-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jv9uOIf/l4sve2JnhchQgZMS3a4jhvZlKXvTT0fhYku3dLl0E6hYpybVhARM6VM7 wjwE9fLgdwxL0dNK8RjLpQ== 0000950144-98-002571.txt : 19980312 0000950144-98-002571.hdr.sgml : 19980312 ACCESSION NUMBER: 0000950144-98-002571 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GS TECHNOLOGIES OPERATING CO INC CENTRAL INDEX KEY: 0000925906 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 431656035 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-80618 FILM NUMBER: 98563781 BUSINESS ADDRESS: STREET 1: 1901 ROXBOROUGH RD STREET 2: STE 200 CITY: CHARLOTTE STATE: NC ZIP: 28211 BUSINESS PHONE: 7043666901 MAIL ADDRESS: STREET 1: 1901 ROXBOROUGH RD STREET 2: STE 200 CITY: CHARLOTTE STATE: NC ZIP: 28211 10-K 1 GS TECHNOLOGIES 10-K 12-31-1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 033-80618 GS TECHNOLOGIES OPERATING CO., INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1656035 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) GS TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-3204785 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1901 ROXBOROUGH ROAD SUITE 200 CHARLOTTE, NORTH CAROLINA 28211 (Address of principal executive office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (704) 366-6901 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ================================================================================ 2 As of March 10, 1998, 100 shares of GS Technologies Operating Co., Inc. Common Stock, par value $.01 per share, were outstanding, all of which are owned by GS Technologies Corporation. Also as of March 10, 1998, 100 shares of GS Technologies Corporation Common Stock, par value $.01 per share, were outstanding, all of which are owned by GS Industries, Inc. This document consists of 51 sequentially numbered pages. The exhibit index can be found on page 46 of the sequential numbering system. FORWARD-LOOKING STATEMENTS The forward-looking statements included in the "Business", "Properties", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Words such as "expects", "anticipates", "believes" and "intends", variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections. Forward-looking information provided by the Company in such sections pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. 2 3 FORM 10-K TABLE OF CONTENTS (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
PART I PAGE ---- Item 1: Business.....................................................................4 Item 2: Properties..................................................................12 Item 3: Legal Proceedings...........................................................13 Item 4: Submission of Matters to a Vote of Security Holders.........................13 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.....................................................................14 Item 6: Selected Financial Data.....................................................15 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................17 Item 8: Financial Statements and Supplementary Data.................................24 Item 9: hanges in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................24 PART III Item 10: Directors and Executive Officers of the Registrant..........................25 Item 11: Executive Compensation......................................................28 Item 12: Security Ownership of Certain Beneficial Owners and Management..............37 Item 13: Certain Relationships and Related Transactions..............................39 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K............45 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES..................................................................50 SIGNATURES
3 4 PART I ITEM 1: BUSINESS GENERAL GS Technologies Corporation (the "Company" or "GST") is a leading producer of high carbon and special grade wire rod, grinding media, mill liners, steel billets and certain high quality wire products. The Company believes its leading position in these products is the result of its high product quality, its position as one of the low cost producers in each of the product segments in which it competes, its long-term relationships with customers and, in the case of wire rod, the close proximity of its mini-mills to the wire drawing facilities of many of its customers. The Company was incorporated in 1993 to effect the November 1993 acquisition of the business and net assets of Armco Worldwide Grinding Systems ("AWGS"), a division of Armco, Inc. ("Armco"). In August 1994, GS Technologies Operating Co., Inc. ("GSTOC"), a wholly-owned subsidiary of GST, issued $125 million of 12% Senior Notes due 2004 (the "12% Notes"). These securities are fully and unconditionally guaranteed by GST. In August 1995, GST was party to a merger transaction whereby it was merged with a subsidiary of a new parent company, GS Industries, Inc. ( "GSI"), resulting in all of the issued and outstanding common stock of GST being converted into shares of common stock of GSI and GST becoming a wholly-owned subsidiary of GSI. In October 1995, GSI through its wholly-owned subsidiary, GSTOC, acquired all the common stock of Georgetown Industries, Inc. ("Georgetown") which resulted in Georgetown and its subsidiaries becoming wholly-owned subsidiaries of GSTOC. In connection with this acquisition, GSTOC issued an additional $125 million of 12 1/4% Senior Notes due 2005 (the "12 1/4% Notes") which are also fully and unconditionally guaranteed by GST. A portion of the total purchase price of $307.0 million for the Georgetown acquisition was paid with a combination of subordinated payment-in-kind notes (the "PIK Notes") and preferred stock of GSI. In April 1996, the preferred stock was exchanged, at GSI's option, into subordinated notes, (the "Exchange Notes") equal to the liquidation value of the stock. The PIK Notes and Exchange Notes bear annual interest rates escalating from 6.0% to 16.0% and are due October 5, 2006. Interest accretes semi-annually on April 5 and October 5 and is added to the carrying value of the notes which was $127.6 million as of December 31, 1997 including accrued interest. GSI is required to use a portion of the proceeds of any equity offering to prepay a principal amount of the PIK Notes and Exchange Notes then outstanding equal to not less than 50% of the net cash proceeds. In May 1997, the Company sold its non-strategic operations, Georgetown Wire Company, Inc. and Tree Island Industries, Ltd. (the "West Coast Wire Business") for $56.0 million resulting in a loss on sale of $23.9 million. The Company expects to realize future tax benefits of approximately $17.1 million related to this sale. 4 5 The current operating structure of the Company is as follows: [CHART] SIGNIFICANT 1997 EVENTS APPOINTMENT OF MARK G. ESSIG AS PRESIDENT AND CHIEF EXECUTIVE OFFICER OF GSI. In late 1997, Mr. Essig was appointed President and Chief Executive Officer of GSI and succeeded Mr. Roger R. Regelbrugge as CEO effective January 1, 1998. Mr. Regelbrugge will continue to serve as Chairman of GSI. Mr. Essig served in various capacities at AK Steel Corporation, headquartered in Middletown, Ohio, and prior to that at Washington Steel Corporation. Most recently, Mr. Essig was Executive Vice President at AK Steel Corporation having joined that Company in 1992 as Vice President Employee Relations and Assistant to the Chief Executive Officer. He became Vice President of Sales and Marketing in 1993 and advanced to the position of Executive Vice President in 1994. Prior to joining AK Steel, he served as Vice President of Finance and Administration and later as Vice President and Chief Financial Officer for Washington Steel Corporation in Washington, Pennsylvania. KANSAS CITY WORK STOPPAGE AND RATIFICATION OF NEW LABOR AGREEMENT. In June 1997, the Company entered into a new 5 1/2 year labor agreement with the United Steel Workers of America ("USWA") covering workers at the Kansas City steel mill. The ratification of this contract occurred after a 10 week work stoppage. During the work stoppage, the Kansas City facility was operated on a limited basis using salaried employees and contract workers. As a result, production levels were far below normal levels which had a significant adverse impact on profitability for the second quarter. Combining the volume impact of reduced production with higher costs incurred during the work stoppage and additional expense recorded for improved pension benefits, management estimates that the strike resulted in an impact on pre-tax earnings of $21.9 million. 5 6 TEMPE RATIFICATION OF NEW LABOR AGREEMENT. The collective bargaining agreement with employees at the Company's facility in Tempe, Arizona was due to expire in November, 1997. The Company successfully negotiated a new contract which extends until November 2003. GEORGETOWN WORK STOPPAGE AND RATIFICATION OF NEW LABOR AGREEMENT. The Company's collective bargaining agreement at the Georgetown, South Carolina facility expired on December 8, 1997. The Company and the USWA were unable to agree on the terms of a new agreement and a work stoppage commenced on December 5, 1997. On January 7, 1998, the 580 employees covered by this agreement ratified a new sixty-two month agreement and returned to work. Management estimates that this four week work stoppage cost the Company approximately $6.8 million as the facility was operated at reduced levels with management personnel and contract workers. CONCEPCION RATIFICATION OF NEW LABOR AGREEMENT. The collective bargaining agreement with employees at the Company's facility in Concepcion, Chile expired on December 31, 1997. The Company successfully negotiated a new contract which extends until December 2002. SALE OF WEST COAST WIRE BUSINESS. When the West Coast Wire Business was purchased by the Company in the late 1980's, the strategic intent was for these wire operations to serve as a remote market outlet for wire rod from the Georgetown mini-mill in times of cyclical wire rod demand troughs. It was anticipated that the net selling prices to the Georgetown mini-mill would be comparable to the available depressed prices in the local markets and still not compromise the cost structure of the West Coast wire operations. As the Georgetown mini-mill has significantly improved its product mix from that time, the usefulness of the West Coast strategy has diminished. Even in poor market conditions, management believes that the alternatives available to the Georgetown mini-mill locally are more advantageous than shipping wire rod to the West Coast Wire Business at prices that would remain in the range of prices that the West Coast operations could receive from its normal suppliers. As a result of this change in strategy, the decision was made in 1996 to market the West Coast Wire Business to potential purchasers. In May 1997, the sale was consummated. The gross proceeds of $56.0 million were used to reduce the outstanding balance on the Revolving Credit Facility of GSTOC. SOUTH AMERICAN EXPANSION PLANS. The Company has begun capital projects at its existing South American grinding media operations that will double the Company's previous capacity within the region. This expansion will involve both new equipment and improvements to existing facilities and is expected to come on line primarily during 1998. The Company also signed a Letter of Intent with Acindar, S. A., a leading long products steel producer in Argentina, to form a joint venture which will produce grinding balls in Argentina.Additionally, the Company has signed a Letter of Intent to form a joint venture with Cia. Electro Metalurgica S. A., to build and operate a mill liner production facility in Santiago, Chile. PRODUCTS AND MARKETS WIRE ROD. The Company manufactures high carbon and special grade wire rod at its Kansas City, Missouri and Georgetown, South Carolina mini-mills. The Company sells the majority of its wire rod output to domestic wire drawers that process wire rod into products for diverse end use applications, such as tire bead and tire cord for the automotive industry, upholstery and bed springs 6 7 for the furniture industry and wire rope and pre-stressed concrete strand ("PC Strand") for the construction industry. In 1997, the Company shipped approximately 1.3 million tons of wire rod of which 1.2 million tons were to third party purchasers. End use applications of the Company's wire rod production were as follows: 1997 WIRE ROD SHIPMENTS (BY MARKET)
Percent of Total Sales ---------------------- Furniture/Bedding...........................................27% Construction................................................22% Industrial..................................................20% Automotive..................................................18% Other.......................................................13% --- Total..................................................100% ---
The Company focuses on providing high quality, high carbon and special grades of wire rod. These products generally command a higher selling price than lower quality commodity grade wire rod products. High carbon wire rod has carbon content greater than 0.45%. Wire drawn from high carbon steel is generally stronger and is more suitable for demanding applications. Due to these properties, it is used extensively by tire manufacturers to make tire cord and tire bead and by the furniture industry to make upholstery and bed springs. The Company's wire rod shipments include shipments to a select group of customers, reflecting the Company's strategy of maximizing production efficiency through long-term strategic relationships. The Kansas City facility is a party to a supply agreement with Leggett & Platt which requires Leggett & Platt to purchase a specified percentage of its annual wire rod requirements at certain of Leggett & Platt's facilities covered by the agreement. In 1997, Leggett & Platt purchased approximately 256,000 tons, or 19.6% of the total wire rod tonnage shipped by the Company. Approximately 29% of the Company's total revenues for 1997 were derived from sales to the Company's five largest wire rod customers (including Leggett & Platt). GRINDING MEDIA AND MILL LINERS. The Company manufactures and sells grinding media and mill liners to the world mining industry (principally copper, iron ore and gold mines) for use in the concentrator stage of mining operations. In a typical open-pit mine configuration, the concentrator receives semi-crushed rock from the ore deposit, grinds the rock into a fine powder, separates the desired mineral from the waste rock for further processing at the smelter and discharges the waste rock. Grinding media are high carbon steel balls and rods used inside a rotating mill to grind semi-crushed rock from the mine. Mill liners are the protective steel liners that shield the rotating mill from the pulverizing action of the grinding media. Grinding media and mill liners are consumed as ore is processed and must be continually replenished. Grinding media and mill liners are generally sold under contract. The Company's grinding media contracts are generally one to three years in duration and at fixed prices. In certain of the Company's contracts, raw material price changes are passed through as price adjustments to the customer. 7 8 The Company's principal customers for mineral processing products are domestic and international mining companies. The following chart details shipments of grinding media, exclusive of mill liners, categorized by mineral processed, through both its consolidated subsidiaries and its joint ventures: 1997 GRINDING MEDIA SHIPMENTS (BY MINERAL)
Percent of Total ---------------- Copper.............................................. 47% Gold................................................ 24% Iron Ore............................................ 10% Other............................................... 19% --- Total...................................... 100% ---
The Company's mill liner shipments reflect a customer consumption pattern similar to that of the grinding media shipments except that there is a greater concentration of shipments to the copper industry. In 1997, the Company shipped 454,000 tons of grinding media and mill liners from its consolidated subsidiaries and 222,000 tons from joint ventures in which it participates. The market for the Company's grinding media products is geographically diversified. The following table details shipments to different geographic regions through both its consolidated subsidiaries and its joint ventures: 1997 GRINDING MEDIA SHIPMENTS (BY REGION)
Percent of Total ---------------- United States....................................... 44% South America....................................... 22% Canada and Mexico................................... 13% Philippines, Australia.............................. 16% Europe.............................................. 5% --- Total ..................................... 100% ---
The Company has developed a network of international operations to satisfy the worldwide demand for grinding media. In the United States, grinding media is supplied from the Company's Kansas City mini-mill. In Chile, Peru and Europe, grinding media is fabricated from purchased bars and sold by the Company's foreign subsidiaries. In Canada, Mexico, the Philippines and Australia, the Company has investments in joint ventures that primarily fabricate grinding media from purchased bars and sell it to mines in those and neighboring countries. Financial information related to the Company's domestic and foreign subsidiaries is provided in Note 6 to the Company's Consolidated Financial Statements. Management believes the outlook for growth in the grinding media and the mill liner markets is attractive. The major factors impacting demand are (i) the head grades, or mineral content of the ore deposit (the lower the head grade, the greater the number of tons of ore deposit which must be ground to extract the same amount of mineral), (ii) the hardness of the material being ground (the harder the ore deposit, the more grinding that is required to reduce it to powder), and (iii) macro-economic consumption of the mineral which leads to increased mining activity. As 8 9 richer ore deposits are depleted, mining companies must utilize lower quality deposits (in terms of head grades and ore deposit hardness) for their mining requirements or open new mines, resulting in increasing demand for grinding media and mill liners. South America, where the Company currently has grinding media operations, is particularly attractive due to significant mining expansion in Chile and Peru. WIRE PRODUCTS. The Company is one of the leading domestic producers of high quality wire products, which it manufactures at two facilities located in Florida. The Company's wire products are primarily comprised of PC strand and galvanized guy strand. PC Strand is sold to the construction industry for use in highways, bridges, commercial buildings, parking structures and multi-family buildings. Guy strand is sold to the electrical, telephone and CATV industries for use as support systems for transmission lines. In 1997, the Company shipped approximately 132,000 tons of wire products. BILLETS. Billets are semi-finished steel products that are subsequently utilized by rolling mills for production of wire rod, bars and other finished steel products. Georgetown has billet capacity in excess of the need for billets for its own rolling mill and has sold billets to third party steel producers. Subsequent to the combination of Georgetown and GST, a significant portion of these excess billets are shipped to Kansas City where rolling capacity exceeds billet production capability. In 1997, the Company shipped approximately 205,000 tons of billets of which only 45,000 tons were to third party purchasers. COMPETITION WIRE ROD. The Company competes for wire rod business on the basis of product quality and consistency, timely delivery, technical assistance and price. The largest competing domestic producers of wire rod in the U.S. are Co-Steel Raritan in Perth Amboy, New Jersey, North Star Steel Company in Beaumont, Texas, and Rocky Mountain Steel (a division of Oregon Steel) in Pueblo, Colorado. Several domestic producers are in the process of implementing or are planning to make investments to start or expand production of wire rod. Some of these are specifically targeting the high quality segment of the market. Imports of wire rod constituted approximately 30% of the total market in 1997. GRINDING MEDIA. Domestically, the Company competes principally with three grinding ball producers. Two of the competitors, Nucor Corp., and Border Steel Co., have production operations in the West and Southwest and produce grinding balls from facilities where scrap is the raw material. A third competitor, North Star Steel Company, located in Minnesota, produces grinding balls from bars and serves the iron ore mines in the upper Midwest. The Company competes principally with one U.S. grinding rod producer and one Canadian grinding rod producer for domestic sales of grinding rods. While factors such as reliability of supply and service are important to customers, competition is based primarily on a combination of price and product performance. Internationally, the Company competes with many producers of forged and cast grinding balls, nearly all of them indigenous to their respective local markets. WIRE PRODUCTS. The Company is a leading producer of both PC strand and guy strand in the United States. The Company's main competitors for PC strand sales include Insteel Industries, Inc. of Gallatin, Tennessee; Sumiden Wire Products Corporation of Stockton, California; and American Spring Wire Corp. of Bedford Heights, Ohio and Houston, Texas. 9 10 The Company's main competitors for guy strand sales include Indiana Steel and Wire Corp. of Muncie, Indiana; Bekaert Corporation of Van Buren, Arkansas; Cal-Wire Stranding of Vernon, California; and National Strand Products, Inc. of Houston, Texas. The Company's wire products operations compete with numerous producers worldwide. Customers for wire products demand competitive prices, good selection and quality service. Management believes that the Company is competitive based on all of these criteria. RAW MATERIALS The principal raw materials and commodities required in the Company's manufacturing operations are steel scrap, DRI, steel bars, electricity and natural gas. All of these raw materials except DRI, which the Company produces, are purchased at prevailing market prices. Adequate sources of supply exist for all of the Company's raw material requirements. PATENTS AND LICENSES The Company owns numerous process and product patents, proprietary expertise, and licenses which it believes are necessary for the operation of its worldwide businesses. In its grinding media processing business, the Company owns process and product patents on grinding rods, mill liners and process equipment. The Company has proprietary processing and product know-how on equipment used in manufacturing grinding balls. The Company also has a license from the Dow Chemical Company to use certain proprietary technology to manufacture and market mineral reagents for the mineral processing industry. HUMAN RESOURCES The Company's worldwide operations are managed by a management team based in its Charlotte, North Carolina headquarters. The Company and its wholly-owned subsidiaries have approximately 2,600 employees, of whom approximately 1,900 are hourly production employees. Approximately 63% of the Company's employees are covered by collective bargaining agreements. See "Business-Significant 1997 Events" for additional information. RESEARCH AND DEVELOPMENT The Company focuses its research and development on improving the quality and reducing the cost of its production processes, as well as on specialized customer applications and enhanced technological support. Research and development costs are recorded in cost of products sold when incurred. CYCLICALITY Demand for the Company's products is cyclical in nature and sensitive to general economic conditions. The Company's sales of wire rod and wire products are affected by economic trends in the furniture, automotive and construction industries, and the Company's sales of grinding media and mill liners are affected by levels of mining activity. 10 11 ENVIRONMENTAL MATTERS The Company's U.S. facilities are subject to a broad range of federal, state and local environmental requirements, including those governing discharges to air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances at Company facilities and associated offsite disposal locations. Liabilities with respect to hazardous substance releases arise principally under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") and similar state laws, which impose strict, retroactive, joint and several liability upon statutorily defined classes of "potentially responsible parties" ("PRPs"). The Company's foreign facilities and joint ventures are subject to varying degrees of environmental regulation in the jurisdictions in which those facilities are located. Based on environmental reviews conducted by outside environmental consultants in connection with the Georgetown acquisition and the AWGS acquisition, and the continuing review of environmental requirements by the Company, the Company believes that it is currently in substantial compliance with environmental requirements. Nevertheless, as is the case with steel producers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal locations, or if contamination from prior activities is discovered at such properties or locations, the Company may be held liable and may be required to pay the cost of remedying the condition or satisfying third party damage claims, or both. The Company devotes considerable resources to ensuring that its operations are conducted in a manner that reduces such risks. The Company has several environmental issues currently under discussion with various federal, state and local agencies. Some of these involve compliance and/or remediation at certain properties. The Company is subject to consent orders, administrative orders, permit renewals and negotiations and ongoing inspection activities relating to certain of its properties and at off-site locations. The Company records certain operating expenses for environmental compliance, testing and other environmental related costs as expenses when incurred. When it has been possible to determine reasonable estimates of liabilities related to environmental issues, based upon information from engineering and environmental specialists, the Company has made provisions and accruals. There can be no assurance, however, that the cost of required remedial activity or environmental compliance will not exceed the established reserves. The Company believes, based upon information currently available to management, that it will not require expenditures to maintain compliance with environmental requirements which would have a material adverse effect on its consolidated financial condition, results of operations or competitive position. For additional information regarding environmental matters, including indemnifications, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters." 11 12 ITEM 2: PROPERTIES The Company conducts its operations through domestic and international facilities as subsidiaries and joint ventures. The following table provides information regarding the Company's principal facilities: [CHART]
Location Square Feet Products Own or Lease - --------------------------------------------------------------------------------------------------------------- CORPORATE HEADQUARTERS: Charlotte, NC (1) 10,000 N/A Lease MANUFACTURING FACILITIES: Kansas City, MO (1) (2) 1,871,800 Wire rod & grinding media Own and lease Georgetown, SC (1) 496,700 Wire rod, DRI, steel billets Own Jacksonville, FL (1) 264,000 Wire products Own Sanderson, FL (1) 145,000 Wire products Own Duluth, MN 335,900 Mill Liners Own Tempe, AZ 241,950 Mill Liners Own Concepcion, Chile 50,000 Grinding media Own Arequipa, Peru 25,000 Grinding media Own Lima, Peru 40,000 Grinding media Own Cividale, Italy (3) 90,000 Idle Own Mezzomerico, Italy 68,000 Grinding media Own JOINT VENTURES (MANUFACTURING LOCATIONS): Kamloops, Canada 34,800 Grinding media Own Guadalajara, Mexico 40,800 Grinding media Lease Perth and Townsville, Australia 54,100 Grinding media Own Manila, Philippines 86,000 Grinding media Lease Chimbote, Peru 5,776,000 Rebar, Flat Rolled Steel Own Convent, LA (4) 1,525,000 DRI Own Piombino, Italy (3) 44,000 Grinding media Lease SALES AND OTHER OFFICES: Minneapolis, MN 18,700 N/A Own Santiago, Chile 7,300 N/A Own
12 13 (1) Subject to liens under existing debt. (2) 748,000 square feet of such facility are leased at a nominal annual rental charge under multiple triple net leases with Armco with varying expiration dates. (3) In December 1996, the manufacturing assets from Cividale, Italy were transferred to the Piombino, Italy location. It is the Company's intention to sell the Cividale facility. (4) Construction at this facility was completed at the end of 1997 and production began in January 1998. The Company believes its facilities are properly maintained and adequately equipped for the purposes for which they are used. Management believes that, with its planned level of capital expenditures, the Company will be able to accommodate its capacity needs for the immediate future in its existing facilities. ITEM 3: LEGAL PROCEEDINGS The Company is a party to various legal proceedings that are considered to be ordinary, routine litigation incidental to the Company's business and not material to its consolidated financial position, results of operations or cash flows. See "Business -- Environmental Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Environmental Matters" for additional information. In August 1996, Samsung America, Inc. ("Samsung") filed an action in the Supreme Court of the State of New York seeking monetary damages against GSI, the Company, its Peruvian subsidiary, Acerco, and Acerco's partners in the Siderperu joint venture collectively, (the "Defendants"). Samsung seeks to recover purported damages of $48.5 million and punitive damages of $10 million and alleges that the Defendants failed to honor a written contract which entitled Samsung to obtain an equity interest in Siderperu and to provide certain distribution and trading services on an exclusive basis. In August 1997, this action was dismissed by the Supreme Court of the State of New York for lack of jurisdiction over the Defendants. Samsung has appealed the dismissal decision to the 1st Department Appellate Division of the State of New York. The Company believes that it has substantial and meritorious defenses and will defend itself accordingly. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 14 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All the outstanding common stock of GSTOC is owned by GST and all the outstanding common stock of GST is owned by GSI. As a result, there is no established public trading market for the common stock of GST and all per share data is omitted. Since the outstanding common stock of GST was privately placed in late 1993, there has been no trading activity in such stock. As of March 10, 1998, 100 shares of common stock of GST were outstanding, all of which were owned by GSI, and there were 40 record holders of the Common Stock of GSI. 14 15 ITEM 6: SELECTED FINANCIAL DATA The following table sets forth selected historical financial data and other operating data of the Company and its predecessor, AWGS for the five year period ending December 31, 1997. The selected financial data for the four year period ending December 31, 1997 have been derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere herein. The selected financial data of AWGS for the period from January 1, 1993 to November 11, 1993 and for the Company for the period from November 12, 1993 to December 31, 1993, are derived from the audited financial statements of AWGS and the Company, respectively, which are not included herein. The selected financial data for AWGS are not comparable in certain respects to the selected financial data of the Company due to the effects of the AWGS acquisition and certain sales or closings of businesses described in the notes hereto. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements, including the notes thereto.
