing availability under the New
Credit Facility were so affected, the Company's liquidity and capital resources
could be materially adversely effected which could also significantly limit the
Company's ability to withstand competitive pressures or additional adverse
economic conditions.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. The most probable worst case
scenario could result in a system failure or miscalculations causing disruptions
of
21
<PAGE>
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has conducted an assessment of its exposure to disruption
associated with the Year 2000 issue. Many of its computer based transactional
business systems are subject to potential failure. The Company believes that it
could be materially affected by such failures. In addition, certain process
control systems are also exposed. The Company is also vulnerable to third-party
failures to correct their systems but believes that such exposure is minimal.
In order to assess third-party compliance and progress on this issue, the
Company has canvassed its suppliers. The Company believes that no material
contingencies exist that would require it to modify its products.
As previously reported last year in the Company's Form 10-K for the fiscal
year ended October 31, 1997, the Company has recognized the serious nature of
its exposure under the Year 2000 Issue and has developed a modification plan
that will minimize this exposure. It has budgeted approximately $8.8 million
(of which $6.2 million is expected to be capitalized) for the purchase of Year
2000 compliant software and consultant support all of which is expected to be
funded through operating cash flows. The primary purchased software is for an
enterprise resource planning system which will provide enhanced productivity and
customer service benefits in addition to mitigating potential consequences of
the Year 2000 problem. Through October 31, 1998, the Company has incurred
capital expenditures for software of $3.0 million and has spent another $0.7
million for contractors to rewrite existing systems. Those activities were
initiated in late 1996 for all business systems. The Company has spent an
additional $0.5 million for the rewrite of systems modules that cannot be
purchased as packages. The Company believes that these items, which will be
expensed as incurred, are not expected to have a material effect on its results
of operations. Approximately $2.6 million of previously capitalized costs
incurred for process reengineering were written off in fiscal year 1997 as the
Cumulative Effect of an Accounting Change relating to the adoption of EITF 97-
13, Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation.
The Company anticipates completing the Year 2000 project by March 31, 1999,
which is prior to any anticipated impact on its operating systems. A team of
information systems personnel is evaluating the progress and has developed
contingency plans that ensure the continued operation of the business. The
Company has appointed a task force to further evaluate and develop action plans
for minimizing the impact of the Year 2000 Issue on its process control systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. See also the Company's statements regarding "forward-looking
statements" contained in this Form 10-K
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Gulf States Steel, Inc. of Alabama
Financial Statements
Years ended October 31, 1998, 1997 and 1996
with
Report of Independent Auditors
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors......................................... 24
Audited Financial Statements
Balance Sheets
As of October 31, 1998 and 1997........................................ 25
Statements of Operations
For the years ended October 31, 1998, 1997 and 1996.................... 26
Statements of Cash Flows
For the years ended October 31, 1998, 1997 and 1996.................... 27
Notes to Financial Statements.......................................... 29
</TABLE>
23
<PAGE>
Report of Ernst & Young, LLP, Independent Auditors
The Board of Directors and Stockholder
Gulf States Steel, Inc. of Alabama
We have audited the accompanying balance sheets of Gulf States Steel, Inc. of
Alabama as of October 31, 1998 and 1997, and the related statements of
operations and cash flows for each of the three years in the period ended
October 31, 1998. 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 financial position of Gulf States Steel, Inc. of
Alabama at October 31, 1998 and 1997, and the related results of its operations
and its cash flows for each of the three years in the period ended October 31,
1998, 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.
The accompanying financial statements have been prepared assuming that Gulf
States Steel, Inc. of Alabama will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring losses and expects to
continue to incur losses in fiscal 1999. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described under the heading
"Description of the Company and Liquidity" contained in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recover-ability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 4 to the financial statements, in 1997 the Company changed
its method of accounting for process reengineering costs.
Birmingham, Alabama
December 4, 1998,
except for Note 11,
as to which the date is
January 28, 1999
24
<PAGE>
Gulf States Steel, Inc. of Alabama
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
October 31,
1998 1997
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,990 $ 2,359
Accounts receivable, less allowance for doubtful
accounts of $930 in 1998 and $390 in 1997 25,117 33,385
Inventories 60,941 54,651
Deferred income taxes 2,949 3,311
Prepaids and other current assets 4,080 7,140
----------------------------
Total current assets 95,077 100,846
Property, plant and equipment, net 200,702 197,706
Deferred charges, less accumulated amortization of
$3,965 in 1998 and $3,109 in 1997 5,122 6,840
----------------------------
Total assets $300,901 $305,392
============================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 29,832 $ 33,998
Accrued payroll and employee benefits 5,264 4,851
Accrued workers compensation 2,517 3,056
Accrued gain sharing 2,425 2,934
Accrued interest payable 1,431 1,272
Other accrued liabilities 6,742 5,166
Income taxes payable - 174
Current portion of long-term debt 964 643
----------------------------
Total current liabilities 49,175 52,094
Long-term debt 230,123 227,556
Deferred postretirement health benefits 4,862 2,736
Deferred income taxes 2,949 1,313
Common stock warrants subject to put options - 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 (24,544) (18,868)
----------------------------
Total stockholder's equity 13,792 19,468
----------------------------
Total liabilities and stockholder's equity $300,901 $305,392
============================
See accompanying notes.
</TABLE>
25
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 407,006 $ 436,510 $ 454,283
Cost of goods sold, excluding depreciation 346,408 389,780 399,547
Depreciation 19,854 18,443 15,345
Selling, general and administrative expenses 18,582 16,145 15,249
Write-off of blooming mill -- 1,800 --
Profit sharing -- 10 139
--------------------------------------------------
Operating profit 22,162 10,332 24,003
Other (income) expense:
Interest expense 27,633 27,019 24,685
Interest income (140) (76) (42)
Write-off of common stock warrants (2,225) -- --
--------------------------------------------------
25,268 26,943 24,643
--------------------------------------------------
Loss before income taxes (3,106) (16,611) (640)
Provision (benefit) for income taxes 1,526 (760) (270)
--------------------------------------------------
Loss before extraordinary item and cumulative
effect of accounting change (4,632) (15,851) (370)
Extraordinary charge for debt refinancing (1,044)
Cumulative effect of accounting change -- (2,647) --
Net loss $ (5,676) $ (18,498) $ (370)
==================================================
Basic and diluted earnings per share:
Loss before extraordinary item and
cumulative effect of accounting change $ (1.28) $ (4.39) $(.10)
Extraordinary charge for debt refinancing (.29) -- --
Cumulative effect of accounting change -- (.73) --
--------------------------------------------------
Net loss per share $ (1.57) $ (5.12) $(.10)
==================================================
Weighted average common and common equivalent
shares outstanding 3,610,000 3,610,000 3,610,000
--------------------------------------------------
See accompanying notes.
</TABLE>
26
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (5,676) $(18,498) $ (370)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, including amounts capitalized in
inventories 20,466 18,443 15,485
Amortization 1,528 1,524 1,663
Deferred income taxes 1,998 (617) (1,134)
Write-off of blooming mill -- 1,800 --
Common stock warrants fair value adjustment (2,225)
Write-off of debt issuance costs 859 -- --
Changes in operating assets and liabilities:
Accounts receivable 8,268 7,403 (1,130)
Inventories (6,290) 3,732 (1,708)
Prepaids and other current assets 3,060 (4,267) (1,979)
Deferred charges -- (7) (49)
Accounts payable (4,166) (880) (692)
Accrued payroll and employee benefits 413 (862) 967
Accrued interest payable 159 2 86
Other accrued liabilities 2,654 4,727 (4,402)
Income taxes payable (174) 18 (1,001)
------------------------------------------
Net cash provided by operating activities 20,874 12,518 5,736
Investing activities:
Building and equipment purchases (23,129) (31,056) (25,535)
Proceeds from disposal of equipment -- -- 70
------------------------------------------
Net cash used in investing activities (23,129) (31,056) (25,465)
</TABLE>
27
<PAGE>
Gulf States Steel, Inc. of Alabama
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Financing activities:
Net borrowings on revolving credit agreement $ 39,628 $17,092 $19,094
Prepayment of prior revolving credit facility (37,393) -- --
Proceeds from long-term debt 946 -- 3,525
Payments of long-term debt (751) (653) (329)
Reduction of capitalized lease obligations (153) -- --
Debt issuance costs (391) -- --
Net cash provided by financing activities 1,886 16,439 22,290
-------------------------------------
Net increase (decrease) in cash and cash equivalents (369) (2,099) 2,561
Cash and cash equivalents at beginning of year 2,359 4,458 1,897
-------------------------------------
Cash and cash equivalents at end of year $ 1,990 $ 2,359 $ 4,458
=====================================
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 28,820 $28,386 $26,817
Income taxes (299) (18) 1,865
Supplemental schedule of non-cash operating and
financing activities:
Capital lease obligations 333 $ - $ -
</TABLE>
See accompanying notes.
28
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
1. Significant Accounting Policies
Description of the Company and Liquidity
Gulf States Steel, Inc. of Alabama (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. Alabama Structural Beam Corp. (ASB), a subsidiary of the Company, was
merged into the Company on January 30, 1998. The Company is a wholly-owned
subsidiary of GSS Holding Corp. (Holding), a Delaware corporation, which is
controlled by Watermill Ventures, Ltd. Certain amounts in the 1997 balance
sheet have been restated to conform to the 1998 presentation.
All material intercompany accounts and transactions have been eliminated.
The Company has incurred losses in the current and prior years. During the
fourth quarter of the current year, orders, shipments and pricing for the
Company's products were adversely affected by, among other things, increased
imports. As a result of such increased imports and its effect on the domestic
steel market, the Company anticipates that orders, shipments and pricing will
continue to decrease significantly into fiscal 1999 and are expected to remain
at low levels throughout much of the year. Given current market conditions,
required capital expenditures and improvements and the potential realization of
loss contingencies, the Company believes that it will continue to incur losses
in fiscal 1999.
