<PAGE>
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
- -----
Act of 1934 for the Fiscal Year ended October 31, 1999.
OR
____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________________ to
___________________
Commission file Number 33-92496
--------
GULF STATES STEEL, INC. OF ALABAMA
----------------------------------
(Debtor-in-Possession as of July 1, 1999)
(Exact name of registrant as specified in its charter)
Alabama 63-114 1013
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
174 South 26th Street
Gadsden, Alabama 35904-1935
- --------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
(256) 543-6100
--------------
(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
------ ------
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained, to the best
or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
[_]
At the date of this filing, there were 3,610,000 shares of $.01 par value common
stock outstanding, all of which was owned by GSS Holding Corp. No voting stock
is held by nonaffiliates nor traded on an established public trading market.
Documents incorporated by reference:
1) Schedule 14A - Proxy Statement dated January 31, 2000, incorporates by
reference information required by Part III.
1
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
Part I
1. Business........................................................ 3
2. Properties...................................................... 20
3. Legal Proceedings............................................... 20
4. Submission of Matters to a Vote of Security Holders............. 20
Part II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 21
6. Selected Financial Data......................................... 22
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 23
7A. Quantitative and Qualitative Disclosure about Market Risk....... 30
8. Financial Statements and Supplementary Data..................... 31
9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 65
Part III
10. Directors and Executive Officers of the Registrant.............. 65
11. Executive Compensation.......................................... 65
12. Security Ownership of Certain Beneficial Owners and Management.. 65
13. Certain Relationships and Related Transactions.................. 65
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 66
</TABLE>
2
<PAGE>
Forward - Looking Statements
- ----------------------------
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.
The words such as "believe", "expect", "anticipate" and similar expressions
identify forward-looking statements. Such statements are based on management's
current assumptions and expectations and are subject to a number of factors and
uncertainties which could cause actual results or business conditions 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 renewed increase of foreign steel
imports at extremely low prices; the continued access to and adequacy of the
Debtor in Possession Credit Facility and the Term Loan (as such terms are
defined below); the gain or loss of significant customers; the ability to
complete the Company's capital improvement program and successfully produce its
products; 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; adverse developments arising from the Company's Chapter
11 of Title 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") proceedings; the Company's ability to successfully
reorganize under Chapter 11; and general economic conditions.
PART I
------
ITEM 1. BUSINESS
- ------- --------
General
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 1,000,000 tons. For the fiscal year ended
October 31, 1999, the Company shipped approximately 240,700 tons of hot-rolled
sheet, 161,600 tons of cold-rolled sheet, 110,400 tons of galvanized sheet, and
333,200 tons of plate products, resulting in sales of approximately $320.5
million, and operating loss per ton shipped of approximately $59.
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 1999, 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.
3
<PAGE>
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.
Segment Reporting
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosures About Segments of an Enterprise and
Related Information. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 had no
impact on the Company's financial position, results of operations, or cash
flows.
The Company operates in one business segment with four primary product
lines: hot-rolled products, cold-rolled products, galvanized products and plate
products.
Hot-rolled products begin as slabs and are processed through the hot strip
mill. This process reduces the thickness of the metal to customer
specifications while improving its qualities. When the metal has obtained the
desired thickness and strength it is rolled into a coil as a finished product.
Hot-rolled products made up 22.3%, 23.9% and 26.2% of the Company's sales in
1999, 1998, and 1997, respectively.
Cold-rolled products begin as a hot-rolled coil. These items are then
processed through the cold strip mill (tandem mill) which reduces the metal to
the desired thickness. The metal then goes through an annealing and temper
process to restore its flexibility and to obtain the qualities the customer has
specified. Once the metal has obtained all of the desired qualities it is
rolled into a coil as a finished product. Cold-rolled products made up 19.1%,
13.6%, and 16.4% of the Company's sales in 1999, 1998, and 1997, respectively.
Galvanized products begin as a hot-rolled coil or a cold-rolled coil which
are then coated with zinc. These items are recoiled as a finished product.
Galvanized products made up 16.0%, 17.1%, and 17.5% of the Company's sales in
1999, 1998, and 1997, respectively.
Plate products begin as slabs and are processed through the plate mill.
Plate slabs are reheated and passed through a series of fast moving rolls which
makes the slab longer and thinner as it passes through the mill. The plate is
finished to the customers specified thickness and then cut to the specified
widths and lengths. Plate products made up 39.7%, 43.9%, and 38.0% of the
Company's sales in 1999, 1998, and 1997, respectively.
The remaining sales of 2.9%, 1.5%, and 1.9% in 1999, 1998, and 1997,
respectively, are from sales of coke, slabs and by-products.
Net sales by product line are as follows (dollars in thousands):
4
<PAGE>
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Hot-Rolled $ 71,461 $ 97,142 $114,548
Cold-Rolled 61,155 55,460 71,637
Galvanized 51,226 69,599 76,313
Plates 127,120 178,525 166,060
Other 9,488 6,280 7,952
-------- -------- --------
Total $320,450 $407,006 $436,510
======== ======== ========
</TABLE>
The Company does not have any foreign sales, and all of the Company's
tangible assets are located in the continental Unites States.
Chapter 11 Bankruptcy Filing
The Company's operating results for fiscal 1998 and fiscal 1999 were
severely affected by, among other things, a dramatic surge in steel imports
beginning in the summer of 1998. As a consequence of record-high levels of low-
priced steel imports and the resultant deteriorating market conditions, the
Company's overall sales prices and shipments declined thereby causing a decrease
in liquidity and profitability. The decreased liquidity made it impossible for
the Company to service its then existing debt and fund ongoing operations. As a
result, on July 1, 1999, the Company filed a voluntary petition seeking
reorganization under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for Northern District of Alabama, Eastern Division (the
"Bankruptcy Court"). Although the Company's reorganization plan has not been
finalized, the Company has implemented a restructuring program to reduce costs,
improve operating efficiencies and increase financial flexibility.
The Company is in possession of its properties and assets and continues to
operate with its existing directors and officers as a debtor-in-possession. As
a debtor-in-possession, the Company is authorized to operate its business, but
may not engage in transactions outside of the normal course of business without
approval, after notice and hearing, of the Bankruptcy Court. Pursuant to the
provisions of the Bankruptcy Code, as of the petition date, actions to collect
prepetition indebtedness owed by the Company are stayed and other prepetition
contractual obligations may not be enforced against the Company. In addition,
as a debtor-in-possession, the Company has the right, subject to the Bankruptcy
Court's approval and certain other conditions, to assume or reject any
prepetition executory contracts and unexpired leases. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting such contracts or
leases or from the filing of claims, and no provisions have been made for these
items. Schedules have been filed by the Company with the Bankruptcy Court
setting forth the assets and liabilities of the debtor as of the filing date as
reflected in the Company's accounting records. Differences between amounts
reflected in such schedules and claims filed by creditors will be investigated
and amicably resolved or adjudicated before the Bankruptcy Court. The
Bankruptcy Court set November 29, 1999 as the Bar Date. The Bar Date is the
date by which all claims must be filed against the Company. The ultimate amount
and settlement terms for such liabilities are subject to a plan of
reorganization, and accordingly, are not presently determinable.
The Bankruptcy Court has approved payment of certain prepetition
liabilities such as employee wages and benefits. These items are recorded as
accounts payable and accrued expenses not subject to compromise. Furthermore,
the Bankruptcy Court has allowed for the retention of legal and financial
professionals to advise in the bankruptcy proceedings. These fees are expensed
as incurred and recorded in restructuring expenses. As further described in the
"Liquidity and Capital Resources" section of "Management's Discussion and
Analysis
5
<PAGE>
of Financial Conditions and Results of Operations" below, on July 20, 1999, the
Bankruptcy Court also approved a $65 million debtor-in-possession credit
facility (the "DIP Credit Facility"), a $17.9 million Term Loan (the "Term
Loan"), and a Preferred Supplier Continuous Credit Program (the "Credit
Program").
The Company intends to present a plan of reorganization to the Bankruptcy
Court to reorganize the Company's business and to restructure the Company's
obligations. Under the provisions of the Bankruptcy Code, the Company has the
exclusive right to file such plan at any time during the 120-day period
following July 1, 1999. The Company filed a motion to extend the exclusive
period to February 29, 2000. On October 25, 1999, the motion to extend the
exclusive filing time period for the Company was granted by the Bankruptcy
Court. A committee, representing holders (the "Ad Hoc Noteholders Committee") of
the Company's 13 1/2% Series B First Mortgage Notes due 2003 (the "First
Mortgage Notes") has been granted the right, in exchange for permitting the
subordination of the liens securing the First Mortgage Notes to the liens
securing the collateral under the Term Loan, to file a Chapter 11 plan of
reorganization on the earlier of (a) the 305/th/ day (April 30, 2000) after the
Company's Chapter 11 filing, unless the Company has failed to file a plan of
reorganization by the 244/th/ day (February 29, 2000) after its bankruptcy
filing, in which case the Ad Hoc Noteholders Committee may file a plan of
reorganization on the 245/th/ day (March 1, 2000), or (b) the first to occur of
(i) certain financial covenant defaults or (ii) 30 days after an uncured default
under the Term Loan.
Due to the lack of sufficient liquidity, the Company did not make the April
15,1999, interest payment of $12.8 million due on the First Mortgage Notes. The
Company was also unable to cure that default by May 15, 1999, which date
represented the expiration of the 30-day cure period from the original interest
payment due date. The Bankruptcy Code generally prohibits the Company from
making payments on prepetition debt, including the First Mortgage Notes, except
pursuant to Bankruptcy Court approval. As a result, the interest payment of
$12.8 million that was due on October 15, 1999, was also not made. State Street
Bank & Trust Company, as indenture trustee with respect to the First Mortgage
Notes, and the Ad Hoc Noteholders Committee entered a stipulation with the
Bankruptcy Court with respect to the adequate protection of the lien securing
the First Mortgage Notes and the subordination of such liens securing the
advance under the Term Loan and the Credit Program.
As a result of the filing of the voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code, liabilities in the amount of
approximately $235.8 million are subject to compromise under a plan of
reorganization. Pursuant to the provisions of the Bankruptcy Code and during
the pendency of the bankruptcy proceeding, actions to enforce or otherwise
effect repayment of prepetition liabilities, as well as all pending litigation
against the Company, are stayed while the Company continues its business
operations as debtor-in-possession. The ultimate amount and settlement terms
for such liabilities are subject to a plan of reorganization, and accordingly,
are not presently determinable.
Although the Chapter 11 filing raises substantial doubt about the Company's
ability to continue as a going-concern, the accompanying financial statements
have been prepared on a going-concern basis. This basis contemplates the
continuity of operations, realization of assets, and discharge of liabilities in
the ordinary course of business. The statements also present the assets of the
Company at historical cost and the current intention that they will be realized
as a going-concern and in the normal course of business. However, this
realization is dependent upon, among other things, the Company's ability to
comply with debtor-in-possession financing arrangements, confirmation of a plan
of reorganization, the ability to achieve positive gross margins, and the
ability to generate sufficient cash flow from operations to meet obligations. A
plan of reorganization could materially change the amounts currently disclosed
in the financial statements.
The financial statements do not present the amount which may ultimately be
paid to settle liabilities and contingencies which may be allowed in the Chapter
11 case. Under Chapter 11, the rights of, and ultimate payment by the Company
to, prepetition creditors may be substantially altered. This could result in
claims being liquidated in the Chapter 11 proceeding at less than 100 percent of
their face value. At this time,
6
<PAGE>
because of the material uncertainties, prepetition claims are carried at face
value in the accompanying 1999 financial statements as Liabilities Subject to
Compromise. Further information about the financial impact of the Chapter 11
filing is set forth in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Notes to Financial
Statements.
Emergency Steel Loan Guarantee Act
On August 17, 1999, President Clinton signed Public L. No. 106-51, The
Emergency Steel Loan Guarantee Act of 1999 (the "Loan Guarantee Act"). The Loan
Guarantee Act will provide guarantees for up to $1 billion in loans to qualified
steel and iron ore companies, with no company receiving guarantees of more than
$250 million. These loans will be made by private sector lenders, with the
Federal Government providing a guarantee for up to 85 percent of the amount of
the principal of the loan. A loan guarantee may be issued upon application to
the Emergency Steel Guarantee Loan Board (the "Loan Board") by a private banking
or investment institution which has committed to enter into an agreement to
provide a loan to a qualified steel company. There are several requirements for
applicants:
(1) Credit is not otherwise available to the qualified steel company under
reasonable terms or conditions sufficient to meet its financing needs.
(2) The prospective earning power of the qualified steel company, together
with the character and value of the security pledged, must furnish
reasonable assurance of repayment of the loan to be guaranteed.
(3) The loan to be guaranteed must bear interest at a rate determined by
the Loan Board to be reasonable.
(4) The qualified steel company must agree to an audit by the General
Accounting Office, or its designee, and an independent auditor
acceptable to the Loan Board, prior to the issuance of the guarantee
and annually thereafter while the guarantee is outstanding.
(5) The qualified steel company may have no debt outstanding to the
Federal government (including environmental fees assessed by the U.S.
Environmental Protection Agency (the "EPA")).
The Company is addressing the following issues in order to form a plan of
reorganization and present an application under the Loan Guarantee Act by: (i)
preparing a business plan to demonstrate that there is reasonable assurance the
federal guaranteed loan can be repaid; (ii) obtaining the consent of the holders
of the First Mortgage Notes for collateral to be used; (iii) obtaining a lender
to provide the loan and to apply for the government guarantees; (iv) reaching an
agreement with the United Steelworkers of America concerning the existing
contract which will expire in October 2000; (v) reaching an agreement with the
EPA regarding pending litigation concerning the Clean Water Act and potential
claims concerning the Comprehensive Environmental Response, Compensation and
Liability Act of 1980; (vi) submitting a Loan Guarantee Act application no later
than January 31, 2000.
The Company has engaged McDonald Investments, Inc., an investment banking
entity, to find a qualified lender and to file the application for the Loan
Guarantee Act guarantee. The Company plans to use a substantial portion of the
loan proceeds secured through the Loan Guarantee Act to upgrade facilities in
order to become more competitive in the market (see "Capital Investments"
section below). There can be no assurance that the Company will be successful
in meeting the eligibility requirements under the Loan Guarantee Act or that it
can obtain a qualified lender.
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
7
<PAGE>
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 ("OEM's") in the
southern market. The Company has developed a base of approximately 300
customers, the largest of which accounted for less than 10% of total shipments
in fiscal 1999. 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. However, two additional plate mills will be entering the southern
market in Mobile, Alabama and Hertford County, North Carolina. Foreign steel
producers have always competed in the southern market; however, recently the
market has been negatively affected by foreign steel imports sold at extremely
low costs. See the section on "Competition" set forth in Item 7 "Management's
Discussion and Analysis of Financial Conditions and Results of Operations".
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 at a rate in excess of the U.S. average
growth rate. 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 opened automobile plants in the
southern market. These include Nissan and General Motors in Tennessee, BMW in
South Carolina and Mercedes-Benz in Alabama. In addition, Honda has announced
the construction of an auto assembly plant within 25 miles of the Company's
location, due for completion in 2002. 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 OEM's 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 was the installation of the single strand
continuous
8
<PAGE>
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.
The Company shipped 845,900 tons in fiscal 1999 which was 92,100 tons less than
fiscal 1998. Lower shipments were mainly a result of a depressed market. During
fiscal 1999, the Company completed its business process reengineering project
and 95% of the plate mill setup computer project. In addition, the Company began
preparation for the repair of the blast furnace. Total expenditures on these
projects during fiscal 1999 were $6.9 million.
As part of the Company's long-range strategic plan, major capital projects
are planned. The major capital projects of fiscal 2000 are anticipated to be
blast furnace bosh repairs and installation of a tilting runner which will
require the blast furnace to be shut down for approximately 28 days. The Company
is currently evaluating when it will commence the bosh reline project, but
anticipates that it will be in the fall of 2000. The project was originally
scheduled for fiscal 1999, but the Company's cash constraints required that it
be postponed. The Company's maintenance practices have allowed the bosh to be
stabilized such that operating activities are not adversely 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, there
is a waiver obtained under the current term loan, and that liquidity, at that
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 a favorable market. The Company expects to spend approximately $7.9
million on this project during fiscal 2000 and approximately $1.9 million in
fiscal 2001. 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 capital expenditures include: (i) installation of
additional galvanizing capacity; (ii) installation of a new pickle line; (iii)
improvements in caster segments; (iv) installation of a walking beam furnace and
slab handling facility; and (v) several other projects, including the reline of
a stove at the blast furnace. The Company estimates that the foregoing capital
expenditures will cost in excess of $170 million. As part of the plan of
reorganization, the Company is in the process of obtaining the financing for
these projects and such projects will be commenced only if and when financing
can be obtained. If these capital projects are successfully completed, 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 expects to continue
purchasing approximately one half of its requirements from Canada and the
remainder from South America 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. Coal is burned in the
Company's coke ovens, which produce coke that is utilized in the blast furnace
to assist in melting the iron ore. Over the years, the Company has obtained its
coal from several producers under negotiated annual supply contracts. The
Company believes that it has realized
9
<PAGE>
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 and molten steel in its steel making operations. 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. In connection with the Company's Chapter 11
filing, the Company has the option to reject, accept or modify this contract.
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.
Electricity. 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. The Company uses natural gas in its reheat operations and at the
blast furnace. Natural gas 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 the Norfolk Southern railroad. The Company owns and maintains railroad
tracks on the Gadsden mill's property, on which such shipments arrive.
10
<PAGE>
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 and heavy gauge, large piece-weight discrete
plate. Only a small portion of the flat-rolled steel products sold by these
midwestern and northern mills is rolled to the same gauge, width, and in the
case of discrete plate, to the same lengths as the Company's steel 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, Arkansas and Berkeley, South Carolina and
Tuscaloosa Steel Corporation ("Tuscaloosa Steel") located in Tuscaloosa, Alabama
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 has installed galvanizing and cold-rolling facilities.
These facilities came on-line in the first quarter of 1999 and have 500,000 to
600,000 tons of hot-dip galvanizing 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. Nucor is selling the 500,000 to 600,000 tons of
galvanized sheet products to the building and agricultural markets and consumes
100,000 to 150,000 tons of cold-roll in their own Vulcraft division.
Nucor's new Berkeley mini-mill, which is now fully operational, is
marketing sheet products throughout the Southeast and up the East Coast. 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 bands
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 has had an
adverse impact on the Company's ability to market hot-rolled bands since the
Company can only produce a 500 pounds per inch of width (PIW) hot band compared
with Nucor's 1000 PIW.
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 large volume Service Centers and OEM's located up the East
Coast. Market conditions have delayed this project however, and it is not
expected to start up before 2001.
11
<PAGE>
Tuscaloosa Steel, owned by British Steel America Inc., produces
approximately 500,000 tons of hot-rolled sheet and plate products per year.
Recent plans call for a reduction in 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 Steel's products
since the rolling of both hot-rolled and plate products, as well as conversion
of stainless steel, are performed at a single mill. The Tuscaloosa mill does
not currently produce any galvanized or cold-rolled sheet products. Tuscaloosa
Steel 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 allows Tuscaloosa Steel to reduce costs
and increase capacity, however, product scope and quality will not be
substantially affected.
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 has been slow to come up to
production capacity due to numerous operating problems. Unlike the existing
mini-mills located in the southern market, the Trico mill has equipment capable
of producing light-gauge hot-rolled products, and it has an annual pickling
capacity of 450,000 tons. 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. 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 annually and the
plant will employ approximately 250 people. IPSCO has stated in the trade press
that this mill will be operational in 2001.
Historically, foreign steel producers have been 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 antidumping actions with the Department of
Commerce and the International Trade Commission. 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 U.S. International
Trade Commission ruled in favor of the petitioners by a unanimous vote. These
cases were resolved by a suspension agreement limiting the tonnage and setting a
floor price for cut-to-length steel plate that can be imported from these
countries for five years.
Foreign competition is a significant factor in the U.S. steel industry and
has adversely affected prices in the United States and tonnage sold by domestic
producers. In January 1999, the White House released a Report to Congress on a
Comprehensive Plan for Responding to the Increase in Steel Imports, which stated
that:
"U.S. steel imports surged to record levels in 1998, rising 30
percent in the first ten months of 1998 over the same period [in
1997]. Surges have been higher in key products such as hot-rolled
sheets and coils, where imports are up 66.3 percent in the first
ten months of this year [1998] compared to the same period [in
1997]....Steel imports from Japan, Russia and Korea together
account for 78 percent of the increase....Foreign steel
industries have often been supported through government subsidies
to encourage expansion or forestall restructuring....As a result,
[of the Asian financial crisis and the catastrophic drop in
demand in Asia], a high volume of shipments has been diverted
from Asian to North American markets. Aggravating the situation
further, Russian steel exports were shifted from Asian to North
American markets.
12
<PAGE>
Steel import quotas against Russian imports made it difficult to
increase Russian exports to the European Union. As a result,
steel imports to the United States have surged [in late 1998] to
the highest level ever. While demand in the United States has
remained strong, U.S. steel producers and workers have been
adversely affected by the sharp increase in imports and the
resulting price suppression."
Beginning in the fall of 1998, a series of antidumping and countervailing
duty petitions were filed by the domestic steel industry and two unions before
the Department of Commerce and the U.S. International Trade Commission
concerning imported hot-rolled steel, cut-to-length plate steel, and cold-rolled
steel products. Antidumping cases involving hot-rolled steel resulted in a
suspension agreement in the spring of 1999 with Russia and Brazil, limiting the
volume and setting a price floor for imports of these products for the next five
years, and administrative orders against Japan imposing prospective duties
ranging from 17%-67%. On November 1, 1999, the Department of Commerce issued a
final determination to impose prospective dumping margins of 177% on cold-rolled
steel imported from Russia. On December 10, 1999, however, a suspension
agreement was entered with Russia limiting the volume and setting a price floor
for imports of these products for the next five years. On December 23, 1999,
the Department of Commerce reported that overall steel imports declined in
November 1999 for the fourth consecutive month to 2.5 million metric tons, a
level 29% lower than that reported a year ago. The American Iron and Steel
Institute, however, reported earlier in the month that the average capability
utilization rate through October 1999 was 82.6%, down from 88.2% in 1998,
although October 1999 shipments showed a 12.3% increase from shipment levels in
October 1998.