AWGS COMPANY ----------- ----------------------------------------------------------------------- PERIOD PERIOD FROM FROM 01/01/93 TO 11/12/93 TO 11/11/93 12/31/93 1994 1995(1) 1996(1) 1997(1) ----------- ----------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net Sales(2) $ 355,819 $ 51,975 $ 455,258 $ 539,749 $ 815,917 $ 809,734 Operating Costs and Expenses: Cost of Products Sold 303,455 43,648 389,287 457,307 703,958 691,200 Selling, General and Administrative Expenses 33,307 3,510 30,613 35,258 46,331 44,749 Depreciation and Amortization 9,158 208 3,612 10,522 26,989 29,587 Non-recurring Costs of Combining Operations(3) 4,866 --------- --------- --------- --------- --------- --------- Operating Profit (Loss)(4) 9,899 4,609 31,746 31,796 38,639 44,198 Net Interest Expense (1,582) (711) (8,928) (22,892) (42,436) (41,070) Equity in Income of Joint Ventures 2,466 390 3,434 4,075 5,500 6,195 Fees from Joint Ventures 1,493 161 1,410 1,357 2,399 2,743 Other, Net (707) (150) 200 (573) 190 904 --------- --------- --------- --------- --------- --------- Income (Loss) Before Income Tax 11,569 4,299 27,862 13,763 4,292 12,970 Income Tax Provision(5) (2,663) (1,753) (12,372) (7,025) (3,815) (6,523) --------- --------- --------- --------- --------- --------- Income from Continuing Operations Before Extraordinary Loss, Discontinued Operations and Cumulative Effect of Accounting Changes $ 8,906 $ 2,546 $ 15,490 $ 6,738 $ 477 $ 6,447 ========= ========= ========= ========= ========= ========= Net Income (Loss) $ (98,931)(6) $ 2,546 $ 13,470 (7) $ 6,129 (8) $ 6,435(9) $ (16,116)(10) ========= ========= ========= ========= ========= ========= BALANCE SHEET DATA AT PERIOD END: Total Assets $ 232,717 $ 189,683 $ 259,611 $ 715,200 $ 715,679 $ 646,277 Total Debt 13,201 69,837 158,185 378,103 385,133 346,182 Mandatory Redeemable Class A Common Stock 2,700 Armco Investment/Stockholder's Equity (Deficit) 10,874 13,956 (29,887) 106,609 112,761 95,161
15 16
OTHER OPERATING DATA: EBITDA $ 23,065 $ 3,740 $ 41,682 $ 47,324 $ 74,032 $ 83,756 Net Cash Provided by (Used in): Operating Activities(12) (25,748) (18,371) 21,784 8,386 40,776 16,802 Investing Activities(12) (6,304) (44,196) (12,316) (187,542) (49,785) 21,877 (13) Financing Activities(12) 38,012 70,602 1,857 170,161 7,030 (40,078)(13) Capital Expenditures(14) 6,394 5,347 34,481 48,342 42,225 25,112
- -------------------- (1) The Statement of Operations Data, Balance Sheet Data, and other operating Data have been restated to reflect the sale of the West Coast Wire Business. Accordingly, the results of operations, cash flows and net assets of this business have been classified as discontinued operations for all periods presented. (2) Net Sales for the period from January 1, 1993 through November 11, 1993 include $22,403 of aggregate sales from operations which were discontinued in 1992 and prior years or held for sale. (3) Represents non-recurring charge for the costs of combining the operations of GST and Georgetown. See Note 1 to the Consolidated Financial Statements. (4) Operating Profit for the period from January 1, 1993 through November 11, 1993 includes $3,919 of aggregate net operating profit from operations which were discontinued in 1992 and prior years or held for sale. (5) Income tax provision for AWGS represents foreign taxes only. AWGS had no domestic income tax provision due primarily to net operating loss carryforwards. (6) Reflects a charge of $107,615 for the cumulative effect of the adoption of SFAS No. 106 related to post-retirement benefits other than pensions. (7) Net of $2,020 non-cash after-tax write-off of debt issuance costs. (8) Includes net loss from discontinued operations of $609, net of related taxes. (9) Reflects effect of a change in accounting for spare parts and supplies inventories of $3,556, net of related taxes. See Note 3 to the Consolidated Financial Statements. Also includes net income from discontinued operations of $2,402, net of related taxes (10) Includes net income from discontinued operations of $1,402, net of related taxes, and loss on disposal of discontinued operations of $23,965, net of related taxes. (11) EBITDA is presented herein to provide additional information about the Company's ability to meet future debt service, capital expenditures and working capital requirements. EBITDA should not be considered as an alternative to net income, as an indicator of operating performance, or as an alternative to cash flows as a measure of liquidity, as such measures would be determined pursuant to generally accepted accounting principles. In addition, EBITDA should not be considered as an indicator that cash flow is sufficient for all of the Company's needs. (12) This cash flow information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation." (13) Includes $56.0 million in proceeds from sale of the West Coast Wire Business which were used to pay off outstanding debt. (14) Excludes purchases of businesses and joint venture investments. 16 17 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides an assessment of the Company's financial condition, results of operations and liquidity and capital resources and should be read in conjunction with the accompanying financial statements and notes thereto included elsewhere herein. The results of operations for the three years presented are not comparable due to the Georgetown acquisition on October 5, 1995. RESULTS OF OPERATIONS (DOLLARS IN MILLIONS) The following table sets forth, for the years indicated, the Company's selected income statement data:
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ------ ------ ------ Net Sales $539.7 $815.9 $809.7 Cost of Products Sold 457.3 704.0 691.2 Selling, General and Administrative Expenses 35.2 46.3 44.7 Depreciation and Amortization 10.5 27.0 29.6 Non-recurring Costs of Combining Operations(1) 4.9 ------ ------ ------ Operating Profit 31.8 38.6 44.2 Net Interest Expense (22.9) (42.4) (41.1) Other Income(2) 4.9 8.1 9.9 ------ ------ ------ Income Before Income Tax 13.8 4.3 13.0 Income Tax Provision (7.1) (3.8) (6.5) ------ ------ ------ Income from Continuing Operations Before Cumulative Effect of Accounting Change 6.7 0.5 6.5 Discontinued Operations (0.6) 2.3 (22.6) Cumulative Effect of Accounting Change 3.6 ------ ------ ------ Net Income $ 6.1 $ 6.4 $(16.1) ====== ====== ====== PERCENTAGE OF NET SALES: Net Sales 100.0% 100.0% 100.0% Cost of Products Sold 84.7 86.3 85.4 Selling, General and Administrative Expenses 6.5 5.7 5.5 Depreciation and Amortization 1.9 3.3 3.7 Non-recurring Costs of Combining Operations(1) 0.9 ------ ------ ------ Operating Profit 6.0 4.7 5.4 Net Interest Expense and Capital Charge (4.3) (5.2) (5.1) Other Income(2) 0.9 1.0 1.3 ------ ------ ------ Income Before Income Tax 2.6 0.5 1.6 Income Tax Provision (1.4) (0.4) (0.8) ------ ------ ------ Income from continuing Operations Before Cumulative Effect of Accounting Change 1.2 0.1 0.8 Discontinued Operations (0.1) 0.3 (2.8) Cumulative Effect of Accounting Change 0.4 ------ ------ ------ Net Income 1.1% 0.8% (2.0%) ====== ====== ======
- -------------------- 17 18 (1) Represents non-recurring charges for the costs of combining the operations of GST and Georgetown. See Note 9 to the Consolidated Financial Statements. (2) Other Income includes Equity in Income of Joint Ventures, Fees from Joint Ventures and Other, Net. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 DISCONTINUED OPERATIONS. In May 1997, the Company sold its West Coast Wire Business for approximately $56.0 million, resulting in an estimated loss on disposition of $23.9 million, net of taxes. Accordingly, the results of operations of this business have been reclassified as discontinued operations and the following discussion excludes the tons shipped and other operating results of this business for all periods presented. 1997 WORK STOPPAGES. The Company's labor contracts for the Kansas City and Georgetown mini-mills expired in March 1997 and December 1997, respectively. When the Company and the USWA were unable to reach accord on the terms of new contracts, the unions in each location stopped working. Management estimates that the ten week work stoppage in Kansas City cost the Company approximately $21.9 million in pre-tax earnings, primarily in the second quarter of 1997. The Georgetown work stoppage, which occurred during the fourth quarter and lasted four weeks, is estimated to have cost approximately $6.8 million in 1997 pre-tax earnings. NET SALES. Net sales for the year ended December 31, 1997 were $809.7 million compared to $815.9 million for the year ended December 31, 1996, a decrease of $6.2 million or 0.8%. Wire rod sales were up $27.3 million to $407.8 million in 1997 compared to 1996 despite the impact of the 1997 strikes and subsequent ramp-up to pre-work stoppage production levels. Wire rod volume in 1997 exceeded 1996 volume by approximately 21,600 tons. Additionally, wire rod selling prices averaged $348 per ton in 1997 compared to $331 per ton in 1996. Grinding media sales were $269.7 million in 1997 compared to $268.7 million in 1996. Domestically, volume was down approximately 22,600 tons reflecting lost volume during the Kansas City work stoppage . Internationally, volume was up 23,400 tons resulting primarily from significant expansion in the mining industry in South America where the Company has substantially increased market share with several significant customers at slightly reduced prices. The Company's wire products sales were down $10.8 million in 1997 compared to 1996 reflecting increased competition from imports. Additionally, the Company's sales of billets to third party purchasers were down $26.9 million as the Company increased its internal consumption of billets. Of 205,000 tons shipped, 160,000 tons were shipped to Kansas City for use in production. COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of net sales decreased to 85.4% in 1997 from 86.3% in 1996 resulting in increased gross profit margin from 13.7% in 1996 to 14.6% in 1997. Wire rod conversion costs for the full year 1997 were comparable to 1996, but reflected significant spikes during the strikes at Kansas City and Georgetown which were offset by continued production improvements and efficiencies in the non-work stoppage quarters. Grinding media conversion costs were approximately 9% higher in 1997 than in 1996 due to the effects of the work stoppage and resulting decline in domestic volume. 18 19 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expense as a percent of sales decreased to 5.5% in 1997 from 5.7% in 1996 as a result of the Company's 1997 cost reduction program. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for 1997 increased $2.6 million from 1996 to $29.6 million. This increase results from capital additions and improvements. NET INTEREST EXPENSE. Net interest expense decreased to $41.1 million for 1997 from $42.4 million for 1996 The decrease reflects a reduction in the borrowings under the revolver as the proceeds from the sale of the West Coast Wire Business were used to repay amounts outstanding. Of this total $1.7 million represents amortization of debt issuance costs. OTHER INCOME. Other income, which is primarily equity income and fees from joint ventures, increased to $9.9 million for 1997 compared to $8.1 million for 1996 due primarily to inclusion in 1997 of a full year of equity earnings and fees from the Siderperu investment made in March 1996 and to improvements in Siderperu's operations since it has been managed by the Company. INCOME TAXES. Income taxes for 1997 were $6.5 million on pre-tax earnings of $13 million, an effective tax rate of 50.3%. Income taxes for 1996 were $3.8 million on pre-tax earnings of $4.3 million, an effective rate of 88.9%. The effective tax rate for the company is high due to limitations on the Company's ability to currently utilize foreign tax credits and due to the non-deductibility of amortization and depreciation expense associated with the Georgetown acquisition. The decrease in the effective rate in 1997 results from a change in the mix of U.S. and foreign earnings. INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the factors discussed above, the Company had income from continuing operations of $6.4 million for 1997 compared to $0.4 million for 1996. NET INCOME (LOSS). After the $23.9 million loss on the disposal of the West Coast Wire Business, the Company experienced a net loss for 1997 of $16.1 million compared to net income of $6.4 million for 1996 after the cumulative effect of an accounting change which increased 1996 net income by $3.6 million. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales for 1996 were $815.9 million compared to $539.7 million in 1995. The majority of this increase reflects the inclusion in 1995 of only three months of operations of the Georgetown group of companies which were acquired on October 5, 1995. Sales for the first three quarters of 1996 for the Georgetown group were $248.7 million. The remainder of the increase results primarily from the five week shutdown in Kansas City for the Rod Mill Modernization in 1995 and the related decrease in 1995 wire rod volume. COST OF PRODUCTS SOLD AND GROSS MARGIN. Total cost of products sold as a percent of sales increased to 86.3% in 1996 from 84.7% in 1995 with resulting gross margins of 13.7% and 15.3%, respectively. The primary reason for the decreased margins was a decrease in wire rod average 19 20 selling prices by $23 per ton. The increase in total cost dollars from $457.3 million in 1995 to $704.0 million in 1996 reflects the additional three quarters activity for the Georgetown group in 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were up in total dollars from $35.2 million in 1995 to $46.3 million for 1996 resulting from the full year inclusion of Georgetown operations. However, as a percentage of net sales, selling, general and administrative expenses were down from 6.5% in 1995 to 5.7% in 1996. This decrease reflects the efficiencies resulting from the combination of the companies which have been realized to date. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased to $27.0 million in 1996 compared to $10.5 million for 1995. The Georgetown acquisition accounts for $12.6 million of this increase, with the remainder resulting from capital additions and improvements. NET INTEREST EXPENSE. Net interest expense increased to $42.4 million for 1996 from $22.9 million for 1995 resulting from debt incurred to effect the Georgetown acquisition and borrowings related to the investment in Sidercorp. Of this total, $1.8 million represents amortization of debt issuance costs. OTHER INCOME. Other income, primarily equity income and fees from joint ventures, increased $3.2 million to $8.1 million for 1996 due, in part, to the additional 1996 investments in joint ventures. INCOME TAXES. Income taxes for 1996 were $3.8 million compared to $7.0 million for 1995. The 1996 effective income tax rate was 88.9% compared to 51.0% for 1995. The effective income tax rate increased primarily due to limitations on the Company's ability to currently utilize foreign tax credits, the nondeductibility of amortization and depreciation expense associated with the Georgetown acquisition, and changes in the relative mix of U. S. and foreign earnings. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had total cash and cash equivalents of $3.4 million, a decrease of $4.3 million from December 31, 1996. Operating activities provided $16.8 million of cash during 1997 composed primarily of a net loss of $16.1 million, non-cash depreciation and amortization of $29.6 million, non-cash loss on disposal of discontinued operations of $23.9 million, changes in deferred taxes using $9.3 million of cash and changes in current assets and liabilities for the year using cash of $6.7 million. Cash of $6.7 million was used in operations to fund working capital needs. Net cash provided by investing activities of $21.9 million consisted primarily of $56.0 million in proceeds from the sale of the West Coast Wire Business, capital improvements of $25.1 million and investments in joint ventures of $9.0 million. The Company had net cash used in financing activities of $40.1 million from net repayments of debt. While management believes that funds available from the Company's cash flow from operations and credit facilities will be sufficient, in the aggregate, to fund planned working capital and capital expenditure requirements for 1998, management continues to evaluate alternative sources of funds. There are fluctuations in the Company's working capital needs over the course of 20 21 a year, generally influenced by various factors such as seasonality in some product lines, inventory levels and the timing of raw material purchases. Due to the cyclical nature of the Company's business, management believes that it is important for the Company to maintain borrowing facilities in excess of working capital requirements. Capital expenditures in the Company's business tend to vary from year to year as the impact of major programs is concentrated in certain periods followed by periods of maintenance spending. Management believes that this pattern is typical of the industry. The high quality sector of the steel and wire products industry is characterized by high levels of capital spending. The focus of capital spending is growth in production, improvement in product quality and reduction in product cost. The acquisition premium recorded as a result of the Georgetown acquisition is being amortized over a period of forty years. Management believes that the use of the forty-year amortization period is appropriate given the expected longevity of the industry, Georgetown's leading market positions, Georgetown's utilization of modern manufacturing technology, and the diversity and lack of expected obsolescence of Georgetown's products. The Company's capital expenditures were $25.1 million in 1997. These expenditures related primarily to the expansion in South America, adding an additional line to the continuous castor in Georgetown and modernizing the Duluth facility. The Company is committed to make additional equity investments in the AIR joint venture of $5.6 million in 1998. See Note 6 to the Consolidated Financial Statements. The Company manages its liquidity needs on a consolidated basis with borrowings available under the Revolving Credit Facility (as defined below), a revolving credit facility at MEI and various credit facilities available at its international subsidiaries and joint ventures. See "Certain Relationships and Related Transactions -- Description of Indebtedness." Management believes the additional borrowing availability under the Credit Facilities (as defined below) and the cash flows from operations will be sufficient to meet anticipated capital expenditures and to make principal and interest payments on the Company's indebtedness when due. The Company believes cash flows from operations will continue to improve due to the ongoing benefits of its business strategy, including its cost reduction program and capital investment projects. Borrowings under the Revolving Credit Facility bear interest at a floating rate. Increases in prevailing rates could adversely affect the Company's cash flow. See "Certain Relationships and Related Transactions -- Description of Indebtedness." To the extent that the interest rate on the Revolving Credit Facility increases or the principal amount outstanding increases, there will be corresponding increases in the Company's interest obligations. Under the Revolving Credit Facility, the Company's availability is $120.0 million (subject to a borrowing base limitation). As of December 31, 1997, the unused availability under the Revolving Credit Facility was $80.5 million, and $17.5 million of letters of credit were outstanding. ENVIRONMENTAL MATTERS The Company has made, and will continue to make, capital expenditures as necessary to comply with environmental requirements. Because environmental requirements are subject to change and are becoming increasingly stringent, the Company's capital expenditures for environmental compliance may increase in the future. The Company has established reserves for 21 22 certain future costs and liabilities associated with environmental matters. As of December 31, 1997, the Company had recorded a reserve of approximately $2.7 million for environmental matters. The Company believes these reserves are adequate in light of certain indemnifications described below. See Note 15 to the Consolidated Financial Statements of the Company for additional information. There can be no assurance, however, that future environmental costs and liabilities will not exceed the established reserves. The Company believes, based upon information currently available to management, that it will not require expenditures to maintain compliance with environmental requirements which would have a material adverse effect on its consolidated financial condition or results of operations. As is the case with steel producers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal locations, the Company may be held jointly and severally liable under CERCLA, the Resource Conservation and Recovery Act ("RCRA"), or similar state or provincial requirements. The amount of any such liability could be material. Although the Company endeavors to carefully manage its wastes, because liability under CERCLA is strict and retroactive, it is possible that in the future the Company or its subsidiaries may be identified as a PRP with respect to various waste disposal sites. There can be no assurance that future costs or damages associated with identified or unidentified sites will not have a material adverse effect on the financial condition or results of operations of the Company. The Company has from time to time been, and presently is, the subject of administrative proceedings, litigation or investigations relating to environmental matters. The Company's Kansas City mini-mill is subject to a Consent Order regarding air emissions. The Georgetown mini-mill and DRI plant are involved in an air emissions permit modification process and ongoing discussions regarding compliance issues and inspections by the state environmental agency. The Kansas City mini-mill is involved in a water discharge permit renewal process with the state environmental agency. The Jacksonville facility is subject to a Consent Order regarding soil and groundwater cleanup. The Tempe, Arizona facility is involved in air emissions permit discussions. Several of the Company's properties are listed in CERCLIS or equivalent state/provincial lists. The Company through its operating units has been named as a PRP at several off-site locations where wastes were sent. Through cost sharing agreements, permits and consent orders the Company is addressing requirements at these locations. Although the Company does not believe that current proceedings, litigation or investigations will have a material adverse effect on its consolidated financial condition or results of operations, there can be no assurance that future costs or damages relating to such proceedings, litigation or investigations will not exceed established reserves. Subject to certain limitations, the Company is indemnified for certain environmental matters, including those referred to herein. Armco has indemnified GST for matters including contamination at the inactive Ishpeming, Michigan facility, and certain matters at the Kansas City facility and the Duluth facility. Capitol Castings, Inc. has indemnified MEI for groundwater contamination at the Tempe, Arizona facility, and Ivaco Inc. has indemnified the Company for groundwater contamination and some soil contamination at the Jacksonville facility. Although the Company believes such indemnifications are adequate to cover these matters, if a matter is not fully covered by these indemnities, or if the indemnitor fails to provide indemnification, the Company may be responsible for such matters. 22 23 YEAR 2000 The Company is currently in the process of assessing its business and manufacturing systems for Year 2000 compliance. The Company is also in the process of contacting its major suppliers of products and services in order to assess these suppliers' efforts to address the Year 2000 problem. While some non-compliant systems are in the process of being replaced, this effort has been part of capital expenditures under the Company's existing business plan. Management believes that progress to-date is satisfactory, that there are no significant Year 2000 problems, and management anticipates that no material expenditures will be required. TAX MATTERS The Company's Peruvian subsidiaries had received notice from the Peruvian tax authorities of proposed tax assessments, for the years 1984 through 1990 relating to sales taxes, employer taxes and income taxes. During 1995, Armco and the Company successfully resolved several of the proposed tax assessments for a total payment of $140,000 (reimbursed by Armco). During 1996, the Peruvian government issued a one-time amnesty program in order to allow Peruvian companies to settle disputed tax claims. Under the tax amnesty program, the Company settled all outstanding Peruvian tax assessments for a total payment of $250,000. The Company has obtained a specific indemnity and has received reimbursement from Armco for the full amount of tax assessments paid, without regard to any deductible. Prior to 1997, the Company recorded deferred tax liabilities for U. S. income tax and foreign withholding tax on the entire amount of unremitted earnings of its foreign subsidiaries and joint ventures. Historically, foreign country capital improvement projects and expansion plans have kept the foreign subsidiaries and joint ventures from repatriating all of their unremitted earnings. Projections for future years indicate this trend will continue. Therefore, beginning in 1997, the deferred tax liabilities have been adjusted so that U.S. income taxes and foreign withholding taxes are not provided on the portion of foreign unremitted earnings that is expected to be invested abroad indefinitely. The Company continues to provide taxes on the portion of the foreign unremitted earnings that is expected to be repatriated. The Company would be required to record additional tax if it received foreign dividends or liquidation proceeds in excess of the amounts expected to be repatriated. The Company's federal income tax returns have included deductions for certain net operating losses ("NOLs"), which deductions reduced its tax liabilities in 1995 and prior years. The Company has recorded deferred tax benefits for tax net operating losses generated in 1996 and 1997 which will be used to offset future taxable income. The Company's tax returns are currently under audit by the Internal Revenue Service ("IRS"). It is impossible to predict with certainty the outcome of any potential IRS examinations, and thus no assurance can be given that tax adjustments will not exceed reserves established by the Company. 23 24 OTHER MATTERS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company in 1996. This statement encourages, but does not require, companies to adopt a method of accounting for stock compensation awards based on the estimated fair value at the date the awards are granted. The Company has elected to continue to follow existing standards and has disclosed in the Notes to the consolidated financial statements the proforma effect on net income had expense been recognized for options based on the new statement. See Note 13 to the Consolidated Financial Statements for further discussion. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements which appears on page 50 herein. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 24 25 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of GST and GSTOC are elected at their respective annual meetings of stockholders to serve during the ensuing year or until a successor is duly elected and qualified. Executive officers of GST and GSTOC are elected annually by the Board of Directors of GST and GSTOC, respectively, to serve during the ensuing year or until a successor is duly elected and qualified. GST's and GSTOC's Boards of Directors currently consist of four members each. In connection with the Georgetown acquisition, GSI, GECC, Leggett & Platt, the Bain Funds ( as defined under Note (1) under "Security Ownership of Certain Beneficial Owners and Management"), Mr. O'Malley, the Government of Kuwait (the "GOK") and certain other stockholders of GSI (the "Stockholder Parties") entered into the Second Amended and Restated Stockholders Agreement (the "Stockholders Agreement") dated October 5, 1995. Under the Stockholders Agreement, the Stockholder Parties agreed to vote all of their shares of Common Stock and to take all other necessary actions (i) to allow the GOK to select two representatives to the Board of Directors of GSI, so long as certain securities issued in connection with the Georgetown acquisition are outstanding, and (ii) to allow the holders of a majority of the shares held by the Bain Funds to select the remaining representatives to the Board, so long as the Bain Funds and certain other persons own at least 60% of the Common Stock which it purchased pursuant to the Stock Purchase Agreement dated October 5, 1995. The following table sets forth certain information with respect to the directors and executive officers of GST and GSTOC.
Name Age Position - ---- --- -------- Roger R. Regelbrugge 67 Chairman and Director Mark G. Essig 40 President, Chief Executive Officer and Director Luis E. Leon 45 Senior Vice President - Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary Donald B. Daily 51 Senior Vice President - Steel Operations David M. Yarborough 47 Senior Vice President - Mining Products Walter Robertson, III 52 Senior Vice President - Commercial
25 26
Name Age Position - ---- --- -------- David O. Shelley 48 Vice President and Controller Benjamin C. Huselton 53 Vice President-Administration George A. Goller 53 Vice President - Technology and Product Development Paul B. Edgerley 42 Director John J. O'Malley 50 Director