Although the Company expects to benefit from improved operating performance
related to its capital investments, there can be no assurance that any or all of
these potential cost savings will be realized. If the Company is unable to
increase sales and pricing, continue to reduce costs and implement productivity
improvements and maintain its borrowing availability under the revolving credit
facility (see Note 5), and if the level of foreign imports is not reduced, the
Company may not be able to meet the covenant requirements of the revolving
credit facility or have sufficient liquidity and capital resources to meet its
projected fiscal 1999 cash requirements, including the April 15, 1999 interest
payment of approximately $12.8 million due on the First Mortgage Notes.
As a result, the Company is developing a restructuring plan to improve operating
results and to increase financial flexibility. The Company has retained
financial and legal advisors to assist it in reviewing financial alternatives
available to the Company, including without limitation, raising additional
capital and a possible debt restructuring. There can be no assurance that a
restructuring is possible or that it will be successful in addressing the
Company's liquidity and capital resource needs.
29
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
1. Significant Accounting Policies (continued)
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
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 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 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.
Property, Plant and Equipment
Property, plant and equipment acquired by the Company subsequent to the
Acquisition is stated at cost. Property, plant and equipment acquired by the
Company in the Acquisition is recorded 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 the term of the debt
instrument.
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.
30
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
1. Significant Accounting Policies (continued)
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.
2. Acquisition
On April 21, 1995, the Company (f/k/a Gulf States Steel Acquisition Corp.)
completed the 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. 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.
3. Inventories
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1998 1997
-------------------------
<S> <C> <C>
Raw materials $15,677 $19,534
Work-in-process 17,821 13,528
Finished goods 27,443 21,589
----------------------
$60,941 $54,651
======================
</TABLE>
31
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
4. Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1998 1997
-------------------------
<S> <C> <C>
Land $ 1,268 $ 1,268
Buildings 6,089 6,089
Machinery and equipment (including $333 and $-0- of equipment
under capitalized leases in 1998 and 1997, respectively 235,403 216,520
Construction-in-progress 19,039 14,460
-----------------------
261,799 238,337
Accumulated depreciation (61,097) (40,631)
-----------------------
$200,702 $197,706
=======================
</TABLE>
During 1997, the Company recorded a $1.8 million charge to write down assets of
the blooming mill that was shut down.
Effective October 31, 1997, the Company changed its method of accounting for
costs incurred for process reengineering. These costs, totaling $2.6 million at
October 31, 1997, were previously capitalized by the Company but were written
off in 1997 as the cumulative effect of an accounting change. This accounting
change is in accordance with a consensus reached by the Emerging Issues Task
Force, Issue 97-13, Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation. The income tax benefit
relating to this write-off is reserved by a deferred income tax valuation
allowance. The effect of this accounting change is not material for years prior
to 1997.
5. Long-Term Debt
Long-term debt of the Company consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1998 1997
------------------------------
<S> <C> <C>
Revolving credit facility $ 39,421 $ 37,186
First mortgage notes 188,749 188,470
Equipment notes and leases 2,723 2,543
Capitalized lease obligations 194 -
----------------------------
231,087 228,199
Less current portion (964) (643)
----------------------------
$230,123 $227,556
============================
</TABLE>
32
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
5. Long-Term Debt (continued)
Revolving Credit Facility
As of October 31, 1997, the Company had a $70 million revolving credit facility
with two banks which was scheduled to expire on April 21, 2000. Available
borrowings were subject to limits based on eligible accounts receivable and
inventories, less outstanding letters of credit. The Company was committed to
maintaining a minimum availability at all times of $10 million. Interest on
borrowings under the facility was calculated, at the Company's option, at either
the bank's Eurodollar rate plus an applicable margin, which was initially 3.25%,
or the prime rate plus 1%. The interest rate in effect at October 31, 1997 was
8.91%. Obligations under the revolving credit facility were secured by accounts
receivable and inventories. Under the terms of the credit facility, the Company
was 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 exceeded
$45 million, or borrowing availability under the facility was less than $20
million at the end of any fiscal quarter, certain other financial covenants
applied.
On November 13, 1997, the Company entered into an $80 million credit facility
which included a $70 million revolving credit facility and $10 million equipment
financing facility. Available borrowings on the revolving credit facility are
subject to limits based on eligible accounts receivable and inventories, less
outstanding letters of credit. This credit facility has an original term of
three years through November 13, 2000, at which time the agreement will
automatically renew itself for one-year terms thereafter. This facility was
used to pay off the outstanding amount of the previous $70 million revolving
credit facility. Borrowings under the facility bear interest, at the Company's
option, at either the adjusted LIBOR rate plus an applicable margin, which is
initially 3.00%, or the prime rate plus .75%. Obligations under the revolving
credit facility are secured by inventories and accounts receivable. Under the
revolving credit facility, the Company is required to maintain at all times a
states amount of consolidated adjusted tangible net worth, as defined. In
November 1997, in connection with the refinancing of the revolving credit
facility, the Company recorded an extraordinary expense of $1.0 million,
consisting of a write-off of unamortized debt issuance costs and a prepayment
penalty. In December, 1998, the Company obtained an amendment to its debt
covenant which decreased the minimum consolidated adjusted tangible net worth
from $(11.6) million to $(20.0) million. The Company's minimum consolidated
tangible net worth at October 31, 1998 was $8.7 million.
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. 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 years
ending October 31, 1998, 1997 or 1996; therefore, no payments were required.
The Notes are senior
33
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
5. Long-Term Debt (continued)
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 were assigned a value resulting in a debt discount of
$2,225,000 at issuance, which was being amortized over the term of the Notes.
The warrants were reflected as common stock warrants subject to put options in
the Company's accompanying 1997 balance sheet. During 1998, the Company
determined that the fair value of the warrants had declined and reduced the
value assigned to the warrants to zero which increased income by $2,225,000.
Equipment Notes
Principal and interest payments are made monthly, with the interest rates from
3.65% above the LIBOR rate (or prime plus 0.75%) to 12.59%. The Equipment Notes
mature from April 1, 2001 to April 30, 2003. The Notes are secured by a
security interest in the equipment that was purchased with the proceeds of these
notes.
Maturities of long-term debt consists of the following (dollars in thousands):
<TABLE>
<S> <C>
1999 $ 964
2000 846
2001 40,239
2002 225
2003 190,065
--------
$232,339
Less unamortized discount on the Notes (1,252)
--------
$231,087
========
</TABLE>
34
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
5. Long-Term Debt (continued)
For the years ended October 31, 1998 and 1997, interest of $2.2 million and $2.0
million was capitalized, respectively.
6. Stockholders' Equity and Partners' Capital
Changes in stockholder's equity were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 19,468 $ 37,966 $ 38,336
Net loss (5,676) (18,498) (370)
-------------------------------------------------
Balance at end of period $ 13,792 $ 19,468 $ 37,966
=================================================
</TABLE>
7. Stock Option Plan
Holding's 1995 Employee, Director and Consultant Stock Option Plan (Holding
Stock Option Plan) provides for the issuance of up to 65,000 shares of Gulf
States Steel Holding Corporation non-voting, $0.01 par value common stock
through grants 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 vested 60% on April 21, 1998, and 20% per annum for the next two
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 the 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 the option holder, Holding 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.
The fair value of each option is estimated on the date of the grant using the
minimum value method with the following weighted average assumptions used in
1998: dividend yield of zero percent, risk-free
35
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
7. Stock Option Plan (continued)
interest rate of 6.34%, and expected life of ten years. Based on this
calculation, the fair value of the options is nominal.
A summary of the status of the Holding Stock Option Plan as of October 31, 1998
and 1997, and the changes during those dates, is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 38,600 $0.01 38,600 $0.01
Granted 31,200 - - -
Cancelled 6,600 - - -
------- --------
Outstanding at end of year 63,200 $0.01 38,600 $0.01
======= ========
Options exercisable at end of year 25,000 15,440
</TABLE>
The following table summarizes information about the stock options outstanding
at October 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------------------------
Weighted
Number average Number Weighted
outstanding at remaining outstanding at average
October 31, contractual October 31, exercise
Range of exercise prices 1998 life 1998 price
- --------------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
$0.01 63,200 8.4 25,000 $0.01
</TABLE>
Had compensation expense for the stock option plan been determined based on the
fair value at the grant date for awards under this plan, consistent with the
method of FASB Statement No. 123, the Company's net loss would not have
increased for 1998 or 1997. The effects of FASB Statement No. 123 on pro forma
net loss in 1998 and 1997 is not likely to be representative of the effects on
pro forma net income or loss in future years.
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
36
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
8. Employee Profit Sharing (continued)
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. 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 an amount equivalent to its federal income tax expense as
if the Company was filing a separate tax return.
The components of net deferred tax amounts recognized in the accompanying
balance sheets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1998 1997
--------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Basis of property, plant and equipment $ 27,734 $ 21,793
Allowance for doubtful accounts 346 245
--------------------------------------------
Total deferred tax liabilities 28,080 22,038
Deferred tax assets:
Net operating loss carryforwards 30,835 23,550
Alternative minimum tax credit carryforwards 2,048 2,048
Accrued employee benefits 3,755 3,174
Environmental - -
Inventories 617 662
--------------------------------------------
Total deferred tax assets 37,255 29,434
Valuation allowance (9,175) (5,398)
--------------------------------------------
Net deferred tax asset $ - $ (1,998)
============================================
</TABLE>
At October 31, 1998, the Company has net operating loss carryforwards of
approximately $83,000,000 that expire from 2011 through 2013.
