S-1/A 1 ds1a.htm AMENDMENT NO. 5 TO FORM S-1 Amendment No. 5 to Form S-1
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As filed with the Securities and Exchange Commission on December 6, 2006.

Registration No. 333-136352


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 5 to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


CLAYMONT STEEL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   3312   20-2928495

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)


4001 Philadelphia Pike

Claymont, Delaware 19703

(302) 792-5400

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)


Allen Egner

Claymont Steel Holdings, Inc.

4001 Philadelphia Pike

Claymont, Delaware 19703

(302) 792-5450

(Name, address, including zip code, and telephone number,

including area code, of agent for service)


Copies to:

 

Kimberly A. Taylor, Esq.

Morgan, Lewis & Bockius LLP

One Oxford Centre

Thirty-Second Floor

Pittsburgh, Pennsylvania 15219

(412) 560-3300

Fax: (412) 560-7001

 

Ronald S. Brody, Esq.

Mayer, Brown, Rowe & Maw LLP

1675 Broadway

New York, New York 10019

(212) 506-2500

Fax: (212) 262-1910


Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

 

If any of the securities being registered on this form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of
Securities to be Registered
   Amount to be
Registered(1)
   Proposed Maximum
Offering Price Per
Share(2)
   Proposed Maximum
Aggregate Offering
Price(2)
   Amount of
Registration
Fee(3)

Common Stock par value $0.001 per share

   7,187,500 shares    $ 17.00    $ 122,187,500    $ 13,075

(1) Includes amounts attributable to shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended.
(3) Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 6, 2006

 

Claymont Steel Holdings, Inc.

 

6,250,000 Shares

Common Stock

 

Claymont Steel Holdings, Inc. is offering 6,250,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to list our shares of common stock on the Nasdaq Global Market under the symbol “PLTE.” We anticipate that the initial public offering price will be between $15.00 and $17.00 per share.

 


 

Investing in our common stock involves risks.

See “Risk Factors” beginning on page 11.

 


 

    

Per

Share


   Total

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

   $    $

Proceeds to Claymont Steel Holdings, Inc.

   $    $

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

H.I.G. Capital LLC, Inc., our principal stockholder, has granted the underwriters a 30-day option to purchase up to an additional 937,500 shares of common stock to cover over-allotments.

 

The underwriters expect to deliver shares of common stock to purchasers on or about     , 2006.

 


 

Jefferies & Company

 

CIBC World Markets    KeyBanc Capital Markets    Morgan Joseph

 

The date of this Prospectus is                 , 2006.

 


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You should rely only on the information contained in this prospectus or in any free writing prospectus that we may provide to you. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any free writing prospectus that we may provide to you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. In this prospectus, the “Company,” “we,” “us,” and “our” refer to Claymont Steel Holdings, Inc., a Delaware corporation and the issuer of our common stock, our subsidiary Claymont Steel, Inc. (formerly CitiSteel USA, Inc.) and its subsidiary CitiSteel PA, Inc., the term “Holdings” refers solely to Claymont Steel Holdings, Inc. and the term “Claymont Steel” refers solely to Claymont Steel, Inc.

 


 

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   12

Cautionary Note Regarding Forward-Looking Statements

   21

Use of Proceeds

   22

Dividend Policy

   23

Capitalization

   24

Dilution

   26

Selected Historical Consolidated Financial and Operating Data

   27

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   29

Business

   45

Management

   55

Principal and Selling Stockholders

   65

Certain Relationships and Related Party Transactions

   66

Description of Capital Stock

   68

Shares Eligible for Future Sale

   72

United States Federal Income Tax Considerations

   74

Underwriting

   78

Legal Matters

   82

Experts

   82

Where You Can Find More Information

   82

Unaudited Pro Forma Financial Statement

   P-1

Index to Historical Financial Statements

   F-1

 

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PROSPECTUS SUMMARY

 

This summary highlights certain information concerning our business and this offering contained elsewhere in this prospectus. This summary is not complete and it does not contain all of the information that may be important to you and to your investment decision. You should carefully read the entire prospectus, including “Risk Factors,” our financial statements, the notes to our financial statements and the other financial information appearing elsewhere in this prospectus before deciding to invest in our common stock.

 

Our Company

 

We are the only non-union mini-mill focused on the manufacture and sale of custom discrete steel plate in North America. Our business is customer service oriented in that we focus on small order quantities, short lead times and non-standard dimensions. This orientation, along with our superior product quality, differentiates us from both commodity steel plate manufacturers and our competition in the custom discrete steel plate market. Our specialized manufacturing capabilities enable us to efficiently provide steel plate in non-standard dimensions to customers with distinct product and service needs. Our production capabilities are complemented by our knowledgeable sales force, meticulous quality assurance process, flexible scheduling system and reliable product delivery. Our ability to provide custom sizes, superior customer service, small order quantities and short lead times allows us to obtain premium pricing as compared to commodity steel plate manufacturers and has also garnered us the number one ranking in end-user customer satisfaction in the steel plate industry every year since 2001 according to surveys conducted by Jacobson & Associates, a recognized steel industry consulting firm.

 

We have the capacity to produce over 500,000 tons of steel plate annually, and we believe that we are a low cost producer of custom discrete steel plate in our primary target market. Our well-maintained facility in Claymont, Delaware conducts a full range of steel-making activities, utilizing an electric arc furnace, slab caster and rolling mill. In 2001, we transitioned our business focus from producing commodity steel plate to producing primarily higher-margin custom discrete steel plate and being customer service oriented. Following the implementation of these initiatives, which included an upgrade and reorientation of our facility, equipment, processes and sales and customer service staff, we have increased our total shipments, custom discrete steel plate shipments and direct sales to end-users, as detailed in the table below.

 

     Year Ended December 31,

   Thirty-Nine Weeks Ended

Tons Shipped:


   2001

   2005

   October 1, 2005

   September 30, 2006

Total

   296,839    336,611    244,517    294,405

Product Mix:

                   

Custom Steel Plate

   145,451    240,570    180,153    185,647

Commodity Steel Plate

   151,388    96,041    64,364    108,758

Customer Mix:

                   

End-Users

   100,925    188,264    136,481    150,817

Service Centers

   195,914    148,347    108,036    143,588

 

We have a loyal customer base and a high level of customer retention. Our customer base includes, among others, service centers, bridge fabricators, tool and die manufacturers, railcar manufacturers and general fabricators. As a result of our niche focus, commitment to customer service and high quality products, we estimate that we have been able to capture approximately 20% of the custom discrete steel plate market east of the Rocky Mountains.

 

Market Opportunity

 

We believe that the supply and demand dynamics in the custom discrete steel plate market will continue to be attractive. The end-markets for custom discrete steel plate are widely varied and include bridges, tools and

 

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dies, railcars, oil and gas pipe, heavy equipment, telecommunications towers and other industrial applications. According to various industry sources, many of these markets have exhibited robust demand in recent years, driving strong demand for steel plate that we believe will continue through 2008. Based on these industry sources, we believe that bridge fabricators will increase their orders significantly over the next five years due to the passage of the latest Federal transportation act and highway spending bill. We also believe that demand for steel plate used in the replacement and expansion of oil and gas pipelines will increase significantly in coming years. We believe that the strength and diversity of these end-markets are largely responsible for the steady growth in demand for custom discrete steel plate. While the demand for steel plate is expected to remain strong, we believe that production capacity in the North American market will remain constant. Due to market and regulatory conditions, as well as published reports by domestic steel manufacturers regarding their expansion plans, we believe that no new steel plate capacity is currently planned. Further, we believe importers of steel plate have difficulty competing in the custom product, small quantity, short lead time market that we target.

 

We are pursuing opportunities to provide our customers with additional value-added services to increase our profitability per ton for custom discrete steel plate. For example, in 2005 we began providing our customers with custom plate burning, which consists of cutting plate into configured shapes and sizes to meet customer needs. Custom-burned plate sells at a premium in excess of $245 per ton to discrete steel plate based on market prices in September 2006. Custom plate burning has traditionally been performed by service centers or by customers in-house. However, burning configured parts at our mill benefits both us and the customer because the significant amount of high-grade scrap that results from the process can be reinserted directly into our melt shop, while resulting in a lower cost to the customer by eliminating the freight and handling costs and mark-up associated with shipping this excess steel to the processing location, then to a scrap dealer and then back to the mill. Similar opportunities exist to produce heat treated plate, another value-added service commonly requested by customers. These value-added services appeal to customers who prefer to purchase steel plate from a single supplier that has the ability to provide manufacturing, burning and treatment options to meet their specifications.

 

Business Strengths

 

We believe that we have the following competitive strengths:

 

    Niche Market Focus with Limited Competition.  We focus specifically on serving customers with distinct needs in the discrete steel plate market. Our products are delivered in a more timely fashion, with less lead time and provide more value to our customers than non-standard sizes purchased from manufacturers with a broader focus. Custom sizes comprise approximately 69% of our production, which limits our primary competition to a single integrated (i.e. non-mini-mill) producer that is focused principally on serving the commodity steel plate market. In addition, substantially all of the steel plate imported to the United States is in standard sizes and therefore does not compete directly with the majority of our products.

 

    Production Facility Optimized for Low Cost Production in Market Niche.  Our well-maintained production facility is specifically configured to produce steel plate in non-standard dimensions, in small order quantities and with short lead times. Unlike continuous mills, which are focused on high-volume, continuous runs of commodity plate, our mill is designed to give us the flexibility to schedule individual orders efficiently. Our rolling mill produces thicker, wider and longer plate than that produced by commodity plate manufacturers and our plant is well-suited for rapid custom order throughput. We believe our mill configuration allows us to be a low-cost producer in our target market.

 

    Non-Union Workforce.  Our non-union workforce provides us significant cost and flexibility advantages. Unlike mills that employ unionized labor, we are able to optimize our headcount to run as efficiently as possible. Many of our skilled workers can perform multiple job functions, allowing for flexibility and rapid changes in production schedules, which we believe would not be possible under many union contracts. In addition, our employees are promoted and rewarded based on performance, which allows us to attract and retain the best employees in key positions.

 

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    Focus on Superior Customer Service.  We believe we provide the highest level of customer service and employ the most knowledgeable sales force in the industry. According to Jacobson & Associates, we have ranked first in end-user customer satisfaction among all North American producers of steel plate every year since 2001. An important differentiating component in providing high-quality service is our highly-trained salespeople, who spend significant time collaborating with our customers.

 

    Loyal and Diverse Customer Base.  We have a very strong base of key customers, with no single customer accounting for more than 7% of our sales, and our top 15 customers accounting for 40% of our sales, in 2005. These key customers have an average tenure with us of more than ten years.

 

    Low Cost Scrap Sourcing.  We believe that our scrap sourcing practices and our scrap-rich geographic location enable us to purchase steel scrap at significantly lower prices than many other steel producers. Because we buy smaller quantities of scrap and can accommodate a wide range of scrap grades, we believe we have a significant advantage in securing low-cost scrap. In addition, our proximity to scrap yards in the Delaware Valley provides us great selection, low pricing and inexpensive delivery of our scrap. We believe we realized an average cost advantage over larger steel plate producers of approximately $9 per scrap ton since 2004.

 

    Significant Barriers to Entry.  There are significant barriers to entry to our market niche primarily due to market conditions in the custom steel plate industry, as well as regulatory constraints which we believe restrict the ability to build new facilities or add additional capacity to existing facilities. Based on these factors and published reports by domestic steel manufacturers regarding their expansion plans, we believe that there is no new steel plate capacity expected to come online in the United States. In addition, the plants of many of our larger competitors are optimized for producing standard size plate and do not have the additional capacity or the infrastructure to enter the custom market.

 

    Experienced Management Team.  We have a strong management team with significant experience in the steel industry. On average, our management team has over 29 years of experience in the steel industry and is led by our Chief Executive Officer, Jeff Bradley, who, prior to joining us, spent 22 years with Worthington Industries, a steel processing and steel products company with approximately $3.0 billion in annual revenue. Members of our management team were responsible for engineering our transition to a custom, service-oriented mini-mill and have a strong track record of driving continuous improvement in the business.

 

Business Strategy

 

We intend to profitably grow our business by pursuing the following strategies:

 

    Expand Into New Markets.  We believe that identifying and entering new markets is critical for our continued growth. We recently entered the Western market which we believe to be underserved particularly for “Buy American” contracts. Under “Buy American” programs, federal or state projects that have been granted federal funds require contractors to purchase materials that are manufactured domestically. Oregon Steel is the major competitor in the Western market and it sources a significant portion of its slabs from foreign sources, which disqualifies the resulting plate from “Buy American” contracts. Sales in this region have grown from 6,000 tons in 2004 to 14,000 tons in 2005 and approximately 18,000 tons in the first three quarters of 2006. We expect to ship over 40,000 tons to this market by 2008. We have also entered the specialty segment of the growing oil and gas steel pipe market in 2005 and sold approximately 4,900 tons.

 

   

Expand Higher Margin, Value-Added Service Offerings.  We plan to continue to expand our custom plate burning service offering, which consists of cutting plate into configured shapes and sizes to meet specific customer requirements. This is a high value-added service that eliminates the need for our customers to purchase their plate from service centers or burn plate themselves in-house. In 2005, we sold approximately 3,200 tons of custom-burned plate parts at a selling price of approximately $1,100 per ton

 

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(an average premium of $320 over commodity plate prices) and expect to sell 30,000 tons annually by 2008. In addition to custom burning, other opportunities exist to provide value-added services such as producing heat treated plate. Increasing this higher-margin business would enable us to increase profitability without the need to increase production capacity.

 

    Increase Mill Capacity and Production Efficiency.  We increased our annual mill production capacity from 300,000 tons in 2001 to over 350,000 tons in 2004 (on a three shifts basis) with no additional headcount or labor hours and no significant capital investment. This increase was largely due to process improvements such as increasing our overall yield of finished steel plate from melt shop input from 71% to 73%, reducing the rejection rate from 7% to less than 0.5%, and significantly reducing mill downtime. Since July of 2005, we have implemented over $10.0 million of capital improvements, significantly overhauled the plant maintenance organization, and added a fourth crew to reduce overtime costs. Based on these improvements, we believe our total current plate mill capacity is in excess of 500,000 tons per year and that we have meaningfully reduced our manufacturing costs per ton. Additionally, we have identified other opportunities to increase capacity in our melt shop and plate mill and have identified cost reduction opportunities that are expected to generate approximately $3.0 million of incremental annual cost savings by the end of 2007.

 

    Further Penetrate Existing Markets.  We believe that we have the opportunity to gain additional share in our current markets. Management has identified a list of target accounts that buy steel plate from our competitors. We believe that we can service these customers’ needs more economically and effectively. Management is targeting selling an additional 20,000 tons to these targeted accounts by 2008.

 

Risk Factors

 

Our ability to execute our strategy is subject to numerous risks as discussed more fully in the “Risk Factors” section of this prospectus. These risks include: the cyclical nature of the steel industry and the industries we serve; the availability and cost of scrap, other raw materials and energy; the level of global demand for steel; the level of imports of steel into the United States; excess global steel capacity and the availability of competitive substitute materials; intense competition in the steel industry; currency fluctuations; environmental regulations; work stoppages and equipment failures; and the loss of key personnel.

 

Any of these risks could adversely affect our financial condition and results of operations. In addition, we have, and after completion of this offering will continue to have, a substantial level of indebtedness and negative stockholders’ equity, and purchasers of our common stock in this offering will incur substantial dilution. Investment in our common stock involves these and other risks. You should read and consider carefully the information set forth in “Risk Factors” and all other information set forth in this prospectus, before deciding whether to invest in our common stock.

 

The Acquisition

 

On June 10, 2005, in accordance with the terms of a stock purchase agreement entered into on April 29, 2005, H.I.G. SteelCo, Inc., an affiliate of H.I.G. Capital, acquired Claymont Steel. Pursuant to the stock purchase agreement between H.I.G. SteelCo and the former stockholder of Claymont Steel, CITIC USA Holding, Inc., H.I.G. SteelCo purchased all of the outstanding capital stock of Claymont Steel from CITIC USA for $74.4 million plus working capital and other adjustments, resulting in an aggregate purchase price of $105.5 million. H.I.G. SteelCo financed the acquisition by incurring indebtedness of approximately $80.3 million, which was subsequently repaid with a portion of the proceeds from the issuance of the Claymont Steel floating rate notes. Immediately following the completion of the stock purchase, H.I.G. SteelCo was merged with and into Claymont Steel. Following this merger, Claymont Steel Holdings became Claymont Steel’s sole stockholder. We refer to this transaction as the “Acquisition” in this prospectus.

 

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Following the Acquisition, Jeff Bradley became our Chief Executive Officer, and Yang Shu, formerly the chief executive officer of Claymont Steel, continued to provide services to us until June 2006 pursuant to an agreement between us and CITIC USA. The other members of Claymont Steel’s management team remained in place following the Acquisition. The Acquisition did not have a material impact on our operations or financial condition.

 

Our Principal Stockholder

 

Upon completion of this offering, H.I.G. Capital LLC, Inc. will control 11,241,303 shares of our common stock (representing 64% of all common stock outstanding), or 10,303,803 shares of our common stock (representing 59% of all common stock outstanding) if the underwriters exercise their over-allotment option in full. H.I.G. Capital has granted the underwriters a 30-day option to purchase up to an additional 937,500 shares of common stock to cover over-allotments. If the underwriters exercise their over-allotment option in full, H.I.G. Capital would receive net proceeds of approximately $14 million (based on an assumed initial public offering price of $16.00 per share, the midpoint of the range shown on the front cover of this prospectus) from this offering. In addition, upon completion of this offering, H.I.G. Capital LLC, an affiliate of our principal stockholder, will receive a fee of $4.0 million. This $4.0 million fee consists of a $1.0 million transaction fee due under the management services agreement between us and H.I.G. Capital LLC and a $3.0 million fee to terminate our obligation to make payments under the management services agreement following the completion of this offering. H.I.G. Capital is a Miami, Florida based private equity firm managing more than $2.0 billion in equity capital. H.I.G. Capital seeks to acquire market leading firms with annual revenues between $25.0 and $500.0 million. Since its founding in 1993, H.I.G. Capital has acquired more than 50 companies with combined revenues in excess of $5.0 billion. H.I.G. Capital’s investors include leading financial institutions, insurance companies, university endowments and pension funds in the United States and Europe.

 

Recent Developments

 

On July 6, 2006, Holdings issued $75.0 million aggregate principal amount of Senior Secured Pay-In-Kind Notes due 2010, or the Holdings Notes. The Holdings Notes are Holdings’ senior secured obligations and are secured by substantially all of Holdings’ assets, which are principally the stock of Claymont Steel. Interest on the Holdings Notes accrues at an annual rate of 15.0%. Interest is payable semiannually in arrears on April 1 and October 1 commencing on April 1, 2007. Holdings may, for the first two interest payment dates only (April 1 and October 1, 2007), in lieu of paying cash, pay interest by the issuance of additional 15.0% Senior Secured Pay-In-Kind Notes due 2010 having an aggregate principal amount equal to the amount of interest due and payable. Holdings paid a $71.2 million dividend to its equity holders on July 13, 2006 from the proceeds of the note issuance. H.I.G. Capital, our principal stockholder, was the primary beneficiary of these dividends.

 

Corporate Information

 

Holdings was incorporated in Delaware in May 2005 as H.I.G. SteelCo Holdings, Inc. In June 2006, H.I.G. SteelCo Holdings, Inc. was renamed CitiSteel USA Holdings, Inc. and in August 2006 was renamed Claymont Steel Holdings, Inc. Holdings’ primary asset is 100% of the capital stock of Claymont Steel, through which we operate our business. Our principal offices are located at 4001 Philadelphia Pike, Claymont, Delaware 19703-2794. We can be reached by phone at (800) 677-3769 and our website address is www.claymontsteel.com. Information on our website is not a part of this prospectus.

 

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The Offering

 

Common stock offered by us

6,250,000 shares

 

Common stock to be outstanding after the offering

17,566,754 shares

 

Common stock offered by selling stockholders

937,500 shares (if the underwriters exercise their over-allotment option)

 

Use of proceeds

We estimate that our net proceeds from the offering will be approximately $91.0 million (based on an assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range shown on the front cover of this prospectus). We currently intend to apply the net proceeds as follows:

 

    Approximately $89 million of the net proceeds to repurchase the Holdings Notes, at a price in cash equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of repurchase. $89 million includes interest through January 31, 2007. Interest on the Holdings Notes accrues at approximately $0.9 million per month. In the event the net proceeds were insufficient to repay the Holdings Notes, we would use cash on hand to repay the Holdings Notes. The proceeds of the Holdings Notes were used to pay a dividend to our stockholders.

 

    The remaining portion of the net proceeds, if any, will be used to pay up to $4.0 million in fees due to H.I.G. Capital LLC, an affiliate of our principal stockholder. $1.0 million of this fee represents a transaction fee due under the management services agreement between us and H.I.G. Capital LLC, and the remaining $3.0 million represents a fee to terminate our obligation to make payments under the management services agreement following the completion of this offering.

 

 

Proposed Nasdaq Global Market Symbol

“PLTE”

 

Dividend policy

Although we have paid cash dividends in the past, we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in shares of our common stock.

 

H.I.G. Capital LLC, Inc., which holds 11,241,303 shares, or 99% of our shares of common stock outstanding, prior to this offering, has granted the underwriters a 30-day option to purchase up to an additional 937,500 shares of common stock to cover over-allotments.

 

Unless we specifically state otherwise, the information in this prospectus:

 

    assumes that our common stock will be sold at $16.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus;

 

    assumes that the underwriters will not exercise their over-allotment option; and

 

    gives effect to a 11.241303 for 1 stock split that occurred on December 5, 2006.

 

 

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The number of shares of our common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of September 30, 2006. The number of shares of common stock to be outstanding immediately after this offering excludes the following:

 

 

    450,000 shares of common stock authorized for future issuance under our stock incentive plan, including:

 

    restricted stock units to be issued to our executive officers and key employees on completion of this offering having an aggregate value, based upon the initial public offering price per share, of $1.6 million; and

 

    options to purchase shares of common stock to be issued to our directors, executive officers and key employees upon completion of this offering, with an aggregate exercise price, based on the initial public offering price, of $1.69 million.

 

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Summary Historical and Pro Forma

Financial and Operating Data

 

On June 10, 2005, in accordance with the terms of a stock purchase agreement entered into on April 29, 2005, we acquired Claymont Steel. Pursuant to the stock purchase agreement, our wholly-owned subsidiary, H.I.G. SteelCo, Inc., purchased all of the outstanding capital stock of Claymont Steel from CITIC USA Holding, Inc. for $74.4 million plus working capital and other adjustments, resulting in an aggregate purchase price of $105.5 million. Immediately following the closing of the transactions contemplated by the stock purchase agreement, H.I.G. SteelCo, Inc. was merged with and into Claymont Steel. Following this merger, we became Claymont Steel’s sole stockholder. We refer to this transaction as the “Acquisition” in this prospectus.

 

In this “Summary Historical and Pro Forma Financial and Operating Data” section and in the other financial presentations contained in this prospectus, including “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and accompanying notes included elsewhere in this prospectus, the terms the “Company,” “we,” “us,” and “our” refer to Holdings and its subsidiaries on a consolidated basis, the term “Claymont Steel” refers to Claymont Steel, Inc. and its subsidiary, the term “predecessor” refers to Claymont Steel and its subsidiary prior to its acquisition by Holdings, which we refer to as the Acquisition, and the term “successor” refers to Holdings and its subsidiaries subsequent to acquisition of Claymont Steel.

 

The following table presents summary historical and unaudited pro forma consolidated financial and operating data. The summary historical consolidated statement of operations data for each of the two years ended December 31, 2003 and 2004 and for the period from January 1 to June 9, 2005 has been derived from, and should be read together with, Claymont Steel’s audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. The summary historical statement of operations data for the period from June 10, 2005 to December 31, 2005 has been derived from, and should be read together with, our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. The summary historical statement of operations data for the period from June 10, 2005 to October 1, 2005 and for the thirty-nine weeks ended September 30, 2006 and the balance sheet data as of September 30, 2006 have been derived from, and should be read together with, our unaudited consolidated financial statements and accompanying notes, included elsewhere in this prospectus.

 

The summary unaudited pro forma consolidated financial data for the year ended December 31, 2005 has been derived from, and should be read together with “Unaudited Pro Forma Financial Data,” included elsewhere in this prospectus. The unaudited pro forma statement of operations data gives effect to the acquisition of Claymont Steel on June 10, 2005, the sale of the $172.0 million of Claymont Steel floating rate notes and the sale of the $75.0 million Holdings Notes as if they had occurred on January 1, 2005. See “Unaudited Pro Forma Financial Data.”

 

The pro forma data is not necessarily indicative of our financial position or results of operations that would have occurred had the Acquisition taken place on the dates indicated, nor is it indicative of future results.

 

In addition, you should read the following summary information in conjunction with “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”

 

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    Actual

    Pro Forma(1)

 
    Predecessor

 

Successor


       
    Year Ended December 31,

    January 1 to
June 9, 2005


  June 10 to
December 31,
2005


    June 10 to
October 1, 2005


   

Thirty-Nine
Weeks Ended
September 30,
2006


    Year Ended
December 31,
2005


 
    2003

    2004

           
    (dollars in thousands, except for other operating data and per share data)  

Statement of Operations Data:

                                                     

Sales

  $ 108,510     $ 239,556     $ 128,687   $ 149,683     $ 75,316     $ 247,706     $ 278,370  

Cost of sales

    109,075       167,029       78,762     114,136       62,941       169,391       177,706  

Selling and administrative expenses

    5,579       8,303       2,535     8,041       4,671       12,930       9,950  

Income (loss) from operations

    (6,144 )     64,224       47,390     27,506       7,704       65,385       90,714  

Net income (loss)

    (6,748 )     41,969       30,035     10,885       1,306       29,612       41,603  

Net income (loss) per share

  $ (7,484 )(2)   $ 41,081 (2)   $ 30,035   $ 0.97 (3)   $ 0.12 (3)   $ 2.63 (3)   $ 2.38 (3)

Weighted average common shares outstanding— basic

    1,000       1,000       1,000     11,241,303       11,241,303       11,248,638       17,510,165  

Other Operating Data:

                                                     

Tons shipped

    290,777       343,758       148,309     188,440       96,208       294,405       336,749  

Sales per ton(4)

  $ 373     $ 697     $ 868   $ 794       783     $ 832     $ 827  

Other Financial Data:

                                                     

Capital expenditures

  $ 1,572     $ 1,638     $ 416   $ 5,926     $ 926     $ 8,772     $ 6,342  

EBITDA(5)

    (1,095 )     69,108       49,206     29,286       8,536       68,539       93,718  

Adjusted EBITDA(5)

    (1,095 )     69,108       49,206     43,307       22,557       68,539       93,718  

 

     As of September 30, 2006

   As Adjusted
as of September 30, 2006(6)


Balance Sheet Data:

             

Cash and cash equivalents

   $ 20,821    $ 18,752

Accounts receivable, net

     36,045      36,045

Inventories

     42,509      42,509

Property, plant and equipment, net

     21,954      21,954

Total assets

     140,527      137,357

Total liabilities

     281,592      199,361

Total stockholder’s deficit

     (141,065)      (62,004)

(1) The pro forma income statement for the year ended December 31, 2005 does not include material nonrecurring charges or indebtedness incurred in the transactions entered into in connection with the Acquisition.
(2) As restated—see Note 17 to the audited consolidated financial statements included elsewhere in this prospectus.
(3) Earnings for the successor company have been calculated in accordance with SEC rules for initial public offerings. These rules require that the weighted average share calculation give effect to any changes in our capital structure. Therefore, weighted average shares for purposes of the earnings per share calculation have been adjusted to reflect the 11.241303 for 1 stock split that occurred on December 5, 2006.
(4) Sales per ton for the thirty-nine weeks ended September 30, 2006 exclude toll processing sales of $2.8 million for 11,927 tons rolled.
(5) EBITDA, which we define as earnings before interest (income) expense, net, income tax (benefit) expense, depreciation and amortization and Adjusted EBITDA, which we define as earnings before interest (income) expense, net, income tax (benefit) expense, depreciation and amortization as adjusted to remove purchase accounting charges related to the Acquisition are not measures of financial performance under GAAP. EBITDA does not represent and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

    they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

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    they do not reflect changes in, or cash requirements for, working capital;

 

    they do not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our revolving credit facility, the Holdings Notes, or the Claymont Steel floating rate notes;

 

    they do not reflect payments made or future requirements for income taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and

 

    because not all companies use identical calculations, our presentations of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

We believe, however, that EBITDA and Adjusted EBITDA are a valuable measure of the operating performance of our business and can assist in comparing our performances on a consistent basis without regard to depreciation and amortization. We believe that EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because:

 

    securities analysts and other interested parties use it as a measure of financial performance and debt service capabilities;

 

    it facilitates our management in measuring operating performance of our business because it assists us in comparing our operating performance on a consistent basis since it removes the impact of items not directly resulting from our operations;

 

    it is used by our management for internal planning purposes, including aspects of our consolidated operating budget and capital expenditures; and

 

    it is used by our board of directors and management for determining certain management compensation targets and thresholds.