ROGER R. REGELBRUGGE has been a Director and the Chairman of GST and GSTOC since the Georgetown acquisition. From the Georgetown acquisition until the appointment of Mr. Essig in January 1998, he also served as Chief Executive Officer. Previously he served as Chairman and Chief Executive Officer of Georgetown Industries, having joined Georgetown in 1974. He served as President and Chief Executive Officer of Georgetown since 1977 and as a director of Georgetown since 1975. Mr. Regelbrugge is a director and member of the Policy and Planning Committee of the AISI, a director of the Steel Manufacturers Association, a member of the Advisory Board of the Fuqua School of Management at Duke University and a member of the Board of Trustees of Belmont Abbey College. MARK G. ESSIG was appointed President and Chief Executive Officer of GSI effective January, 1998. He succeeds Mr. Regelbrugge as CEO. Prior to joining GSI, Mr. Essig served in various capacities at AK Steel Corporation, headquartered in Middletown, Ohio, and prior to that at Washington Steel Corporation. Most recently, Mr. Essig was Executive Vice President, having joined that Company in 1992 as Employee Relations and Assistant to the Chief Executive Officer of AK Steel. He became Vice President of Sales and Marketing of that company in 1993 and advanced to the position of Executive Vice President in 1994. Prior to joining AK Steel he served as Vice President of Finance and Administration and later as Vice President and Chief Financial Officer for Washington Steel Corporation in Washington, Pennsylvania. LUIS E. LEON has been Senior Vice President - Finance and Administration, Chief Financial Officer and Treasurer of GST and GSTOC since February 1997. Mr. Leon joined the Company in November 1994 as Vice President, Chief Financial Officer and Treasurer. In October 1995, he was appointed Senior Vice President. From May 1991 to October 1994, Mr. Leon was Vice President, Chief Financial Officer and Treasurer for Wyman-Gordon Company. From 1986 through May 1991, Mr. Leon served as Corporate Treasurer for Milton Roy Company. Prior to joining Milton Roy Company, Mr. Leon held various treasury and financial management positions with Kerr-McGee Corporation, American Express Company, Money Order Division and numerous banking positions with United Bank of Denver (now known as Norwest Bank). DONALD B. DAILY has been Senior Vice President - Steel Operations since February 1997. Mr. Daily has been President and Chief Executive Officer of Georgetown Steel Corporation since 1993, and President and Chief Executive Officer of GST Steel since September 1996. Mr. Daily joined Georgetown Steel as Vice President of Operations in 1984 and was named Executive Vice President and General Manager in 1988. 26 27 DAVID M. YARBOROUGH has been Senior Vice President-Mining Products since February 1997. From October 1995 to February 1997, he served as Vice President - Corporate Development of GST and GSTOC. From August 1993 until October 1995, Mr. Yarborough provided project development services to Georgetown pursuant to an agreement between Georgetown and GeoCapital Corporation of which he was President. Prior to founding GeoCapital in 1992, Mr. Yarborough held various management positions in steel and industrial equipment concerns. WALTER ROBERTSON, III has been Senior Vice President-Commercial since February 1997. Until then he served as Vice President - Commercial of GST and GSTOC beginning when he joined the Company in March 1996. Prior to joining the Company, Mr. Robertson was President of American Steel and Wire, a subsidiary of Birmingham Steel Corporation. DAVID O. SHELLEY has been Vice President and Controller of GST and GSTOC since November 1995 and Controller of GST and GSTOC since the Georgetown acquisition. Mr. Shelley served as Controller of Georgetown from 1985 until the Georgetown acquisition. Mr. Shelley joined Georgetown in 1974 and held various financial positions prior to being named Controller. From 1970 to 1974, he served in various financial positions at Georgetown Steel Corporation. BENJAMIN C. HUSELTON has been Vice President-Administration of GST and GSTOC since March 1997. Prior to that he had served as Vice President-Communications and Vice President of GST and GSTOC since the Georgetown acquisition. From November 1993 to the Georgetown acquisition, he was Vice President of Human Resources and Business Systems and Assistant Secretary of GST and GSTOC. From 1991 to November 1993, Mr. Huselton was Vice President of Human Resources and Administration for AWGS. From 1970 to 1991, Mr. Huselton served as a manager of industrial relations and human resources in several Armco divisions, including the Baltimore Works of Armco's Specialty Steel Division. GEORGE A. GOLLER has been Vice President - Technology and Product Development of GST and GSTOC since November 1995 and a Vice President of GST and GSTOC since November 1993. From December 1990 to November 1993, Mr. Goller was Director of Business Development for AWGS. From 1964 to 1992, Mr. Goller served in various capacities with AWGS, including Metallurgy Coordinator at the Kansas City mini-mill, Commercial Manager and Senior Product Engineer at the Ishpeming, Michigan facility, and Director of the High Chrome Cast technical development group. PAUL B. EDGERLEY has been a Director of GST since July 1993 and served as Vice President and Director from November 1993 until February 1997. Mr. Edgerley has been a managing director of Bain since May 1993 and has been a general partner of Bain Venture Capital since 1990. Mr. Edgerley was a principal of Bain Capital Partners from 1988 through 1990. Mr. Edgerley is also a director of AMF Group, Inc. and Steel Dynamics, Inc. JOHN J. O'MALLEY has been a Director of GST and GSTOC since November 1993. Mr. O'Malley has been an Executive Vice President of Bain since 1993. From 1991 to 1993, Mr. O'Malley was President and Chief Executive Officer of Robertson Ceco, an international construction products and engineering company. From 1986 to 1991, he was Executive Vice President of HMK Group Inc., a diversified manufacturing and services company. Mr. O'Malley is also a director of Physio-Control International Corporation and Wesley Jessen Vision Care, Inc. 27 28 ITEM 11: EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS Set forth below is information for the fiscal years ended December 31, 1995, 1996 and 1997 with respect to compensation for services to the Company of the following individuals: (1) the Chief Executive Officer of GST and GSTOC during 1997, (2) the Chief Executive Officer of GST and GSTOC effective January 1, 1998, and (3) the four most highly compensated executive officers of GST and GSTOC (other than the Chief Executive Officers) during 1997. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------------- LONG-TERM OTHER ANNUAL COMPENSATION ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2) COMPENSATION($)(3) - --------------------------------------------------------------------------------------------------------------------------- Roger R. Regelbrugge 1997 $650,000 $694,950 $ 9,754 25,000 $ 34,397 Chairman and Director 1996 $612,500 $339,938 $ 8,958 -- $ 34,397 1995 $143,548(4) $113,372(4) $ 2,144 325,000 $ 58,313 Mark G. Essig 1997(5) 450,000 President and Chief 1996 Executive Officer 1995 Luis E. Leon 1997 $245,000 $174,628 $ 12,329 20,000 $ 11,498 Senior Vice President - 1996 $220,000 $ 81,400 $ 49,420 -- $ 57,019 Finance and Administration, 1995 $195,000 $ 46,400 $ 7,885 -- $ 8,098 Chief Financial Officer Donald B. Daily 1997 $275,000 $158,058 $ 19,105 20,000 $ 24,712 Senior Vice President - 1996 $231,250 $ 69,998 $ 5,981 -- $ 36,922 Steel Operations 1995 $200,000 $302,899 $ 6,348 120,000 $ 10,563 David M. Yarborough 1997 $227,500 $196,616 $ 56,155 20,000 $ 3,238 Senior Vice President- 1996 $190,000 $ 52,725 $ 5,267 -- $ 2,680 Mining Products 1995(6) $ 45,552 $ 18,995 -- 100,000 $ 16,066 Walter Robertson, III 1997 $215,000 $ 92,668 $ 8,657 20,000 $ 3,052 Senior Vice President- 1996(7) $149,808 $ 90,000 $ 38,108 90,000 $ 87,326 Commercial 1995 -- -- -- -- --
- -------------------- (1) Other annual compensation reflects certain incidental perquisites and benefits. (2) For additional information concerning the grant of options in 1997, see "-- Stock Options" below. (3) Other compensation paid to Mr. Regelbrugge consists of $50,000 in 1995 paid in connection with his initial employment with the Company and certain life insurance premiums paid by the Company on Mr. Regelbrugge's behalf in the amount of $30,825 in 1997 and 1996 and a pro-rated amount of $8,313 for 1995. See "--Mr. Regelbrugge's Employment Arrangements." The amounts shown for 1996 for Messrs. Leon, Daily and Robertson include reimbursement of certain relocation expenses of $49,519, $22,917 and $35,316, respectively. Mr. Daily's amount includes payment in lieu of vacation of $21,140 in 1997, $10,570 in 1996 and $7,687 in 1995. Mr. Robertson's amount also includes $50,000 in connection with his initial employment in 1996. Mr. Leon participates in a 401(k) plan with a Company match. The amounts related to this plan for 1997 and 1996 were $4,800 and $4,500, respectively. Mr. Leon also participates in a profit sharing plan and contributions on his behalf in 1997 and 1996 were $3,200 and $3,000, respectively. (4) Represents prorated amount for the portion of 1995 that follows the Georgetown acquisition, during which period Mr. Regelbrugge was Chairman and Chief Executive Officer of GST and GSTOC. (5) Mr. Essig joined the Company in January 1998. 28 29 (6) Mr. Yarborough joined the Company in October 1995. (7) Mr. Robertson joined the Company in March 1996. STOCK OPTIONS OF GSI The following table sets forth information regarding stock options in the Common Stock granted during the Company's fiscal year ended December 31, 1997. OPTION GRANTS IN 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL RATES -------------------------------------------------------- OF STOCK PRICE NUMBER OF PERCENT OF TOTAL APPRECIATION FOR SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM (2) UNDERLYING TO EMPLOYEES IN BASE PRICE EXPIRATION --------------- NAME OPTIONS(#)(1) FISCAL YEAR(%) ($PER SHARE) DATE 5%($) 10%($) - ----------------------------------------------------------------------------------- -------------------------- Roger R. Regelbrugge(3) 25,000 2.71% $7.00 09/01/07 $ 260,623 $ 414,999 Mark G. Essig(4) 450,000 48.81% $7.00 12/31/07 $4,691,217 $7,469,978 Luis E. Leon 20,000 2.17% $7.00 09/01/07 $ 208,499 $ 331,999 Donald B. Daily 20,000 2.17% $7.00 09/01/07 $ 208,499 $ 331,999 David M. Yarborough 20,000 2.17% $7.00 09/01/07 $ 208,499 $ 331,999 Walter Robertson, III 20,000 2.17% $7.00 09/01/07 $ 208,499 $ 331,999
- -------------------- (1) Such options were granted on August 31, 1997 pursuant to a stock option agreement between GSI and the above named executives. The options vest and become exercisable at 5% per quarter beginning on September 30, 1997. (2) Represents the value of the options granted at the end of the option term if the market price of shares of Common Stock on the date of grant were to appreciate annually by 5% and 10%, respectively, based on the assumed fair market value of $6.40 per share as of the grant date. (3) Mr. Regelbrugge's 1997 options vest at the rate of 3.575% per month beginning on September 30, 1997. (4) Mr. Essig's options were granted on December 11, 1997 and vest and become excercisable at 5% per quarter beginning on March 31, 1998. The following table sets forth information concerning outstanding options in the Common Stock held by Mr. Regelbrugge and the other named executives during the Company's fiscal year ended December 31, 1997. No executive officer exercised options during 1997. 29 30 AGGREGATED OPTION EXERCISABLE IN 1997 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1997(#) DECEMBER 31, 1997 ($)(1) --------------------- ------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Roger R. Regelbrugge 328,571 21,429 -- -- Mark G. Essig -- 450,000 -- -- Luis E. Leon 92,000 108,000 -- -- Donald B. Daily 50,000 90,000 -- -- David Yarborough 42,000 78,000 -- -- Walt Robertson 20,000 90,000 -- --
(1) Year end value is based on an assumed fair market value of $6.40 per share, less the applicable aggregate option exercise price(s) of in-the-money options, multiplied by the number of unexercised in-the-money options which are exercisable and unexercisable, respectively. MR. REGELBRUGGE'S EMPLOYMENT ARRANGEMENTS Mr. Regelbrugge and GSI are parties to an employment agreement (the "Regelbrugge Agreement"), dated October 5, 1995 and amended on April 28, 1997, pursuant to which Mr. Regelbrugge served as the Chairman and Chief Executive Officer of GSI, GST and GSTOC until December 31, 1997. Subsequent to December 31, 1997, Mr. Regelbrugge will serve as Chairman through March 31, 1999. Mr. Regelbrugge has also agreed to serve as a Director of GSI through December 31, 1999, or such alternate date as may be determined by the shareholders of GSI; provided, however, that Mr. Regelbrugge will have no further obligation to serve as a Director of GSI if a new chairman is designated prior to April 1, 1999. Under the Regelbrugge Agreement currently in effect, Mr. Regelbrugge is entitled to receive (i) a base salary at the annual rate of $650,000 through December 31, 1998, (ii) a base salary at the annual rate of $260,000 from January 1, 1999, through March 31, 1999, (iii) a base salary at the annual rate of no less the $200,000 from April 1, l999 through December 31, 1999, and (iv) an annual incentive bonus based on the Company achieving certain performance targets. Until March 31, 1999 Mr. Regelbrugge will not be required to devote more than 40% of his time and energy to the furtherance of the business of GSI, GST, GSTOC and Georgetown. Commencing April 1, 1999 and continuing through December 31, 1999, Mr. Regelbrugge will not be required to devote more than ten days each calendar quarter to the furtherance of the business of GSI, GST, GSTOC and Georgetown. Beginning on January 1, 1998, Mr. Regelbrugge is entitled to advise or work for another individual, firm or corporation provided that it does not unreasonably interfere with his duties under the Regelbrugge Agreement and that such other individual, firm or corporation is not directly in competition with GSI and its subsidiaries within a specified territory. The Regelbrugge Agreement also entitles Mr. Regelbrugge to certain privileges and benefits, including participation in the Company's management employee benefit plans in effect from time to time and in a supplemental executive retirement plan established and maintained by GSI (the "GSI SERP"). The GSI SERP will provide Mr. Regelbrugge with retirement benefits as described under Pension and Retirement Plans. 30 31 Mr. Regelbrugge also has entered into a Stock Option Agreement dated October 5, 1995 and amended on July 31, 1997 (the "1995 Stock Option Agreement") and a Stock Option Agreement dated September 1, 1997 (the "1997 Stock Option Agreement") with GSI. Pursuant to both the 1997 Stock Option Agreement and the 1995 Stock Option Agreement, he received options to purchase Common Stock. The options granted under the 1995 Stock Option Agreement are non-qualified and fully vested and exercisable. The options granted under the 1997 Stock Option Agreement are non-qualified and become exercisable at the rate of 3.57143% on the last day of each month beginning September 30, 1997, if Mr. Regelbrugge is employed by the Company on such date, subject to the options becoming exercisable at an earlier date upon the occurrence of certain change of control transactions. Both the 1995 Stock Option Agreement and the 1997 Stock Option Agreement provide for certain transfer restrictions with respect to the Option Stock. MR. ESSIG'S EMPLOYMENT ARRANGEMENTS Mr. Essig and GSI entered into an Employment Agreement (the "Essig Agreement") which became effective on January 1, 1998 pursuant to which Mr. Essig will serve as President and Chief Executive Officer of GSI, GST and GSTOC until the Essig Agreement is terminated by either Mr. Essig or GSI by giving sixty days prior written notice of termination or until Mr. Essig's death or his involuntary termination of employment with or without good reason (as defined). Under the Essig Agreement, Mr. Essig is entitled to receive (i) an annual base salary at the rate of $550,000, (ii) a signing bonus of $1,000,000 payable in three equal annual installments provided, however, that the second and third installments will be due only if Mr. Essig's employment has not been terminated for cause by GSI or terminated without good reason by Mr. Essig, (iii) an additional signing bonus of $350,000 payable in 1998, subject to certain conditions, and (iv) an annual incentive bonus based on the Company achieving certain performance targets, with a minimum bonus for 1998 of $450,000. The Essig Agreement prohibits Mr. Essig from engaging in certain competitive activities generally and from using or disclosing certain "confidential" or "proprietary" information during his term of employment and for a period of two years after the termination of his employment. Additionally, the Essig Agreement entitles Mr. Essig to reimbursement of expenses of relocation and certain other perquisites and benefits, including participation in all the Company's benefit plans applicable to the Company's executive officers generally and the GSI SERP. The GSI SERP will provide Mr. Essig with retirement benefits as described under Pension and Retirement Plans. In the event of Mr. Essig's termination of employment by GSI without "cause" or by Mr. Essig with "good reason", Mr. Essig is, in general, entitled to (a) a lump sum payment equal to twice the amount of his annual base salary then in effect, (b) an annual incentive bonus for the calendar year of the termination and for the ensuing calendar year payable when bonuses are paid to other employees under the annual incentive bonus plan, (c) continued vesting under the Essig Stock Option Agreement and under the GSI SERP for a period of two years, and (d) continuation of certain benefits and other contract rights; provided, however, if GSI gives Mr. Essig written notice on or before July 1, 200l, Mr. Essig's payments and other termination benefits will be modified in certain respects based upon his length of service at termination and the time periods of the competitive restrictions and prohibition against disclosure of "confidential" or "Proprietary" information placed upon Mr. Essig following the termination of his employment will be decreased from two years to one year. Mr. Essig is also party to an Indemnification Agreement that is similar in content and scope to that entered into by the other directors and officers of GSI. 31 32 Mr. Essig has also entered into a stock option agreement (the "Essig Stock Option Agreement") with GSI pursuant to which he received options to purchase up to 450,000 shares of common stock at an exercise price of $7.00 per share. The options are non-qualified and become vested and exercisable at the rate of 5% on the last day of each calendar quarter, beginning with the quarter ending March 31, 1998, if Mr. Essig is employed by the Company of such date, subject to the options becoming exercisable at an earlier date upon the occurrence of certain change of control transactions. Mr. Essig's options will expire on the earlier of December 31, 2007 or the date of the termination of Mr. Essig's employment with the Company for any reason other than death or disability (as defined); provided, however, that Mr. Essig will have until the tenth anniversary of the date of the Essig Stock Option Agreement to exercise the options with respect to vested options. Mr. Essig is also party to an agreement which provides certain protections in the event of severance upon a Change of Control of GSI (the "Essig Change of Control Agreement"). The Essig Change of Control Agreement is in lieu of any other severance agreement and provides for cash compensation and continuance of fringe benefits for a period of two years in the event that in anticipation of, or within two years following a Change of Control his employment is terminated either by (x) the Company for any reason other than "cause" (as defined in the Essig Change of Control Agreement), death or disability, or (y) by Mr. Essig for good reason. If Mr. Essig should become entitled to receive benefits thereunder, he will receive (i) a lump sum payment equal to two times his annual base salary and, (ii) a lump sum payment equivalent to an incentive bonus for two years following termination. OTHER MANAGEMENT AGREEMENTS Mr. Leon has entered into a management agreement with the Company (the "Management Agreement") pursuant to which Mr. Leon acquired shares of GSI Common Stock and options to purchase Common Stock. The terms of of the Management Agreement provides that (i) the Common Stock held by Mr. Leon is subject to purchase by GSI and the Bain Funds, at their option, in the event the executive is no longer employed by the Company as of a stated date, (ii) if Mr. Leon's employment with the Company is terminated, the purchase price to GSI and the Bain Funds for Mr. Leon's shares of Common Stock is either the original value or the fair market value thereof, depending on whether the termination was for "cause" or voluntary termination other than for "good reasons," and (iii) the purchase option held by GSI and the Bain Funds terminates upon the first to occur of (A) a sale of GSI, or (B) GSI becoming a reporting company under the Securities Exchange Act of 1934 as a result of the registration of its common equity securities thereunder and the Bain Funds and their affiliates collectively ceasing to own at least 50% of the aggregate number of shares of Common Stock held by the Bain Funds as of August 17, 1995. In addition, the Management Agreement also provides for certain transfer restrictions with respect to the Common Stock and options to purchase Common Stock granted to Mr. Leon thereunder. The terms of the Management Agreement provides for certain restrictions on Mr. Leon's ability to compete with the Company following his termination of employment with the Company. The Management Agreement also provides that Mr. Leon is entitled to receive a payment equal to two years' base salary upon his termination of employment under certain circumstances prior to GSI's completing a sale of its equity securities pursuant to a registration statement filed under the Securities Act of 1933, and there are certain variations in Mr. Leon's option terms. For additional information, see "-- Stock Options", "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions -- Certain Transactions." 32 33 Messrs. Robertson and Yarborough have entered into separate stock option agreements with the Company on terms that are generally similar to Mr. Regelbrugge's Stock Option Agreement described above. Mr. Yarborough's stock option agreement was entered into as of October 5, 1995, and Mr. Robertson's stock option agreement was entered into as of February 28, 1996. Each of these stock option agreements provide that (i) the options granted pursuant thereto vest at a rate of 20% each year for the five years following the date of the respective stock option agreement, and (ii) the purchase option held by GSI and Bain does not terminate if the executive remains employed with the Company as of a certain date, but instead terminates only upon the first to occur of (A) a sale of GSI, or (B) GSI becoming a reporting company under the Securities Exchange Act of 1934 as a result of the registration of its common equity securities thereunder and the Bain Funds and their affiliates collectively ceasing to own at least 50% of the aggregate number of shares of Common Stock held by the Bain Funds as of the date of the stock option agreement. In accordance with the employment agreement with Mr. Robertson, in the event Mr. Robertson is terminated during the four years following his employment date (February 28, 1996) for any reason other than for cause, Mr. Robertson's salary and benefits will be continued for two years. Such termination compensation will be reduced from two years to one year after the completion of four years of service, with the reduction occurring month by month during the fifth year of employment. In accordance with the employment agreement with Mr. Yarborough, in the event Mr. Yarborough's employment is terminated for any reason other than for cause, Mr. Yarborough's salary and benefits will be continued for one year. Messrs. Leon, Daily, Yarborough, Robertson and other key executives are also parties to agreements which provide certain protections upon a change of control (the "Change of Control Agreements"). Such Change of Control Agreements are in lieu of other severance agreements and provide for cash compensation and continuation of fringe benefits for a period of two years following a Qualified Termination, as defined in such agreements. STOCK OPTIONS The 1997 stock options were issued in accordance with the GS Industries, Inc. 1997 Stock Option Plan (the "Stock Option Plan") pursuant to which certain executives received options to purchase common stock of GSI. Pursuant to the terms of the Stock Option Plan, the options are non-qualified and become exercisable at the rate of 5% on the last day of each quarter beginning September 30, 1997 if the executive is employed by the Company on such date, subject to the options becoming exercisable at an earlier date upon the occurrence of certain change of control transactions. The Stock Option Plan further provides that (i) the shares of Common Stock issuable pursuant to the options or issued pursuant thereto (the "Option Stock") are subject to purchase first, by GSI at its option, and if GSI does not exercise such option to purchase, then second, by the Bain Funds, at their option, in each case in the event the executive is no longer employed by the Company. The purchase price to GSI or the Bain Funds for the executive's Option Stock is either the original value or the fair market value thereof, depending on whether the termination was for "cause" or voluntary termination other than for "good reason", and (ii) the respective purchase options held by GSI and the Bain Funds terminate upon the first to occur of (A) a sale of GSI, or (B) GSI becoming a 33 34 reporting company under the Securities Exchange Act of 1934 as a result of the registration of its common equity securities thereunder and the Bain Funds and their affiliates collectively ceasing to own at least 50% of the aggregate number of shares of Common Stock held by the Bain Funds as of the date of the Stock Option Agreement. The Stock Option Agreement also provides for certain transfer restrictions with respect to the Option Stock. PENSION AND RETIREMENT PLANS Messrs. Regelbrugge, Robertson, Daily, Yarborough and Essig are participants in the GSI Employees Pension Plan (the "GSI Pension Plan") and Messrs. Regelbrugge, Essig and Daily also are participants in the GSI SERP. The annual benefit under the GSI Pension Plan at normal retirement age (age 65) generally is equal to the sum of (1) one percent of the average of the five consecutive calendar years of Compensation (as defined below) that produce the highest average (the "Average Compensation") for each year of benefit service and (2) six-tenths of one percent of the Average Compensation in excess of the covered compensation (which is the average Social Security wage base) for each year of benefit service up to 35 years. For purposes of the GSI Pension Plan, "Compensation" consists of all remuneration paid to the employee for services rendered as reported or reportable on Form W-2 as "wages, tips or other compensation" plus elective or salary reduction contributions to a cash or deferred arrangement, cafeteria plan or tax-sheltered annuity, but excluding reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving allowances and expenses, amounts designated by GSI as retirement-oriented non-qualified deferred compensation and welfare benefits. Compensation under the GSI Pension Plan may not, however, exceed the annual compensation limit imposed by the Internal Revenue Code (the "Code"), which was $160,000 for 1997. Benefits under the GSI Pension Plan currently are not offset by Social Security payments or any other amounts. The maximum annual benefit limit payable under the GSI Pension Plan for 1997 was $125,000. The annual benefit under the GSI SERP at normal retirement age (age 65) is equal to the sum of: (1) 2.5 percent of the Average Compensation for each year of benefit service up to 20, less (2) 2.5 percent of the annual primary Social Security benefit for each year of benefit service up to 20, less (3) the annual benefit payable under the GSI Pension Plan. The benefit payable under the GSI SERP to Messrs. Regelbrugge and Daily will be further reduced by the annual benefit value of the lump sum payment received by Messrs. Regelbrugge and Daily from the GSI SERP on October 5, 1995. As of December 31, 1997, Mr. Regelbrugge has 23 years of credited service under the GSI Pension Plan and 24 years of service under the GSI SERP. Mr. Daily has 13 years of credited service under the GSI Pension Plan and 24 years of service under the GSI SERP. The GSI SERP is an unfunded obligation of GSI. Mr. Regelbrugge's retirement benefit under the GSI Pension Plan and the GSI SERP will be the greater of (i) the amount determined by the continued accrual of benefits under the above plans, or (ii) the actuarial adjusted benefit that Mr. Regelbrugge would have received at age 65 adjusted for late retirement. Mr. Regelbrugge's combined net annual benefit payable under these plans at December 31, 1997 would be $222,000. In addition, Mr. Regelbrugge has the option to receive the GSI SERP benefit in a lump sum amount upon his retirement. 34 35 Mr. Robertson and Mr. Yarborough participate in the GSI Pension Plan. At December 31, 1997, Mr. Robertson and Mr. Yarborough had two years of credited service. The following table shows the projected annual benefits payable for a single life annuity as of December 31, 1997 upon retirement at age 65 based on different levels of compensation and years of credited service under the GSI Pension Plan.
GSI PENSION PLAN TABLE* YEARS OF SERVICE -------------------------------------------------------------------------- COMPENSATION 15 20 25 30 35 - ------------ ---------- ---------- ---------- ---------- ---------- $ 125,000 $ 24,300 $ 36,400 $ 45,500 $ 54,600 $ 63,700 150,000 33,300 44,400 55,500 66,800 77,700 175,000 35,700 47,600 59,500 71,400 83,300 200,000 35,700 47,600 59,500 71,400 83,300 300,000 35,700 47,600 59,500 71,400 83,300 500,000 35,700 47,600 59,500 71,400 83,300 750,000 35,700 47,600 59,500 71,400 83,300 900,000 35,700 47,600 59,500 71,400 83,300 1,000,000 35,700 47,600 59,500 71,400 83,300
- -------------------- *Figures in table do not reflect amounts payable under the GSI SERP. If employment were continued until normal retirement age of 65 at their 1997 rates of pay, Messrs. Robertson and Yarborough would receive yearly pensions of $44,400 and $33,800, respectively, under the GSI Pension Plan and Mr. Daily would receive a combined yearly benefit of $153,400 under the GSI Pension Plan and the GSI SERP. Mr. Leon participates in the GST non-qualified Supplement Retirement Plan (the "GST SERP") which provides a retirement benefit equal to 25% of the participant's average annual compensation (last five years average base compensation, including bonuses) less any amounts payable under any other retirement plan maintained by GST. The GST SERP is an unfunded obligation of GST. Participants under the GST SERP receive full benefits after attaining age 62 and the completion of five years of service. Participants who have completed five years of service but have not attained age 62 may elect early retirement starting at age 55. The amount of such early retirement benefit shall be 25% of the participant's average annual compensation multiplied by the ratio of the participant's years of service (and any fractions thereof) at his or her early retirement date over the lessor of the participants years of service at age 62 or 15 years of service. If benefit payments commence prior to age 62, the amount payable shall be the actuarial equivalent of the benefit that would be payable at age 62. The following table shows the projected annual benefits payable for a single life annuity as of December 31, 1997 upon retirement at the normal retirement age of 62 based on different levels of average annual compensation and benefit service for the GST SERP. As of December 31, 1997, Mr. Leon had 3 years of credited service under the GST SERP. 35 36
GST COMBINED PENSION AND SERP TABLE YEARS OF SERVICE ---------------------------------------------------------------- COMPENSATION 5 10 15 20 25 - ------------ -------- -------- -------- -------- -------- $ 125,000 $ 31,250 $ 31,250 $ 31,250 $ 31,250 $ 31,250 150,000 37,500 37,500 37,500 37,500 37,500 175,000 43,750 43,750 43,750 43,750 43,750 200,000 50,000 50,000 50,000 50,000 50,000 225,000 56,250 56,250 56,250 56,250 56,250 250,000 62,500 62,500 62,500 62,500 62,500 275,000 68,750 68,750 68,750 68,750 68,750 300,000 75,000 75,000 75,000 75,000 75,000 400,000 100,000 100,000 100,000 100,000 100,000 500,000 125,000 125,000 125,000 125,000 125,000
If employment were continued until normal retirement age of 62 at his 1997 rate of compensation, Mr. Leon would receive a yearly pension of $81,600 under the GST SERP. Mr. Leon also participates in the GS Technologies Retirement and Savings Plan. This plan has two components, a defined contribution profit sharing component under Section 401(a) of the Code and a cash or deferred arrangement that qualifies under Section 401(k) of the Code. Annual contributions for profit sharing are made at the rate of 2% of a participants' compensation. Compensation for the profit sharing component of this plan is limited to a maximum compensation level in 1997 of $160,000. The Company's contribution in 1997 for Mr. Leon under this plan was $3,200. The Section 401(k) portion of the plan allows for a tax-deferred contribution by the executive up to the maximum allowed by the Code ($9,500 in 1997). The executive may also make after-tax voluntary contributions. The Company will make a matching contribution in an amount equal to fifty percent of the tax-deferred and after-tax contributions of the executive up to a maximum of 3% of the executive's base compensation, excluding bonuses and limited to $4,800 in 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1997, compensation decisions for executive officers and directors of GST and GSTOC were made by GSI's Compensation Committee which consisted of Messrs. Regelbrugge, O'Malley, Al-Gabandi and Haas. Mr. Regelbrugge, Chairman and Chief Executive Officer (until December 31, 1997), did not participate in decisions regarding his compensation. There were no fees paid to the directors of GST or GSTOC during 1997. No executive officer employed by the Company serves or served on the compensation committee of another entity during 1997 and, except as described below, no executive officer of the Company serves or served as a director of another entity who has or had an executive officer serving on the Board of Directors of the Company. Mr. Edgerley is a managing director of Bain which is the management company for certain of the Bain Funds. Mr. Edgerley is also a limited partner of Bain Capital Partners IV, L.P., the general partner of certain of the Bain Funds. Mr. O'Malley is an executive vice president of Bain. Bain received certain fees from the Company in 1993, 1994, 1995, 1996 and 1997 and, it is 36 37 expected, will continue to receive such fees from GSI in 1998. See "Certain Relationships and Related Transactions". ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the outstanding common stock of GSTOC is owned by GST and all of the outstanding common stock of GST is owned by GSI. The table below sets forth certain information regarding ownership of GSI's Common Stock (and thereby proportionate beneficial ownership of GST and GSTOC) as of March 1, 1998 by (i) each person or entity who beneficially owns five percent or more of the Common Stock, (ii) each director of GST and GSTOC, (iii) each executive officer of GST and GSTOC included in the Summary Compensation Table above, and (iv) all current directors and executive officers of GST and GSTOC as a group. Except as otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the securities beneficially owned by it or him as set forth opposite its or his name. There is no established public trading market for the Common Stock.