The Company believes that although the hot-rolled sheet market appears to
be stabilizing and that prices are slowly beginning to recover, the plate market
has remained weak, due primarily to a reduction in demand and lingering
inventory buildups at the service centers because of the volumes of plate steel
imported late in 1998 and 1999. On December 14, 1999, however, the Department
of Commerce announced proposed final antidumping duty margins on hot-rolled
carbon cut-to-length steel plate from France (10.43%), India (72.49%), Indonesia
(42.36%), Italy (8.97%), Japan (59.12%), and South Korea (2.98%). On January
19, 2000, the U.S. International Trade Commission issued a final decision
finding that France, India, Indonesia, Italy, Japan, and Korea had violated U.S.
antidumping law. The duty rates will not be imposed until January 28, 2000, but
the U.S. International Trade Commission is expected to adopt the Department of
Commerce's margins announced on December 14, 1999. In addition, the U.S.
International Trade Commission found that each of these countries, other than
Japan, had received unlawful subsidies, for which the following duties also are
expected to be imposed on January 28, 2000, by the Department of Commerce:
France (5.56%-6.86%); India (11.25%); Indonesia (15.90% and 47.71%); Italy
(26.12%); and Korea (1.73%). The Company believes that a favorable decision
will have a positive effect in the plate market, however, antidumping orders
imposed in 1992 against Taiwan for carbon steel plate, and cut-to-length carbon
steel plate from Belgium, Brazil, Canada, Finland, Germany, Mexico, Poland,
Romania, Spain, Sweden, and the United Kingdom will be subject in 2000 to a full
sunset review at the U.S. International Trade Commission. In the event that a
decision is made to revoke these existing orders, the duties imposed in 1992
would be eliminated, which could have an adverse effect on the Company's sales
of plate steel in 2000. On December 29, 1999, the Department of Commerce
announced preliminary decisions in the antidumping cases filed by the domestic
industry and two unions concerning imported cold-rolled steel: China (8.84% and
23.72%); Indonesia (49.28%); Slovakia (32.83% and 32.83%); Taiwan (14.80%, 4.72%
and 14.80%); Turkey (32.91% and 8.81%). Final duty margins will not be issued
by the Department of Commerce and final injury determinations will not be made
by the U.S. International Trade Commission for another six months.
13
<PAGE>
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, 1999, the Company had approximately 1,749 employees.
Substantially all of the Company's hourly employees and 42 salaried office and
clerical employees are represented by the 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
was for a term of 54 months expiring on October 1, 2000, and included 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. The Predecessor experienced a 1 1/2 day work
stoppage in 1989, however, the Company has not experienced any work stoppages
since. In November of 1999, the Company believes a work "slowdown" occurred.
The Company believes that it has satisfactory relationships with its union-
represented employees and the USWA. The Company is currently in negotiations
with the USWA regarding the contract expiring in October 2000.
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. During fiscal year 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, 1999, 1998 and 1997 approximated $0, $0 and $10,000, 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.
Monthly, the Company funds its obligations under the defined contribution and
401(k) plans. There are no other pension plans. However, the Company 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.
In connection with the Chapter 11 filing, the Company offered several of
its key executives retention agreements. These agreements provide for the
executives to receive continued pay and benefits for specified periods of time,
and forgiveness of any debts owed if they are terminated without cause while the
Company is in Chapter 11. The agreements also provide bonus amounts and
forgiveness of any debts owed if the executive remains with the Company until
there is a final order confirming the plan of reorganization.
Environmental Compliance
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company conducts continuous environmental compliance and
monitoring programs and believes that it is currently in substantial compliance
with all known material and applicable environmental regulations, except as
follows:
14
<PAGE>
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 EPA asserted that a wastewater ditch system on the
Company's property should be remediated and "closed" under the Resource
Conservation and Recovery Act ("RCRA"). The Predecessor entered a consent
decree in settlement of that claim, which required a regulatory "closure" of the
ditch. 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.
Based on the results obtained in this sampling, on September 29, 1998, clean
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 $2.7
million ($90,000 annually for 30 years). As part of the settlement of this
action, the Company is required to perform a RCRA Facility Investigation of
certain solid waste management units ("SWMUs") at the site. The Company
submitted a workplan for this investigation to the EPA on May 26, 1999 and is
waiting for the agency's comments. The RCRA facility assessment conducted by
the EPA identified a total of 41 SWMUs and 6 areas of concern ("AOCs") at the
Gadsden facility. Of the 41 SWMUs, two are recommended for confirmatory
sampling ("CS"). Of the 6 AOCs, two are recommended for CS. All other SWMUs or
AOCs are recommended for no further action ("NFA") or are recommended for action
under other regulatory programs.
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 wastewater treatment system, and these
upgrades have now largely 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.
The DOJ has alleged that over 4,000 potential violations of the Clean Water Act
have occurred. On June 8, 1999, the district court issued an order granting
DOJ's motion for partial summary judgment holding the Company liable for 1,000
violations of its National Pollution Discharge Elimination System (the "NPDES")
permit from May 1995 to September 1998 comprising 4,290 days of violation. Each
violation carries a civil penalty of up to $27,500 per day. Almost two-thirds
of the exceedances occurred at points internal to the plant. The district
court's opinion provides that "the amount of the penalty for violations of the
effluent limitations on outfalls along the Company's internal waste streams
might be subject to mitigation, given that those outfalls do not discharge
directly into waters of the United States." It is the Company's belief that if
that is true, such discharges are not regulated by the Clean Water Act and
therefore, the Company has no liability for those discharges as a matter of law.
In the event a civil penalty is imposed, the Clean Water Act requires the
district court to consider the seriousness of the violations, the economic
benefits (if any) resulting from the violations, any good faith efforts to
comply with the applicable requirements, the economic impact of the penalty on
the Company, and such other matters as the DOJ may require in determining the
amount of the penalty. On December 11, 1998, the Company filed an expedited
petition with the ADEM for a modification of its NPDES
15
<PAGE>
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. ADEM has not yet acted on that
petition.
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, Alabama, 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 wastewater 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
conducted a Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") Site Investigation in two phases, the first in June 1997 and the
second in December 1997. Analyses of surface water samples indicated elevated
levels of zinc. Analyses of sediment samples indicated elevated levels of
inorganic constituents, primarily lead and zinc. Zinc contamination was found
to be widespread in Lake Gadsden sediments, not limited to discrete areas of the
lake. The EPA compiled its data into a CERCLA Site Investigation Report on
September 30,1998. 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. On December 23, 1998, as a result of a routine file review
at the ADEM, the Company was provided 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." Although certain core samples were taken at Lake
Gadsden more than two years ago, the EPA has initiated no enforcement action
regarding this matter, although on November 24, 1999, the United States filed a
Proof of Claim on behalf of the United States seeking approximately $280,000 in
alleged prepetition unreimbursed CERCLA response costs to test and evaluate Lake
Gadsden and an estimated $13,020,000 in potential additional CERCLA response
costs. The Company has 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 Company,
the DOJ, and the EPA have been negotiating the terms of a potential consent
decree that would settle both the current Clean Water Act claims and any
potential CERCLA claims that could be asserted against the Company in the
future. In light of these discussions, a Pretrial Order was entered by the
District Court for the Northern District of Alabama on December 6, 1999,
allowing discovery to proceed through January 31, 2000, but reaffirming that the
date for the Clean Water Act trial remains set for March 27, 2000. The Company
and the DOJ have informed the District Court for the Northern District of
Alabama that they are working toward finalizing the terms of a consent decree
that they anticipate will be ready to place on the public record for comment on
or before January 31, 2000.
Based on the most recent draft consent decree provided to the Company on
January 19, 2000, the Company believes that all pending claims under the Clean
Water Act and potential claims under CERCLA, will be resolved by a settlement,
which is expected to contain the following elements:
1. The Company has agreed to be assessed a civil penalty of
$8,000,000, however, because of the Company's bankruptcy
proceeding, the United States has agreed to accept a payment
of $100,000 on or before July 1, 2001, in settlement of the
Company's liability for penalties arising out of the alleged
violations of the Company's NPDES permit. The United States
agrees that the remainder of the assessed civil penalty of
$7,900,000 will be subordinated to all other claims and
interests in the bankruptcy proceeding. Stipulated penalties
are also proscribed for any future violations of the Clean
Water Act.
16
<PAGE>
2. The Company has agreed to undertake the construction of four
Supplemental Environmental Projects, expending the following
amounts on each: Plate Mill Scale Pit ($2,000,000); Water
Intake Flow Reduction ($200,000); Oil Lubrication System
Replacements ($150,000); and Oil Cellar Improvement Project
($150,000). These projects were recommended by the expert
engineering firm employed by the Department of Justice and
are designed to secure significant environmental protection
and improvements. In addition, not later than 18 months
after the date of the entry of a final judgment, the Company
will contribute $100,000 for the purchase of "ecologically
valuable land" for benefit of the Alabama Land Trust, which
will be responsible for retaining such land in its natural
condition in perpetuity.
3. The Company has agreed to pay to the EPA Hazardous Substance
Superfund $6,400,000. Monthly payments will be made in
installments of approximately $177,800 over 36 months into
an escrow account and will commence on the latter of July 1,
2001, or 30 days after the date that the EPA issues a formal
cleanup decision, i.e., an Action Memo or a Record of
Decision, pursuant to the National Contingency Plan, 40
C.F.R. Part 300. If the EPA has not commenced cleanup at the
site after the Company makes four monthly payments, the
Company may temporarily cease making payments until cleanup
commences. When the EPA issues a Certification of
Completion, any monies remaining in the escrow account will
revert to the Company.
4. The United States will settle all pending claims under the
Clean Water Act and provide a Covenant Not to Sue or take
any other civil or administrative action against the
Company, pursuant to Sections 106 or 107(a) of CERCLA with
respect to any existing contamination at the site. However,
the Company reserves any and all rights (including, but not
limited to, any right to contribution), defenses, claims,
demands, and causes of action that it may have with respect
to any matter, transaction, or occurrence relating to the
facility or the site against any person that is not a party
to the consent decree.
The principal subject of continuing discussion is the EPA's request that
the Company agree to dispose of up to 434,000 cubic yards of any sediment
removed from Lake Gadsden on the Company's property, however, the Company may
refuse such disposal if a RCRA permit would be required. The Company is
presently exploring whether this proposal is acceptable, and if not, alternative
approaches for addressing this issue.
Although the consent decree has not been finalized and will require the
approval of the Attorney General of the United States, the Administrator of the
EPA, the United States District Court for the Northern District of Alabama, and
the Bankruptcy Court, and therefore may be subject to further revision, it is
the Company's belief, after participating in these negotiations and having
consulted with legal counsel responsible for this case, that the final language
of the consent decree will not likely vary materially from the description
provided herein. Therefore, the Company has recorded a liability for such
matters in the amount of $13,300,000, using a present value calculation for the
future payments, for item 3) above. Of this amount, $7,900,000 is subject to
subordination in the bankruptcy proceeding and is thus reflected in the 1999
balance sheet as prepetition Liabilities Subject to Compromise. The remaining
amount ($6,500,000 discounted to $5,400,000) is not subject to compromise.
However, there can be no assurance that the consent decree will be accepted on
the terms set forth above.
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
17
<PAGE>
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. The
Company received a recent NOV, dated September 27, 1999, which documented
excessive emissions from the No. 3 and No. 4 coke oven combustion stacks, but
did not refer to any continuous opacity monitors.
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 of December 31, 1999,
all four transformers have been replaced.
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. ADEM issued
a draft Administrative Order regarding the consolidated NOV's on May 20, 1999,
again proposing a civil penalty of $80,000. The Company requested a meeting
with ADEM to discuss settlement of this matter. At this meeting, the Company
discussed with ADEM coordination of any state required activities with the
ongoing RCRA Facility Investigation workplan. ADEM generally agreed with this
approach, and the Company is working with ADEM on finalizing a revised
Administrative Order.
On April 1, 1999, the Company was identified by the Environmental
Protection Division of the State of Georgia Department of Natural Resources
("EPD") as one of the parties responsible for the SoGreen Barren Area Site in
Tifton, Georgia. Previously, the Company had responded to EPD that it had no
records of any materials being shipped to the site, and that a review of EPD
documents revealed that the Company was incorrectly identified as a "successor"
to Republic Steel Corporation. EPD nevertheless issued an Administrative Order
to the Company. The Company declined to participate in the Order, and EPD now
may seek cost recovery and punitive damages for expenses it incurs to complete
the corrective action at the site. No appeal was available from the
Administrative Order; however, the Company may petition for a hearing in the
event EPD seeks to recover costs, enforce the Administrative Order, or recover a
penalty. It is unknown at this time whether EPD will take any of these actions.
Should EPD take any such action, the Company will petition for a review, as it
believes it has valid defenses as it is not a successor to Republic Steel
Corporation.
The Company has applied for a Title V Major Source Operating Permit under
the Clean Air Act. On October 14, 1999, ADEM placed a copy of a draft permit on
the public record for a 30 day comment period. The Company and ADEM are in the
process of negotiating certain terms and conditions of the permit as a result of
that process.
On January 27, 1999, the EPA filed an information request with the Company
regarding certain potential violations of the Clean Air Act regarding Prevention
of Significant Deterioration ("PSD") preconstruction review and permitting for
certain boilers (Nos. 1, 2, 3, 4, 5, 7, 8, and 9). The Company responded to the
request on May 6, 1999. The EPA has not yet replied.
For the fiscal years ended October 31, 1999, 1998 and 1997, capital
expenditures for environmental projects were $2.8 million, $4.2 million and $4.1
million, respectively, and environmental compliance expenses were $5.0 million,
$5.5 million and $6.0 million, respectively.
As of October 31, 1999, the Company has accrued $14.0 million for
unresolved environmental remediation matters, with $7.9 million being reflected
in Liabilities Subject to Compromise. Though the
18
<PAGE>
Company believes that it has adequately reserved for the cost of all known
environmental conditions in accordance with generally accepted accounting
principles, the relevant agencies may insist upon different and more costly
remedial measures than those previously believed by the Company to be adequate
or required by existing law. The ultimate resolution of the above matters could
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.
19
<PAGE>
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 102,500 tons per month limits the Company's in-house slab
production to 113,800 tons per month ("TPM"), yielding an in-house capacity of
89,000 TPM of finished steel products. Since the finishing end of the Company's
operation has a higher relative capacity (113,800 TPM) than the caster (102,500
TPM), the Company has from time-to-time purchased steel slabs in the open market
at a higher cost than its internal production costs in order to increase product
shipments.
Although the Company will be required to make the significant capital
expenditures as discussed above, including, but not limited to, the repairs to
the blast furnace which will require the blast furnace to be shut down for
approximately 28 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
- ------- -----------------
On July 1, 1999, the Company filed a voluntary petition seeking
reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for Northern District of Alabama, Eastern
Division. The Company's operating results for fiscal 1999 and fiscal 1998 were
severely affected by, among other things, a dramatic surge in steel imports
beginning in the summer of 1998. As a consequence of record-high levels of low-
priced steel imports and the resultant deteriorating market conditions, the
Company's overall price realization and shipments declined. Decreased liquidity
made it impossible for the Company to service its debt and fund ongoing
operations. Therefore, the Company sought protection under Chapter 11 of the
Bankruptcy Code.
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 several 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.
20
<PAGE>
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 1999.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
(dollars in millions except per share and per ton data)
<TABLE>
<CAPTION>
(Successor) (Predecessor)
---------------------------------------------------- ---------------
For the Period For the Period
April 21, 1995 Nov, 1, 1994
Fiscal years Ended October 31, to October 31, to April 20,
----------------------------------- --------------- ---------------
1999 1998 1997 1996 1995 1995
-------- ------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales $ 320.5 $407.0 $436.5 $454.3 $ 255.8 $232.6
Cost of goods sold, excluding depreciation 318.9 346.4 389.8 399.6 204.3 180.4
Effect of inventory write-up - - - - 13.2 -
Depreciation and amortization 22.1 19.9 18.4 15.3 7.3 8.7
Selling, general and administrative expenses 17.0 17.3 15.8 14.3 13.9 15.3
Write-off of blooming mill - - 1.8 - - -
Environmental expenses (1) 12.1 1.3 0.4 1.1 2.5 3.1
------- ------ ------ ------ ------- ------
Operating profit (loss) (49.6) 22.1 10.3 24.0 14.6 25.1
Write-off common stock warrants - 2.2 - - - -
Net interest expense 20.5 27.5 26.9 24.7 12.4 5.2
------- ------ ------ ------ ------- ------
Income (loss) before restructuring fees, income taxes,
cumulative effect of accounting change
and extraordinary item (70.1) (3.2) (16.6) (0.7) 2.2 19.9
Restructuring fees (4.2) - - - - -
------- ------ ------ ------ ------- ------
Income (loss) before income taxes, cumulative effect
of accounting change and extraordinary item (74.3) (3.2) (16.6) (0.7) 2.2 19.9
Provision (benefit) for income taxes (1.2) 1.5 (0.8) (0.3) 1.0 7.1
------- ------ ------ ------ ------- ------
Income (loss) before cumulative effect of accounting
change and extraordinary item (73.1) (4.7) (15.8) (0.4) 1.2 12.8
Cumulative effect of accounting change (2) - - (2.7) - - -
Extraordinary item (3) - (1.0) - - - -
------- ------ ------ ------ ------- ------
Net income (loss) $ (73.1) $ (5.7) $(18.5) $ (0.4) $ 1.2 $ 12.8
======= ====== ====== ====== ======= ======
Net income (loss) per share $(20.26) $(1.57) $(5.12) $(0.10) $ 0.33 -
Dividends paid and declared per share - - - - $ 1.87 -
Balance Sheet Data:
Total assets $ 280.0 $300.9 $305.4 $304.3 $ 287.9 $220.5
Long-term debt (including current portion) - 231.1 228.2 211.5 188.8 96.1
Liabilities subject to compromise 235.8 - - - - -
Stockholders equity (deficit) and partners' capital (59.1) 13.8 19.5 38.0 38.3 58.6
Other Data:
EBITDA (4) $ (29.0) $ 45.2 $ 33.8 $ 41.3 $ 21.9 $ 34.0
Capital expenditures 11.8 23.1 31.1 25.6 16.8 11.6
Net cash provided by operations $ 2.0 $ 20.9 $ 12.5 $ 5.7 $ 5.8 $ 12.4
Net cash used in investing activities (11.8) (23.1) (31.1) (25.5) (218.7) (11.6)
Net cash provided by (used in) financing activities 9.4 1.9 16.4 22.3 214.8 (0.8)
Operating Data:
Total tons shipped (000's) 846 938 1,014 1,075 602 512
Average selling price per ton shipped (5) $ 368 $ 427 $ 423 $ 417 $ 420 $ 448
Average manufacturing cost per ton shipped (5) 363 361 375 365 331 338
Operating profit (loss) per ton shipped (6) (59) 24 10 22 46 49
Average rated capacity utilization (7) 77.2% 93.3% 95.4% 93.6% 98.7% 94.6%
</TABLE>
(1) Environmental expenses on the income statement.
(2) $2.7 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) $1.0 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, the FASB 106 accrual for the Company's postretirement health
benefit plans has been added back, as it is a noncash charge. 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) 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.
(6) Excluding non-recurring effect of inventory write-up.
(7) Net tons of raw steel melted divided by the Company's estimated annual raw
steel production capacity
22
<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, 1999 Compared to Fiscal Year Ended October 31,
1998
Net Sales. Net sales decreased 21.3% to $320.5 million for fiscal year
1999 from $407.0 million for fiscal 1998. This decrease in revenues was
primarily caused by a 9.8% decrease in shipments of flat rolled products from
937,900 net tons in fiscal year 1998 to 845,900 net tons in fiscal 1999. The
decrease in revenues was not only due to lower sales volume, but was magnified
by a decrease in the average selling price for flat rolled steel from $427 per
ton in the 1998 period to $368 per ton in the 1999 period. This 13.8% decrease
in average selling price primarily resulted from the influx of foreign steel
products at extremely low prices.
Foreign competition is a significant factor in the U.S. steel industry and
has adversely affected prices in the United States and tonnage sold by domestic
producers. In January 1999, the White House released a Report to Congress on a
Comprehensive Plan for Responding to the Increase in Steel Imports, which stated
that:
"U.S. steel imports surged to record levels in 1998, rising 30
percent in the first ten months of 1998 over the same period [in
1997]. Surges have been higher in key products such as hot-rolled
sheets and coils, where imports are up 66.3 percent in the first
ten months of this year [1998] compared to the same period [in
1997]....Steel imports from Japan, Russia and Korea together
account for 78 percent of the increase....Foreign steel
industries have often been supported through government subsidies
to encourage expansion or forestall restructuring....As a result,
[of Asian financial crisis and the catastrophic drop in demand in
Asia], a high volume of shipments has been diverted from Asian to
North American markets. Aggravating the situation further,
Russian steel exports were shifted from Asian to North American
markets. Steel import quotas against Russian imports made it
difficult to increase Russian exports to the European Union. As a
result, steel imports to the United States have surged [in late
1998] to the highest level ever. While demand in the United
States has remained strong, U.S. steel producers and workers have
been adversely affected by the sharp increase in imports and the
resulting price suppression."
Beginning in the fall of 1998, a series of antidumping and countervailing
duty petitions were filed by the domestic steel industry and two unions before
the Department of Commerce and the U.S. International Trade Commission
concerning imported hot-rolled steel, cut-to-length plate steel, and cold-rolled
steel products. Antidumping cases involving hot-rolled steel resulted in a
suspension agreement in the spring of 1999 with Russia and Brazil, limiting the
volume and setting a price floor for imports of these products for the next five
years, and administrative orders against Japan imposing prospective duties
ranging from 17%-67%. On November 1, 1999, the Department of Commerce issued a
final determination to impose prospective dumping margins of 177% on cold-rolled
steel imported from Russia. On December 10, 1999, however, a suspension
agreement was entered with Russia limiting the volume and setting a price floor
for imports of these products for the next five years. On December 23, 1999,
the Department of Commerce reported that overall steel imports declined in
November 1999 for the fourth consecutive month to 2.5 million metric tons, a
level 29% lower than that reported a year ago. The American Iron and Steel
Institute, however, reported earlier in the month that the average capability
utilization rate through October 1999 was 82.6%, down from 88.2% in 1998,
although October 1999 shipments showed a 12.3% increase from shipment levels in
October 1998.