 

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income (loss):

 

    Actual

  Pro Forma

    Predecessor

   

Successor


   
    Year Ended

  January 1 to
June 9, 2005


    June 10 to
December 31,
2005


 

June 10 to
October 1, 2005


  Thirty-Nine
Weeks Ended
September 30,
2006


  Year Ended
December 31,
2005


    2003

    2004

         
    (in thousands)

Net income (loss)

  $ (6,748 )   $ 41,969   $ 30,035     $ 10,885   $ 1,306   $ 29,612   $ 41,603

Interest (income) expense, net

    897       521     (228 )     10,664     5,677     18,130     25,188

Income tax (benefit) expense

    (147 )     21,881     17,583       6,058     822     17,782     24,025

Depreciation & amortization(i)

    4,903       4,737     1,816       1,679     731     3,015     2,902

EBITDA

    (1,095 )     69,108     49,206       29,286     8,536     68,539     93,718

Charge to cost of sales(ii)

    —         —       —         14,021     14,021     —       —  
   


 

 


 

 

 

 

Adjusted EBITDA

  $ (1,095 )   $ 69,108   $ 49,206     $ 43,307   $ 22,557   $ 68,539   $ 93,718
   


 

 


 

 

 

 


  (i) Depreciation and amortization includes depreciation on fixed assets and amortization of intangible assets. Amortization of deferred financing costs is added back to net income as part of interest expense.
  (ii) Represents a charge to cost of sales to account for a non-recurring inventory adjustment related to the write up of finished goods to fair value, as required under purchase accounting for the Acquisition, and the subsequent charge to cost of sales for the portion of finished goods sold during the June 10, 2005 to December 31, 2005 period.

 

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(6) The as adjusted balance sheet data as of September 30, 2006 gives effect to the consummation of this offering as if it had occurred on September 30, 2006. Any increases or decreases in the estimated net proceeds received by us in this offering will change the amount of proceeds available for us to repay indebtedness or use for general corporate purposes. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, would decrease (increase) our stockholders’ deficit by $5.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase of one million shares, to a total of 7,250,000 million shares offered, would decrease our stockholders’ deficit by $14.9 million (assuming an initial public offering price of $16.00 per share). Similarly, a decrease of one million shares, to a total of 5,250,000 million shares offered, would increase our stockholders’ deficit by $14.9 million (assuming an initial public offering price of $16.00 per share).

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and the other information contained in this prospectus before making an investment decision. Any of the following risks could materially adversely affect our business, financial condition, results of operations or liquidity. In such event, the market price of our common stock could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

Our level of production and our sales and earnings are subject to significant fluctuations as a result of the cyclical nature of the steel industry and the industries we serve.

 

The price of steel and steel products may fluctuate significantly due to many factors beyond our control. This fluctuation directly affects the levels of our production and our sales and earnings. The steel industry is highly cyclical, influenced by a combination of factors, including periods of economic growth or recession, strength or weakness of the U.S. dollar, worldwide production capacity, levels of steel imports and applicable tariffs, as well as general economic conditions and the condition of certain other industries. The demand for steel products is generally affected by macroeconomic fluctuations in the United States and global economies in which steel companies sell their products. Future economic downturns, stagnant economies or currency fluctuations in the United States or globally could decrease the demand for our products or increase the amount of imports of steel into the United States, either of which would decrease our sales, margins and profitability.

 

In addition, a disruption or downturn in the construction, oil and gas, durable goods, agricultural, commercial equipment, shipbuilding, bridge fabrication or rail transportation industries could negatively impact our financial condition, production, sales, margins and earnings. We are also particularly sensitive to trends and events, including strikes and labor unrest, that may impact these industries. These industries are significant markets for our products and are themselves highly cyclical.

 

Any decrease in the availability, or increase in the cost, of scrap, other raw materials and energy could materially reduce our earnings.

 

Our operation depends heavily on the availability of various raw materials and energy resources, including scrap metal, natural gas, electricity, and alloys. The availability of raw materials and energy resources may decrease, and their prices are likely to be volatile as a result of, among other things, changes in overall supply and demand levels and new laws or regulations. Disruption in the supply of our raw materials or energy resources could temporarily impair our ability to manufacture some of our products or require us to pay higher prices in order to obtain these raw materials or energy resources from other sources. If our raw material or energy costs increase, we may not be able to pass these higher costs on to our customers in full or at all. Any increase in the prices for raw materials or energy resources could materially increase our costs and lower our earnings.

 

Our principal raw material is scrap metal derived primarily from junked automobiles, industrial scrap, railroad cars, railroad track materials and demolition scrap from obsolete structures, containers and machines. The prices for scrap are subject to market forces largely beyond our control, including demand by U.S. and international steel producers, freight costs and speculation. The prices for scrap have varied significantly, may vary significantly in the future and do not necessarily fluctuate in tandem with the price of steel. Since the latter part of 2003 through the present, the price of scrap has risen sharply, largely as a result of foreign scrap demand (particularly from China). If we are unable to pass on the cost of higher scrap prices to our customers we will be less profitable. We may not be able to adjust our product prices, especially in the short term, to recover the costs of increases in scrap prices. Moreover, integrated steel producers are not as dependent as we are on scrap as a

 

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part of their raw material melt mix, which, during periods of high scrap costs relative to the cost of blast furnace iron used by the integrated producers, gives them a raw material cost advantage over mini-mills.

 

Natural gas and electric power are the primary energy resources used at our facility. Prices for natural gas and electricity have fluctuated in recent years. We do not have a long-term supply contract for electricity. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, energy prices may increase further, which could adversely affect our production costs, competitive position and results of operations. A substantial and prolonged increase in energy costs could have an adverse effect on our margins, earnings and cash flow.

 

A decrease in the global demand for steel, particularly from China, could have a material adverse effect on global steel pricing and could result in increased steel exports into the United States, which may negatively impact our sales, margins and profitability.

 

A significant factor in the worldwide strengthening of steel pricing over the past several years has been the explosive growth in Chinese steel consumption, which has vastly outpaced that country’s manufacturing capacity to produce its own steel needs. This increased demand has resulted in China becoming a net importer of steel products, as well as a net importer of raw materials and supplies required in the steel manufacturing process. A combination of a slowdown in China’s economic growth rate and its consumption of steel, coupled with its own expansion of steelmaking capacity, could result in a substantial weakening of both domestic and global steel demand and steel pricing. Should Chinese demand weaken, China might not only become a net exporter of steel but many Asian and European steel producers whose steel output currently feeds China’s steel import needs could find their way into the domestic market, through increased steel imports, thus causing an erosion of margins and a reduction in pricing.

 

In the recent past, imports of steel into the United States have adversely affected, and may again adversely affect, U.S. steel prices, which would impact our sales, margins and profitability.

 

Excessive imports of steel into the United States have in recent years exerted, and may again in the future, exert downward pressure on U.S. steel prices and significantly reduce our sales, margins and profitability. According to the American Iron and Steel Institute, imports of steel mill products into the United States constituted 25.4%, 25.6%, and 19.1% of the domestic steel market supply for 2005, 2004, and 2003 respectively.

 

U.S. steel producers compete with many foreign producers. Competition from foreign producers is typically strong and periodically exacerbated by weakening of the economies of certain foreign steelmaking countries, while also being further intensified during periods when the U.S. dollar is strong relative to foreign currencies. Economic difficulties in these countries or a reduction in demand for steel produced by these countries tends to encourage greater steel exports to the United States at depressed prices.

 

In addition, we believe the downward pressure on, and periodically depressed levels of, U.S. steel prices in some recent years has been further exacerbated by imports of steel involving dumping and subsidy abuses by foreign steel producers. Some foreign steel producers are owned, controlled or subsidized by foreign governments. As a result, decisions by these producers with respect to their production, sales and pricing are often influenced to a greater degree by political and economic policy considerations than by prevailing market conditions, realities of the marketplace or consideration of profit or loss. For example, between 1998 and 2001, when imports of hot-rolled and cold-rolled products increased dramatically, domestic steel producers were adversely affected by unfairly priced or “dumped” imported steel. Even though various protective actions taken by the U.S. government during 2001, including the enactment of various steel import quotas and tariffs, resulted in an abatement of some steel imports during 2002 and 2003, these protective measures were only temporary. Many foreign steel manufacturers were granted exemptions from the application of these measures and President Bush, in December 2003, rescinded a substantial part of these protective measures, the so-called Section 201 tariffs, as a result of a November 10, 2003 World Trade Organization ruling declaring that the tariffs on hot-rolled and cold-rolled finished steel imports violated global trade rules, and as a result of economic and political pressures from foreign governments, including threats of retaliatory tariffs on U.S. exports. Moreover, there are products and countries that were not covered by these protective measures, and imports of these exempt

 

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products or of products from these countries may have an additional adverse effect upon our revenues and income. In any event, when any of these remaining measures expire or if they are further relaxed or repealed, or if increasingly higher U.S. steel prices enable foreign steelmakers to export their steel products into the United States, even with the presence of duties or tariffs, the resurgence of substantial imports of foreign steel could again create downward pressure on U.S. steel prices.

 

Excess global capacity and the availability of competitive substitute materials have, at times, resulted in intense competition and may, in the future, cause downward pressure on prices.

 

Competition within the steel industry, both domestic and worldwide, is intense and is expected to remain so. We compete primarily on the basis of price, quality and the ability to meet customers’ product needs and delivery schedules. The highly competitive nature of the steel industry periodically exerts downward pressure on prices for our products. In the case of certain product applications, we and other steel manufacturers compete with manufacturers of other materials, including plastic, aluminum, graphite composites, ceramics, glass, wood and concrete. The global steel industry is generally characterized by overcapacity, which can have a negative impact on domestic steel prices. This overcapacity has sometimes resulted in high levels of steel imports into the United States exerting downward pressure on domestic steel prices and resulting in, at times, a dramatic reduction in, or in the case of many steel producers, the elimination of, gross margins.

 

Fluctuations in the relative value of the U.S. dollar and foreign currencies may negatively impact our sales, margins and profitability.

 

The value of the U.S. dollar against foreign currencies has been generally in decline since 2001. This weakness in the U.S. dollar has contributed to a decrease in foreign steel imports, which has decreased competition for U.S. steel manufacturers and helped to sustain or increase domestic steel prices. If the value of the U.S. dollar strengthens against foreign currencies, steel imports to the United States may increase and put downward pressure on steel prices, which may adversely affect our sales, margins and profitability.

 

Environmental regulation imposes substantial costs and limitations on our operations.

 

The risks of substantial costs and liabilities related to compliance with environmental laws and regulations are an inherent part of our business. For the year ended December 31, 2005 and the thirty-nine weeks ended September 30, 2006, we expended $222,000 and $307,000, respectively in environmental compliance. We are subject to various federal, state and local environmental, health and safety laws and regulations concerning such issues as air emissions, wastewater discharges, solid and hazardous waste handling and disposal, and the investigation and remediation of contamination. These laws and regulations are increasingly stringent. It is possible that future conditions may create substantial environmental compliance or remediation liabilities and the cost of compliance and remediation could be substantial. For example, our steelmaking operations produce certain waste products, such as electric arc furnace dust, which are classified as hazardous waste and must be properly disposed of under applicable environmental laws. These laws can impose clean-up liability on generators of hazardous waste and other substances that are disposed of either on or off-site, regardless of fault or the legality of the disposal activities. In addition, in October 2006, the Delaware Department of Natural Resources and Environmental Control issued a Notice of Conciliation and Secretary’s Order requiring Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions and in November 2006 issued a separate Secretary’s Order that requires Claymont Steel to monitor and reduce mercury emissions. However, the corrective measures and the outcome of each of these matters cannot be determined at this time, nor can we estimate the cost of any corrective measures or the possibility or amount of any penalty that may be imposed. Moreover, although we are currently able to purchase automobile-free scrap, which results in lower mercury emissions, on the same terms as scrap that includes automobiles, there can be no assurance that we will continue to be able to do so in the future. Further, other laws may require us to investigate and remediate contamination at our properties, including contamination that was caused in whole or in part by previous owners of our properties. While we believe that we can comply with environmental legislation and regulatory requirements and that the costs of doing so have been included within our budgeted cost estimates, it is possible that such compliance will prove to be more limiting to our operations and more costly than anticipated. In addition to potential clean-up liability, we may become subject to substantial monetary fines and penalties for violation of applicable laws, regulations or administrative orders.

 

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Work stoppages or unexpected equipment failures may lead to production curtailments or shutdowns.

 

Work stoppages or other slowdowns could significantly disrupt our operations, which could have a material adverse effect on our future operating results and financial condition. Our manufacturing processes are dependent upon critical pieces of steelmaking equipment, which may, on occasion, be out of service as a result of unanticipated failures. We have experienced and may in the future experience material plant shutdowns or periods of reduced production as a result of such equipment failures. Interruptions in our production capabilities will inevitably increase our production costs, and reduce our sales and earnings for the affected period. In addition to equipment failures, our facility is subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Moreover, any interruption in production capability may require us to make significant capital expenditures to remedy the problem, which could have a negative effect on our profitability and cash flows. We may also sustain revenue losses in excess of any recoveries we make under any applicable business interruption insurance coverages we may have. In addition to such revenue losses, longer-term business disruption could result in a loss of customers, which could adversely affect our business, results of operations and financial condition.

 

We depend on our senior management’s experience and knowledge of our industry, and the loss of any key members of our senior management team could disrupt our operations and harm our business.

 

Our success depends, in part, on the efforts of certain key individuals, including the members of our senior management team, who have significant experience in the steel industry. If, for any reason, our senior executives do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. We may not be able to attract and retain additional qualified senior personnel with significant steel industry experience as needed in the future. Failure to continue to attract these individuals at reasonable compensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that we will have to replace any of these individuals in the near future, the loss of the services of any of our key employees could disrupt our operations and have a material adverse effect on our business.

 

We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

 

Holdings has no direct operations and no significant assets other than ownership of 100% of the stock of Claymont Steel, and the indirect ownership of 100% of the stock of CitiSteel PA, Inc. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, including our required obligations under the Holdings Notes, or to pay any dividends with respect to our common stock. Legal and contractual restrictions in Claymont Steel’s senior revolving credit agreement and the indenture governing Claymont Steel’s floating rate notes, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. The earnings from, or other available assets of, our subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable us to repay our indebtedness or to pay any dividends on our common stock.

 

We have substantial indebtedness, and we have negative stockholders’ equity, which could adversely affect our financial condition and otherwise adversely impact our business and growth prospects.

 

We have a substantial amount of debt and we have negative stockholders’ equity. As of September 30, 2006, we have total indebtedness of approximately $243.8 million and stockholders’ deficit of $141.1 million. Upon completion of this offering and the application of the net proceeds therefrom, we will have approximately $168.8 million of indebtedness, based on our indebtedness as of September 30, 2006 and after giving effect to the use of proceeds therefrom. Our substantial level of indebtedness could have important consequences to you, including the following:

 

    we must use a substantial portion of our cash flow from operations to pay interest on our other indebtedness, which will reduce the funds available to us for other purposes;

 

    our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited;

 

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    our flexibility in reacting to changes in the industry may be limited and we could be more vulnerable to adverse changes in our business or economic conditions in general; and

 

    we may be at a competitive disadvantage to those of our competitors who operate on a less leveraged basis.

 

Furthermore, the Claymont Steel floating rate notes and any borrowings under the Claymont Steel credit agreement bear interest at variable rates. Interest on the Claymont Steel floating rate notes accrues at a floating rate per annum equal to six-month LIBOR plus 7.5%. The interest rate applicable to the March 1, 2007 interest payment is 13%. If we elect to pay interest in-kind on the Holdings Notes until October 2007, then our annual debt service, at the current interest rates, would be $22.1 million. If we elect to pay interest in cash until October 2007, then our annual debt service, at the current interest rates, would be $33.4 million. Beginning on October 1, 2007, when interest on the Holdings Notes can no longer be paid in-kind, annual debt service, based on current interest rates, will total $33.4 million. Based on the outstanding Claymont Steel floating rate notes at September 30, 2006, a 1% increase in interest rates would increase our annual interest expense by $1.7 million. Borrowings under the Claymont Steel credit agreement bear interest at the lender’s prime rate, which was 8.25% on September 30, 2006. There were no amounts outstanding under this agreement on September 30, 2006. If these rates were to increase significantly, our ability to borrow additional funds may be reduced, our interest expense would significantly increase, and the risks related to our substantial indebtedness would intensify.

 

Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future performance will be affected by a range of economic, competitive, legislative, operating and other business factors, many of which we cannot control, such as general economic and financial conditions in our industry or the economy at large. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition, or other events could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations and prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying acquisitions and capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital. We cannot assure you that any of these alternative strategies could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on the notes and our other indebtedness.

 

We urge you to consider the information under “Capitalization” and “Summary—Summary Historical and Pro Forma Financial and Operating Data” for more information on these matters.

 

The agreements governing our and our subsidiaries’ indebtedness impose significant operating and financial restrictions on us that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.

 

The agreements governing our and our subsidiaries’ indebtedness contain covenants that restrict our ability and the ability of our subsidiaries to take various actions, such as:

 

    incurring or generating additional indebtedness or issuing certain preferred stock;

 

    making certain investments or acquisitions;

 

    paying dividends on our capital stock or redeeming, repurchasing or retiring our capital stock or subordinated indebtedness or making other restricted payments;

 

    selling or issuing capital stock of our current subsidiary and our future restricted subsidiaries;

 

    entering into certain transactions with affiliates;

 

    creating or incurring liens on our assets;

 

    transferring or selling assets;

 

    incurring dividend or other payment restrictions affecting certain of our existing and future subsidiaries; and

 

    consummating a merger, consolidation or sale of all or substantially all of our assets.

 

These covenants limit our ability, and the ability of our subsidiaries, to engage in activities that may be in our long-term best interests. Our failure, and the failure of our subsidiaries, to comply with these covenants would result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, and have a material adverse effect on our liquidity, financial condition and results of operations.

 

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Risk Factors Relating to our Common Stock and the Offering

 

Our principal stockholder controls us and its interests may conflict with or differ from your interests as a stockholder.

 

After the consummation of this offering, our principal stockholder, H.I.G. Capital, will beneficially own approximately 64% of our common stock, assuming the underwriters do not exercise their over-allotment option. If the underwriters exercise in full their over-allotment option, H.I.G. Capital will beneficially own approximately 59% of our common stock. As a result, H.I.G Capital may exercise control over the outcome of stockholder votes, including the election of directors, the adoption or amendment of provisions in our certificate of incorporation and the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets. This concentration of ownership may also have the effect of delaying or preventing a change in the management or voting control of Holdings and the interests of our principal stockholders may not be aligned with yours. Our principal stockholder may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. A sale of a substantial number of shares of stock in the future by our principal stockholder or its affiliates could cause our stock price to decline.

 

Upon completion of this offering, we will be a “controlled company” within the meaning of the Nasdaq Global Market rules and, as a result, we will not be subject to all of the Nasdaq Global Market’s corporate governance requirements.

 

Following this offering, affiliates of H.I.G. Capital will control a majority of the outstanding shares of our common stock. Therefore, we will be a “controlled company” within the meaning of the Nasdaq Global Market rules. Under these rules, a controlled company may elect not to comply with certain Nasdaq Global Market corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended by a majority of the independent directors or by a nominating committee composed solely of independent directors. If we elect not to comply with these requirements, you will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq Global Market corporate governance requirements.

 

We do not intend to pay dividends in the foreseeable future, and, because we are a holding company, we may be unable to pay dividends.

 

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. In addition, the indenture governing the Holdings Notes restricts our ability to pay dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the board of directors considers relevant. Furthermore, because we are a holding company, we depend on the cash flow of our subsidiaries, and the indenture governing the Claymont Steel floating rate notes and the Claymont Steel credit agreement impose restrictions on Claymont Steel’s ability to distribute cash to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Capital Stock—Common Stock.”

 

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution of your investment and may experience additional dilution in the future.

 

If you purchase shares of our common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will experience immediate and substantial dilution of $20.22 per share, representing the difference between our pro forma net tangible book value after giving effect to this offering and the initial public offering price (assuming the mid-point of the range). In the future, we may also acquire other companies or assets, raise additional capital or finance other transactions by issuing equity which may result in additional dilution to you.

 

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An active trading market for our common stock may not develop.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock quoted on the Nasdaq Global Market, an active trading market for our shares may never develop and if developed may not be sustained following this offering. If an active market for our common stock does not develop, it may be difficult to sell shares you purchase in this offering without depressing the market price for the shares, or at all.

 

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

 

Our stock price is likely to be volatile. The stock market in general and the market for steel companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

    the level of imports of steel into the United States;

 

    intense competition in the steel industry;

 

    the cyclical nature of the steel industry and the industries we serve;

 

    the level of global demand for steel;

 

    the availability and cost of scrap, other raw materials and energy;

 

    currency fluctuations;

 

    environmental regulations;

 

    labor costs;

 

    equipment failures; and

 

    loss of key personnel.

 

These and other factors may cause the market price and demand for our common stock to fluctuate substantially.

 

Certain provisions in our charter documents and agreements and Delaware law may inhibit potential acquisition bids for us and prevent changes in our management.

 

Effective on the closing of this offering, our certificate of incorporation and bylaws will contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in management that our stockholders might deem advantageous. Specific provisions in our certificate of incorporation will include:

 

    our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval;

 

    advance notice requirements for stockholder proposals and nominations; and

 

    limitations on convening stockholder meetings.

 

As a result of these and other provisions in our certificate of incorporation, the price investors may be willing to pay in the future for shares of our common stock may be limited.

 

In addition, we will be subject to Section 203 of the Delaware General Corporation Law, which imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. See “Description of Capital Stock—Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law.”

 

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If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

 

Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities.

 

Upon consummation of this offering, there will be 17,566,754 shares of our common stock outstanding. All shares of our common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the “Securities Act.” The remaining 11,316,754 shares of our common stock outstanding, including the shares of common stock owned by H.I.G. Capital and certain of our management members, will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144. We, our directors and executive officers, and our existing stockholders have agreed to a “lock-up,” pursuant to which neither we nor they will sell any shares of our common stock without the prior consent of Jefferies & Company, Inc. for 180 days after the date of this prospectus. See “Underwriting.” Following the expiration of the applicable lock-up period, all these shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. In addition, H.I.G. Capital will have the ability to cause us to register the resale of their shares. See “Shares Eligible for Future Sale” for a discussion of the shares of our common stock that may be sold into the public market in the future.

 

We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

 

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

 

Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

 

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission and Nasdaq have imposed various new requirements on public companies, including changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and

 

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more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage as we currently have.

 

Non-compliance with the Sarbanes-Oxley Act of 2002 could materially adversely affect us.

 

The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules which will require us to include in our annual reports on Form 10-K, beginning with the Form 10-K for the year ending December 31, 2007, an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of such internal controls over financial reporting. While we intend to diligently and thoroughly document, review, test and improve our internal controls over financial reporting in order to ensure compliance with Section 404 of the Sarbanes-Oxley Act, management may not be able to conclude that our internal controls over financial reporting are effective. Furthermore, even if management were to reach such a conclusion, if our independent auditors are not satisfied with the adequacy of our internal controls over financial reporting, or if the independent auditors interpret the requirements, rules and/or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. Any of these events could result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the price of our common stock.

 

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and effective disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to retain the services of additional accounting and financial staff or consultants with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404.

 

Our internal controls over financial reporting may be insufficient to detect in a timely manner misstatements that could occur in our financials statements in amounts that may be material.

 

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and therefore are not required to make an assessment of the effectiveness of our internal controls over financial reporting for that purpose. However, in October 2006, Crowe Chizek, our independent accounting firm, advised our management and board of directors that it believed that our failure to properly calculate earnings per share in our financial statements was a significant deficiency under the standards established by the Public Company Accounting Oversight Board. As more fully described in Note 17 to the audited consolidated financial statements included elsewhere in this prospectus, the calculation of earnings per share of the predecessor company for the years ended December 31, 2003 and 2004 did not exclude cash dividends that accumulated on preferred stock. The Company has restated the earnings per share, as more fully described in Note 17. Other than the revision of the earnings per share amounts to exclude cash dividends accumulated on preferred stock, the restatement did not have any impact on the Company’s financial statements. Significant deficiencies are defined as a control deficiency, or combination of control deficiencies, that adversely affect the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

 

We intend to review the effectiveness of our internal controls and procedures and make any changes management determines appropriate, including to achieve compliance with Section 404 of the Sarbanes-Oxley Act by the date on which we are required to so comply. However, any significant deficiencies in our control systems may affect our ability to comply with SEC reporting requirements and NASDAQ Global Market listing standards or cause our financial statements to contain material misstatements, which could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, as well as subject us to civil or criminal investigations and penalties.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include, the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

 

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

 

    the cyclical nature of the steel industry and the industries we serve;

 

    the availability and cost of scrap, other raw materials and energy;

 

    the level of global demand for steel;

 

    the level of imports of steel into the United States;

 

    excess global steel capacity and the availability of competitive substitute materials;

 

    intense competition in the steel industry;

 

    currency fluctuations;

 

    environmental regulations;

 

    work stoppages and equipment failures;

 

    loss of key personnel; and

 

    other factors described in this prospectus. See “Risk Factors.”

 

We believe the forward-looking statements in this prospectus are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

 

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USE OF PROCEEDS

 

We estimate that our net proceeds from the offering, will be approximately $91.0 million at an assumed initial public offering price of $16.00 per share (the midpoint of the estimated price range shown on the front cover of this prospectus). We currently intend to apply the net proceeds as follows:

 

    Approximately $89 million of the net proceeds to repurchase the Holdings Notes, at a price in cash equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of repurchase. $89 million includes interest through January 31, 2007. Interest on the Holdings Notes accrues at approximately $0.9 million per month. In the event the net proceeds were insufficient to repay the Holdings Notes, we would use cash on hand to repay the Holdings Notes. The proceeds of the Holdings Notes were used to pay a dividend to our stockholders.

 

    The remaining portion of the net proceeds, if any, will be used to pay up to $4.0 million in fees due to H.I.G. Capital LLC, an affiliate of our principal stockholder. $1.0 million of this fee represents a transaction fee due under the management services agreement between us and H.I.G. Capital LLC, and the remaining $3.0 million represents a fee to terminate our obligation to make payments under the management services agreement following the completion of this offering.