NUMBER OF PERCENTAGE SHARES OF OF SHARES OF NAME AND ADDRESS COMMON STOCK COMMON STOCK ---------------- ------------ ------------ PRINCIPAL STOCKHOLDERS: Bain Funds(1) 11,741,917.93 57.58% c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116 General Electric Capital Corporation 3,986,692.90 19.55% 190 South LaSalle Street Suite 2740 Chicago, Illinois 60603 Leggett & Platt, Incorporated 1,993,346.45 9.77% No. 1 Leggett Road Carthage, Missouri 64836 Robert A. Cushman 1,166,854.00(2)(3) 5.45% 64 Yorkshire Drive Wexford Plantation Hilton Head Island, SC 29928
37 38 DIRECTORS AND EXECUTIVE OFFICERS: Mark G. Essig 22,500.00(2) * Roger R. Regelbrugge 333,035.72(2) 1.59% Luis E. Leon 98,555.56(2) * Donald B. Daily 51,000.00(2) * David M. Yarborough 43,000.00(2) * Walter Robertson III 39,000.00(2) * Paul B. Edgerley (1) 11,741,917.93 57.58% John J. O'Malley 66,666.67 * All current directors and executive officers as a group (11 persons)(1) 13,150,294.31(2) 61.48%
- -------------------- * Less than 1%. (1) Includes 5,132,861.12 shares of Common Stock held by Bain Capital Fund IV, L.P. ("Bain IV"), 5,874,068.04 shares of Common Stock held by Bain Capital Fund IV-B, L.P. ("Bain IV-B"), 468,835.44 shares of Common Stock held by BCIP Associates ("BCIP"), and 266,153.33 shares of Common Stock held by BCIP Trust Associates, L.P. ("BCIP Trust" and, collectively with Bain IV, Bain IV-B and BCIP, the "Bain Funds"). Mr. Edgerley is a director and executive officer of GSI and Mr. O'Malley is a director of GSI. Mr. Edgerley is a managing director of Bain Capital Investors, Inc., which is the general partner of Bain Capital Partners IV, L.P., which is the general partner of Bain Capital Fund IV, L.P. and Bain Capital Fund IV-B, L.P. Mr. Edgerley is a limited partner of Bain Capital Partners IV, L.P. Accordingly, Mr. Edgerley may be deemed to beneficially own shares owned by the Bain Funds, although Mr. Edgerley disclaims beneficial ownership of any such shares. Mr. O'Malley is an Executive Vice President of Bain. (2) Includes the following shares of Common Stock that may be acquired by the person(s) indicated upon the exercise of outstanding stock options that are either currently exercisable or will become exercisable on or before May 31, 1998: Robert A. Cushman 1,016,854.00 Mark G. Essig 22,500.00 Roger R. Regelbrugge 333,035.72 Luis E. Leon 93,000.00 Donald B. Daily 51,000.00 David M. Yarborough 43,000.00 Walter Robertson III 39,000.00 All current directors and executive officers as a group 997,677.70
(3) Includes 150,000 shares held by the Cushman Trust. Prior to consummation of the Georgetown acquisition, the authorized capital stock of GSI was increased to include 3,000,000 shares of Class P Common Stock and 1,000 shares of Preferred Stock. In connection with the Georgetown acquisition, the Bain Funds, GECC, Leggett & Platt, certain members of management and certain other existing stockholders of GSI purchased shares of Class P Common Stock for $30 million in cash. In addition, GSI issued to the GOK approximately 4% of its outstanding Common Stock and Class P Common Stock as well as a combination of pay-in-kind subordinated notes and preferred stock (the "Seller Securities"). As of March 6, 1996, the Class P Common Stock was converted by GSI into shares of Common Stock at a rate of 1.2222 shares of Common Stock for each share of Class P Common Stock. In April 1996, the preferred stock was converted into exchange notes of GSI. 38 39 See "Certain Relationship and Related Transactions - Description of Indebtedness - Note Guarantees" for a description of the pledge of all outstanding shares of common stock of GSTOC to secure the 12% Note Guarantee (as defined). ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS GSI, GST and GSTOC have entered into a Management Services Agreement pursuant to which GSI provides certain consolidated administrative services to GST and GSTOC, is reimbursed for its actual out-of-pocket expenses and is entitled to receive an annual fee. In addition, GSI, GST and GSTOC have entered into a Tax Sharing Agreement providing for the allocation of tax obligations among GSI's consolidated group. The Bain Funds, GECC, Leggett & Platt, Mr. John J. O'Malley, and certain other stockholders of GSI entered into a Stock Purchase Agreement with GST dated as of November 12, 1993 (the "Stock Purchase Agreement") pursuant to which such persons purchased from GST the shares of Class P Common Stock held by them for $8.10 per share, the shares of Class A Common Stock held by them for $8.10 per share and the shares of Common Stock held by them for $.10 per share. Pursuant to the Recapitalization, the Class A Common Stock and Class P Common Stock of GST were reclassified as Common Stock of GST. Pursuant to the GST Merger, the common stock of GST held by the parties described above was converted into GSI Common Stock. The Bain Funds, GECC, Leggett & Platt and Mr. O'Malley received $36,105, $12,041, $6,136 and $245, respectively, as a result of the distribution made by the Company pursuant to the Recapitalization. Mr. Paul B. Edgerley is a managing director of Bain, which is the general partner of certain Bain Funds, and are limited partners of Bain Capital Fund IV, L.P., the general partner of certain of the Bain Funds. Mr. O'Malley is an executive vice president of Bain. In connection with the Georgetown acquisition, GSI, GECC, Leggett & Platt, the Bain Funds, Mr. O'Malley, the GOK, which was then Georgetown's sole stockholder, and certain other stockholders of GSI entered into the Stockholders Agreement. The parties to the Stockholders Agreement have agreed to vote their GSI Common Stock and to take all other necessary actions (i) to allow the GOK to select two representatives to the Board of GSI, so long as the Seller Securities are outstanding, and (ii) to allow the holders of a majority of the shares held by the Bain Funds to select the remaining representatives to the Board, so long as the Bain Funds and certain other persons own at least 60% of the GSI Common Stock which it purchased pursuant to the Stock Purchase Agreement. Pursuant to the Stockholders Agreement, GECC and Leggett & Platt may not sell, transfer or otherwise dispose of any GSI Common Stock without the prior written consent of the Bain Funds, except pursuant to certain participation rights, transfers among affiliates, a public sale or a sale of GSI. The holders of GSI Common Stock also have the right to participate in transfers of GSI Common Stock by the Bain Funds and certain other persons or GECC (other than to affiliates of each). The Bain Funds have a first offer right with respect to the transfer of GSI Common Stock by GECC. Such restrictions on transfer, participation rights and first offer rights terminate upon the earlier of the date on which such shares are transferred in a public sale, the consummation of a sale of GSI or the consummation of a public offering. The Stockholders Agreement grants to the parties thereto preemptive rights to purchase securities issued or sold by GSI. Such preemptive rights terminate upon the effectiveness of a registration statement filed by GSI with the Commission with respect to an offering of GSI Common Stock to the public. The 39 40 Bain Funds, GECC, Leggett & Platt and certain other stockholders of GSI have also agreed that, so long as the Seller Securities are outstanding, they will not transfer any of the shares of GSI Common Stock, except for certain permitted transfers. In connection with the Georgetown acquisition, GSI, Leggett & Platt, GECC, the Bain Funds, the GOK, Messrs. O'Malley, Leon, certain members of GSI management, and certain other stockholders of GSI entered into a Registration Agreement (the "Registration Agreement"). Under the Registration Agreement, the holders of a majority of GSI Common Stock held by the Bain Funds may at any time request registration under the 1933 Act of all or part of such GSI Common Stock. Subject to certain conditions, the Bain Funds may request three long-form registrations at GSI's expense, and any number of short-form registrations at GSI's expense. If the GSI Common Stock is publicly traded on any national securities exchange or quoted on the NASDAQ System, subject to certain conditions, the holders of a majority of the GSI Common Stock issued to GECC may request one long-form registration at GSI's expense. Whenever GSI proposes to register any of its securities under the 1933 Act (other than pursuant to a registration requested pursuant to the Registration Agreement), the holders of GSI Common Stock issued to the parties to the Registration Agreement may require GSI, subject to certain limitations, to include all or any portion of their GSI Common Stock in such registration at GSI's expense. Also in connection with the Georgetown acquisition, as of October 5, 1995, GSI entered into a series of stock purchase agreements with Bain, GECC, Leggett & Platt and Mr. Leon among others, providing for the purchase by them of Class P Common Stock of GSI for $30 million in cash. Such Class P Common Stock was converted by the Company to GSI Common Stock as of March 6, 1996. See "Security Ownership of Certain Beneficial Owners and Management." The Company's Kansas City operations and Leggett & Platt entered into a Rod Supply Agreement dated November 12, 1993 and amended on August 2, 1994 pursuant to which Leggett & Platt agreed to purchase from the Kansas City mini-mill 90% of the first 200,000 tons of wire rod and 60% of the remaining wire rod consumed by three Leggett & Platt wire mills located in the central United States each year. Leggett & Platt is not required to purchase more than 250,000 tons of wire rod per year, and the Kansas City mini-mill is not required to supply more than 300,000 tons per year, pursuant to the Rod Supply Agreement. The agreement terminates on December 31, 2000. Leggett & Platt has the option to extend the agreement for a period of five years. Leggett & Platt purchased $83.2 million of wire rod in 1997 representing 10% of the Company's total net sales. Bain, the management company for certain of the Bain Funds, received from the Company an annual fee in 1997 for professional services rendered in the aggregate amount of $900,000. Bain is expected to continue to receive annual fees and expenses from the Company for professional services performed on an annual basis. Professional services rendered by Bain as described above include management consulting, advisory services and support, negotiation and analysis of financing alternatives, acquisitions and dispositions and other services agreed upon by the Company and Bain. The fees received for the professional services rendered are at least as favorable to the Company as those which could be negotiated with an unaffiliated third party. GECC is the agent and one of the lenders under the Revolving Credit Facility and the Term Loan Facility. As of December 31, 1997, the weighted average interest rate under the Revolving Credit Facility was 8.9%. See "-- Description of Indebtedness." 40 41 DESCRIPTION OF INDEBTEDNESS CREDIT FACILITIES The Credit Facilities consist of: (i) the Revolving Credit Facility of up to $120 million established by GSTOC and its operating subsidiaries and secured by accounts receivable, inventory and other current assets and (ii) a $50 million Term Loan Facility established by GSTOC and its subsidiaries and secured by the property, plant and equipment and other noncurrent assets of GSTOC and its subsidiaries (the "Credit Facilities") The Revolving Credit Facility will mature on September 30, 2001. Outstanding amounts under the Revolving Credit Facility may not exceed the lesser of (i) $120 million or (ii) the sum of 85% of eligible accounts receivable and 65% of eligible inventories (the "Borrowing Base"). As of December 31, 1997, the Borrowing Base was approximately $120.5 million. Outstanding borrowings under the Revolving Credit Facility bear interest at varying margins over the Base Rate (as defined in the agreements) or at varying margins over the London Interbank Offered Rate ("LIBOR"). Outstanding borrowings under the Term Loan Facility will bear interest at either (i) fixed margins over the Base Rate or (ii) fixed margins over LIBOR. The Credit Facilities contain customary non-financial covenants including, among others, maintenance of properties, maintenance of adequate insurance, restrictions or the sale and disposition of assets, restrictions on liens and compliance with pension and environmental laws and regulations. The Credit Facilities also contain certain customary financial covenants and events of default. The lenders' commitment to make any loans under the Credit Facilities is subject to certain customary conditions. MEI FACILITIES In addition to the Credit Facilities, MEI is party to a credit agreement that provides an unsecured revolving credit facility (the "MEI Revolver") and an unsecured term loan facility (the "MEI Term Loan" and collectively with the MEI Revolver, the "MEI Facilities"). The MEI Revolver has a maximum availability of $9 million and will mature on June 30, 1999. The MEI Revolver bears interest at varying margins over LIBOR, the domestic CD rate or at the Reference Rate, (as defined in the agreements). The MEI Term Loan is $8 million and will mature on December 31, 2000. The MEI Term Loan bears interest at varying margins over LIBOR, the domestic CD rate or at the Reference Rate. The MEI Facilities contain a negative pledge on all MEI assets. The MEI Facilities also include certain customary financial covenants, including a current ratio requirement, a fixed charge coverage ratio, a debt to tangible net worth ratio and a tangible net worth requirement. The lender's commitment to make any loans under the MEI Facilities is subject to customary conditions. THE NOTES GSTOC has issued $125 million of 12-1/4% Senior Notes due 2005 under an Indenture dated as of October 5, 1995 (the "12-1/4% Note Indenture") between GSTOC, GST and State Street Bank and Trust Company, as successor trustee (the "Trustee"). GSTOC has also issued $125 million of 12% Senior Notes due 2004 under an Indenture dated as of August 30, 1994 (as amended to date, the "12% Note Indenture") between GSTOC, GST and the Trustee. The 12-1/4% Notes and the 12% Notes are herein referred to collectively as the "Notes". 41 42 The terms of the Notes include those stated in the respective Indentures and those made part of the Indentures by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), as in effect on the date of the respective Indentures. The Notes are subject to all such terms, and holders of the Notes are referred to the Indentures and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Indentures does not purport to be complete and is qualified in its entirety by reference to the respective Indentures, including the definitions therein of certain terms used below. Capitalized terms used herein and not otherwise defined shall have the meanings as defined in each of the Indentures. TERMS OF THE 12 1/4% NOTES. The 12-1/4% Notes are general, unsecured obligations of GSTOC, limited to $125 million aggregate principal amount. Payment of the 12-1/4% Notes are fully and unconditionally guaranteed by a guarantee of GST (the "12-1/4% Note Guarantee"). The 12-1/4% Notes bear interest at a rate equal to 12-1/4% per annum from October 5, 1995 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on April 1 and October 1 of each year, commencing April 1, 1996, to the Person in whose name the 12-1/4% Note (or any predecessor 12-1/4% Note) is registered at the close of business on the preceding March 15 or September 15, as the case may be. The 12-1/4% Notes will bear interest on overdue principal and premium, if any, and, to the extent permitted by law, overdue interest at a rate equal to 14-1/4% per annum. Interest on the 12-1/4% Notes will be computed on the basis of a 360-day year of twelve 30-day months. The 12-1/4% Notes will mature on October 1, 2005 and were issued in denominations of one thousand dollars and integral multiples thereof. The 12-1/4% Notes will rank pari passu with all existing and future unsecured and unsubordinated indebtedness of GSTOC, including the 12% Notes. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the 12-1/4% Notes are not redeemable prior to October 1, 2000. On or after such date, the 12-1/4% Notes will be subject to redemption, at the option of GSTOC, in whole or in part, at any time prior to maturity, upon not less than 30 nor more than 60 days' notice mailed to each Holder of 12-1/4% Notes to be redeemed, in amounts of one thousand dollars or an integral multiple thereof, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued interest to but excluding the Redemption Date (subject to the right of Holders of record on the relevant regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the twelve-month period beginning October 1 of the years indicated:
YEAR REDEMPTION PRICE ---- ---------------- 2000...............................................106.125% 2001...............................................104.083 2002...............................................102.042 2003 and thereafter ...............................100.000
At any time prior to October 1, 1998, GSTOC may redeem up to $40 million aggregate principal amount of the 12-1/4% Notes with the net proceeds of one or more Public Offerings of common stock of GSI, GST or GSTOC upon not less than 30 nor more than 60 days' notice mailed within 30 days of the consummation of such Public Offering to each Holder of 12-1/4% Notes to be redeemed, in amounts of one thousand dollars or an integral multiple thereof, at a Redemption Price of 110% of the principal amount thereof plus accrued interest thereon to but excluding the 42 43 Redemption Date (subject to the right of Holders of record on the relevant regular Record Date to receive amounts due on an Interest Payment Date that is on or prior to the Redemption Date). TERMS OF THE 12% NOTES. The 12% Notes are general, unsecured (as to GSTOC) obligations of GSTOC, limited to $125 million aggregate principal amount. Payment of the 12% Notes are fully and unconditionally guaranteed by a guarantee of GST (the "12% Note Guarantee" and collectively with the 12-1/4% Note Guarantee, the "Note Guarantees"). The 12% Notes bear interest at a rate equal to 12% per annum from August 30, 1994 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on March 1 and September 1 of each year, commencing March 1, 1995, to the Person in whose name the 12% Note (or any predecessor 12% Note) is registered at the close of business on the preceding February 15 or August 15, as the case may be. The 12% Notes will bear interest on overdue principal and premium, if any, and, to the extent permitted by law, overdue interest at a rate equal to 14% per annum. Interest on the 12% Notes will be computed on the basis of a 360-day year of twelve 30-day months. The 12% Notes will mature on September 1, 2004 and were issued in denominations of one thousand dollars and integral multiples thereof. The 12% Notes will rank pari passu with all existing and future unsecured and unsubordinated indebtedness of GSTOC, including the 12-1/4% Notes. OPTIONAL REDEMPTION. The 12% Notes are currently not redeemable prior to September 1, 1999. On or after such date, the 12% Notes will be subject to redemption, at the option of GSTOC, in whole or in part, at any time prior to maturity, upon not less than 30 nor more than 60 days' notice mailed to each holder of 12% Notes to be redeemed, in amounts of one thousand dollars or an integral multiple thereof, at the following Redemption Prices (expressed as percentages of principal amount) plus accrued interest to but excluding the Redemption Date (subject to the right of Holders of record on the relevant regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the twelve-month period beginning September 1 of the years indicated:
YEAR REDEMPTION PRICE ---- ---------------- 1999............... .................................106% 2000.................................................104 2001.................................................102 2002 and thereafter .................................100
CERTAIN COVENANTS. The 12-1/4% Note Indenture and the 12% Note Indenture contain certain covenants that restrict: the incurrence of additional indebtedness; investments; the issuance of preferred stock; the repurchase of stock and the making of certain other Restricted Payments (as defined in such indentures); certain transactions with affiliates and related persons; dispositions of assets; the incurrence of liens; the issuance or disposition of certain capital stock; the incurrence of restrictions concerning distributions by and transfers to Restricted Subsidiaries; certain sale and leaseback transactions; and certain mergers, consolidations and sales of assets. Additionally, such indentures provide that in the event of a Change of Control and subject to certain conditions, each holder of the Notes will have the right to require GSTOC to repurchase such holder's Notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the redemption date. 43 44 EVENTS OF DEFAULT. Each of the 12-1/4% Note Indenture and 12% Note Indenture provides that an Event of Default is: default in payment when due of principal (or premium, if any); default for 30 days in payment of interest on any of the 12-1/4% Notes or 12% Notes, as the case may be; default in the payment of principal and interest on Notes required to be purchased pursuant to an Offer to Purchase when due and payable; failure to comply with certain covenants of the applicable indenture; failure by GSTOC or GST for 60 days after notice to perform any of its other agreements in the applicable indenture or the Notes; default under the terms of certain instruments evidencing or securing certain debt by GST or any Restricted Subsidiary having an outstanding principal amount of $10 million individually or in the aggregate which default results in the acceleration of the payment of such indebtedness or constitutes the failure to pay such indebtedness when due; the rendering of a final judgment against GST or any Restricted Subsidiary in an amount in excess of $10 million which remains undischarged or unstayed for a period of 60 days; certain events of bankruptcy, insolvency or reorganization; and the cessation of effectiveness of the Note Guarantees or a finding that such guarantees are unenforceable or invalid. NOTE GUARANTEES The 12-1/4% Note Guarantee and the 12% Note Guarantee by GST constitute the unconditional guarantee to each Holder of a 12-1/4% Note and 12% Note, respectively, of the payment of the principal of (and premium, if any) and interest on such Note when and as due and payable, whether at the stated maturity, by acceleration, call for redemption, purchase or otherwise. In case of the failure of GSTOC to make any such payment, GST will cause such payment to be made. There can be no assurance that GST will be able to make such payment. The 12-1/4% Note Guarantee ranks pari passu with all existing and future unsecured and unsubordinated indebtedness of GST, including the 12% Note Guarantee. GST is entitled to incur additional secured and unsecured indebtedness in the future provided certain financial and other conditions are met. The 12-1/4% Note Guarantee will be effectively subordinated to (a) all existing and future secured indebtedness of GSTOC and GST as to the assets securing such indebtedness and (b) all existing and future indebtedness of GST's subsidiaries other than GSTOC and of GSTOC's subsidiaries as to the assets and cash flow of those subsidiaries. As of December 31, 1997, the Company had approximately $96 million of such indebtedness and would have been entitled to incur additional secured and unsecured indebtedness in the future provided certain financial and other conditions are met. Unlike the 12-1/4% Note Guarantee, the 12% Note Guarantee is secured by a pledge of all of the capital stock of GSTOC and MEI and 65% of the capital stock of "Inversiones en Molienda, S.A. ("IMSA"). 44 45 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The exhibits and other documents filed as a part of this Annual Report on Form 10-K, including those exhibits which are incorporated by reference herein, are: (a)(1) FINANCIAL STATEMENTS The following financial statements are filed as part of this report:
PAGE ---- Report of Independent Accountants ..............................................F-1 Consolidated Balance Sheets of the Company as of December 31, 1996 and 1997 .......................................................................F-2 Consolidated Income Statements for the Years Ended December 31, 1995, 1996 and 1997................................................F-3 Consolidated Statements of Cash Flows for the Years Ended December 31 1995, 1996 and 1997.................................................F-4 Consolidated Statement of Changes in Stockholder's Equity (Deficit) of the Company for the Years Ended December 31, 1995, 1996 and 1997....................F-5 Notes to Consolidated Financial Statements......................................F-6 Report of Independent Accountants...............................................F-29 Consolidated Balance Sheet of SiderCorp at December 31, 1997....................F-30 Consolidated Statement of Income of SiderCorp for the Year Ended December 31, 1997.........................................................F-31 Consolidated Statement of Changes in Stockholders' Equity of SiderCorp for the Year Ended December 31, 1997............................................F-32 Consolidated Statement of Cash Flows of SiderCorp for the Year Ended December 31, 1997....................................................F-33 Notes to Consolidated Financial Statements of SiderCorp.........................F-35
45 46 (a)(2) FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules of the Company are included in this Annual Report on Form 10-K:
PAGE ---- Report of Independent Accountants...............................................S-1 Schedule I Condensed Financial Information of the Parent Company................S-2 Schedule II Valuation and Qualifying Accounts and Reserves......................S-6
(a)(3) EXHIBITS Exhibits required in connection with this Annual Report on Form 10-K are listed below. Certain of such exhibits, which have heretofore been filed with the Commission and which are designated by reference to their exhibit numbers in prior filings, are incorporated herein as exhibits by such reference and made a part hereof. EXHIBIT NO. DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of GST, as amended (1) 3.2 By-laws of GST (1) 3.3 Amendment to By-laws of GST dated April 1, 1996 (1) 3.4 Certificate of Incorporation of GSTOC (1) 3.5 By-laws of GSTOC (4) 3.6 Amendment to By-laws of GSTOC dated April 1, 1996 (1) 4.1 Indenture between GSTOC, GST and Shawmut Bank Connecticut, National Association, and State Street Bank and Trust Company, successor trustee, as Trustee, relating to the 12% Notes (including the form of 12% Note) (4) 4.2 Form of Pledge Agreement between GSTOC, GST and Shawmut Bank Connecticut, National Association, and State Street Bank and Trust Company, successor trustee, as Collateral Trustee, relating to the 12% Notes (1) 4.3 First Supplemental Indenture dated October 5, 1995 among GSTOC, GST and Shawmut Bank Connecticut, National Association, and State Street Bank and Trust Company, successor trustee, as Trustee, relating to the 12% Notes (3) 46 47 4.4 Second Supplemental Indenture dated August 15, 1996 among GSTOC, GST and Fleet National Bank (formerly Shawmut Bank Connecticut, National Association), and State Street Bank and Trust Company, successor trustee, as Trustee, relating to the 12% Notes 4.5 Indenture between GSTOC, GST and Shawmut Bank Connecticut, National Association, and State Street Bank and Trust Company, successor trustee, as Trustee, relating to the 12 1/4% Notes (including the form of 12 1/4% Note) (3) 4.6 Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein (3) 4.7 Amendment No. 1, dated July 8, 1996, to Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein 4.8 Amendment No. 2, dated December 20, 1996, to Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein 4.9 Loan Agreement dated as of October 5, 1995 among Tree Island Industries, Ltd., the Lenders named therein and GECC (3) 10.1 Stock Purchase Agreement dated as of September 30, 1993 and amended and restated as of November 11, 1993 by and among Armco, GSTOC, GST and Inversiones En Molienda, S.A. (1) 10.2 Agreement dated as of November 12, 1993 by and between GST and Armco (1) 10.3 Agreement and Plan of Merger dated as of November 11, 1993 by and between GSTOC and GS Merger Corp. (1) 10.4 Stock Purchase Agreement dated as of November 12, 1993 by and among GST and the Persons set forth on the Schedule attached thereto (1) 10.5 Second Amended and Restated Stockholders Agreement dated as of October 5, 1995 by and among GSI, GECC, Leggett & Platt and each of the Persons listed on Schedule I attached thereto (4) 10.6 Second Amended and Restated Registration Agreement dated as of October 5, 1995 by and among GSI, Leggett & Platt, GECC and the Persons listed on Schedule A and Schedule B attached thereto (4) 10.7 GS Technologies Non-Qualified Deferred Compensation Plan dated November 11, 1993 (1) 10.8 Merger Agreement dated as of August 21, 1995 among Georgetown, GSI, GST, GSTOC and GI Merger Corp. (2) 10.9 GS Technologies Pension Plan (1) 47 48 10.10 GS Technologies Retirement and Savings Plan (1) 10.11 Rod Supply Agreement dated November 12, 1993, as amended on August 2, 1994, between GST and Leggett & Platt (confidential treatment has been requested for certain portions of this agreement) (1) 10.12 Purchase Agreement relating to Instapanel Sale dated July 28, 1994 between MolyCop Chile S.A., GST, Grupo Imsa S.A. de C.V. and Industria Procesadora de Acerco S.A. (1) 10.13 Form of Stock Option Agreement (1) 10.14 Form of GS Technologies Excess Retirement Plan (1) 10.15 Form of GS Technologies Supplemental Retirement Plan (1) 10.16 Partnership Agreement relating to MolyCop Canada (1) 10.17 Purchase Agreement dated as of May 31, 1994 by and among MEI, GST, Stelco Erie Corporation and Stelco (1) 10.18 Form of Amended and Restated Management Agreement dated as of August 17, 1995 among GSI, GST and Messrs. Leon and Concha (4) 10.19 Stock Purchase Agreement dated as of August 21, 1995 among GSI, GST, GSTOC and the Government of Kuwait (2) 10.20 First Amendment dated as of October 5, 1995 to Stock Purchase Agreement dated as of August 21, 1995 among GSI, GST, GSTOC and the Government of Kuwait (3) 10.21 Stock Redemption Agreement dated as of October 5, 1995 between Georgetown, the Government of Kuwait, Waccamaw Corporation and Western Lumber Company, Inc. (4) 10.22 Transfer Restriction Agreement dated as of October 5, 1995 by and among GSI and stockholders thereof (4) 10.23 Investor Stock Purchase Agreement dated as of October 5, 1995 among GSI, GSTOC, Bain Funds, GECC, Leggett & Platt, Randolph Street Partners and James Haas (4) 10.24 Executive Stock Purchase Agreement dated as of October 5, 1995 among GSI, GST and the Persons named on the schedule attached thereto (4) 10.25 Executive Stock Purchase Agreement dated as of October 5, 1995 among GSI, GST and Messrs. Wieland, Leon, Burnsworth and Shelley (4) 48 49 10.26 Amended and Restated Employment Agreement dated October 5, 1995 between GSI and Roger R. Regelbrugge (4) 10.27 Stock Option Agreement dated October 5, 1995 between GSI and Roger R. Regelbrugge (4) 10.28 Agreement dated January 19, 1994 between Georgetown and Roger R. Regelbrugge (4) 10.29 Amended and Restated Pension Plan and Trust of Georgetown dated as of May 1, 1993, as amended through October 5, 1995 (4) 10.30 Management Services Agreement dated as of October 5, 1995 among GSI, GST, GSTOC and certain subsidiaries named therein (3) 10.31 Amended and Restated Management Services Agreement dated as of August 14, 1996 among GSI, GST and GSTOC and certain subsidiaries named therein 10.32 Tax Sharing Agreement dated as of October 5, 1995 among GSI, GST, GSTOC and certain subsidiaries named therein (3) 10.33 Purchase Agreement for sale of West Coast Wire Business (5) 10.34 Amendment dated April 28, 1997 to Employment Agreement date of October 5, 1995 between GSI and Roger R. Regelbrugge (6) 10.35 Amendment dated July 31, 1997 to Stock Option Agreement dated October 5, 1995 between GSI and Roger R. Regelbrugge (6) 10.36 1997 Stock Option Plan 10.37 Essig Employment Agreement dated December 11, 1997 10.38 Essig Stock Option Agreement dated December 11, 1997 10.39 Form of Change of Control Agreement between GSI and each of Messrs. Essig, Daily, Yarborough, Leon and Robertson dated December 11, 1997 21.1 List of Subsidiaries of GST and GSTOC 27.1 Financial Data Schedule (for SEC use only.) - -------------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-80618). (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-95278). (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (File No. 33-80618). 49 50 (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 33-80618). (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants....................................................F-1 Consolidated Balance Sheets of the Company as of December 31, 1996 and 1997...........................................................................F-2 Consolidated Income Statements for the Years Ended December 31, 1995, 1996 and 1997......................................................................F-3 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997................................................................F-4 Consolidated Statement of Changes in Stockholder's Equity (Deficit) of the Company for the Years Ended December 31, 1995, 1996 and 1997.......................F-5 Notes to Consolidated Financial Statements...........................................F-6 INDEX TO FINANCIAL STATEMENTS OF SIDERCORP S. A. AND SUBSIDIARY (AN UNCONSOLIDATED EQUITY INVESTEE) Report of Independent Accountants....................................................F-29 Consolidated Balance Sheet of SiderCorp at December 31, 1997.......................F-30 Consolidated Statement of Income of SiderCorp for the Year Ended December 31, 1997............................................................F-31 Consolidated Statement of Changes in Stockholders' Equity of SiderCorp for the Year Ended December 31, 1997...............................................F-32 Consolidated Statement of Cash Flows of SiderCorp for the Year Ended December 31, 1997.......................................................F-33 Notes to Consolidated Financial Statements of SiderCorp..............................F-35
50 51 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page ---- Report of Independent Accountants....................................................S-1 Schedule I Condensed Financial Information of the Parent Company.....................S-2 Schedule II Valuation and Qualifying Accounts and Reserves...........................S-6
(b) REPORTS ON FORM 10-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. 51 52 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholder of GS Technologies Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in stockholder's equity (deficit) and of cash flows present fairly, in all material respects, the financial position of GS Technologies Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 3 to the financial statements, GS Technologies Corporation changed its method of accounting for spare parts and supplies inventories during 1996. Price Waterhouse LLP Charlotte, North Carolina February 20, 1998 F-1 53 GS TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 7,747 $ 3,362 Receivables less allowance of $1,828 and $1,838........... 106,314 94,768 Receivable from related party (Note 14)................... 6,991 6,484 -------- -------- Total receivables................................. 113,305 101,252 -------- -------- Inventories (Note 3)...................................... 128,976 144,063 Net assets of discontinued operations..................... 75,265 Prepaid expenses and other current assets................. 4,190 6,495 Deferred tax benefit...................................... 8,469 1,023 -------- -------- Total current assets.............................. 337,952 256,195 Investments in joint ventures (Note 6)...................... 31,097 41,639 Properties, net (Note 7).................................... 263,402 260,957 Acquisition premium (Note 2)................................ 62,324 60,713 Other assets................................................ 20,904 26,773 -------- -------- Total assets...................................... $715,679 $646,277 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Notes payable (Note 10)................................... $ 15,717 $ 10,794 Current portion of long-term debt (Note 10)............... 862 500 Income taxes payable (Notes 2 and 12)..................... 1,261 Payables and accrued liabilities (Note 8)................. 151,426 138,099 -------- -------- Total current liabilities......................... 168,005 150,654 Long-term debt (Note 10).................................... 368,554 334,888 Post retirement benefit obligations other than pensions (Note 11)................................................. 25,793 26,848 Deferred income taxes payable (Note 12)..................... 17,489 7,098 Other long-term liabilities................................. 23,077 31,628 Commitments and contingencies (Note 15) -------- -------- Total liabilities................................. 602,918 551,116 -------- -------- Stockholder's equity (Note 13): Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares issued and outstanding at December 31, 1996 and 1997............................................... 1 1 Additional paid in capital................................ 132,166 132,166 Accumulated deficit....................................... (17,729) (33,845) Cumulative translation adjustment......................... (1,677) (3,161) -------- -------- Total stockholder's equity........................ 112,761 95,161 -------- -------- Total liabilities and stockholder's equity........ $715,679 $646,277 ======== ========
See accompanying notes to consolidated financial statements F-2 54 GS TECHNOLOGIES CORPORATION CONSOLIDATED INCOME STATEMENTS (DOLLARS IN THOUSANDS)