23
<PAGE>
The Company believes that although the hot-rolled sheet market appears to
be stabilizing and that prices are slowly beginning to recover, the plate market
has remained weak, due primarily to a reduction in demand and lingering
inventory buildups at the service centers because of the volumes of plate steel
imported late in 1998 and 1999. On December 14, 1999, however, the Department of
Commerce announced proposed final antidumping duty margins on hot-rolled carbon
cut-to-length steel plate from France (10.43%), India (72.49%), Indonesia
(42.30%), Italy (8.97%), Japan (59.12%), and South Korea (2.98%). On January 19,
2000, the U.S. International Trade Commission issued a final decision finding
that France, India, Indonesia, Italy, Japan, and Korea had violated U.S.
antidumping law. The duty rates will not be imposed until January 28, 2000, but
the U.S. International Trade Commission is expected to adopt the Department of
Commerce's margins announced on December 14, 1999. In addition, the U.S.
International Trade Commission found that each of these countries, other than
Japan, had received unlawful subsidies, for which the following duties also are
expected to be imposed on January 28, 2000, by the Department of Commerce:
France (5.56%-6.86%); India (11.25%); Indonesia (15.90% and 47.71%); Italy
(26.12%); and Korea (1.73%). The Company believes that a favorable decision will
have a positive effect in the plate market, however, antidumping orders imposed
in 1992 against Taiwan for carbon steel plate, and cut-to-length carbon steel
plate from Belgium, Brazil, Canada, Finland, Germany, Mexico, Poland, Romania,
Spain, Sweden, and the United Kingdom will be subject in 2000 to a full sunset
review at the U.S. International Trade Commission. In the event that a decision
is made to revoke these existing orders, the duties imposed in 1992 would be
eliminated, which could have an adverse effect on the Company's sales of plate
steel in 2000. On December 29, 1999, the Department of Commerce announced
preliminary decisions in the antidumping cases filed by the domestic industry
and two unions concerning imported cold-rolled steel: China (8.84% and 23.72%);
Indonesia (49.28%); Slovakia (32.83% and 32.83%); Taiwan (14.80%, 4.72% and
14.80%); Turkey (32.91% and 8.81%). Final duty margins will not be issued by the
Department of Commerce and final injury determinations will not be made by the
U.S. International Trade Commission for another six months.
Most of the Company's products have been negatively affected by the
increase in imports. The Company's product prices were an average of 13.8% lower
in fiscal 1999 than in fiscal 1998. The total shipments for the year were 9.8%
lower than in fiscal 1998. As a result, the Company has been forced to decrease
production, resulting in higher costs per ton due to production inefficiencies.
Cost of Goods Sold. Cost of goods sold, excluding depreciation, decreased
8.0% to $318.8 million for fiscal year 1999 from $346.4 million for the year
1998, and as a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 99.5% in fiscal 1999 compared to 85.1% in 1998. While
much of the overall decrease in costs is a result of the decrease in sales
volume described above, the increase in cost of goods sold as a percentage of
net sales is also a result of these decreases. Decreased production has led to
inefficiencies which increase cost per ton. Average manufacturing costs for flat
rolled products increased $2 per ton shipped from $361 in 1998 to $363 in 1999.
Depreciation expense was $22.1 million for fiscal 1999 compared to $19.9 million
in fiscal 1998. 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 decreased to $17.0 million, or 5.3% of net sales in
1999, from $17.3 million, or 4.2% of net sales in 1998. This decrease was
primarily due to reduced management fee costs (fees paid to affiliates for
management agreements and insurance services were discontinued on July 1, 1999,
due to the Chapter 11 filing), lower amortization expense, and other cost
reductions. The increase as a percentage of sales is a result of much lower
sales.
Environmental Expenses. Environmental expenses increased to $12.1 million
in 1999 from $1.3 million in 1998. This increase is the result of the proposed
settlement of the Clean Water Act and CERCLA environmental claims. (See the
"Environmental Compliance" section in Item 1 above).
24
<PAGE>
Restructuring Expenses. Restructuring expenses for the fiscal 1999 were
approximately $4.2 million. Restructuring expenses include additional costs for
financial and legal advisors incurred as a result of the Company's Chapter 11
filing and are classified as professional fees under restructuring items on the
1999 Statement of Operations.
Profit Sharing. No profit sharing payments were required in fiscal 1998 or
1999 due to the net loss of the Company.
Operating Loss. As a result of the changes in net sales, cost of goods
sold, depreciation and selling, general and administrative expenses discussed
above, the Company experienced an operating loss of $49.6 million in 1999, down
$71.8 million from operating profit of $22.2 million in 1998
Interest Expense. Interest expense, net of interest income and capitalized
interest, decreased to $20.5 million in fiscal 1999 from $27.5 million in fiscal
1998. This decrease was primarily due to the Company discontinuing to accrue
interest on prepetition debt as of July 1, 1999, due to the bankruptcy filing,
thus fiscal 1999 contains only 7 months of interest expense compared to 12
months in fiscal 1998. Contractual interest is $8.6 million in excess of the
reported interest expense.
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 7.5% decrease in shipments of flat rolled products from 1,014,000
net tons in fiscal year 1997 to 937,900 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 of 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. At 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
has adversely affected prices in the United States and tonnage sold by domestic
producers. Steel imports surged to record high levels in 1998 due to the Asian
financial crisis which resulted in shipments being diverted to North American
markets instead of the Asian markets. Surges were highest in key products such
as hot-rolled sheets and coils.
Most of the Company's products were 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 was 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.
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
25
<PAGE>
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 $17.3 million, or 4.2% of net sales in
1998, from $15.8 million, or 3.6% 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 of fiscal 1998, the Company
decided to reduce the value assigned to certain common stock warrants due to
continuing losses by the Company and the erosion of any fair market value of
these warrants.
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 ASBI.
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.
Interest Expense. Interest expense, net of interest income and capitalized
interest, 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.
Liquidity and Capital Resources
The Company's net cash provided by operations was $2.0 million during
fiscal 1999 compared to cash provided by operations of $20.9 million for fiscal
1998. The primary reason for this decrease was the decrease in earnings during
fiscal 1999 compared to fiscal 1998, partially offset by decreased inventory.
The Company's current liquidity requirements include working capital needs,
Chapter 11 administrative expenses and capital expenditures as allowed by the
covenants in the DIP Credit Facility and the Term Loan. The Company intends to
finance its current operations and investing activities with existing cash
balances, borrowings under the DIP Credit Facility, funds from the Term Loan,
and trade credit, including amounts provided under the Credit Program. Although
the Company believes that anticipated cash flows from future operations and
borrowings under the DIP Credit Facility, the Term Loan, and the Credit Program
should provide sufficient liquidity for the Company to meet its debt service
requirements, satisfy covenants under the financing agreements and fund ongoing
operations and capital improvements, there can be no assurances these or other
possible sources of liquidity will be adequate.
26
<PAGE>
The Company was unable to make its April 15,1999, interest payment of $12.8
million due on the First Mortgage Notes. The Company was also unable to cure
that default by May 15, 1999, which date represented the expiration of the 30-
day cure period from the original interest payment due date. The Bankruptcy
Code generally prohibits the Company from making payments on prepetition debt,
including the First Mortgage Notes, except pursuant to Bankruptcy Court
approval. As a result, the interest payment of $12.8 million that was due on
October 15, 1999, was also not made.
Under the terms of the bankruptcy case, liabilities in the amount of
approximately $235.8 million are subject to compromise under a plan of
reorganization. Pursuant to the provisions of the Bankruptcy Code and during
the pendency of the bankruptcy proceeding, actions to enforce or otherwise
effect repayment of prepetition liabilities, as well as all pending litigation
against the Company, are stayed while the Company continues its business
operations as debtor-in-possession. The ultimate amount and settlement terms
for such liabilities are subject to a plan of reorganization, and accordingly,
are not presently determinable.
On July 20, 1999, the Bankruptcy Court granted the Company's motion to
approve a new $65 million DIP Credit Facility. The DIP Credit Facility replaced
the Company's prepetition revolving credit facility. The DIP Credit Facility is
secured by raw materials, work-in-process, finished goods inventory, and the
Company's trade accounts receivable. Actual borrowing availability is subject
to a borrowing base calculation and the right of the lender to establish
reserves, which it has required in the amount of $2.8 million. Subsequent to
October 31, 1999, the reserves were increased to $3.3 million. The amount
available to the Company under the DIP Credit Facility is the aggregate of 85%
of eligible accounts receivable, and 64% of eligible inventories (up to an
aggregate of $40 million), less reserves on the various collateral established
by the lender. Borrowing availability under the DIP Credit Facility is also
subject to compliance with certain covenants. As of October 31, 1999, the
Company's eligible inventories and accounts receivable supported access to $52.2
million, less applicable reserves of $2.8 million, under the DIP Credit
Facility. As of October 31, 1999, the Company had a net availability of $14.5
million under the DIP Credit Facility. The DIP Credit Facility expires on the
earlier of the consummation of a plan of reorganization or July 6, 2000. The
Company recorded $350,000 for debt issuance cost of the DIP Credit Facility,
which is being amortized over the term of the loan.
On July 20, 1999, the Bankruptcy Court also granted the Company's motion to
approve a new debtor-in-possession Term Loan agreement in the aggregate
principal amount of $17.9 million. The Term Loan is secured by the property,
plant and equipment, and certain other collateral of the Company. The holders
of the First Mortgage Notes permitted the subordination of the liens securing
those notes to the liens securing the collateral under the Term Loan. Upon
entry of the bankruptcy interim order on July 7, 1999, the Bankruptcy Court
approved the advance of $6.4 million to the Company and $9.0 million was
advanced upon entry of the bankruptcy final order on July 20, 1999, less
approximately $0.8 million which has been retained by the lender pending
resolution of certain collateral issues. An additional $2.5 million was
advanced on November 2, 1999. Such amounts may be reduced by certain reserves
in respect of existing liens on collateral and are subject to compliance with
certain covenants. All loans are payable one year from the initial advance.
The Company recorded $247,000 for debt issuance cost of the Term Loan, which is
being amortized over a one-year period.
On July 20, 1999, the Bankruptcy Court also approved the Credit Program.
The Credit Program provides that (a) selected suppliers that offer postpetition
credit terms at least equal to the lesser of twice the number of days that are
listed as "current trade term days" (but not less that 30 days) or 45 days, and
(b) any suppliers that have not been pre-selected that offer postpetition credit
terms of at least 45 days, and, in each case, for a continuous period of at
least 6 months, shall be entitled to liens with superpriority administrative
expense status on all postpetition credit extended to the Company under the
Credit Program. Such liens are senior to the First Mortgage Noteholders'
prepetition liens, but subordinate to all liens for money borrowed under the
Bankruptcy Code and certain professional and administrative fees and expenses.
In addition, so long as continuous credit is provided, a participant is entitled
to a credit extension fee of up to 50% of the participants prepetition claim, if
any, payable after 6 months over a 30 month period. The maximum amount
27
<PAGE>
of postpetition credit eligible to receive credit extension fees is $15 million
and the Company may pay up to a maximum of $7.5 million in credit extension fees
to selected suppliers that participate in the Credit Program.
At October 31, 1999, and November 30, 1999, the Company was in default
under certain financial covenants contained in the DIP Credit Facility and the
Term Loan. Subsequently, the Company obtained a waiver from the lenders with
respect to the covenant defaults, and the DIP Credit Facility and the Term Loan
agreements have been amended to revise such covenants on a going forward basis.
These amendments were approved by the Bankruptcy Court on January 21, 2000.
Given current market conditions, the levels of debt and associated interest
expense, required capital expenditures and improvements and the potential
realization of loss contingencies, the Company believes that it will continue to
incur losses in fiscal 2000. If the level of foreign imports is not reduced and
if the Company is unable to increase sales and pricing, continue to reduce
costs, implement productivity improvements, comply with the covenant
requirements contained in the Company's financing documents and maintain its
borrowing availability under the DIP Credit Facility and the Term Loan, the
Company may not have sufficient liquidity and capital resources to meet its
fiscal year 2000 requirements. As a result, the Company has been evaluating
when it will commence the bosh reline project, discussed under "Capital
Investments" in Item 1 above and is developing a restructuring plan to improve
operating results and increase its financial flexibility. The evaluation has
determined that certain refractories maintenance techniques may allow the
project to be deferred until at least the fall of 2000. This estimate could be
affected by unseen deterioration of the bosh lining. A failure of the blast
furnace would have a material adverse effect on the Company. The Term Loan
covenants do not permit capital expenditures to be made for steel making
activities, including the bosh reline project.
The Company makes capital expenditures for the replacement of existing
plant and equipment, compliance with environmental regulations, and the
upgrading and improvement of manufacturing facilities. The Company's capital
expenditures for fiscal 1999 were $ 11.8 million compared to $23.1 million for
fiscal 1998. Although the Company expects to benefit from improved operating
performance related to its capital investments, there can be no assurance that
any or all or the potential cost savings will be realized.
The Company purchased two used galvanizing lines in the summer of 1997 that
are currently in storage. Due to cash constraints, the Company has been unable
to install these lines. The Company's plan of reorganization includes the
installation of a new galvanizing line that will utilize a significant portion
of sections of each of these two lines.
On August 17, 1999, President Clinton signed the Loan Guarantee Act. The
Loan Guarantee Act will provide guarantees for up to $1 billion in loans to
qualified steel and iron ore companies, with no company receiving guarantees of
more than $250 million. These loans will be made by private sector lenders,
with the Federal Government providing a guarantee for up to 85 percent of the
amount of the principal of the loan. A loan guarantee may be issued upon
application to the Loan Board by a private banking or investment institution
which has committed to enter into an agreement to provide a loan to a qualified
steel company. There are several requirements for applicants:
(1) Credit is not otherwise available to the qualified steel company under
reasonable terms or conditions sufficient to meet its financing needs.
(2) The prospective earning power of the qualified steel company, together
with the character and value of the security pledged, must furnish
reasonable assurance of repayment of the loan to be guaranteed.
(3) The loan to be guaranteed must bear interest at a rate determined by
the Loan Board to be reasonable.
28
<PAGE>
(4) The qualified steel company must agree to an audit by the General
Accounting Office, or its designee, and an independent auditor
acceptable to the Loan Board, prior to the issuance of the guarantee
and annually thereafter while the guarantee is outstanding.
(5) The qualified steel company may have no debt outstanding to the
Federal government (including environmental fees assessed by the U.S.
Environmental Protection Agency (the" EPA")).
The Company is addressing the following issues in order to form a plan of
reorganization and present an application under the Loan Guarantee Act by: (i)
preparing a business plan to demonstrate that there is reasonable assurance the
federal guaranteed loan can be repaid; (ii) obtaining the consent of the holders
of the First Mortgage Notes for collateral to be used; (iii) obtaining a lender
to provide the loan and to apply for the government guarantees; (iv) reaching an
agreement with the United Steelworkers of America concerning the existing
contract which will expire in October 2000; (v) reaching an agreement with the
EPA regarding pending litigation concerning the Clean Water Act and potential
claims concerning the Comprehensive Environmental Response Compensation and
Liability Act of 1980; (vi) submitting a Loan Guarantee Act application no later
than January 31, 2000.
The Company has engaged McDonald Investments, Inc., an investment banking
entity, to find a qualified lender and to file the application for the Loan
Guarantee Act guarantee. There can be no assurance that the Company will be
successful in meeting the eligibility requirements under the Loan Guarantee Act
or that it can obtain a qualified lender.
On April 21, 1995, the Company completed the Acquisition (see the
"Business" section of Item 1) of substantially all of the assets and the
assumption of certain liabilities of the Gadsden, Alabama facilities of Gulf
States Steel, Inc. of Alabama (the "Predecessor of the Company") from the
Brenlin Group. In connection with the Acquisition, GSS Holdings Corp ("GSS
Holdings") 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 was expected to be dividend distributions or loans from the Company. The
promissory notes require GSS Holdings to cause the Company to pay dividends to
GSS Holdings to the maximum extent allowed under the terms of the First Mortgage
Notes Indenture and applicable law until the GSS Holding notes are repaid in
full. No dividends are payable by the Company as of October 31, 1999. In
addition, in connection with the Acquisition, GSS Holdings issued a promissory
note to the seller for which the source of funds for repayment was 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, 1999. As noted
above, the Company is prohibited from making payments with respect to
prepetition debt, except pursuant to Bankruptcy Court approval.
29
<PAGE>
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 have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company conducted an assessment of its exposure to disruption
associated with the Year 2000 issue. Many of its computer based transactional
business systems were subject to potential failure. The Company believed that
it could have been materially affected by such failures. In addition, certain
process control systems were also exposed. The Company was also vulnerable to
third-party failures to correct their systems but believed that such exposure
was minimal. In order to assess third-party compliance and progress on this
issue, the Company surveyed its suppliers. The Company believed that no
material contingencies existed 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, 1998, the Company recognized the serious nature of its
exposure under the Year 2000 Issue and developed a modification plan that would
minimize this exposure. It purchased and implemented Year 2000 compliant
software and consultant support all of which was funded through operating cash
flows and borrowing on its DIP Credit Facility. The primary purchased software
was for an enterprise resource planning system which provides enhanced
productivity and customer service benefits in addition to mitigating potential
consequences of the Year 2000 problem. From project inception through October
31, 1999, the Company incurred capital expenditures for software of $12.1
million and spent another $0.7 million for contractors to rewrite existing
systems. Those activities were initiated in late 1996 for all business systems.
The Company spent an additional $0.5 million for the rewrite of systems modules
that could not be purchased as packages. Approximately $2.7 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 implemented the final phase of the Year 2000 project (the
"Project") on August 2, 1999, which was prior to any anticipated impact on its
operating systems. A team of information systems personnel evaluated the
progress and developed contingency plans that would ensure the continued
operation of the business. The Company 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 appointed task force identified a few
minor system faults that have been remediated.
The costs of the project and the date on which the Company believed it
would complete the Year 2000 modifications were 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. See also the Company's statements
regarding "forward-looking statements" contained in this Form 10-K.
Subsequent to October 31, 2000, the transition into the Year 2000 occurred
and only minor problems were experienced. These problems were remedied quickly
and there was no effect on the Company's financial position. The Company
continues to monitor its computer systems to ensure they are operating properly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company does not hold any market risk sensitive instruments.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Financial Statements
As of October 31, 1999 and 1998
with
Report of Independent Public Accountants
Contents
<TABLE>
<S> <C>
Reports of Independent Public Accountants....................... 32
Audited Financial Statements:
Balance Sheets
As of October 31, 1999 and 1998............................... 34
Statements of Operations
For the years ended October 31, 1999, 1998 and 1997........... 35
Statements of Cash Flows
For the years ended October 31, 1999, 1998 and 1997........... 36
Notes to Financial Statements................................... 38
</TABLE>
31
<PAGE>
Report of Independent Public Accountants
To Gulf States Steel, Inc. of Alabama:
We have audited the accompanying balance sheet of GULF STATES STEEL, INC. OF
ALABAMA (an Alabama corporation and wholly-owned subsidiary of GSS Holding
Corp.) (Debtor-in-Possession) as of October 31, 1999, and the related statements
of operations and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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, 1999 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency. Furthermore, as described in Note 1, on July
1, 1999, the Company filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Alabama, Eastern Division, for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code. Management's plans
in regard to these matters are also described in Note 1. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Birmingham, Alabama
December 22, 1999,
except with respect to the environmental
matters discussed in Note 12,
as to which the date is
January 31, 2000
32
<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 the related statements of operations and
cash flows for each of the two 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 the related results of its operations and its
cash flows for each of the two 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" contained in Note 1. 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.
As discussed in Note 4 to the financial statements, in 1997 the Company changed
its method of accounting for process reengineering costs.
/s/ Ernst & Young
Birmingham, Alabama
December 4, 1998,
except for Note 12,
as to which the date is
January 28, 1999
33
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
October 31,
1999 1998
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,551 $ 1,990
Accounts receivable, less allowance for doubtful
accounts of $941 in 1999 and $930 in 1998 35,721 25,117
Inventories 37,861 60,941
Deferred income taxes 2,860 2,949
Prepaids and other current assets 9,461 3,878
-------- --------
Total current assets 87,454 94,875
Noncurrent assets:
Property, plant and equipment, net 191,848 200,702
Deferred charges, less accumulated amortization of
$199 in 1999 and $3,965 in 1998 398 5,122
Other noncurrent assets 300 300
-------- --------
Total assets $280,000 $300,999
======== ========
Liabilities and Stockholder's (Deficit) Equity
Liabilities not subject to compromise
Current liabilities:
Accounts payable $ 19,795 $ 30,374
Accrued payroll and employee benefits 11,101 9,773
Accrued workers compensation 2,933 2,517
Accrued environmental expense 6,100 2,004
Other accrued liabilities 3,591 3,746
Debtor-in-possession term loan (Note 6) 14,570 -
Debtor-in-possession credit facility (Note 6) 34,915 -
Current portion of long-term debt - 964
-------- --------
Total current liabilities 93,005 49,378
-------- --------
Noncurrent liabilities:
Long-term debt - 230,123
Deferred postretirement health benefits 7,475 4,757
Deferred income taxes 2,860 2,949
-------- --------
Total noncurrent liabilities 10,335 237,829
Liabilities subject to compromise (Note 1) 235,782 -
-------- --------
Total liabilities 339,122 287,207
Stockholder's (deficit) 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 (535) (750)
Accumulated deficit (97,673) (24,544)
-------- --------
Total stockholder's (deficit) equity (59,122) 13,792
-------- --------
Total liabilities and stockholder's (deficit) equity $280,000 $300,999
======== ========
</TABLE>
The accompanying notes are an integral part of the Financial Statements.