 

The Holdings Notes accrue interest at a rate of 15.0% and mature on October 1, 2010. The proceeds of the Holdings Notes were used to pay a dividend to our stockholders. The Claymont Steel floating rate notes accrue interest at LIBOR plus 7.5% and mature on September 1, 2010. The interest rate for the interest payment on September 1, 2006 was 12.6% and is 13% for the payment due on March 1, 2007. The proceeds of the Claymont Steel floating rate notes were used to repay Claymont Steel indebtedness and to pay a dividend to Holdings which then paid a dividend to its stockholders.

 

Assuming net proceeds of approximately $91.0 million, no proceeds would be available for general corporate purposes. Any increase or decrease in the estimated net proceeds received by us from this offering, will change the amount of proceeds available for us to pay any unpaid portion of the $4.0 million in fees due to H.I.G. Capital LLC, repay indebtedness or use for general corporate purposes. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share (the mid-point of the range on the cover page of this prospectus) would increase (decrease) the estimated net proceeds to us by $5.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. An increase of one million shares in the number of shares offered by us, to a total of 7,250,000 shares, would increase the net proceeds to us from this offering by approximately $14.9 million and a decrease of one million shares in the number of shares offered by us, to a total of 5,250,000 million shares, would decrease the net proceeds to us from this offering by approximately $14.9 million (in each case assuming an initial public offering price of $16.00 per share).

 

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DIVIDEND POLICY

 

On September 23, 2005, we paid a dividend to our stockholders of approximately $41.4 million from a portion of the proceeds of the Claymont Steel floating rate notes offering. On June 14, 2006, we paid a dividend to our stockholders of approximately $69.6 million from the remainder of the proceeds of the Claymont Steel floating rate notes offering. On July 13, 2006, we paid a dividend to our stockholders of approximately $71.2 million from the proceeds of the Holdings Note offering. Although we have paid cash dividends in the past, we do not currently anticipate paying cash dividends in the foreseeable future. The agreements governing our and our subsidiaries’ existing indebtedness restrict our ability to pay cash dividends. Any future dividend would be at the discretion of our board of directors and would depend on our financial condition, results of operations, capital requirements, contractual obligations, the terms of our financing agreements at the time a dividend is considered and other relevant factors.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2006:

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to give further effect to our sale of common stock in this offering at an assumed initial public offering price of $16.00 per share (the midpoint of the estimated price range shown on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us as if each had occurred on that date and the use of proceeds therefrom.

 

You should read the following table in conjunction with the information set forth under “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the unaudited condensed consolidated financial statements and the related notes thereto, included elsewhere in this prospectus.

 

     At September 30, 2006

 
     Actual

    Adjusted

 
     (in thousands)  

Cash and cash equivalents

   $ 20,821     $ 18,752  
    


 


Debt:

                

Claymont Steel credit agreement

     —         —    

Claymont Steel floating rate notes

   $ 168,763 (1)   $ 168,763  

Holdings Notes

     75,000       —    
    


 


Total debt

   $ 243,763     $ 168,763  

Common stock, par value $0.001 per share:

                

20,000,000 shares authorized; 11,316,754 shares issued and

outstanding, actual; and 100,000,000 shares authorized;

17,566,754 shares issued and outstanding, pro forma

                

Additional paid-in capital

                

Total stockholders’ deficit

     (141,065 )     (62,004 )
    


 


Total capitalization

   $ 102,698     $ 106,759  
    


 



(1) $170.1 million principal amount outstanding net of discount from issuance of $1.3 million at September 30, 2006.

 

The number of shares of common stock to be outstanding immediately after this offering excludes the following:

 

    450,000 shares of common stock authorized for future issuance under our stock incentive plan, including:

 

    restricted stock units to be issued to our executive officers and key employees on completion of this offering having an aggregate value, based upon the initial public offering price per share, of $1.6 million; and

 

    options to purchase shares of common stock to be issued to our directors, executive officers and key employees upon completion of this offering, with an aggregate exercise price, based on the initial public offering price, of $1.69 million.

 

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Any increases or decreases in the estimated net proceeds received by us in this offering will change the amount of proceeds available for us to repay indebtedness or use for general corporate purposes. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, the midpoint of the range on the cover page of this prospectus, would decrease (increase) total stockholders’ deficit and decrease (increase) our total long-term debt (including current maturities) expected to be outstanding upon completion of this offering by $5.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses.

 

We may also increase or decrease the number of shares we are offering. An increase of one million shares in the number of shares offered by us, to a total of 7,250,000 shares, would decrease total stockholders’ deficit expected to be outstanding upon completion of this offering by $14.9 million (assuming an initial public offering price of $16.00 per share). Similarly, a decrease of one million shares in the number of shares offered by us, to a total of 5,250,000 million shares, would increase total stockholders’ deficit expected to be outstanding upon completion of this offering, by $14.9 million (assuming an initial public offering price of $16.00 per share). The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock upon the completion of this offering.

 

Our net tangible book value as of September 30, 2006 without giving effect to this offering was negative $156.6 million or $(13.84) per share of common stock. Net tangible book value per share is determined by dividing tangible stockholders’ equity, which is total tangible assets less total liabilities, by the aggregate number of shares of common stock outstanding. Tangible assets represent total assets excluding goodwill and other intangible assets. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of common stock in this offering at an assumed initial public offering price of $16.00 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus), our adjusted net tangible book value at September 30, 2006 would have been negative $74.2 million or $(4.22) per share. This represents an immediate increase in net tangible book value of $9.62 per share to our existing stockholders and an immediate dilution of $20.22 per share to new stockholders purchasing shares of common stock in this offering. The following table illustrates this dilution per share:

 

Initial public offering price per share

           16.00  

Net tangible book value per share as of September 30, 2006

   (13.84 )        

Increase in net tangible book value attributable to this offering

   9.62          
    

       

Pro forma net tangible book value per share after this offering

           (4.22 )
          


Dilution per share to new investors

         $ 20.22  

 

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our pro forma net tangible book value per share after this offering by $0.33, and would increase (decrease) the dilution to new investors by $0.67 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. An increase of one million shares in the number of shares offered by us, to a total of 7,250,000 shares, would result in an as adjusted net tangible book value per share of $(3.20), and the dilution in as adjusted net tangible book value per share to new investors would be $19.20 per share. Similarly, a decrease of one million shares in the number of shares offered by us, to a total of 5,250,000 million shares, would result in an as adjusted net tangible book value per share of $(5.38), and the dilution in as adjusted net tangible book value per share to new investors would be $21.38 per share. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

The following table summarizes as of September 30, 2006 the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering before deducting the underwriting discount and estimated offering expenses payable by us:

 

     Shares Purchased

   Total Consideration

   Average Price
Per Share


     Number

   Percent

   Amount

   Percent

  

Existing stockholders(1)

   11,316,754    64%    $ —      —  %    $ —  

New investors

   6,250,000    36%    $ 100,000,000    100%    $ 16.00
    
  
  

  
  

Total

   17,566,754    100%    $ 100,000,000    100%    $ 5.69
    
  
  

  
  


(1) The total consideration paid by existing stockholders does not give effect to dividends of $182.1 million paid by us to existing stockholders.

 

To the extent shares of common stock are issued upon vesting of restricted stock units, there will be further dilution to new investors. In addition, if options are issued having an exercise price that is less than the offering price in this offering, new investors will experience further dilution.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth selected historical consolidated financial and operating data. The unaudited statement of operations data for the thirty-nine weeks ended October 1, 2005 and September 30, 2006 and the balance sheet data as of September 30, 2006 are derived from and should be read together with the unaudited consolidated financial statements of Claymont Steel and Holdings and the accompanying notes, included elsewhere in this prospectus. The statement of operations data and balance sheet data as of December 31, 2005 and 2004 and for each of the two years ended December 31, 2003 and 2004 and for the periods from January 1, 2005 to June 9, 2005 and June 10, 2005 to December 31, 2005 are derived from, and should be read together with, the audited consolidated financial statements of Claymont Steel and Holdings and the accompanying notes, included elsewhere in this prospectus. The statement of operations data and balance sheet data as of December 31, 2001, 2002 and 2003 and for the years ended December 31, 2001 and 2002 are derived from Claymont Steel’s audited financial statements not included in this prospectus. The period from June 10, 2005 to December 31, 2005 is impacted by the purchase price allocation as a result of the Acquisition. Data for periods prior to June 10, 2005 is related to Claymont Steel prior to the Acquisition. All of the selected historical consolidated financial and operating data should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and Holdings’ and Claymont Steel’s consolidated financial statements and the accompanying notes and other information, included elsewhere in this prospectus.

    Year Ended December 31,

    Jan. 1 to
June 9


    June 10 to
Dec. 31


   

June 10 to
October 1,
2005


   

Thirty-Nine Weeks
Ended
September 30, 2006


 
    2001(1)

    2002(1)

    2003(1)

    2004(1)

    2005(1)

    2005(2)

     
    (dollars in thousands, except per ton numbers and per share numbers)  

Statement of Operations Data:

                                                               

Sales

  $ 102,553     $ 101,736     $ 108,510     $ 239,556     $ 128,687     $ 149,683     $ 75,316     $ 247,706  

Cost of sales

    96,853       96,738       109,075       167,029       78,762       114,136       62,941       169,391  
   


 


 


 


 


 


 


 


Gross profit

    5,700       4,998       (565 )     72,527       49,925       35,547       12,375       78,315  

Selling, general and administrative expenses

    5,978       6,353       5,579       8,303       2,535       8,041       4,671       12,930  
   


 


 


 


 


 


 


 


Income (loss) from operations

    (278 )     (1,355 )     (6,144 )     64,224       47,390       27,506       7,704       65,385  

Interest income

    34       6       3       47       228       968       191       1,909  

Other non-operating income (expense)

    (16 )     6       146       147             101       101       139  

Interest expense

    (1,149 )     (854 )     (900 )     (568 )           (11,632 )     (5,868 )     (20,039 )
   


 


 


 


 


 


 


 


Income (loss) before income taxes

    (1,409 )     (2,197 )     (6,895 )     63,850       47,618       16,943       2,128       47,394  
   


 


 


 


 


 


 


 


Income tax benefit (expense)

    457       763       147       (21,881 )     (17,583 )     (6,058 )     (822 )     (17,782 )
   


 


 


 


 


 


 


 


Net income (loss)

  $ (952 )   $ (1,434 )   $ (6,748 )   $ 41,969     $ 30,035     $ 10,885     $ 1,306     $ 29,612  
   


 


 


 


 


 


 


 


Net income (loss) per share—basic

  $ (2,517 )(3)   $ (2,359 )(3)   $ (7,484 )(3)   $ 41,081 (3)   $ 30,035     $ 0.97 (4)   $ 0.12 (4)   $ 2.63 (4)

Net income (loss) per share—diluted

  $ (2,517 )(3)   $ (2,359 )(3)   $ (7,484 )(3)   $ 41,081 (3)   $ 30,035     $ 0.96 (4)   $ 0.12 (4)   $ 2.62 (4)

Weighted average common shares outstanding—

                                                               

basic

    1,000       1,000       1,000       1,000       1,000       11,241,303       11,241,303       11,248,638  

diluted

    1,000       1,000       1,000       1,000       1,000       11,316,754       11,316,754       11,316,754  

Other Financial and Operating Data:

                                                               

Tons shipped

    296,839       285,675       290,777       343,758       148,309       188,440       96,208       294,405  

Sales per ton(5)

  $ 345     $ 356     $ 373     $ 697     $ 868     $ 794     $ 783     $ 832  

Capital expenditures

  $ 3,071     $ 2,896     $ 1,572     $ 1,638     $ 416     $ 5,926     $ 926     $ 8,772  

Cash dividends declared:

                                                               

per common share

  $     $     $     $     $     $ 3.66 (4)   $ 3.66 (4)   $ 12.51 (4)

per preferred share

  $     $     $     $ 18,534     $     $     $     $  

(1) Predecessor company.
(2) Successor company.
(3) As restated—see Note 17 to the audited consolidated financial statements included elsewhere in this prospectus.
(4) Basic and diluted earnings and cash dividends declared for the successor company have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure. Therefore, weighted average shares for purposes of the basic and diluted earnings per share calculation have been adjusted to reflect the 11.241303 for 1 stock split that occurred on December 5, 2006.
(5) Sales per ton for the thirty-nine weeks ended September 30, 2006 exclude toll processing sales of $2.8 million for 11,927 tons rolled.

 

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     December 31,

    September 30,
2006(2)


 
     2001(1)

   2002(1)

   2003(1)

   2004(1)

   2005(2)

   
     (dollars in thousands)  

Balance Sheet Data (at period end):

                                            

Cash and cash equivalents

   $ 707    $ 746    $ 523    $ 4,177    $ 2,619     $ 20,821  

Investment securities

                         68,317     $  

Net property, plant, and equipment

     36,166      33,962      30,631      27,012      14,615       21,954  

Total assets

     70,555      74,363      67,455      102,285      176,971       140,527  

Total debt

     14,011      17,382      19,911           170,452       243,763  

Total stockholder’s equity (deficit)

     43,153      41,040      34,308      76,240      (30,214 )     (141,065 )

(1) Predecessor company.
(2) Successor company.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in connection with “Selected Historical Consolidated Financial and Operating Data” and our consolidated financial statements and the accompanying notes, included elsewhere in this prospectus. Some of the statements in the following discussion are forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ for various reasons, including those described in “Forward-Looking Statements” and in “Risk Factors.”

 

Overview

 

We are a non-union, niche mini-mill specializing in the manufacture and sale of custom discrete steel plate in the United States and Canada. As a provider of custom discrete steel plate, we focus on customers with special product and service needs that are underserved by more traditional commodity-oriented steel plate producers. Our specialized manufacturing capabilities enable us to provide steel plate in non-standard dimensions (i.e., thicker, longer and/or wider) that neither commodity-oriented domestic steel plate manufacturers nor foreign manufacturers typically produce. Custom steel plate usually sells at a premium price to commodity steel plate. We are one of only two mills east of the Rocky Mountains (and the only mini-mill) that regularly offers custom sizes, allowing our customers to eliminate the costs associated with steel service centers for certain applications. Further, we are oriented toward small order quantities and shorter lead times which, along with our product quality and customer service, differentiates us not only from commodity steel plate manufacturers but also our competition in the custom discrete plate market. To leverage our production capabilities, our knowledgeable sales force collaborates with customers to meet their specific product and service requirements. We focus on building and maintaining long-term relationships with our customers by fulfilling their specific product and service requirements, including providing various non-standard dimensions of plate, and by providing meticulous quality assurance, reliable service and prompt delivery.

 

The Acquisition

 

 

On June 10, 2005, in accordance with the terms of a stock purchase agreement entered into on April 29, 2005, we acquired Claymont Steel. Pursuant to the stock purchase agreement, our wholly-owned subsidiary, H.I.G. SteelCo, Inc., purchased all of the outstanding capital stock of Claymont Steel from CITIC USA Holding, Inc. for $74.4 million plus working capital and other adjustments, resulting in an aggregate purchase price of $105.5 million. Immediately following the closing of the transactions contemplated by the stock purchase agreement, H.I.G. SteelCo, Inc. was merged with and into Claymont Steel. Following this merger, we became Claymont Steel’s sole stockholder. We refer to this transaction as the “Acquisition” in this prospectus.

 

Key Components of Results of Operations

 

Sales.  We derive our sales from the production and sale of steel plate to service centers, bridge fabricators, tool and die manufacturers, railcar manufacturers and general fabricators. Pricing is generally based upon the overall market – which is a function of customer demand and available capacity – and scrap metal costs. We follow the standard industry practice of including a scrap surcharge in our pricing based on the then current cost of scrap metal.

 

Cost of sales.  We classify, in cost of sales, the underlying scrap metal, alloy and flux costs, as well as inbound freight charges. The cost of scrap, alloy and flux represents approximately one-half of total cost of sales. Also included in cost of sales is labor expense for the melt shop, plate mill, maintenance departments and shipping department and the related indirect costs. In addition, energy costs for melting scrap and rolling plate, depreciation expense associated with property, buildings and equipment used in the manufacturing process and facilities expense are included in cost of sales.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses include sales and marketing expenses, accounting expenses, human resources, information technology, executive officers’ compensation and administrative salaries, customer service, general insurance, legal, and professional services and costs not directly associated with the melting and rolling of plate or the delivery costs of our products.

 

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Inventories.  Our inventories include labor, material and overhead costs which are stated at the lower of cost or market using the first-in first-out method of accounting. Inventories are comprised of raw materials, work-in-process, finished goods, spare-parts and manufacturing supplies.

 

Raw material inventory includes the materials consumed by the melt shop to produce steel slabs: scrap steel; alloy and flux. Scrap steel accounts for 70 to 80% of our raw material inventory and is purchased from local scrap dealers and kept in our scrap yard. We typically maintain a 10 to 20 day supply of scrap inventory to support the melt shop and, as available, take advantage of price discounts to purchase larger quantities. We maintain a 15 to 30 day supply of alloy and flux which are also used in the melting process.

 

Work-in-process inventory is composed of steel slabs of varying sizes and metallurgical grades. The majority of slabs are produced internally by our melt shop. We also purchase slabs from other suppliers in order to supplement our production and, as available, to take advantage of favorable pricing. We typically maintain a 15 to 30 day supply of slabs for use in our plate mill.

 

Finished goods inventory is composed of rolled steel plate, and a small number of seconds, produced by our plate mill and awaiting shipment to customers. We roll steel plate to fill specific customer orders, so the quantity of finished goods inventory is typically small, accounting for 15 to 30 days of sales.

 

Spare-parts inventory includes replacement parts for machinery and equipment in the melt shop and the plate mill. Parts include motors, coils, bearings, rolls, gearing, crane parts and electrical switchgear. These items typically cost in excess of $25,000. We maintain sufficient spare parts to limit downtime when equipment fails as well as to support preventative maintenance programs.

 

Manufacturing supplies include items directly consumed in the production of slabs by the melt shop like refractories, electrodes, stirring lances and various types of probes. We maintain sufficient inventory to support melt shop operations. Manufacturing supplies also include store room supplies used by our various operations departments including safety gear, electrical and mechanical supplies and crane supplies.

 

Results of Operations

 

Thirty-Nine Weeks Ended September 30, 2006 compared to the Pro Forma Thirty-Nine Weeks Ended October 1, 2005

 

The following presents an overview of our results of operations for the period from January 1, 2006 to September 30, 2006 compared to the pro forma results of operations for the period from January 1, 2005 to October 1, 2005. The pro forma statement was used for 2005 because the thirty-nine week period ended October 1, 2005 included results for both the predecessor and successor companies. We compared the actual 2006 results to the pro forma results before material nonrecurring charges or indebtedness incurred in the transactions entered into in connection with the Acquisition. The pro forma income statement is not in compliance with GAAP as the predecessor and successor companies are separate accounting entities and use different basis for their assets. For more detailed information, see “Unaudited Pro Forma Financial Data” beginning on page P-1.

 

     Pro Forma

   Successor

    

Thirty-Nine Weeks

Ended October 1, 2005


   Thirty-Nine Weeks
Ended September 30, 2006


     $

   % of Sales

   $

   % of Sales

    

(dollars in thousands)

Income Statement Data:

                       

Sales

   $ 204,003    100.0%    $ 247,706    100.0%

Cost of sales

     126,511    62.0%      169,391    68.4%
    

  
  

  

Gross profit

     77,492    38.0%      78,315    31.6%

Selling, general and administrative expenses

     6,580    3.2%      12,930    5.2%
    

  
  

  

Income from operations

     70,912    34.8%      65,385    26.4%

Interest income

     239    0.1%      1,909    0.8%

Other non-operating income

     101    0.1%      139    0.1%

Interest expense

     (19,666)    (9.7)%      (20,039)    (8.2)%
    

  
  

  

Income before income taxes

     51,586    25.3%      47,394    19.1%

Income tax expense

     19,067    9.4%      17,782    7.2%
    

  
  

  

Net income

   $ 32,519    15.9%    $ 29,612    11.9%
    

  
  

  

 

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Sales.    Sales for the thirty-nine weeks ended September 30, 2006 increased 21% to $247.7 million, compared with $204.0 million in the thirty-nine weeks ended October 1, 2005. The increase was due to a 20% increase in tons shipped partially offset by a 0.3% decrease in average selling price. We shipped 294,405 tons to customers in the thirty-nine weeks ended September 30, 2006 and 244,517 tons in the thirty-nine weeks ended October 1, 2005. Average selling price was $834 per ton in the thirty-nine weeks ended October 1, 2005 and declined to $832 per ton in the thirty-nine weeks ended September 30, 2006.

 

Cost of Sales.    Cost of sales for the thirty-nine weeks ended September 30, 2006 increased 34% to $169.4 million, compared with $126.5 million for the thirty-nine weeks ended October 1, 2005. The increase was primarily related to higher volume as cost of goods sold per ton increased 11% from $517 per ton in the thirty-nine weeks ended October 1, 2005 to $574 per ton in the thirty-nine weeks ended September 30, 2006. This increase of $57 per ton was primarily related to a $22 per shipped ton increase in scrap costs, from $208 per ton in the thirty-nine weeks ended October 1, 2005 to $231 per ton in the thirty-nine weeks ended September 30, 2006, and a $25 per shipped ton increase in supplies, parts, and outside services, from $76 per ton in the thirty-nine weeks ended October 1, 2005 to $101 per ton in the thirty-nine weeks ended September 30, 2006.

 

Raw material scrap prices increased from an average of $168 per ton for the thirty-nine weeks ended October 1, 2005 to $200 per ton for the thirty-nine weeks ended September 30, 2006. Scrap prices are expected to remain stable in the fourth quarter. Parts, supplies and outside services increased from $76 per shipped ton for the thirty-nine week period ended October 1, 2005 to $101 per shipped ton in the thirty-nine week period ended September 30, 2006 primarily as a result of the Company conducting regular maintenance in the melt shop and plate mill that was deferred prior to the Acquisition, including a $2.3 million charge ($8 per shipped ton) from a planned two week shut down of the plate mill in March 2006. Regular maintenance includes cleaning scrap pits and roller tables and replacing motors and switches.

 

Gross Margin.    Gross margin decreased from 38.0% in the thirty-nine weeks ended October 1, 2005 to 31.6% in the thirty-nine weeks ended September 30, 2006. The decline was primarily caused by the higher cost of goods sold from increased scrap costs and parts, supplies and outside services expenses.

 

Selling, General & Administrative Expenses.    Selling, general and administrative expenses increased $6.4 million in the thirty-nine weeks ended September 30, 2006 to $12.9 million, compared to $6.6 million for the thirty-nine weeks ended October 1, 2005. The increase related to a number of one-time costs, including: $2.0 million charge for the settlement of the Acquisition-related CITIC litigation; $0.6 million from the write-off of the trade name related to the name change; $0.4 million charge for our Chief Executive Officer’s restricted stock and bonus; and $0.7 million of transaction-related fees. The increase was also related to an increase in administrative headcount, which increased from approximately 32 employees in July 2005 to 46 employees in September 2006 as the Company grew shipments by 20% and added capacity. This increase included the addition of 6 employees in the sales department. The headcount increase led to a $1.3 million increase in compensation, benefits and sales commissions for the thirty-nine weeks ended September 30, 2006.

 

Interest Expense.    Interest expense for the thirty-nine weeks ended September 30, 2006 was $20.0 million compared to $19.7 million for the thirty-nine weeks ended October 1, 2005. Interest expense was incurred from the Claymont Steel floating rate notes issued in August 2005 (the proceeds of which were used to repay the Acquisition debt), the Holdings Notes issued in July 2006 and amortization of deferred financing fees. Interest expense on the debt totaled $18.2 million and non-cash amortization of deferred financing fees and amortization of the bond discount totaled $1.8 million. Interest income for the thirty-nine weeks ended September 30, 2006 was $1.9 million earned on overnight deposits of cash balances.

 

Income Tax Expense.    Income tax expense totaled $17.8 million for the thirty-nine weeks ended September 30, 2006, a 38% tax rate, and $19.1 million for the thirty-nine weeks ended October 1, 2005, a 37% tax rate. Claymont Steel’s statutory tax rate is approximately 37%.

 

Net Income.    Net income in the thirty-nine weeks ended September 30, 2006 was $29.6 million compared to $32.5 million in the thirty-nine weeks ended October 1, 2005.

 

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Results of Predecessor Company for the period from January 1, 2005 to June 9, 2005

 

Sales.  Sales were $128.7 million for the period with shipments of 148,309 tons and an average selling price of $868 per ton.

 

Cost of Sales.  Cost of sales was $78.8 million or $531 per ton. Cost of sales increased from $486 per ton in 2004 primarily due to a significant increase in energy costs. Energy costs rose from $63 per ton in 2004 to $105 per ton in 2005.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $2.5 million for the period.

 

Results of Successor Company for the period from June 10, 2005 to December 31, 2005

 

Sales.  Sales were $149.7 million for the period with shipments of 188,440 tons and an average selling price of $794 per ton.

 

Cost of Sales.  Cost of sales was $114.1 million or $606 per ton. Cost of sales increased from $486 per ton in 2004 primarily due to a significant increase in energy costs. Energy costs rose from $63 per ton in 2004 to $105 per ton in 2005.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $8.0 million for the period and included a $1.5 million transaction fee related to the Acquisition.

 

Pro Forma—Year Ended December 31, 2005

 

The following presents an overview of our pro forma results for the year ended December 31, 2005, which includes results for both the predecessor and successor companies. The pro forma income statement is not in compliance with GAAP as the predecessor and successor companies are separate accounting entities and use different bases for their assets. Pro forma results do not include material nonrecurring charges or indebtedness incurred in the transactions entered into in connection with the Acquisition. For more detailed information, see “Unaudited Pro Forma Financial Data.” The aggregate purchase price of the Acquisition was $105.5 million, which was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. Intangible assets were valued at $7.6 million, of which $0.6 million was assigned to the trade name, which is not subject to amortization. The remaining $7.0 million of acquired intangible assets relates to customer relationships and has a weighted-average useful life of approximately five years. The difference between the aggregate purchase price and the estimated fair values of the assets acquired and liabilities assumed was approximately $103.2 million. This negative goodwill was used to reduce the value of property, plant and equipment and intangible assets. Intangible asset amortization is expected to total $1.4 million per year in 2006 through June 30, 2010.

 

    Pro Forma

 
   

Year Ended

Dec. 31, 2005


 
    $

    % of Sales

 
    (dollars in thousands)  

Income Statement Data:

             

Sales

  $ 278,370     100.0 %

Cost of sales

    177,706     63.8  
   


 

Gross profit

    100,664     36.2  

Selling, general and administrative expenses

    9,950     3.6  
   


 

Income from operations

    90,714     32.6  

Interest income

    243     0.1  

Other non-operating income

    101     0.0  

Interest expense

    (25,430 )   (9.1 )
   


 

Income before income taxes

    65,628     23.6  

Income tax expense

    (24,025 )   8.6  
   


 

Net income

  $ 41,603     15.0 %
   


 

 

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Sales.  Sales were $278.4 million for the year ended December 31, 2005 with shipments of 336,749 tons and an average selling price of $827 per ton. Average selling price per ton increased from $697 per ton in 2004 to $827 per ton in 2005. Selling prices increased significantly through 2004, from an average of $481 per ton in the first quarter to $809 per ton in the fourth quarter, as customer demand increased and scrap and energy costs rose. Selling prices remained relatively stable from the fourth quarter of 2004 through the second quarter of 2005 and then declined to $773 per ton in the third quarter. Prices began to rise again and averaged $806 in the fourth quarter of 2005.