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Net sales................................................. $465,503 $719,865 $726,495 Net sales -- related party (Note 14)...................... 74,246 96,052 83,239 -------- -------- -------- 539,749 815,917 809,734 -------- -------- -------- Operating costs and expenses: Cost of products sold................................... 457,307 703,958 691,200 Selling, general and administrative expenses............ 35,258 46,331 44,749 Depreciation and amortization........................... 10,522 26,989 29,587 Non-recurring costs of combining operations (Note 9).... 4,866 -------- -------- -------- 507,953 777,278 765,536 -------- -------- -------- Operating profit.......................................... 31,796 38,639 44,198 -------- -------- -------- Other income (expenses): Interest income......................................... 271 925 986 Interest expense........................................ (23,163) (43,361) (42,056) Equity in income of joint ventures (Note 6)............. 4,075 5,500 6,195 Fees from joint ventures (Note 6)....................... 1,357 2,399 2,743 Other, net.............................................. (573) 190 904 -------- -------- -------- (18,033) 34,347 (31,228) Income from continuing operations before income tax and cumulative effect of accounting change.................. 13,763 4,292 12,970 Income tax provision (Notes 2 and 12)..................... 7,025 3,815 6,523 -------- -------- -------- Income from continuing operations before cumulative effect of accounting change.................................... 6,738 477 6,447 -------- -------- -------- Discontinued operations (Note 4): Income (loss) from discontinued operations, net of taxes................................................ (609) 2,402 1,402 Loss on disposal of discontinued operations, net of taxes................................................ (23,965) -------- -------- -------- Income (loss) before cumulative effect of accounting change.................................................. 6,129 2,879 (16,116) Cumulative effect of change in accounting for spare parts and supplies inventories, net of taxes (Note 3)......... 3,556 -------- -------- -------- Net income (loss)......................................... $ 6,129 $ 6,435 $(16,116) ======== ======== ========
See accompanying notes to consolidated financial statements F-3 55 GS TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Operating activities: Net income (loss).................................... $ 6,129 $ 6,435 $ (16,116) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change............ (3,556) Depreciation and amortization..................... 10,522 26,989 29,587 Loss on disposal of discontinued operations....... 23,965 Net cash from discontinued operations............. 50 7,843 (3,095) (Gain) loss on disposal of fixed assets........... 3,106 110 (40) Deferred income taxes............................. 4,551 3,091 (9,321) Equity in income of joint ventures................ (4,075) (5,500) (6,195) Dividends from joint ventures..................... 1,969 4,519 3,640 Post retirement benefit obligations accrued in excess of cash paid............................. 1,813 1,524 1,055 Changes in operating assets and liabilities: Receivables..................................... (4,930) (4,379) 12,053 Inventories..................................... (7,139) 2,902 (15,087) Payables and accrued liabilities................ (1,252) 5,106 (12,302) Income taxes.................................... (6,987) (1,972) 7,638 Other........................................... 4,629 (2,336) 1,020 --------- --------- --------- Net cash provided by operating activities.... 8,386 40,776 16,802 --------- --------- --------- Investing activities: Purchase of GII, net of cash acquired................ (145,508) Proceeds from disposal of discontinued operations.... 55,998 Purchase of properties............................... (48,342) (42,225) (25,112) Investment in joint ventures......................... (11,484) (9,049) Cash received from Armco, net........................ 1,308 Proceeds from disposals of properties................ 5,000 3,924 40 --------- --------- --------- Net cash provided by (used in) investing activities................................. (187,542) (49,785) 21,877 ========= ========= ========= Financing activities: Borrowings under long-term debt arrangements......... 268,280 223,684 200,339 Repayments of long-term debt......................... (97,983) (227,195) (235,494) Proceeds from (payments on) notes payable, net....... (13,994) 10,541 (4,923) Distributions to stockholders........................ (5,543) Debt issuance costs.................................. (10,599) Contribution from GSI................................ 30,000 --------- --------- --------- Net cash provided by (used in) financing activities................................. 170,161 7,030 (40,078) --------- --------- --------- Effect of exchange rate changes on cash................ (33) (563) (2,986) --------- --------- --------- Net decrease in cash and cash equivalents.............. (9,028) (2,542) (4,385) Cash and cash equivalents: Beginning of period.................................. 19,317 10,289 7,747 --------- --------- --------- End of period........................................ $ 10,289 $ 7,747 $ 3,362 ========= ========= ========= Supplemental disclosure of cash flow information Non-cash equity contributions from GSI............... $ 102,000 Non-cash portion of GII purchase price............... $ 102,000 Cash paid during the period for interest............. $ 19,188 $ 45,230 $ 39,057 Cash paid during the period for taxes................ $ 12,625 $ 1,082 $ 6,613
See accompanying notes to consolidated financial statements F-4 56 GS TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
RETAINED COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE TOTAL --------------------- PAID IN (ACCUMULATED TRANSLATION STOCKHOLDER'S SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT EQUITY (DEFICIT) ------------ ------ ---------- ------------ ----------- ---------------- Balance at December 31, 1994........ 16,691,667 $ 167 $ -- $ (30,293) $ 239 $ (29,887) ============ ====== ========== ============ ========== ================ Reduction of outstanding shares (Note 1).......... (16,691,567) (166) 166 Contribution by GSI (Note 1)................. 132,000 132,000 Net income................. 6,129 6,129 Cumulative translation adjustment............... (1,633) (1,633) ------------ ------ ---------- ------------ ---------- ---------------- Balance at December 31, 1995........ 100 1 132,166 (24,164) (1,394) 106,609 ------------ ------ ---------- ------------ ---------- ---------------- Net Income................. 6,435 6,435 Cumulative translation adjustment............... (283) (283) ------------ ------ ---------- ------------ ---------- ---------------- Balance at December 31, 1996........ 100 1 132,166 (17,729) (1,677) 112,761 ------------ ------ ---------- ------------ ---------- ---------------- Net income (loss).......... (16,116) (16,116) Cumulative translation adjustment............... (1,484) (1,484) ------------ ------ ---------- ------------ ---------- ---------------- Balance at December 31, 1997........ 100 $ 1 $ 132,166 $ (33,845) $ (3,161) $ 95,161 ============ ====== ========== ============ ========== ================
See accompanying notes to consolidated financial statements F-5 57 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 1. ORGANIZATION AND BUSINESS BUSINESS GS Technologies Corporation (the "Company" or "GST") is a leading producer of high carbon and special grade wire rod, grinding media, mill liners, steel billets and certain high quality wire products. The Company's high carbon and special grade wire rod is sold primarily to domestic wire rod drawers that process wire rod into products for diverse end use applications such as tire cord and tire bead for the automotive industry, upholstery and bed springs for furniture and wire rope and pre-stressed concrete strand ("PC strand") for the construction industry. Grinding media are high carbon steel balls and rods used inside a rotating mill to grind semi-crushed rock as a step in processing various kinds of ore. Mill liners are protective steel liners that shield the rotating mill from the pulverizing activity of the grinding media. Grinding media and mill liners are consumed as ore is processed and must be continually replenished. The Company conducts it operations through several domestic and international facilities. OWNERSHIP The Company was incorporated in 1993 to affect the acquisition of certain operations and accounts of certain operating units and wholly-owned subsidiaries of Armco, Inc. ("Armco") and investments in certain joint ventures. SIGNIFICANT DEVELOPMENTS In August 1994, GS Technologies Operating Company, Inc. ("GSTOC"), a wholly-owned subsidiary of the Company, issued $125.0 million of Senior Notes (the "12% Notes"). The proceeds of the offering were used to repay outstanding debt of $54.9 million and to pay a distribution of $65.0 million of which $61.2 million was to the Company's stockholders and $3.8 million was in lieu of dividends to Armco pursuant to the terms of a warrant agreement and to partially fund debt issuance costs of $6.9 million. The Company paid $45.0 million of the Distribution in August 1994 and in October 1994 the Board of Directors declared a dividend of $20.0 million of which $14.5 million was paid in November 1994 and $5.5 million was paid in January 1995. The 12% Notes are due September 1, 2004 and are fully and unconditionally guaranteed by the Company. Interest is payable semi-annually at an annual rate of 12%. In May 1994, the Company acquired the remaining fifty percent partnership interest of ME International ("MEI") for $10.7 million. MEI is now a wholly-owned subsidiary of GST. THE GEORGETOWN ACQUISITION In August 1995, the Company was party to a merger transaction whereby it was merged with a subsidiary of a new parent company, GS Industries, Inc. ("GSI") resulting in all of the issued and outstanding common stock of the Company being converted into shares of common stock of GSI and the Company becoming a wholly owned subsidiary of GSI. In October 1995, GSI and the Company, through it's wholly owned subsidiary, GSTOC, acquired Georgetown Industries, Inc. ("GII") and GII and it's subsidiaries are now wholly owned subsidiaries of GSTOC. The results of GII's operations have been consolidated with those of the Company since the date of acquisition. F-6 58 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) GSI's common stockholders and certain members of management purchased stock of GSI for $30.0 million in cash. GSI purchased a portion of the GII common stock with approximately 4% of its common stock and a combination of payment-in-kind ("PIK") subordinated notes and preferred stock of GSI which together with the common stock had a fair market value of approximately $102.0 million. The PIK subordinated notes and preferred shares are unsecured obligations of GSI and are not guaranteed by any of GSI's subsidiaries. In April 1996, the preferred stock was exchanged, at the Company's option, into subordinated notes (the "Exchange Notes") equal to the liquidation value of the stock including dividends through the date of exchange. The $30.0 million in cash and the common stock of GII acquired by GSI were contributed to the Company and were in turn contributed to GSTOC. GSTOC used the $30.0 million in cash, proceeds from a $125.0 million public senior note offering (the "12 1/4% Notes") and proceeds from borrowings under its credit facilities to acquire the remaining GII common stock. The total consideration was $307.0 million of which $205.0 million was cash and $102.0 million was the fair value of the securities described above. The 12 1/4% Notes were issued by GSTOC on October 5, 1995 and are due on October 1, 2005. Interest is payable semi-annually at an annual rate of 12 1/4%. GSTOC replaced it's existing credit facility with a new facility currently providing up to $120.0 million in aggregate availability secured by the Company's current assets and entered into a new $50.0 million term loan facility secured by property, plant and equipment. Proceeds from these facilities were used to complete the acquisition and to refinance GSTOC indebtedness. The acquisition was recorded in accordance with the purchase method of accounting. Accordingly, the purchase price plus costs were allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. The following represents the pro forma results of the Company and it's subsidiaries as if the Georgetown acquisition and related transactions described above had occurred on January 1, 1995 after giving effect to certain pro forma adjustments, which include depreciation, amortization and interest expense:
PRO FORMA ----------------- YEAR ENDED DECEMBER 31, 1995 ----------------- (UNAUDITED) Net sales................................................ $827,428 Net income............................................... $ 13,179
The pro forma results of operations presented above are not necessarily indicative of the results that actually would have been obtained if the Georgetown acquisition and related transactions had occurred on January 1, 1995 and are not intended to be a projection of future results or trends. F-7 59 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following summarizes the significant policies applied in the preparation of the accompanying financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated affiliates in which the Company has a 20% or more ownership position are accounted for using the equity method of accounting. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Sales and related cost of products sold are recognized upon shipment of products to customers. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include demand deposits and cash equivalents which are highly liquid instruments with maturities of three months or less at the time of purchase. In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows", cash flows from the Company's operations in foreign countries are calculated based on their reporting currencies. As a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree to changes in the corresponding balances on the balance sheet. The effect of exchange rate changes on cash balances held in foreign currencies is reported below cash flows from financing activities. INVENTORIES Inventories are valued at the lower of FIFO (first-in, first-out) and/or average cost or market for all operating subsidiaries except the Italian operations for which inventories are valued on the LIFO (last-in, first-out) method. PROPERTIES Properties are recorded at cost. Maintenance and repairs are expensed in the year incurred. Expenditures which result in betterments or extensions of the useful lives of assets are capitalized and depreciated over the remaining lives of such assets. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, as follows: Leasehold improvements...................................... 10 Machinery and equipment..................................... 4-20 Buildings and improvements.................................. 4-30
F-8 60 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) Assets under capital leases are amortized over the life of the lease. Leasehold improvements are capitalized and amortized over the lesser of their estimated useful lives or the life of the related lease. ACQUISITION PREMIUM, OTHER ASSETS AND IDENTIFIABLE INTANGIBLE ASSETS The acquisition premium represents the excess cost over fair value of net assets acquired, and is being amortized on a straight-line basis over forty years. Other assets include debt issuance costs of $13.6 million and $11.9 million at December 31, 1996 and 1997, respectively, which are amortized over the lives of the corresponding debt agreements. Amortization of these costs aggregated $0.9 million, $1.8 million and $1.7 million for the years ended December 31, 1995, 1996 and 1997, respectively, and is included in interest expense. Identifiable intangible assets resulting from certain acquisitions are being amortized on a straight-line basis over periods ranging from five to seventeen years. Identifiable intangible assets, net of related amortization, of $4.4 million and $4.6 million at December 31, 1996 and 1997, respectively, are classified as other assets in the accompanying balance sheets. The Company continually monitors conditions that may affect the carrying value of its tangible and intangible assets. When conditions indicate potential impairment of an intangible asset, the Company will undertake necessary market studies and re-evaluate projected future cash flows associated with the intangible asset. To the extent projected future cash flows, not discounted for the time value of money, are less than the carrying value of the intangible asset, the impaired asset is written down to its net realizable value. INCOME TAXES Since the merger with GSI, the Company is included in the GSI consolidated U.S. federal income tax return and is party to a tax sharing agreement with GSI. The tax sharing agreement provides among other things that the accounting for U.S. federal and combined state income taxes for financial reporting purposes is calculated as though the Company were filing separate U.S. federal and combined state income tax returns. Payments by the Company to GSI are made at such times as would be made to the federal and state governments had the Company been filing separate tax returns. Non-combined state and foreign taxes are recorded and paid directly to the appropriate governmental agencies. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which is an asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences, utilizing current tax rates, of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Deferred tax expense reflects changes in the deferred tax asset and liability balances. Through the end of 1996, the Company provided deferred tax liabilities for the tax effect of repatriating all unremitted earnings of foreign subsidiaries and joint ventures. During 1997, management determined that a portion of the unremitted earnings of the foreign subsidiaries and joint ventures will remain invested in the foreign operations indefinitely. This change was based upon expected opportunities to use these funds in expansion and capital improvement projects undertaken by the foreign subsidiaries and joint ventures and the historical percentage of earnings repatriated. F-9 61 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) The Company continues to provide U.S. federal income tax and foreign withholding tax liabilities on the portion of the unremitted earnings of foreign subsidiaries and joint ventures that is expected to be repatriated. Receipt of foreign dividends or liquidation proceeds in excess of the anticipated repatriation amount would be subject to additional U.S. income tax and foreign withholding tax. ENVIRONMENTAL EXPENDITURES Environmental expenditures by the Company are expensed or capitalized depending upon their future economic benefit. Expenditures which improve a property as compared with the condition of the property when originally constructed or acquired and which prevent future environmental contamination are capitalized. Expenditures which return a property to its condition at the time of acquisition are expensed. Liabilities are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated at the period-end exchange rate. Revenues and expenses are translated at an average rate of exchange in effect during the period. Translation adjustments are reported as a separate component of stockholder's equity. EARNINGS PER SHARE Earnings per share amounts are not presented as the Company's common stock is not publicly traded. CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed although collateral is generally not required. In addition, the Company maintains allowances for potential credit losses. RECLASSIFICATIONS Certain amounts previously reported have been reclassified to conform to the current year presentation. 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Inventories at FIFO and average cost: Finished and semi-finished............................. $ 63,465 $ 81,871 Raw materials.......................................... 61,154 60,870 -------- -------- Total.......................................... 124,619 142,741 -------- -------- Inventories at LIFO: Finished and semi-finished............................. 4,658 1,382 Adjustment to state inventories at LIFO value.......... (301) (60) -------- -------- Total.......................................... 4,357 1,322 -------- -------- $128,976 $144,063 ======== ========
F-10 62 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) The carrying value of inventories approximates replacement cost. Effective January 1, 1996, the Company changed its method of accounting for spare parts and supplies at one of its major facilities from expensing them at time of purchase to inventorying them and charging them to expense in the period in which they are used. This method is consistent with the Company's practice at its other operations and with prevailing industry practice and in management's opinion, results in a better matching of costs with related revenues. The effect of the change was to increase net income for the year ended December 31, 1996 by $3.6 million, net of taxes of $2.4 million. Proforma results for the year ended December 31, 1995 would not have been materially different from historical results had this new method been employed. 4. DISCONTINUED OPERATIONS In May 1997, the Company sold Georgetown Wire Company, Inc. and Tree Island Industries, Ltd. (the "West Coast Wire Business") for approximately $56.0 million, resulting in an estimated loss on disposition of $23.9 million, net of taxes. Accordingly, the results of operations, cash flows and net assets of this business have been classified as discontinued operations for all periods presented. The Company has recorded a net tax benefit of $17.1 million on the transaction; of this amount, $15.4 million was recorded as a deferred tax asset in connection with finalizing the purchase accounting. The remaining tax benefit of $1.7 million has been netted against the loss from discontinued operations. The West Coast Wire Business had combined annual sales of $124.3 million and net earnings of $2.4 million in 1996. 5. SUMMARIZED FINANCIAL INFORMATION OF GSTOC The 12% Notes and the 12 1/4% Notes were issued by GSTOC and are unconditionally guaranteed by the Company. Pursuant to Securities and Exchange Commission disclosure requirements, summarized financial information for GSTOC is provided below. Summarized financial information follows:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Current assets........................................... $266,105 $191,164 Noncurrent assets........................................ 321,132 337,626 -------- -------- Total assets................................... $587,237 $528,790 ======== ======== Current liabilities...................................... $110,017 $100,405 Noncurrent liabilities................................... 401,844 371,485 -------- -------- Total liabilities.............................. 511,861 471,890 -------- -------- Stockholder's equity..................................... 75,376 56,900 -------- -------- Total liabilities and equity................... $587,237 $528,790 ======== ========
F-11 63 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Net Sales................................................. $372,669 $638,359 $618,664 Cost of products sold..................................... 329,348 569,139 544,954 Selling, general & administrative expenses................ 16,202 24,026 24,629 Depreciation and amortization............................. 6,976 23,365 25,761 Costs of combining operations............................. 4,866 -------- -------- -------- Operating profit........................................ 15,277 21,829 23,320 Interest expense.......................................... (21,000) (39,950) (39,434) Fees from joint ventures.................................. 1,357 3,132 3,636 Interest income and other, net............................ 841 386 322 -------- -------- -------- Income (loss) from continuing operations before income tax and cumulative effect of accounting change.............. (3,525) (14,603) (12,156) Income tax (expense) benefit.............................. 24 6,256 3,910 -------- -------- -------- Income (loss) from continuing operations and cumulative effect of accounting change............................. (3,501) (8,347) (8,246) Discontinued operations: Income (loss) from discontinued operations.............. (609) 2,402 1,402 Loss on disposal of discontinued operations............. (23,965) Cumulative effect of change in accounting for spare parts and supplies inventories................................ 3,556 -------- -------- -------- Net income (loss)............................... $ (4,110) $ (2,389) $(30,809) ======== ======== ========
6. INVESTMENTS IN JOINT VENTURES Investments in associated companies (joint ventures, partnerships, and companies in which there is a 20% or more interest, but not control) accounted for using the equity method are as follows:
INVESTMENT AMOUNT --------------------------- PERCENT DECEMBER 31, DECEMBER 31, OWNERSHIP 1996 1997 --------- ------------ ------------ Donhad Pty. Ltd (Australia)....................................... 40.0% $ 6,383 $ 5,965 Moly-Cop Canada (Canada).......................................... 50.0% 4,577 3,985 GST Philippines (Philippines)..................................... 37.5% 106 121 SIMEC-Moly-Cop (Mexico).......................................... 50.0% 2,481 2,495 Sidercorp, S.A (Peru)............................................ 33.3% 12,213 14,827 American Iron Reduction LLC ("AIR") (U.S.).................................... 50.0% 5,001 13,553 Lucchini Siderurgica, SpA (Italy and Sweden)................................ 49.0% 336 693 ------- ------- $31,097 $41,639 ======= =======
F-12 64 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) Aggregate summarized balance sheets and results of operations of associated companies accounted for using the equity method are as follows:
YEAR ENDED DECEMBER 31, 1995 ------------ FOREIGN ------------ Net sales................................................... $ 123,688 Operating profit............................................ 10,054 Net income.................................................. 8,471
DECEMBER 31, 1996 AND THE YEAR THEN ENDED ------------------------------ FOREIGN U.S. TOTAL -------- -------- -------- Current Assets......................................... $138,514 $ 1,842 $140,356 Properties............................................. 88,016 48,079 136,095 Total Assets........................................... 249,860 62,652 312,512 Current Liabilities.................................... 67,611 67,611 Total Liabilities...................................... 175,524 57,652 233,176 Net Sales.............................................. 237,265 237,265 Operating Profit....................................... 32,069 32,069 Net Income............................................. 14,284 14,284
DECEMBER 31, 1997 AND THE YEAR THEN ENDED ------------------------------ FOREIGN U.S. TOTAL -------- -------- -------- Current Assets......................................... $193,270 $ 11,740 $205,010 Properties............................................. 129,539 190,492 320,031 Total Assets........................................... 352,232 212,179 564,411 Current Liabilities.................................... 124,657 1,007 125,664 Total Liabilities...................................... 275,028 184,915 459,943 Net Sales.............................................. 284,179 284,179 Operating Profit....................................... 38,377 38,377 Net Income............................................. 18,698 18,698
In March 1996, the Company's Peruvian subsidiary, Acerco S. A., and two joint venture partners through Sidercorp S.A. ("Sidercorp"), acquired approximately ninety-six percent of the outstanding common stock of Empresa Siderurgica del Peru S.A., ("Siderperu"). Each of the joint venture partners made an initial investment of $11.1 million and owns one-third of the outstanding capital stock of Sidercorp. Under the terms of the acquisition, Acerco is the operating partner of Siderperu. Also, in connection with the acquisition, Siderperu entered into a Technical Assistance Agreement with each of Acerco and GST and entered into a Steel Bar Supply Agreement with Acerco and the Company's Chilean subsidiary, MolyCop Chile S.A. F-13 65 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) In June 1996, the Company entered into an agreement to form a new Italian joint venture called GSI Lucchini SpA. The joint venture, 49% owned by the Company, manufactures and sells grinding media. Manufacturing assets and spare parts inventory from the Company's Cividale forged ball plant were sold to the joint venture and the new facility commenced operations in March 1997. Operations at the Cividale facility ceased at the end of October, 1996. The Company, through GSTOC, and Birmingham Steel are each 50% shareholders in a joint venture, American Iron Reduction LLC, (AIR) which has recently completed the construction of a Direct Reduced Iron (DRI) facility in Convent, Louisiana. This DRI facility is expected to produce approximately 1.2 million metric tons of DRI annually. DRI is a substitute for steel scrap used in the Company's steel making facilities. The Company made an initial non-cash equity contribution of $5.0 million, cash contributions of $8.6 million during 1997 and is committed to make additional equity investments of approximately $5.6 million in 1998. Under certain circumstances, the Company may be required to make an additional equity contribution of $7.5 million. The Company also entered into a DRI purchase agreement with AIR to purchase up to 600,000 metric tons of DRI annually. The construction and long-term financing was obtained by AIR on a non-recourse basis to GSTOC and the Company. The Company's recorded investment in equity companies is approximately $1.8 million less than its share of the underlying equity of the associated companies at December 31, 1997. The difference results from the 1993 acquisition and is being amortized over approximately 10 years, which is the estimated weighted average life of the related assets. All of the joint ventures are invoiced technical service fees pursuant to technology and management support agreements. These amounts are included in the accompanying income statements as a separate component of other income. 7. PROPERTIES Properties consist of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Land and leaseholds.................................... $ 13,255 $ 13,895 Buildings and improvements............................. 47,623 49,421 Machinery and equipment................................ 237,614 256,102 Construction in progress............................... 3,989 7,388 -------- -------- 302,481 326,806 Less accumulated depreciation.......................... (39,079) (65,849) -------- -------- $263,402 $260,957 ======== ========
To participate in certain local government sponsored programs, the Kansas City operations structured an arrangement with the city government of Kansas City, Missouri whereby GSTOC purchased certain industrial revenue bonds and leases the project equipment through November 1, 1999. At any time during the term of the lease, the Kansas City operations, pursuant to a purchase option, can fully extinguish the lease obligation with the bonds and reacquire legal title to the project equipment. The Company capitalized $0.9 million in interest during 1996 and none in 1997. F-14 66 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 8. PAYABLES AND ACCRUED LIABILITIES Payables and accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Trade payables.............................................. $ 94,679 $ 86,015 Salaries and wages.......................................... 14,269 12,936 Accrued interest payable.................................... 9,639 10,509 Other....................................................... 32,839 28,639 -------- -------- $151,426 $138,099 ======== ========
9. NON-RECURRING COSTS OF COMBINING OPERATIONS The Company recorded a pre-tax charge of $4.9 million in the fourth quarter of 1995 for the costs of combining the operations of GST and GII. This charge included costs for the relocation of the corporate headquarters to Charlotte, North Carolina, severance costs, relocation costs for transferring employees and the estimated costs associated with closing a subsidiary. 10. SHORT-TERM AND LONG-TERM DEBT Short-term debt consists of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 1997 INTERNATIONAL OUTSTANDING OUTSTANDING AVAILABILITY AVERAGE RATE ------------- ------------ ----------- ------------- ------------ Chile.................................... $ -- $ 3,752 $18,800 10.15% Peru (Adesur)............................ -- 2,316 3,200 8.27% Peru (Acerco)............................ 10,946 4,646 1,328 8.47% Europe................................... 4,771 80 3,563 11.80% ------- ------- ------- Total.......................... $15,717 $10,794 $26,891 ======= ======= =======
International borrowing arrangements are outstanding under several uncollateralized credit lines in Chile and Peru, and collateralized and uncollateralized short-term credit lines in Europe. The borrowings are utilized for general corporate purposes and working capital requirements. In accordance with the senior note indenture limitations, these credit lines are limited to 85% of accounts receivable and 65% of inventory. These lines may be unsecured or secured by accounts receivable, inventory and other current assets. F-15 67 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ 12% Senior notes due September 1, 2004, unsecured and guaranteed by the Company, interest payable semi-annually.......................................... $125,000 $125,000 12 1/4% Senior notes due October 1, 2005, unsecured and guaranteed by the Company, interest payable semi-annually.......................................... 125,000 125,000 $50,000 Long-term note due in quarterly installments to September 30, 2002, secured by certain property, plant and equipment of GSTOC, GSC and FWC. Interest payable monthly/quarterly at the Company's option based upon fixed margin over LIBOR or the prime rate (8.5% at December 31, 1997)..................................... 49,375 48,875 $120,000 Revolving credit facility due September 30, 2001, secured by accounts receivable, inventory and other current assets of GSTOC and subsidiaries, interest payable monthly/quarterly at the Company's option based upon varying margin over LIBOR or the prime rate (8.9% at December 31, 1997)................. 61,109 22,058 $8,000 Unsecured MEI term note due in quarterly installments commencing March 31, 1999 to December 31, 2000, interest payable quarterly based upon varying margins over LIBOR or the prime rate (6.9% at December 31, 1997).............................................. 8,000 8,000 $9,000 Unsecured MEI revolving credit agreement due June 30, 1999, interest payable quarterly based upon varying margins over LIBOR or the prime rate (8.5% at December 31, 1997).............................................. 81 4,381 Long-term note due in annual installments to July 31, 1999, secured by certain property, plant and equipment of MEI, interest has been imputed at 5%................ 690 Unsecured Acerco S.A. long-term note due on August 8, 2000. Interest payable based on a fixed rate over the one year LIBOR rate (8.12% at December 31, 1997)....... 2,026 Other.................................................... 161 48 -------- -------- 369,416 335,388 Less current portion..................................... (862) (500) -------- -------- $368,554 $334,888 ======== ========
F-16 68 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) The fair value of the 12% Notes and the 12 1/4% Notes is $136.7 million and $139.7 million, respectively, based on the market trading price at December 31, 1997. The carrying value of all other long-term debt approximates fair value. The Revolving Credit Facility provides for up to $120.0 million inclusive of letters of credit, limited by a borrowing base to specified percentages of eligible accounts receivable and inventories of GSTOC and subsidiaries. At December 31, 1997, $17.5 million of letters of credit were outstanding, and unused availability under the facility at December 31, 1997 was $80.5 million. The facility requires payment of a commitment fee on the unused portion of the line of credit. The unsecured MEI revolving credit agreement permits borrowings on the revolving line of credit up to $9.0 million. Unused availability under the facility was $4.6 million at December 31, 1997. An annual commitment fee is due on the unused balance of the revolving line of credit. Several of the debt agreements require the Company to comply with certain covenants; the Company is in compliance with these covenants at December 31, 1997. The aggregate maturities of long-term debt at December 31, 1997 are as follows: 1998........................................................ $ 500 1999........................................................ 8,881 2000........................................................ 6,574 2001........................................................ 22,558 2002........................................................ 46,875 Thereafter.................................................. 250,000 -------- $335,388 ========
11. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PENSION PLANS The Company has several qualified non-contributory employee pension plans covering most employees. Plans covering most salaried employees provide benefits based on employees' years of service and compensation. Defined benefit plans covering most hourly employees provide benefits based on employees' years of service. The weighted average discount rate used in developing the actuarial present values of benefit obligations was 7.75% at December 31, 1996 and 7.50% at December 31, 1997. The expected long-term rate of return on plan assets was 9.5% for 1996 and 1997. As part of the acquisition agreement, Armco retained the pension liability for all retirees as of November 11, 1993 as well as the accrued pension liability as of the November, 1993 acquisition for all Armco employees employed by GSTOC. The Company established new and different pension plans for the employees and did not retain any liability for service prior to the November, 1993 acquisition. Assets of the qualified defined benefit plans are administered by a trustee and consist primarily of units of certain collective trust funds, and diversified mutual funds. F-17 69 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) In accordance with GII's union contract, GII committed to accrue (until December 1996) a fixed amount per hour worked to provide increased retirement benefits for the steel division union employees, to periodically amend the union employees' pension plan (the "Union Plan") and to contribute the accrued amount to the Union Plan's trust to provide for the increased benefits. The amount charged against income was $1.2 million during 1996 and $1.2 million was accrued for these increased benefits at December 31, 1996. The net periodic pension cost of the Company's plans at the dates noted was as follows:
YEAR ENDED -------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Service cost................................ $ 3,357 $ 3,630 $ 3,728 Interest cost on projected benefit obligations............................... 2,336 3,020 3,852 Actual return on plan assets................ (5,259) (4,201) (8,004) Net amortization and deferral............... 2,735 1,416 5,983 ------- ------- ------- $ 3,169 $ 3,865 $ 5,559 ======= ======= =======