34
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net Sales $ 320,450 $ 407,006 $ 436,510
Cost of goods sold, excluding depreciation 318,842 346,408 389,780
Depreciation and amortization 22,056 19,854 18,443
Selling, general and administrative expenses 17,022 17,286 15,772
Write-off of blooming mill - - 1,800
Environmental expense 12,122 1,296 383
----------- ----------- -----------
Operating profit (loss) (49,592) 22,162 10,332
Other (income) expense:
Interest expense (Contractual interest $29,100 in 1999) 20,509 27,633 27,019
Interest income (19) (140) (76)
Common stock warrants fair value adjustment - (2,225) -
----------- ----------- -----------
20,490 25,268 26,943
----------- ----------- -----------
Loss before restructuring items, income taxes, extraordinary
items and cumulative effect of accounting change (70,082) (3,106) (16,611)
Restructuring items:
Professional fees (4,190) - -
----------- ----------- -----------
Loss before income taxes, extraordinary items, and
cumulative effect of accounting change (74,272) (3,106) (16,611)
Provision (benefit) for income taxes (1,143) 1,526 (760)
----------- ----------- -----------
Loss before extraordinary item and cumulative effect of
accounting change (73,129) (4,632) (15,851)
Extraordinary charge for debt refinancing - (1,044) -
Cumulative effect of accounting change - - (2,647)
----------- ----------- -----------
Net loss $ (73,129) $ (5,676) $ (18,498)
=========== =========== ===========
Basic and diluted loss per share:
Loss before extraordinary item and cumulative effect of $ (20.26) $ (1.28) $ (4.39)
accounting change
Extraordinary charge for debt refinancing - (0.29) -
Cumulative effect of accounting change - - (0.73)
----------- ----------- -----------
Net loss per share $ (20.26) $ (1.57) $ (5.12)
=========== =========== ===========
Weighted average shares outstanding 3,610,000 3,610,000 3,610,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the Financial Statements.
35
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net loss $(73,129) $ (5,676) $(18,498)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 21,046 20,466 18,443
Amortization 1,410 1,528 1,524
Environmental Expenses 12,122 1,296 383
Write down of inventories 5,921 - -
Deferred income taxes - 1,998 (617)
Write-off of capitalized interest 462 - -
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 (10,605) 8,268 7,403
Inventories 16,970 (6,290) 3,732
Prepaid and other current assets (5,583) 3,060 (4,274)
Accounts payable 9,072 (4,166) (880)
Accrued payroll and employee benefits 4,462 413 (862)
Accrued interest payable 17,089 - -
Other accrued liabilities 2,748 1,343 4,364
-------- -------- --------
Net cash provided by operating activities 1,985 20,874 12,518
-------- -------- --------
Investing activities:
Capital expenditures (11,840) (23,129) (31,056)
-------- -------- --------
Net cash used in investing activities (11,840) (23,129) (31,056)
-------- -------- --------
Financing activities:
Net borrowings (payments) on revolving credit agreement (4,506) 39,628 17,092
Prepayment of prior revolving credit facility - (37,393) -
Proceeds from issuance of long-term debt - 946 -
Proceeds from debtor-in-possession term loan 14,570 - -
Net borrowings (payments) on long-term debt 82 (751) (653)
Payment of capitalized lease obligations (133) (153) -
Debt issuance costs paid (597) (391) -
-------- -------- --------
Net cash provided by financing activities 9,416 1,886 16,439
-------- -------- --------
Net decrease in cash and cash equivalents (439) (369) (2,099)
Cash and cash equivalents at beginning of year 1,990 2,359 4,458
-------- -------- --------
Cash and cash equivalents at end of year $ 1,551 $ 1,990 $ 2,359
======== ======== ========
</TABLE>
36
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-In-Possession)
Statements of Cash Flows (continued)
(dollars in thousands)
<TABLE>
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest $ 3,038 $ 28,820 $ 28,386
Income taxes - (299) (18)
Noncash investing and financing activities:
Capital lease obligations 668 333 -
Reclassification of prepetition liabilities
to Liabilities Subject to Compromise:
Accounts payable 19,651 - -
Accrued interest payable 18,240 - -
Real estate and personal property taxes 1,877 - -
</TABLE>
The accompanying notes are an integral part of the Financial Statements.
37
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
1. Description of the Company
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 Inc. (ASB), a former 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. All material intercompany accounts and
transactions have been eliminated.
Voluntary Filing Seeking Reorganization Under Chapter 11 of the United States
Bankruptcy Code
The Company's operating results for fiscal 1998 and 1999 were severely affected
by, among other things, a dramatic surge in steel imports beginning in the
summer of 1998. As a consequence of record-high levels of low-priced steel
imports and the resultant deteriorating market conditions, the Company's overall
sales prices and shipments declined thereby causing a decrease in liquidity and
profitability. The decreased liquidity made it impossible for the Company to
service its then existing debt and fund ongoing operations. As a result, on July
1, 1999, the Company filed a voluntary petition seeking reorganization under
Chapter 11 of Title 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for Northern District
of Alabama, Eastern Division (the "Bankruptcy Court"). Although the Company's
reorganization plan has not been finalized, the Company has implemented a
restructuring program to reduce costs, improve operating efficiencies and
increase financial flexibility.
The Company is in possession of its properties and assets and continues to
operate with its existing directors and officers as a debtor-in-possession. As a
debtor-in-possession, the Company is authorized to operate its business, but may
not engage in transactions outside of the normal course of business without
approval, after notice and hearing, of the Bankruptcy Court. Pursuant to the
provisions of the Bankruptcy Code, as of the petition date, actions to collect
prepetition indebtedness owed by the Company are stayed and other prepetition
contractual obligations may not be enforced against the Company. In addition, as
a debtor-in-possession, the Company has the right, subject to the Bankruptcy
Court's approval and certain other conditions, to assume or reject any
prepetition executory contracts and unexpired leases. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting such contracts or
leases or from the filing of claims, and no provisions have been made for these
items. Schedules have been filed by the Company with the Bankruptcy Court
setting forth the assets and liabilities of the debtor as of the filing date as
reflected in the Company's accounting records. Differences between amounts
reflected in such schedules and claims filed by creditors will be investigated
and amicably resolved or adjudicated before the Bankruptcy Court. The Bankruptcy
Court set November 29, 1999 as the Bar Date. The Bar Date is the date by which
all claims must be filed against the Company. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
38
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
The Bankruptcy Court has approved payment of certain prepetition liabilities
such as employee wages and benefits. These items are recorded as accounts
payable and accrued expenses not subject to compromise. Furthermore, the
Bankruptcy Court has allowed for the retention of legal and financial
professionals to advise in the bankruptcy proceedings. These fees are expensed
as incurred and are recorded in restructuring expenses. As further described
under Note 6 below, on July 20, 1999, the Bankruptcy Court also approved a $65
million debtor-in-possession credit facility (the "DIP Credit Facility"), a
$17.9 million Term Loan (the "Term Loan"), and a Preferred Supplier Continuous
Credit Program (the "Credit Program").
The Company intends to present a plan of reorganization to the Bankruptcy Court
to reorganize the Company's business and to restructure the Company's
obligations. Under the provisions of the Bankruptcy Code, the Company has the
exclusive right to file such plan at any time during the 120-day period
following July 1, 1999. The Company filed a motion to extend the exclusive
period to February 29, 2000. On October 25, 1999, the motion to extend the
exclusive filing time period for the Company was granted by the Bankruptcy
Court. A committee, representing holders (the "Ad Hoc Noteholders Committee") of
the Company's 13 1/2% Series B First Mortgage Notes due 2003 (the "First
Mortgage Notes") has been granted the right, in exchange for permitting the
subordination of the liens securing the First Mortgage Notes to the liens
securing the collateral under the Term Loan, to file a Chapter 11 plan of
reorganization on the earlier of (a) the 305th day (April 30, 2000) after the
Company's Chapter 11 filing, unless the Company has failed to file a plan of
reorganization by the 244th day (February 29, 2000) after its bankruptcy filing,
in which case the Ad Hoc Noteholders Committee may file a plan of reorganization
on the 245th day ( March 1, 2000), or (b) the first to occur of (i) certain
financial covenant defaults or (ii) 30 days after an uncured default under the
Term Loan.
Due to the lack of sufficient liquidity, the Company did not make the $12.8
million interest payment due April 15, 1999 on the First Mortgage Notes. The
Company was also unable to cure that default by May 15, 1999, which date
represented the expiration of the 30-day cure period from the original interest
payment due date. The Bankruptcy Code generally prohibits the Company from
making payments on prepetition debt, including the First Mortgage Notes, except
as pursuant to Bankruptcy Court approval, thus the payment of interest of $12.8
million that was due October 15, 1999, was also not made. State Street Bank &
Trust Company, as indenture trustee with respect to the First Mortgage Notes,
and the Ad Hoc Noteholders Committee entered a stipulation with the Bankruptcy
Court with respect to the adequate protection of the lien securing the First
Mortgage Notes and the subordination of such liens to the liens securing the
advance under the Term Loan and the Credit Program.
As a result of the filing of the voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court and under the terms of
the bankruptcy case, liabilities in the amount of approximately $235.8 million,
as set forth below, are subject to compromise under a plan of reorganization.
Pursuant to the provisions of the Bankruptcy Code and during the pendency of the
bankruptcy proceeding, actions to enforce or otherwise effect repayment of all
prepetition liabilities, as well as all pending litigation against the Company,
are stayed while the Company continues is business operations as debtors-in-
possession. The ultimate amount and settlement terms for such liabilities are
subject to a plan of reorganization, and accordingly, are not presently
determinable. Liabilities Subject to Compromise are detailed as follows:
39
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
(dollars in thousands)
<TABLE>
<S> <C>
Bonds, and Accrued Interest net of Debt Issuance Cost
and Debt Discount (First Mortgage Notes) $ 202,863
Accounts Payable (Unsecured) 16,722
Accrued Environmental Expenses (Unsecured) 7,900
Notes Payable (Secured Equipment Notes) 2,805
Vendor Notes Payable and Accrued Interest (Unsecured) 2,929
Real Estate and Personal Property Taxes (Unsecured) 1,877
Capitalized Lease Obligations (Secured) 686
---------
Total Liabilities Subject to Compromise $ 235,782
=========
</TABLE>
On August 17, 1999, President Clinton signed Public L. No. 106-51, The Emergency
Steel Loan Guarantee Act of 1999 ("the Loan Guarantee Act"). The Loan Guarantee
Act will provide guarantees for up to $1 billion in loans to qualified steel and
iron ore companies, with no company receiving guarantees of more than $250
million. These loans will be made by private sector lenders, with the Federal
Government providing a guarantee for up to 85 percent of the amount of the
principal of the loan. A loan guarantee may be issued upon application to the
Emergency Steel Guarantee Loan Board (the "Loan Board") by a private banking or
investment institution which has committed to enter into an agreement to provide
a loan to a qualified steel company. There are several requirements for
applicants:
(1) Credit is not otherwise available to the qualified steel company under
reasonable terms or conditions sufficient to meet its financing needs.
(2) The prospective earning power of the qualified steel company, together
with the character and value of the security pledged, must furnish
reasonable assurance of repayment of the loan to be guaranteed.
(3) The loan to be guaranteed must bear interest at a rate determined by
the Loan Board to be reasonable.
(4) The qualified steel company must agree to an audit by the General
Accounting Office, or its designee, and an independent auditor
acceptable to the Loan Board, prior to the issuance of the guarantee
and annually thereafter while the guarantee is outstanding.
(5) The qualified steel company may have no debt outstanding to the
Federal government (including environmental fees assessed by the
Environmental Protection Agency (the "EPA")).
The Company is addressing the following issues in order to form a plan of
reorganization and present an application under the Loan Guarantee Act by: (i)
preparing a business plan to demonstrate that there is reasonable assurance the
federal guaranteed loan can be repaid; (ii) obtaining the consent of the holders
of the First Mortgage Notes for collateral to be used; (iii) obtaining a lender
to provide the loan and to apply for the government guarantees; (iv) reaching an
agreement with the USWA concerning the existing contract which will expire in
October 2000; (v) reaching an agreement with the EPA regarding pending
litigation concerning the Clean Water Act and potential claims concerning the
Comprehensive Environmental
40
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
Response, Compensation, and Liability Act of 1980; (vi) submitting a Loan
Guarantee Act application no later than January 31, 2000.
The Company has engaged McDonald Investments, Inc., an investment banking
entity, to find a qualified lender and to file the application for the Loan
Guarantee Act guarantee. There can be no assurance that the Company will be
successful in meeting the eligibility requirements under the Loan Guarantee Act
or that it can obtain a qualified lender.
2. Basis of Presentation and Significant Accounting Policies
The financial statements have been prepared in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7 ("SOP 90-
7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code. The financial statements have been prepared using accounting principles
applicable to a going concern, which assumes continuity of operations,
realization of assets, and settlement of liabilities in the normal course of
business. The Company's recent losses from operations, significant
stockholder's deficit and the related bankruptcy filing raise substantial doubt
about the Company's ability to continue as a going concern. Realization of the
carrying amounts of the Company's assets and classification of its liabilities
is dependent upon, among other things, the ability to comply with debtor-in-
possession financing agreements, confirmation of a plan of reorganization, the
ability to achieve positive gross margins, and the ability to generate
sufficient cash flow from operations to meet its obligations.
In accordance with SOP 90-7 the accompanying balance sheet as of October 31,
1999, segregates Liabilities Subject to Compromise, such as unsecured claims,
from liabilities not subject to compromise and liabilities arising subsequent to
filing bankruptcy. A plan of reorganization could materially change the amounts
currently recorded in the financial statements. The financial statements that
might result from the outcome of this uncertainty may be materially different
than those presented herein. Restructuring items represent expenses incurred by
the Company as a result of the bankruptcy proceedings, which are required to be
expensed as incurred.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
41
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
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.
Long-lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company recognizes impairment losses on long-lived assets
used in operations when impairment indicators are present and the undiscounted
cash flows estimated to be generated by those assets are less than their
carrying values. Long-lived assets held for disposal are valued at the lower of
the carrying amount or fair value less cost to sell.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated
depreciation and amortization and include expenditures for major renewals and
betterments that substantially increase the useful lives of existing assets as
well as the net amount of interest cost associated with significant capital
additions. Maintenance and repairs are charged to expense as incurred. Upon
sale, retirement, or other disposition of these assets, the cost and related
gain or loss is credited or charged to income. 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 being
amortized over the term of the debt instrument. Debt issuance costs related to
financing obtained prior to the debtor-in-possession financing, have been
included in the Liabilities Subject to Compromise in accordance with SOP 90-7 in
the accompanying 1999 balance sheet.
Loss Per Share
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. The warrants were anti-dilutive
for each of the three years in the period ended October 31, 1999, and,
therefore, are not included in the loss per share.
42
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
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. See Footnote 1 regarding the
Company's Chapter 11 filing.
Insurance Arrangements
The Company is substantially self-insured for worker's compensation and employee
medical/dental claims. Worker's compensation claims are accrued currently for
management's estimated cost of claims incurred, including related expenses,
based upon independent actuary reports, and historical claims experience.
Medical/dental claims are also accrued currently based on management's estimated
cost of claims incurred as determined by reference to historical experience and
current claim trends. Management considers the accrued liabilities for
unsettled claims to be adequate; however, there is no assurance that the
estimates accrued will not vary from the ultimate amounts incurred upon final
disposition of all outstanding claims. As a result, periodic adjustments to the
reserves will be made as events occur which indicate changes are necessary.
New Accounting Pronouncements
During fiscal 1999 the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes reporting and display requirements with
respect to comprehensive income and its components. The statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
adoption of this statement did not have any effect on the Company's financial
statements, due to the fact that the Company does not have any transactions
required to be displayed in comprehensive income.
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 had
no impact on the Company's financial position, results of operations, or cash
flows. See Footnote 3.
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, Employers' Disclosures About Pensions and Other Postretirement
Benefits. SFAS No. 132 revises employers' disclosures about pensions and other
postretirement benefit plans. It also standardizes the disclosure
43
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
no longer are useful. The Company adopted the new standard in fiscal 1999. See
Footnote 14.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133). SFAS No. 133 requires all derivatives to be measured at fair
value and recognized as either assets or liabilities on the balance sheet.
Changes in such fair values are required to be recognized immediately in net
income (loss) to the extent the derivatives are not effective as hedges. SFAS
No. 137 delayed the effective date to fiscal years beginning after June 15,
2000, and is effective for interim periods in the initial year of adoption. At
the present time, the Company does not expect SFAS 133 to have any effect on the
Company's financial position, results of operations, or cash flows because the
Company does not presently use derivatives or engage in hedging activities.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform with the presentation in the current year financial statements.
3. Segment Reporting
The Company operates in one business segment with four primary product lines:
hot-rolled products, cold-rolled products, galvanized products and plate
products.
Hot-rolled products begin as slabs and are processed through the hot strip mill.
This process reduces the thickness of the metal to customer specifications while
improving its qualities. When the metal has obtained the desired thickness and
strength it is rolled into a coil as a finished product. Hot-rolled products
made up 22.3%, 23.9% and 26.2% of the Company's sales in 1999, 1998, and 1997,
respectively.
Cold-rolled products begin as a hot-rolled coil. These items are then processed
through the cold strip mill (tandem mill) which reduces the metal to the desired
thickness. The metal then goes through an annealing and temper process to
restore its flexibility and to obtain the qualities the customer has specified.
Once the metal has obtained all of the desired qualities it is rolled into a
coil as a finished product. Cold-rolled products made up 19.1%, 13.6%, and
16.4% of the Company's sales in 1999, 1998, and 1997, respectively.
Galvanized products begin as a hot-rolled coil or a cold-rolled coil and are
then coated with zinc. These items are recoiled as a finished product.
Galvanized products made up 16.0%, 17.1%, and 17.5% of the Company's sales in
1999, 1998, and 1997, respectively.
Plate products begin as slabs and are processed through the plate mill. Plate
slabs are reheated and passed through a series of fast moving rolls which makes
the slab longer and thinner as it passes through the mill. The plate is
finished to the customers specified thickness and then cut to the specified
widths and lengths. Plate products made up 39.7%, 43.9%, and 38.0% of the
Company's sales in 1999, 1998, and 1997,
44
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
respectively.
The remaining sales of 2.9%, 1.5%, and 1.9% in 1999, 1998, and 1997,
respectively, are from sales of coke, slabs and by-products.
Net sales by product line are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Hot-Rolled $ 71,461 $ 97,142 $114,548
Cold-Rolled 61,155 55,460 71,637
Galvanized 51,226 69,599 76,313
Plates 127,120 178,525 166,060
Other 9,488 6,280 7,952
-------- -------- --------
Total $320,450 $407,006 $436,510
======== ======== ========
</TABLE>
The Company does not have any foreign sales, and all of the Company's tangible
assets are located in the continental Unites States.
4. Inventories
Inventories consist of the following (dollars in thousands):
October 31,
1999 1998
------- -------
Raw materials $ 5,896 $15,677
Work-in-process 10,985 17,821
Finished goods 20,980 27,443
------- -------
$37,861 $60,941
======= =======
The Company had lower of cost or market write-downs to inventory during fiscal
1999 of $5,921.
45
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1999 1998
-------- --------
<S> <C> <C>
Land $ 1,268 $ 1,268
Buildings 6,089 6,089
Machinery and equipment (including $333 under
capitalized leases in 1999 and 1998)
241,200 235,403
Construction-in-progress 25,244 19,039
-------- --------
273,801 261,799
Accumulated depreciation (81,953) (61,097)
-------- --------
$191,848 $200,702
======== ========
</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 $2.7 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.
For the years ended October 31, 1999 and 1998, interest of $2.0 million and $2.2
million was capitalized, respectively. For the year ended October 31, 1999,
$0.5 million of previously capitalized interest was written off.
46
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
6. Long-Term Debt, Debtor-in-Possession and Other Financing Arrangements
Long-term debt of the Company consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1999 1998
--------- --------
<S> <C> <C>
Revolving credit facility $ - $ 39,421
First Mortgage Notes - 188,749
Equipment notes and leases - 2,723
Capitalized lease obligations - 194
-------- --------
- 231,087
Less current portion - (964)
-------- --------
$ - $230,123
======== ========
</TABLE>
As a result of the Chapter 11 filing, all of the Company's long term debt was in
default as of the bankruptcy date. For fiscal 1999, all of the above items are
included in Liabilities Subject to Compromise on the accompanying 1999 balance
sheet. The new DIP Credit Facility and the Term Loan are included in current
liabilities because their terms expire within one year of the loan date, or on
the effective date of an approved plan of reorganization, whichever is earlier.
Revolving Credit Facilities
DIP Credit Facility
On July 20, 1999, the Bankruptcy Court granted the Company's motion to approve a
new $65 million debtor-in-possession credit facility. The DIP Credit Facility
expires on the earlier of the consummation of a plan of reorganization or July
6, 2000. The DIP Credit Facility replaced the Company's prepetition revolving
credit facility. The DIP Credit Facility is secured by raw materials, work-in-
process, finished goods inventory, and the Company's trade accounts receivable.
Actual borrowing availability is subject to a borrowing base calculation and the
right of the lender to establish reserves, which it has required in the amount
of $2.8 million. Subsequent to October 31,1999, these reserves were increased
to $3.3 million. The amount available to the Company under the DIP Credit
Facility is the aggregate of 85% of eligible accounts receivable, and 64% of
eligible inventories (up to an aggregate of $40 million), less reserves on the
various collateral established by the lender. Borrowing availability under the
DIP Credit Facility is also subject to compliance with certain covenants,
generally common to such loan agreements. The interest rate is computed as the
Prime Rate plus 0.75%, or the adjusted LIBOR Rate plus 3.0% at the debtor's
option. The rate is subject to a 2.0% increase in the continuance of an event
of default. At October 31, 1999, the interest rate was 8.5625% on the $22.0
million 60 day renewable loan and 9.0% on the $12.9 million daily borrowings.