 

Cost of Sales.  Cost of sales was $177.7 million or $528 per ton for the year ended December 31, 2005. Cost of sales per ton increased 9% from $486 per ton in 2004 primarily due to a 60% increase in energy costs per ton. Energy costs rose from $63 per ton in 2004 to $105 per ton in 2005. Energy costs are largely comprised of electricity used in the melt shop. Electricity rates increased significantly in 2004, from $0.037 per KWH in January to $0.060 in December. Rates declined somewhat at the beginning of 2005 until July when rates dramatically increased, reaching $0.100 in December 2005. Rates declined in 2006 to $0.063 in February 2006. Although scrap costs varied during 2004 and 2005 the average cost per ton produced was virtually identical in both years.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $10.0 million for the year ended December 31, 2005. The increase in 2005 primarily resulted from increased amortization expense of $714,000 related to intangible assets recorded from the Acquisition.

 

Interest Income.  Interest income totaled $0.2 million for the year ended December 31, 2005 as a result of interest earned on the Company’s overnight money market accounts.

 

Interest Expense.  Interest expense for the year ended December 31, 2005 totaled $25.4 million, including interest expense on the Claymont Steel floating rate notes and amortization of deferred financing fees.

 

Income Tax Expense.  Income tax expense for the year ended December 31, 2005 totaled $24.0 million, a tax rate of 36.6%. Our statutory tax rate is approximately 37%.

 

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

 

The following presents an overview of results of operations of the predecessor company for the years ended December 31, 2004 and 2003.

 

     Year Ended December 31,

 
     2003

    2004

 
     $

    % of Sales

    $

    % of Sales

 
     (dollars in thousands)  

Income Statement Data:

                            

Sales

   $ 108,510     100.0 %   $ 239,556     100.0 %

Cost of sales

     109,075     100.5       167,029     69.7  
    


 

 


 

Gross (loss) profit

     (565 )   (0.5 )     72,527     30.3  

Selling, general and administrative expenses

     5,579     5.1       8,303     3.5  
    


 

 


 

Income (loss) from operations

     (6,144 )   (5.6 )     64,224     26.8  

Interest income

     3     0.0       47     0.0  

Other non-operating income

     146     0.1       147     0.1  

Interest expense

     (900 )   (0.8 )     (568 )   (0.2 )
    


 

 


 

Income (loss) before income taxes

     (6,895 )   (6.3 )     63,850     26.7  

Income tax benefit (expense)

     147     0.1       (21,881 )   (9.1 )
    


 

 


 

Net income (loss)

   $ (6,748 )   (6.2 )%   $ 41,969     17.6 %
    


 

 


 

 

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Sales.  Sales increased $131.0 million or 120.8%, for the year ended December 31, 2004 over the year ended December 31, 2003 primarily as a result of a $324 per ton, or 86.7%, increase in average selling price and an increase of 52,981 tons, or 18.2%, in products sold. The increase in average selling price was aided by an average $90 per ton raw material surcharge. To satisfy increased demand and capitalize on attractive pricing, management implemented several operational enhancements that increased production from 290,777 tons to 343,758 tons.

 

Cost of Sales.  Cost of sales increased $58.0 million, or 53.1%, for the year ended December 31, 2004 over the year ended December 31, 2003 primarily as a result of a $75 per ton, or 69%, increase in the average price of scrap metal and a 52,981 ton, or 18.2%, increase in products sold. Operating yields remained approximately the same between the two periods. Direct and indirect employee headcount remained stable between the periods. Gross margin improved from a negative 0.5% in 2003 to a positive 30% in 2004 primarily as a result of the implementation of the scrap surcharge added to selling prices beginning in January 2004. The surcharge added $31 million to sales in calendar 2004. The surcharge was implemented in the industry and accepted by customers in early 2004 as a result of: significantly rising scrap costs, growing from $94 per ton in January 2003 to $167 per ton in January 2004; several years of diminished industry profits and the closure of four domestic plate mills, which reduced production capacity. Gross margin also increased in 2004 as a result of melt shop and plate mill yield improvements, significant headcount reductions and quality improvement programs, which lowered customer rejections below 0.5%. The negative gross margin in 2003 was largely caused by the increase in scrap metal costs and the inability to pass along the increased cost to customers in 2003.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased by $2.7 million, or 48.8%, for the year ended December 31, 2004 over the year ended December 31, 2003 as a result of bad debt expense of $0.8 million related primarily to a single customer bankruptcy, a $0.5 million charge for loss on disposal of fixed assets, a $0.6 million management fee paid to the parent company related to 2004 and previous periods and a $0.3 million reserve for potential state tax liability.

 

Interest Income.  Interest income increased $0.04 million for the year ended December 31, 2004 over the year ended December 31, 2003. In addition, we received interest income of approximately $50,000 in 2004 on our overnight money market account.

 

Other Income.  Other income of $0.1 million and $0.1 million was recorded in 2004 and 2003, respectively, for the gain on the sale of capital stock received by us in satisfaction of an obligation.

 

Interest Expense.  Interest expense decreased by $0.3 million, or 36.9%, for the year ended December 31, 2004 over the year ended December 31, 2003 as a result of a 48% decline in average debt outstanding.

 

Income Tax Expense.  Income tax expense increased by $22.0 million for the year ended December 31, 2004 over the year ended December 31, 2003 as a result of a $70.7 million increase in pre-tax income. Tax expense was calculated at 34% of 2004 pre-tax income.

 

Liquidity and Capital Resources

 

Holdings is a holding company and conducts all of its operations through its subsidiaries. Accordingly, Holdings depends on its subsidiaries for dividends and other payments to generate the funds necessary to meet its financial obligations. The earnings from, or other available assets of, Holdings’ subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Holdings to repay its indebtedness or to pay any dividends on its common stock.

 

Our ongoing working capital requirements are largely driven by our level of accounts receivable and inventory and our capital expenditures. Ongoing accounts receivable balances will be determined by future sales and customer payment terms. Customer payment terms are expected to remain at the current level of 30 to 45 days with certain customers given a small discount for more rapid payment. Inventory balances will largely be

 

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determined by levels of scrap and purchased slab inventory. We carefully control our scrap purchases in order to match inventory levels to production requirements and may, from time to time, take advantage of opportunities to purchase excess scrap at advantageous pricing. Likewise, we attempt to match slab purchases to production requirements. Slab purchases typically require long lead times, and we may also purchase excess slab inventory at advantageous pricing.

 

At September 30, 2006, Claymont Steel’s liquidity consisted of cash and funds available under the $20.0 million Claymont Steel credit agreement totaling approximately $40.3 million. Net working capital at September 30, 2006 decreased $45.9 million to $65.6 million from $111.5 million at December 31, 2005 primarily due to the redemption of $68.3 million of investment securities used to pay the $69.6 million cash dividend paid to stockholders in June 2006. In addition, a $71.2 million cash dividend was paid to stockholders in July 2006 from the proceeds of the issuance of the Holdings Notes. The Company’s current ratio was 2.8 at September 30, 2006 and 4.1 at December 31, 2005. The percentage of long-term debt to total capital was 237% at September 30, 2006 and 122% at December 31, 2005. We believe the funds provided by operations, together with borrowings under the Claymont Steel credit agreement will be adequate to meet future capital expenditure and working capital requirements for existing operations for at least the next twelve months.

 

Cash Flows

 

Operating Activities. Net cash flows provided by operating activities were $30.3 million for the thirty-nine weeks ended September 30, 2006, $29.3 million for the period of June 10, 2005 to December 31, 2005, $11.5 million for the period from June 10 to October 1, 2005, $36.5 million for the period from January 1 to June 9, 2005, and $24.9 million for fiscal 2004, and net cash used by operating activities was $0.3 million in fiscal 2003.

 

During the thirty-nine weeks ended September 30, 2006 net income adjusted for non-cash items provided $34.5 million in cash from operating activities, and growth in inventory to support accelerating sales used $6.6 million of cash. This increase was partially offset by $5.4 million increase in accounts payable primarily related to raw material purchases. Also, a decline in accounts receivable generated $2.7 million of cash as the Company improved days-sales outstanding from 48 days at the beginning of the period to 40 days at the end of the period. Further, the Company used $6.2 million in cash to settle the CITIC litigation regarding the working capital adjustment in connection with the Acquisition. $4.3 million of the CITIC settlement was applied to the due to seller liability and $1.9 million was charged to operating expense.

 

During the period from June 10 to December 31, 2005, net income adjusted for non-cash items provided $11.3 million in cash from operating activities and growth in accounts receivable used $8.8 million of cash. The growth in accounts receivable was caused by an increase in days-sales-outstanding, from 36 days at the beginning of the period to 48 days at the end of the period, as certain large customers were granted longer payment terms. Inventories declined $9.9 million as the non-cash purchase accounting inventory write-up of $14.0 million, made at the time of the Acquisition, was expensed. Accounts payable grew $8.4 million as a result of negotiating extended terms with our vendors.

 

During the period from June 10 to October 1, 2005, net income adjusted for non-cash items generated $0.1 million in cash from operating activities. A decline in accounts receivable and inventories generated $2.1 million and $7.3 million of cash, respectively. Inventory would have increased $6.7 million without the $14.0 million non-cash purchase accounting inventory write-up. An accounts payable increase generated $8.4 million of cash largely related to the purchase of raw material inventory.

 

During the period from January 1 to June 9, 2005, net income adjusted for non-cash items provided $32.0 million in cash from operating activities. Inventories declined $5.3 million as a result of a decline in average scrap price from $204 per ton at the beginning of the period to $150 per ton at the end of the period.

 

Net cash provided by operations increased by $25.3 million from fiscal 2003 to fiscal 2004 as a result of an increase of $53.1 million in net income adjusted for non-cash items. Accounts receivable and inventories increased $18.5 million and $14.6 million in fiscal 2004, respectively, as a result of a 121% increase in net sales which was the result of an 18% increase in shipped tons and a $324 per ton increase in average selling price (including a $90 per ton average raw material surcharge).

 

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Investing Activities. Cash flows provided by investing activities were $59.5 million for the thirty-nine weeks ended September 30, 2006. Cash flows used in investing activities were $175.1 million for the period of June 10, 2005 to December 31, 2005, $101.8 million for the period from June 10 to October 1, 2005, $0.4 million for the period from January 1 to June 9, 2005, $1.4 million in fiscal 2004 and $1.5 million in fiscal 2003.

 

During the thirty-nine weeks ended September 30, 2006, we redeemed investment securities, net of purchases, of $68.3 million, which was used to pay a dividend to our stockholders. We spent $8.8 million on capital expenditures during this period. Major capital projects in this period included completing the upgrade to the plate mill electrical drive system, enhancing the plate mill reheat furnace, replacing the 2 hi motor in the plate mill and renovating office space.

 

During the period from June 10 to December 31, 2005, we used $100.8 million of cash to acquire Claymont Steel, purchased $68.3 million of investment securities, net of redemptions, from the proceeds of the Claymont Steel floating rate notes issuance and spent $5.9 million on capital expenditures. Major capital projects in this period included upgrading the plate mill electrical drive system, purchasing a second ladle for the melt shop, enhancing the cooling tower and adding a bag room. These projects enhanced the efficiency and reliability of the plate mill and the melt shop.

 

During the period from January 1 to June 9, 2005, we spent $0.4 million on capital expenditures, essentially deferring all major projects until after the Acquisition.

 

During the period from June 10 to October 1, 2005, we used $100.8 million of cash to acquire Claymont Steel and spent $0.9 million on capital expenditures.

 

During fiscal 2003 and 2004, we spent $1.6 million and $1.6 million, respectively, on capital expenditures, which amount was sufficient to maintain the facilities, but it did not provide expansion capacity.

 

Financing Activities. Cash flows used in financing activities were $71.6 million for the thirty-nine weeks ended September 30, 2006. Cash flows provided by financing activities were $117.4 million for the period from June 10, 2005 to December 31, 2005 and $127.0 million for the period from June 10 to October 1, 2005. Cash flows used in financing activities were $9.3 million for the period from January 1 to June 9, 2005 and $19.9 million in fiscal 2004. Cash flows provided by financing activities were $1.6 million in fiscal 2003.

 

During the thirty-nine weeks ended September 30, 2006, we paid cash dividends to our stockholders of approximately $140.7 million from the proceeds of the Claymont Steel floating rate notes offering and the Holdings Notes offering, repaid $1.9 million of the Claymont Steel floating rate notes as required pursuant to an excess cash flow covenant in the indenture governing the floating rate notes and incurred $4.2 million of deferred financing fees related to the issuance of the floating rate notes and the Holdings Notes.

 

During the period of June 10 to December 31, 2005, the floating rate notes were issued for cash proceeds of $170.5 million, and we paid a dividend of $41.1 million to our stockholders and incurred deferred financing costs related to the notes and the original Acquisition debt of $12.0 million.

 

During the period of June 10 to October 1, 2005, we borrowed the following amounts to fund the Acquisition: $40.0 million under the revolving credit facility; $15.0 million under a Term A loan; and, $25.3 million under senior secured notes. This original Acquisition debt was repaid in August 2005 from the proceeds of the Claymont Steel floating rate notes issuance. Also during this period, we repaid $31.7 million of the revolving credit facility and incurred $10.5 million of deferred financing fees.

 

During the period of January 1 to June 9, 2005, we paid a $9.3 million dividend on the preferred stock.

 

During fiscal 2004, we repaid our line of credit of $16.5 million and the note payable of $3.4 million to our former parent from cash provided by operating activities. During fiscal 2003, we repaid $0.9 million under our line of credit and borrowed $2.5 million from our parent to fund operating activities.

 

Capital Expenditures

 

Capital expenditures were $8.8 million in the thirty-nine weeks ended September 30, 2006, compared to $5.9 million in the period of June 10 to December 31, 2005. We are undertaking a number of

 

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deferred capital projects including capacity enhancement and efficiency improvement projects. Capital expenditures are projected to be approximately $12.0 million in 2006 and approximately $10.0 million in 2007. The planned capital expenditures for 2006 and 2007 are a result of our initiatives to increase plant capacity and to reduce operating costs.

 

Indebtedness

 

15% Senior Secured Pay-In-Kind Notes due 2010. On July 6, 2006, we issued $75.0 million aggregate principal amount of Senior Secured Pay-In-Kind Notes due 2010. The Holdings Notes are senior secured obligations of Holdings secured by substantially all of Holdings’ assets. Pursuant to an intercreditor agreement, the security interest in Holdings’ assets is subordinated to a lien thereon that secures Holdings’ guarantee of Claymont Steel’s revolving credit facility. Interest on the Holdings Notes accrues at an annual rate of 15%. Interest is payable semiannually in arrears on April 1 and October 1 commencing on April 1, 2007. Holdings may, for the first two interest payment dates only (April 1 and October 1, 2007), in lieu of cash, pay interest by the issuance of additional 15% Senior Secured Pay-In-Kind Notes due 2010 having an aggregate principal amount equal to the amount of interest due and payable. The Holdings Notes will mature on October 1, 2010.

 

Holdings has the right, at any time, to redeem all or some of the Holdings Notes at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest, to the date of redemption. Upon a change in control, each holder has the right to require Holdings to repurchase such holder’s notes at a purchase price in cash equal to 110% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase.

 

After this offering of common stock, each holder of Holdings Notes will have the right to require us to repurchase all or any part of its notes at an offer price in cash equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The indenture governing the Holdings Notes also includes an excess cash flow covenant that requires Holdings (subject to certain limitations) to offer to repurchase a portion of the Holdings Notes at 102% of principal plus accrued interest up to a maximum of 75% of Holdings’ excess cash flow, as defined, starting with the year ended January 1, 2008.

 

The indenture governing the Holdings Notes imposes certain restrictions that limit the ability of Holdings and its restricted subsidiaries to, among other things: incur debt; restrict dividend or other payments from its subsidiaries; issue and sell capital stock of its subsidiaries; engage in transactions with affiliates; create liens on its assets to secure indebtedness; transfer or sell assets; and consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries. The indenture governing the Holdings Notes also contains certain events of default, including, but not limited to:

 

    non-payment of interest and additional interest;

 

    non-payment of principal or premium;

 

    violations of certain covenants;

 

    non-payment of certain judgments

 

    certain bankruptcy-related events;

 

    invalidity of any collateral agreements; and

 

    invalidity of any guarantee.

 

The foregoing summary of certain terms of the Holdings Notes is qualified in its entirety by reference to the complete terms contained in the indenture governing the Holdings Notes. We are in compliance with the covenants in this indenture as of September 30, 2006.

 

Senior Secured Floating Rate Notes due 2010. In August 2005, Claymont Steel issued $172.0 million of the Claymont Steel floating rate notes. As of September 30, 2006, the aggregate principal amount of Claymont Steel floating rate notes outstanding was $170.1 million. The Claymont Steel floating rate notes are senior

 

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secured obligations of Claymont Steel and rank senior in right of payment to all of Claymont Steel’s subordinated indebtedness and pari passu in right of payment with all of Claymont Steel’s existing and future senior indebtedness. Pursuant to an intercreditor agreement interest on the Claymont Steel floating rate notes accrues at a floating rate per annum equal to six month LIBOR plus a margin of 7.5%. Interest is payable semiannually in arrears on September 1 and March 1. Interest on overdue principal is payable at 1% in excess of the above rate. The Claymont Steel floating rate notes will mature on September 1, 2010.

 

Claymont Steel may, at its option, redeem all or some of the Claymont Steel floating rate notes at the following redemption prices:

 

For the period below:


   Percentage

On or after September 1, 2006

   103.0%

On or after September 1, 2007

   102.0%

On or after September 1, 2008

   101.0%

On or after September 1, 2009

   100.0%

 

Upon a change in control, each holder has the right to require Claymont Steel to repurchase such holder’s Claymont Steel floating rate notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase. The indenture governing the Claymont Steel floating rate notes also includes an excess cash flow covenant that requires Claymont Steel, after the end of each fiscal year, to offer to repurchase a portion of the Claymont Steel floating rate notes at 102% of principal plus accrued interest up to a maximum of 75% of the excess cash flow, as defined. On May 3, 2006, pursuant to the excess cash flow covenant, Claymont Steel redeemed $1.9 million of the Claymont Steel floating rate notes.

 

The indenture governing the Claymont Steel floating rate notes imposes certain restrictions that limit the ability of Claymont Steel and its restricted subsidiaries to, among other things: incur debt; restrict dividend or other payments from its subsidiaries; issue and sell capital stock of its subsidiaries; engage in transactions with affiliates; create liens on its assets to secure indebtedness; transfer or sell assets; and consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries. For example, the Claymont Steel floating rate notes contain a restricted payment covenant, which among other things, restricts Claymont Steel’s ability to pay dividends on its capital stock until after September 1, 2007.

 

The indenture governing the Claymont Steel floating rate notes also contains certain events of default, including, but not limited to:

 

    non-payment of interest and additional interest;

 

    non-payment of principal or premium;

 

    violations of certain covenants;

 

    non-payment of certain judgments

 

    certain bankruptcy-related events;

 

    invalidity of any collateral agreements; and

 

    invalidity of any guarantee.

 

The foregoing summary of certain terms of the Claymont Steel floating rate notes is qualified in its entirety by reference to the complete terms contained in the indenture governing the Claymont Steel floating rate notes. Claymont Steel is in compliance with the covenants in this indenture as of September 30, 2006.

 

Credit Agreement. In August 2005, Claymont Steel entered into a $20 million senior secured revolving credit facility. The Claymont Steel credit agreement is secured by a first priority perfected security interest in

 

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existing and future accounts receivable, inventories, and other associated working capital assets and by a security interest in our real property and other tangible and intangible assets, which security interest in real property and other tangible and intangible assets is subordinated to the lien thereon that secures the Claymont Steel floating rate notes and guarantees in respect thereof; however, pursuant to the intercreditor agreement entered into by and among the administrative agent, the trustee, the collateral agent and Holdings in respect of the Holdings Notes, the security interest on the assets of Holdings that secures the Holdings Notes is contractually subordinated to the liens thereon that secures its guarantee in respect of the Claymont Steel credit agreement. The Claymont Steel credit agreement matures on August 25, 2008.

 

Interest accrues on amounts outstanding under the Claymont Steel credit agreement at floating rates equal to either the prime rate of interest in effect from time to time (plus .25% in certain circumstances) or LIBOR plus 1.75% to 2.50% based on the amount of availability under the Claymont Steel credit agreement. The Claymont Steel credit agreement contains certain customary fees, including servicing fees, unused facility fees and pre-payment fees.

 

The Claymont Steel credit agreement contains customary covenants that restrict its ability to, among other things:

 

    declare dividends;

 

    prepay, redeem or purchase debt;

 

    incur liens;

 

    make loans and investments;

 

    make capital expenditures;

 

    incur additional indebtedness;

 

    engage in mergers, acquisitions and asset sales;

 

    enter into transactions with affiliates; and

 

    engage in businesses that are not related to our business.

 

The Claymont Steel credit agreement also includes financial covenants that, among others, require us to meet minimum levels of EBITDA (as defined in the Claymont Steel credit agreement) and maintain specified financial coverage ratios.

 

The Claymont Steel credit agreement contains customary events of default, including, but not limited to:

 

    non-payment of principal, interest or fees;

 

    violations of certain covenants;

 

    certain bankruptcy-related events;

 

    inaccuracy of representations and warranties in any material respect; and

 

    cross defaults with certain other indebtedness and agreements.

 

Claymont Steel is in compliance with the covenants in this credit agreement as of September 30, 2006.

 

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Contractual Obligations

 

The following is a summary of our significant contractual obligations by year as of September 30, 2006.

 

     Payments Due by Period

Contractual Obligations


   Total

  

Less Than

1 Year


   1-3 Years

   3-5 Years

  

More Than

5 Years


     (in thousands)

Pension obligations(1)

     N/A    $      N/A      N/A      N/A

Operating lease obligations

   $ 978      337    $ 422    $ 219    $

Service agreement(2)

     2,500      323      645      645      887

Letters of credit

     550      550               

Management agreement

     5,906      675      1,350      1,350      2,531

Claymont Steel credit agreement and related interest(3)

     192      100      92          

Claymont Steel floating rate notes and related interest(4)

     256,724      22,114      44,229      190,381     

Claymont Steel Holdings pay-in-kind notes(5)

     120,000      11,250      22,500      86,250     
    

  

  

  

  

     $ 386,850    $ 35,349    $ 69,237    $ 278,845    $ 3,418
    

  

  

  

  


(1) With the exception of 2006, which is $ 0, we are not able to reasonably estimate future obligations.
(2) Service agreement relates to a contract with a third party for the scarfing of slabs.
(3) Unused commitment fee on the Claymont Steel credit agreement, calculated at 0.5% multiplied by the $20.0 million commitment.
(4) Interest on the Claymont Steel floating rate notes, calculated using 6-month LIBOR plus 7.5%, or 13.0%.
(5) We have the option to pay interest on the Holdings Notes in cash or by issuing additional notes through October 1, 2007. This table assumes that interest is paid in cash. This table does not give effect to the application of the net proceeds of this offering.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk. We are exposed to market risk in the form of interest rate risk relating to the Claymont Steel floating rate notes and borrowings under the Claymont Steel credit agreement. The Claymont Steel floating rate notes accrue interest at a rate equal to LIBOR plus 7.5% per annum. Revolving credit loans under the Claymont Steel credit agreement accrue interest at floating rates equal to the prime rate of interest or LIBOR plus 1.75%, as applicable per annum. Advances under the letters of credit under the Claymont Steel credit agreement accrue interest at floating rates equal to LIBOR plus 1.75% per annum. Because the prime and LIBOR rates may increase or decrease at any time, we are subject to the risk that they may increase, thereby increasing the interest rates applicable to our borrowings under the Claymont Steel credit agreement. Increases in the applicable interest rates would increase our interest expense and reduce our net income. We do not have any instruments, such as interest rate swaps or caps, in place that would mitigate our exposure to interest rate risk relating to these borrowings. At September 30, 2006, there were no amounts outstanding under the Claymont Steel credit agreement. Based on the outstanding Claymont Steel floating rate notes, at September 30, 2006 the effect of a hypothetical 1% increase in interest rates would increase our annual interest expense by $1.7 million and decrease our net income by approximately $1.0 million.

 

Commodity Price Risk. In the ordinary course of business, we are exposed to market risk for price fluctuations of raw materials and energy, principally scrap steel, steel slabs, electricity and natural gas. We attempt to negotiate the best prices for our raw materials and energy requirement and to obtain prices for our steel products that match market price movements in response to supply and demand. We introduced a raw material surcharge in January 2004 designed to pass through increases in scrap steel costs to our customers. Our surcharge mechanism has worked effectively to reduce the impact of increased scrap costs so we can maintain higher and more consistent gross margins. During the thirty-nine weeks ended October 1, 2005, we captured 90% of the announced raw material surcharge. For the thirty-nine weeks ended September 30, 2006, we captured 62% of the announced raw material surcharge as two large customers were granted preferential pricing. Any increase in the prices for raw materials or energy resources could materially increase our costs and lower our earnings.

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. This provides a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. We believe that our significant accounting policies, as discussed in the “Notes to Consolidated Financial Statements” and “Notes to Condensed Consolidated Financial Statements,” included elsewhere in this prospectus, involve a higher degree of judgment and complexity.

 

Investment Securities. Investment securities represented 0% and 38% of our total assets at September 30, 2006 and December 31, 2005, respectively. Investment securities are carried at fair value and have maturities of less than three months at December 31, 2005. Fair value is approximated based on market value of the securities at the balance sheet date.

 

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable represented 26% and 22% of our total assets at September 30, 2006 and December 31, 2005, respectively. Accounts receivable, net of a reserve for doubtful accounts, are carried at net realizable value, which is estimated based on the expected collectibility of each individual customer account. We establish reserves for doubtful accounts on a case-by-case basis when we believe the payment of amounts owed to us is unlikely to occur. In establishing these reserves, we consider our historical experience, changes in our customer’s financial position, and any disputes with customers. We derive a significant portion of our revenues from steel service centers and fabricators and construction-related industries and our receivables are concentrated in those industries. If the financial condition of our clients were to deteriorate, additional allowances may be required. During the thirty-nine weeks ended September 30, 2006, we increased the allowance for doubtful accounts through charges to expense of $0.2 million. For the period from June 10 to December 31, 2005, we increased the reserve by $0.3 million. In fiscal 2004 and 2003, we increased the reserve by $0.8 million and $0.4 million, respectively. The allowance was decreased for write-offs and recoveries of specifically identified uncollectible accounts by $0.7 million, $0.0 million, $0.6 million and $1.0 million, respectively.

 

The reserve for doubtful accounts totaled $0.8 million at September 30, 2006, $1.3 million at December 31, 2005, $1.0 million at each of June 9, 2005 and December 31, 2004 and $0.8 million at December 31, 2003.

 

Inventories. Inventories represented 30% and 20% of our total assets at September 30, 2006 and December 31, 2005, respectively. Inventories include raw materials consisting of scrap steel, alloys and flux and work-in-process consisting of steel slabs, finished plate, manufacturing supplies and spare parts. Inventories include labor and overhead and are recorded at the lower of cost (first-in, first-out method) or market. We review whether the realizable value of this inventory is lower than its book value. If our valuation is lower than its book value, we take a charge to expense and directly reduce the value of the inventory. We do not maintain a separate inventory reserve account.

 

Property, Plant and Equipment. Property, plant and equipment represented 16% and 8% of our total assets at September 30, 2006 and December 31, 2005, respectively. We determine the carrying value of these assets based on our property and equipment accounting policies, which incorporate our estimates, assumptions and judgments relative to capitalized costs and useful lives of our assets.