The following table sets forth the combined qualified defined benefit plans' funded status and amounts recognized in the accompanying balance sheets at:
PLANS WHOSE ASSETS EXCEED PLANS WHOSE ACCUMULATED ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS ---------------------------- ---------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1997 1996 1997 ------------ ------------ ------------ ------------ Actuarial present value of accumulated benefit obligation: Vested...................... $(33,135) $(10,564) -- $(39,642) Non-vested.................. (2,874) (1,197) -- (5,182) -------- -------- -------- -------- Accumulated benefit obligations................. (36,009) (11,761) -- (44,824) Effect of actuarial projections................. (5,231) (5,528) -- 0 -------- -------- -------- -------- Projected benefit obligations................. (41,240) (17,289) -- (44,824) Plans' assets at fair market value....................... 42,748 16,992 -- 37,492 -------- -------- -------- -------- Funded status................. 1,508 (297) -- (7,332) Unrecognized net (gain) loss due to past experience different from assumptions................. (2,363) (2,837) -- 9,471 -------- -------- -------- -------- (Accrued) prepaid pension cost........................ $ (855) $ (3,134) -- $ 2,139 ======== ======== ======== ======== Additional minimum liability................... -- -- -- $ (9,471) Offsetting intangible asset... -- -- -- 9,471 -------- -------- -------- -------- Net........................... -- -- -- -- ======== ======== ======== ========
With respect to the accrued pension expense, $2.7 million and $12.2 million were recorded in noncurrent liabilities at December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997, $1.7 million and $11.2 million were recorded in prepaid expenses. The assets and liabilities of the ME International Pension Plan for the United Steelworkers of America Local 1028 Employees Plan were transferred to the United Steelworkers multi-employer plan as of December 31, 1997. The Company's funding policy is to meet or exceed the minimum amount required under ERISA. F-18 70 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) Additionally, the Company has Supplemental Retirement Plans which cover certain key executives. These plans are defined benefit pension plans and are not intended to be qualified plans under the Internal Revenue Code. Benefits payable under these plans are not funded; rather, the liability for future plan benefits is recorded on the balance sheet and amounted to $0.4 million and $0.6 million at December 31, 1996 and 1997, respectively. DEFINED CONTRIBUTION PLANS The Company's subsidiaries have various defined contribution plans which cover substantially all of the salaried and hourly employees. The Company recorded expense related to those plans of $0.8 million, $0.5 million and $0.5 million for the years ended December 31, 1995, 1996 and 1997, respectively. POST RETIREMENT BENEFITS OTHER THAN PENSIONS The Kansas City operations provide certain health care, life and other post retirement benefits other than pensions ("OPEB") to current and future hourly union retirees and certain salaried retirees hired prior to January 1, 1990. Armco retained the liability for post retirement benefits for all Armco retirees as of the November, 1993 acquisition. Benefit expense begins to accrue on the date of hire. The life insurance plan is non-contributory and covers retirees only. The Company's policy is to fund benefits payable under these plans as the obligations become due. The following table sets forth the OPEB plans' obligations:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Accumulated post retirement benefit obligation: Fully eligible active plan participants................... $ (3,452) $ (3,325) Retirees.................................................. (3,198) (4,347) Other active plan participants............................ (13,138) (16,017) Unrecognized net gain..................................... (6,005) (3,159) -------- -------- Accumulated post retirement benefit obligation ("APBO")... $(25,793) $(26,848) ======== ========
The APBO is recorded as a long-term obligation in the accompanying balance sheets. The discount rate assumed in determining the APBO for both salaried and hourly plans was 7.75% at December 31, 1996 and 7.50% at December 31, 1997. Net periodic post retirement benefit cost included the following components:
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Service cost...................................... $ 581 $ 469 $ 528 Interest cost..................................... 1,453 1,445 1,664 Actuarial gain.................................... (54) (390) (237) ------ ------ ------ Net periodic post retirement benefit cost......... $1,980 $1,524 $1,955 ====== ====== ======
Increases in the Company's health care costs for salaried employees are limited to the increase in the Consumer Price Index ("CPI"). Accordingly, health care costs in excess of the CPI limit will be borne by the salaried participants. The assumed annual increase in the CPI was 3% at December 31, 1997. F-19 71 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) The Company's health care costs for hourly union employees are subject to future changes in health care costs. Future health care costs are assumed to increase 7% to 10% in 1997 and descend to 5% by 1999 to 2002. A one percent increase in the assumed health care trend rate in each year would increase the APBO at December 31, 1996 and 1997 approximately $3.2 million and $2.9 million, respectively and the net periodic post retirement benefit expense by $0.3 million in 1997. 12. INCOME TAXES TAX EXPENSE Total income tax expense (benefit) was allocated as follows:
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Income from continuing operations................. $7,025 $3,815 $6,523 Income (loss) from discontinued operations........ (307) 98 97 Loss on disposal of discontinued operations....... (1,704) Cumulative effect of change in accounting......... $2,444 ------ ------ ------ $6,718 $6,357 $4,916 ====== ====== ======
The provision (benefit) for income taxes attributable to income from continuing operations consists of the following components:
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Current Federal......................................... $1,175 State and Local................................. 380 $ 514 $ 140 Foreign......................................... 1,653 3,097 3,657 ------ ------ ------ Total current................................ 3,208 3,611 3,797 ------ ------ ------ Deferred Federal......................................... 1,304 283 308 State and Local................................. 812 (1,214) (388) Foreign......................................... 1,701 1,135 2,806 ------ ------ ------ Total deferred............................... 3,817 204 2,726 ------ ------ ------ Total income tax expense..................... $7,025 $3,815 $6,523 ====== ====== ======
F-20 72 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) TAX RATES Differences between income taxes computed using the U.S. federal income tax statutory rate of 35% and income tax expense recorded by the Company are attributable to the following:
YEAR ENDED -------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Income tax expense using the US statutory rate...................................... $ 4,817 $ 1,502 $ 4,540 Difference in rates on earnings of foreign subsidiaries and joint ventures........... (1,569) 212 (1,789) Unremitted earnings of foreign subsidiaries and joint ventures........................ 2,300 4,711 3,725 State income taxes, net..................... 594 (455) (161) Change in valuation allowance............... (2,065) Other....................................... 883 (90) 208 ------- ------- ------- Total............................. $ 7,025 $ 3,815 $ 6,523 ======= ======= =======
DEFERRED TAXES Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax net operating loss ("NOL"), credit carryovers and certain adjustments related to the purchase price reallocation (see Note 1). Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Inventory................................................ $ 3,184 $ 3,826 Basis in foreign subsidiaries............................ 15,285 Intangibles.............................................. 1,290 1,422 Properties............................................... 44,492 45,184 -------- -------- Gross deferred tax liabilities........................... 48,966 65,717 -------- -------- Long-term employee health obligations.................... (9,543) (9,999) NOL, AMT credit and ITC credit carryovers................ (20,144) (52,695) Book liabilities not currently deductible for tax........ (3,828) (2,713) Deferred compensation and other employee benefits........ (2,721) (1,679) Basis in foreign subsidiaries............................ (2,343) Vacation accrual......................................... (1,636) (1,667) Other, net............................................... (131) 201 -------- -------- Gross deferred tax assets................................ (40,346) (68,552) -------- -------- Deferred tax asset valuation allowance................... 400 8,910 -------- -------- Net deferred tax liability..................... $ 9,020 $ 6,075 ======== ========
F-21 73 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) The net change in the valuation allowance for deferred tax assets for the year ended December 31, 1997 was an increase of $8.5 million. Management has determined based upon the Company's expectations for the future that taxable income of the Company will, more likely than not, be sufficient to recognize the gross deferred tax assets, as adjusted for the valuation allowance. At December 31, 1997, the Company has NOL carryforwards for U.S. federal income tax purposes of approximately $123.0 million which are available to offset future federal taxable income and will begin to expire in 2010. In addition, the Company has alternative minimum tax credit carryforwards of approximately $5.7 million which are available to reduce future U.S. federal regular income taxes over an indefinite period. The Company's foreign subsidiary in Italy has a foreign tax loss carryforward of approximately $0.8 million at December 31, 1996 and 1997. The carryforward is available to reduce future taxable income of the subsidiary through 1998. A valuation allowance of $0.4 million at December 31, 1996 and 1997 has been provided on the tax loss carryforward. Pursuant to the Purchase and Sale Agreement, any tax benefit realized from the tax loss carryforward will be shared equally with Armco. To the extent a net tax benefit is recognized in excess of the subsidiary's remaining net deferred tax asset, the benefit will be allocated first as a purchase price adjustment which will reduce other noncurrent intangible assets. Any remaining tax benefit recognized will reduce income tax expense. Deferred tax expense has been provided for the portion of the unremitted earnings of foreign subsidiaries and joint ventures that the Company anticipates will be repatriated. Provision has not been made for U.S. income tax or foreign withholding tax on approximately $9.8 million of unremitted earnings of foreign subsidiaries and joint ventures, as those earnings are considered to be invested indefinitely. Such earnings could become taxable upon the sale or liquidation of these foreign operations or upon the remittance of dividends in excess of the percentage the Company has estimated to be repatriated. Determination of the amount of unrecognized deferred U.S. income tax associated with these earnings is not practicable because such amounts depend on the Company's future ability to claim foreign tax credits which cannot currently be predicted. Foreign withholding taxes of approximately $0.3 million would be payable upon the remittance of the portion of unremitted earnings considered to be invested indefinitely. 13. CLASS A COMMON STOCK AND STOCKHOLDERS' EQUITY STOCK OPTIONS -- GSI The GSI Board of Directors has granted stock options of GSI to certain officers and employees which provide the option to purchase common stock of GSI. These options consist of two general types. Time Options vest over a five year period from the date of the grant; however, vesting is accelerated upon the occurrence of an Acceleration Event, as defined. Target Options vest after a specified period of time unless there is an Acceleration Event or an Exercise Event, as defined. Upon the occurrence of an Acceleration Event or Exercise Event, all or some portion of the target options granted become immediately exercisable depending on achievements of predetermined investor return multiples. Those not currently exercisable remain outstanding through the original vesting date. Both types of options are non-qualified, have anti-dilution provisions, and have been granted at exercise prices not less than 100% of the fair market value of the stock at the date of option grant. F-22 74 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) Stock option activity was as follows:
TIME TARGET AVERAGE OPTION OPTIONS OPTIONS PRICE PER SHARE --------- --------- --------------- Outstanding at December 31, 1993............. 644,123 1,932,368 $ .10 Options granted.............................. 1,203,384 93,087 $5.63 --------- --------- Outstanding at December 31, 1994............. 1,847,507 2,025,455 $1.95 Options granted.............................. 995,000 $9.00 Options cancelled............................ (44,377) (52,942) $1.51 --------- --------- Outstanding at December 31, 1995............. 2,798,130 1,972,513 $3.43 --------- --------- Options granted.............................. 90,000 $9.00 Options cancelled............................ (170,368) (58,163) $3.99 Options exercised............................ (5,857) $ .10 --------- --------- Outstanding at December 31, 1996............. 2,711,905 1,914,350 $3.51 --------- --------- Options granted.............................. 922,000 $7.00 Options cancelled............................ (74,133) $6.82 --------- --------- Outstanding at December 31, 1997............. 3,559,772 1,914,350 $4.06 ========= ========= Exercisable at December 31, 1994............. 323,954 -- $3.20 Exercisable at December 31, 1995............. 956,555 519,489 $2.61 Exercisable at December 31, 1996............. 1,542,079 1,276,143 $2.72 Exercisable at December 31, 1997............. 2,084,752 1,318,754 $3.30
At December 31, 1997 there were 350,785 options outstanding which have been approved by the Board of Directors, but not yet granted. Exercise prices have not been determined for these options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS 123), "Accounting for Stock-Based Compensation." This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice to recognize related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25, the former standard. If the former standard for measurement is elected, SFAS 123 requires supplemental disclosure to show the effect of using the new measurement criteria. The Company has elected to continue using the measurement prescribed by APB Opinion No. 25. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Assuming any compensation expense for the GSI options would reduce net income of GSI, the Company's pro forma information follows:
1995 1996 1997 ------ ------ -------- Pro forma net income after adjustment for stock option expense..................................... $6,074 $6,040 $(16,633)
The weighted Black-Scholes value of options granted during 1995, 1996 and 1997 was $1.52, $1.52, and $2.39. Value was estimated using an expected life of 6 years, no dividends, volatility of .27, and risk-free interest rates of 6%, 6.2% and 6.2% in 1995, 1996 and 1997. MANAGEMENT COMMON STOCK The terms of some management agreements include call provisions whereby the GSI shares held by certain members of management may be purchased, by either GSI or other shareholders, at either unrecovered original cost or fair market value, depending on the event of termination as defined. At December 31, 1997, 870,682 shares of common stock of GSI were held, directly or beneficially, by members of management. F-23 75 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 14. RELATED PARTY TRANSACTIONS TRANSITION SERVICES AND OTHER ANCILLARY AGREEMENTS Effective January 1, 1996, the officers, directors and management employees of GST were transferred from GST to GSI. The cost and expenses of this management group are charged to GST under a management services agreement and included in selling, general and administrative expenses. This charge amounted to $13.4 million and $11.8 million in 1996 and 1997, respectively, and is comparable to the cost incurred directly by GST in 1995. Certain agreements were entered into as part of the Purchase and Sale Agreement between the Company and Armco. The Company leases certain facilities from Armco at its Kansas City operations for which it pays a nominal rental and the associated property taxes, maintenance and utilities. The Company and Armco also agreed to share in any net tax benefit that might be realized in conjunction with the usage of the Ardel (Belgium) and GST Europa SpA (Italy) net operating loss carryforwards existing at the acquisition date. TRANSACTIONS AMONG STOCKHOLDERS/SIGNIFICANT CUSTOMER Certain stockholders of GSI are party to other transactions with the Company. General Electric Capital Corporation acted as an agent in placement of certain of the Company's existing domestic debt. Bain Capital provides certain management support services for which it receives a fee not to exceed $1.0 million annually, exclusive of out-of-pocket expenses. One stockholder of GSI is a major customer of the Company's Kansas City wire rod operation. Sales to this customer for the years ended December 31, 1995, 1996 and 1997 comprised 13.8%, 11.8% and 10.3% of the Company's consolidated sales, respectively. Trade accounts receivable as of December 31, 1996 and December 31, 1997 include $7.0 million and $6.5 million, respectively, due from such stockholder. The Company and the stockholder have entered into a contract for the Company to supply a substantial portion of stockholder's wire rod needs through December 31, 2000. This contract is renewable if certain conditions are present. 15. COMMITMENTS AND CONTINGENCIES LITIGATION AND OTHER CONTINGENCIES In August 1996, Samsung America, Inc. ("Samsung") filed an action in the Supreme Court of the state of New York seeking monetary damages against GSI, the Company, its Peruvian subsidiary, Acerco, and Acerco's partners in the Siderperu joint venture, collectively, ("the Defendants"). Samsung seeks to recover purported damages of $48.5 million and punitive damages of $10.0 million and alleges that the Defendants failed to honor a written contract which entitled Samsung to obtain an equity interest in Siderperu and to provide certain distribution and trading services on an exclusive basis. In August 1997, the action was dismissed from the Supreme Court of the State of New York. Samsung has appealed the dismissal decision to the 1st Department Appellate Division of the State of New York. The Company believes that it has substantial and meritorious defenses and will defend itself accordingly. There are various claims pending involving the Company arising out of the normal course of business. In management's opinion, the ultimate liability resulting therefrom will not materially affect the financial position or results of operations of the Company. F-24 76 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) INDEMNIFICATIONS FROM ARMCO As part of the Purchase and Sale Agreement with Armco, the Company has been indemnified by Armco for known environmental matters and known quantified income tax issues related to periods prior to November 12, 1993. The Company has also been indemnified against all unknown other pre-closing environmental matters or conditions for a period of six years from closing. Armco's indemnity covers 100% of the first $10.0 million subject to an aggregate deductible of $0.3 million and a fifty-fifty sharing for aggregate claims between $10.0 million and $15.0 million with a maximum cap of $12.5 million. Management of the Company is not aware of any current information which would indicate that Armco will not be able to satisfy its obligation to the Company under these indemnifications. ENVIRONMENTAL MATTERS The Company's U.S. facilities are subject to a broad range of federal, state and local environmental requirements, including those governing discharges to the air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with releases of hazardous substances at Company facilities and associated offsite disposal locations. Liabilities with respect to hazardous substance releases arise principally under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state laws, which impose strict, retroactive, joint and several liability upon statutorily defined classes of "potentially responsible parties." The Company's foreign facilities and joint ventures are subject to varying degrees of environmental regulation in the jurisdictions in which those facilities are located. Based on the continuing review of environmental requirements, the Company believes that it is currently in compliance with environmental requirements. Nevertheless, as is the case with steel producers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal locations, or if contamination from prior activities is discovered at such properties or locations, the Company may be held liable and may be required to pay the cost of remedying the condition or satisfying third party damage claims. The amount of any such liability could be material. The Company devotes considerable resources to ensuring that its operations are conducted in a manner that reduces such risks. The Company has several environmental issues currently under discussion with various federal and local agencies, some of these involve compliance and/or remediation at certain properties. During 1996 and 1997, the Company spent $0.2 million and $0.1 million, respectively, on environmental matters. The Company records certain operating expenses for environmental compliance, testing and other environmental related costs as expenses when incurred. When it has been possible to determine reasonable estimates of liabilities related to environmental issues, based upon information from engineering and environmental specialists, the Company has made provisions and accruals. At December 31, 1997, $2.7 million was accrued for environmental related issues. The Company believes, based upon information currently available to management, that it will not require expenditures to maintain compliance with environmental requirements which would have a material adverse effect on its financial condition, results of operations or competitive position. F-25 77 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) PERU TAX CONTINGENCIES The Company's Peruvian subsidiaries had received various notices of proposed tax assessments from the Peruvian tax authorities for the years 1985 through 1991, the balances of which aggregated $16.9 million as of December 31, 1994. Due to the large number of unsettled tax cases throughout the Peruvian tax system, the Government of Peru issued a one-time amnesty program in October 1996. The Company has elected to participate in the amnesty program and has settled all remaining proposed Peruvian tax assessments, including interest and penalties, for a payment of approximately $0.3 million. The amounts paid for resolution of the tax assessments were reimbursed in full by Armco under the indemnification provisions of the agreement between Armco and the Company. LABOR RELATIONS A significant portion of the Company's employees are covered by collective bargaining agreements negotiated with various unions. These agreements expire at various times between April 1998 and November 2003. In the course of previous contract negotiations, the Company has on occasion been affected by work stoppages. The collective bargaining agreement at the Kansas City facility expired on March 31, 1997 and the Company and the United Steel Workers of America ("USWA") were unable to agree on terms of a new labor agreement. A work stoppage at this facility commenced on April 2, 1997. On June 13, 1997, the 650 employees covered by this collective bargaining agreement ratified a new five and one-half year agreement and returned to work. This facility has returned to full production. The collective bargaining agreement with employees at the Company's facility in Tempe, Arizona was due to expire in November, 1997. The Company has successfully negotiated a new contract which extends until November, 2003. The Company's collective bargaining agreement at the Georgetown, South Carolina facility was due to expire on December 8, 1997. The Company and the USWA were unable to agree on the terms of a new agreement and a work stoppage commenced on December 5, 1997. On January 7, 1998, the 580 employees covered by this agreement ratified a new sixty-two month agreement and returned to work. The collective bargaining agreement with employees at the Company's facility in Concepcion, Chile was due to expire on December 31, 1997. The Company successfully negotiated a new contract which extends until December, 2002. COMMITMENTS The Kansas City operations have entered a ten year agreement, expiring in 2004, with a third party which will staff and manage its computer operations for $0.9 million per year. Rent expense under operating leases was $0.7 million, $4.1 million and $2.4 million for the years ended December 31, 1995, 1996 and 1997, respectively. The Company has future minimum noncancelable operating lease commitments of the following at December 31, 1997: 1998........................................................ $2,250 1999........................................................ 1,762 2000........................................................ 1,313 2001........................................................ 839 2002........................................................ 746 Thereafter.................................................. 756
F-26 78 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 16. GEOGRAPHIC INFORMATION Financial information, by geographic region for the Company is presented below. United States includes GSTOC and MEI. South America is principally comprised of the Company's operations in Chile and Peru. Europe and Other includes the Company's operations in Europe (principally Italy), Canada and other joint venture interests around the world (Note 6).
DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31, 1995 ----------------------------------------- UNITED SOUTH EUROPE STATES AMERICA AND OTHER TOTAL -------- ------- --------- -------- Net sales.............................................. $430,165 $76,496 $33,088 $539,749 Equity in income of joint ventures..................... 2,875 -- 1,200 4,075 Operating profit....................................... 23,610 6,936 1,250 31,796 Net income (loss)...................................... (178) 4,451 1,856 6,129 Identifiable assets.................................... 645,189 45,545 24,466 715,200 Total liabilities...................................... 564,407 28,127 16,057 608,591 Net assets............................................. 80,782 17,418 8,409 106,609
DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1996 ----------------------------------------- UNITED SOUTH EUROPE STATES AMERICA AND OTHER TOTAL -------- ------- --------- -------- Net sales.............................................. $704,425 $86,203 $25,289 $815,917 Equity in income of joint ventures..................... 3,421 1,068 1,011 5,500 Operating profit....................................... 28,413 8,177 2,049 38,639 Net income (loss)...................................... (1,652) 6,054 2,033 6,435 Identifiable assets.................................... 637,500 57,536 20,643 715,679 Total liabilities...................................... 553,217 36,526 13,175 602,918 Net assets............................................. 84,283 21,010 7,468 112,761
DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997 ----------------------------------------- UNITED SOUTH EUROPE STATES AMERICA AND OTHER TOTAL -------- ------- --------- -------- Net sales.............................................. $690,758 $106,664 $12,312 $809,734 Equity in income of joint ventures..................... 2,679 3,003 513 6,195 Operating profit....................................... 33,657 9,982 559 44,198 Net income (loss)...................................... (27,014) 9,478 1,420 (16,116) Identifiable assets.................................... 567,521 67,020 11,736 646,277 Total liabilities...................................... 507,444 39,695 3,977 551,116 Net assets............................................. 60,077 27,325 7,759 95,161
F-27 79 GS TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED) 17. SELECTED QUARTERLY FINANCIAL DATA -- UNAUDITED (DOLLARS IN MILLIONS)
1996 1997 --------------------------------- --------------------------------- 1(ST) 2(ND) 3(RD) 4(TH) 1(ST) 2(ND) 3(RD) 4(TH) ------ ------ ------ ------ ------ ------ ------ ------ Net sales................................. $191.6 $213.1 $205.0 $206.2 $208.9 $184.5 $216.9 $199.4 Operating profit (loss)................... 4.6 9.9 9.5 14.6 13.1 (4.0) 18.3 16.8 Income (loss) from continuing operations.............................. (2.3) 0.7 0.4 1.6 3.0 (6.0) 5.2 4.3 Discontinued operations................... (0.0) 0.2 0.7 1.5 (22.6) Income (loss) before cumulative effect of accounting change....................... (2.3) 0.9 1.1 3.1 (19.6) (6.0) 5.2 4.3 Cumulative effect of change in accounting for spare parts and supplies (Note 3)... 3.6 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss)......................... 1.3 0.9 1.1 3.1 (19.6) (6.0) 5.2 4.3
18. AUDITED FINANCIAL STATEMENTS OF SIDER CORP S.A. AND SUBSIDIARY The financial statements of Sider Corp S.A. and Subsidiary are included in the Company's Form 10-K filing because this unconsolidated equity investee meets the Security and Exchange Commission's definition of significance. These financial statements were prepared in conformity with accounting principals generally accepted in Peru. Generally accepted accounting principals in Peru provide for the periodic write-up of fixed assets to appraised fair market values and do not require recording deferred income tax assets. F-28 80 (The accounting principles referred to are those generally accepted in Peru) REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Sider Corp S.A. We have audited the accompanying consolidated balance sheet of SIDER CORP S.A. AND SUBSIDIARY (Empresa Siderurgica del Peru S.A. - SIDERPERU) as of December 31, 1997 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended, expressed in United States currency (U.S. dollars). The preparation of these financial statements is the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Company's Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sider Corp S.A. and subsidiary at December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in Peru and the foreign currency translation procedures as described in Note 2 to these financial statements. January 30, 1998. /s/ Hansen-Holm, Alonso & Co. - ----------------------------- Antonio Alonso (Partner) Peruvian Public Accountant Matriculation No.134 F-29 81 SIDERCORP S.A. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 (Note 2.a) (In U.S. dollars)
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY ------ ------------------------------------ Current assets: Current liabilities: Cash and cash investments (Note 3) $ 54,971,477 Revolving credit $ 26,805,039 ----------- ----------- Trade accounts receivable (Note 4) 22,082,754 Current portion, long-term debt (Note 10) 9,071,944 ----------- ----------- Other accounts receivable: Trade accounts payable 57,032,762 Interest receivable 89,677 ----------- Other miscellaneous receivable (Note 5) 8,301,188 Other accounts payable: ----------- Other miscellaneous payables (Note 8) 4,530,060 Interest payable 7,880,738 8,390,865 Provision for employees' severance indemnities 183,277 ----------- Other current liabilities (Note 9) 5,552,838 ----------- Inventories: Finished goods 10,916,461 18,146,913 Work in process 7,620,994 ----------- Raw materials 22,497,815 Supplies and others 13,441,982 Total current liabilities 111,056,658 ----------- Long-term debt (Note 10) 109,435,962 54,477,252 ----------- Prepaid expenses and taxes: Deferred income (Note 11) 19,481,989 Expenses 2,988,586 ----------- Income taxes 2,646,970 ----------- Total liabilities 239,974,609 ----------- 5,635,556 ----------- Minority interest (Note 12) 3,263,405 ----------- Total current assets 145,557,904 Stockholders' equity: Common stock 33,441,757 Prepaid expenses 1,624,175 Retained earnings 9,751,523 Fixed assets (Note 6) 116,735,489 ----------- Goodwill (Note 7) 22,513,726 ----------- Total stockholders' equity 43,193,280 ----------- Total assets $286,431,294 =========== Total liabilities and stockholders' equity $286,431,294 ===========
The accompanying notes are an integral part of the financial statements. F-30 82 SIDER CORP S.A. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (Note 2.a) FOR THE YEAR ENDED DECEMBER 31, 1997 (In U.S. dollars) Net sales $ 160,891,951 Cost of sales (121,937,749) ------------- Gross margin 38,954,202 ------------- Operating (expenses) income: Sales and administrative expenses (7,629,932) Depreciation (5,096,556) Amortization (592,782) Other (expense) income, net (461,107) ------------- (13,780,377) ------------- Operating income 25,173,825 ------------- Other (expense) income: Technical fee expense (1,683,183) Gain on sale of fixed assets 2,865,474 ------------- 1,182,291 ------------- Financial (expense) income: Interest expense (16,381,032) Interest income 4,183,698 ------------- (12,197,334) ------------- Income before income tax 14,158,782 Income tax (Note 13) (934,457) ------------- Net income before minority interest 13,224,325 Minority interest (744,266) ------------- Net income $ 12,480,059 =============
The accompanying notes are an integral part of the financial statements. F-31 83 SIDER CORP S.A. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Note 2.a) FOR THE YEAR ENDED DECEMBER 31, 1997 (In U.S. dollars)
Retained earnings -------------------------------------------------------------- Currency Common Legal translation Accumulated stock reserve adjustment results Total ---------- --------- ------------- ------------- ------------ Balance at December 31, 1996 $33,441,757 -- $(316,084) $ 3,131,005 $ 2,814,921 Adjustment -- -- -- (269,278) (269,278) Advance payment of dividends -- -- -- (4,615,385) (4,615,385) Net income for the year -- -- -- 12,480,059 12,480,059 Translation adjustment -- -- (658,794) -- (658,794) Legal assignation -- $5,052,071 -- (5,052,071) -- ----------- ---------- --------- ------------ ------------ Balance at December 31, 1997 $33,441,757 $5,052,071 $(974,878) $ 5,674,330 $ 9,751,523 =========== ========== ========= ============ ============
The accompanying notes are an integral part of the financial statements. F-32 84 SIDER CORP S.A. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (Note 2.a) (In U.S. dollars) OPERATING ACTIVITIES: Net income $ 12,480,059 Adjustments to reconcile net income to cash flows provided by operating activities: Adjustment (269,278) Depreciation 5,096,556 Amortization of goodwill 592,782 Translation adjustment (658,794) Net changes in assets and liabilities: Trade accounts receivable (2,910,329) Interest income receivable (54,537) Other miscellaneous receivables (6,798,665) Inventories (10,148,831) Prepaid expenses and taxes (4,985,559) Trade accounts payable 26,036,333 Other miscellaneous payables 1,564,378 Interest payable 1,231,980 Provision for employees' severance indemnities (6,358) Other liabilities (5,092,178) ------------ Net cash provided by operating activities 16,077,559 ------------ INVESTING ACTIVITIES: Acquisition of fixed assets (21,985,956) Deferred income (Notes 6 and 10, proceeds regarding a sale of assets accompanied by a leaseback) 19,481,989 Decrease of fixed assets, net cost 798,157 Goodwill adjustments 77,105 ------------ Net cash used in investing activities (1,628,705) ------------
(to be continued) F-33 85 (continued) FINANCING ACTIVITIES: Revolving credit, net 25,685,249 Long-term debt, net (7,489,696) Minority interest (402,849) Advance payment of dividends (4,615,385) ------------ Net cash provided by financing activities 13,177,319 ------------ Net increase in cash 27,626,173 CASH AT BANKS AT BEGINNING OF YEAR 27,345,304 ------------ CASH AT BANKS AT END OF YEAR $ 54,971,477 ============