37
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
9. Income Taxes (continued)
The Company's effective tax rate differs from the applicable U.S. federal
statutory rate for the year due to the following:
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at the federal
statutory rate (35.0)% (35.0)% (35.0)%
Increase (decrease) resulting from:
State income taxes (2.2)% (2.1)% (3.3)%
Expenses not tax deductible 0.9% 0.9% 3.8%
Common stock warrants (25.1)% - -
Deferred income tax valuation allowance 110.5% 32.5% -
Other - (0.9)% (7.7)
---------------------------------------------------------------
Effective rate 49.1% (4.6)% (42.2)%
===============================================================
</TABLE>
The provision (benefit) for income taxes consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (459) $(130) $ 864
State (14) (13) -
----------------------------------------------------------------
(473) (143) 864
Deferred:
Federal 1,933 (562) (1,037)
State 66 (55) (97)
----------------------------------------------------------------
1,999 (617) (1,134)
----------------------------------------------------------------
$ 1,526 $(760) $ (270)
================================================================
</TABLE>
Income taxes payable at October 31, 1998 and 1997 include amounts for federal
income taxes of $-0- and $174,000, respectively, due Holding Corp. 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 years ended October 31, 1998, 1997
and 1996 were $1,344,000, $1,545,000 and $1,378,000, respectively, including
$94,000, $295,000 and $128,000, respectively, in reimbursed expenses. Total
38
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
10. Related Parties (continued)
fees paid to an affiliate under the insurance services agreement for the years
ended October 31, 1998, 1997 and 1996 totaled $209,000, $213,000 and $175,000,
respectively.
Notes receivable from officers of $750,000 at October 31, 1998 and 1997 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.
11. Commitments and Contingencies
Commitments
The Company has two purchase agreements with suppliers whereby agreed-upon
volumes of ore pellets will be supplied. Contract volumes under one agreement
are established six months prior to the beginning of each contract year with a
minimum of 695,000 metric tons. Volumes under the other agreement have been
established at 688,000 metric tons for contract year 1999, and 172,000 metric
tons for contract year 2000; however, the Company can increase or decrease the
amounts under the second agreement by ten percent at its discretion. Prices
under the agreements are adjusted annually based on a formula. Amounts paid
under the contracts, excluding freight charges, totaled $46.3 million, $42.3
million and $46.6 million for the years ended October 31, 1998, 1997 and 1996,
respectively. At October 31, 1998, the Company has a minimum obligation of
approximately $47.1 million under the above agreements.
The Company has commitments for construction projects related to plant expansion
and environmental improvements of approximately $3.4 million at October 31,
1998.
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. No dividends were
declared for the years ended October 31, 1998, 1997 and 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
39
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
11. Commitments and Contingencies (continued)
believes that it is currently in substantial compliance with all known material
and applicable environmental regulations, except as follows:
The predecessor company settled with the Alabama Department of
Environmental Management ("ADEM") 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, subject, however, to the matters set forth
below.
During 1992, the U.S. Environmental Protection Agency ("EPA") asserted that a
waste water ditch system on the Company's property should be remediated and
"closed" under the Resource Conservation and Recovery Act ("RCRA"). As of
October 31, 1994, the Predecessor had remediated a portion of the ditch. 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. As of
October 31, 1996, the $800,000 penalty had been paid. Subsequently, the
$300,000 of capital expenditures were not approved by the EPA, and during fiscal
year 1997 the Company made an additional penalty payment of that amount plus
interest. On November 26, 1997, ADEM approved the closure plan for the
wastewater ditch system. The requirements of the closure plan are: (1) sediment
sampling in the ditch system and (2) groundwater monitoring. Sixty-six sediment
samples were taken throughout the system and analyzed in March 1998. Eleven
groundwater-monitoring wells were installed and samples taken in February 1998.
On September 29, 1998, closure certification was granted by ADEM releasing the
Company from providing financial assurance of closure. The EPA has not yet
responded to the closure certification. If clean closure cannot be achieved,
the Company estimates the contingent closure costs will be $1.1 million with
post-closure costs of $2.8 million ($90,000 annually for 30 years).
The Company faces an enforcement action under the Clean Water Act. The U.S.
Department of Justice ("DOJ") notified the Company that it, at the request of
the EPA, 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 a possible settlement prior to filing suit. The
Company opened discussions with the DOJ in an attempt to settle these claims.
These discussions resulted in substantial agreement as to certain additional
upgrades to the Company's waste water treatment system, and these upgrades have
now been completed. On August 28, 1997, while negotiations were ongoing with
the DOJ, a 60-day notice of intent to file a citizen suit under the Clean Water
Act was sent by one Johnny Williams, a resident of Rainbow City, Alabama. Prior
to expiration of the 60-day period, the DOJ filed its action under the Clean
Water Act, thus precluding the citizen suit. On October 27, 1997, Mr. Williams
moved to intervene in the government's action, and this intervention was allowed
by the court. On April 21, 1998, a second motion to intervene was filed by L.E.
McGriff and Herbert Patterson, and this motion was also allowed by the court.
Despite the filing of this litigation, the Company and the DOJ continued to
explore a possible settlement. As a result of these discussions, an agreement
in principle was reached with the EPA and DOJ on September 1, 1998 pursuant to
the terms of which the Company will pay $500,000 as a cash civil penalty and
will agree to implement $4.0 million in facility improvements as Supplemental
Environmental Projects ("SEPs") which offer
40
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
11. Commitment and Contingencies (continued)
environmental benefits. On December 27, 1998, DOJ decided to reduce the SEP
expenditures required from $4 million to $3,175,000, which was accepted by the
Company, on the condition that additional minor language modifications be made
in the proposed consent decree. On January 4, 1999, however, settlement
discussions terminated because DOJ required the Company to agree to waive
certain defenses to any and all future actions of any nature that the United
States might initiate in the future against the Company. The Company declined to
agree to this unconditional waiver. On January 8, 1999, the United States
District Court for the Northern District of Alabama convened a Status
Conference, at which time a Pretrial Conference was set for October 25, 1999. On
January 22, 1999, the court issued a scheduling order regarding dispositive
motions and discovery, which are to be completed by September 30, 1999. The
Clean Water Act provides for civil penalties of up to $25,000 per day for
violations occurring before January 30, 1997 and $27,500 per day for violations
occurring on or after January 30, 1997. DOJ has alleged that over 4,000
potential violations of the Clean Water Act have occurred. Many of these alleged
violations concern temperature and dissolved oxygen limitations, which are
exceeded because of the extreme hot weather that occurs during certain months of
the year in Alabama. Therefore, on December 11, 1998, the Company filed an
expedited petition with the Alabama Department of Environmental Management for a
modification of its NPDES permit. If granted, the Company will be in a position
to be in compliance with the Clean Water Act at all times of the year.
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, individually and as a representative of a
putative class of downstream property owners, seeking unspecified damages and
injunctive relief on a variety of theories for the alleged diminution of
downstream property values and unspecified health hazards as a result of the
Company's waste water discharges. The Company believes the claims of Mr.
Williams are without merit, and that no class should be certified. On motion of
the Company, this action has been stayed pending possible resolution of the
Clean Water Act enforcement action.
During negotiations with the DOJ over the Clean Water Act matter described
above, the DOJ raised remediation of Black Creek as a possible issue. The EPA
investigated Black Creek and performed sampling in Black Creek and Lake Gadsden.
Sampling results thus far indicate levels of metals, primarily lead and zinc, in
the sediment of Black Creek and in certain locations in Lake Gadsden. The
levels of metals in the sediment generally increase with depth, indicating
historical discharges are a greater contributor to the elevated levels. The EPA
has made no determination of what remediation, if any, will be necessary,
although the EPA indicated that another round of sampling would be performed to
define the scope of the potential remediation. On December 23, 1998, as a
result of a routine file review at the Alabama Department of Environmental
Management, the Company was provided with the initial page of a "CERCLA Site
Investigation Report," prepared for EPA on September 30, 1998, under the
supervision of a EPA Task Monitor, together with a November 30, 1998 e-mail
message from the EPA Task Monitor addressed to a member of the public. That e-
mail reported that the Gulf States Steel Site Investigation Report was referred
from EPA's Emergency Response and Removal Branch to the EPA Superfund Remedial
Program for evaluation and potential remediation, but reported that "the time
41
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
11. Commitments and Contingencies (continued)
frame for this is uncertain." Since the time that core samples were taken at
Lake Gadsden almost one year ago, EPA has initiated no further communications
with the Company regarding this matter. The Company was informed that when the
EPA's Site Investigation Report was completed, the Company would have an
opportunity to discuss the findings with EPA prior to the time that EPA made any
future decisions regarding this matter. Instead, the Company learned about these
events through the above-referenced file review. The Company informed the EPA
that its contribution, if any, to the sediment findings is divisible, and that
apportioned, rather than joint and several liability, is appropriate.
Additionally, the Company's relative contribution, if any, to the sediment
results must be further reduced to the extent that it is the result of a
federally permitted discharge. The combined effect of the Company's analysis is
that any potential liability that is assignable to it is so small as to be de
minimis. Given current information, it is not possible to predict the scope or
cost of any potentially required remediation of Black Creek and/or Lake Gadsden,
nor is it known whether the Company's analysis regarding its potential liability
will be accepted. The Company has requested an immediate meeting with the
relevant EPA officials and is waiting on a responsive date.
On February 20, 1996, ADEM issued a Notice of Violation ("NOV") to the
Company for continuing violation of opacity limits from the combustion stacks of
the coke ovens, and included in the NOV a requirement that the Company install
continuous opacity monitors in the stacks. The Company appealed this
requirement, and it was subsequently withdrawn by ADEM on the condition that the
Company employ an independent contractor to conduct visible emission readings on
the stacks. The Company complied with this condition. While there has been no
renewed request by ADEM that the Company install opacity monitors, ADEM has, in
subsequent NOV's, identified such monitors as a possible future requirement.
The Company has taken the position in its communications with ADEM that the
installation of such monitors on its existing stacks is not feasible; however,
it is not currently possible to predict whether ADEM will again attempt to
require that continuous opacity monitors be installed in the coke oven
combustion stacks.
On April 22, 1998, the EPA issued an NOV to the Company relating to alleged
violations of the Toxic Substance Control Act ("TSCA") based on an inspection
conducted on May 16, 1996. The conditions cited in the NOV had been promptly
addressed following the May 16, 1996 inspection. On December 31, 1998 the
Company and the EPA reached an administrative settlement of these allegations
for a penalty payment of $31,813 and the voluntary replacement of four PCB
transformers at an estimated total cost of $149,500.