 

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Our property and equipment accounting policies are designed to depreciate our assets over their estimated useful lives. The assumptions and judgments we use in determining the estimated useful lives reflect both historical experience and expectation regarding future operations. The use of different estimates, assumptions and judgments in the establishment of the property and equipment accounting policies would likely result in different net book values of our assets and results from operations. We review our property and equipment for impairment when events or circumstances change indicating the carrying value of the assets may be impaired.

 

Revenue Recognition. We recognize revenue when the steel plate is shipped to our customers. We ship plate after we determine that it meets customer specifications. We establish reserves for sales returns and allowances based on our historical experience and future expectations. During the thirty-nine weeks ended September 30, 2006, we increased the allowance for sales returns and allowances through charges to expense of $1.0 million, and for the period from June 10 to December 31, 2005, we increased the reserve by $0.2 million. For the period of January 1 to June 9, 2005, we increased the reserve by $0.1 million, and in fiscal 2004 and 2003, we increased the reserve by $1.4 million and $0.4 million, respectively. The allowance was decreased for actual returns and allowances by $0.5 million, $0.2 million, $0.7 million, $0.6 million and $0.5 million, respectively.

 

The reserve for sales returns and allowances totaled $0.4 million at September 30, 2006, $0.2 million at December 31, 2005, $0.2 million at June 9, 2005, $0.9 million ay December 31, 2004 and $0.1 million at December 31, 2003.

 

Recently Issued Accounting Pronouncements

 

The Company adopted SFAS No. 151, Inventory Costs, on January 1, 2006. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facility. In accordance with SFAS No. 151, the Company recorded a $2.3 million charge in the thirteen weeks ended April 1, 2006 for maintenance related costs from a planned shut down of the plate mill in March 2006. The adoption did not change the manner in which the Company previously recorded these expenses and did not have a significant impact on its consolidated financial position or results of operations.

 

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company adopted SFAS No. 153 effective January 1, 2006 and its adoption did not have a significant impact on its consolidated financial position or results of operations.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). This Statement requires companies to record compensation expense for all share based awards granted subsequent to the adoption of SFAS No. 123R. In addition, SFAS No. 123R requires the recording of compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The Company adopted SFAS No. 123R on January 1, 2006 and the adoption did not have a significant impact on its consolidated financial position or results of operations.

 

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”), which is effective no later than the end of fiscal years ending after December 15, 2005. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS

 

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No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). Conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. At the adoption of FIN No. 47, the Company recorded a $550,000 asset retirement liability on the December 31, 2005 balance sheet to cover replacement and remediation of certain assets, including removal and replacement of transformers containing PCB’s and removal of certain contaminated smoke stacks.

 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”). This Statement requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principles unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. SFAS No. 154 replaces Accounting Principles Bulletin (“APB”) No. 20, Accounting Changes (“APB No. 20”), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in the net income of the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

 

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 (Accounting for Derivative Instruments and Hedging Activities) and No. 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), which permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. In addition, SFAS No. 155 established a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation under the requirements of Statement No. 133. This Statement will be effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt this Statement effective January 1, 2007. Based on our current evaluation of this Statement, we do not expect this adoption of SFAS No. 155 to have a material effect on our financial statements.

 

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement clarifies when servicing rights should be separately accounted for, requires companies to account for separately recognized servicing rights initially at fair value, and gives companies the option of subsequently accounting for these servicing rights at either fair value or under the amortization method. This Statement will be effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt this Statement effective January 1, 2007. Based on our current evaluation of this Statement, we do not expect the adoption of SFAS No. 156 to have a material effect on our financial statements.

 

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), which is effective in fiscal years beginning after December 15, 2006. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will adopt FIN No. 48 on January 1, 2007 and does not anticipate the adoption to have a material impact on its consolidated financial condition or results of operations.

 

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for the financial statements for fiscal years beginning after November 15, 2007. We have not yet evaluated the impact of this statement.

 

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The standard is effective for fiscal years beginning after June 15, 2007; however, as required by the standard, we will disclose, in the notes to the financial statements, a brief description of the standard and the date adoption is required. We have not yet evaluated the impact of this standard.

 

In September 2006, the Securities and Exchange Commission (SEC) issued SAB 108, in which the SEC staff established an approach that requires quantification of financial statement errors based on the effects of the error on each of our financial statements and the related financial statement disclosures. The interpretations in this Staff Accounting Bulletin are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build-up of improper amounts on the balance sheet. SAB 108 is effective on or before November 15, 2006. We have completed our evaluation of SAB 108 and have determined that this interpretation does not have a material effect on our consolidated results of operations or consolidated financial position.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing arrangements.

 

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BUSINESS

 

Our Company

 

We are the only non-union mini-mill focused on the manufacture and sale of custom discrete steel plate in North America. Our business is customer service oriented in that we focus on small order quantities, short lead times and non-standard dimensions. This orientation, along with our superior product quality, differentiates us from both commodity steel plate manufacturers and our competition in the custom discrete steel plate market. Our specialized manufacturing capabilities enable us to efficiently provide steel plate in non-standard dimensions to customers with distinct product and service needs. Our production capabilities are complemented by our knowledgeable sales force, meticulous quality assurance process, flexible scheduling system and reliable product delivery. Our ability to provide custom sizes, superior customer service, small order quantities and short lead times allows us to obtain premium pricing as compared to commodity steel plate manufacturers and has also garnered us the number one ranking in end-user customer satisfaction in the steel plate industry every year since 2001 according to surveys conducted by Jacobson & Associates, a recognized steel industry consulting firm.

 

Through our manufacturing facility located in Claymont, Delaware, we have the capacity to produce over 500,000 tons of steel plate annually and we believe we are a low cost producer of custom steel plate in our primary target market. Our well-maintained facility in Claymont, Delaware conducts a full range of steel-making activities, utilizing an electric arc furnace, slab caster and rolling mill. We believe that our Claymont manufacturing facility is in good condition and is suitable for our operations and believe that this manufacturing facility will have sufficient capacity to meet our needs for the foreseeable future.

 

Throughout the 1990’s, we profitably served the commodity plate market, with approximately 80% of our revenues generated from service centers. However, by the end of the decade, competition from new mini-mill entrants had reduced profits in the commodity plate market to unattractive levels. In 2001, we made a strategic decision to transition our business focus to producing custom (i.e., thicker, longer and wider than standard sized) plate and being customer service oriented in order to serve fewer service centers and greater high margin end-user customers in numerous end-markets, including bridges, tool and die, railcars, and general fabrication, among others. In order to effect this change, from 2001 to 2003 we upgraded and reoriented our facility, equipment and processes to maximize our ability to efficiently produce plate across a broader range of grades, gauges, widths and lengths. We also strengthened and reoriented our sales and customer service staff. Since the implementation of these initiatives, we have improved overall shipments, custom steel plate shipments and direct sales to end-users, as detailed in the table below.

 

    Year Ended December 31,

  Thirty-Nine Weeks Ended

Tons Shipped:


  2001

  2005

  October 1, 2005

  September 30, 2006

Total

  296,839   336,611   244,517   294,405

Product Mix:

               

Custom Steel Plate

  145,451   240,570   180,153   185,647

Commodity Steel Plate

  151,388   96,041   64,364   108,758

Customer Mix:

               

End-Users

  100,925   188,264   136,481   150,817

Service Centers

  195,914   148,347   108,036   143,588

 

We believe we are well positioned for continued growth in volume and profitability. From July 2005 to March 2006, we spent over $10.0 million on capital improvements to increase capacity, improve efficiency, and upgrade our facility. We believe that these upgrades, when combined with our recent addition of a fourth shift, increases our capacity from 420,000 tons annually to over 500,000 tons annually. In addition, we are now actively marketing and selling our products in the custom discrete steel plate market west of the Rocky Mountains, which we believe is an underserved and attractive market.

 

We have developed a loyal customer base with a high level of customer retention. As a result of our niche focus, commitment to customer service and high product quality, we estimate that we have been able to capture approximately 20% of the custom discrete steel plate market east of the Rocky Mountains.

 

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Industry Overview

 

In 2005, domestic steel mill shipments reached over 103 million net tons, a decrease of 7.1% from 2004, according to the American Iron and Steel Institute. Estimated steel use in North America reached 126 million tons in 2005, approximately 25% of this supplied by imports. Steel is sold principally to the automotive, construction, steel product fabrication, container and packaging, oil and gas, electrical, machinery and appliance industries. In some of these industries, such as the automotive and construction industries, steel competes with other substitute materials such as plastic, glass, composite and ceramic materials.

 

Manufacturers of steel are classified as either “integrated mills” or “mini-mills.” Mini-mills differ from integrated steel producers in that their primary input is scrap metal, whereas the integrated mills make steel by processing iron ore and other raw materials in blast furnaces. We believe that mini-mills and integrated mills generally have significantly different management styles, labor relations, cost structures and scale efficiencies. We believe that mini-mills are generally considered more efficient and technologically advanced than integrated mills, with lower ratios of fixed costs to variable costs and more effective human resource allocation than integrated mills. Consequently, we believe that mini-mills are typically able to operate more cost effectively than integrated mills. Of the total steel shipments in the United States, it is estimated that mini-mills accounted for approximately 55% in 2005 according to the American Iron and Steel Institute.

 

The domestic steel industry has experienced strong profitability following a trough period from 1999 to 2003. Increased shipments, consumption, and production were driven by strength in several key end-markets and a stronger overall economy. In addition to strong domestic demand for steel, structural changes to the U.S. steel industry, including consolidation and the widespread acceptance of steel scrap surcharges, significantly contributed to the rebound in the domestic industry. We believe that these structural changes will reduce industry cyclicality and result in greater pricing discipline.

 

There are a variety of major product segments produced by steel mills, including long products (rod, bar, rebar, etc.), sheet and plate. The steel plate market is a relatively small segment of the overall steel industry, representing only 9.76% of U.S. steel shipments by weight in 2005, according to the American Iron and Steel Institute. Consistent with overall industry consolidation and rationalization trends, since the beginning of 2003, we believe that approximately 1.2 million tons of capacity have been eliminated from the steel plate market and the number of principal plate competitors has been reduced from ten to six. Furthermore, we believe that there is currently no new domestic plate capacity expected to come online. Steel plate is used in a wide range of end-markets, including construction and heavy equipment, general construction, railcars, shipbuilding, bridge, fabrication, numerous industrial applications and wide diameter pipe, and demand is expected to grow in many of these end markets through 2008, according to various industry sources. The strength and diversity of these markets creates a more stable supply/demand balance than that for sheet steel, which is highly dependent on the auto industry. Relative to sheet products, steel plate is more costly and difficult to ship, reducing import pressures, which are further mitigated by the demand for plate from developing economies such as China and India.

 

The stable supply/demand balance for steel plate is reflected in its price, which has remained virtually flat over the past year. Between September 2005 and September 2006, monthly domestic plate prices ranged from a high of $726 per ton to a low of $681 per ton, a variance of only $45 per ton, or 7% from the yearly low. This consistent pricing for plate differs significantly from other segments, such as hot rolled sheet, where prices have ranged from a high of $630 per ton to a low of $500 per ton between September 2005 and September 2006, a variance of $130 per ton, or 26% from the yearly low.

 

The steel plate market is comprised of three segments: coil, standard discrete and custom discrete. We focus on the niche custom discrete plate market, which we believe to be approximately 1.6 million tons annually and which commands higher prices per ton than other segments. Since 2000, three steel plate mini-mills that historically served the custom discrete market and had aggregate capacity of over two million tons have been eliminated, leaving very favorable market conditions for the remaining three participants.

 

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Business Strengths

 

We believe that we have the following competitive strengths:

 

    Niche Market Focus with Limited Competition.  We are a custom, service-oriented mini-mill focused specifically on serving customers with distinct needs in the discrete steel plate market. We deliver steel plate to our customers in a more timely fashion and provide more value by significantly reducing mill lead times, enabling smaller minimum order sizes and by providing a lower-cost alternative to purchasing non-standard sizes through a steel service center (which requires paying additional processing charges). Custom sizes comprise approximately 67% of our production, which limits our primary competition to a single integrated (i.e., non mini-mill) producer that is focused principally on serving the commodity steel market. We compete to a lesser degree with two mini-mills that produce standard sizes but do not produce the thicker, wider and longer plate in which we specialize. We believe that over 50% of our 2005 plate production could not have been produced efficiently in these mills, because these mills do not have the capability to produce thicker, wider and longer plate. We therefore have limited competition in this niche market. Oregon Steel, our only competitor located in the Western U.S. market, is a slab converter with rolling capabilities similar to ours. Due to its primary reliance on foreign produced slabs, we believe that Oregon Steel has difficulty competing for “Buy American” projects and for custom-sized orders with short lead times. Finally, substantially all of the steel plate imported to the United States is in standard sizes and therefore does not compete directly with the majority of our products.

 

    Production Facility Optimized for Low Cost Production in Market Niche.  Our well-maintained production facility is specifically configured to produce steel plate, in non-standard dimensions, in small order sizes, with short lead times. Our high-quality mill assets include a 515,000 tons per year electric arc furnace, a single strand continuous slab caster, a reheat furnace and an over 500,000 tons per year plate rolling facility. Unlike continuous mills, which are focused on high volume continuous runs of commodity plate, our mill is designed to give us the flexibility to schedule and process individual orders in an efficient manner. Our rolling mill produces thicker, wider and longer plate than that produced by commodity plate mills, and we have upgraded our mill to ensure close tolerances and excellent overall quality. Our plant is well-suited for rapid custom order throughput; a slab can be rolled into a finished plate within three hours of being charged into the furnace. Finished goods testing can be completed within 24 hours in order to insure that the plate meets customer requirements without delaying order turnaround. We believe our mill configuration allows us to be a low-cost producer in our target market.

 

    Non-Union Workforce.  Our non-union workforce provides us with significant cost and flexibility advantages. Unlike mills that employ unionized labor, which mandate specific criteria with respect to wage rates, the number of employees and the functions each employee can perform, we are able to control our wage rates and optimize our headcount to run as efficiently as possible. Many of our skilled workers can perform multiple job functions, allowing for flexibility in scheduling and rapid changes in production schedules, which we believe would not be possible under many union contracts. In addition, union contracts typically provide the highest compensation to employees with the most seniority rather than those with the greatest ability. Our employees are assigned to positions, promoted and rewarded based on job performance. This improves efficiency and our ability to attract and retain the best employees in key positions.

 

    Focus on Superior Customer Service.  We believe we provide the highest level of customer service available in the industry. Our niche within the industry and our core service philosophy require us to be especially attentive to our customers and to meet their specific needs, including offering our customers quicker delivery and warehousing. According to Jacobson & Associates, an industry recognized consulting firm, we have ranked first in end-user customer satisfaction among all North American producers of steel plate every year since 2001. In addition, we believe that we employ the most knowledgeable sales force within the discrete steel plate market. Unlike salespeople at commodity- oriented mills who focus on taking numerous large orders, the customized nature of our products requires us to employ highly-trained salespeople to work collaboratively with our customers. Our salespeople spend significant time with our customers and are a differentiating component in providing high quality service.

 

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    Loyal and Diverse Customer Base.  We have a very strong base of key customers, with no single customer accounting for more than 7% of sales in 2005, and our top 15 customers accounting for 40% of our sales, in 2005. These key customers have an average tenure with us of more than ten years. We attribute our loyal and diverse customer base to our custom approach and our dedication to providing the highest quality customer service in the industry.

 

    Low Cost Scrap Sourcing.  We believe that our scrap sourcing practices, combined with our scrap rich geographic location, enable us to purchase steel scrap at significantly lower prices than many other steel producers. We are highly active in the scrap market and can accommodate a wide range of scrap grades and buy smaller quantities of scrap than larger steel producers, which, we believe, provides us a significant advantage in securing low scrap pricing. In addition, we are in a geographically advantageous location and within close proximity to numerous scrap yards in the Delaware Valley, which provides us greater selection, low pricing and inexpensive and timely delivery of our scrap. As a result of these factors, we believe we realized an average cost advantage over larger steel plate producers of approximately $9 per scrap ton since 2004 based on our cost of scrap compared to the average cost of scrap published by industry sources.

 

    Significant Barriers to Entry.  There are significant barriers to entry primarily due to market conditions in the custom steel plate industry, as well as regulatory constraints which we believe restrict the ability to build new facilities or add additional capacity to existing facilities. Based on these factors and published reports by domestic steel manufacturers regarding their expansion plans, we believe that there currently is no new steel plate capacity expected to come online in the United States. In addition, the plants of many of our larger competitors are optimized for producing standard size plate and do not have the additional capacity or the infrastructure to enter the custom market.

 

    Experienced Management Team.  We have a strong and experienced management team with significant experience in the steel industry. On average, our management team has over 29 years of experience in the steel industry and is led by our Chief Executive Officer, Jeff Bradley, who, prior to joining us, spent 22 years with Worthington Industries, a steel processing and steel products company with approximately $3.0 billion in annual revenue. Members of our management team were responsible for engineering our transition to a custom, service-oriented mini-mill and have a strong track record of driving continuous improvement in the business. In addition to our strong executive management team, we benefit from highly motivated and experienced mid-level managers in all of the key functional areas, including operations, sales and marketing, and accounting and finance.

 

Business Strategy

 

We intend to profitably grow our business by pursuing the following strategies:

 

   

Expand Into New Markets.  We believe that identifying and entering new markets is critical for our continued growth. One of the key growth regions we have recently entered is the Western market which we believe to be underserved particularly for “Buy American” contracts. Under “Buy American” programs, federal projects and state projects requiring matching federal funds require contractors to purchase materials that are manufactured domestically. Oregon Steel is the only steel plate producer located in this region and they source a significant portion of their slabs from foreign sources which disqualifies the resulting plate from “Buy American” contracts. Due to Oregon Steel’s reliance on foreign-based slabs, we believe that there are no steel plate manufacturers west of the Rocky Mountains that can satisfy “Buy American” contracts. In 2004, we hired a sales agency staffed by two highly experienced sales representatives to sell our products into the Western market. One of these representatives was formerly the head of sales for Oregon Steel. We estimate the Western market to be approximately 500,000 tons annually. In 2004, we shipped approximately 6,000 tons and in 2005, we shipped approximately 14,000 tons into the Western market. In the first three quarters of 2006, we shipped over 18,000 tons in the Western market and we expect to ship over 40,000 tons to this market by 2008. Moreover, in 2005, the United States Congress passed a new transportation bill that we believe will enable us to significantly increase our estimated growth into this market through “Buy American” bridge and interstate construction projects. In addition to entering the Western market, we have

 

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recently entered the specialty segment of the growing oil and gas steel pipe market and sold approximately 4,900 tons in 2005, up from zero tons in 2004.

 

    Expand Higher Margin, Value-Added Service Offerings.  We believe we can seamlessly expand the value-added services we offer to our customers. We plan to continue to expand our custom plate burning service offering, which consists of cutting plate into configured shapes and sizes to meet specific customer requirements. This is a high value-added service as it eliminates the need for our customers to purchase their plate from service centers or burn plate themselves in-house. For the fiscal year ending 2005 we sold approximately 3,200 tons of custom-burned plate parts at a selling price of approximately $1,100 per ton (an average premium of $320 over commodity plate prices). In the first three quarters of 2006, we sold approximately 9,150 tons, which is an annual ship rate of 12,200 tons, at a selling price of approximately $1,012 per ton. We expect to increase our annual tonnage of custom-burned plate parts to 30,000 tons by the end of 2008. We believe that this technology could also increase our orders for additional steel plate due to our customers’ preference to purchase steel plate from a single source that can manufacture and burn steel plate to their specifications. In addition to custom burning, other opportunities exist to provide value-added services such as producing heat treated plate. Increasing this higher margin business would enable us to increase profit without the need to increase production capacity.

 

    Increase Mill Capacity and Production Efficiency.  We continually strive to improve our operating efficiency and increase our production capacity. In 2001, we cut back production to three shifts from four shifts to accommodate our new custom product mix and to optimize yield and quality. Based on this reduced schedule, our plant had 300,000 tons of finished capacity in 2001. By 2004 we had increased overall yield of finished steel plate from melt shop input from 71% to 73%, reduced the rejection rate from as high as 7% to less than 0.5%, and reduced mill downtime significantly. These improvements remain consistent through today. These changes resulted in an increase in our annual production capacity to over 350,000 tons (on a three shifts basis) with no additional headcount or labor hours and no significant capital improvements. In the first three quarters of 2006, we shipped over 294,400 tons, which represents an annual ship rate of over 392,500 tons. Since July of 2005, we have implemented over $10.0 million of capital improvements, significantly overhauled the plant maintenance organization, and added a fourth crew to reduce overtime costs. Based on these improvements we believe our total current plate mill capacity is in excess of 500,000 tons per year and that we have meaningfully reduced our manufacturing costs per ton. To increase capacity we have upgraded the plate mill electrical system, replaced the discharge door on the reheat furnace and added additional rail tracks. We also have identified several additional improvement opportunities that we believe will further improve production capacity in our melt shop and plate mill, including: reducing the bottleneck in the melt shop by moving the slab yard into the plate mill; installing a more efficient scarfing facility; expanding the crane system in the shipping area; adding Level Two controls (which automate the process of reheating our slabs); and optimizing preventative maintenance planning and execution. These initiatives are targeted for completion by the end of 2007 and will accommodate our sales growth initiatives discussed above. Furthermore, we have identified cost reduction opportunities within the melt shop and plate mill, including a gauge control upgrade, a redesigned zoned roll cooling system, and other general improvements that we expect will cost approximately $2.5 million and are expected to generate approximately $3.0 million of incremental annual cost savings. Many of these cost savings initiatives are currently underway and are expected to be completed by the end of 2007.

 

    Further Penetrate Existing Markets.  We believe that we have the opportunity to gain additional share in our current markets. Management has identified a list of target accounts that buy steel plate from the competition even though we believe that we can service these customers’ needs more economically and effectively. Management is targeting selling an additional 20,000 tons to these targeted accounts by 2008.

 

Products

 

We are a niche manufacturer of custom discrete carbon steel plate for use in a number of end-use applications, including bridges, railcars, tool and die, and heavy machine and equipment. We offer a wide range of steel plate products of varying thickness, width and length. Our discrete plate is produced in thicknesses from

 

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1/4” to 5” and in widths from 48” to 156” with a maximum length of 1,400.” We primarily produce three categories of plate steel including Carbon, High Strength Low Alloy (“HSLA”) and Pressure Vessel Quality (“PVQ”). Within each of these categories we manufacture grades as specified by various organizations including the American Society for Testing and Materials (“ASTM”), the American Iron and Steel Institute (“AISI”), the American Bureau of Ships (“ABS”), Canadian Steel Association (“CSA”) and the American Association of State Highway Transportation Officials (“AASHTO”). We produce steel plate in custom lengths, widths and thicknesses primarily for the grades of steel designated in the table below:

 

Category


  

Grade


  

Application


Carbon

  

ASTM-A36

   General construction, general fabrication, light structures
    

ASTM-A283

   General construction, general fabrication, light structures
    

AISI-1008-1045

   Chemistry only steels—not certified to any strength levels
    

ABS-Grade A

   Ship building
    

ABS-Grade B

   Ship building
    

CSA-44W

   CSA designation for ASTM-A36 (Canadian)

HSLA

  

ASTM-A572-50

   Increased strength fabrications and structures
    

ASTM-A572-60, 65

   Increased strength fabrications and structures
    

ASTM-A588

   Structures that do not require paint (bridges and towers) uniform corrosion resistance
    

ABS-AH 32/36

  

Higher strength ship building

    

ABS-DH 32/36

   Higher strength ship building, increased impact resistance
    

ASTM-A656-80

   High strength fabrications, increased abrasion resistance
    

ASTM-A633

   Medium to high strength fabrications
    

ASTM-AR 235

   Medium to light duty abrasion resistance
    

ASTM-A871-60

   High strength fabrications and general construction

PVQ

  

ASTM A516-70

  

Pressure vessels, most commonly used grade

    

ASTM A285 B/C

  

Lighter duty pressure vessels

    

ASTM A 612

  

Lighter duty pressure vessels

 

Customers

 

We primarily sell discrete steel plate for end use applications that include bridges, tool and die, railcars, and other applications. In the past, the majority of the products we produced were sold directly to service centers, which process and distribute steel plate to end-users. While this continues to be an important part of our business, our customer mix has shifted to include more direct sales to end-users. Providing products to end-users offers us an opportunity to provide higher levels of customization, and represents a higher margin opportunity. We have a strong base of key customers, with no single customer accounting for more than 7% of sales in 2005. In 2005, our top 15 customers represented approximately 40% or our total sales, and these customers have an average tenure with us of more than ten years.

 

The following table presents data for tons shipped for the year ended December 31, 2005 by end-market and geographical region:

 

End Market


   Tons

   % of Total
Tons
Shipped


 

Service Center

   148,347    44 %

Bridge

   56,014    17  

Die

   31,928    9  

Railcar

   28,905    9  

Heavy Machinery & Equipment

   16,554    5  

Fabrication

   15,418    5  

Tank & Pressure Vessel

   13,887    4  

Power & Communication Equipment

   11,043    3  

Shipbuilding

   8,991    3  

Pipe

   4,932    1  

Miscellaneous

   591    <1  

 

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Geographical Region


   Tons

   % of Total
Tons
Shipped


Midwest

   115,758    34%

Mid-Atlantic

   84,519    25

West

   41,158    12

Southeast

   39,970    12

Canada

   30,625    9

Northeast

   24,581    7

 

Sales and Marketing

 

We sell our steel plate principally through our own sales department. Our sales office is located in our headquarters in Claymont, Delaware. Most of our sales are initiated by contacts between sales representatives and customers. Accordingly, we do not incur material advertising or other promotional expenses. Our sales organization is designed to take full advantage of our successful transition to a custom, service-oriented mini-mill, reaching end-user customers throughout the United States and Canada. Additionally, we utilize independent sales agents to cover regional sales in the Western United States.

 

Raw Materials

 

There are three raw material categories consumed in the production of steel plate: scrap, alloys and flux. Scrap comprises 90% of the charge while alloys and flux are 2% and 8% respectively. The key inputs within the scrap mix are shredded automobile scrap and #1 heavy melting scrap. These scrap types account for more than 50% of the scrap consumed at the facility. Alloys, though not a significant proportion of the tonnage of raw materials consumed, have a dramatic impact on the cost to produce steel. The significant flux additives are lime and coal. The lime acts as a cleansing agent while the coal is used to contribute carbon and energy to the melt shop process.

 

Local scrap brokers supply a significant amount of scrap that is required for our operations. Several brokers, all located within close proximity of the plant, fulfill the majority of our ongoing scrap requirements. We purchase scrap in small orders, ranging from 200 to 500 tons, to avoid overpaying for the material.

 

Alloys and flux are purchased by a purchasing agent in the spot market on an as needed basis. Typically, pricing is secured on a quarterly basis and there is no minimum purchase commitment. All purchase orders are reviewed by management to ensure the best pricing has been obtained.

 

We do not have long-term contracts with any of our suppliers. There are multiple sources of supply for the raw materials we use.

 

Energy

 

Our manufacturing process in Claymont consumes large amounts of electricity. We currently satisfy the electrical needs for our facility by purchasing electricity from the local utility, Delmarva Power. Our purchasing is based on hourly real-time market pricing. We do not currently secure long-term energy contracts or purchase futures for purposes of hedging. During the summer months, we may elect to shut down our melt shop during peak periods of power costs. We believe that purchasing energy on a short term basis allows us to maximize usage during low cost market environments while providing a cost effective solution for slowing down production during times of peak energy pricing. Historically, we have been adequately supplied with electricity and we do not anticipate any material curtailment in our operations resulting from energy shortages.

 

Our process also consumes a significant amount of natural gas, which is purchased through a combination of Delmarva Power and a third party marketer. The larger portion purchased through a marketer is secured one to three months in advance based on NYMEX contracts to manage supply and price risk.