The accompanying notes are an integral part of the financial statements. F-34 86 SIDER CORP S.A. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 (In U.S.dollars) 1. ECONOMIC ACTIVITY OF THE COMPANY On March 21st., 1996, the Consortium formed by Acerco S.A., Wiese Inversiones Financieras S.A. and Stanton Capital Funding Ldc., each acquired a one third equity share in Sider Corp S.A., which simultaneously acquired 96.46% of Siderperu's common shares from the Peruvian Government. Sider Corp S.A. was incorporated in March 1996 to represent and control the above mentioned majority interest in the capital stock of Empresa Siderurgica del Peru S.A. - SIDERPERU (the Subsidiary, SIDERPERU), incorporated in 1971 and manufacturies and trading sales steel and steel related products. Inversiones Cofide S.A., is the entity representing the Peruvian Government. Pursuant to the right established by the Peruvian Government for employees participation, Siderperu's employees acquired the balance of 3.54% of Siderperu's share capital. Sider Corp S.A. however, currently owns 97.05% of Siderperu's share capital, after purchasing a portion of the employees' shares during 1996 and 1997. 2. ACCOUNTING POLICIES AND/OR PRACTICES The following is a summary of the significant accounting policies and/or practices followed by the Company in the preparation and presentation of the consolidated financial statements: a. Currency translation and consolidation basis of financial statements The statutory books and accounts of the Company are maintained in Peruvian currency (Nuevo sol, S/.); the related statutory consolidated financial statements are restated for inflation in accordance with Peruvian generally accepted accounting principles (Peruvian GAAP). The functional currency of the Company is the United States dollar. Based on the currency translation approach described below, the net exchange adjustment in U.S. dollars arising from translation is included in stockholders' equity under the caption "Translation adjustment". F-35 87 The translation of the consolidated financial statements into U.S. dollars was accomplished by translating the balance sheet in nuevos soles at December 31, 1997. Accordingly, inventories, prepaid expenses, fixed assets, goodwill, deferred income, common stock and retained earnings (except the results of operations for the period) were translated at the historical exchange rate in effect at the dates of acquisition or inception. All other assets and liabilities have been translated into U.S.dollars at the exchange rate at December 31, 1997 (S/.2.73 = US$1). The statement of income has been translated at historical monthly average rates of exchange, in effect during the year, except for depreciation and amortization, which were translated on the basis of the initial balance sheet aforementioned at the historical exchange rates in effect on the dates of acquisition or inception of fixed assets and goodwill, respectively. The consolidated financial statements comprise the accounts of separate entities Sider Corp S.A. and Subsidiary. All significant intercompany transactions have been eliminated. The statement of cash flows excludes the transaction related to the DRI plant for US$20,000,000 which is a non cash item, is presented in Machinery and equipment and its related lease obligation is presented in Long-term debt on the balance sheet. b. Inventories Inventories are stated at cost, as determined in Note 2.a, which does not exceed market value. Cost is determined following the average cost method, except for inventories in transit which are valued on the basis of specific cost of acquisition. c. Fixed assets Corresponds to fixed assets accounted for at cost, as determined in Note 2.a, at the rescue value established by an appraisal of an independent specialist as of December 31, 1994, before the privatization. Assets under capital lease obligations are accounted as fixed assets. Maintenance and repair expense is charged to the results of operations as incurred. Replacements and improvements are considered additions to fixed assets. d. Depreciation Depreciation of fixed assets is computed based on historical cost, as determined in Note 2.a, following the straight-line method and based on estimated useful lives of F-36 88 the respective assets. Depreciation is charged directly to the results of the period; therefore, it is not included in determining the cost of production. Based on a technical appraisal performed by independent specialist, in connection with the acquisition, the estimated useful lives of fixed assets were reassessed as of January 1st., 1996 and for subsequent periods, for statutory financial purposes only. e. Amortization of goodwill Goodwill represents the excess cost over the fair value of assets acquired and is being amortized over forty years. f. Provision for employees' severance indemnities These are severance indemnities payable which are accrued in full based on Peruvian labor regulations, and correspond to accrued liabilities for November and December 1997. g. Income tax Provision for income tax payable was computed in accordance with Peruvian income tax regulations. h. U.S. currency transactions Foreign currency balances expressed in U.S.dollars as of December 31, 1997, are as follows: Assets: Cash and cash investments $ 54,419,731 Trade accounts receivable 22,063,131 Interest receivable 89,677 Other miscellaneous receivable 15,000 ------------ 76,587,539 ------------ Liabilities: Revolving credit 22,275,905 Trade accounts payable 61,850,775 Other miscellaneous payable 230,989 Interest payable 6,785,462 Long-term debt 118,507,906 ------------ 209,651,037 ------------ Net liabilities $133,063,498 ============
F-37 89 3. CASH AND CASH INVESTMENTS Comprises: Petty cash $ 2,297 Cash in bank accounts 7,850,889 Cash collateral (Note 10) 12,917,837 Cash in term deposits 33,995,660 Other 204,794 ----------- $54,971,477 ===========
4. TRADE ACCOUNTS RECEIVABLE Includes primarily accounts and notes receivable of US$17,004,000 and US$5,059,000, respectively, which are guaranteed by bank collateral letters. 5. OTHER MISCELLANEOUS RECEIVABLES Includes loans to shareholders of Sider Corp S.A. for US$7,384,615 which will be cancelled by subsequent dividends from SIDERPERU; and loans to employees of US$845,713, pursuant to a labor agreement from the former administration. 6. FIXED ASSETS Comprises the following: Cost: Land and improvements $ 1,314,886 Buildings and improvements 27,421,545 Machinery and equipment 185,374,321 Furniture and fixtures 2,118,147 Construction in progress 30,725,052 ------------ 246,953,951 ------------ Accumulated depreciation 130,218,462 ------------ Net value $116,735,489 ============
F-38 90 In 1996, taking into consideration the significant improvement realized through comprehensive maintenance and refurbishing of most processes, the Company reevaluated the useful lives of fixed assets supported additionally by a technical appraisal prepared by independent specialist. As a result, new estimated useful lives were assigned and have been applied since January 1st., 1996 for statutory purposes. These new lives resulted in the following depreciation rates: buildings and improvements, 1.5 and 3 percent (with 15 years remaining life); machinery and equipment, 5 percent; and furniture and fixtures 5 percent. On December 30, 1997, Sider Corp S.A. entered into a sale leaseback transaction where machinery and equipment were sold to a local bank for US$20,000,000 under a capital lease arrangement. Accordingly, the fixed assets and related lease obligation (See Note 10), are reported on the Company's balance sheet. Additionally, Sider Corp S.A. executed a rental contract for the use of this asset by SIDERPERU for a four-year term renewable up to fourteen years for equal monthly installments of US$496,797. 7. GOODWILL Results from the purchase price paid for the acquisition of SIDERPERU's common shares, being higher than the fair value of those shares at the date of acquisition. As of December 31, 1997 comprises the following: Goodwill $ 23,711,274 Allocation effect of subsequent purchases (167,089) ------------ 23,544,185 Less accumulated amortization (1,030,459) ------------ $ 22,513,726 ============
F-39 91 8. OTHER MISCELLANEOUS PAYABLE Comprises: Other taxes payable $2,531,437 Vacations, salaries and other personnel payables 1,670,512 Deposits by customers 163,770 Other accounts payable 25,473 Attorneys fees 138,868 ---------- $4,530,060 ==========
9. OTHER CURRENT LIABILITIES Comprises: Labor contingencies and downsizing reserves $1,040,836 Legal and tax contingencies reserve 716,291 Blast furnace maintenance reserve 1,299,403 Electricity (monthly reserve) 839,702 Technical services provision 52,894 Personnel services provision 165,941 Freight services provision 111,091 Other provisions 1,227,048 Sundry 99,632 ---------- $5,552,838 ==========
10. LONG - TERM DEBT Corresponds mainly to financing from Inversiones Cofide S.A., as representative of Peruvian State for the acquisition of common shares of Empresa Siderurgica del Peru S.A. - SIDERPERU (Note 3); loans in foreign currency from Corporacion Andina de Fomento (CAF) for the Fluids Distribution and Treatment Project; and leased obligation from local bank per leaseback of capital asset (See Note 6). They are summarized as follows: F-40 92
Current Non current portion portion ---------- ----------- Inversiones Cofide S.A. (*) - Loan of US$86,788,111, due annually through March 2004, at an annual effective rate of 9.5% $3,498,618 $ 83,289,493 Corporacion Andina de Fomento - Loan (French francs equivalent to US$946,818) due semi-annually through August 1999, at annual effective rate of 10.065% 473,409 473,409 - Loan of US$199,834, due semi-annually through August 1999, at current rate during the payment period (in August, annual rate was 7.875%) 99,917 99,917 Leased obligation - Leaseback liability, due monthly through December 2001, at annual effective rate of 9.27% 5,000,000 15,000,000 Local banks (at variable rates) - Loan due on March 1999 -- 2,004,234 - Loan due on February 1999 -- 4,679,260 - Loan due on a renewable year basis -- 3,889,649 ---------- ------------ $9,071,944 $109,435,962 ========== ============
(*) The Company granted to the Government in guarantee for this loan 164,322,621 common shares of SIDERPERU; additionally, a local bank granted to this Government's financial entity a bank collateral letter for US$25,835,675, equivalent to 20% of the nominal loan balance. 11. DEFERRED INCOME Corresponds to the higher amount established between the capital asset value of US$20,000,000, as disclosed in Note 6, and its related original net cost book value of US$518,011. This deferred income will be applied to the results of operations over the four-year term established in the corresponding leaseback arrangement. F-41 93 12. MINORITY INTEREST Corresponds to 2.95% of SIDERPERU's share capital, and with a participation in retained earnings as follows: Common stock $3,183,702 Retained earnings 79,703 ---------- $3,263,405 ==========
13. TAX SITUATION In accordance with current tax legislation, the Company computes its provision for income tax based on taxable income. SIDERPERU's tax loss carryforward as of December 31, 1997 is S/.213,703,260 (equivalent to US$78,279,582 at that date) and will be used to offset the resulting taxable income for the year 1998; the loss carryforwards expire at the end of 1998 and any remaining amounts cannot be utilized. 14. ENVIRONMENTAL MATTERS The Code of Environmental and Natural Resources was issued, by Legislative Decree No. 611 on September 8, 1990. This decree establishes that all projects of labor and/or activity that could cause damages to the environment, require a study on the environmental impact and are subject to approval by competent authority. A study for SIDERPERU was completed and approved by competent authority, on a prebid basis, providing a ten-year period for compliance with reasonable standards. 15. LEGAL RESPONSIBILITIES FOR CONTINGENCIES The purchase-sale contract of SIDERPERU's share capital, between Inversiones Cofide S.A. and Sider Corp S.A., established a maximum limit of responsibilities for Sider Corp S.A. of up to US$5,000,000 for legal, commercial, labor contingencies and concepts regarding environmental problems but excluding tax situations. Inversiones Cofide S.A. will, therefore, indemnify Sider Corp S.A. for any amounts above the US$5,000,000 limit and will be responsible for any payment in excess of that amount. This indemnification extends for eight years from transfer (March 21, 1996). As of December 31, 1997, US$1,835,554 was reported to ICSA as applicable indemnities under the US$5 million limit. Likewise, this contract establishes that Inversiones Cofide S.A. will assume any taxable debt incurred prior to this closing date, inclusively. F-42 94 16. AGREEMENT OF JURIDICAL STABILITY On March 21st., 1996, Sider Corp S.A. suscribed with the Peruvian State an agreement of juridical stability for a ten year-period in conformity with Legislative Decrees Nos.662 and 757. This agreement relates to the investment made on March 21st., 1996 for US$33,428,936 at Sider Corp S.A. and establishes, mainly, for Sider Corp S.A.'s shareholders (as investors) and Sider Corp S.A. (as recipient of investors' contributions) the following: - Stability in the tax regime on income tax and nonwithholding is applicable on dividends. - Stability in the labor regime on hiring personnel. - Stability in the regime on exports promotion. 17. INVESTMENT COMMITMENT In accordance with the purchase-sale contract of SIDERPERU's share capital, Sider Corp S.A. has an investment commitment with the Peruvian government to make a minimum investment over a four - year period for the expansion and modernization of SIDERPERU's manufacturing processes, for an amount of US$30 million. During 1996 and 1997 the investment amounts were approximately US$3 and US$27 million, respectively. ------------------ F-43 95 REPORT OF INDEPENDENT ACCOUNTS ON FINANCIAL STATEMENTS SCHEDULES To the Board of Directors of GS Technologies Corporation Our audits of the consolidated financial statements referred to in our report dated February 20, 1998 appearing on page F-1 of this Annual Report on Form 10-K also included an audit of the Financial Statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth herein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP Charlotte, North Carolina February 20, 1998 S-1 96 SCHEDULE 1 GS TECHNOLOGIES CORPORATION CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 637 $ 15 Other receivables......................................... 135 63 Receivable from affiliates Recoverable income taxes.................................. 6,606 137 Deferred Income Taxes..................................... 853 -------- -------- Total current assets.............................. 7,378 1,068 Investment in consolidated subsidiaries..................... 123,525 111,155 Investment in joint ventures................................ 8,970 8,585 -------- -------- Total assets...................................... $139,873 120,808 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt Payables and accrued liabilities.......................... 4,025 2,971 -------- -------- Total current liabilities......................... 4,025 2,971 Long-term debt Deferred income taxes payable............................... 21,692 19,109 Other long-term liabilities................................. 1,395 3,567 -------- -------- Total liabilities................................. 27,112 25,647 -------- -------- Stockholder's equity Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares issued and outstanding at December 31, 1996 and 1997............................................... 1 1 Additional paid-in capital................................ 132,166 132,166 Retained earnings (accumulated deficit)................... (17,729) (33,845) Cumulative translation adjustment......................... (1,677) (3,161) -------- -------- Total stockholder's equity........................ 112,761 95,161 -------- -------- Total liabilities and stockholder's equity........ $139,873 120,808 ======== ========
See notes to Condensed Financial Information S-2 97 SCHEDULE I GS TECHNOLOGIES CORPORATION CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Equity in income of consolidated subsidiaries.......... $ 6,484 $10,385 $(12,093) Equity in income of joint ventures..................... 2,875 3,421 1,530 Other, net............................................. (120) (1,853) (1,262) ------- ------- -------- Income before income tax............................... 9,239 11,953 (11,825) Income tax provision................................... (3,110) (5,518) (4,291) ------- ------- -------- Net income................................... $ 6,129 $ 6,435 $(16,116) ======= ======= ========
See notes to Condensed Financial Information S-3 98 SCHEDULE I GS TECHNOLOGIES CORPORATION CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income........................................ $ 6,129 $ 6,435 $(16,116) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Equity in income of consolidated subsidiaries................................. (6,484) (10,385) 12,093 Equity in income of joint ventures............. (2,875) (3,421) (1,530) Dividends from joint ventures.................. 1,228 3,141 1,018 Deferred income taxes.......................... 1,386 10,085 (3,436) Changes in operating assets and liabilities: Receivables.................................. 913 272 Payables and accrued liabilities............. (1,048) (5,289) 79 Income taxes................................. 632 (6,606) 6,469 Other........................................ 1,506 498 -------- -------- -------- Net cash provided by (used in) operating activities................................ (1,032) (3,621) (653) -------- -------- -------- INVESTING ACTIVITIES: Investment in consolidated subsidiaries........... (30,000) (11,849) (10,730) Dividends received from consolidated subsidiaries................................... 16,778 10,761 Cash received from Armco, net..................... 1,922 -- Change in receivable/payable to affiliates........ (1,767) 1,727 -- -------- -------- -------- Net cash provided by (used in) investing activities................................... (29,845) 6,656 31 -------- -------- -------- FINANCING ACTIVITIES: Repayments of long-term debt...................... (2,400) -- Issuance of stock................................. -- Distributions to stockholders..................... (5,543) -- Distributions to warrantholder.................... -- Contribution from GSI............................. 30,000 -- -------- -------- -------- Net cash provided by (used in) financing activities................................... 24,457 (2,400) -- -------- -------- -------- Net increase (decrease) in cash and cash equivalents....................................... (6,420) 635 (622) CASH AND CASH EQUIVALENTS: Beginning of period............................... 6,422 2 637 -------- -------- -------- End of period..................................... $ 2 $ 637 $ 15 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Non-cash equity contributions from GSI............ $102,000 Non-cash investment in subsidiaries............... $102,000 $ 22,300
See notes to Condensed Financial Information S-4 99 SCHEDULE I GS TECHNOLOGIES CORPORATION NOTES TO SCHEDULE 1 -- CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (DOLLARS IN THOUSANDS) NOTE 1 BASIS OF PRESENTATION The accompanying condensed financial information has been presented pursuant to Rule 5-04(c) of Regulation S-X. The notes to the audited consolidated financial statements contained elsewhere in this Form 10-K reflect all disclosures required by generally accepted accounting principles. Such information has not been separately disclosed in this schedule. NOTE 2 RESTRICTED ASSETS GST owns 100% of the common stock of GS Technologies Operating Co., Inc. ("GSTOC"). Inversiones en Molienda (Chile) ("Inversiones"), Acerco S.A. (Peru), GST Europa SpA (Italy), ME International ("MEI"), and other various joint ventures and subsidiaries. At December 31, 1997 and 1996, GSTOC and MEI, had long-term debt instruments that contained various covenants which, among other things, restrict the payment of dividends to GST. There were no restrictions for dividend payments from the other subsidiaries to GST. S-5 100 SCHEDULE II GS TECHNOLOGIES CORPORATION VALUATION AND QUALIFYING ACCOUNTS RESERVES
ADDITIONS ----------------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING CHARGED TO OTHER END OF DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD - ----------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1996 Allowance for doubtful accounts....... $2,382 $367 $(921) $1,828 Year ended December 31, 1997 Allowance for doubtful accounts....... $1,828 $457 $(447) $1,838
S-6 101 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 10th day of March, 1998. GS Technologies Corporation and GS Technologies Operating Co., Inc. By: /s/ Luis E. Leon ------------------------------- Luis E. Leon, Senior Vice President-Finance and Administration, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Mark G. Essig Chief Executive Officer (Principal - ---------------------------- Executive Officer), President and Director Mark G. Essig /s/ Roger R. Regelbrugge Chairman and Director - ---------------------------- Roger R. Regelbrugge /s/ Luis E. Leon Senior Vice President - Finance - ---------------------------- and Administration, Chief Luis E. Leon Financial Officer and Treasurer (Principal Financial Office) /s/ David O. Shelley Vice President and Controller - ---------------------------- (Principal Accounting Officer) David O. Shelley /s/ Paul B. Edgerley Director - ---------------------------- Paul B. Edgerley /s/ John J. O'Malley Director - ---------------------------- John J. O'Malley 102 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT SECTION 12 OF THE ACT. No annual report or proxy soliciting materials has been provided to security holders as of the date of filing of this annual report on Form 10-K. The Company may subsequently provide an annual report to security holders and will provide the Commission with copies of any such report. The Company does not plan to send a proxy statement, form of proxy or other proxy soliciting material to its security holders during 1998. EX-10.36 2 1997 STOCK OPTION PLAN 1 EXHIBIT 10.36 GS INDUSTRIES, INC. 1997 STOCK OPTION PLAN 1. PURPOSES OF PLAN. The purposes of the Plan, which shall be known as the GS Industries, Inc. 1997 Stock Option Plan and is hereinafter referred to as the "Plan", are (i) to provide incentives for key employees providing services to GS Industries, Inc. (the "Company") and its Subsidiaries (as defined below) by encouraging their ownership of the common stock of the Company, par value $.01 per share (the "Common Stock") and (ii) to aid the Company in retaining key employees upon whose efforts the Company's success and future growth depends and in attracting other such individuals. The options to be issued under the Plan are not intended to be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee"). In the event that no such Committee exists or is appointed, then the powers to be exercised by the Committee hereunder shall be exercised by the Board of Directors (the "Board") or the Executive Committee of the Board. For purposes of administration, the Committee, subject to the terms of the Plan, shall have authority to (a) determine which individuals ("Optionees") shall be granted options ("Options") to purchase Common Stock, (b) determine the number of shares of Common Stock that each such Optionee shall receive an option to purchase hereunder ("Option Shares"), subject to the limit established by the Board on the total number of shares of Common Stock for which options will be issued under the Plan, and (c) establish such rules and regulations, make such determinations and interpretations, and take such other administrative actions, as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including the Optionees and their legal representatives and beneficiaries. 3. COMMON STOCK AVAILABLE FOR OPTIONS. The number of Option Shares available for Options to be issued under the Plan shall be set by the Board and shall be subject to adjustments pursuant to Section 6(f) hereof. Shares of Common Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. 4. ELIGIBILITY. Options under the Plan may be granted to employees of the Company or any Subsidiary. Options may be granted to eligible employees whether or not they hold or have held Options previously granted under the Plan or options otherwise granted or assumed by the Company. In selecting employees for Options, the Committee may take into consideration any factors it may deem relevant, including its estimate of the employee's present and potential contributions to the success of the Company and its Subsidiaries. 5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall prescribe the terms and conditions of the Options to be granted hereunder including, but not limited to, (i) the price at which each share of Common Stock covered by an Option granted under the Plan may be purchased (the "Option Price"), and (ii) the effective date of the grant of the Option (the "Effective Date"), which terms and conditions need not be the same in each case. 1 2 6. EXERCISE OF OPTIONS. (a) Exercisability. Unless otherwise determined by the Committee with respect to a particular grant of an Option hereunder, on the last day of each calendar quarter, beginning with the last day of the calendar quarter which includes the Effective Date for the particular Optionee, the Option to be issued under the Plan to such Optionee will vest and become exercisable with respect to five percent (5%) of Option Shares covered by the Option granted to such Optionee if such Optionee is employed by the Company or a Subsidiary on such date; provided, however, that upon the occurrence of an Acceleration Event (as defined below) prior to the Expiration Date (as defined below), all of the Option Shares will vest and become exercisable. For this purpose, an "Acceleration Event" will be the first to occur of (i) a merger, consolidation or reorganization of the Company or a sale of the Company's stock, if after giving effect to such merger, consolidation, reorganization or stock sale, the holders of the Company's voting securities (on a fully-diluted basis) immediately prior to the merger, consolidation, reorganization or sale, own less than a majority of the ordinary voting power (on a fully-diluted basis) to elect the board of directors of the surviving corporation, or (ii) a sale of all or substantially all of the Company's assets to another person or entity or a complete liquidation of the Company. (b) Option Period. Options issued to an Optionee hereunder will expire (the "Expiration Date") on the earlier of the tenth anniversary of the Effective Date or the date of the termination of the particular Optionee's employment with the Company or a Subsidiary for any, reason other than death or Disability (as defined below) (the "Termination Date"), provided that the particular Optionee will have until the tenth anniversary of the Effective Date to exercise any Option with respect to Option Shares as to which the Option shall have vested pursuant to paragraph 6(a) above. (c) Procedure for Exercise of Options. At any time after Options hereunder have become exercisable with respect to any Option Shares and prior to the Expiration Date (except as provided in paragraph 6(b) above), an Optionee may exercise all or a portion of the Option with respect to Option Shares vested pursuant to paragraph 6(a) above by delivering written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased, together with (i) a written acknowledgment that the Optionee has read and has been afforded an opportunity to ask questions of management of the Company regarding all financial and other information provided to the Optionee regarding the Company and (ii) payment in full by delivery of a cashier's, personal or certified check or wire transfer of immediately available funds in the amount of the Option Price. An Optionee shall have none of the rights of a stockholder until the shares of Common Stock are issued to him. Within 60 days after exercise, the Optionee will pay to the Company the amount of any additional federal and state income taxes required to be withheld by reason of the exercise of the Option issued to such Optionee hereunder. As a condition to any Optionee's exercise of any Options issued hereunder, the Optionee will permit the Company to deliver to him all financial and other information regarding the Company and its Subsidiaries which it believes necessary to enable the Optionee to make an informed investment decision. (d) Non-Transferability of Options. Options issued under the Plan to an Optionee are personal to the Optionee and are not transferable by the Optionee except to a Permitted Transferee (as defined below). Only the Optionee or a Permitted Transferee is entitled to exercise the Option issued to the Optionee under the Plan, except pursuant to paragraphs 7 and 8 below. 2 3 (e) Section 83(b) Election by Optionee. Within 30 days after an Optionee has exercised an Option, the Optionee may make an effective election with the U.S. Internal Revenue Service under Section 83(b) of the Code relative to the Common Stock received by the Optionee pursuant to the exercise of said Option. (f) Adjustments for Change in Common Stock Subject to Plan. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company, corresponding adjustments shall be made to the number and kind of shares available for issuance under this Plan, the number and kind of shares covered by outstanding Options under this Plan, and the Option Price. (g) Securities Laws Restrictions. Each Optionee receiving Options issued under the Plan will be required to represent to the Company that when the Optionee exercises the Option he will be purchasing Option Shares for the Optionee's own account and not on behalf of others. The Optionee also will be required to represent that he understands and acknowledges that federal and state securities laws govern and restrict the Optionee's right to offer, sell or otherwise dispose of any Option Shares unless the Optionee's offer, sale or other disposition thereof is registered under the Securities Act of 1933, as amended (the "1933 Act") and state securities laws or, in the opinion of the Company's counsel, such offer, sale or other disposition is exempt from registration thereunder. The Optionee will agree that he will not offer, sell or otherwise dispose of any Option Shares in any manner which would: (i) require the Company to file any registration statement (or similar filing under state law) with the Securities and Exchange Commission or to amend or supplement any such filing or (ii) violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state or federal law. The Optionee will be required to further represent that he understands that the certificates for any Option Shares the Optionee purchases will bear the legend set forth in paragraph 9 hereof or such other legends as the Company deems necessary or desirable in connection with the 1933 Act or other rules, regulations or laws. (h) Effect of Transfers in Violation of the Plan or the Option Agreement. The Company will not be required (i) to transfer on its books any Option Shares which have been sold or transferred in violation of any of the provisions of the Plan or as set forth in any Option Agreement between the Company and an Optionee, or (ii) to treat as the owner of such shares, to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares have been transferred in violation of the Plan or any Option Agreement between the Company and an Optionee. (i) Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of Options, as it deems advisable. 7. REPURCHASE OPTION. (a) Definitions. The following terms are defined as follows: 3 4 "Cause" means (i) the willful failure by the Optionee to perform duties reasonably requested or reasonably prescribed by the Board, (ii) the engaging by the Optionee in conduct which is materially injurious to the Company or any of its Subsidiaries, (iii) gross negligence or willful misconduct by the Optionee in the performance of his duties which results in, or causes, harm to the Company or any of its Subsidiaries, (iv) any breach by the Optionee of any covenant or condition contained in the Plan or the Option Agreement between the Company and the Optionee, (v) the Optionee's conviction of a crime involving fraud or misrepresentation, a gambling-related offense or a felony or (vi) the Optionee's abuse of illegal drugs or other controlled substances or such Optionee's habitual intoxication. "Disability" means the inability (as determined by the Board in its sole discretion) of such Optionee, as a result of incapacity due to physical or mental illness, to perform his duties with the Company or its Subsidiary for more than six months in the aggregate during any twelve-month period. "Executive Stock" for purposes hereof, means the Option Shares exercisable pursuant to the Option and any shares of Common Stock issued pursuant thereto. "Fair Market Value" of each share of Executive Stock means the market value, excluding any discounts for minority interest and lack of marketability, agreed upon by the Optionee and the Board; provided that the Fair Market Value of Option Shares which have not been exercised will be reduced by the exercise price of such Option Shares. If the Optionee and the Board are unable to agree upon the market value, then the Optionee and the Company will share the cost, on an equal basis, of a mutually acceptable business appraiser whose determination will be binding. "Good Reason" means (i) with respect to the termination of employment of the Optionee with the Company or a Subsidiary within five years of the Effective Date, means death, Disability, the Optionee's retirement from employment by the Company or a Subsidiary with the approval of the Board, or the voluntary termination by the Optionee of his employment with the Company or any of its Subsidiaries following a significant reduction of his duties, responsibilities or compensation; and (ii) with respect to the termination of employment of the Optionee after five years following the Effective Date, means, in addition to the reasons limited in part (i) of this definition, voluntary termination by the Optionee of his employment; provided, however, that the Optionee does not engage directly or indirectly in, as a principal, agent, employee, officer, director or in any other capacity, or have any interest in, or perform services for, any business directly or indirectly competing with the Company or any of its Subsidiaries. "Investors" means Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates or BCIP Trust Associates, L.P. "Original Value" of each share of Executive Stock will be equal to the Option Price for each share of Common Stock (as proportionally adjusted for all stock splits, stock dividends and other recapitalization affecting the Common Stock, subsequent to the date hereof); provided that the Original Value of Option Shares which have not been exercised will be equal to zero. "Subsidiary" as used herein shall mean (i) any corporation (or other entity) of which shares of stock (or the equivalent thereof) having a majority of the general voting power in electing the board of directors (or the equivalent thereof) of such entity are, at the time as of which any 4 5 determination is being made, owned by the Company either directly or indirectly, and (ii) any joint venture in which the Company directly or indirectly owns, at the time as of which any determination is being made, an equity interest. (b) Repurchase Option. In the event that the Optionee is no longer employed by the Company or any of its Subsidiaries for any reason (the date of such termination being referred to herein as the "Termination Date"), the Executive Stock, whether held by the Optionee or one or more Permitted Transferees (as defined below), will be subject to repurchase by the Company and the Investors pursuant to the terms and conditions set forth in this paragraph 7 (the "Repurchase Option"). (c) Termination Other than for Cause or Voluntary Termination. If the Optionee is no longer employed by the Company or any of its Subsidiaries as a result of the Optionee's voluntary termination for Good Reason, the Optionee's termination without Cause, or the Optionee's death or Disability, then on or after the Termination Date, the Company may elect to purchase all or any portion of the Executive Stock at a price per share equal to the Fair Market Value thereof (i) as determined on the Termination Date, if the Repurchase Notice (as defined in subparagraph (e) below) has been delivered within three months of the Termination Date, or (ii) as determined on a date determined by the Board within 30 days prior to the delivery of the Repurchase Notice, if the Repurchase Notice is delivered after the third month following the Termination Date. (d) Termination for Cause and Voluntary Termination. If the Optionee is no longer employed by the Company or any of its Subsidiaries as a result of the Optionee's termination for any reason other than as set forth in (c) above, then on or after the Termination Date, the Company may elect to purchase all or any portion of the Executive Stock at a price per share equal to the lower of its Original Value or the Fair Market Value thereof. (e) Repurchase Procedures. The Company may elect to exercise the right to purchase all or any portion of the shares of Executive Stock pursuant to the Repurchase Option by delivering written notice (the "Repurchase Notice") to the holder or holders of the Executive Stock. The Repurchase Notice will set forth the number of shares of Executive Stock to be acquired from such holder(s), the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. If any Executive Stock is held by Permitted Transferees of the Optionee, the Company shall purchase the shares elected to be purchased from such holder(s) of Executive Stock, pro rata according to the number of shares of Executive Stock held by such holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). (f) Investor Rights. (i) If for any reason the Company does not elect to purchase all of the Executive Stock pursuant to the Repurchase Option prior to the 180th day following the Termination Date, the Investors will be entitled to exercise the Repurchase Option, in the manner set forth in this paragraph 7, for the Executive Stock the Company has not elected to purchase (the "Available Shares"). As soon as practicable, but in any event within thirty (30) days after the Company determines that there will be any Available Shares, the Company will deliver written notice (the "Option Notice") to the Investors setting forth the number of Available Shares and the price for each Available Share. 5 6 (ii) Each of the Investors will initially be permitted to purchase its pro rata share (based upon the number of shares of Common Stock then held by such Investors) of the Available Shares. Each Investor may elect to purchase any number of the Available Shares (subject to the preceding sentences) by delivering written notice to the Company within 30 days after receipt of the Option Notice from the Company (such 30-day period being referred to herein as the "Investor Election Period"). (iii) As soon as practicable but in any event within five (5) days after the expiration of the Investor Election Period, the Company will, if necessary, notify the Investors electing to purchase Available Shares of any Available Shares which Investors have elected not to purchase and each of the electing Investors will be entitled to purchase the remaining Available Shares on the same terms as described above (the "Second Option Notice"); provided that if in the aggregate such Investors elect to purchase more than the remaining Available Shares, such remaining Available Shares purchased by each such Investor will be reduced on a pro rata basis based upon the number of shares of Common Stock then held by such Investors. Each Investor may elect to purchase any of the remaining Available Shares available to such Investor by delivering written notice to the Company within 10 days after the delivery of the Second Option Notice (with such 10-day period referred to herein as the "Second Investor Election Period"). (iv) As soon as practicable but in any event within five (5) business days after the expiration of the Investor Election Period or the Second Investor Election Period (if any) the Company will, if necessary, notify the holder(s) of Executive Stock as to the number of shares of Executive Stock being purchased from the holder(s) by the Investors (the "Supplemental Repurchase Notice"). At the time the Company delivers a Supplemental Repurchase Notice to the holder(s) of Executive Stock, the Company will also deliver to each electing Investor written notice setting forth the number of shares of Executive Stock the Company and each Investor will acquire, the aggregate purchase price to be paid and the time and place of the closing of the transaction. (g) Closing. The closing of the transactions contemplated by this paragraph 7 will take place on the date designated by the Company in the Repurchase Notice or the Supplemental Repurchase Notice, as the case may be, which date will not be more than 90 days after the delivery of such notice. The Company and/or the Investors, as the case may be, will pay for the Executive Stock to be purchased pursuant to the Repurchase Option by check payable to the holder of such Executive Stock. The Company and/or the Investors, as the case may be, will receive customary representations and warranties from each seller regarding the sale of the Executive Stock, including but not limited to the representation that such seller has good and marketable title to the Executive Stock to be transferred free and clear of all liens, claims and other encumbrances. 