As a result of a September 1997 inspection, ADEM determined that certain
violations of hazardous waste rules had occurred at the Company's facility and
had resulted in the release of hazardous waste from a secondary containment area
on site. The Company is addressing assessment and possible remediation of this
site area with ADEM. In August 1998, ADEM proposed a Consent Order with an
administrative penalty of $80,000. On September 28, 1998, ADEM issued a second
NOV regarding the same issue. These matters have been consolidated. The
Company has responded and has entered settlement discussions with ADEM on this
matter.
42
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
11. Commitment and Contingencies (continued)
The solid waste permit for the on-site landfill at the facility expired on
December 31, 1988, and a renewal application has been pending since that time.
On April 21 and October 9, 1998, the Company received NOV's regarding the
submission of necessary data for renewal of the solid waste permit. The
requested data was submitted, and on November 10, 1998, ADEM issued public
notice of the application for modification and renewal of the solid waste
permit. On January 4, 1999, the Company received an NOV alleging that non-
approved garbage had been placed on the landfill, and that all material was not
being covered, in violation of the solid waste permit. These matters are being
corrected.
For the fiscal years ended October 31, 1998, 1997 and 1996, capital
expenditures for environmental projects were $4.2 million, $4.1 million and $6.4
million, respectively, and environmental compliance expenses were $5.5 million,
$6.0 million and $5.8 million, respectively. The Company currently estimates
that expenditures for environmental capital projects in fiscal year 1999 will be
approximately $4.6 million.
As of October 31, 1998, the Company has accrued $2.0 million for unresolved
environmental remediation matters. However, the ultimate resolution of the
above matters may have a material adverse effect on the Company's financial
position, results of operations and liquidity.
The Company is also 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.
12. Pension Plan
The Company has a defined contribution pension plan covering all employees
represented by the Union. For the period from April 1, 1997 to October 31,
1998, the Company's required contribution to the plan was $.70 per hour for all
paid qualified hours for each eligible participant. For the period from
November 1, 1996 to March 31, 1997, and during fiscal year 1996, the Company's
required contribution to the plan was $.60 per hour. Pension expense for the
years ended October 31, 1998, 1997 and 1996, was $2.2 million, $2.2 million and
$2.1 million, respectively.
43
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
13. Postretirement Benefit Plan
Effective April 1, 1996 for union employees and November 1996 for non-union
employees, the Company initiated and sponsors defined benefit health care plans
that provide 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 plans are
contributory and contain other cost-sharing features such as deductibles and
coinsurance provisions. The accounting for the plans anticipates future cost-
sharing changes to the written plans 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.
The following table presents the plans' funded status reconciled with amounts
recognized in the Company's balance sheets (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1998 1997
--------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (840) $ (340)
Fully eligible active plan participants (6,855) (4,319)
Other active plan participants (13,213) (11,069)
--------------------------------
(20,908) (15,728)
Plan assets at fair value 3,781 3,493
--------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets (17,127) (12,235)
Unrecognized obligation (asset):
Unrecognized prior service cost 7,677 8,268
Unrecognized net (gain) or loss 4,588 1,199
--------------------------------
Accrued postretirement benefit cost $ (4,862) $ (2,768)
================================
Net periodic postretirement benefit cost includes the following components:
Service cost $ 669 $ 576
Interest cost 1,297 1,079
Actual return on assets (288) (120)
Net amortization and deferral 618 458
--------------------------------
Net periodic postretirement benefit cost $ 2,296 $ 1,993
================================
</TABLE>
44
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
13. Postretirement Benefit Plan (continued)
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is 7.0% for pre-65 medical costs and 5.5%
for post-65 medical costs for 1999, and is assumed to decrease gradually to 5%
by 2003 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
October 31, 1998 by $4,602,000, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1998 by
$467,000. The unrecognized prior service cost resulting from the Plans'
initiations is being amortized on a straight-line basis over seventeen years for
the Union Plan and eleven years for the Non-Union Plan, which is the average
remaining years of service of the Plans' participants.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.00% and 7.75% at October 31, 1998 and 1997, respectively. The
trust holding the Union Plan's assets is subject to federal income taxes at a
34% tax rate. The Union Plan's assets are invested in U.S. Treasury
obligations. The expected long-term rate of return on plan assets, after
estimated income taxes, was 7.5% both at October 31, 1998 and 1997.
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 42% of
its sales are to wholesalers and the remaining 58% 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 notes outstanding under the Revolving Credit Agreement
approximates its fair value. The fair market value of the First Mortgage Notes
at October 31, 1998 is estimated to be $47,500,000. This estimate is based on a
January 15, 1999 report of Goldman Sachs which quotes a bid price for Gulf
States Steel First Mortgage Notes at 25% of par value.
45
<PAGE>
Gulf States Steel, Inc. of Alabama
Notes to Financial Statements
October 31, 1998, 1997 and 1996
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,
1998 1998 1998 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $92,741 $107,356 $103,592 $103,317
Operating profit 5,123 5,597 4,934 6,508
Loss before extraordinary item (834) (1,181) (2,086) (531)
Extraordinary charge for debt
refinancing - - - (1,044)
Net loss (834) (1,181) (2,086) (1,575)
Earnings per share:
Loss before extraordinary item (.23) (.33) (.57) (.15)
Extraordinary charge for debt
refinancing - - - (.29)
Net loss (.23) (.33) (.57) (.44)
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------
October 31, July 31, April 30, January 31,
1997 1997 1997 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $109,863 $108,402 $106,928 $111,317
Operating profit (loss) 368 (543) 5,390 5,117
Net loss (8,881) (7,678) (1,097) (842)
Net loss per share (2.46) (2.13) (.30) (.23)
</TABLE>
46
<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, 6 and 7 of Gulf States Steel, Inc. of
Alabama's Proxy Statement dated February 1, 1999, 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, 8, 9 and 10 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated February 1, 1999, 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 February 1, 1999, 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 10, 11, and 12 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated February 1, 1999, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.
47
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
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
As of October 31, 1998 and 1997
Statements of Operations
For the years ended October 31, 1998, 1997 and 1996
Statements of Cash Flows
For the years ended October 31, 1998, 1997 and 1996
Notes to Financial Statements
ITEM 14 (a)2. INDEX TO FINANCIAL STATEMENT SCHEDULES
- ------------- --------------------------------------
The following financial statement schedules of Gulf States Steel, Inc. of
Alabama are included in Item 14 (d):
<TABLE>
<CAPTION>
Form 10-K Schedules Description Page Number
------------------- ----------- -----------
<S> <C>
II Valuation and Qualifying Accounts 52
</TABLE>
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.
48
<PAGE>
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.)
10.1 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.)
10.2 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.)
10.3 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.)
10.4 Amendment to Intercreditor Agreement (see Exhibit 10.3 hereto) dated
as of November 13, 1997, by and among GSS Holding Corp., the
Registrant, Alabama Structural Beam Corp., Fleet Capital Corporation,
as Agent, and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 10.4 to the Registrant's annual
report on Form 10-K for the fiscal year ended October 31, 1997, filed
with the Securities and Exchange Commission on January 23, 1998.)
10.5 Loan and Security Agreement dated November 13, 1997, by and among the
Registrant, Alabama Structural Beam Corp., Fleet Capital Corporation,
as Agent, and the financial institutions listed therein.
(Incorporated by reference to Exhibit 10.5 to the Registrant's annual
report on Form 10-K for the fiscal year ended October 31, 1997, filed
with the Securities and Exchange Commission on January 23, 1998.)
49
<PAGE>
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
50
<PAGE>
10.14 Iron Ore Sales Agreement dated as of May 5, 1994 by and between Quebec
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.)
10.15 Employment contract with Jack R. Collins dated September 24, 1997, by
and between Jack R. Collins and the Registrant. (Incorporated by
reference to the Registrant's annual report on Form 10-K for the
fiscal year ended October 31, 1997, filed with the Securities and
Exchange Commission on January 23, 1998.)
10.16 Employment contract with Robert Schaal dated February 2, 1998, by and
between Robert Schaal and the Registrant filed herewith.
10.17 Employment contract with Jim R. Grimm dated July 28, 1998, by and
between Jim R. Grimm and the Registrant filed herewith.
10.18 Non-Compete Agreement dated as of January 1,1999 between John D.
Lefler and the Registrant filed herewith.
10.19 First Amendment to Loan and Security Agreement dated December 17, 1998
by and between the Registrant and Fleet Capital Corporation filed
herewith.
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.)
27 Financial Data Schedule.
ITEM 14 (b). REPORTS ON FORM 8-K
- ------------ -------------------
No reports on Form 8-K were filed during the fourth quarter ended October
31, 1998.
ITEM 14 (c). EXHIBITS
- ------------ --------
The response to this portion of Item 14 is submitted as a separate section of
this report.
51
<PAGE>
ITEM 14 (d). FINANCIAL STATEMENT SCHEDULE
- ------------ ----------------------------
Schedule II
GULF STATES STEEL, INC. OF ALABAMA
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Deductions- Balance at
Beginning of Costs and Write-offs(a) End of Period
Description Period Expenses
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended October 31, 1998 $ 389,874 $ 310,000 $ 230,534 $ 930,408
Year ended October 31, 1997 1,050,000 -- (660,126) 389,874
Year ended October 31, 1996 1,509,000 (234,520) (224,480) 1,050,000
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
<TABLE>
<CAPTION>
Balance at Charged to Deductions- Balance at
Beginning of Costs and Write-offs(a) End of Period
Description Period Expenses
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve for Environmental
Contingencies:
Year ended October 31, 1998 $ 750,000 $ 1,296,000 $ (42,140) $ 2,003,860
Year ended October 31, 1997 750,000 383,179 (383,179) 750,0000
Year ended October 31, 1996 -- 1,062,723 (312,723) 750,0000
</TABLE>
52
<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)
1/28/99 /s/ Robert Schaal
- ------- ---------------------------------------------
Date Robert Schaal, Chairman and Chief Executive
Officer (principal executive officer)
1/28/99 /s/ James R. Grimm
- ------- ---------------------------------------------
Date James R. Grimm, 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 date indicated.