Interest is due the first day of the month for the preceding month. As of
October 31, 1999, the Company's eligible inventories and accounts receivable
supported access to $52.2 million, less applicable reserves of $2.8 million,
under the DIP Credit Facility. As of October 31, 1999, the Company had a net
availability of $14.5 million under the DIP Credit Facility. The Company
recorded $350,000 for debt issuance cost related to the DIP Credit Facility,
which is being amortized over the term of the loan.
47
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
Prepetition Credit Facility
On November 13, 1997, the Company retired its previous $70 million revolving
credit facility and 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 were subject to
limits based on eligible accounts receivable and inventories, less outstanding
letters of credit. This credit facility had an original term of three years
through November 13, 2000, at which time the agreement would 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 were
secured by inventories and accounts receivable. Under the revolving credit
facility, the Company was required to maintain at all times a stated 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. This prepetition
credit facility was replaced by the DIP Credit Facility.
Term Loan
On July 20, 1999, the Bankruptcy Court granted the Company's motion to approve a
new debtor-in-possession Term Loan agreement in the aggregate principal amount
of $17.9 million. The Term Loan is secured by the property, plant and
equipment, and certain other collateral of the Company. The holders of the
First Mortgage Notes permitted the subordination of the liens securing the First
Mortgage Notes to the liens securing the collateral under the Term Loan. All
loans are payable one year from the initial advance. Upon entry of the
bankruptcy interim order on July 7, 1999, the Bankruptcy Court approved the
advance of $6.4 million to the Company and $9.0 million was advanced upon entry
of the bankruptcy final order on July 20, 1999, less approximately $0.8 million
which has been retained by the lender pending resolution of certain collateral
issues. Subsequent to year end, an additional $2.5 million was advanced. Such
amounts may be reduced by certain reserves in respect of existing liens on
collateral and are subject to compliance with certain covenants, generally
common to such loan agreements. Interest is calculated at the Prime Rate plus
5.0% for the first two advances and the Prime Rate plus 8.5% for the third
advance with 3.5% payable in kind (which means it is added to the principal
balance). The interest rate at October 31, 1999, was 13.25% on the outstanding
advances. Interest is due the first day of the month for the preceding month.
The Company recorded $247,000 for debt issuance cost related to the Term Loan,
which is being amortized over the term of the loan.
48
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
Preferred Supplier Continuous Credit Program
On July 20, 1999, the Bankruptcy Court approved the Credit Program. The Credit
Program provides that (a) selected suppliers that offer postpetition credit
terms at least equal to the lesser of twice the number of days that are listed
as "current trade term days" (but not less that 30 days) or 45 days, and (b) any
suppliers that have not been pre-selected that offer postpetition credit terms
of at least 45 days, and, in each case, for a continuous period of at least 6
months, shall be entitled to liens with superpriority administrative expense
status on all postpetition credit extended to the Company under the Credit
Program. Such liens are senior to the First Mortgage Noteholders' prepetition
liens, but subordinate to all liens for money borrowed under the Bankruptcy Code
and certain professional and administrative fees and expenses. In addition, so
long as continuous credit is provided, a participant is entitled to a credit
extension fee of up to 50% of the participant's prepetition claim, if any,
payable after 6 months of continuous credit being provided. The fee is
calculated based on predetermined percentages as approved by the Bankruptcy
Court and will be paid over a 30 month period. The maximum amount of
postpetition credit eligible to receive credit extension fees is $15 million and
the Company may pay up to a maximum of $7.5 million in credit extension fees to
selected suppliers that participate in the Credit Program.
At October 31, 1999, and November 30, 1999, the Company was in default under
certain financial covenants contained in the DIP Credit Facility and the Term
Loan. Subsequently, the Company obtained a waiver from the lenders with respect
to the covenant defaults, and the DIP Credit Facility agreement and the Term
Loan agreement have been amended to revise such covenants on a going forward
basis. These amendments were approved by the Bankruptcy Court on January 21,
2000.
First Mortgage Notes
During 1999, as a result of the Company's Chapter 11 filing, the Company
reclassified the First Mortgage Notes and the accrued interest relating to the
First Mortgage Notes, net of the unamortized debt issuance cost and related
discount to the Liabilities Subject to Compromise section of the accompanying
1999 balance sheet.
The Company was unable to make its April 15, 1999, interest payment of $12.8
million due on the First Mortgage Notes. The Company was also unable to cure
that default by May 15, 1999, which date represented the expiration of the 30-
day cure period from the original interest payment due date. The Bankruptcy
Code generally prohibits the Company from making payment on prepetition debt,
including the First Mortgage Notes, except pursuant to Bankruptcy Court
approval. As a result, the payment of interest of $12.8 million that was due on
October 15, 1999, was also not made.
The Company discontinued to accrue interest on all prepetition debt as of July
1, 1999, due to the Chapter 11 filing. Contractual interest on all obligations
amounts to $29.1 million, which is $8.6 million in excess of the reported
interest expense.
The First Mortgage Notes (the "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
49
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
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, 1999, 1998 or 1997;
therefore, no payments were required. The Notes are senior obligations of the
Company and are secured by substantially all of the assets of the Company except
accounts receivable and inventories. The Notes are redeemable at the option of
the Company on or after April 15, 1999, at amounts ranging from 106.75% of face
value in 1999 to 100.00% of face value in 2001 and thereafter. The Company is
required to purchase all of the outstanding Notes in the event of a change of
control and to offer to purchase a portion of the Notes in the event of one or
more public equity offerings. The Notes impose certain limitations on the
Company including the ability to incur additional indebtedness, pay dividends,
make certain other restricted payments, create liens, consummate certain mergers
or consolidations or sell substantially all of the Company's assets.
The Company has 190,000 warrants outstanding, which were included with the Notes
in the units sold by the Company. Each warrant entitles the holder thereof to
purchase one share of common stock, subject to certain adjustments, at a price
of $.01 per share. The warrants are exercisable upon the occurrence of an
Exercise Event (as defined in the warrant agreement) and expire 180 days after
becoming exercisable, but in any event no later than April 15, 2003. Pursuant
to the warrant agreement, under certain circumstances the Company or Holding is
required to make an offer to purchase all outstanding warrants and warrant
shares in cash at a price equal to the current market value, as defined,
thereof. The warrants 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 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. Amortization of the debt
discount was stopped on July 1, 1999, due to the Company's Chapter 11 filing.
Equipment Notes
Principal and interest payments were made monthly, until July 1, 1999, with the
interest rates from 3.65% above the LIBOR rate (or prime plus 0.75%) to 12.59%.
At that time equipment notes were reclassified to Liabilities Subject to
Compromise as a result of the Company's Chapter 11 filing. The Bankruptcy Code
generally prohibits the Company from making payments on prepetition debt, except
pursuant to Bankruptcy Court approval. The equipment notes are secured by a
security interest in the equipment that was purchased with the proceeds of these
notes.
50
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
7. Stockholder's (Deficit) Equity
Changes in stockholder's (deficit) equity were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year ended October 31,
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 13,792 $19,468 $ 37,966
Net loss (73,129) (5,676) (18,498)
Amortization of officers' notes 215 - -
-------- ------- --------
Balance at end of period $(59,122) $13,792 $ 19,468
======== ======= ========
</TABLE>
8. 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 vest in accordance with each individuals' agreement. 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.
Options granted pursuant to the Holding 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, by
delivery of a personal, interest bearing recourse note, among other things. 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
1999: dividend yield of zero percent, risk-free interest rate of 6.34%, and
expected life of ten years. Based on this calculation, the fair value of the
options is nominal.
51
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
A summary of the status of the Holding Stock Option Plan as of October 31, 1999,
1998 and 1997, and the changes during those dates, is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- ------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 63,200 $0.01 38,600 $0.01 38,600 $0.01
Granted -- -- 31,200 0.01 -- --
Cancelled (16,000) 0.01 (6,600) 0.01 -- --
------- ------ ------
Outstanding at end of year 47,200 $0.01 63,200 $0.01 38,600 $0.01
======= ====== ======
Options exercisable at end of year 25,280 25,000 15,440
</TABLE>
The following table summarizes information about the stock options outstanding
at October 31, 1999:
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 1999 Life 1999 price
- ------------------------------------------------------ -------------------------
$0.01 47,200 7.9 25,280 $0.01
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 1999, 1998 or 1997. The effects of FASB Statement No. 123 on pro
forma net loss in 1999 and 1998 is not likely to be representative of the
effects on pro forma net income or loss in future years.
9. Employee Profit Sharing
The Company is required by the terms of an agreement (the "Agreement"), which
expires October 1, 2000, between the Company and the USWA, 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
principles, pre-tax income or loss from increases or decreases in value of
equipment permanently taken out of service and deferred costs arising out of
permanent closure of any department of substantial portion thereof. 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. Expense under these
plans was zero in 1999 and 1998 and $10,000 in 1997.
52
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
10. Income Taxes
The components of net deferred tax amounts recognized in the accompanying
balance sheets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1999 1998
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Basis of property, plant and equipment $ 31,127 $27,734
Allowance for doubtful accounts 188 346
-------- -------
Total deferred tax liabilities 31,315 28,080
Deferred tax assets:
Net operating loss carryforwards 57,048 30,835
Alternative minimum tax credit carryforwards 2,048 2,048
Accrued employee benefits 5,362 3,755
Environmental 5,201 -
Inventories 205 617
-------- -------
Total deferred tax assets 69,864 37,255
Valuation allowance (38,549) (9,175)
-------- -------
Net deferred tax asset $ - $ -
======== =======
</TABLE>
At October 31, 1999, the Company has net operating loss carryforwards of
approximately $153,000,000 that expire from 2009 through 2017.
The Company's effective tax rate differs from the applicable U.S. federal
statutory rate due to the following:
<TABLE>
<CAPTION>
Year ended October 31,
1999 1998 1997
------ ------ ------
<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)% (2.2)% (2.1)%
Expenses not tax deductible 0.1 % 0.9 % 0.9 %
Common stock warrants - % (25.1)% - %
Deferred income tax valuation allowance 35.3 % 110.5 % 32.5 %
Other - % - % (0.9)%
------ ------ ------
Effective rate (1.8)% 49.1 % (4.6)%
====== ====== ======
</TABLE>
53
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
The provision (benefit) for income taxes consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended October 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $(1,143) $ (459) $(130)
State - (14) (13)
------- ------ -----
(1,143) (473) (143)
Deferred:
Federal - 1,933 (562)
State - 66 (55)
------- ------ -----
- 1,999 (617)
------- ------ -----
$(1,143) $1,526 $(760)
======= ====== =====
</TABLE>
11. 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. Payments to affiliates under these
plans were discontinued July 1, 1999, due to the bankruptcy filing. Total
amounts paid to affiliates for services under management agreements for the
fiscal years ended October 31, 1999, 1998 and 1997, were $451,000, $1,344,000
and $1,545,000, respectively, including $85,000, $94,000 and $295,000,
respectively, in reimbursed expenses. Total fees paid to an affiliate under the
insurance services agreement for the fiscal years ended October 31, 1999, 1998
and 1997, totaled $44,000, $209,000 and $213,000, respectively.
Notes receivable from officers of $535,000 and $750,000 at October 31, 1999 and
1998, respectively, 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' interests in a limited partnership.
Due to non-compete agreements signed in fiscal 1999 by two officers upon their
resignation, two of these notes are being amortized over the life of the
agreements upon which their respective indebtedness will be forgiven. Also, the
remaining officers have signed retention agreements whereby these notes will be
forgiven if the executive is terminated without cause while the Company is in
Chapter 11, or if the executive remains with the Company until a final plan of
reorganization is confirmed. Amortization expense amounted to $215,000 in
fiscal 1999. See Footnotes 7 and 12.
54
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
12. Commitments and Contingencies
Commitments
The Company had two purchase agreements with suppliers of ore pellets which were
terminated in fiscal 1999. The Company is currently evaluating other sources
for iron ore pellets. The Company expects to continue to purchase approximately
one half of its requirements from Canada and the remainder from South America.
These negotiations should conclude in February 2000.
The Company has commitments for construction projects related to plant expansion
and environmental improvements of approximately $0.7 million at October 31,
1999.
In connection with the Chapter 11 filing, the Company offered several of its key
executives retention agreements. These agreements provide for the executives to
receive continued pay and benefits for variable amounts of time, and forgiveness
of any debts owed if they are terminated without cause while the Company is in
Chapter 11. The agreements also provide bonus amounts and forgiveness of any
debts owed if the executive remains with the Company until there is a final
order confirming the plan of reorganization.
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. 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 fiscal years ended October 31, 1999, 1998 and 1997.
Contingencies
The Company is involved in litigation arising from its normal operations,
including employee matters, the resolution of which is not expected to have a
significant effect on the Company's financial position, results of operations or
liquidity.
Substantially all of the Company's hourly employees, and several salaried office
and clerical employees are represented by the USWA. The current contract which
was signed in April 1996 is due to expire in October 2000. The predecessor to
the Company experienced a 1 1/2 day work stoppage in 1989, however, the Company
has not experienced any work stoppages since. The Company believes a work
"slowdown" occurred in November 1999. The Company believes that it has
satisfactory relationships with its union represented employees. The Company is
currently in negotiations with the USWA regarding the contract expiring in
October 2000, and management believes a settlement will be reached. However, if
an extended work stoppage occurred, it could have a material adverse effect on
the Company's financial position, results of operations and liquidity.
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.
55
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
The Company conducts continuous environmental compliance and monitoring programs
and believes that it is currently in substantial compliance with all known
material and applicable environmental regulations, except as follows:
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
wastewater ditch system on the Company's property should be remediated and
"closed" under the Resource Conservation and Recovery Act ("RCRA"). The
Predecessor entered a consent decree in settlement of that claim, which required
a regulatory "closure" of the ditch. 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. Based on the results obtained in this sampling,
on September 29, 1998, clean 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 $2.7 million ($90,000 annually for 30 years). As another
part of the settlement of this action, the Company is also required to perform a
RCRA Facility Investigation of certain solid waste management units ("SWMUs") at
the site. The Company submitted a workplan for this investigation to the EPA on
May 26, 1999 and is waiting for the agency's comments. The RCRA facility
assessment conducted by the EPA identified a total of 41 SWMUs and 6 areas of
concern ("AOCs") at the Gadsden facility. Of the 41 SWMUs, two are recommended
for confirmatory sampling ("CS"). Of the 6 AOCs, two are recommended for CS.
All other SWMUs or AOCs are recommended for no further action ("NFA") or are
recommended for action under other regulatory programs.
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 wastewater treatment system, and these upgrades have
now largely 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. The DOJ has alleged that over 4,000
potential violations of the Clean Water Act have occurred. On June 8, 1999, the
district court issued an order granting DOJ's motion for partial
56
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
summary judgement holding the Company liable for 1,000 violations of its
National Pollution Discharge Elimination System (the "NPDES") permit from May
1995 to September 1998 comprising 4,290 days of violation. Each violation
carries a civil penalty of up to $27,500 per day. Almost two-thirds of the
exceedances occurred at points internal to the plant. The district court's
opinion provides that "the amount of the penalty for violations of the effluent
limitations on outfalls along the Company's internal waste streams might be
subject to mitigation, given that those outfalls do not discharge directly into
waters of the United States." It is the Company's belief that if that is true,
such discharges are not regulated by the Clean Water Act and therefore the
Company has no liability for those discharges as a matter of law. In the event a
civil penalty is imposed, the Clean Water Act requires the district court to
consider the seriousness of the violations, the economic benefits (if any)
resulting from the violations, any good faith efforts to comply with the
applicable requirements, the economic impact of the penalty on the Company, and
such other matters as the DOJ may require in determining the amount of the
penalty. On December 11, 1998, the Company filed an expedited petition with the
ADEM 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. ADEM has not yet acted on that petition.
In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, Alabama, 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 wastewater 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
conducted a Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") Site Investigation in two phases, the first in June 1997 and the
second in December 1997. Analyses of surface water samples indicated elevated
levels of zinc. Analyses of sediment samples indicated elevated levels of
inorganic constituents, primarily lead and zinc. Zinc contamination was found
to be widespread in Lake Gadsden sediments, not limited to discrete areas of the
lake. The EPA compiled its data into a CERCLA Site Investigation Report on
September 30,1998. 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. On December 23, 1998, as a result of a routine file review
at the ADEM, the Company was provided 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." Although certain core samples were taken at Lake
Gadsden more than two years ago, the EPA has initiated no enforcement action
regarding this matter, although on November 24, 1999, the United States filed a
Proof of Claim on behalf of the United States seeking approximately $280,000 in
alleged prepetition unreimbursed CERCLA response costs to test and evaluate Lake
Gadsden and an estimated $13,020,000 in potential additional CERCLA response
costs. The Company has 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.
57
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
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 Company, the DOJ, and the EPA have been
negotiating the terms of a potential consent decree that would settle both the
current Clean Water Act claims and any potential CERCLA claims that could be
asserted against the Company in the future. In light of these discussions, a
Pretrial Order was entered by the District Court for the Northern District of
Alabama on December 6, 1999, allowing discovery to proceed through January 31,
2000, but reaffirming that the date for the Clean Water Act trial remains set
for March 27, 2000. The Company and the DOJ have informed the District Court for
the Northern District of Alabama that they are working toward finalizing the
terms of a consent decree that they anticipate will be ready to place on the
public record for comment on or before January 31, 2000.
Based on the most recent draft consent decree provided to the Company on
January 19, 2000, the Company believes that all pending claims under the Clean
Water Act and potential claims under CERCLA, will be resolved by a settlement,
which is expected to contain the following elements:
1. The Company has agreed to be assessed a civil penalty of
$8,000,000, however, because of the Company's bankruptcy
proceeding, the United States has agreed to accept a payment
of $100,000 on or before July 1, 2001, in settlement of the
Company's liability for penalties arising out of the alleged
violations of the Company's NPDES permit. The United States
agrees that the remainder of the assessed civil penalty of
$7,900,000 will be subordinated to all other claims and
interests in the bankruptcy proceeding. Stipulated penalties
are also proscribed for any future violations of the Clean
Water Act.
2. The Company has agreed to undertake the construction of four
Supplemental Environmental Projects, expending the following
amounts on each: Plate Mill Scale Pit ($2,000,000); Water
Intake Flow Reduction ($200,000); Oil Lubrication System
Replacements ($150,000); and Oil Cellar Improvement Project
($150,000). These projects were recommended by the expert
engineering firm employed by the Department of Justice and
are designed to secure significant environmental protection
and improvements. In addition, not later than 18 months
after the date of the entry of a final judgment, the Company
will contribute $100,000 for the purchase of "ecologically
valuable land" for benefit of the Alabama Land Trust, which
will be responsible for retaining such land in its natural
condition in perpetuity.
3. The Company has agreed to pay to the EPA Hazardous Substance
Superfund $6,400,000. Monthly payments will be made in
installments of approximately $177,800 over 36 months into
an escrow account and will commence on the latter of July 1,
2001, or 30 days after the date that the EPA issues a formal
cleanup decision, i.e., an Action Memo or a Record of
Decision, pursuant to the National Contingency Plan, 40
C.F.R. Part 300. If the EPA has not commenced cleanup at the
site after the Company makes four monthly payments, the
Company may temporarily cease making payments until cleanup
commences. When the EPA issues a Certification of
Completion, any monies remaining in the escrow account will
revert to the Company.
4. The United States will settle all pending claims under the
Clean Water Act and provide a Covenant Not to Sue or take
any other civil or administrative action against the
58
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
Company, pursuant to Sections 106 or 107(a) of CERCLA with
respect to any existing contamination at the site. However,
the Company reserves any and all rights (including, but not
limited to, any right to contribution), defenses, claims,
demands, and causes of action that it may have with respect
to any matter, transaction, or occurrence relating to the
facility or the site against any person that is not a party
to the consent decree.
The principal subject of continuing discussion is the EPA's request that the
Company agree to dispose of up to 434,000 cubic yards of any sediment removed
from Lake Gadsden on the Company's property, however, the Company may refuse
such disposal if a RCRA permit would be required. The Company is presently
exploring whether this proposal is acceptable, and if not, alternative
approaches for addressing this issue.
Although the consent decree has not been finalized and will require the approval
of the Attorney General of the United States, the Administrator of the EPA, the
United States District Court for the Northern District of Alabama, and the
Bankruptcy Court, and therefore may be subject to further revision, it is the
Company's belief, after participating in these negotiations and having consulted
with legal counsel responsible for this case, that the final language of the
consent decree will not likely vary materially from the description provided
herein. Therefore, the Company has recorded a liability for such matters in the
amount of $13,300,000, using a present value calculation for the future
payments, for item 3) above. Of this amount, $7,900,000 is subject to
subordination in the bankruptcy proceeding and is thus reflected in the 1999
balance sheet as prepetition Liabilities Subject to Compromise. The remaining
amount ($6,500,000 discounted to $5,400,000) is not subject to compromise.
However, there can be no assurance that the consent decree will be accepted on
the terms set forth above.
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. The Company received a recent NOV, dated September 27, 1999,
which documented excessive emissions from the No. 3 and No. 4 coke oven
combustion stacks, but did not refer to any continuous opacity monitors.
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 of December 31, 1999,
all four of the transformers have been replaced.
59
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
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. ADEM issued
a draft Administrative Order regarding the consolidated NOV's on May 20, 1999,
again proposing a civil penalty of $80,000. The Company has requested a meeting
with ADEM to discuss settlement of this matter. At this meeting, the Company
discussed with ADEM coordination of any state required activities with the
ongoing RCRA Facility Investigation workplan. ADEM generally agreed with this
approach and is drafting an appropriate document, which will be forwarded to the
Company shortly.
On April 1, 1999, the Company was identified by the Environmental Protection
Division of the State of Georgia Department of Natural Resources ("EPD") as one
of the parties responsible for the SoGreen Barren Area Site in Tifton, Georgia.
Previously, the Company had responded to EPD that it had no records of any
materials being shipped to the site, and that a review of EPD documents revealed
that the Company was incorrectly identified as a "successor" to Republic Steel
Corporation. EPD nevertheless issued an Administrative Order to the Company.