 

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Manufacturing Process

 

We produce steel plate from steel scrap in a two-step process involving, (1) the melt shop operation, where scrap is melted down and cast into a steel slab, and (2) the plate mill operation, where the slab is rolled into steel plate.

 

Melt Shop Operations

 

The steelmaking process begins with the receipt and charging of raw materials, scrap, alloys and flux, into the charging buckets. The scrap is loaded into charging buckets with the use of an overhead crane and a field magnet. Other materials are fed through the use of gravity into hoppers and then dumped into the charging buckets with fork trucks.

 

When all the required material has been loaded, the electric arc furnace roof is swung open so an overhead crane can pick up the charging bucket and charge material into the furnace vessel. The roof swings back into position and three electrodes are lowered into the vessel so the melting process can begin. Electricity and oxygen are the prime sources of energy used to melt the scrap. The electricity is introduced into the vessel through the electrodes while oxygen is piped into the furnace. This process is repeated three times before the capacity of the furnace vessel is reached.

 

When enough scrap has been melted, approximately 185 tons, the materials are tapped into slide-gate equipped ladles for transfer to the continuous caster to be shaped into slabs. Prior to delivery at the caster, these materials are brought to the stir station where nitrogen or argon gas is introduced so temperature homogenization can occur. Once the hot metal is sufficiently cooled, the ladle is picked up by an overhead crane and delivered to the caster.

 

The ladle is positioned at the top of the caster for dumping into the caster machine. The slide-gate on the ladle is opened and the hot metal pools in the tundish, which is a reservoir leading to the molds of the caster machine. As a consistent supply and flow of metal is established, the metal enters a water-cooled mold resting directly below the tundish. The function of the mold is to shape the metal as well as to cool the outer edges so that it can be pulled through the machine. The newly formed slab is continuously cooled through the various roll zones until it reaches the bottom of the machine where it is cut into five slabs called “mothers.”

 

Upon cooling, the mothers are inspected for surface defects. Based on the observation of the inspectors, the slabs are conditioned at the scarfing machine. The scarfing machine is effectively a large torch that melts away the imperfections in the slab. The slabs are again torch cut into smaller pieces, “babies,” and transferred to the reheat furnace located at the plate mill.

 

Plate Mill Operations

 

Slabs for the plate mill are taken from the slab yard and reheated to rolling temperatures in the furnace. The slabs are then pushed onto the furnace delivery table. Slabs accepted for rolling are processed in the roughing mill. Any necessary slab turns are made on the mill entry and delivery tables. After the last pass, the roughing mill operator delivers the slab to the runout tables. At this point the roughing mill operator can retain control of the slab on the runout tables to oscillate the slab for additional cooling or control can be passed to the finishing mill operator for processing in the finishing mill.

 

The slab is reduced to plate in the 5,000-hp four-high finishing mill, and delivered to the mill runout tables. When processing is complete, the operator at the leveller control station directs the plate from the runout tables through the plate leveller. After passing through the leveller, the plate is delivered to the cooling bed transfer table and then to the cooling bed.

 

From the cooling bed, the plates are transferred to the cooling bed return tables and transported to the layout area. After marking and identifying the plate for final dimensions, the plates are transferred to the crop

 

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shear for initial cutting. The plate passes from the crop shear onto the turntable, rotated 90 degrees, and then sheared at the double-sided trimming shear. After shearing, the plate is inspected and loaded onto railroad cars for delivery to the shipping department. Any plate measuring greater than 1.5” inches in gauge is burned by torch to its final dimensions. This activity takes place in the burn out area adjacent to the hot leveller and cooling bed runout tables.

 

Competition

 

Competition within the steel industry is intense. We compete with commodity steel plate manufacturers and other producers of custom steel plate, including service centers. Our competitors include both integrated steel mills and mini-mills. We compete primarily on the basis of custom design capability, unique production capabilities, customer responsiveness, product quality and price. Many of our competitors are larger and have substantially greater capital resources and more modern technology. Our principal competitor in the plate market is Mittal Steel, the largest steel plate producer in North America. Mittal competes in all three segments of the steel plate market, producing coil, standard discrete and custom discrete plate in three North American facilities. We also compete with Oregon Steel, a slab converter on the West Coast, with rolling capabilities similar to ours.

 

There are significant barriers to entry primarily due to market conditions in the custom steel plate industry, as well as regulatory constraints which we believe restrict the ability to build new facilities or add additional capacity to existing facilities. In addition, the plants of many of our larger competitors are optimized for producing standard size plate and do not have the additional capacity or the infrastructure to enter the custom market.

 

Employees

 

At September 30, 2006, we had 406 employees (129 salaried employees and 277 hourly employees). Of our employees at September 30, 2006, 22 were in sales and sales management, 24 in office and administrative capacities, and 360 in the production facility. None of our employees are parties to a collective bargaining agreement.

 

Properties

 

Our corporate headquarters are located in Claymont, Delaware. We operate out of a single, owned manufacturing facility also located in Claymont, Delaware on a 425-acre site bordering the Delaware River, which includes a 185-ton electric arc furnace, a single strand caster and a 160 inch plate rolling facility. We believe that our plate mill is in good condition and is suitable for our operations and believe that our operating facility has sufficient capacity to meet our needs for the foreseeable future. We do not own or lease any other real property.

 

On April 4, 2006, we engaged a commercial real estate advisory firm to conduct an evaluation of the five semi-contiguous parcels of land comprising our 425-acre site. Following the completion of this evaluation, we determined to pursue the sale of three parcels, totaling approximately 175 acres. None of our facilities are located on these parcels and the sale of these parcels would not affect any of our operations.

 

Regulatory Matters

 

Our business is subject to numerous, federal, state and local laws and regulations relating to the protection of the environment and worker safety. Environmental laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act with respect to releases and remediation of hazardous substances. Worker safety laws include the Occupational Safety and Health Act. In addition, we are subject to similar state laws. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable, due in part to the fact that certain implementing regulations for some of the laws described above have not yet been promulgated or in certain instances are undergoing revision. These laws and regulations could result in substantially increased capital, operating and compliance costs.

 

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The State of Delaware had requested us to investigate part of our mill site for the existence of potential hazardous substances. We have submitted the requested information to the State of Delaware and have received no further communication on this matter. Accordingly, the outcome cannot be determined at this time.

 

In October 2006, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Notice of Conciliation and Secretary’s Order requiring Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions. The study must be completed by March 1, 2007. DNREC will make a determination on further dust control requirements upon review of the study. Accordingly, the outcome cannot be determined at this time, nor can we estimate the costs of any additional dust control requirements.

 

In 2006, Claymont Steel performed an emissions test that indicated that mercury emissions were higher than previously calculated by Claymont Steel using information supplied by the United States Environmental Protection Agency. In November 2006, DNREC issued a Secretary’s Order, which requires Claymont Steel to monitor and reduce mercury emissions. The Order requires Claymont Steel to implement a quarterly testing program, with the first test to take place by December 15, 2006, and to develop a plan to reduce the mercury contained in the feed to the electric arc furnace. Mercury-containing scrap is an industry-wide problem. Automobile scrap may contain mercury switches that have not been removed during the recycling process, and thus mercury can be emitted when Claymont Steel smelts recycled scrap steel products, including used automobiles, to produce custom steel plate products. Claymont Steel has already taken steps to reduce mercury levels in the feed—it is no longer using municipal solid waste scrap, is partially funding a national mercury switch removal program through an industry trade association, and is increasing its purchases of automobile-free scrap. The Order also requires Claymont Steel to elect one of the alternatives set forth in the Order for reducing mercury emissions and notify DNREC of the alternative selected by January 31, 2007. The alternatives include source reduction of mercury in the scrap, installation of a carbon injection system or alternative emission control system, some combination of source reduction and emission controls, or ceasing operation of the electric arc furnace. The Order requires Claymont Steel to have the selected alternative operational by December 31, 2008. We are evaluating the Order and have not determined what actions we will take, or whether we will contest the Order. Accordingly, any corrective measures that may be taken cannot be determined at this time, nor can we estimate the cost of any corrective measures. If we were ultimately required to install and operate a carbon injection system, we do not believe the associated costs would have a material effect on our results of operations or financial condition.

 

Although there is no mercury emissions standard, the Company believes that its emissions are within applicable particulate emissions standards, but there can be no assurance that new or more restrictive standards will not be adopted.

 

Legal Proceedings

 

In addition to the matters discussed above under “—Regulatory Matters,” certain claims and suits have been filed or are pending against Claymont Steel. In the opinion of management, all matters are adequately covered by insurance or, if not covered, involve such amounts, which would not have a material effect on our consolidated financial position or results of operations if disposed of unfavorably.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth the names and ages of each person who is a director or executive officer of Holdings, and the descriptions below include his service as a director or executive officer of Claymont Steel:

 

Name


  Age

  

Position


Jeff Bradley

  46    Chief Executive Officer and Director Nominee

Allen Egner

  53    Vice President, Finance

David Clark

  42    Chief Financial Officer

Steve Lundmark

  64    Vice President, Sales and Marketing

Sami Mnaymneh

  45    Director

Matthew Sanford

  37    Director

Steve Scheinkman

  53    Director Nominee

Tracy L. Shellabarger

  49    Director Nominee

Tony Tamer

  49    Director Nominee

Jeffrey Zanarini

  36    Director

 

Jeff Bradley has served as our chief executive officer since 2005 and will become a member of our Board upon completion of this offering. Prior to joining Claymont Steel, from September, 2004 to June, 2005, Mr. Bradley served as vice president of strategic planning for Dietrich Industries, a $900 million construction products subsidiary of Worthington Industries. Prior to joining Dietrich Industries, from September, 2000 to August, 2004, Mr. Bradley served as a vice president and general manager for Worthington Steel. Mr. Bradley has a Business Administration degree.

 

David Clark has served as our Chief Financial Officer since November 2006. Prior to joining Claymont Steel, Mr. Clark served as executive vice president, chief financial officer and secretary of SunCom Wireless, Inc., a publicly traded company, from its founding in 1997 through February 2006. From 1997 to 2000, Mr. Clark served as chief financial officer of Triton Cellular Partners, L.P., an entity related to SunCom Wireless. Before joining Triton, Mr. Clark was a managing director at Furman Selz L.L.C. specializing in communications finance. Prior to joining Furman Selz, Mr. Clark spent over ten years at Citibank N.A. and Citicorp Securities Inc. as a lending officer and a high yield finance specialist. Mr. Clark holds a Bachelor of Science degree in accounting from Boston College.

 

Allen Egner has served as our vice president, finance since 2005. From 2001 to 2005, Mr. Egner served as Claymont Steel’s controller, from 1998 to 2001 he served as our manager of accounting, and from 1989 to 1998 he served as our manager of cost accounting. Before joining us, Mr. Egner was employed by Bethlehem Steel from 1974 to 1989, first as a general foreman and then as a senior cost analyst. Mr. Egner holds a Bachelor of Science degree and a Masters in Business Administration.

 

Steve Lundmark has served as our vice president, sales and marketing since Claymont Steel’s inception in 1988. Prior to joining Claymont Steel, Mr. Lundmark served as manager of carbon plate sales for Lukens Steel from 1986-1988, as regional sales manager of Lukens Steel from 1977 to 1986, as a branch manager for Kaiser Aluminum from 1969 to 1977, as production supervisor at Johnson & Johnson from 1967 to 1969 and as industrial engineer for Owens-Illinois Glass from 1964 to 1967. Mr. Lundmark holds a Bachelor of Science degree and a Masters in Business Administration.

 

Sami Mnaymneh has served on our Board and Claymont Steel’s Board since 2005. Mr. Mnaymneh is a co-founding partner of H.I.G. Capital and has served as a managing partner of the firm since 1993. Prior to joining H.I.G. Capital, from 1990 to 1993 Mr. Mnaymneh was a managing director at The Blackstone Group, a merchant bank, where he provided financial advisory services to Fortune 100 companies. Prior to that, from 1984 to 1989 Mr. Mnaymneh was a vice president in the mergers and acquisitions department at Morgan Stanley & Co. where he served as a senior advisor to private equity firms. Mr. Mnaymneh currently serves on the board of

 

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directors of Securus Technologies, Inc. and a number of other H.I.G. Capital portfolio companies. Mr. Mnaymneh holds a Bachelor of Arts degree, a Masters in Business Administration and a Juris Doctorate.

 

Matthew Sanford has served on our Board and Claymont Steel’s Board since 2005. Mr. Sanford joined H.I.G. Capital in 2000 and currently serves as a managing director. Prior to joining H.I.G. Capital, Mr. Sanford was a manager with Pittiglio, Rabin, Todd and McGrath, an operations-focused consulting firm to technology based businesses, from 1999 to 2000. Previously, he held a variety of positions at Bain & Company, a management consulting firm, in which he managed the development and implementation of marketing and operating strategies for Fortune 500 business. Mr. Sanford currently serves on the board of directors of several H.I.G. Capital portfolio companies. Mr. Sanford holds a Bachelor of Arts degree and a Masters in Business Administration.

 

Steve Scheinkman. Effective upon the completion of this offering, Mr. Scheinkman will become a member of our Board. Mr. Scheinkman served as the president and chief executive officer of Transtar Metals Inc. from September 1999 to September 2006. Since Transtar’s acquisition by A.M. Castle & Co. in September 2006, Mr. Scheinkman has served as president of Transtar. Prior to joining Transtar, Mr. Scheinkman served as the president, chief operating officer and chief financial officer of Macsteel Service Centers USA. Mr. Scheinkman earned a bachelor of business administration degree in accounting from George Washington University and is a Certified Public Accountant.

 

Tracy Shellabarger. Effective upon the completion of this offering, Mr. Shellabarger will become a member of our Board. From 1994 to 2004, Mr. Shellabarger served as chief financial officer and vice president-finance for Steel Dynamics, Inc., a publicly traded steel manufacturer. Prior to his role with Steel Dynamics, from 1987 to 1994, Mr. Shellabarger served as controller of a division of Nucor Corporation, a Fortune 400 steel manufacturer. Mr. Shellabarger currently serves on the board of directors of Tarpon Industries, Inc. and two non-profit organizations. Mr. Shellabarger earned a Bachelor of Science degree in Accounting from the University of North Carolina, Chapel Hill, and is a Certified Public Accountant and member of the AICPA.

 

Tony Tamer. Effective upon the completion of this offering, Mr. Tamer will become a member of our Board. Mr. Tamer is a co-founding partner of H.I.G. Capital and has served as a managing partner of the firm since 1993. Prior to joining H.I.G. Capital, Mr. Tamer was a partner at Bain & Company, one of the world’s leading management consulting firms. Mr. Tamer has extensive operating experience particularly in the communications and semiconductor industries, having held marketing, engineering and manufacturing positions at Hewlett-Packard and Sprint Corporation. Mr. Tamer currently serves on the board of directors of Securus Technologies, Inc. and a number of other H.I.G. Capital portfolio companies. Mr. Tamer holds a Masters in Business Administration degree from Harvard Business School, and a Masters degree in Electrical Engineering from Stanford University. His undergraduate degree is from Rutgers University.

 

Jeffrey Zanarini has served on our Board and Claymont Steel’s Board since 2005. Since 2004, Mr. Zanarini has been a principal in H.I.G. Capital. Prior to joining H.I.G. Capital, from 2000 to 2004 Mr. Zanarini was a manager with Bain & Company, a management consulting firm. While at Bain, Mr. Zanarini devised corporate growth strategies and directed diligence efforts for equity investors. Mr. Zanarini holds Bachelor of Science and Bachelor of Arts degrees and a Masters in Business Administration.

 

Key Employees

 

The following table sets forth the names and ages of key employees of Claymont Steel:

 

Name


  Age

  

Position


Dan Kloss

  63    General Manager, Plate Mill Operations

Randolph Harris

  49    General Manager, Melting and Casting

Dana LeSage

  44    Manager, Environmental and Energy Engineering

Frank Hancock

  56    Manager, Melt Shop Maintenance

Tom Trier

  56    Manager, Plate Mill Maintenance

 

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Dan Kloss has served as Claymont Steel’s general manager, plate mill operations since 2003. He served as a consultant to Claymont Steel’s president from 2001 to 2003. Before joining Claymont Steel, Mr. Kloss was employed by Bethlehem Steel as the manager of hot mill processing and shipping from 1998 to 2000 and as a superintendent of its plate mill from 1964 to 1998.

 

Randolph Harris has served as Claymont Steel’s general manager, melting and casting since 2001. Mr. Harris served as Claymont Steel’s general supervisor of steelmaking from 1994 to 2001, and as Claymont Steel’s furnace supervisor from 1990 to 1994. Before joining Claymont Steel Mr. Harris worked as the furnace supervisor at Norfolk Steel from 1979 to 1980 and served in the United States Marine Corps from 1976 to 1979.

 

Dana LeSage has served as Claymont Steel’s manager, environmental and energy engineering since 1993. Before joining Claymont Steel, Mr. LeSage served as a staff engineer at Hercules, Inc. from 1988 to 1993 and as applications engineer at Philadelphia Mixers from 1985 to 1988. Mr. LeSage holds a Bachelor of Science degree and a Masters in Business Administration.

 

Frank Hancock has served as Claymont Steel’s manager, melt shop maintenance since 2001. From 1990 to 2001 Mr. Hancock served as Claymont Steel’s general supervisor of maintenance and from 1989 to 1990 as Claymont Steel’s supervisor of maintenance. Prior to joining Claymont Steel, Mr. Hancock was employed as a supervisor of mechanical projects by Voest Alpine from 1986 to 1989, and was a self-employed design consultant from 1984 to 1986. Mr. Hancock holds Associate and Bachelor of Science degrees.

 

Tom Trier has served as Claymont Steel’s manager, plate mill maintenance since 1992, and served as Claymont Steel’s assistant general supervisor of maintenance from 1991 to 1992. Prior to joining us, Mr. Trier served as an electrical maintenance supervisor for Hoeganaes Corp. from 1989 to 1991, and in various capacities at AFG Industries, including maintenance superintendent from 1981 to 1989, maintenance foreman from 1980 to 1981, maintenance mechanic from 1979 to 1980, and operations manager from 1969 to 1979.

 

Board of Directors

 

Upon completion of this offering, our amended and restated certificate of incorporation and bylaws will provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. Initially, our authorized number of directors will be set at seven. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and one class of directors will be elected by the stockholders each year. Tracy Shellabarger and Jeffrey Zanarini have been designated as Class I directors, whose term will expire at the 2007 annual meeting of stockholders. Matthew Sanford and Steve Scheinkman have been designated as Class II directors, whose terms will expire at the 2008 annual meeting of stockholders. Jeff Bradley, Sami Mnaymneh and Tony Tamer have been designated as Class III directors, whose terms will expire at the 2009 annual meeting of stockholders. We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by the board of directors. Holders of common stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a plurality of shares of common stock will be able to elect all of the successors of the class of directors whose term expires at that meeting.

 

None of our current directors are compensated for serving on our Board. Upon consummation of this offering, each of our non-employee directors who is not affiliated with H.I.G. Capital will be granted options to purchase our common stock having an aggregate exercise price (based on the initial public offering price) of $30,000. The options will vest ratably over a four year period. In addition, each non-employee director who is not affiliated with H.I.G. Capital will receive an annual retainer of $20,000 in cash and an award of restricted stock units with a value equal to $20,000, based on the fair market value of shares of our common stock on the date of grant. Further, each non-employee director who is not affiliated with H.I.G. Capital will receive a cash payment of $1,500 for each board meeting and $1,500 for each committee meeting attended. All of our directors will be reimbursed for actual expenses incurred in attending Board meetings.

 

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Committees of our Board of Directors

 

Audit Committee

 

Upon consummation of this offering, our board of directors will establish an audit committee and we expect that the members of the audit committee will be Messrs. Scheinkman, Shellabarger and Zanarini, who will be appointed promptly following this offering. Our audit committee will recommend the firm to be appointed as independent accountants to audit our financial statements and to perform services related to the audit, review the scope and results of the audit, review with management and the independent accountants our annual operating results, consider the adequacy of the internal accounting procedures, consider the effect of such procedures on the accountants’ independence and establish policies for business values, ethics and employee relations. Our board of directors has determined that Messrs. Scheinkman and Shellabarger are independent. No later than one year after the consummation of this offering, we will have a fully independent audit committee, as required by National Association of Securities Dealers rules.

 

Compensation Committee

 

Upon consummation of this offering, our board of directors intends to establish a compensation committee. The composition of this committee has not been determined. Our compensation committee will provide oversight on the development and implementation of the compensation policies, strategies, plans and programs for our key employees and outside directors and disclosure relating to these matters, review and approve the compensation of our chief executive officer and the other executive officers of us and our subsidiaries and provides oversight concerning selection of officers, management succession planning, performance of individual executives and related matters. We intend to avail ourselves of the “controlled company” exception under the National Association of Securities Dealers rules, which eliminates the requirement that we have a compensation committee composed entirely of independent directors.

 

Nominating/Governance Committee

 

After consummation of this offering, our board of directors may establish a nominating/governance committee. The composition of this committee has not been determined.

 

Compensation Committee Interlocks and Insider Participation

 

There are no interlocking relationships between any member of our compensation committee and any of our executive officers that require disclosure under the applicable rules promulgated under the U.S. federal securities laws.

 

Executive Compensation

 

The following table summarizes the compensation that was paid for 2005 to our chief executive officer and our two other executive officers, whom we refer to as our named executive officers.

 

Summary Compensation Table

 

        Annual Compensation

  Long-Term Compensation

 

All Other

Compensation
($)


                All Other
Compensation
($)


  Awards

  Payouts

 

Name and Principal Position


  Year

  Salary ($)

  Bonus ($)

   

Restricted
Stock

Awards


    Securities
Underlying
options/SARs


  LTIP
Payouts


   

Jeff Bradley

  2005   $ 145,000(1)   $ (2)     (3)     $  —   $ 276,000(4)

Chief Executive Officer

                                         

Steve Lundmark

  2005   $ 175,000   $ 63,000(5)           $    

Vice President, Sales and Marketing

                                         

Allen Egner

  2005   $ 132,000   $ 118,000(6)           $    

Vice President, Finance

                                         

 

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(1) Mr. Bradley’s employment with us commenced in June 2005. This amount was paid to Mr. Bradley from June 2005 through December 2005.
(2) Mr. Bradley was paid a bonus of $225,000 on July 13, 2006 for his performance for the twelve month period ended June 30, 2006.
(3) Pursuant to a restricted shares agreement, Mr. Bradley was granted 75,451 shares of our restricted stock, none of which shares were vested in 2005.
(4) Mr. Bradley received a dividend payment of approximately $276,000 in September 2005 with respect to his restricted stock.
(5) Mr. Lundmark was also paid a bonus of $48,000 in March 2006 for his performance for the year ended December 31, 2005.
(6) Mr. Egner was also paid a bonus of $50,000 in March 2006 and $25,000 in July 2006 for his performance for the year ended December 31, 2005.

 

Defined Benefit Retirement Plan

 

The Company maintains a noncontributory defined benefit pension plan, which covers substantially all full-time employees, including Messrs. Bradley, Clark, Egner and Lundmark. Pension benefits are based on years of service and average annual earnings. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974. The following table sets forth the estimated annual benefits payable upon retirement for participants.

 

PENSION PLAN TABLE

Annual Benefits for Years of Service

Average

Compensation


  

5

Years


  

10

Years


  

15

Years


  

20

Years


  

25

Years


  

30

Years


$  35,000

   $ 1,750    $ 3,500    $ 5,250    $ 7,000    $ 8,750    $ 10,500

    45,000

     2,250      4,500      6,750      9,000      11,250      13,500

    55,000

     2,750      5,500      8,250      11,000      13,750      16,500

    65,000

     3,250      6,500      9,750      13,000      16,250      19,500

    75,000

     3,750      7,500      11,250      15,000      18,750      22,500

    85,000

     4,250      8,500      12,750      17,000      21,250      25,500

    95,000

     4,750      9,500      14,250      19,000      23,750      28,500

  105,000

     5,250      10,500      15,750      21,000      26,250      31,500

  115,000

     5,750      11,500      17,250      23,000      28,750      34,500

  125,000

     6,250      12,500      18,750      25,000      31,250      37,500

  135,000

     6,750      13,500      20,250      27,000      33,750      40,500

  145,000

     7,250      14,500      21,750      29,000      36,250      43,500

  155,000

     7,750      15,500      23,250      31,000      38,750      46,500

  165,000

     8,250      16,500      24,750      33,000      41,250      49,500

  175,000

     8,750      17,500      26,250      35,000      43,750      52,500

  185,000

     9,250      18,500      27,750      37,000      46,250      55,500

  275,000

     13,750      27,500      41,250      55,000      68,750      82,500

  300,000

     15,000      30,000      45,000      60,000      75,000      90,000

  350,000

     17,500      35,000      52,500      70,000      87,500      105,000

  400,000

     20,000      40,000      60,000      80,000      100,000      120,000

 

Pension benefits are based on an employee reaching the normal retirement age of 65. The amounts are accumulated by multiplying the employee’s average base salary by the number of years of un-interrupted service by a pension factor of 1%. The benefit paid out is calculated using a normal form straight line annuity for a single person. The benefits paid out are not subject to any deduction for social security or other offset amounts.

 

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As of September 30, 2006, Messrs. Bradley, Clark, Egner, and Lundmark had 1, 0, 17 and 18 years of service, respectively. The estimated annual benefit payable at normal retirement age 65, assuming no increase in annual earnings, will be $54,857 for Mr. Bradley, $44,627 for Mr. Egner and $33,166 for Mr. Lundmark. Earnings for the purpose of calculating the final earnings are limited to base salary as reflected in the Summary Compensation Table.

 

Restricted Stock Awards in the Last Fiscal Year

 

Pursuant to the terms of the employment agreement and the restricted shares agreement between us and Jeff Bradley, Mr. Bradley was granted 75,451 shares of our restricted stock, representing 0.6667% of our then outstanding common stock. Of such shares, 12.5% vest each anniversary of the original grant date assuming that Mr. Bradley is employed on each applicable vesting date. An additional 12.5% of such shares vest each anniversary of the original grant date if our EBITDA levels equal or exceed targets established by our Board and Mr. Bradley is employed on each applicable vesting date. Mr. Bradley received a dividend payment of approximately $276,000 in September 2005. Mr. Bradley was also entitled to a $466,490 dividend on his restricted shares with respect to a dividend to our equity holders declared on June 13, 2006. Mr. Bradley received $90,000 of the dividend on June 14, 2006 and the remainder was deferred pursuant to the terms of Mr. Bradley’s restricted shares agreement. In addition, Mr. Bradley was entitled to a $477,921 dividend on his restricted shares with respect to a dividend to our equity holders declared on July 12, 2006. This dividend was deferred pursuant to the terms of Mr. Bradley’s restricted shares agreement.

 

Employment Arrangement

 

In June 2005, we entered into an employment agreement with Jeff Bradley pursuant to which, among other things, Mr. Bradley will serve as its Chief Executive Officer until June 10, 2009. Under this agreement, Mr. Bradley receives a base salary of $275,000 per year, and is eligible for an annual bonus of up to $225,000 of which up to $150,000 is based on us attaining certain EBITDA levels and the remaining $75,000 may be earned in our Board’s discretion. In June 2005, Mr. Bradley was also granted 75,451 shares of Holdings’ restricted stock, representing 0.6667% of its outstanding common stock. Of such shares, 12.5% vest each anniversary of the original grant date assuming that Mr. Bradley is employed on each applicable vesting date. An additional 12.5% of such shares vest beginning on June 30, 2006 and on June 30 of each subsequent year if our EBITDA levels equal or exceed target established by our Board and Mr. Bradley is employed on each applicable vesting date. The first portion of the shares vested on June 23, 2006. In the event that we or certain of our affiliates, including our sole stockholder, experience a change of control, Mr. Bradley is entitled to an additional bonus equal to $1,000,000 minus the net proceeds that he receives upon such change of control as a result of his equity ownership. If we terminate Mr. Bradley without cause he is entitled to salary accrued through the effective date of the termination notice, the reimbursement of any expenses, and, if he executes a separation release, one year’s salary and any bonus accrued as of termination. If we terminate Mr. Bradley with cause he is entitled to his salary accrued through the effective date of the termination notice and the reimbursement of any expenses.