1/28/99 /s/ Steven E. Karol
- ------- ---------------------------------------------
Date Steven E. Karol, Chairman of the Board,
Director
1/28/99 /s/ Robert Schaal
- ------- --------------------------------------------
Date Robert Schaal, Director
1/28/99 /s/ Robert W. Ackerman
- ------- --------------------------------------------
Date Robert W. Ackerman, Director
1/28/99 /s/ Dale S. Okonow
- ------- --------------------------------------------
Date Dale S. Okonow, Director
1/28/99 /s/ William S. Karol
- ------- --------------------------------------------
Date William S. Karol, Director
1/28/99 /s/ Howard H. Stevenson
- ------- --------------------------------------------
Date Howard H. Stevenson, Director
1/28/99 /s/ Robert M. Wadsworth
- ------- --------------------------------------------
Date Robert M. Wadsworth, Director
1/28/99 /s/ Alexander S. McGrath
- ------- --------------------------------------------
Date Alexander S. McGrath, Director
53
<PAGE>
Exhibit 10.16
February 2, 1998
Personal & Confidential
Mr. Robert Schaal
321 Price Street
West Chester, PA 19382
Dear Bob:
It is a pleasure for me to offer you employment as Chairman and Chief
Executive Officer of Gulf States Steel, Inc. of Alabama (the "Company") under
the following terms and conditions:
1. Employment Date: You will commence your employment with the Company on
---------------
February 4, 1998 (the "Employment Date").
2. Base Salary: Your base salary during your employment with the Company
-----------
will be at the rate of $25,000 per month, subject to adjustment (at the
Company's sole discretion) based on a review of your performance on
each anniversary of the Employment Date, and payable in accordance with
the normal salary payment procedures for senior executives of the
Company.
3. Bonus: You will have the opportunity to earn a bonus in accordance
-----
with the terms used to pay bonuses to the other officers of the Company
under the Company's bonus plan (the "Plan"), as in effect from time-to-
time. The Plan currently in effect allows the participant to receive a
bonus of 25% to 50% of his base salary earned in such fiscal year, upon
the achievement of pre-approved (by the Board of Directors) operating
and financial performance levels of the Company. In addition, as soon
as possible after the start of your employment with the Company, we
will endeavor to agree to certain short-and long-term operating and
financial performance goals, as well as goals related to implementation
of the Company's strategic plan, which, if achieved by you, will allow
you to receive a bonus of up to an additional 35% of your base salary.
This additional bonus will apply to the fiscal year ending October 31,
1998 only, after which you will participate solely in the Plan as
described above. In order to qualify for the bonus, however, you must
be employed by the Company at the end of the fiscal year for which a
bonus might be payable. Payment of a bonus is subject to approval of
the Company's Board of Directors, and the Company reserves the right to
change, alter, amend or discontinue the bonus plan in effect at any
time.
4. Duties: At the time you commence your employment with the Company,
------
you will serve as the Chairman and Chief Executive Officer of the
Company. The Company's Board of Directors will also invite you to join
the Board as a member. While you are employed by the Company, you will
report directly to the Chairman of the Board of Directors, and you
shall perform such duties as he and the Board of Directors may request
from time-to-time. While you are employed by the Company, you shall
devote your full working time, best efforts, knowledge and skills
<PAGE>
Mr. Robert Schall
February 2, 1998
Page 2
exclusively to the business of the Company and, at all times, act in
the best interests of the Company.
5. Termination: Your employment with the Company shall be on an "at will"
-----------
basis and, accordingly, either of us shall have the right at any time
to terminate your employment with the Company by written notice given
to the other. Notwithstanding the foregoing, (i) you will be guaranteed
your annual base salary for a period of one (1) year from the
Employment Date, and (ii) you shall be eligible to severance pay (at
the rate of your annual base salary in effect at that time) payable
over a one (1) year period (the "Severance Period") if your employment
with the Company is terminated for reasons other than "cause." The term
"cause" will be defined in the non-competition agreement referred to
below. Medical insurance benefits would also continue in effect for the
same period.
6. Non-Competition Agreement: As a condition to your employment by the
-------------------------
Company, you agree that, on the Employment Date you will enter into a
non-competition agreement whereby you agree not to compete, directly or
indirectly, with the business of the Company or any other steel
business acquired by the Company or any other affiliate of Watermill
Ventures, Ltd. while you are employed by the Company (collectively, the
"Watermill Steel Companies") for a period of two (2) years following
the termination of your employment with the Company. Such non-
competition arrangement will apply: a) to companies, wherever located,
in the same or similar businesses as the Watermill Steel Companies for
the first year following the termination of your employment with the
Company and, for the second year following the termination of your
employment with the Company, (b) to a list of companies that we will
mutually agree upon, and to any companies which are not currently on
such list, but which later own, operate or control facilities in the
same or similar businesses as the Company which are located within a
500-mile radius of the Company.
7. Fringe and Health Benefits: You shall be entitled to participate in
--------------------------
those retirement, health and other fringe benefits generally made
available from time-to-time to senior executives of the Company.
8. Incentive Stock Options: As soon as possible after the start of your
-----------------------
employment with the Company, we will enter into an Incentive Stock
Option Agreement with you whereby you will have the opportunity to
share in 2.5% of the equity appreciation of GSS Holding Corp., the
parent company of the Company, from the Employment Date forward;
subject to certain restrictions, including gradual vesting as follows:
20% on the Employment Date, 20% on August 4, 1999, 20% on August 4,
2000, 20% on August 4, 2001, and the remaining 20% on August 4, 2002,
all of which are in accordance with the terms of the GSS Holding Corp.
1995 Employee, Director and Consultant Stock Option Plan.
<PAGE>
Mr. Robert Schall
February 2, 1998
Page 3
9. Relocation Costs: The position requires residency within Gadsden or
----------------
its immediate vicinity. In order to defray the costs of moving from the
West Chester, Pennsylvania area to the Gadsden, Alabama area, the
Company will pay the following (not to exceed $60,000 in the
aggregate): (a) your reasonable temporary living expenses in the
Gadsden area until your family is relocated, (b) your reasonable
closing costs, including real estate commissions, incurred in
connection with the sale of your home in the West Chester area and the
purchase of a home in the Gadsden area, (c) your reasonable expenses
for moving your household furnishings to the Gadsden area, with amount
to be determined by submission of bids from at least two reputable
moving firms, and (d) your reasonable travel expenses associated with
your relocation.
10. Physical Examination: This offer of employment is conditioned upon
--------------------
your passing a physical examination, to be administered by a physician
of your choice (reasonably acceptable by the Company), with results
satisfactory to the Company, within 30 days after your acceptance
hereof.
Please sign the extra copy of this letter to indicate your agreement with
the foregoing and to confirm your agreement that you are under no disability,
and that you are not a party to any other agreement, that would prevent you from
entering into this employment relationship with the Company or from fully
performing your duties for the Company in a satisfactory manner. Please return
a signed copy of this letter to me by February 3, 1998.
Bob, we greatly look forward to your anticipated contributions and we look
forward to welcoming you to the Gulf States team.
Sincerely yours,
GULF STATES STEEL, INC. OF
ALABAMA
By: /s/ Steven E. Karol
-------------------
Steven E. Karol
Chairman of the Board of Directors
CONFIRMED AND AGREED TO:
/s/ Robert Schaal
- -----------------------
Robert Schaal
<PAGE>
Exhibit 10.17
Personal and Confidential
July 28, 1998
Mr. Jim R. Grimm
6500 E. Caron Drive
Paradise Valley, Arizona 85253
Dear Jim:
It is a pleasure for me to offer you employment as the Senior Vice President and
Chief Financial Officer of Gulf States Steel, Inc. of Alabama (the "Company"),
under the following terms and conditions:
1. Employment Date: You will commence your employment with the Company on
----------------
September 14, 1998 (the "Employment Date").
2. Base Compensation: Your base compensation during your employment with
------------------
the Company will be at the rate of $200,000 per year, subject to
adjustment (at the Company's sole discretion) based on a review of your
performance on each anniversary of the Employment Date, and payable in
accordance with the normal salary payment procedures for senior
executives of the Company.
3. Bonus: You will be eligible to participate in the three bonus plans as
------
described in the bonus plan document you received. These three programs
are described as the Profit Sharing Plan, BPM Program, and the Business
Plan (Return on Assets). Your eligibility to participate in these plans
will be immediate, on a prorated basis for the portion of the year you
are employed. Payment of bonus plans are subject to approval of the
Company's Board of Directors, and the Company reserves the right to
change, alter, amend, or discontinue the bonus plan in effect at any
time.
4. Duties: At the time you commence your employment with the Company,
-------
you will serve as an executive and operating officer of the Company.
While you are employed by the Company, you will report directly to the
Chief Executive Officer, and you shall perform such duties as he may
request from time to time. While you are employed by the Company, you
shall devote your full working time, best efforts, knowledge, and
skills exclusively to the business of the Company and, at all times,
act in the best interests of the Company.
5. Termination: Your employment with the Company shall be on an "at will"
------------
basis and, accordingly, either of us shall have the right at any time
to terminate your employment with the Company by written notice given
to the other.
<PAGE>
Mr. Jim Grimm
July 28, 1998
Page 2
Notwithstanding the foregoing, you shall be eligible during the first three
years of your employment for twelve months severance pay payable over a
twelve-month period (the "Severance Period") if your employment with the
Company is terminated for reasons other than cause. All insurance benefits
would also continue in effect for the same period.
6. Fringe and Health Benefits: You shall be entitled to participate in
---------------------------
those retirement, health, and other fringe benefits generally made
available from time-to-time to senior executives of the Company, which
currently consist of a medical program, life insurance, supplemental
life, 401-K pension plan, and paid holidays and six weeks of paid
vacation each year.