The Company declined to participate in the Order, and EPD now may seek cost
recovery and punitive damages for expenses it incurs to complete the corrective
action at the site. No appeal was available form the Administrative Order;
however, the Company may petition for a hearing in the event EPD seeks to
recover costs, enforce the Administrative Order, or recover a penalty. It is
unknown at this time whether EPD will take any of these actions. Should EPD
take any such action, the Company will petition for a review, as it believes it
has valid defenses as it is not a successor to Republic Steel Corporation.
The Company has applied for a Title V Major Source Operating Permit under the
Clean Air Act. On October 14, 1999, ADEM placed a copy of a draft permit on the
public record for a 30 day comment period. The Company and ADEM are in the
process of negotiating certain terms and conditions of the permit as a result of
that process.
On January 27, 1999, the EPA filed an information request with the Company
regarding certain potential violations of the Clean Air Act regarding Prevention
of Significant Deterioration ("PSD") preconstruction review and permitting for
certain boilers (Nos. 1, 2, 3, 4, 5, 7, 8, and 9). The Company responded to the
request on May 6, 1999. The EPA has not yet replied.
For the fiscal years ended October 31, 1999, 1998 and 1997, capital expenditures
for environmental projects were $2.8 million, $4.2 million and $4.1 million,
respectively, and environmental compliance expenses were $5.0 million, $5.5
million and $6.0 million, respectively.
As of October 31, 1999, the Company has accrued $14 million for unresolved
environmental remediation matters, with $7.9 million being reflected in
Liabilities Subject to Compromise. Though the Company believes that it has
adequately reserved for the cost of all known environmental conditions in
accordance with generally accepted accounting principles, the relevant agencies
may insist upon different and more costly remedial measures than those
previously believed by the Company to be adequate or required by
60
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
existing law. The ultimate resolution of the above matters could have a material
adverse effect on the Company's financial position, results of operations and
liquidity.
13. Pension Plan
The Company has a defined contribution pension plan covering all employees
represented by the Union. For the period after October 1, 1999, the Company's
required contribution to the plan was $.90 per hour for all paid qualified hours
for each eligible participant. For the periods from April 1, 1999 to October 1,
1999, and April 1, 1997 to April 1, 1999, the Company's required contribution to
the plan was $.80 and $.70 per hour, respectively. Pension expense for the
fiscal years ended October 31, 1999, 1998 and 1997, was $2.1 million, $2.2
million and $2.2 million, respectively.
14. Postretirement Benefit Plan
The Company sponsors a defined benefit health care plan for union and non-union
employees which provides postretirement medical benefits to full-time employees
who have worked 30 years, or have reached the age of 60 with 15 years of
service, or have reached the age of 65 while in service with the Company. The
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 ability to
actually increase the retiree contribution rate depends in part on changes to
the Company's union contract. The Company's policy is to fund the cost of
medical benefits in amounts determined at the discretion of management.
61
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
The following tables present the changes during the year in the benefit
obligation and in the fair value of plan assets (dollars in thousands):
<TABLE>
<CAPTION>
October 31,
1999 1998
--------------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 20,908 $15,728
Service cost 756 669
Interest cost 1,532 1,297
Actuarial gain/(loss) (1,968) 3,347
Estimated benefits paid (30) (133)
-------- -------
Benefit obligation at end of year $ 21,198 $20,908
-------- -------
Change in plan assets
Fair value of plan assets at beginning of year $ 3,781 $ 3,493
Actual return on plan assets 37 288
Employer contribution 30 133
Estimated benefits paid (30) (133)
-------- -------
Fair value of plan assets at end of year $ 3,818 $ 3,781
-------- -------
</TABLE>
The reconciliation of the funded status of the plan, and the components of net
periodic benefit cost are as follows (in thousands):
<TABLE>
<CAPTION>
October 31,
1999 1998
--------------------
<S> <C> <C>
Reconciliation of funded status
Benefit obligation in excess of plan assets $(17,380) $(17,127)
Unrecognized prior service cost 7,086 7,677
Unrecognized net loss 2,714 4,588
-------- --------
Accrued benefit cost $ (7,580) $ (4,862)
======== ========
Components of the plans net periodic benefit cost
Service cost $ 756 $ 669
Interest cost 1,532 1,297
Expected return on plan assets (284) (262)
Amortization of prior service cost 591 591
Recognized net actuarial loss 153 1
-------- --------
Net periodic benefit cost $ 2,748 $ 2,296
======== ========
</TABLE>
62
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
The annual assumed rate of increase in the per capita cost of covered benefits
for the union plan (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 costs for the non-union plan are capped after fiscal 2000 and there
is no medical trend after fiscal 2000. 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, 1999, by $4,529,000, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1999 by
$539,000. Also, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation as of October 31, 1999, by $3,502,000, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1999 by $410,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 7.0% at October 31, 1999 and 1998, respectively. The
expected long-term rate of return on plan assets, after estimated income taxes,
was 7.5% both at October 31, 1999 and 1998.
15. 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.
16. Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments approximates fair
value at October 31, 1999 and 1998, except for the fair values of financial
instruments subject to compromise which are not presented because these fair
values are subject to the outcome of the Chapter 11 case described in Note 1.
Subsequent allowances of claims by the Bankruptcy Court may vary widely from
amounts currently recorded in the Company's accompanying balance sheets.
63
<PAGE>
Gulf States Steel, Inc. of Alabama
(Debtor-in-Possession)
Notes to Financial Statements
October 31, 1999 and 1998
17. Summary of Quarterly Results of Operations
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,
1999 1999 1999 1999
----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 84,570 $ 82,339 $ 78,918 $ 74,623
Operating loss (21,354) (6,598) (16,696) (4,944)
Loss before restructuring item
(22,846) (11,566) (23,825) (11,845)
Restructuring item :
Professional fees (2,403) (1,787) - -
Net loss (24,106) (13,353) (23,825) (11,845)
Net loss per share (6.68) (3.70) (6.60) (3.28)
</TABLE>
<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 Items (0.23) (.33) (.57) (.15)
Extraordinary charge for
Debt refinancing -- -- -- (.29)
Net loss (0.23) (.33) (.57) (.44)
</TABLE>
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
See the Company's Form 8-K dated September 2, 1999 filed with the
Securities and Exchange Commission on September 10, 1999, which is incorporated
herein by reference.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained on pages 4, 5 and 6 of Gulf States Steel, Inc. of
Alabama's Proxy Statement dated January 31, 2000, 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 January 31, 2000, with respect to
directors and executive officers of this Company, is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information contained on pages 2 and 3 of Gulf States Steel, Inc. of
Alabama's Proxy Statement dated January 31, 2000, 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 11 and 12 of Gulf States Steel, Inc. of
Alabama's Proxy Statement dated January 31, 2000, with respect to directors and
executive officers of this Company, is incorporated herein by reference in
response to this item.
65
<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, 1999 and 1998
Statements of Operations
For the years ended October 31, 1999, 1998 and 1997
Statements of Cash Flows
For the years ended October 31, 1999, 1998 and 1997
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):
Form 10-K Schedules Description Page Number
------------------- ----------- -----------
II Valuation and Qualifying Accounts 71
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.
66
<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.)
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
67
<PAGE>
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.)
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.)
68
<PAGE>
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 (Incorporated by reference to
the Registrant's annual report on Form 10-K for the fiscal year ended
October 31, 1998, filed with the Securities and Exchange Commission on
January 27, 1999).
10.17 Employment contract with Jim R. Grimm dated July 28, 1998, by and
between Jim R. Grimm and the Registrant (Incorporated by reference to
the Registrant's annual report on Form 10-K for the fiscal year ended
October 31, 1998, filed with the Securities and Exchange Commission on
January 27, 1999).
10.18 Non-Compete Agreement dated as of January 1, 1999 between John D.
Lefler and the Registrant (Incorporated by reference to the
Registrant's annual report on Form 10-K for the fiscal year ended
October 31, 1998, filed with the Securities and Exchange Commission on
January 27, 1999).
10.19 First Amendment to Loan and Security Agreement dated December 17, 1998
by and between the Registrant and Fleet Capital Corporation
(Incorporated by reference to the Registrant's annual report on Form
10-K for the fiscal year ended October 31, 1998, filed with the
Securities and Exchange Commission on January 27, 1999).
10.20 Postpetition Loan and Security Agreement dated July 1, 1999, among
Gulf States Steel, Inc. of Alabama, Fleet Capital Corporation, as
agent, and certain financial institutions listed therein (Incorporated
by reference to the Registrant's Form 10-Q for the quarter ended July
31, 1999, filed with the Securities and Exchange Commission on
September 21, 1999).
10.20(a) First Amendment to Postpetition Loan and Security Agreement dated July
20, 1999, filed herewith.
10.20(b) Second Amendment to Postpetition Loan and Security Agreement dated
January 10, 2000, filed herewith.
10.21 Financing Agreement, dated as of July 1, 1999, among Gulf States
Steel, Inc. of Alabama, Ableco Finance LLC, as agent, and certain
lenders listed therein (Incorporated by reference to the Registrant's
Form 10-Q for the quarter ended July 31, 1999, filed with the
Securities and Exchange Commission on September 21, 1999).
10.21(a) Amendment Number One and Waiver and Consent to Financing Agreement
dated December 29, 1999, filed herewith.
10.22 Final Order Pursuant to 11 U.S.C. (S)(S) 105(a), 364(c)(1), (c)(3) and
(d)(1) (I) Authorizing Debtor to Obtain Trade Credit from Suppliers
Secured by Lien on Debtor's Assets with Administrative Expense
Priority, and (II) Authorizing Debtor to Pay Credit Extension Fees,
signed and dated July 20, 1999, by the United States Bankruptcy Court,
Northern District of Alabama, Eastern Division, In the Matter of Gulf
States Steel, Inc. of
69
<PAGE>
Alabama, as debtor, in Bankruptcy Case No. 99-41958-JSS-11, with
accompanying Exhibit of Terms (Incorporated by reference to the
Registrant's Form 10-Q for the quarter ended July 31, 1999, filed
with the Securities and Exchange Commission on September 21,
1999).
10.23 Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and John W. Duncan dated April 14, 1999, filed herewith.
10.23(a) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and James R. Grimm dated April 7, 1999, filed herewith.
10.23(b) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and James S. Henderson dated April 13, 1999, filed
herewith.
10.23(c) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and Joe P. Magee dated April 7, 1999, filed herewith.
10.23(d) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and Peter P. Pincura dated April 7, 1999, filed herewith.
10.23(e) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and Robert Schaal dated April 13, 1999, filed herewith.
10.23(f) Executive Retention Agreement between Gulf States Steel, Inc. of
Alabama and Larry W. Singleton dated October 19, 1999, filed
herewith.
16 Letter regarding changes in Registrant's certifying accountant
(Incorporated by reference to the Registrant's report on Form 8-K
dated September 2, 1999, filed with the Securities and Exchange
Commission on September 10, 1999).
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
- ------------ -------------------
Form 8-K was filed on September 10, 1999, relating to Item 4, Change in
Certifying Accountant.
ITEM 14 (c). EXHIBITS
- ------------ --------
The response to this portion of Item 14 is submitted as a separate section
of this report.
70
<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 End
Beginning of Costs and Write-offs(a) of Period
Description Period Expenses
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended October 31, 1999 $ 930,408 $ -- $ 10,998 $941,406
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
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
<TABLE>
<CAPTION>
Balance at Charged to Deductions- Balance at End
Beginning of Costs and Write-offs(a) of Period
Description Period Expenses
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve for Environmental
Contingencies:
Year ended October 31, 1999 $ 2,003,860 $12,122,258 $(126,118) $14,000,000 (b)
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) 750,000
</TABLE>
(b) Of the amount $7,900,000 is reflected in Liabilities Subject to Compromise
in the 1999 Balance Sheet.
71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulf States Steel, Inc. of Alabama:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of GULF STATES STEEL, INC. OF ALABAMA included
in this Form 10-K and have issued our report thereon dated December 22, 1999,
except with respect to the environmental matters discussed in Note 12, as to
which the date is January 31, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Birmingham, Alabama
December 22, 1999,
except with respect to the environmental
matters discussed in Note 12,
as to which the date is
January 31, 2000
72
<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)
1/21/00 /s/ Robert Schaal
- -------------- -----------------------------------------------------
Date Robert Schaal, Chairman and Chief Executive Officer
(principal executive officer)
1/21/00 /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 dated indicated.
1/21/00 /s/ Steven E. Karol
- -------------- -----------------------------------------------------
Date Steven E. Karol, Chairman of the Board, Director
1/21/00 /s/ Robert Schaal
- -------------- -----------------------------------------------------
Date Robert Schaal, Director
1/21/00 /s/ Robert W. Ackerman
- -------------- -----------------------------------------------------
Date Robert W. Ackerman, Director
1/21/00 /s/ Dale S. Okonow
- -------------- -----------------------------------------------------
Date Dale S. Okonow, Director
1/21/00 /s/ William S. Karol
- -------------- -----------------------------------------------------
Date William S. Karol, Director
1/21/00 /s/ Howard H. Stevenson
- -------------- -----------------------------------------------------
Date Howard H. Stevenson, Director
1/21/00 /s/ Robert M. Wadsworth
- -------------- -----------------------------------------------------
Date Robert M. Wadsworth, Director
73
<PAGE>
Exhibit 10.23 (a-f)
Exhibit 10.20 (a-b))
Exhibit 10.21 (a)
[Exhibits filed but not included here]
74
<PAGE>
FIRST AMENDMENT TO POST-PETITION LOAN AND SECURITY AGREEMENT
------------------------------------------------------------
THIS FIRST AMENDMENT TO POST-PETITION LOAN AND SECURITY AGREEMENT (this
"Amendment") is made and entered into this 20th day of July, 1999, by and among
GULF STATES STEEL, INC. OF ALABAMA, an Alabama corporation and a Chapter 11
debtor-in-possession ("Borrower"); the financial institutions listed on the
signature pages to the Loan Agreement (as hereinafter defined) and their
respective successors and assigns which become "Lenders" as provided therein
(such financial institutions and their respective successors and assigns
referred to collectively herein as "Lenders" and individually as a "Lender");
and FLEET CAPITAL CORPORATION, a Rhode Island corporation, in its capacity as
collateral and administrative agent for the Lenders pursuant to Section 12 of
the Loan Agreement (together with its successors in such capacity, "Agent").
Recitals:
--------
Borrower, Lenders, and Agent are parties to a certain Post-Petition Loan
and Security Agreement dated July 1, 1999 (as at any time amended, the "Loan
Agreement"), pursuant to which Lenders have made certain loans to Borrower
secured by all of the Collateral (as hereinafter defined).
The parties desire to amend the Loan Agreement as hereinafter set forth.
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. Capitalized terms used in this Amendment (including
-----------
in the Recitals above), unless otherwise defined herein, shall have the meaning
ascribed to such terms in the Loan Agreement.
1. Amendment to Loan Agreement. The Loan Agreement is hereby amended as
---------------------------
follows:
(a) By adding a new paragraph at the end of Section 6.1 thereof, to
read as follows:
Notwithstanding the foregoing, the Collateral shall not include any
Property of Borrower constituting Term Loan Lender Exclusive
Collateral, as that term is defined in the Intercreditor Agreement.
(b) By amending the definition of "Term Lender" in Appendix A, to
delete the reference to "Ableco Finance LL" and to substitute in lieu
thereof "Ableco Finance LLC."
1. Ratification and Reaffirmation. Borrower hereby ratifies and
------------------------------
reaffirms the Obligations, each of the Loan Documents and all of Borrower's
covenants, duties, indebtedness and liabilities under the Loan Documents.
<PAGE>
2. Acknowledgments and Stipulations. Borrower acknowledges and
---------------------------------
stipulates that the Loan Agreement and the Notes 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 (except as otherwise
provided in the Intercreditor Agreement); and the unpaid principal amount of the
Revolver Loans as of the close of business on July 19, 1999, totalled
$38,302,116.10.
1. Representations and Warranties. Borrower represents and warrants
------------------------------
to Agent and each Lender, to induce Agent and each Lender 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 all of the representations and
warranties made by Borrower in the Loan Agreement are true and correct on and as
of the date hereof.
1. Expenses of Agent and Lenders. Borrower agrees to pay, on
-----------------------------
demand, all costs and expenses incurred by Agent and each Lender 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 and each Lender'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.
1. Effectiveness; Governing Law. This Amendment shall be effective
----------------------------
when duly executed by Borrower and Lenders and thereafter accepted by Agent in
Atlanta, Georgia (notice of which acceptance is hereby waived), whereupon the
same shall be deemed a contract made in the State of Georgia and governed by and
construed in accordance with the internal laws of the State of Georgia.
1. 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.
1. Counterparts; Telecopied Signatures. This Amendment may be executed in
-----------------------------------
any number of counterparts and by different parties to this Amendment 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.
2
<PAGE>
1. Further Assurances. Borrower agrees to take such further actions as
------------------
Agent or any Lender 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.
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/ James R. Grimm
-------------------------
Title: Senior VP & CFO
-------------------
LENDERS:
-------
FLEET CAPITAL CORPORATION
By: /s/ Robert Dailey
-------------------------
Title: Vice President
------------------
CONGRESS FINANCIAL CORPORATION
By: /s/ John Husson
-------------------------
Title: Vice President
-------------------------
Accepted in Atlanta, Georgia:
AGENT:
-----
FLEET CAPITAL CORPORATION, as Agent
By: /s/ Robert Dailey
-------------------------
Title: Vice President
-------------------------
<PAGE>
SECOND AMENDMENT TO POST-
PETITION LOAN AND SECURITY AGREEMENT
------------------------------------
This SECOND AMENDMENT TO POST-PETITION LOAN AND SECURITY AGREEMENT (this
"Amendment") is made and entered into this 10th day of January, 2000, by and
among GULF STATES STEEL, INC. OF ALABAMA, an Alabama corporation and a Chapter
11 debtor-in-possession ("Borrower"); the financial institutions listed on the
signature pages to the Revolver Loan Agreement (as hereinafter defined) and
their respective successors and assigns which become "Lenders" as provided
therein (such financial institutions and their respective successors and assigns
referred to collectively herein as "Revolver Lenders" and individually as a
"Revolver Lender"); and FLEET CAPITAL CORPORATION, a Rhode Island corporation,
in its capacity as collateral and administrative agent for the Lenders pursuant
to Section 12 of the Revolver Loan Agreement (together with its successors in
such capacity, "Revolver Agent").
Recitals:
--------
Borrower, Revolver Lenders, and Revolver Agent are parties to a certain
Post-Petition Loan and Security Agreement dated July 1, 1999, as amended by that
certain First Amendment to Post-Petition Loan and Security Agreement dated July
20, 1999 (as at any time amended, the "Revolver Loan Agreement"), pursuant to
which Revolver Lenders have made certain revolving loans to Borrower.
Borrower, the various lenders from time to time party thereto (the "Term
Loan Lenders"), and ABLECO FINANCE LLC, a Delaware limited liability company, in
its capacity as agent for the Term Loan Lenders (together with its successors in
such capacity, "Term Loan Agent"), are parties to a certain Financing Agreement
dated as of July 1, 1999, as amended by that certain Amendment Number One and
Waiver and Consent to Financing Agreement dated as of December 29, 1999 (as at
any time amended, the "Term Loan Agreement"), pursuant to which Term Loan
Lenders have made certain term loans to Borrower.
Both the Revolver Loan Agreement and the Term Loan Agreement contain, among
other things, certain financial covenants applicable to Borrower, and the
Revolver Lenders and Borrower intended for such covenants to be the same.
The parties desire to amend the Revolver Loan Agreement as hereinafter set
forth in order to, among other things, modify the financial covenants to match
the financial covenants set forth in the Term Loan Agreement.
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. Capitalized terms used in this Amendment (including in the
-----------
Recitals above), unless otherwise defined herein, shall have the meaning
ascribed to such terms in the Revolver Loan Agreement.
1. Amendment to Revolver Loan Agreement. The Revolver Loan Agreement is
------------------------------------
hereby amended as follows:
<PAGE>
a. By deleting Section 9.2.11 in its entirety and inserting the following
in lieu thereof:
9.2.11. Permitted Debt. Incur or suffer to exist any Debt
--------------
other than Claims in existence on the Petition Date; the Obligations;
Debt to Term Lender under the Term Lender Documents; Capitalized Lease
Obligations and Permitted Purchase Money Debt to the extent
expenditures in connection therewith are not in violation of Section
9.3 hereof; and Debt (other than Debt for Money Borrowed, Capitalized
Lease Obligations and Permitted Purchase Money Debt) incurred in the
ordinary course of Borrower's business during the Chapter 11 Case,
including Debt incurred pursuant to the Preferred Supplier Continuous
Credit Program.
a. By deleting Sections 9.3.1, 9.3.2 and 9.3.3 in their entirety and
inserting the following in lieu thereof:
9.3.1. Minimum Net Revenues. Permit Borrower's Net Revenue from
--------------------
operations to fall below the amount shown below for the period
corresponding thereto:
--------------------------------------------------------------------
For the period of: Minimum Net Revenues
--------------------------------------------------------------------
November 1, 1999 to December 31, 1999 $49,865,000
--------------------------------------------------------------------
December 1, 1999 to January 31, 2000 $51,380,000
--------------------------------------------------------------------
January 1, 2000 to February 29, 2000 $50,485,000
--------------------------------------------------------------------
February 1, 2000 to March 31, 2000 $52,895,000
--------------------------------------------------------------------
March 1, 2000 to April 30, 2000 $56,965,000
--------------------------------------------------------------------
April 1, 2000 to May 31, 2000 $58,080,000
--------------------------------------------------------------------
May 1, 2000 to June 30, 2000 $58,670,000
--------------------------------------------------------------------
9.3.2. Minimum Consolidated EBITDA. Permit Borrower's
---------------------------
Consolidated EBITDA to be less than the amount shown below for the
period corresponding thereto:
--------------------------------------------------------------------
For the period of: Minimum Consolidated EBITDA
--------------------------------------------------------------------
January 1, 1999 to December 31, 1999 - $25,150,000
--------------------------------------------------------------------
February 1, 1999 to January 31, 2000 - $28,075,000
--------------------------------------------------------------------
March 1, 1999 to February 29, 2000 - $23,725,000
--------------------------------------------------------------------
April 1, 1999 to March 31, 2000 - $20,135,000
--------------------------------------------------------------------
May 1, 1999 to April 30, 2000 - $16,375,000
--------------------------------------------------------------------
June 1, 1999 to May 31, 2000 - $14,800,000
--------------------------------------------------------------------
July 1, 1999 to June 30, 2000 - $12,725,000
--------------------------------------------------------------------
9.3.3. Capital Expenditures. Permit Borrower's Capital
--------------------
Expenditures to exceed the amount shown below for the period
corresponding thereto, provided that Borrower may carry forward the
amount by which the monthly limit exceeds Capital Expenditures
actually made in any given month, it being
2
<PAGE>
agreed that the amount carried forward in respect of periods prior to
December 1999 is $3,428,000:
------------------------------------------------------------------------
For the month of: Maximum Capital Expenditures
------------------------------------------------------------------------
June 1999 $ 905,000
------------------------------------------------------------------------
July 1999 $1,680,000
------------------------------------------------------------------------
August 1999 $ 875,000
------------------------------------------------------------------------
September 1999 $1,005,000
------------------------------------------------------------------------
October 1999 $1,030,000
------------------------------------------------------------------------
November 1999 $ 975,000
------------------------------------------------------------------------
December 1999 $ 980,000
------------------------------------------------------------------------
January 2000 $ 980,000
------------------------------------------------------------------------
February 2000 $ 985,000
------------------------------------------------------------------------
March 2000 $ 985,000
------------------------------------------------------------------------
April 2000 $ 980,000
------------------------------------------------------------------------
May 2000 $ 975,000
------------------------------------------------------------------------
June 2000 $ 965,000
------------------------------------------------------------------------
9.3.4. Minimum Liquidity. At any time, permit (i) the sum of
-----------------
(a) unrestricted cash, plus (b) Cash Equivalents, plus (c)
---- ----
Availability to be less than (ii) the remainder of (a) the aggregate
amount Borrower has paid on pre-petition claims to trade creditors,
minus (b) any amounts paid on account of pre-petition claims pursuant
-----
to the order of the Bankruptcy Court, minus (c) any amounts paid by
-----
Borrower to its secured creditors as adequate protection payments,
minus (d) any amounts paid by Borrower to Kvaerner Metals.