 

Effective upon completion of this offering, our Board has approved the following changes to Mr. Bradley’s compensation. Mr. Bradley’s base salary will be increased to $350,000 per year. In addition to the cash bonus of $225,000 described above, Mr. Bradley will be eligible for an equity award under our 2006 Stock Incentive Plan of restricted stock units having a value of $225,000 based on the fair market value of our common stock on the date of the grant. Two-thirds of his equity award will be based upon us attaining certain EBITDA levels and the remaining one-third may be earned in our compensation committee’s discretion. Additionally, upon completion of this offering, Mr. Bradley will be granted restricted stock units having a value equal to $200,000 based on the initial public offering price. Their restricted stock units will vest ratably over a four-year period from the date of grant.

 

We expect to enter into an employment agreement with David Clark pursuant to which, among other things, Mr. Clark will serve as our Chief Financial Officer. Under this agreement, Mr. Clark will receive a base salary of $250,000 per year, and be eligible for an annual cash bonus of up to $125,000 and an equity award under our 2006 Stock Incentive Plan of restricted stock units having a value of up to $62,500 and options to purchase shares of our

 

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common stock having an aggregate exercise price (based on the fair market value of our common stock on the date of grant) of up to $62,500. Two-thirds of Mr. Clark’s cash bonus and two-thirds of his equity award will be based upon us attaining certain EBITDA levels and the remaining one-third of both his cash bonus and his equity award may be earned in our compensation committee’s discretion. If we terminate Mr. Clark without cause, he will be entitled to salary accrued through the effective date of the termination notice, the reimbursement of any expenses, and, if he executes a separation release, one year’s salary and any bonus accrued as of termination. If we terminate Mr. Clark with cause, he will be entitled to his salary accrued through the effective date of the termination notice and the reimbursement of any expenses. Additionally, upon completion of this offering, the Board has approved the grant to Mr. Clark of options to purchase shares of our common stock having an aggregate exercise price (based on the initial public offering price) of $750,000. These options will vest ratably over a four-year period from the date of grant.

 

Our Board has also approved the following compensation arrangements effective upon completion of this offering. Mr. Egner’s base salary will be increased to $150,000 per year. Mr. Egner will be eligible for an annual cash bonus of up to $75,000 and an equity award under our 2006 Stock Incentive Plan of options to purchase shares of our common stock having an aggregate exercise price (based on the fair market value of our common stock on the date of grant) of up to $80,000. One-half of Mr. Egner’s cash bonus and one-half of his equity award will be based upon us attaining certain EBITDA levels and the remaining one-half of his cash bonus and his equity award may be earned in our compensation committee’s discretion. Additionally, upon completion of this offering, Mr. Egner will receive a cash award of $100,000 and will be granted restricted stock units having a value of $300,000 based on the initial public offering price and options to purchase shares of our common stock having an aggregate exercise price (based on the initial public offering price) of $200,000. These restricted stock units and options will each vest ratably over a four-year period from the date of grant. Mr. Lundmark’s base salary will be increased to $180,000 per year. Mr. Lundmark will be eligible for an annual cash bonus of up to $90,000 and an equity bonus under our 2006 Stock Incentive Plan of options to purchase shares of our common stock having an aggregate exercise price (based on the fair market value of our common stock on the date of grant) of up to $80,000. One-half of Mr. Lundmark’s cash bonus and one-half of his equity award will be based upon us attaining certain EBITDA levels and the remaining one-half of both his cash bonus and his equity award may be earned in our compensation committee’s discretion. Additionally, upon completion of this offering, Mr. Lundmark will be granted restricted stock units having a value of $300,000 based on the initial public offering price and options to purchase shares of our common stock having an aggregate exercise price (based on the initial public offering price) of $200,000. These restricted stock units and options will each vest ratably over a four-year period from the date of grant.

 

Benefit Plans

 

2006 Stock Incentive Plan

 

Introduction. Our 2006 Stock Incentive Plan was adopted by the board of directors and approved by the stockholders in November 2006. Our 2006 plan will become effective on the date the underwriting agreement for this offering is signed and will terminate no later than November 27, 2016, unless extended with stockholder approval.

 

Share Reserve. 450,000 shares of common stock have been authorized for issuance under our 2006 plan. However, no participant in our 2006 plan may receive awards for more than 100,000 shares of common stock per calendar year.

 

Equity Incentive Programs. Our 2006 plan is divided into three separate components:

 

    the discretionary grant program, under which eligible individuals in our employ or service may be granted options to purchase shares of common stock or stock appreciation rights tied to the value of such Common Stock;

 

    the stock issuance program, under which eligible individuals may be issued shares of common stock pursuant to restricted stock awards, restricted stock units or other stock-based awards which vest upon the completion of a designated service period or the attainment of pre-established performance milestones, or such shares of common stock may be issued through direct purchase or as a bonus for services rendered to us (or any parent or subsidiary); and

 

    the automatic grant program, under which awards in the form of stock options and restricted stock units grants will automatically be made at periodic intervals to our eligible non-employee board members.

 

Eligibility. The individuals eligible to participate in our 2006 plan include our officers and other employees, our non-employee board members and any consultants we hire and any individuals in similar capacities with any of our parent or subsidiary companies.

 

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Administration. The compensation committee of our board will administer the discretionary grant and stock issuance programs. However, our board may, at any time, appoint a secondary committee of one or more board members to have separate but concurrent authority with the compensation committee to make awards under those two programs to individuals other than executive officers and board members.

 

The plan administrator will determine which eligible individuals are to receive awards under these two programs, the time or times when those awards are to be made, the number of shares subject to each such award, the vesting, exercise and issuance schedules to be in effect for each such award, the maximum term for which such award is to remain outstanding, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws and the cash consideration payable (if any) for shares issuable under the stock issuance program. The automatic grant program for the non-employee board members will be self-executing, and the plan administrator will have limited authority under that program.

 

Plan Features. Our 2006 plan will include the following features:

 

    The exercise price for options and stock appreciation rights will not be less than the fair market value per share on the grant date. No option or stock appreciation right will have a term in excess of seven years, and each grant will be subject to earlier termination following the recipient’s cessation of service with us. The grants will generally vest and become exercisable in installments over the recipient’s period of continued service.

 

    Two types of stock appreciation rights may be granted:

 

    Tandem rights which provide the holders with the election to surrender their outstanding options for an appreciation distribution from us equal to the excess of (i) the fair market value of the vested shares subject to the surrendered option over (ii) the aggregate exercise price payable for those shares; and

 

    Stand-alone rights which allow the holders to exercise those rights as to a specific number of shares of our common stock and receive in exchange a distribution from us in an amount equal to the excess of (i) the fair market value of the shares of common stock as to which those rights are exercised over (ii) the aggregate base price in effect for those shares.

 

    The appreciation distribution on any exercised tandem or stand-alone stock appreciation right will be made in shares of our common stock.

 

    Under the stock issuance program, shares may be issued at a price per share not less than their fair market value, payable in cash or other valid consideration under the Delaware General Corporation Law. Shares may also be issued as a bonus for past services without any cash purchase price required of the recipient. Shares of our common stock may also be issued pursuant to performance share awards or restricted stock units which entitle the recipients to receive those shares, without payment of any cash purchase price, upon the attainment of designated performance goals and/or the completion of a prescribed service period or upon the expiration of a designated time period following the vesting of those awards or units, including (without limitation), a deferred distribution date following the termination of the recipient’s service with us.

 

    The 2006 plan includes the following change in control provisions which may result in the accelerated vesting of outstanding awards:

 

    In the event of a change in control, each outstanding award under the discretionary grant program which is not to be assumed by the successor corporation or otherwise continued in effect will automatically vest in full on an accelerated basis. However, the plan administrator will have the authority to grant awards which will immediately vest in the event of a change in control, even if those awards are to be assumed by the successor corporation or otherwise continued in effect.

 

    Each award (whether in the form of an option grant or restricted stock units) outstanding under the automatic grant program at the time of a change in control will automatically vest in full on an accelerated basis.

 

    The plan administrator will also have complete discretion to structure one or more awards under the discretionary grant program so those awards will vest as to all the underlying shares in the event those awards are assumed or otherwise continued in effect but the individual’s service with us or the acquiring entity is subsequently terminated within a designated period following the change in control event.

 

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    Outstanding awards under the stock issuance program may be structured so that those awards will vest immediately upon the occurrence of a change in control event or upon a subsequent termination of the individual’s service with us or the acquiring entity.

 

    A change in control will be deemed to occur in the event (i) we are acquired by merger or asset sale or (ii) there occurs any transaction or series of related transactions pursuant to which any person or group of related persons becomes directly or indirectly the beneficial owner of securities possessing (or convertible into or exercisable for securities possessing) more than fifty percent (50%) of the total combined voting power of our securities outstanding immediately after the consummation of such transaction or series of related transactions, whether such transaction involves a direct issuance from us or the acquisition of outstanding securities held by one or more of our stockholders.

 

    In the event of any stock split, stock dividend, spin-off transaction, extraordinary distribution (whether in cash, securities or other property), recapitalization, combination of shares, exchange of shares or other similar transaction affecting our outstanding common stock without our receipt of consideration, equitable adjustments will be made by the plan administrator to (i) the maximum number and/or class of securities issuable under the 2006 Plan, (ii) the maximum number and/or class of securities for which any one person may receive awards under the plan per calendar year, (iii) the number and/or class of securities for which awards may subsequently be made under the automatic grant program to new and continuing eligible non-employee directors, (iv) the number and/or class of securities and the exercise or base price per share in effect under each outstanding award under the discretionary grant and automatic grant programs and (v) the number and/or class of securities subject to each outstanding award under the stock issuance and automatic grant program and the cash consideration (if any) payable per share.

 

    The plan administrator may provide one or more individuals holding awards under the 2006 Plan with the right to have us withhold a portion of the shares otherwise issuable to such individuals in satisfaction of the withholding taxes to which they become subject in connection with the exercise of those options or stock appreciation rights, the issuance of vested shares or the vesting of unvested shares issued to them. Alternatively, the plan administrator may allow such individuals to deliver previously acquired shares of our common stock in payment of such withholding tax liability.

 

    Plan amendments will be subject to stockholder approval to the extent required by applicable law or regulation or the listing standards of the stock exchange (or Nasdaq National Market) on which our common stock is at the time primarily traded.

 

Automatic Option Grant Program. Participation in the automatic option grant program is limited to (i) each individual serving as an eligible non-employee board member the date the underwriting agreement for this stock offering is signed and (ii) any individual who first becomes an eligible non-employee board member on or after such date. For purposes of the program, an eligible non-employee board member is any board member who is not a member, officer, manager, equity holder or other affiliate of H.I.G. Capital LLC, Inc.

 

Grants under the automatic grant program will be made as follows:

 

    Each individual who is serving as an eligible non-employee board member on the date the underwriting agreement for this offering is signed will automatically be granted an option to purchase that number of shares of common stock determined by dividing the sum of thirty thousand dollars by the price per share at which the common stock is to be sold pursuant to this offering (an “IPO grant”).

 

    Each individual who first becomes an eligible non-employee board member at any time after the date the underwriting agreement for this stock offering is signed will, on the date such individual joins the board, automatically be granted an option to purchase that number of shares of our common stock determined by dividing the applicable dollar amount by the fair market value per share of our common stock on such date, provided that individual has not previously been in our employ (the “Initial Grant”). The applicable dollar amount will be determined by the plan administrator at the time of each such grant, but in no event will exceed fifty thousand dollars.

 

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    On the date of each annual stockholders meeting held after the completion of this offering, each eligible non-employee board member who is to continue to serve as a non-employee board member, including each of our current eligible non-employee board members, will automatically be awarded restricted stock units covering that number of shares of our common stock determined by dividing the applicable annual amount by the fair market value per share of our common stock on such date, provided that such individual has served as an eligible director for a period of at least six (6) months (the “Annual Grant”). The applicable annual amount will be determined by the plan administrator on or before the date of the annual stockholders meeting on which those Annual Grants are to be made, but in no event shall exceed thirty thousand dollars.

 

Any fractional share of common stock resulting from the application of the applicable dollar formula will be rounded up to the next whole share.

 

Each IPO Grant and Initial Grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of seven years, subject to earlier termination following the eligible non-employee director’s cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the lower of the exercise price paid per share or the fair market value per share, any shares purchased under the option which are not vested at the time of the eligible non-employee director’s cessation of board service. The shares subject to each IPO Grant and Initial Grant will vest in a series of four successive annual installments upon the eligible non-employee director’s completion of each year of board service over the four-year period measured from the grant date. The shares subject to each Annual Grant will vest upon the earlier of the eligible non-employee director’s completion of one year of board service measured from the grant date or his or her continuation in board service until the day immediately preceding the next annual stockholders meeting following the grant date. However, the shares subject to each automatic grant held by an eligible non-employee director (whether in the form of an option grant or restricted stock units) will immediately vest in full upon his or her death or disability while a board member.

 

 

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PRINCIPAL AND SELLING STOCKHOLDERS

 

The following table sets forth, as of November 1, 2006, information regarding the beneficial ownership of the common stock of the Company before the completion of this offering and shows the number and percentage owned by:

 

    each person who is known by us to beneficially own more than 5% of our outstanding common stock;

 

    each member of our board of directors;

 

    each of our named executive officers; and

 

    all members of our board of directors and executive officers as a group.

 

    Shares Beneficially Owned
Prior to this Offering(1)


    Shares Included in
this Offering
Assuming Exercise
of Over-Allotment
Option


 

Shares Beneficially Owned
After Offering

Assuming No Exercise

of Over-Allotment

Option


   

Shares Beneficially Owned
After Offering

Assuming Full Exercise

of Over-Allotment

Option


 

Beneficial Owner


    Number  

    Percent  

      Number  

    Number  

    Percent  

      Number  

    Percent  

 
                                   

Directors and Executive Officers

                                 

Jeff Bradley

  75,451     *       75,451     *   75,451     *

David Clark

                         

Allen Egner

                         

Steve Lundmark

                         

Sami Mnaymneh(2)

  11,241,303   99.3 %     11,241,303   64.0 %   10,303,803   59.0 %

Matthew Sanford

                         

Jeffrey Zanarini

                         

All executive officers and directors as a group (6 persons)(3)

  11,316,754   100 %   937,500   11,316,754   64.0 %   10,379,254   59.0 %

5% Stockholders

                                 

H.I.G. Capital LLC, Inc. and affiliates (4)

  11,241,303   99.3 %   937,500   11,241,303   64.0 %   10,303,803   59.0 %

* less than 1%
(1) Adjusted to reflect our 11.241303 for 1 stock split that occurred on December 5, 2006.
(2) Mr. Mnaymneh is a director of H.I.G. Capital LLC, Inc. and may be deemed to beneficially own the shares of common stock held of record by H.I.G. Capital LLC, Inc. and its affiliates. Mr. Mnaymneh disclaims beneficial ownership of such shares of common stock except to the extent of any pecuniary interest therein.
(3) Includes 11,241,303 shares that may be deemed to be beneficially owned by Mr. Mnaymneh, an officer and director of H.I.G. Capital LLC, Inc. Mr. Mnaymneh disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein.
(4) Mr. Mnaymneh has investment or voting power over the shares held by H.I.G. Capital LLC, Inc. and its affiliates. The address of H.I.G. Capital LLC, Inc. is 1001 Brickell Bay Drive, 27th Floor, Miami, FL 33131.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

General

 

The Company intends to adopt a policy that all transactions with directors, officers and other affiliates must be on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm’s-length basis from a person or entity that is not an affiliate of the Company. The policy will include procedures for reviewing and obtaining approval of proposed transactions with affiliates.

 

Tax Sharing Agreement

 

On July 6, 2006, we entered into a tax sharing agreement with our wholly-owned subsidiary Claymont Steel and its wholly-owned subsidiary CitiSteel PA, Inc. Pursuant to the terms of this agreement, Claymont Steel will pay to us an amount representing Claymont Steel’s tax liability if Claymont Steel were filing a United States tax return or a state or local tax return as the common parent of a United States federal income tax consolidated group or a state or local consolidated, combined, unitary or similar group, that includes Claymont Steel’s direct or indirect subsidiaries. Payments are to be made to us based on reasonable estimates, as determined by us in good faith, of Claymont Steel’s tax liability as calculated using the method described above. Any excess of payments for a taxable period over Claymont Steel’s actual tax liability using the above calculation method will be returned to Claymont Steel within 10 days following the determination of such excess.

 

Employment Agreement

 

In June 2005, we entered into an employment agreement with Jeff Bradley pursuant to which, among other things, Mr. Bradley will serve as our Chief Executive Officer until June 10, 2009. Under this agreement, Mr. Bradley receives a base salary of $275,000 per year, and is eligible for an annual bonus of up to $225,000 of which up to $150,000 is based on us attaining certain EBITDA (as defined in the agreement) levels and the remaining $75,000 may be earned in our Board’s discretion. In June 2005, Mr. Bradley was also granted 75,451 shares of our restricted stock representing 0.6667% of our then outstanding common stock. Of such shares, 12.5% vest each anniversary of the original grant date assuming that Mr. Bradley is employed on each applicable vesting date, as defined in the agreement. An additional 12.5% of the shares vest on June 30 of each year if our EBITDA levels equal or exceed targets established by our Board and Mr. Bradley is employed on each applicable vesting date. As of June 30, 2006, 25% of Mr. Bradley’s shares were vested. In the event that we or certain of our affiliates experience a change of control, Mr. Bradley is entitled to an additional bonus equal to $1,000,000 minus the net proceeds that he receives upon such change of control as a result of his equity ownership. If we terminate Mr. Bradley without cause he is entitled to salary accrued through the effective date of the termination notice, the reimbursement of any expenses, and, if he executes a separation release, one year’s salary and any bonus accrued as of termination. If we terminate Mr. Bradley with cause he is entitled to his salary accrued through the effective date of the termination notice and the reimbursement of any expenses.

 

Management Agreement

 

On June 10, 2005, our wholly owned subsidiary Claymont Steel entered into a management agreement with H.I.G. Capital, LLC, an affiliate of our principal stockholder. Pursuant to the terms of this agreement, H.I.G. Capital will provide management, consulting and financial services to Claymont Steel, subject to the supervision of its Board. In exchange for these services, Claymont Steel will pay H.I.G. Capital an annual management fee of $675,000. In addition to this fee, H.I.G. Capital is also entitled to additional compensation for the introduction or negotiation of any transactions not in the ordinary course of business or pursuant to which we acquire or dispose of any business operations. The amount of any additional compensation is to be determined by good faith negotiations between H.I.G. Capital and Claymont Steel’s Board, except that in the case of a sale of a majority of Claymont Steel’s stock or all or substantially all of its assets to a third party, H.I.G. Capital is entitled to a fee equal to 1% of the aggregate sale transaction value. Claymont Steel has also agreed to reimburse H.I.G. Capital for any expenses incurred in the performance of its duties under the management agreement. The

 

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agreement terminates in June 2015 or upon a material breach by either party that remains uncured after 10 business days’ notice to the breaching party. Upon completion of this offering, we will pay H.I.G. Capital a fee of $4 million, $1 million of which represents a transaction fee payable upon completion of this offering and $3 million of which represents a fee to terminate our obligation to make payments under the management services agreement following the completion of this offering.

 

Registration Rights

 

Upon the completion of this offering, affiliates of H.I.G. Capital or its transferees will be entitled to demand the registration of shares of common stock held by them and to include its shares for registration in certain registration statements that we may file under the Securities Act after the completion of this offering. See “Shares Eligible for Future Sale—Registration Rights.”

 

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DESCRIPTION OF CAPITAL STOCK

 

The following is a description of the material terms of our amended and restated certificate of incorporation and bylaws as each will be in effect as of the consummation of this offering, and of specific provisions of Delaware law.

 

General

 

Prior to the consummation of this offering, we will increase our total authorized number of shares of common stock to 100,000,000 shares.

 

Immediately following the consummation of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share, the rights and preferences of which may be established from time to time by the board of directors. Upon completion of this offering, there will be 17,566,754 shares of common stock outstanding and no outstanding shares of preferred stock.

 

Common Stock

 

Voting Rights.  Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of common stock do not have cumulative voting rights in the election of directors.

 

Dividend Rights.  Holders of common stock are entitled to receive ratably dividends if, as and when dividends are declared from time to time by our board of directors out of funds legally available for that purpose, after payment of dividends required to be paid on outstanding preferred stock, as described below, if any. Under Delaware law, we can only pay dividends either out of “surplus” or out of the current or the immediately preceding year’s net profits. Surplus is defined as the excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a corporation’s assets can be measured in a number of ways and may not necessarily equal their book value.

 

Liquidation Rights.  Upon liquidation, dissolution or winding up, the holders of common stock are entitled to receive ratably the assets available for distribution to the stockholders after payment of liabilities and accrued but unpaid dividends and liquidation preferences on any outstanding preferred stock.

 

Other Matters.  The common stock has no preemptive or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our common stock are fully paid and non-assessable, and the shares of our common stock offered in this offering, upon payment and delivery in accordance with the underwriting agreement, will be fully paid and non-assessable.

 

Preferred Stock.  Our board of directors will have the authority, without further action by the stockholders, to issue preferred stock in one or more series, and to fix the rights, preferences and privileges of any preferred stock. Any and all of these rights, preferences and privileges may be superior to the rights of the common stock.

 

Composition of Board of Directors; Election and Removal of Directors

 

In accordance with our amended and restated bylaws, the number of directors comprising our board of directors will be as determined from time to time by our board of directors, and only a majority of the board of directors may fix the number of directors. We intend to avail ourselves of the “controlled company” exception under the Nasdaq Global Market rules, which exempts us from certain of the requirements, including that we have a majority of independent directors on our board of directors and that we have compensation and

 

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nominating committees composed entirely of independent directors. We will, however, remain subject to the requirement that we have an audit committee composed entirely of independent members. Upon the closing of this offering, it is anticipated that we will have seven directors. Each director is to hold office until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. At any meeting of our board of directors, a majority of the total number of directors then in office will constitute a quorum for all purposes.

 

Our amended and restated certificate of incorporation will provide that our board of directors is divided into three classes of directors, with the classes to be as nearly equal in number as possible. As a result, approximately one-third of our board of directors are elected each year. The classification of directors has the effect of making it more difficult for stockholders to change the composition of our board.

 

Under the Delaware General Corporation Law, unless otherwise provided in our amended and restated certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. Our amended and restated certificate of incorporation will not make an exception to this rule. In addition, our amended and restated certificate of incorporation and bylaws provide that any vacancies on our board of directors will be filled only by the affirmative vote of a majority of the remaining directors.

 

Amendment of Our Certificate of Incorporation

 

Under applicable law, our amended and restated certificate of incorporation may be amended only with the affirmative vote of a majority of the outstanding stock entitled to vote thereon.

 

Amendment of Our Bylaws

 

Our amended and restated bylaws will provide that they can be amended by the vote of the holders of a majority of the shares then entitled to vote or by the vote of a majority of the board of directors.

 

Limitation of Liability and Indemnification

 

Our amended and restated certificate of incorporation will provide that no director will be personally liable for monetary damages for breach of any fiduciary duty as a director, except with respect to liability:

 

    for any breach of the director’s duty of loyalty to us or our stockholders;

 

    for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

 

    under Section 174 of the Delaware General Corporation Law (governing distributions to stockholders); or

 

    for any transaction from which the director derived any improper personal benefit.

 

However, if the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. The modification or repeal of this provision of our amended and restated certificate of incorporation will not adversely affect any right or protection of a director existing at the time of such modification or repeal.

 

Our amended and restated certificate of incorporation will provide that we will, to the fullest extent from time to time permitted by law, indemnify our directors, officers and employees against all liabilities and expenses in any suit or proceeding, arising out of their status as an officer or director or their activities in these capacities. We will also indemnify any person who, at our request, is or was serving as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise.

 

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The right to be indemnified will include the right of an officer or a director to be paid expenses in advance of the final disposition of any proceeding, provided that, if required by law, we receive an undertaking to repay such amount if it will be determined that he or she is not entitled to be indemnified.

 

Our board of directors may take such action as it deems necessary to carry out these indemnification provisions, including adopting procedures for determining and enforcing indemnification rights and purchasing insurance policies. Our board of directors may also adopt bylaws, resolutions or contracts implementing indemnification arrangements as may be permitted by law. Neither the amendment or repeal of these indemnification provisions, nor the adoption of any provision of our amended and restated certificate of incorporation inconsistent with these indemnification provisions, will eliminate or reduce any rights to indemnification relating to their status or any activities prior to such amendment, repeal or adoption.

 

We believe these provisions will assist in attracting and retaining qualified individuals to serve as directors.

 

Anti-takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law

 

Some provisions of Delaware law and our certificate of incorporation and bylaws could make the following more difficult:

 

    acquisition of us by means of a tender offer,

 

    acquisition of us by means of a proxy contest or otherwise, or

 

    removal of our incumbent officers and directors.

 

These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the disadvantages of discouraging those proposals because negotiation of them could result in an improvement of their terms.

 

Election and Removal of Directors.  Our certificate of incorporation provides that our board of directors is divided into three classes. The term of the first class of directors expires at our first annual meeting of stockholders following the offering; the term of the second class of directors expires at our second annual meeting of stockholders following the offering; and the term of the third class of directors expires at our third annual meeting of stockholders following the offering. At each of our annual meetings of stockholders, the successors of the class of directors whose term expires at that meeting of stockholders will be elected for a three-year term, one class being elected each year by our stockholders. In addition, our directors may only be removed for cause. This system of electing and removing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us because it generally makes it more difficult for stockholders to replace a majority of the directors.

 

Size of Board and Vacancies.  Our bylaws provide that the number of directors on our board of directors will be fixed exclusively by our board of directors. Newly created directorships resulting from any increase in our authorized number of directors or any vacancies in our board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause will be filled by the majority vote of our remaining directors in office, except that any vacancy caused by the removal of a director by a majority vote of our stockholders may be filled by a majority vote of our stockholders.

 

Delaware Anti-takeover Law.  Upon completion of the offering, we will be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of

 

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three years following the date such person became an interested stockholder, unless the business combination or the transaction in which such person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person that, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of our common stock.

 

No Cumulative Voting.  Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors.

 

Undesignated Preferred Stock.  The authorization of our undesignated preferred stock makes it possible for our board of directors to issue our preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes of control of our management.

 

Listing

 

We have applied to list our common stock on the Nasdaq Global Market under the trading symbol “PLTE”.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Future sales of substantial amounts of our common stock in the public market, or the perception that substantial sales may occur, could adversely affect the prevailing market price of our common stock. Prior to this offering, there has been no public market for our common stock. After completion of the offering, there will be 17,566,754 shares of common stock outstanding. Of these shares, the 6,250,000 shares sold in the offering, or up to 7,187,500 shares if the underwriters fully exercises their option to purchase additional shares, will be freely transferable without restriction under the Securities Act, except by persons who may be deemed to be our affiliates.

 

In addition to the shares of our common stock sold in this offering, there will be 11,316,754 shares of our common stock outstanding immediately after this offering. Of these shares, all are restricted securities and may be sold into the public market pursuant to Rule 144 and 144(k) under the Securities Act as described below.