7. Incentive Stock Options: As soon as possible after the start of your
------------------------
employment with the Company, we will enter into an Incentive Stock
Option Agreement with you whereby you will have the opportunity to
share 0.5% of the equity appreciation of GSS Holding Corporation, the
parent company of the Company, from the Employment Date forward,
subject to certain restrictions, including a five-year gradual vesting,
all of which are in accordance with the terms of the GSS Holding
Corporation 1995 Employee, Director and Consultant Stock Option Plan.
If after working for the company for a full three years, you elect to
retire, vesting will continue, providing you consult for the company
under mutually agreeable conditions until the vesting period is
completed.
8. Relocation Costs: The position requires residency within Gadsden
-----------------
or its immediate vicinity. In order to defray the costs of moving from
the Paradise Valley, Arizona area, the Company will pay, in accordance
with it's published policy, reasonable expenses, not to exceed
$150,000, exclusive of the gross-up of expenses for tax purposes.
9. Signing Bonus: As a special employment bonus, Gulf States Steel
--------------
will provide you with a one-time payment in the amount of $25,000, less
required deductions for federal and state withholding taxes. This
payment will be made during the first week of employment.
10. Physical Condition: As a pre-condition of your employment with
-------------------
the Company, we will require you to affirmatively state that you are in
good physical condition and have no debilitating illness. (Your
signature on this letter shall be deemed to constitute such affirmative
statement.)
Please sign the extra copy of this letter to indicate your agreement with the
foregoing and to confirm your agreement that you are under no disability and
that you are not a party to any other agreement that would prevent you from
entering into this employment relationship with the company or from fully
performing your duties for the Company in a satisfactory manner.
<PAGE>
Mr. Jim Grimm
July 28, 1998
Page 3
Jim, we greatly look forward to your anticipated contributions, and we look
forward to welcoming you to the Gulf States team.
Sincerely,
GULF STATES STEEL, INC. OF ALABAMA
By /s/ Robert Schaal
----------------------
Robert Schaal
Chief Executive Officer
CONFIRMED AND AGREED TO:
Jim R. Grimm
- ---------------------
Jim R. Grimm
<PAGE>
Exhibit 10.18
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
January 1, 1999
Mr. John D. Lefler
221 Sommerset Drive
Gadsden, AL 35901
Re: Non-Competition Agreement
-------------------------
Dear John:
This letter is to confirm our understanding with respect to your
resignation as an employee of Gulf States Steel, Inc. of Alabama (the
"Company"), including (i) your agreement not to compete with the Company, (ii)
your agreement to protect and preserve information and property which is
confidential and proprietary to the Company, (iii) your agreement to provide
legal testimony on behalf of the Company, (iv) your agreement to relinquish all
claims to ownership of the Company and (v) your release of all claims against
the Company (the terms and conditions agreed to in this letter shall hereinafter
be referred to as the "Agreement"). In consideration for your agreements,
promises and covenants contained in this Agreement, (i) the Company shall
forgive all debt and interest owed by you to the Company for the prior purchase
of your limited partnership interest in GSS Management, LLC ("GSS") and (ii) the
Company shall provide legal services to you in connection with claims against
you arising out of your former employment by the Company prior to December 31,
1998 to the same extent that the Company provides legal services to its current
officers. Accordingly, we hereby mutually agree as follows:
1. Resignation.
-----------
You acknowledge and agree that you have chosen to resign from your position
as President and Chief Executive Officer of the Company and that you are no
longer an employee of the Company.
2. Prohibited Competition.
----------------------
(a) From the date hereof until December 31, 2000 (the "Restricted
Period"), you shall not, directly or indirectly, either alone or in association
with others, in any geographic location within a 350-mile radius of Gadsden,
Alabama (the "Restricted Area"):
(i) engage or seek to engage, in any way or to any extent, in the
flat-rolled steel market in the manufacture or sale of the same products
sold by the Company ("Competitive Activity"); or
(ii) whether as a principal, consultant, partner or in any other
capacity, own, manage, control or participate in the on-site ownership,
management or control of any person, corporation, partnership,
proprietorship, firm, association or other business entity engaged in any
<PAGE>
Competitive Activity, or render services related to or in furtherance of
any Competitive Activity to any person, corporation, partnership,
proprietorship, firm, association or other business entity engaged in any
Competitive Activity.
(b) In addition to the foregoing Section 2(a), during the Restricted
Period, you shall not, directly or indirectly:
(i) solicit, divert or appropriate, or attempt to solicit, divert
or appropriate, any customer or supplier of the Company or any affiliate
thereof, for the purpose of engaging or seeking to engage, in any way or to
any extent, in any Competitive Activity;
(ii) induce or attempt to induce, request or encourage, any
employee, consultant, officer or director of the Company or any affiliate
thereof, to terminate his or her relationship with the Company or such
affiliate, or join with any such employee, consultant, officer or director
in any direct or indirect capacity, in any Competitive Activity; or
(iii) hire or commit to hire as an employee or consultant any
person that is or previously was an employee, individual consultant,
officer or director of the Company or any affiliate thereof, unless such
person shall not have been employed or retained in such capacity by the
Company or such affiliate (as the case may be) for a period of at least
twelve (12) consecutive months ending immediately prior to the date that
you hire or commit to hire such person, without written approval by the
Chief Executive Officer of the Company; or
(c) During the Restricted Period, if you shall, either directly or
indirectly, become associated with another entity engaged in a Competitive
Activity outside the Restricted Area, you shall inform the Company of such
association and you hereby agree to work with the Company and its affiliates to
develop joint ventures and other cooperative ventures with the Company and its
affiliates.
(d) Notwithstanding any provision of this Agreement to the contrary, you
may own, individually or collectively, directly or indirectly, securities of any
entity traded on any national securities exchange which engages in a Competitive
Activity; provided that you do not, directly or indirectly, individually or in
--------
the aggregate (including without limitation by being a member of a group within
the meaning of Rule 13d-5 under the Exchange Act) own more than five percent
(5%) or more of any class of securities of such entity.
(e) You and the Company acknowledge and agree that the provisions of this
Section 2 are reasonable and valid in duration and scope and in all other
respects. If any court of competent jurisdiction determines that any of the
provisions of this Section 2, or any part thereof, is invalid or unenforceable,
such court shall have the power to reduce the duration or scope of such
provision, as the case may be, and, in its reduced form, such provision shall
then be enforceable.
(f) You and the Company acknowledge and agree that, in the event that any
of the provisions of this Section 2 are determined, notwithstanding the
provisions of the foregoing clause (e), to be invalid or unenforceable, the
remainder of this Section 2 shall not thereby be affected and shall be given
full effect, without regard to the invalid portions.
2
<PAGE>
(g) The waiver or consent by the Company or any of its affiliates of any
breach by you of any provision of this Section 2 shall not operate as or be
construed as a waiver or consent of any subsequent breach thereof.
3. Assistance in Legal Proceedings.
-------------------------------
At any time reasonably requested by the Company, you hereby agree to
provide sworn testimony, whether taken in a deposition or other setting, and to
provide counsel to the Company and its affiliates in legal proceedings related
to trade suits, environmental matters, investor relations or any other legal
proceedings involving the Company or its affiliates.
4. Disclaim Ownership of the Company.
----------------------------------
You hereby disclaim, surrender and forever relinquish any and all claims to
any ownership interest in the Company, including any stock or options to
purchase stock or any limited partnership interest in GSS, whether absolute or
contingent. You hereby agree that simultaneously with the execution of this
Agreement, you shall deliver to the Company any stock certificates or stock
option agreements held by you or by your agents on your behalf and you shall
execute and deliver any and all documents required to transfer your limited
partnership interest in GSS to the Company. Further, you hereby disclaim,
surrender and forever relinquish any and all claims to the return or refund of
any and all partial payments made by you with respect to your limited
partnership interest in GSS.
5. Forgiveness of Debt.
-------------------
Upon the termination of the Restricted Period, provided that you have not
breached any provision of this Agreement and have not engaged in any activity
which violates Section 2 hereof, whether or not such Section 2 is enforceable as
written, the Company shall cancel all debt (including principal and accrued
interest) owed by you or your successors to the Company for the prior purchase
of your limited partnership interest in GSS.
6. Continued Legal Representation.
------------------------------
The Company hereby agrees to provide legal services to you, to the same
extent that the Company provides to its then current officers, in legal
proceedings against you arising out of your former employment by the Company
prior to December 31, 1998.
7. Protected Information. You shall at all times maintain in
---------------------
confidence and shall not, without the prior written consent of the Company, use,
disclose or give to others any fact or information about the Company, its
owners, investors, operations or customers which was disclosed to or developed
by you during the course of performing services for the Company and is not
generally available to the public, including but not limited to information and
facts concerning strategy, business plans, customers, future customers,
suppliers, licensors, licensees, partners, investors, affiliates or others,
training methods and materials, financial information, sales prospects,
3
<PAGE>
client lists, inventions or any other scientific, technical, trade or business
secret or confidential or proprietary information of the Company or of any third
party provided to you during your employment by the Company. In the event you
are questioned by anyone not employed by the Company or by an employee of or a
consultant to the Company not authorized to receive such information, in regard
to any such information or any other secret or confidential work of the Company,
or concerning any fact or circumstance relating thereto, you will promptly
notify the Chairman of the Board of Directors of the Company.
8. Disclosure to Future Employers. You agree that you will provide,
------------------------------
and that the Company may similarly provide in its discretion, notice of the
covenants contained in Sections 2 and 3 of this Agreement to any business or
enterprise which you may directly, or indirectly, own, manage, operate, finance,
join, control or in which you participate in the ownership, management,
operation, financing, or control, or with which you may be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise.