-----
a. By deleting the definition of "Availability Reserve"
from Appendix A in its entirety and inserting the following in lieu thereof:
Availability Reserve - on any date of determination thereof, an
--------------------
amount equal to the sum of the following (without duplication): (i)
the amount of the Pre-Petition Debt outstanding as of the opening of
business on such date (excluding the amount of any Pre-Petition Debt
to be satisfied on the Closing Date); (ii) a reserve for general
Inventory shrinkage that is determined by Agent from time to time in
its reasonable credit judgment based upon Borrower's historical losses
due to such shrinkage; (iii) any amount that Borrower is obligated to
pay pursuant to the provisions of any of the DIP Financing Documents
that Agent or Lenders elect to pay for the account of Borrower in
accordance with authority contained in any of the DIP Financing
Documents; (iv) all amounts of past due rent or other charges owing at
such time by Borrower to any landlord of any premises where any of the
Collateral is located; (v) the Professional Expense Reserve; (vi) a
reserve in the amount of monthly charges due from time to time to the
Alabama State Docks Department; (vii) the Inventory Reserve; (viii)
the LC Reserve; (ix) such additional reserves as Agent may, in its
sole credit judgment, determine to be appropriate from time to time;
(x) $500,000 (provided that Agent may, in its discretion, increase
such amount to $1,000,000 after the earlier to occur of (a) the day on
which average Availability for the preceding 5 consecutive Business
Days is less than
3
<PAGE>
$3,500,000 or (b) the day on which Availability on any Business Day is
less than $1,000,000); and (xi) for so long as any Event of Default
exists, such additional reserves as Agent, in its sole and absolute
discretion, may elect to impose from time to time, without waiving any
such Event of Default or Agent's entitlement to accelerate the
maturity of the Obligations as a consequence thereof.
a. By deleting the definition of "Consolidated EBITDA" from
Appendix A in its entirety and inserting the following in lieu thereof:
Consolidated EBITDA - with respect to any Person for any period,
-------------------
the consolidated net income of such Person for such period, plus (i)
----
without duplication, the sum of the following amounts of such Person
and its Subsidiaries for such period and to the extent deducted in
determining consolidated net income of such Person for such period:
(a) Consolidated Net Interest Expense, (b) income tax expense, (c)
depreciation expense, (d) amortization expense, (e) extraordinary or
unusual non-cash losses and other losses from sales of assets other
than Inventory sold in the ordinary course of business, and (f) any
reserves, in an amount not to exceed $15,000,000 in the aggregate,
established by Borrower for the settlement of claims asserted by any
Governmental Authority arising from the breach of any Environmental
Law by Borrower which claims are not to be paid prior to the
confirmation of Borrower's Reorganization Plan, minus (ii)
-----
extraordinary or unusual non-cash gains and other gains from sales of
assets other than Inventory sold in the ordinary course of business.
a. By adding the following definition of "Net Revenue" to
Appendix A in appropriate alphabetical order:
Net Revenue - with respect to any Person for any period, the
-----------
sum of (a) the aggregate amount of all revenues of such Person that
would, as determined in accordance with GAAP, be classified as gross
revenues on the consolidated income statement of such Person for such
period, minus (b) the amount of all sales credits, discounts, credits
-----
as a result of fraud, and any other credits that would, in accordance
with GAAP, be charged against gross revenues for such period.
1. Limited Waiver of Default. Events of Default have occurred and
-------------------------
currently exist under the Revolver Loan Agreement as a result of (a) Borrower's
breach of Section 9.3.1 for the month of November 1999, (b) Borrower's breach of
Section 9.3.2 for the months of July 1999, August 1999, September 1999, October
1999 and November 1999, (c) the existence of defaults or events of default under
the Term Loan Agreement arising because of Borrower's breach of the financial
covenants set forth in the Term Loan Agreement (the "Designated Defaults").
Borrower represents and warrants that the Designated Default are the only
Defaults or Events of Default that exist under the Revolver Loan Agreement and
the other Loan Documents as of the date hereof. Revolving Lenders hereby waive
the Designated Defaults in existence on the date hereof. In no event shall such
waiver be deemed to constitute a waiver of (a) any Default or Event of Default
other than the Designated Defaults in existence on the date of this Amendment or
(b) Borrower's obligation to comply with all of the terms and conditions of the
Revolver Loan Agreement and the other Loan Documents from and after the date
4
<PAGE>
hereof. Notwithstanding any prior, temporary mutual disregard of the terms of
any contracts between the parties, Borrower hereby agrees that it shall be
required strictly to comply with all of the terms of the Loan Documents on and
after the date hereof.
1. Ratification and Reaffirmation. Borrower hereby ratifies and reaffirms
------------------------------
the Obligations, each of the Loan Documents and all of Borrower's covenants,
duties, indebtedness and liabilities under the Loan Documents.
1. Acknowledgments and Stipulations. Borrower acknowledges and stipulates
--------------------------------
that the Revolver Loan Agreement and notes 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 Revolver Agent are
duly perfected, first priority Liens, except as otherwise expressly provided in
the Intercreditor Agreement; and the unpaid principal amount of the Revolver
Loans on and as of the opening of business on January 10, 2000, totaled
$47,039,846.64.
1. Representations and Warranties. Borrower represents and warrants to
------------------------------
Revolver Agent and each Revolver Lender, to induce Revolver Agent and each
Revolver Lender to enter into this Amendment, that no Default or Event of
Default exists on the date hereof other than the Designated Defaults; 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 all of the representations and
warranties made by Borrower in the Revolver Loan Agreement are true and correct
on and as of the date hereof, except for such matters that have changed in
compliance with the Loan Documents.
1. Expenses of Revolver Agent and Revolver Lenders. Borrower agrees to
-----------------------------------------------
pay, on demand, all costs and expenses incurred by Revolver Agent and each
Revolver Lender 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 Revolver Agent's and each Revolver Lender'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.
1. Effectiveness; Governing Law. This Amendment shall be effective upon
----------------------------
acceptance by Revolver Agent in Atlanta, Georgia (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 Georgia.
1. No Novation, etc. Except as otherwise expressly provided in this
-----------------
Amendment, nothing herein shall be deemed to amend or modify any provision of
the Revolver 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 Revolver Loan Agreement as herein modified shall continue in full force and
effect.
1. Counterparts; Telecopied Signatures. This Amendment may be executed in
-----------------------------------
any number of counterparts and by different parties to this Amendment on
separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and
5
<PAGE>
the same agreement. Any signature delivered by a party by facsimile transmission
shall be deemed to be an original signature hereto.
1. Further Assurances. Borrower agrees to take such further actions as
------------------
Revolver Agent or any Revolver Lender 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.
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/ James R. Grimm
----------------------------------
Title: Senior VP & CFO
---------------------------
LENDERS:
-------
FLEET CAPITAL CORPORATION
By: /s/ Robert Dailey
----------------------------------
Title: Vice President
---------------------------
CONGRESS FINANCIAL CORPORATION
By: /s/ John Husson
----------------------------------
Title: Vice President
---------------------------
AGENT:
-----
FLEET CAPITAL CORPORATION, as Agent
By: /s/ Robert Dailey
----------------------------------
Title: Vice President
---------------------------
6
<PAGE>
AMENDMENT NUMBER ONE AND WAIVER
-------------------------------
AND CONSENT TO FINANCING AGREEMENT
----------------------------------
THIS AMENDMENT NUMBER ONE AND WAIVER AND CONSENT TO FINANCING
AGREEMENT (this "Amendment") dated as of December 29, 1999, is entered into by
and among Gulf States Steel, Inc. of Alabama, an Alabama corporation
("Borrower"), each of the lenders that are signatories to that certain Financing
Agreement, dated as of July 1, 1999 (as amended, restated, supplemented, or
otherwise modified from time to time, the "Financing Agreement"), together with
their successors and permitted assigns (hereinafter, individually, "Lender" and,
collectively, "Lenders" or "Lender Group"), and Ableco Finance LLC, a Delaware
limited liability company, as agent for the Lenders (in such capacity, together
with its successors, if any, "Agent") in light of the following:
RECITALS
--------
A. The Borrower has requested that Lenders amend the Financing
Agreement and grant certain waivers and consents thereunder, all in accordance
with Section 11.02 of the Financing Agreement, all as set forth in this
Amendment.
B. Lenders are willing to amend the Financing Agreement and grant
such waivers and consents under the terms and conditions set forth in this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall have
------------
the meaning ascribed thereto in the Financing Agreement.
2. Amendments To The Financing Agreement. Upon the effectiveness of this
--------------------------------------
Amendment, the parties agree to amend the Financing Agreement as follows:
(a) The definition of "Consolidated EBITDA" in Section 1.01 of the
------------
Financing Agreement hereby is amended and restated in its entirety as follows:
"Consolidated EBITDA" means, for any period, the sum of the
-------------------
consolidated Net Income of the Borrower for such period determined in accordance
with GAAP plus (a) the sum of the following amounts for such period determined
on a consolidated basis in conformity with GAAP to the extent included in the
determination of consolidated Net Income and without duplication: (i)
depreciation expense, (ii) amortization expense, (iii) interest expense, (iv)
income tax expense, (v) losses on the sale of fixed assets outside the ordinary
course of business, (vi) losses arising from extraordinary items, as determined
in accordance with GAAP, (vii) any reserves, in an amount not to exceed
$15,000,000 in the aggregate, for settlement of environmental claims asserted by
any Governmental Authority except to the extent payments are to be made on such
settlements before confirmation of a chapter 11 plan of the Borrower, (viii)
-1-
<PAGE>
non-cash write-downs of fixed assets, and less the sum of the following amounts
for such period determined on a consolidated basis in conformity with GAAP to
the extent included in the determination of Net Income without duplication: (b)
(i) gains from extraordinary items (ii) gains on the sale of fixed assets
outside of the ordinary course of business, and (iii) non-cash write-ups of
fixed assets to the extent included in the determination of such consolidated
Net Income.
(b) Section 6.01(p) of the Financing Agreement hereby is amended
---------------
and restated in its entirety as follows:
(p) Oxygen Generation Contract. On or before March 31, 2000,
--------------------------
provide Lenders with an assignment of Borrower's rights under any and all
contracts relating to the generation of oxygen for use at Borrower's Facility,
in form and content satisfactory to Agent, together with such waivers, estoppel
certificates and agreements regarding the ability of Lenders to cure any
defaults in such contract and to cause such contract to be assigned to a third
party purchaser of the Facility as Agent may request.
(c) Section 6.03(a) of the Financing Agreement hereby is amended
---------------
and restated in its entirety as follows:
(a) Net Revenues. Permit Net Revenues from operations to fall
------------
below the amount shown below for the period corresponding thereto:
- -----------------------------------------------------------------------------
For the following period Minimum Net Revenues
- -----------------------------------------------------------------------------
November 1, 1999 to December 31, 1999 $49,865,000
- -----------------------------------------------------------------------------
December 1, 1999 to January 31, 2000 $51,380,000
- -----------------------------------------------------------------------------
January 1, 2000 to February 29, 2000 $50,485,000
- -----------------------------------------------------------------------------
February 1, 2000 to March 31, 2000 $52,895,000
- -----------------------------------------------------------------------------
March 1, 2000 to April 30, 2000 $56,965,000
- -----------------------------------------------------------------------------
April 1, 2000 to May 31, 2000 $58,080,000
- -----------------------------------------------------------------------------
May 1, 2000 to June 30, 2000 $58,670,000
- -----------------------------------------------------------------------------
(d) Section 6.03(b) of the Financing Agreement hereby is amended
---------------
and restated in its entirety as follows:
(b) Minimum Consolidated EBITDA. Permit Consolidated EBITDA to
---------------------------
be less than the amount shown below for the each period corresponding thereto:
- -----------------------------------------------------------------------------
For the period of Minimum Consolidated EBITDA
- -----------------------------------------------------------------------------
January 1, 1999 to December 31, 1999 -$25,150,000
2
<PAGE>
- -----------------------------------------------------------------------------
For the period of Minimum Consolidated EBITDA
- -----------------------------------------------------------------------------
February 1, 1999 to January 31, 2000 -$28,075,000
- -----------------------------------------------------------------------------
March 1, 1999 to February 29, 2000 -$23,725,000
- -----------------------------------------------------------------------------
April 1, 1999 to March 31, 2000 -$20,135,000
- -----------------------------------------------------------------------------
May 1, 1999 to April 30, 2000 -$16,375,000
- -----------------------------------------------------------------------------
June 1, 1999 to May 31, 2000 -$14,800,000
- -----------------------------------------------------------------------------
July 1, 1999 to June 30, 2000 -$12,725,000
- -----------------------------------------------------------------------------
(e) Section 6.03(d) of the Financing Agreement hereby is amended and
---------------
restated in its entirety as follows:
(d) Minimum Liquidity. Permit the sum of unrestricted Cash plus
-----------------
Cash Equivalents plus availability under the Fleet Loan Facility for Borrower to
request and to actually receive revolving advances, at any time to be less than
the amounts Borrower has paid in the aggregate on pre-petition claims to trade
creditors, not including, however, any amounts paid on account of pre-petition
claims to any utility pursuant to an order of the Bankruptcy Court, any amounts
Borrower has paid to its secured creditors as adequate protection payments, and
any amounts Borrower has paid to Kavaerner Metals.
3. Waivers Of Existing Events Of Default. Upon the effectiveness of this
-------------------------------------
Amendment, the Required Lenders hereby waive any Event of Default existing
solely as a result of (i) the Borrower's failure to comply with the financial
covenants set forth in Section 6.03(a) of the Loan Agreement for any period
---------------
ending prior to December 1, 1999; (ii) the Borrower's failure to comply with the
financial covenants set forth in Section 6.03(b) of the Loan Agreement for any
---------------
period ending prior to December 1, 1999; (iii) the Borrower's failure to comply
with Section 6.03(d) at any time prior to the date hereof; and (iv) the
---------------
Borrower's failure to comply with Section 6.01(p) at any time prior to the date
---------------
hereof (collectively, the "Specified Events of Default"). Upon the effectiveness
of a written waiver (delivered to Agent) by Fleet Financial of Events of Default
under the Fleet Loan Facility, the Required Lenders waive any Events of Default
occurring under Section 8.01(e) with respect to those same Events of Default
---------------
under the Fleet Loan Facility. Such waivers are specific in time and in intent
and do not constitute, nor should they be construed as constituting, except to
the extent expressly set forth herein, a waiver or modification of any term of,
or right, power, or privilege under, the Loan Agreement, the other Loan
Documents, or any agreement, contract, indenture, document, or instrument
mentioned therein. Such waivers do not preclude any exercise of any right,
power, or privilege under any Loan Document, based upon any Events of Default
other than the Specified Events of Default.
4. Conditions Precedent to Amendment. The satisfaction of each of the
---------------------------------
following, unless waived or deferred by the Required Lenders, in their sole
discretion, shall constitute conditions precedent to the effectiveness of this
Amendment and each and every provision hereof:
3
<PAGE>
(a) The representations and warranties in this Amendment and the
other Loan Documents shall be true and correct in all respects on and as of the
date hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date or have been
suspended in connection with this Amendment);
(b) No Event of Default or event which with the giving of notice or
passage of time would constitute an Event of Default shall have occurred and be
continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein, unless any such Event of Default is waived
hereunder or has previously been waived in accordance with Section 11.02 of the
Financing Agreement; and
(c) No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
Governmental Authority against the Borrower or any of the Lenders.
5. Conditions Subsequent to the Amendment. As a condition subsequent to
--------------------------------------
the continuing effectiveness of this Amendment, the following condition shall be
satisfied to the satisfaction of the Agent (the failure to fulfill the following
condition constituting an Event of Default under the Financing Agreement),
unless waived by the Required Lenders in their sole discretion in writing:
(a) On or before January 31, 2000, Borrower shall obtain an order
from the Bankruptcy Court approving all of the terms and conditions in this
Amendment and Borrower shall provide Agent with a certified copy of that order;
and
(b) Agent shall have received a fee, for the ratable benefit of
the Lenders, of $75,000 within two business days of the entry of the above order
of the Bankruptcy Court.
6. Consent. Section 6.02(o) of the Financing Agreement provides as
-------
follows:
(o) Restrictions on Expenditures on Hot End of Borrower's Mill.
----------------------------------------------------------
Without the prior written consent of the Lender Group, reline the blast
furnace or make any expenditures other than routine maintenance
expenditures on the hot end of the Facility, including without limitation
the blast furnace, continuous caster and the coke ovens.
Pursuant to this provision and without modifying section 6.03(c) of
the Financing Agreement in any manner, Lenders hereby consent to the Borrower
incurring a capital expenditure, not to exceed $600,000, on the hot end of the
Facility for the installation of a Quick Change Submerged Entry Nozzle.
7. Representations and Warranties. Borrower hereby represents and
------------------------------
warrants to the Lenders that (a) the execution, delivery, and performance of
this Amendment are within such Borrower's corporate powers, have been duly
authorized by all necessary corporate
4
<PAGE>
action, and are not in contravention of any law, rule, or regulation, or any
order, judgment, decree, writ, injunction, or award of any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its properties
may be bound or affected, and (b) this Amendment and the Financing Agreement
constitute such Borrower's legal, valid, and binding obligation, enforceable
against such Borrower in accordance with its terms, (c) this Amendment has been
duly executed and delivered by such Borrower.
8. Choice of Law. The validity of this Amendment, its construction,
-------------
interpretation and enforcement, and the rights of the parties hereunder, shall
be determined under, governed by, and construed in accordance with the laws of
the State of New York.
9. Counterparts; Telefacsimile Execution. This Amendment may be executed
-------------------------------------
in any number of counterparts and by different parties and separate
counterparts, each of which when so executed and delivered, shall be deemed an
original, and all of which, when taken together, shall constitute one and the
same instrument. Delivery of an executed counterpart of a signature page to this
Amendment by telefacsimile shall be effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
10. Effect on Financing Agreement. The Financing Agreement, as amended
-----------------------------
hereby, shall be and remain in full force and effect in accordance with its
respective terms and hereby is ratified and confirmed in all respects. The
execution, delivery, and performance of this Amendment shall not operate as a
waiver of or, except as expressly set forth herein, as an amendment of, any
right, power, or remedy of Agent or any Lender under the Financing Agreement, as
in effect prior to the date hereof.
11. Further Assurances. The Borrower shall execute and deliver all
------------------
agreements, documents, and instruments, in form and substance satisfactory to
Agent, and take all actions as Agent may reasonably request from time to time,
to fully consummate the transactions contemplated under this Amendment and the
other Loan Documents.
12. Miscellaneous.
--------------
(a) Upon and after the effectiveness of this Amendment, each
reference in the Financing Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like import referring to the Financing Agreement, and each
reference in the other Loan Documents to "the Financing Agreement",
"thereunder", "therein", "thereof" or words of like import referring to the
Financing Agreement, shall mean and be a reference to the Financing Agreement as
modified and amended hereby.
(b) The Financing Agreement and all other Loan Documents, are and
shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed
5
<PAGE>
and shall constitute the legal, valid, binding and enforceable obligations of
the Borrower to Agent and Lenders.
[Remainder of page intentionally left blank]
6
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
BORROWER:
--------
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Larry W. Singleton
---------------------------------
Name: Larry W. Singleton
Title: Executive Vice President
AGENT:
-----
ABLECO FINANCE LLC, as Agent
By: /s/ Kevin Genda
---------------------------------
Name: Kevin Genda
Title: Senior Vice President
LENDERS:
-------
ABLECO FINANCE LLC
By: /s/ Kevin Genda
---------------------------------
Name: Kevin Genda
Title: Senior Vice President
A2 FUNDING LP
By: /s/ Mark Neporent
---------------------------------
Name: Mark Neporent
Title:
S-1
<PAGE>
Schedule 5.8
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and John W.