 

Sales of Restricted Shares

 

An aggregate of 11,316,754 shares held by our existing stockholders upon completion of this offering will be “restricted securities,” as that phrase is defined in Rule 144, and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from such registration, including among others, the exemptions provided by Rule 144 and 144(k) under the Securities Act, which are summarized below. Taking into account the lock-up agreements described below and the provisions of Rules 144 and 144(k), additional shares will be available for sale in the public market as follows:

 

    no shares will be available for immediate sale on the date of this prospectus;

 

    commencing 180 days (or earlier if waived by the underwriters) after the date of this prospectus, the expiration date for the lock-up agreements, 11,260,165 shares will be available for sale pursuant to Rule 144, as further described below.

 

Rule 144

 

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a stockholder who has beneficially owned our shares for at least one year, would be entitled to sell within any three month period a number of shares that does not exceed the greater of:

 

    1.0% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or

 

    the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the sale.

 

Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of certain public information about us.

 

Rule 144(k)

 

Under Rule 144(k), a person who is not currently an affiliate of ours, and who has not been an affiliate of ours for at least three months before the sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

 

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Lock-Up Agreements

 

We, our executive officers and directors and all of our stockholders have entered into lock-up agreements with Jefferies & Company, Inc., as representative of the underwriters, under which we have agreed, subject to specified exceptions, not to directly or indirectly:

 

    sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or

 

    otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock, or securities exchangeable or exercisable for or convertible into shares of common stock currently or hereafter owned either of record or beneficially, or

 

    publicly announce an intention to do any of the foregoing

 

for a period of 180 days after the date of this prospectus without the prior written consent of Jefferies & Company, Inc.

 

Jefferies & Company, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our stockholders who will execute a lock-up agreement, providing consent to the sale of shares prior to the expiration of the lock-up period.

 

Registration Rights

 

Upon the completion of this offering, affiliates of H.I.G. Capital or its transferees will be entitled to demand the registration of shares of common stock held by them and to include its shares for registration in certain registration statements that we may file under the Securities Act after the completion of this offering.

 

Demand registration rights require us to prepare and file, at our expense, a registration statement covering the shares subject to the demand. The number of demands that may be made for registration on any appropriate form under the Securities Act, other than on a Form S-3 or any similar short form registration statement, will be limited to five. There is no limit to the number of demands that may be made for registration on a Form S-3, except that we will not be obligated to effect any short form registration within six months after the effective date of a previous long-form registration. We are not obligated to take any action to effect the demand registration rights prior to six months after the date of this prospectus.

 

If we propose to register our securities under the Securities Act, either for our own account or for the account of other security holders, affiliates of H.I.G. Capital or its transferees will generally be entitled to notice of the registration and will be entitled to include, at our expense, their shares of common stock in such registration statement. These registration rights will be subject to conditions and limitations, including the right of any underwriters to limit the number of shares included in the registration statement.

 

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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

This summary describes the principal tax consequences of the ownership and disposition of our common stock, but it does not purport to be a comprehensive description of all of the tax consequences that may be relevant to a decision to hold or dispose of our common stock. This summary applies only to purchasers of our common stock that will hold our common stock as a capital asset for tax purposes and does not apply to special classes of holders such as dealers and traders in securities or currencies, holders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar (other than Non-U.S. Holders), tax-exempt organizations, certain financial institutions, real estate investment trusts, regulated investment companies, insurance companies, persons that acquired our common stock pursuant to the exercise of any employee stock option or otherwise as compensation, holders liable for the alternative minimum tax, partnerships or other entities classified as partnerships for U.S. federal income tax purposes and persons holding our common stock in a hedging transaction or as part of a straddle, conversion, constructive sale transaction or other integrated transaction.

 

Each holder should consult such holder’s own tax adviser concerning the overall tax consequences to it, including the consequences under laws other than U.S. federal income tax laws, of an investment in our common stock.

 

U.S. Holders

 

In this discussion, references to a “U.S. Holder” are to a beneficial owner of our common stock that is

 

    a citizen or resident of the United States,

 

    a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States or any political subdivision thereof,

 

    an estate the income of which is subject to United States federal income tax without regard to its source, or

 

    a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.

 

Taxation of Distributions

 

U.S. Holders will be taxed on distributions on our common stock as ordinary dividend income to the extent paid out of our current or accumulated earnings and profits for U.S. federal income tax purposes. If a U.S. Holder is taxed as a corporation, dividends may be eligible for the 70% dividends-received deduction. The Internal Revenue Code of 1986, as amended, or the Code, contains various limitations upon the dividends-received deduction. U.S. Holders who are corporations should consult their tax advisors with respect to the possible application of these limitations to their ownership or disposition of our common stock in their particular circumstances.

 

A U.S. Holder generally will not be taxed on any portion of a distribution not paid out of our current or accumulated earnings and profits if its tax basis in our common stock is greater than or equal to the amount of the distribution. However, U.S. Holders will be required to reduce their tax basis (but not below zero) in our common stock by the amount of the distribution, and would recognize capital gain to the extent that the distribution exceeds their tax basis in our common stock. Further, U.S. Holders who are corporations would not be entitled to a dividends-received deduction on this portion of a distribution.

 

Distributions that individual U.S. Holders receive with respect to our common stock that are dividends for U.S. federal income tax purposes before prior to January 1, 2011 will be subject to taxation as net capital gain at a maximum rate of 15%, provided that certain holding period and other requirements are satisfied.

 

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Taxation of Capital Gains

 

Upon the sale or other disposition of our common stock, U.S. Holders will generally recognize gain or loss for U.S. federal income tax purposes. The amount of the gain or loss will be equal to the difference between the amount realized on the disposition of our common stock and your tax basis in our common stock. Such gain or loss generally will be treated as capital gain or loss and will be long-term capital gain or loss if our common stock has been held for more than one year. Generally, capital gain recognized by an individual U.S. Holder before January 1, 2011 is subject to taxation at a maximum rate of 15%. The deductibility of capital losses is subject to limitations.

 

Non-U.S. Holders

 

This subsection describes the tax consequences to a “Non-U.S. Holder”. For purposes of this discussion, you are a “Non-U.S. Holder” if you are for United States income tax purposes:

 

    a nonresident alien individual,

 

    a foreign corporation, or

 

    a foreign estate or trust, in either case not subject to United States federal income tax on a net income basis in respect of income or gain from our common stock.

 

Taxation of Dividends

 

Any distributions received in respect of our common stock by a person that is a Non-U.S. Holder, to the extent considered dividends for U.S. federal income tax purposes, generally will be subject to withholding of U.S. federal income tax at a 30% rate or at a lower rate specified by an applicable income tax treaty, unless the dividend is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the U.S. or, where a tax treaty applies, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder.

 

If the dividend is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States or, where a tax treaty applies, is attributable to the Non-U.S. Holder’s United States permanent establishment, the dividend will be subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates and will be exempt from the withholding tax. In addition, dividends received by a corporate Non-U.S. Holder that are effectively connected with a U.S. trade or business or, where a tax treaty applies, are attributable to the Non-U.S. Holder’s U.S. permanent establishment may, under some circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate specified by an applicable income tax treaty.

 

For purposes of obtaining a reduced rate of withholding under an income tax treaty, the Non-U.S. Holder will be required to provide information concerning the Non-U.S. Holder’s country of residence and entitlement to tax treaty benefits on an appropriate form, currently Internal Revenue Service, or IRS, Form W-8BEN, and may also be required to provide a U.S. taxpayer identification number thereon. However, some payments to foreign partnerships and other fiscally transparent entities may not be eligible for a reduced rate of withholding tax under an applicable income tax treaty or may require provision of IRS Form W-8BEN by the fiscally transparent entity and IRS Form W-BEN by its beneficial owners that are eligible for such reduced rate of withholding. If the Non-U.S. Holder claims exemption from withholding with respect to dividends effectively connected with the Non-U.S. Holder’s conduct of a business within the U.S., the Non-U.S. Holder must provide appropriate certification, currently IRS Form W-8ECI, to us or our paying agent. If the Non-U.S. Holder is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, the Non-U.S. Holder may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.

 

If a distribution exceeds our current and accumulated earnings and profits allocable to the distribution, it will be treated first as a return of the Non-U.S. Holder’s tax basis in the common stock to the extent of the Non-U.S. Holder’s adjusted tax basis in the common stock and then as gain from the sale of a capital asset, which

 

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would be taxable as described below. Any withholding tax on distributions in excess of our current and accumulated earnings and profits will be refundable to the Non-U.S. Holder upon the timely filing of an appropriate claim for refund with the IRS.

 

Taxation of Capital Gains

 

Generally, Non-U.S. Holders will not be subject to U.S. federal income tax on any gain recognized upon the sale or other disposition of our common stock. However, a Non-U.S. Holder will be subject to U.S. federal income tax on the gain if:

 

    the gain is effectively connected with the Non-U.S. Holder’s U.S. trade or business or, if a tax treaty applies, attributable to the Non-U.S. Holder’s U.S. permanent establishment,

 

    the Non-U.S. Holder is an individual who is a former citizen of the United States who lost U.S. citizenship within the preceding ten-year period, or a former long-term resident of the United States who relinquished U.S. residency on or after February 6, 1995, and the loss of citizenship or permanent residency had as one of its principal purposes the avoidance of U.S. tax, or

 

    the Non-U.S. Holder is a non-resident alien individual, the Non-U.S. Holder is present in the U.S. for 183 or more days in the taxable year of disposition and certain other conditions exist.

 

The Non-U.S. Holder will also be subject to U.S. federal income tax on any gain from the sale of our common stock if we are or have been a “U.S. real property holding corporation” within the meaning of section 897(c)(2) of the Code at any time the Non-U.S. Holder held our common stock, or within the five-year period preceding the sale of our common stock if the Non-U.S. Holder holds our common stock for more than five years. We believe that:

 

    we are not now a “U.S. real property holding corporation”,

 

    we have not been a “U.S. real property holding corporation” at any time since we were formed, and

 

    based on the assumption that the fair market value of the U.S. real property interests of each company in our group will continue to be less than 50 percent of the sum of the fair market value of our real property interests plus the fair market value of any other assets in the United States that are used in a business, we should not be a “U.S. real property holding corporation” in the future.

 

If we were a “U.S. real property holding corporation” or were to become a “U.S. real property holding corporation,” the Non-U.S. Holder would be subject to U.S. federal income tax on any gain from sale of our common stock if the Non-U.S. Holder beneficially owned, or had owned at any time during the specified five-year period, more than 5% of the total fair market value of the class of stock the Non-U.S. Holder sold.

 

Information Reporting and Backup Withholding

 

U.S. Holders

 

Dividends and proceeds from the sale or other disposition with respect to our common shares paid to a U.S. Holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides an accurate taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding collected from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is furnished to the IRS.

 

Non-U.S. Holders

 

We generally will be required to report to Non-U.S. Holders and to the IRS the amount of any dividends paid to the Non-U.S. Holder in each calendar year and the amounts of tax withheld, if any, with respect to the

 

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dividend payments. Copies of the information returns reporting the dividends and withholding may also be made available to the tax authorities in the country in which a Non-U.S. Holder resides under the provisions of an applicable income tax treaty.

 

Backup withholding is generally imposed at the current rate of 28% on certain payments to persons that fail to furnish the necessary identifying information to the payor. You generally will be subject to backup withholding tax with respect to dividends paid on our common stock at a 28% rate unless you certify your non-U.S. status.

 

Payment of the proceeds of a sale of our common stock by or through a U.S. office of a broker will be subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a Non-U.S. Holder or otherwise establishes exemption. In general, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of our common stock by or through a foreign office of a broker. If, however, the broker is, for U.S. federal income tax purposes:

 

    a U.S. person,

 

    a “controlled foreign corporation,”

 

    a foreign person, 50% or more of whose gross income is effectively connected with a U.S. trade or business for a specified three-year period, or

 

    a foreign partnership in which one or more U.S. persons, in the aggregate, own more than 50% of the income or capital interests in the partnership or if the partnership is engaged in a trade or business in the United States,

 

payment of the proceeds will be subject to information reporting, but not backup withholding, unless:

 

    the broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and certain other conditions are met, or

 

    the beneficial owner otherwise establishes an exemption.

 

Certification will be required in the case of the disposition of shares of our common stock held in an offshore account if the disposition is made through a foreign broker described in the immediately preceding paragraph.

 

Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS.

 

The foregoing discussion is for general information and is not tax advice. Accordingly, each Non-U.S. Holder of our common stock should consult its tax advisor as to the particular tax consequences to it of owning our common stock, including the applicability and effect of any state, local or foreign income tax laws, and any recent or prospective changes in applicable tax laws.

 

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UNDERWRITING

 

Under the terms and subject to the conditions contained in an underwriting agreement dated                  , 2006, the underwriters named below, for whom Jefferies & Company, Inc. is acting as representative, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Name


   Number of Shares

Jefferies & Company, Inc.

    

CIBC World Markets Corp.

    

KeyBanc Capital Markets, a division of McDonald Investments Inc.

    

Morgan Joseph & Co. Inc.

    

 

The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

 

At our request, the underwriters have reserved up to     % of the shares of common stock for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares.

 

Over-Allotment Option

 

The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 937,500 additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. We will not receive any proceeds from the sale of the shares of common stock upon the exercise of the underwriters’ over-allotment option.

 

Commission and Expenses

 

The underwriters have advised us that they propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $         per share. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $         per share of common stock to certain brokers and dealers. After the offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representative. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares of common stock are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority.

 

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The following table shows the public offering price, the underwriting discounts and commissions payable to the underwriters by us and the proceeds, before expenses, to us. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.

 

     Per Share

   Total

     Without Over-
allotment


   With Over-
allotment


   Without Over-
allotment


   With Over-
allotment


Public offering price

   $    $    $    $

Underwriting discounts and commissions paid by us

   $    $    $    $

Proceeds, before expenses, to us

   $    $    $    $

 

We estimate expenses payable by us in connection with the offering of shares of common stock, other than the underwriting discounts and commissions referred to above, will be approximately $              million.

 

Indemnification

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

 

Lock-up Agreements

 

We, our officers, directors and all of our stockholders have agreed, subject to specified exceptions, not to directly or indirectly:

 

    sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or

 

    otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock, or securities exchangeable or exercisable for or convertible into shares of common stock currently or hereafter owned either of record or beneficially, or

 

    publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of Jefferies & Company, Inc.

 

This restriction terminates after the close of trading of the shares of common stock on and including the 180 days after the date of this prospectus. However, subject to certain exceptions, in the event that either (i) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, then in either case the expiration of the 180-day restricted period will be extended until the expiration of the 18-day period beginning on the date of the issuance of an earnings release or the occurrence of the material news or event, as applicable, unless Jefferies & Company, Inc. waives, in writing, such an extension.

 

Jefferies & Company, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our stockholders who will execute a lock-up agreement, providing consent to the sale of shares prior to the expiration of the lock-up period.

 

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Listing

 

We have applied to list our common stock on the Nasdaq Global Market under the trading symbol “PLTE”.

 

Electronic Distribution

 

A prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters of the offering, or by their affiliates. Other than the prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter and should not be relied upon by investors.

 

Price Stabilization, Short Positions and Penalty Bids

 

Until the distribution of the shares of common stock is completed, SEC rules may limit underwriters from bidding for and purchasing shares. However, the representative may engage in transactions that stabilize the market price of the shares, such as bids or purchases to peg, fix or maintain that price so long as stabilizing transactions do not exceed a specified maximum.

 

In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise make short sales of shares of the Company’s common stock and may purchase shares of the Company’s common stock on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. “Naked” short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. A “stabilizing bid” is a bid for or the purchase of shares of common stock on behalf of the underwriter in the open market prior to the completion of this offering for the purpose of fixing or maintaining the price of the shares of common stock. A “syndicate covering transaction” is the bid for or purchase of shares of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering.

 

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the Company’s stock or preventing or retarding a decline in the market price of the Company’s stock. As a result, the price of the Company’s stock may be higher than the price that might otherwise exist in the open market.

 

The representative may also impose a “penalty bid” on underwriters. A “penalty bid” is an arrangement permitting the representative to reclaim the selling concession otherwise accruing to the underwriters in connection with this offering if the shares of common stock originally sold by the underwriters are purchased by the underwriters in a syndicate covering transaction and have therefore not been effectively placed by the underwriters. The imposition of a penalty bid may also affect the price of the shares of common stock in that it discourages resales of those shares of common stock.

 

Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of shares of our common

 

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stock. In addition, neither we nor any of the underwriters makes any representation that the representative will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

 

No Public Market

 

Prior to the offering, there has not been a public market for our common stock. Consequently, the initial public offering price for our shares of common stock was determined by negotiations between us and the underwriters subject to the applicable provisions of Rule 2720 of the NASD. Among the factors considered in these negotiations were prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

 

We offer no assurances that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market for the common stock will develop and continue after the offering.

 

Affiliations

 

The representative or its affiliates have in the past performed and may in the future from time to time perform investment banking and other financial services for us and our affiliates for which they receive advisory or transaction fees, as applicable, plus out-of-pocket expenses, of the nature and in amounts customary in the industry for these financial services.

 

Jefferies & Company, Inc. acted as the initial purchaser for our offering of the Holdings Notes in July 2006. In addition, in July 2005, Jefferies & Company, Inc. acted as the initial purchaser for the offering by Claymont Steel of its Senior Secured Floating Rate Notes due 2010. In consideration for these services, Jefferies & Company, Inc. received customary cash compensation.

 

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LEGAL MATTERS

 

The validity of the shares of common stock offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP, Pittsburgh, Pennsylvania. Mayer, Brown, Rowe & Maw LLP, New York, New York will act as counsel to the underwriters.

 

EXPERTS

 

The consolidated financial statements of CitiSteel USA, Inc. and subsidiary for the year ended December 31, 2003, included in this prospectus have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their report appearing herein, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement discussed in Note 17) and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The consolidated financial statements of Claymont Steel Holdings, Inc., as of December 31, 2005 and 2004 and for the periods from June 10, 2005 to December 31, 2005 and January 1, 2005 to June 9, 2005 and for the year ended December 31, 2004 included in this prospectus have been audited by Crowe Chizek and Company LLC, independent registered public accounting firm as stated in their report herein, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement discussed in Note 17) and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act relating to this offering. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. For further information with respect to us and this offering, you should refer to the registration statement and the exhibits filed as a part of the registration statement. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or other documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or the matter involved.

 

You may obtain copies of the information and documents referenced in this prospectus and included as exhibits to the registration statement at no charge by writing or telephoning us at the following address or telephone number:

 

Claymont Steel Holdings, Inc.

4001 Philadelphia Pike

Claymont, Delaware 19703

Attention: Allen Egner, Vice President, Finance

 

Our wholly-owned subsidiary Claymont Steel files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Claymont Steel and other companies that file materials with the SEC electronically.

 

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UNAUDITED PRO FORMA FINANCIAL STATEMENT

 

The unaudited pro forma financial statement should be read in conjunction with our consolidated financial statements and related notes, and other financial information appearing elsewhere in this offering circular, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Historical Consolidated Financial and Operating Data.”

 

The unaudited pro forma statements of operations give effect to the acquisition of Claymont Steel on June 10, 2005 (the “Acquisition”), the sale of the $172.0 million of Claymont Steel floating rate notes, the sale of the $75.0 million Holdings Notes and the receipt of proceeds from this offering and the redemption of the Holdings Notes as if they had occurred on January 1, 2005.

 

The unaudited pro forma statements of operations do not include non-recurring costs of approximately $7.5 million in redemption premiums or non-cash charges of approximately $3.3 million that the Company will incur as a result of redeeming the Holdings Notes with the proceeds from this offering.

 

 

The unaudited pro forma balance sheet gives effect to the receipt of the proceeds from this offering and the anticipated redemption of the Holdings Notes.

 

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable.

 

The pro forma adjustments include an estimate for deferred tax liabilities. The structure of the Acquisition and certain elections that we may make in connection with the Acquisition and subsequent tax filings may impact the amount of deferred tax liabilities that are due and the realization of deferred tax assets. The unaudited pro forma financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of our future consolidated results of operations or financial position.

 

The following table summarizes the allocation of the aggregate purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of Acquisition (amounts in thousands).

 

     As of June 10,
2005


Current assets

   $ 108,517

Property, plant, and equipment

     9,578

Intangible assets

     7,563
    

Total assets acquired

     125,658
    

Current liabilities

     13,240

Deferred taxes

     4,643

Long-term debt

     2,298
    

Total liabilities assumed

     20,181
    

Net assets acquired

   $ 105,477
    

 

Of the $7.6 million of acquired intangible assets, $600,000 was assigned to the trade name, which is not subject to amortization. The remaining $7.0 million of acquired intangible assets relate to customer relationships and have a weighted-average useful life of approximately five years. The difference between the aggregate purchase price and the estimated fair values of the assets acquired and liabilities assumed was approximately $103.2 million. This negative goodwill was used to reduce the value of property, plant and equipment and intangible assets.

 

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     Unaudited Pro Forma Balance Sheet as of
September 30, 2006


 
     Successor
Company
Actual


   
Adjustments


   
Adjusted
Pro Forma


 

ASSETS

                        

Cash and cash equivalents

   $ 20,821     $ (2,069 )(1)   $ 18,752  

Accounts receivable, net

     36,045       —         36,045  

Inventories

     42,509       —         42,509  

Income taxes receivable

     —         2,204 (3)     2,204  

Deferred income taxes

     1,167       —         1,167  

Prepaid expenses

     587       —         587  
    


 


 


Total current assets

     101,129       135       101,264  

Property, plant and equipment, net

     21,954       —         21,954  

Intangible assets, net

     5,281       —         5,281  

Deferred financing fees, net

     10,227       (3,305 )(2)     6,922  

Deferred taxes

     1,936       —         1,936  
    


 


 


Total assets

     140,527       (3,170 )     137,357  
    


 


 


LIABILITIES AND STOCKHOLDER’S DEFICIT

                        

Accounts payable

     21,935       —         21,935  

Accrued expenses

     2,838       —         2,838  

Accrued profit sharing

     1,776       —         1,776  

Accrued interest payable

     4,433       (2,719 )(1)     1,714  

Income taxes payable

     4,512       (4,512 )(3)     —    

Due to seller

     —         —         —    
    


 


 


Total current liabilities

     35,494       (7,231 )     28,263  

Long-term debt

     243,763       (75,000 )(1)     168,763  

Deferred income taxes

     2,049               2,049  

Other long-term liabilities

     286       —         286  
    


 


 


Total liabilities

     281,592       (82,231 )     199,361  

STOCKHOLDER’S DEFICIT:

                        

Common stock

                        

Accumulated deficit

     (141,065 )     79,061 (1), (2),(3)     (62,004 )
    


 


 


Total stockholder’s deficit

     (141,065 )     79,061       (62,004 )

Total liabilities and stockholder’s deficit

   $ 140,527     $ (3,170 )   $ 137,357  
    


 


 



(1) Represents the proposed equity offering assuming $100 million in gross proceeds and $9 million of offering-related expenses. The offering proceeds and $2,069,000 of additional cash are applied to redeem the $75 million of Holdings Notes plus $7.5 million in premium and $6,469,000 of interest through January 31, 2007 and to pay an affiliate of our principal stockholder a $4.0 million fee and an employee a $0.1 million bonus.
(2) Write off of the deferred financing fees associated with the Holdings Notes.
(3) Represents a tax benefit of $6.7 million, calculated at the Company’s effective rate of 36%, for the total of $18.7 million of tax deductible payments related to the proposed equity offering, as follows: write-off of the deferred financing fees of $3.3 million; payment of the $4.0 million fee to an affiliate of our principle stockholder; payment of a $0.1 million bonus to an employee; and, payment of the $7.5 million premium and $3.8 million of interest from October 1, 2006 to January 31, 2007 to redeem the Holdings Notes.

 

P-2


Table of Contents
   

Unaudited Pro Forma Statement of Operations for the

Thirty-Nine Weeks Ended September 30, 2006


 
    Successor
Company
Actual


    Nonrecurring
Charges
Related to the
Acquisition


    Holding Co
Notes
Pro Forma
Adjustments


    IPO
Pro Forma
Adjustments(5)


    Pro Forma

 

Sales

  $ 247,706           $ —       $ —       $ 247,706  

Cost of sales

    169,391     —         —         —         169,391  
   


 

 


 


 


Gross profit (loss)

    78,315     —         —         —         78,315  

Operating expenses—selling, general and administrative

    12,930     (440 )(1)     —         —         12,490  
   


 

 


 


 


Income (loss) from operations

    65,385     440       —         —         65,825  
   


 

 


 


 


Other income (expense):

                                     

Interest and other income

    1,909     —         (1,465 )(3)     —         444  

Other non-operating (expense) income

    139     —         —         —         139  

Interest expense

    (20,039 )   —         (6,063 )(4)     8,989 (6)     (17,113 )
   


 

 


 


 


Income from continuing operations before material nonrecurring charges or credits directly attributable to the transactions, before income tax

    47,394     440       (7,528 )     8,989       49,295  

Income tax (expense) benefit

    (17,782 )   (158 )(2)     2,710 (2)     (3,236 )(2)     (18,466 )
   


 

 


 


 


Net income from continuing operations before material nonrecurring charges or credits directly attributable to the transactions, before income tax

    29,612     282       (4,818 )     5,753       30,829  
   


 

 


 


 


Net income per common share

                                     

Basic

    2.63 (7)   —         —         —         —    

Diluted

    2.62 (7)   —         —         —         —    

Weighted average shares outstanding

                                     

Basic

    11,248,638     —         —         —         —    

Diluted

    11,316,754     —         —         —         —    

Net income from continuing operations before material nonrecurring charges or credit directly attributable to the transaction per common share—basic

    —       —         —         —         1.76  

Net income from continuing operations before material nonrecurring charges or credits directly attributable to the transaction net earnings per common share—diluted

    —       —         —         —         1.75  

Shares outstanding after the offering

                                     

Basic

    —       —         —         —         17,510,165  

Diluted

    —       —         —         —         17,566,754  

(1) Represents $135,000 in legal fees related to the registration of the Claymont Steel floating rate notes and charges to compensation expense of $89,000 and $216,000 related to the restricted stock granted to our Chief Executive Officer.
(2) Represents the tax effect at the 36% effective rate of the pro forma adjustments.
(3) Represents the reversal of interest income earned on investment securities, which were used to fund dividend payments.
(4) Represents interest expense and amortization of deferred financing fees for the Holdings Notes.
(5) Material nonrecurring charges directly related to this offering total $4.1 million and consist of a $4.0 million fee to be paid to an affiliate of our principal stockholder and $0.1 million employee bonus. The tax benefit related to these charges totals $1.5 million.
(6) Represents the redemption of the Holdings Notes with the offering proceeds and the reduction of interest expense and deferred financing fee amortization.
(7) Basic and diluted earnings for the successor company have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure. Therefore, weighted average shares for purposes of the basic and diluted earnings per share calculation have been adjusted to reflect the 11.241303 for 1 stock split that occurred on December 5, 2006.

 

P-3


Table of Contents
   

Unaudited Pro Forma Statement of Operations for the

Thirty-Nine Weeks Ended October 1, 2005


 
    Predecessor
Company
Actual


    Successor
Company
Actual 


    Nonrecurring
Charges
Related to the
Acquisition(1)


   

Acquisition
Related

Pro Forma
Adjustments


   

Holding Co
Notes

Pro Forma
Adjustments


   

IPO

Pro Forma
Adjustments(10)


    Pro Forma

 

Sales

  $ 128,687     $ 75,316     $ —       $ —       $ —       $ —       $ 204,003  

Cost of sales

    78,762       62,941       (14,021 )(2)     (1,171 )(5)     —         —         126,511</