9. Release of Claims. In consideration of the covenants set forth
-----------------
herein, and more particularly the forgiveness of debt by the Company and other
good and valuable consideration, you and your respective agents, heirs,
legatees, successors and assigns (collectively hereinafter the "Lefler
Releasors"), hereby irrevocably and unconditionally release, remise, and forever
discharge the Company and its affiliates (including, without limitation, GSS,
GSS Holdings Corp., Watermill Ventures, Ltd. and Spectrum Management Company,
Inc.), and all persons acting by, through, under or in concert with the Company,
(collectively hereinafter the "the Company Releasees") of and from any and all
actions, causes of actions, suits, debts, charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages, and
expenses (including attorney fees and costs actually incurred), of any nature
whatsoever, in law or equity (collectively "Claims"), which the Lefler Releasors
had, now have, or hereafter may have against the Company Releasees from the
beginning of time to the date of this Agreement; provided, however, that this
-------- -------
Section 9 shall not be deemed to release the Company from its obligations under
this Agreement.
Without limitation to the generality of the foregoing terms, the Lefler
Releasors hereby irrevocably and unconditionally release, remise, and forever
discharge the Company Releasees on account of any claim against the Company
Releasees arising from or related to your prior employment relationship with the
Company or your resignation therefrom, or any events that have occurred since
that time including, without limitation, (i) Claims under any state or federal
discrimination, fair employment practices or other employment related statute,
regulation or executive order prohibiting discrimination or harassment based
upon any protected status including, without limitation, race, national origin,
age, gender, marital status, disability, veteran status or sexual orientation;
(ii) Claims under any other state or federal employment related statute,
regulation or executive order relating to wages, hours or any other terms and
conditions of employment; and (iii) Claims under any state or federal common law
theory including, without limitation, wrongful discharge, breach of express or
implied contract, promissory estoppel, unjust enrichment, breach of a covenant
of good faith and fair dealing, violation of public policy, defamation,
interference with contractual relations, intentional or negligent infliction of
emotional distress, invasion of privacy, misrepresentation, deceit, fraud or
negligence.
4
<PAGE>
10. General.
-------
(a) Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing, shall be addressed to the receiving party's
address set forth above or to such other address as a party may designate by
notice hereunder, and shall be either (i) delivered by hand, (ii) made by
telecopy or facsimile transmission, (iii) sent by overnight courier, or (iv)
sent by registered or certified mail, return receipt requested, postage prepaid.
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telecopy or facsimile transmission, at the time that receipt
thereof has been acknowledged by electronic confirmation or otherwise, (iii) if
sent by overnight courier, on the next business day following the day such
notice is delivered to the courier service, or (iv) if sent by registered or
certified mail, on the fifth (5th) business day following the day such mailing
is made.
(b) Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof. No statement, representation, warranty,
covenant or agreement of any kind not expressly set forth in this Agreement
shall affect, or be used to interpret, change or restrict, the express terms and
provisions of this Agreement.
(c) Modifications and Amendments. The terms and provisions of this
----------------------------
Agreement may be modified or amended only by written agreement executed by the
parties hereto.
(d) Waivers and Consents. The terms and provisions of this Agreement
--------------------
may be waived in whole or in part, or consent for the departure therefrom
granted, only by written document executed by the party entitled to the benefits
of such terms or provisions. No such waiver or consent shall be deemed to be or
shall constitute a waiver or consent with respect to any other terms or
provisions of this Agreement, whether or not similar. Each such waiver or
consent shall be effective only in the specific instance and for the purpose for
which it was given, and shall not constitute a continuing waiver or consent.
(e) Assignment. The Company may assign its rights and obligations
----------
hereunder to any person or entity who succeeds to all or substantially all of
you are principally involved (a "Successor"); provided, however, that the
-----------------
Company shall require any such Successor to assume the Company's obligation
to forgive and cancel your debt as provided hereunder. Your rights and
obligations under this Agreement may not be assigned by you without the
prior written consent of the Company.
(f) Benefit. All statements, representations, warranties, covenants and
-------
agreements in this Agreement shall be binding on the parties hereto and shall
inure to the benefit of the respective successors and permitted assigns of each
party hereto. Nothing in this Agreement shall be construed to create any rights
or obligations except among the parties hereto, and no person or entity shall be
regarded as a third-party beneficiary of this Agreement.
5
<PAGE>
(g) Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereunder shall be construed in accordance with and governed by the law
the State of Alabama, without giving effect to the conflict of law principles
thereof.
(h) Jurisdiction and Service of Process. Any legal action or
-----------------------------------
proceeding with respect to this Agreement shall be brought in the courts of the
State of Alabama or of the United States of America for the District of Alabama.
By execution and delivery of this Agreement, each of the parties hereto accepts
for itself and in respect of its property, generally and unconditionally, the
jurisdiction of the aforesaid courts. Each of the parties hereto irrevocably
consents to the service of process of any of the aforementioned courts in any
such action or proceeding by the mailing of copies thereof by certified mail,
postage prepaid, to the party at its address set forth above.
(i) Severability. The parties intend this Agreement to be enforced as
------------
written. However, (i) if any portion or provision of this Agreement shall to any
extent be declared illegal or unenforceable by a duly authorized court having
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law; and (ii) if any provision, or part thereof, is
held to be unenforceable because of the duration of such provision or the
geographic area covered thereby, the Company and you agree that the court making
such determination shall have the power to reduce the duration and/or geographic
area of such provision, and/or to delete specific words and phrases ("blue-
penciling"), and in its reduced or blue-penciled form such provision shall then
be enforceable and shall be enforced.
(j) Headings and Captions. The headings and captions of the various
---------------------
subdivisions of this Agreement are for convenience of reference only and shall
in no way modify, or affect the meaning or construction of any of the terms or
provisions hereof.
(k) Injunctive Relief. You hereby expressly acknowledge that any
-----------------
breach or threatened breach of any of the terms and/or conditions set forth in
Section 2, 3 or 4 of this Agreement will result in substantial, continuing and
irreparable injury to the Company. Therefore, you hereby agree that, in addition
to any other remedy that may be available to the Company, the Company shall be
entitled to injunctive or other equitable relief by a court of appropriate
jurisdiction in the event of any breach or threatened breach of the terms of
Section 2, 3 or 4of this Agreement.
(l) Expenses. Should any party breach this Agreement, in addition to
--------
all other remedies available at law or in equity, such party shall pay all of
any other party's costs and expenses resulting therefrom and/or incurred in
enforcing this Agreement, including legal fees and expenses. Such payment shall
be due only after resolution of said breach, as determined by mutual agreement
or legal resolution.
(m) Counterparts. This Agreement may be executed in one or more
------------
counterparts, and by different parties hereto on separate counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
[Remainder of Page Intentionally Left Blank]
6
<PAGE>
If the foregoing accurately sets forth our agreement, please so indicate by
signing and returning to us the enclosed copy of this letter.
Very truly yours,
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
-----------------
Name: Robert Schaal
Title: Chairman and Chief Executive Officer
Accepted and Approved as of the date above:
/s/ John D. Lefler
- ------------------------
John D. Lefler
7
<PAGE>
Exhibit 10.19
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made and entered into this 17th day of December, 1998, by and between GULF
STATES STEEL, INC. OF ALABAMA, an Alabama corporation ("Borrower"), and
successor-by-merger to Alabama Structural Beam Corp., with its chief executive
office and principal place of business at 174 South 26th Street, Gadsden,
Alabama 35904; and FLEET CAPITAL CORPORATION, a Rhode Island corporation with an
office at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033, in its
capacity as collateral and administrative agent for the Lenders pursuant to
Section 12 of the Loan Agreement (as hereinafter defined) (together with its
successors in such capacity, "Agent").
Recitals:
--------
Agent, Lenders, Borrower and Alabama Structural Beam Corp., an Alabama
corporation ("ASB") entered into a certain Loan and Security Agreement dated
November 13, 1997 (as at any time amended, the "Loan Agreement"), pursuant to
which Lenders have made certain revolving credit loans and other financial
accommodations to Borrower and ASB.
ASB has been merged with and into Borrower, with Borrower being the
surviving company after giving effect to such merger.
The parties desire to amend the Loan Agreement to reflect the merger and
certain other changes set forth herein.
NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good and
valuable consideration, the receipt and sufficiency of which are hereby
severally acknowledged, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Definitions. All capitalized terms used in this Amendment, unless
-----------
otherwise defined herein, shall have the meaning ascribed to such terms in the
Loan Agreement.
2. Amendment to Loan Agreement. The Loan Agreement is hereby amended as
---------------------------
follows:
(a) By inserting the following definitions of "Investment Property"
and "Margin Stock" into Appendix A of the Loan Agreement in proper
----------
alphabetical sequence:
Investment Property - all securities (whether certificated
-------------------
or uncertificated), security entitlements, securities accounts,
commodities contracts and commodity accounts.
Margin Stock - shall have the meaning ascribed to it in
------------
Regulation U of the Board of Governors of the Federal Reserve
System.
<PAGE>
(b) By deleting subsections (vii), (viii), (ix) and (x) of Section
6.1 of the Loan Agreement in their entirety and by substituting the following
new subsections in lieu thereof:
(vii) All Investment Property (but excluding any portion
thereof that constitutes Margin Stock unless otherwise expressly
provided in any Security Documents);
(viii) All monies now or at any time or times hereafter in the
possession or under the control of Agent or a Lender or a bailee or
Affiliate of Agent or a Lender, including any Cash Collateral in the
Cash Collateral Account;
(ix) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i) through
(viii) above, including proceeds of unearned premiums with respect to
insurance policies insuring any of the Collateral; and
(x) All books and records, including customer lists, files,
correspondence, tapes, computer programs, print-outs, and other
computer materials and records of Borrower pertaining to any of (i)
through (ix) above.
(c) By inserting the following new Section 9.1.9 into the Loan
Agreement:
9.1.9 Year 2000 Compatibility. Take all action necessary to
-----------------------
ensure that Borrower's computer-based systems are able to operate and
effectively process data including dates on and after January 1, 2000.