Duncan (the "Executive"), dated as of the 14th day of April 1999. Unless
otherwise provided, capitalized terms shall have the meaning provided in Section
2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twelve
(12) months of the Executive's then base annual salary (provided, however, that
for the purposes hereof, such base salary shall be deemed to be not less than
his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) Deliver to the Executive a written instrument canceling any
debt (including principal and accrued interest) owed by the Executive to the
Company for any purchase, if any, prior to the date hereof, of any limited
partnership interest in GSS Management LLC ("GSSM"); provided, however, that
Executive shall, in such case, concurrently with the delivery by the Company of
such written instrument of debt cancellation: (i) deliver one or more
2
<PAGE>
written instruments to the Company (as reasonably requested by the Company) in
which Executive: (x) disclaims, surrenders and forever relinquishes any and all
claims to any limited partnership or other ownership interest in GSSM, whether
absolute or contingent, and (y) disclaims, surrenders and forever relinquishes
any and all claims to the return or refund of any and all payments made by him
with respect to such limited partnership interest other ownership interest or in
GSSM and any damage claims he may have in respect of the purchase of such
interest; (ii) deliver to the Company duly endorsed all evidence of such limited
partnership or other ownership interest in GSSM; and (iii) execute and deliver
any and all documents required by the Company to transfer such interest, if any,
to the Company; and
(3) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twelve (12) months of
Executive's then base salary (provided, however, that for the purposes hereof,
such base salary shall be deemed to be not less than his base salary on the date
hereof), subject, however, to Section 8(e). Such amount shall be payable one-
half on the date of the final order and the balance (the "Second Installment")
on the first Anniversary Date (the "Anniversary Date") thereof (without
interest), so long as the Executive shall be employed by the Company on such
Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
3
<PAGE>
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: John W. Duncan
1110 Akridge Circle
Glencoe, AL 35905
4
<PAGE>
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Jim Grimm
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ John W. Duncan
------------------------------------------
John W. Duncan
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
-------------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and James R.
Grimm (the "Executive"), dated as of the 7th day of April, 1999. Unless
otherwise provided, capitalized terms shall have the meaning provided in Section
2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twelve
(12) months of the Executive's then base annual salary (provided, however, that
for the purposes hereof, such base salary shall be deemed to be not less than
his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) Deliver to the Executive a written instrument canceling any
debt (including principal and accrued interest) owed by the Executive to the
Company for any purchase, if any, prior to the date hereof, of any limited
partnership interest in GSS Management LLC ("GSSM"); provided, however, that
Executive shall, in such case, concurrently with the delivery by the Company of
such written instrument of debt cancellation: (i) deliver one or more
2
<PAGE>
written instruments to the Company (as reasonably requested by the Company) in
which Executive: (x) disclaims, surrenders and forever relinquishes any and all
claims to any limited partnership or other ownership interest in GSSM, whether
absolute or contingent, and (y) disclaims, surrenders and forever relinquishes
any and all claims to the return or refund of any and all payments made by him
with respect to such limited partnership interest other ownership interest or in
GSSM and any damage claims he may have in respect of the purchase of such
interest; (ii) deliver to the Company duly endorsed all evidence of such limited
partnership or other ownership interest in GSSM; and (iii) execute and deliver
any and all documents required by the Company to transfer such interest, if any,
to the Company; and
(3) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twelve (12) months of
Executive's then base salary (provided, however, that for the purposes hereof,
such base salary shall be deemed to be not less than his base salary on the date
hereof), subject, however, to Section 8(e). Such amount shall be payable one-
half on the date of the final order and the balance (the "Second Installment")
on the first Anniversary Date (the "Anniversary Date") thereof (without
interest), so long as the Executive shall be employed by the Company on such
Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
3
<PAGE>
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: James R. Grimm
527 Mistletoe Hollow
Gadsden, AL 35901
4
<PAGE>
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26/th/ Street
Gadsden, Alabama 35904
Attention: Bob Schaal
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ James R. Grimm
--------------------------------------
James R. Grimm
GULF STATES STEEL, INC. OF ALABAMA
By: Robert Schaal
-----------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and James S.
Henderson, Jr., (the "Executive"), dated as of the 13th day of April 1999.
Unless otherwise provided, capitalized terms shall have the meaning provided in
Section 2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a
result of incapacity due to physical or mental illness) which is
demonstrably willful and deliberate on the Executive's part, which is
committed in bad faith or without reasonable belief that such breach is in
the best interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company specifying
such breach; or (ii) the conviction of the Executive of a felony involving
moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such
duties at the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company
which results in a material diminution in such duties, position or
responsibilities, which is not remedied by the Company promptly after
receipt of notice thereof given by the Executive to the Board of Directors
of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twelve
(12) months of the Executive's then base annual salary (provided, however, that
for the purposes hereof, such base salary shall be deemed to be not less than
his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) Deliver to the Executive a written instrument canceling any
debt (including principal and accrued interest) owed by the Executive to the
Company for any purchase, if any, prior to the date hereof, of any limited
partnership interest in GSS Management LLC ("GSSM"); provided, however, that
Executive shall, in such case, concurrently with the delivery by the Company of
such written instrument of debt cancellation: (i) deliver one or more
2
<PAGE>
written instruments to the Company (as reasonably requested by the Company) in
which Executive: (x) disclaims, surrenders and forever relinquishes any and all
claims to any limited partnership or other ownership interest in GSSM, whether
absolute or contingent, and (y) disclaims, surrenders and forever relinquishes
any and all claims to the return or refund of any and all payments made by him
with respect to such limited partnership interest other ownership interest or in
GSSM and any damage claims he may have in respect of the purchase of such
interest; (ii) deliver to the Company duly endorsed all evidence of such limited
partnership or other ownership interest in GSSM; and (iii) execute and deliver
any and all documents required by the Company to transfer such interest, if any,
to the Company; and
(3) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twelve (12) months of
Executive's then base salary (provided, however, that for the purposes hereof,
such base salary shall be deemed to be not less than his base salary on the date
hereof), subject, however, to Section 8(e). Such amount shall be payable one-
half on the date of the final order and the balance (the "Second Installment")
on the first Anniversary Date (the "Anniversary Date") thereof (without
interest), so long as the Executive shall be employed by the Company on such
Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
3
<PAGE>
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement
executed by the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: James S. Henderson, Jr.
3601 West Ridgeview Drive
Birmingham, AL 35213
4
<PAGE>
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Jim Grimm
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ James S. Henderson, Jr.
------------------------------------
James S. Henderson, Jr.
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
-------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and Joe P. Magee
(the "Executive"), dated as of the 7th day of April, 1999. Unless otherwise
provided, capitalized terms shall have the meaning provided in Section 2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twelve
(12) months of the Executive's then base annual salary (provided, however, that
for the purposes hereof, such base salary shall be deemed to be not less than
his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) Deliver to the Executive a written instrument canceling any
debt (including principal and accrued interest) owed by the Executive to the
Company for any purchase, if any, prior to the date hereof, of any limited
partnership interest in GSS Management LLC ("GSSM"); provided, however, that
Executive shall, in such case, concurrently with the delivery by the Company of
such written instrument of debt cancellation: (i) deliver one or more
2
<PAGE>
written instruments to the Company (as reasonably requested by the Company) in
which Executive: (x) disclaims, surrenders and forever relinquishes any and all
claims to any limited partnership or other ownership interest in GSSM, whether
absolute or contingent, and (y) disclaims, surrenders and forever relinquishes
any and all claims to the return or refund of any and all payments made by him
with respect to such limited partnership interest other ownership interest or in
GSSM and any damage claims he may have in respect of the purchase of such
interest; (ii) deliver to the Company duly endorsed all evidence of such limited
partnership or other ownership interest in GSSM; and (iii) execute and deliver
any and all documents required by the Company to transfer such interest, if any,
to the Company; and
(3) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twelve (12) months of
Executive's then base salary (provided, however, that for the purposes hereof,
such base salary shall be deemed to be not less than his base salary on the date
hereof), subject, however, to Section 8(e). Such amount shall be payable one-
half on the date of the final order and the balance (the "Second Installment")
on the first Anniversary Date (the "Anniversary Date") thereof (without
interest), so long as the Executive shall be employed by the Company on such
Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
3
<PAGE>
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Joe P. Magee
610 Noble Hill Road
Attalla, AL 35954
4
<PAGE>
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Jim Grimm
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Joe P. Magee
----------------------------------------
Joe P. Magee
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
------------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and Peter P.
Pincura (the "Executive"), dated as of the 7th day of April, 1999. Unless
otherwise provided, capitalized terms shall have the meaning provided in Section
2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twelve
(12) months of the Executive's then base annual salary (provided, however, that
for the purposes hereof, such base salary shall be deemed to be not less than
his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) Deliver to the Executive a written instrument canceling any
debt (including principal and accrued interest) owed by the Executive to the
Company for any purchase, if any, prior to the date hereof, of any limited
partnership interest in GSS Management LLC ("GSSM"); provided, however, that
Executive shall, in such case, concurrently with the delivery by the Company of
such written instrument of debt cancellation: (i) deliver one or more
2
<PAGE>
written instruments to the Company (as reasonably requested by the Company) in
which Executive: (x) disclaims, surrenders and forever relinquishes any and all
claims to any limited partnership or other ownership interest in GSSM, whether
absolute or contingent, and (y) disclaims, surrenders and forever relinquishes
any and all claims to the return or refund of any and all payments made by him
with respect to such limited partnership interest other ownership interest or in
GSSM and any damage claims he may have in respect of the purchase of such
interest; (ii) deliver to the Company duly endorsed all evidence of such limited
partnership or other ownership interest in GSSM; and (iii) execute and deliver
any and all documents required by the Company to transfer such interest, if any,
to the Company; and
(3) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twelve (12) months of
Executive's then base salary (provided, however, that for the purposes hereof,
such base salary shall be deemed to be not less than his base salary on the date
hereof), subject, however, to Section 8(e). Such amount shall be payable one-
half on the date of the final order and the balance (the "Second Installment")
on the first Anniversary Date (the "Anniversary Date") thereof (without
interest), so long as the Executive shall be employed by the Company on such
Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
3
<PAGE>
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Peter P. Pincura
91 Cindi Lee Lane
Boaz, AL 35957
4
<PAGE>
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Jim Grimm
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Peter P. Pincura
-------------------------------------------
Peter P. Pincura
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
---------------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and Robert
Schaal (the "Executive"), dated as of the 13th day of April, 1999. Unless
otherwise provided, capitalized terms shall have the meaning provided in Section
2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of a
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during a Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and/or (B) In the event of a Trigger Event defined in Section 2(d)(3)
an incentive to remain with the Company and work for a successful reorganization
of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) "Disability" means a physical or mental infirmity which renders
the Executive incapable of performing his duties with the Company for any
consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(c) "Good Reason" shall mean the assignment to the Executive of any
duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(d) A "Trigger Event" shall mean the first to occur of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 prom-
<PAGE>
ulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors; provided, however, that the following
acquisitions shall not constitute a Trigger Event under this Section 2(d)(1):
(i) any acquisition by the Company, (ii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iii) any acquisition of the Company
by any corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, no Trigger Event has
occurred under Section 2(d)(3);
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date hereof, members of
the Board of Directors of the Company (the "Incumbent Board"); provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company; or
(3) The filing by or against the Company of a petition with a
United States Bankruptcy Court under Title 11 of the United States Bankruptcy
Code.
(e) The "Trigger Event Period" shall mean the period commencing on
the occurrence of a Trigger Event, and ending on March 31, 2001, unless extended
by the Board of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to twenty-
four (24) months of the Executive's then base annual salary (provided, however,
that for the purposes hereof, such base salary shall be deemed to be not less
than his base salary on the date hereof), and the Company shall also pay for any
accrued vacation;
(2) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent
2
<PAGE>
such coverage is permissible under, and shall be subject to, the terms of such
group policies (and nothing shall require the Company to continue such coverage
in effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that any such continuation of
medical coverage shall be credited against any COBRA requirements of the Company
with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If a Trigger Event described in Section 2(d)(3) occurs during the
Trigger Event Period and a bankruptcy court shall enter a final order confirming
a plan of reorganization for the Company during the Trigger Event Period or at
any time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to twenty-four (24) months
of Executive's then base salary (provided, however, that for the purposes
hereof, such base salary shall be deemed to be not less than his base salary on
the date hereof), subject, however, to Section 8(e). Such amount shall be
payable one-half on the date of the final order and the balance (the "Second
Installment") on the first Anniversary Date (the "Anniversary Date") thereof
(without interest), so long as the Executive shall be employed by the Company on
such Anniversary Date; but subject, however to Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Anniversary Date:
(i) a Trigger Event as defined in Section 2(d)(1) or (d)(2) shall occur and the
Executive shall be employed by the Company on the date of such Trigger Event;
(ii) the Company shall terminate the Executive's employment other than for
Cause; (iii) the Executive shall terminate his employment for Good Reason; or
(iv) the Executive shall die or suffer a Disability while he is an employee of
the Company.
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement may be subject to
rejection in the event of a bankruptcy filing by or against the Company. The
Company agrees to use reasonable efforts to cause a bankruptcy court to approve
the assumption of this Agreement in the event of a bankruptcy filing.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
3
<PAGE>
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement)
and the Executive shall not, without the prior written consent of the Company or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. The obligations of the Executive under this Section shall
supplement and not supersede any duty of confidentiality he may have under any
other agreement with the Company or under applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Robert Schaal
135 Fairoaks Circle
Gadsden, AL 35901
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Jim Grimm
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld
4
<PAGE>
by the Company in respect of such amount (or in respect of any other
consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Robert Schaal
-----------------------------------
Robert Schaal
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Steven Karol
-------------------------------
Chairman of the Board
6
<PAGE>
GULF STATES STEEL, INC. OF ALABAMA
174 South 26th Street
Gadsden, Alabama 35904
EXECUTIVE RETENTION AGREEMENT ("Agreement") by and between Gulf States
Steel, Inc. of Alabama, an Alabama corporation (the "Company"), and Larry W.
Singleton (the "Executive"), dated as of the 19th day of October, 1999. Unless
otherwise provided, capitalized terms shall have the meaning provided in Section
2.
1. Purpose.
The Company has determined that it is in its best interests to assure
the continued dedication of the Executive, notwithstanding the occurrence of the
Trigger Event with respect to the Company, by providing Executive with: (A)
severance pay and other considerations in the event that: (i) the Executive's
employment is terminated during the Trigger Event Period other than for "Cause",
or (ii) Executive shall during such period terminate his employment for "Good
Reason"; and (B) an incentive to remain with the Company and work for a
successful reorganization of the Company within the Trigger Event Period.
2. Certain Definitions.
(a) "Cause" shall mean: (i) a material breach by the Executive of the
Executive's duties or responsibilities with the Company (other than as a result
of incapacity due to physical or mental illness) which is demonstrably willful
and deliberate on the Executive's part, which is committed in bad faith or
without reasonable belief that such breach is in the best interests of the
Company and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) the
conviction of the Executive of a felony involving moral turpitude.
(b) A "Change of Control Event" shall mean the first to occur of
either of the following events :
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then outstanding shares of common stock of the Company or
(ii) the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors; provided,
however, that the following acquisitions shall not constitute a Change of
Control Event under this Section 2(b)(1): (i) any acquisition by the Company,
(ii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company; or
(2) The election or appointment of a Board of Directors of the
Company, a majority of whose members are not, as of the date of the Trigger
Event, members of the Board of Directors of the Company (the "Incumbent Board");
provided, however, that any individual becoming a director subsequent to the
date thereof whose election, or nomination for
<PAGE>
election by the Company's shareholders, was approved by a vote of at least a
majority of the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors of the Company.
(c) "Disability" means a physical or mental infirmity which
renders the Executive incapable of performing his duties with the Company for
any consecutive or non-consecutive period of ninety (90) days during any twelve
month period, if the Executive remains so incapable of performing such duties at
the end of such 90 day period.
(d) "Good Reason" shall mean the assignment to the Executive of
any duties, position or responsibilities materially inconsistent with the
Executive's existing duties, position or responsibilities by the Company which
results in a material diminution in such duties, position or responsibilities,
which is not remedied by the Company promptly after receipt of notice thereof
given by the Executive to the Board of Directors of the Company.
(e) The "Trigger Event" shall mean the 1999 filing by the
Company of the petition with the United States Bankruptcy Court under Title 11
of the United States Bankruptcy Code.
(f) The "Trigger Event Period" shall mean the period commencing
on the date hereof, and ending on March 31, 2001, unless extended by the Board
of Directors of the Company.
3. Severance Payment and other Considerations.
(a) If, during the Trigger Event Period: (i) the Company shall
terminate the Executive's employment (other than for Cause or Disability); or
(ii) the Executive shall terminate his employment for Good Reason, the Company
shall (subject, however, to Sections 8(e) and 8(k)):
(1) Pay to the Executive in a lump sum in cash within 30 days
after the date of termination a severance payment in an amount equal to two and
three fourths months of the Executive's then base annual salary (provided,
however, that for the purposes hereof, such base salary shall be deemed to be
not less than his base salary on the date hereof), and the Company shall also
pay for any accrued vacation; and
(2) During the 18-month period following such date of
termination, continue at the Company's expense such Executive's coverage under
the Company group health insurance and/or group life insurance in which the
Executive was a participant and which the Company is providing to other
employees, provided, however, that such continuation of coverage (and payment by
-------- -------
the Company of the cost thereof) shall be provided only to the extent such
coverage is permissible under, and shall be subject to, the terms of such group
policies (and nothing shall require the Company to continue such coverage in
effect generally or restrict the right of the Company to modify or amend such
policies or programs), and provided further that
2
<PAGE>
any such continuation of medical coverage shall be credited against any COBRA
requirements of the Company with respect to the Executive.
(b) If the Executive's employment shall be terminated by the Company
for Cause or Disability during the Trigger Event Period or if the Executive
shall terminate employment other than for "Good Reason" during such Period, this
Agreement shall terminate without any further obligations of the Company to the
Executive hereunder.
4. Incentive Payment for Successful Reorganization.
(a) If the bankruptcy court shall enter a final order confirming a
plan of reorganization for the Company during the Trigger Event Period or at any
time thereafter and on a date on which Executive remains employed by the
Company, the Executive shall on such date such final order is entered become
entitled to receive from the Company an amount equal to two and three fourths
months of Executive's then base salary (provided, however, that for the purposes
hereof, such base salary shall be deemed to be not less than his base salary on
the date hereof), subject, however, to Section 8(e). Such amount shall be
payable one-half on the date of the final order and the balance (the "Second
Installment") on the date of consummation of the plan or reorganization (the
"Consummation Date") thereof (without interest) so long as the Executive shall
be employed by the Company on such Consummation Date; but subject, however to
Section 4(b).
(b) Notwithstanding Section 4(a), the Second Installment shall become
immediately due and payable to the Executive if prior to the Consummation Date:
(i) a Change of Control Event as defined in Section 2(b)(1) or (b)(2) shall
occur and the Executive shall be employed by the Company on the date of such
Change in Control Event; (ii) the Company shall terminate the Executive's
employment other than for Cause; (iii) the Executive shall terminate his
employment for Good Reason; or (iv) the Executive shall die or suffer a
Disability while he is an employee of the Company.
5. Assumption of Agreement In Bankruptcy.
The Executive acknowledges that this Agreement shall be subject to
rejection by the bankruptcy court. The Company agrees to use reasonable efforts
to cause a bankruptcy court to approve the assumption of this Agreement.
6. No Employment Agreement.
The Executive acknowledges that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and may be terminated by
the Company at any time, subject, however, to any obligations of the Company
hereunder or thereunder.
7. Confidential Information.
After termination of Executive's employment by Executive or by the
Company, the Executive shall continue to hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its
3
<PAGE>
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement) and the Executive shall not, without
the prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. The obligations of
the Executive under this Section shall supplement and not supersede any duty of
confidentiality he may have under any other agreement with the Company or under
applicable law.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Alabama, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) This Agreement may not be terminated, amended or modified (or any
provision or condition waived) otherwise than by a written agreement executed by
the parties hereto.
(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Larry W Singleton
8907 Southern Breeze Drive
Orlando, Florida 32836
If to the Company: Gulf States Steel, Inc. of Alabama
174 South 26th Street
Gadsden, Alabama 35904
Attention: Robert Schaal
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amount payable under this
Agreement such Federal, state or local taxes as shall be required by applicable
law to be withheld by the Company in respect of such amount (or in respect of
any other consideration provided by the Company hereunder).
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
4
<PAGE>
(g) The Executive shall not be obligated to seek other employment or
take any other action by way of mitigation of any amount payable to the
Executive hereunder. The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any successful contest by the Executive of the
validity or enforceability of this Agreement or the liability of the Company
hereunder, or of any provision of this Agreement, plus interest on any delayed
payment at the rate of six percent per annum.
(h) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
estate and legal representatives.
(i) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(j) 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, 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.
(k) The benefits provided under this Agreement shall be in addition
to any other benefits to which the Executive may be entitled under any other
Company programs or by law; provided, however, that any severance or vacation
payment made hereunder shall be reduced by any severance or vacation payments
otherwise required to be paid to the Executive under any other Company program
or under applicable law.
5
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Larry W. Singleton
--------------------------------------------
Executive
GULF STATES STEEL, INC. OF ALABAMA
By: /s/ Robert Schaal
----------------------------------------
Chairman and Chief Executive Officer
6
<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, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 1,551
<SECURITIES> 0
<RECEIVABLES> 36,662
<ALLOWANCES> (941)
<INVENTORY> 37,861
<CURRENT-ASSETS> 87,454
<PP&E> 273,801
<DEPRECIATION> (81,953)
<TOTAL-ASSETS> 280,000
<CURRENT-LIABILITIES> 93,005
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> (59,122)
<TOTAL-LIABILITY-AND-EQUITY> 280,000
<SALES> 320,450
<TOTAL-REVENUES> 320,450
<CGS> 318,842
<TOTAL-COSTS> 340,898
<OTHER-EXPENSES> 33,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,490
<INCOME-PRETAX> (74,272)
<INCOME-TAX> (1,143)
<INCOME-CONTINUING> (73,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,129)
<EPS-BASIC> (20.26)
<EPS-DILUTED> (20.26)
</TABLE>