Borrower shall provide Agent written assurance acceptable to Agent
that Borrower's systems are Year 2000 compliant on or before June 30,
1999. Borrower shall promptly and in no event later than June 30,
1999, take all action necessary to ensure that all computer-based
systems of Borrower are capable of the following: (a) handling date
information involving any and all dates before, during and/or after
January 1, 2000, including accepting input, providing output and
performing date calculations in whole or in part; (b) operating
accurately without any interruption on and in respect of any and all
dates before, during and/or after January 1, 2000, and without any
change in performance; (c) responding to and processing two digit year
input without creating any ambiguity as to the century; and (d)
storing and providing date input information without creating any
ambiguity as to the century. In addition, at the request of Agent,
Borrower shall provide Agent assurances in form and substance
reasonably satisfactory to Agent of Borrower's Year 2000
compatibility.
(d) By deleting Section 9.3 of the Loan Agreement in its entirety
and by substituting the following new Section 9.3 in lieu thereof:
2
<PAGE>
9.3. Specific Financial Covenant. For so long as there are any
---------------------------
Commitments outstanding and thereafter until payment in full of the
Obligations, Borrower covenants that, unless otherwise consented to by
the Required Lenders in writing, it shall maintain Consolidated
Adjusted Tangible Net Worth at all times greater than ($20,000,000).
3. Ratification and Reaffirmation. Borrower hereby ratifies and reaffirms
------------------------------
each of the Loan Documents and all of Borrower's covenants, duties, indebtedness
and liabilities thereunder. Borrower agrees that any and all duties,
indebtedness and liabilities of ASB under the Loan Agreement and the other Loan
Documents have been assumed by Borrower and Borrower hereby ratifies and
reaffirms all such duties, indebtedness and liabilities thereunder. For purposes
of the Loan Agreement and each of the other Loan Documents, any and all
references to "Borrowers" or "each Borrower" shall be deemed to mean Gulf States
Steel, Inc. of Alabama.
4. Acknowledgments and Stipulations. Borrower acknowledges and stipulates
--------------------------------
that the Loan Agreement and the other Loan Documents executed by Borrower are
legal, valid and binding obligations of Borrower that are enforceable against
Borrower in accordance with the terms thereof; all of the Obligations are owing
and payable without defense, offset or counterclaim (and to the extent there
exists any such defense, offset or counterclaim on the date hereof, the same is
hereby waived by Borrower); the security interests and liens granted by Borrower
in favor of Agent are duly perfected, first priority security interests and
liens; and the unpaid principal amount of the Loans on and as of December 17,
1998, totaled $47,105,978.60.
5. Representations and Warranties. Borrower represents and warrants to
------------------------------
Agent, to induce Agent to enter into this Amendment, that no Default or Event of
Default exists on the date hereof; the execution, delivery and performance of
this Amendment have been duly authorized by all requisite corporate action on
the part of Borrower and this Amendment has been duly executed and delivered by
Borrower; and except as may have been disclosed in writing by Borrower to Agent
prior to the date hereof; all of the representations and warranties made by
Borrower in the Loan Agreement are true and correct on and as of the date hereof
6. Expenses of Agent. Borrower agrees to pay, on demand, all costs and
-----------------
expenses incurred by Agent in connection with the preparation, negotiation and
execution of this Amendment and any other Loan Documents executed pursuant
hereto and any and all amendments, modifications, and supplements thereto,
including, without limitation, the costs and fees of Agent's legal counsel and
any taxes or expenses associated with or incurred in connection with any
instrument or agreement referred to herein or contemplated hereby.
7. Effectiveness: Governing Law. This Amendment shall be effective upon
----------------------------
acceptance by Agent (notice of which acceptance is hereby waived), whereupon the
same shall be governed by and construed in accordance with the internal laws of
the State of Connecticut.
8. Successors and Assigns. This Amendment shall be binding upon and inure
----------------------
to the benefit of the parties hereto and their respective successors and
assigns.
3
<PAGE>
9. No Novation. etc.. Except as otherwise expressly provided in this
-----------------
Amendment, nothing herein shall be deemed to amend or modify any provision of
the Loan Agreement or any of the other Loan Documents, each of which shall
remain in full force and effect. This Amendment is not intended to be, nor shall
it be construed to create, a novation or accord and satisfaction, and the Loan
Agreement as herein modified shall continue in full force and effect.
10. Counterparts: Telecopied Signatures. This Amendment may be executed in
-----------------------------------
any number of counterparts and by different parties to this Agreement on
separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same agreement.
Any signature delivered by a party by facsimile transmission shall be deemed to
be an original signature hereto.
11. Further Assurances. Borrower agrees to take such further actions as
------------------
Agent shall reasonably request from time to time in connection herewith to
evidence or give effect to the amendments set forth herein or any of the
transactions contemplated hereby.
12. Section Titles. Section titles and references used in this Amendment
--------------
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto.
13. Release of Claims. To induce Agent to enter into this Amendment,
-----------------
Borrower hereby releases, acquits and forever discharges Agent, and all
officers, directors, agents, employees, successors and assigns of Agent, from
any and all liabilities, claims, demands, actions or causes of action of any
kind or nature (if there be any), whether absolute or contingent, disputed or
undisputed, at law or in equity, or known or unknown, that Borrower now has or
ever had against Agent arising under or in connection with any of the Loan
Documents or otherwise, except for claims arising from Agent's or any Lender's
gross negligence or wilful misconduct and except that this paragraph shall not
be deemed to release Agent or any Lender from their respective obligations under
the Loan Documents.
14. Waiver of Jury Trial. To the fullest extent permitted by Applicable
--------------------
Law, the parties hereto each hereby waives the right to trial by jury in any
action, suit, counterclaim or proceeding arising out of or related to this
Amendment.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal, and delivered by their respective duly authorized
officers on the date first written above.
BORROWER:
--------
GULF STATES STEEL, INC.
OF ALABAMA
By: /s/ Jeffrey S. Stein
-------------------------------------
Jeffrey S. Stein, Vice President and
Assistant Secretary
LENDERS:
-------
FLEET CAPITAL CORPORATION
By: /s/ Robert Daley
-------------------------------------
Robert Daley, Vice President
LENDERS:
-------
FLEET CAPITAL CORPORATION
By: /s/ Robert Daley
-------------------------------------
Title: Vice President
-------------------------------
CONGRESS FINANCIAL CORPORATION
By: /s/ John Husson
-------------------------------------
Title: Vice President
-------------------------------
AGENT:
-----
FLEET CAPITAL CORPORATION
("Agent")
By: /s/ Robert Daley
-------------------------------------
Title: Vice President
-------------------------------
5
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
GULF STATES STEEL, INC. OF ALABAMA
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
October 31, October 31, October 31,
----------- ----------- -----------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss before extraordinary item and cumulative
effect of accounting change $(4,632,000) $(15,851,000) $ (370,000)
Extraordinary charge for debt refinancing (1,044,000) -- --
Cumulative effect of accounting change -- (2,647,000) --
----------- ------------ ----------
Net loss $(5,676,000) $(18,498,000) $ (370,000)
=========== ============ ==========
Shares:
Weighted average common shares outstanding 3,610,000 3,610,000 3,610,000
Net effect of dilutive put warrants and stock
options based on the treasury stock method N/A N/A N/A
----------- ------------ ----------
Weighted average common and common
equivalent shares outstanding 3,610,000 3,610,000 3,610,000
=========== ============ ==========
Net loss per share before extraordinary item and
cumulative effect of accounting change $ (1.28) $ (4.39) $ (.10)
Extraordinary charge for debt refinancing (.29)
Cumulative effect of accounting change -- (.73) --
----------- ------------ ----------
Net loss per share $ (1.57) $ (5.12) $ (.10)
=========== ============ ==========
</TABLE>
56
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
GULF STATES STEEL, INC. OF ALABAMA
(dollars in thousands)
<TABLE>
<CAPTION>
(Successor) (Predecessor)
------------------------------------------------- -----------------------------
For the Period For the Period Fiscal Year
Fiscal Year Ended April 21, 1995 Nov. 1, 1994 Ended
October 31,
------------------------------- to October 31, to April 20, October 31,
-------------- ------------ -----------
1998 1997 1996 1995 1995 1994
==== ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net interest expense (a) $27,214 $ 26,665 $24,118 $12,406 $ 5,230 $14,349
Amortization expense (a) 1,528 1,525 1,663 618 415 706
------- -------- ------- ------- ------- -------
Fixed charges $28,742 $ 28,190 $25,781 $13,024 $ 5,645 $15,055
======= ======== ======= ======= ======= =======
Calculation of fixed charges:
Fixed charges $28,742 $ 28,190 $25,781 $13,024 $ 5,645 $15,055
Net income (loss) before tax (3,106) (16,611) (640) 2,155 19,928 33,375
------- -------- ------- ------- ------- -------
Earnings $25,636 $ 11,579 $25,141 $15,179 $25,573 $48,430
======= ======== ======= ======= ======= =======
Ratio of earnings to fixed charges (b) (b) (b) 1.2x 4.5x 3.2x
=== === === ==== ==== ====
</TABLE>
(a) Interest expense has been reduced by the amount of amortization of debt
discount and that amount is included in amortization expense.
(b) Earnings are inadequate to cover fixed charges in 1998, 1997 and 1996 by
$3,106, $16,611 and $640, respectively.
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCTOBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 1,990
<SECURITIES> 0
<RECEIVABLES> 26,047
<ALLOWANCES> (930)
<INVENTORY> 60,941
<CURRENT-ASSETS> 95,077
<PP&E> 261,779
<DEPRECIATION> (61,097)
<TOTAL-ASSETS> 300,901
<CURRENT-LIABILITIES> 49,175
<BONDS> 188,749
0
0
<COMMON> 36
<OTHER-SE> 13,756
<TOTAL-LIABILITY-AND-EQUITY> 300,901
<SALES> 407,006
<TOTAL-REVENUES> 407,006
<CGS> 346,408
<TOTAL-COSTS> 366,262
<OTHER-EXPENSES> 18,248
<LOSS-PROVISION> 334
<INTEREST-EXPENSE> 27,493
<INCOME-PRETAX> (3,106)
<INCOME-TAX> 1,526
<INCOME-CONTINUING> (4,632)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,044)
<CHANGES> 0
<NET-INCOME> (5,676)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