8. RESTRICTIONS ON TRANSFER. (a) Transfer of Executive Stock. The Optionee will not sell, pledge or otherwise transfer any interest in any shares of Executive Stock, except pursuant to (i) the provisions of paragraphs 6, 7, 11 and 12 hereof, or (ii) the provisions of paragraph 8(b) below. (b) Certain Permitted Transfers. The restrictions contained in this paragraph 8 will not apply with respect to transfers of Executive Stock (i) pursuant to applicable laws of descent and distribution or (ii) among the Optionee's Family Group (as defined below), provided that the restrictions contained in this paragraph 8 will continue to be applicable to the Executive Stock after any such transfer and the transferees of such Executive Stock shall agree in writing to be bound 6 7 by the provisions of the Option Agreement between the Company and the Optionee. "Family Group" means the Optionee's spouse and descendants (whether natural or adopted) and any trust solely for the benefit of, or any corporation or partnership (foreign or domestic) solely owned by, the Optionee and/or the Optionee's spouse and/or descendants. Any transferee of Executive Stock pursuant to a transfer in accordance with the provisions of this subparagraph 8(b) is herein referred to as a "Permitted Transferee". Upon the transfer of Executive Stock pursuant to this paragraph 8(b), the Permitted Transferee(s) will deliver a written notice (the "Transfer Notice") to the Company. The Transfer Notice will disclose in reasonable detail the identity of the Permitted Transferee(s). 9. ADDITIONAL RESTRICTIONS ON TRANSFER. (a) The certificates representing the Executive Stock and Option Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCK OPTION AGREEMENT BETWEEN THE ISSUER (THE "COMPANY") AND A CERTAIN EMPLOYEE OF THE COMPANY DATED AS OF _______________, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." (b) No holder of Executive Stock may sell, transfer or dispose of any Executive Stock (except pursuant to an effective registration statement under the 1933 Act) without first delivering to the Company an opinion of counsel reasonably acceptable in form and substance to the Company (which counsel shall be reasonably acceptable to the Company) that registration under the 1933 Act is not required in connection with such transfer. 10. DEFINITION OF EXECUTIVE STOCK. For all purposes of the Plan, Executive Stock will continue to be Executive Stock in the hands of any holder other than the Optionee (except for the Company, the Investors and purchasers pursuant to an offering registered under the 1933 Act or purchasers pursuant to a Rule 144 transaction), and each such other holder of Executive Stock will succeed to all rights and obligations attributable to the Optionee as a holder of Executive Stock hereunder. Executive Stock will also include shares of the Company's capital stock issued with respect to shares of Executive Stock by way of a stock split, stock dividend or other recapitalization. 11. SALE OF THE COMPANY. (a) If the Board and the holders of a majority of the shares of Common Stock then outstanding approve a sale of all or substantially all of the Company's assets determined on a consolidated basis or a sale of all or substantially all of the Company's outstanding capital stock (whether by merger, recapitalization, consolidation, reorganization, combination or otherwise) to an Independent Third Party (as defined below) or group of Independent Third Parties (collectively an "Approved Sale"), each holder of Executive Stock will vote for, consent to and raise no 7 8 objections against such Approved Sale. If the Approved Sale is structured as (i) a merger or consolidation, each holder of Executive Stock will waive any dissenters rights, appraisal rights or similar rights in connection with such merger or consolidation or (ii) sale of stock, each holder of Executive Stock will agree to sell all of his shares of Executive Stock and rights to acquire shares of Executive stock on the terms and conditions approved by the Board and the holders of a majority of the Executive Stock then outstanding. Each holder of Executive Stock will take all necessary or desirable actions in connection with the consummation of the Approved Sale as requested by the Company. "Independent Third Party" means any person or entity who, immediately prior to the contemplated transaction, does not own in excess of 10% of the Company's Common Stock on a fully-diluted basis (a "10% Owner"), who is not controlling, controlled by or under common control with any such 10% Owner and who is not the spouse or descendent (by birth or adoption) of any such 10% Owner or a trust for the benefit of such 10% Owner and/or such other persons or entities. (b) The obligations of the holders of Common Stock with respect to the Approved Sale of the Company are subject to the satisfaction of the following conditions: (i) upon the consummation of the Approved Sale, each holder of Common Stock will receive the same form of consideration and the same portion of the aggregate consideration that such holders of Common Stock would have received if such aggregate consideration had been distributed by the Company in complete liquidation pursuant to the rights and preferences set forth in the Company's Certificate of Incorporation as in effect immediately prior to such Approved Sale; (ii) if any holders of Common Stock are given an option as to the form and amount of consideration to be received, each holder of Common Stock will be given the same option; and (iii) each holder of then currently exercisable rights to acquire shares of Common Stock will be given an opportunity to exercise such rights prior to the consummation of the Approved Sale and participate in such sale as holders of Common Stock. (c) If the Company or the holders of the Company's securities enter into any negotiation or transaction for which Rule 506 (or any similar rule then in effect) promulgated by the Securities Exchange Commission may be available with respect to such negotiation or transaction (including a merger, consolidation or other reorganization), the holders of Executive Stock will, at the request of the Company, appoint a purchaser representative (as such term is defined in Rule 501) reasonably acceptable to the Company. If any holder of Executive Stock appoints a purchaser representative designated by the Company, the Company will pay the fees of such purchaser representative, but if any holder of Executive Stock declines to appoint the purchaser representative designated by the Company such holder will appoint another purchaser representative, and such holder will be responsible for the fees of the purchaser representative so appointed. (d) The Optionee and the other holders of Executive Stock (if any) will bear their pro-rata share (based upon the number of shares sold) of the costs of any sale of Executive Stock pursuant to an Approved Sale to the extent such costs are incurred for the benefit of all holders of Common Stock and are not otherwise paid by the Company or the acquiring party. Costs incurred by the Optionee and the other holders of Executive Stock on their own behalf will not be considered costs of the transaction hereunder. (e) The provisions of this paragraph 11 will terminate upon completion of the initial public offering of the Common Stock. 8 9 12. PARTICIPATION RIGHTS. (a) At least 30 days prior to any sale or exchange (a "Transfer") of Common Stock by an Investor (other than a Transfer among the Investors or their affiliates or to an employee of the Company or its Subsidiaries) (the "Transferring Stockholder"), the Company will deliver a written notice (the "Sale Notice") to the holders of Executive Stock and Option Shares (the "Other Stockholders"), specifying in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the Transfer. The Other Stockholders may elect to participate in the contemplated Transfer by delivering written notice to the Transferring Stockholder within 30 days after delivery of the Sale Notice. If any Other Stockholders have elected to participate in such Transfer, the Transferring Stockholder and such Other Stockholders will be entitled to sell in the contemplated Transfer, at the same price and on the same terms, a number of shares of Common Stock equal to the product of (i) the quotient determined by dividing the number of shares of Common Stock owned by such person by the aggregate number of shares of Common Stock (including any vested time options which are entitled to participation rights under other agreements with the Company but not including any other unexercised stock options owned by the Transferring Stockholder, the Other Stockholders and other stockholders participating in such sale), and (ii) the number of shares of Common Stock to be sold in the contemplated Transfer. (b) Reasonable efforts will be made to obtain the agreement of the prospective transferee(s) to the participation of the Other Stockholders in any contemplated Transfer, and no Transfer will be made to the prospective transferee(s) unless (i) the prospective transferee(s) agrees to allow the participation of the Other Stockholders or (ii) the Transferring Stockholder agrees to purchase the number of securities from the Other Stockholders which the Other Stockholders would have been entitled to sell pursuant to the last sentence of paragraph (a) above. 13. TERMINATION OF PROVISIONS RELATING TO EXECUTIVE STOCK. The provisions of paragraphs 7 and 8 will terminate upon the first to occur of (i) an Approved Sale, or (ii) (A) the Company (or its successor as a result of merger, consolidation, reorganization or sale) becoming a reporting company under the Securities Exchange Act of 1934, as amended, as a result of the registration of its common equity securities thereunder and (B) the Investors and their affiliates collectively ceasing to own at least 50% of the aggregate number of shares of Common Stock that they own as of September 1, 1997 (as adjusted for stock splits, stock dividends and recapitalization and for exchanges in connection with a merger, consolidation, reorganization or sale). 14. AMENDMENT AND TERMINATION. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no Option shall be granted hereunder after, September 1, 2007; provided, however, that the Board may at any time prior to that date terminate the Plan. The Board may at any time amend the Plan or the term of any Option outstanding under the Plan; provided, however, that no termination or amendment of the Plan or any Option outstanding under the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee under any Option held by such Optionee. 15. WITHHOLDING. It shall be a condition to the obligation of the Company to issue shares of Common Stock upon exercise of an Option that the Optionee (or any Permitted Transferee) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any other taxes. If the amount requested is not paid, the Company may refuse to issue such shares of Common Stock. 9 10 16. OTHER ACTIONS. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company to grant or assume Options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. 10 EX-10.37 3 ESSIG EMPLOYMENT AGREMENT 12-11-97 1 EXHIBIT 10.37 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of the 11th day of December, 1997, between GS INDUSTRIES, INC., a Delaware corporation ("Employer") and MARK G. ESSIG ("Employee"). RECITALS: Employer and Employee desire to enter into this Agreement for purposes of setting forth the terms and conditions of Employee's employment with Employer. This Agreement shall be the definitive employment agreement of Employee with Employer and, except as specifically provided for herein, the terms and conditions of this Agreement shall supersede in all respects the terms and conditions of all previous agreements between Employee and Employer. NOW, THEREFORE, the parties hereby stipulate and agree as follows: 1. Employer agrees to employ Employee as President and Chief Executive Officer of Employer effective January 12, 1998 or such earlier date as is mutually agreed. Employee shall have such powers and perform such duties as may be determined from time to time by the Board of Directors of Employer consistent with past practice. 2. Employer agrees to pay Employee an annual base salary of Five Hundred Fifty Thousand Dollars ($550,000), payable in twelve (12) equal monthly payments. As a signing bonus and in partial compensation to Employee for the value of lost options and restricted stock with respect to his former employment, Employer agrees to pay Employee a one-time payment of Three Hundred Thirty-Three Thousand Three Hundred Thirty-Four Dollars ($333,334) at the 2 time of the execution of this Agreement and, provided Employee's employment by Employer has not been terminated by Employer for Cause or by Employee without Good Reason at such times, to pay Employee the sum of Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three Dollars ($333,333) on January 1, 1999 and on January 1, 2000. In the event that all or any part of the long term incentive bonus of Three Hundred Fifty Thousand Dollars ($350,000) payable to Employee by his former employer in the first quarter of 1998 is not paid to Employee as a result of his resignation from employment with his former employer or his employment by Employer, Employer shall pay such unpaid amount to Employee as an additional sign-on bonus. Employer shall also reimburse Employee for the reasonable professional fees incurred by Employee in connection with the negotiation and execution of this Agreement and the employment relationship between the parties. 3. During the period of Employee's employment under this Agreement, Employer shall provide Employee with the following benefits and reimbursements: (a) Upon proof of payment, Employer shall reimburse Employee in accordance with Employer's policies for all monies advanced in connection with Employee's employment for expenses incurred by Employee on behalf of Employer. (b) Employee shall be entitled to four (4) weeks paid vacation during each full calendar year and for a prorated amount of vacation for any partial calendar year. Vacation shall be taken at a time or times mutually agreeable with Employee and the Board of Directors of Employer. If requirements of Employer prevent Employee's taking all or any part of such vacation, Employee may elect to carry forward all unused vacation time (or part thereof) to the next succeeding calendar year in accordance with Employer's policies. 2 3 (c) Employee shall be entitled to the exclusive use of a late model luxury automobile to be provided by Employer. All reasonable expenses incident to the operation of such automobile, including fuel, oil, insurance, maintenance and repairs, shall be paid by Employer. (d) Employee is required, as part of his employment, to entertain for the purpose of promoting the business of Employer. Employer agrees that business promotion will be facilitated by having Employee maintain membership in a luncheon club and in a country club. Employee shall be entitled to paid membership including, but not limited to initiation fees, in a luncheon club and in a country club selected with the mutual agreement of Employer and Employee. (e) Employee shall be entitled to participate in Employer's health and accident insurance plans, group life insurance plans, travel and accident plans, major medical plans, pension plan, the long term disability insurance plan for salaried employees, and such other management employee benefit plans currently available to newly employed executive employees of Employer and that may be in effect from time to time subject to the condition that the Employer shall have the right, in its sole discretion, to terminate, change, modify or amend such benefit plans. (f) Employee shall be designated as a participant in the Amended and Restated GS Industries, Inc. Supplemental Executive Retirement Plan (the "SERP") dated October 5, 1995, as amended; provided, that Employee's benefits under the SERP are modified as follows: 3 4 (i) the vesting provision of Section 7.1 of the SERP is hereby modified with respect to Employee to eliminate forfeiture in the event that prior to Employee obtaining five (5) Years of Credited Service (as defined in the SERP) Employer terminates Employee without Cause, Employee terminates this Agreement for Good Reason or Employee dies; and (ii) the Normal Retirement Benefit (as defined in the SERP) shall not exceed 75% of the highest annual base salary paid to Employee by Employer which limitation shall apply for all purposes of the SERP including but not limited to in the determination of the Deferred Retirement Benefit; and (iii) Years of Credited Service shall only include service on or subsequent to the Commencement Date. (g) Employee shall be entitled to receive a bonus under Employer's Annual Incentive Program with an individual multiplier of six (6) applicable to Employee. Employee shall be entitled to a minimum bonus for 1998 of Four Hundred Fifty Thousand Dollars ($450,000). (h) Tax planning and preparation during Employee's employment under this Agreement shall be provided to Employee at Employer's expense by the Company's audit firm or by an alternative equivalent selected by Employer. (i) Employer shall provide Employee with reimbursement and relocation expenses under Employer's Corporate Policy Statement with respect to such expenses with the following additions: 4 5 (i) Employer shall pay Employee the difference, if any, by which the gross sale price of Employee's home located at 11420 Grandstone Lane, Cincinnati, Ohio is less than the appraised value of such property as of the date that Employee and his family vacate such property and permanently relocate to Charlotte and Employee shall transfer title to such property to Employer or its designee at such time; provided that Employee has not sold the property prior to such time. If, with the consent of Employer, Employee sells the property to a third party prior to permanently relocating to Charlotte for a gross sale price less than the appraisal value, Employer shall pay Employee the difference between such gross sale price and the appraisal value; and (ii) Reimbursement of temporary living and commuting expenses reasonably incurred by Employee and his immediate family pending his permanent relocation to Charlotte shall be extended beyond the time period in the Corporate Policy Statement as reasonably requested by Employee and, the amount of such reimbursement shall be grossed up to the extent that such reimbursed expenses are taxable to Employee. 4. If Employee becomes disabled during the period of his employment under this Agreement such that he is unable to perform the regular duties of his employment on a full-time basis, he shall continue to receive the annual base salary and other benefits extended, paid or granted to him hereunder until either (a) his restoration to active service for Employer, (b) his death, or (c) twelve (12) months after commencement of the disability, whichever date or event first occurs. Any dispute between Employer and Employee as to the disability of Employee shall be determined by a doctor of medicine selected by Employee and agreed to by Employer. 5 6 5. During the term of this Agreement or any extension thereof, Employee shall devote his entire time and energy to the furtherance of the businesses of Employer and shall not work in any advisory or other capacity for any other individual, firm or corporation without first having obtained the written consent of Employer thereto. 6. As part of the consideration given by Employee for the considerations paid to him by Employer, Employee agrees that he will not use, divulge, publish or otherwise reveal, either directly or indirectly, to any person, firm or corporation during the term of his employment or for a period of two (2) years after termination thereof any business or operational know-how or customer lists with regard to the financial or other affairs of Employer or any knowledge or information or any facts concerning any formulas, methods, inventions or devices used by Employer or its affiliated companies and disclosed to Employee by reason of his employment; provided, that the obligation of Employee to maintain the confidentiality of business or operational know-how, formulas, methods, inventions or devices used by Employer or its affiliated companies and disclosed to Employee by reason of his employment shall continue indefinitely. Upon termination of employment and at the written request of Employer, Employee shall turn over to Employer all documents, including customer lists, books and records, calculations, descriptions, drawings, models and designs, with Employer and are in any way connected with Employer's business. 7. In further consideration of the salary paid to him by Employer, Employee agrees that he will promptly communicate, disclose and deliver to Employer any and all inventions, discoveries and other improvements relating to equipment, devices, methods, formulas, or processes of any nature whatsoever which are created or developed by Employee while in the 6 7 employ of Employer ("Discoveries"). To the maximum extent permitted under North Carolina General Statutes Sections 66-57.1 and 66-57.2 (as the same may be amended from time to time), such Discoveries and any patent rights, copyrights and other intellectual property rights relating thereto shall constitute the sole property of Employer and its successors and assigns. Employer shall have the right, at its expense, to apply for United States and foreign patents on any such inventions, discoveries or other improvements in the name of Employee, and Employee, upon request, shall at once execute all documents relating to he application for and assignment to Employer of such applications and patents without further compensation for such assignment. 8. The term of this Agreement shall begin on January 12, 1998 or such earlier date as is mutually agreed (the "Commencement Date") and shall continue indefinitely until terminated as provided in this paragraph or until the death of Employee. (a) Either party may terminate this Agreement without Cause, by giving the other party sixty (60) days prior written notice of termination. (b) If Employer terminates this Agreement without Cause or Employee terminates this Agreement with Good Reason , Employee shall be entitled to the following: (i) a lump sum payment equal to twice the amount of Employee's annual base salary then in effect; (ii) a bonus under the Annual Incentive Program for the calendar year of the termination and a bonus for the ensuing calendar year payable when bonuses are paid to other employees under the Annual Incentive Program unless Employer and Employee agree to a lump sum or other settlement of such benefit; 7 8 (iii) continuation of Employee's other benefits set forth in paragraph 3 hereof (other than under Employer's qualified pension plan, section 401(k) plan or similar benefits where continuation of coverage for Employee is prohibited) for a period of two years from the date of termination; and (iv) continued vesting under the Stock Option Agreement between Employer and Employee of even date herewith and under the SERP for a period of two (2) years. Notwithstanding the provision of this paragraph 8(b), if Employer gives Employee written notice on or before six months prior to fourth anniversary of the Commencement Date, this paragraph 8(b) shall be modified by adding the words "prior to the fourth anniversary of the Commencement Date" after the words "Good Reason"; and (i) the two year time periods set forth in paragraph 6 and paragraph 10 of this Agreement shall be changed to one year; and (ii) paragraphs 8(c) and (d) below shall become effective. If Employer does not give such written notice, the foregoing modifications to paragraphs 8(b), 6 and 10 shall be of no force and effect, and paragraphs 8(c) and 8(d) below shall be of no force and effect. (c) If Employer terminates this Agreement without Cause or Employee terminates this Agreement with Good Reason after the fourth anniversary of the Commencement Date and prior to the fifth anniversary of the Commencement Date, Employee shall be entitled to the following: (i) a lump sum payment equal to twelve months base salary then in effect plus one month for each full calendar month remaining in the fifth contract year; (ii) a bonus under the Annual Incentive Program for the calendar year of the termination and, if such termination occurs on or before the 31st day of December of the 8 9 fifth contract year, a bonus under the Annual Incentive Program for the ensuing calendar year payable when bonuses are paid to other employees under the Annual Incentive Program unless Employer and Employee agree to a lump sum or other settlement of such benefit; and (iii) continuation of employee's other benefits set forth in paragraph 3 hereof (other than under Employer's qualified pension plan, Section 401(k) plan or similar benefits where continuation of coverage for Employee is prohibited) and continued vesting under the Stock Option Agreement between Employer and Employee of even date herewith and under the SERP for a period of twelve months plus one month for each full calendar month remaining in the fifth contract year. (d) If Employer terminates this Agreement without Cause or Employee terminates this Agreement with Good Reason at any time after the fifth anniversary of the Commencement Date, Employee shall be entitled to the following: (i) a lump sum payment equal to Employee's annual base salary then in effect; (ii) a bonus under the Annual Incentive Program for the calendar year of the termination payable when bonuses are paid to other employees under the Annual Incentive Program unless Employer and Employee agree to a lump sum or other settlement of such benefit; and (iii) continuation of Employee's other benefits set forth in paragraph 3 hereof (other than under Employer's qualified pension plan, Section 401(k) plan or similar benefits where continuation of coverage for Employee is prohibited) and continued vesting under the SERP for a period of twelve months. 9 10 (e) Employer may also terminate this Agreement at any time, without notice, for Cause. "Cause" means (i) after written demand from the Board of Directors of Employer which reasonably identifies the conduct or obligation required of Employee and, after a reasonable time for Employee to cure such demand if curable, (w) the willful failure by Employee to perform duties or adhere to policies reasonably requested or reasonably prescribed by the Board of Directors of Employer, (x) the engaging by Employee in conduct which is materially injurious to Employer or any of its subsidiaries, (y) the willful and material failure of Employee to comply with the Corporate Policies of Employer including the requirements of Employer's Code of Business Conduct and its Antitrust and Trade Regulation Policy, or (z) gross negligence or willful misconduct by Employee in the performance of his duties which results in, or causes, harm to the Employer or any of its subsidiaries, (ii) Employee's conviction of a crime involving fraud or misrepresentation, a gambling-related offense or a felony or (iii) Employee's abuse of illegal drugs or other controlled substances or Employee's habitual intoxication. (f) For purposes of the Agreement, Good Reason shall mean the occurrence of any of the following prior to Employee's 65th birthday: (i) a material diminution of Employee's duties and responsibilities; or (ii) the failure of Employee to be elected to the Board of Directors of Employer or the removal of Employee as a Director of Employer or as Chief Executive Officer of Employer other than for Cause; or (iii) a reduction in Employee's annual base salary or a material, adverse change in the benefit plans or programs set forth in paragraph 3 hereof; or 10 11 (iv) the relocation of Employee's principal place of employment more than 50 miles from Charlotte, North Carolina; or (v) a sale or other transfer of a material part of the business or operations of Employer without the consent of Employee if, at the time of such sale or transfer, it appears likely that it will have material adverse effect on Employee's prospects for a bonus under Employer's Annual Incentive Program unless an equitable adjustment is made in the method of determining Employee's bonus such that such sale or transfer is not likely to have a material adverse effect on Employee's bonus prospects; or (vi) during the thirty (30) day period immediately following the nine (9) calendar month period subsequent to the calendar month during which a Change In Control (as defined in the Executive Severance Agreement referred to in paragraph 9 below) occurs, Employee gives written notice to Employer that Employee is terminating this Agreement for Good Reason. In such notice Employee shall specify the date of termination which, unless otherwise agreed by Employee and Employer, shall not be less than sixty (60) days nor more than ninety (90) days following the end of the nine calendar month period. During the notice period, Employee shall continue to receive his full salary and benefits, provided Employee satisfactorily performs his duties during the notice period (unless relieved of those duties by Employer). (g) Anything herein to the contrary notwithstanding, if Employee becomes disabled during the term of this Agreement, he shall be solely entitled to the payments provided under paragraph 4 of this Agreement. 11 12 9. Executive Severance Agreement. Employer and Employee have entered into an Executive Severance Agreement of even date herewith, the terms of which are incorporated herein. Anything in this Agreement or in the Executive Severance Agreement to the contrary notwithstanding, any payments made or benefits provided under the Executive Severance Agreement shall mitigate any payments or benefits required to be provided under this Agreement and any payment made or benefits provided under this Agreement shall mitigate any payments or benefits required to be provided under the Executive Severance Agreement. 10. For a period of two (2) years after termination of his employment with Employer, Employee will not accept employment in, or himself carry on, or provide consulting or other services to a competitive business in the Territory (defined below), if in such connection he is required to serve, with regard to products competitive with the material product lines of Employer or any of its subsidiaries, along the same or similar lines as he was engaged in with Employer. For the purposes of this Paragraph 10, "Territory" means: (a) Mecklenburg County, North Carolina; (b) Jackson County, Missouri; (c) Mecklenburg County and Jackson County; (d) the State of Missouri; (e) the State of North Carolina; (f) the states of North Carolina, South Carolina and Missouri; (g) the states in the United States east of the Mississippi Rover; (h) all the states in the continental United States; (i) all of the states in the United States and (j) all of the countries in the world wherein Employer or its subsidiaries and affiliated companies have conducted business directly or through joint ventures with third parties during the twelve (12) month period immediately prior to the termination of Employee's employment with Employer. For a period of two (2) years after termination of his employment with Employer, Employee 12 13 shall not solicit the employment of any person that is an employee of Employer or any of its subsidiaries or affiliated companies. 11. This contract shall be governed by and construed according to the laws of the State of North Carolina. 12. The provisions of this Agreement are severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity or enforceability of any other provision. 13. Employee has carefully read and considered the provisions of this Agreement and agrees that the restrictions set forth herein are fair and reasonably required for Employer's protection. 14. This Agreement shall be binding upon, and shall insure to the benefit of, the parties and their respective successors, heirs and assigns. 15. The provisions of paragraphs 6, 7, 8, 9, 10 and 17 of this Agreement shall survive the termination of Employee's employment with Employer for any reason. 16. A delay or omission of either party to exercise any right or power arising from any default by the other party shall not impair any right or power of the non-defaulting party or be construed to be a waiver of any such default. A waiver by either party of any breach of any of the provisions of this Agreement shall not operate or be construed as a waiver of any other breach of the same or any other provision of this Agreement. 17. Any dispute under this Agreement (except for disputes arising under paragraphs 6, 7 and 10 above) and, anything in the Stock Option Agreement between Employer and Employee of even date herewith to the contrary notwithstanding, any dispute under the Stock 13 14 Option Agreement shall be submitted to binding arbitration in Charlotte, North Carolina pursuant to the rules of the American Arbitration Association. The decision of the arbitrator(s) shall be final. Except as hereafter provided, Employer and Employee shall each bear their own attorney's fees and shall share equally the cost of arbitration. However, if Employee prevails in a challenge by Employee to Employer's assertion of the existence of Cause for termination or in a challenge by Employer to Employee's assertion of the existence of Good Reason for termination, Employee shall be reimbursed by Employer for all reasonable costs and expenses incurred by Employee in such challenge, including reasonable attorney's fees. 18. The foregoing constitutes the complete agreement and understanding between the parties hereto with respect to the subject matter hereof. Any changes or alterations in this Agreement shall be valid only if set forth in writing and signed by both parties. [SIGNATURES APPEAR ON FOLLOWING PAGE] 14 15 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first above written. GS INDUSTRIES, INC. By: /s/ Roger Regelbrugge ---------------------------- Title: Chairman ---------------------------- /s/ Mark G. Essig ----------------------------------- MARK G. ESSIG 15 EX-10.38 4 ESSIG STOCK OPTION AGREEMENT 12-11-97 1 EXHIBIT 10.38 STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT (this "Option Agreement") is entered into as of this 11th day of December, 1997 between GS INDUSTRIES, INC., a Delaware corporation (the "Company"), and MARK G. ESSIG (the "Optionee"). WHEREAS, the Company has adopted the GS Industries, Inc. 1997 Stock Option Plan (the "Plan"), the terms and conditions of which are incorporated herein by reference, and pursuant to which the Company may, from time to time, make awards of Options (as defined below) and enter into Option Agreements with eligible employees of the Company; and WHEREAS, pursuant to the Plan, the Company has determined to grant to the Optionee an Option to purchase Common Stock (as defined below) of the Company, which Option shall be subject to the terms and conditions of this Option Agreement; and WHEREAS, a copy of such Plan has been delivered to the undersigned Optionee. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. DEFINITIONS. For purposes of this Option Agreement, the following terms shall have the meanings indicated (all other capitalized terms used in this Option Agreement but not defined herein shall have the meaning assigned to such terms in the Plan): (a) "Committee" shall mean the Compensation Committee of the Board of Directors of the Company, or, in the event no such Committee exists or is appointed, then the Board of Directors of the Company. (b) "Common Stock" means the common stock of the Company, par value $.01 per share. (c) "Executive Option Shares" shall have the meaning provided in paragraph 2 below. (d) "Exercise Date" shall mean the business day, during the Option Period, upon which the Option is exercised pursuant to the Plan. (e) "Exercise Option Price" shall have the meaning provided in paragraph 2 below. (f) "Fair Market Value" shall mean: (i) if shares of Common Stock are traded on an established United States national stock exchange or in the United States over-the-counter market with prices reported on the NASDAQ, the average of the highest and lowest sales prices for 1 2 shares of Common Stock on the relevant date (or, if there were no sales of shares of Common Stock on such date, the weighted average of the mean between the highest and lowest sale prices for shares of Common Stock on the nearest preceding trading day on which there were sales of shares of Common Stock); and (ii) if shares of Common Stock are not traded as described in clause (i), the fair market value of shares of Common Stock on the relevant date, as determined in good faith by the Committee. (g) "Option" shall mean the option to purchase shares of Common Stock granted to the Optionee pursuant to this Option Agreement. (h) "Option Agreement" shall mean this Stock Option Agreement between the Company and the undersigned Optionee. (i) "Option Period" shall have the meaning provided in paragraph 3(b) below. (j) "Plan" shall mean the GS Industries, Inc. 1997 Stock Option Plan and any amendments thereto. 2. GRANT OF OPTION. Effective on the Commencement Date of the Employment Agreement between Company and Optionee of even date herewith, and subject to the terms and conditions set forth herein, the Company hereby grants to the Optionee the Option to purchase from the Company, at an exercise price of $7.00 per share (the "Exercise Option Price"), up to but not exceeding in the aggregate four hundred fifty thousand (450,000) shares of Common Stock (the "Executive Option Shares"). 3. EXERCISABILITY. (a) On the last day of each calendar quarter, beginning with the quarter ending March 31, 1998, the Option will have vested and become exercisable with respect to five percent (5%) of the Executive Option Shares if the Optionee is employed by the Company or a Subsidiary on such date; provided, however, that upon the occurrence of an Acceleration Event (as defined in the Plan) during the Option Period (as defined below), all of the Executive Option Shares will vest and become exercisable. (b) The Option will commence on the date hereof and will expire on the earlier of December 31, 2007 or the date of the termination of Optionee's employment with the Company or a Subsidiary for any reason other than death or Disability (the "Option Period"); provided, however, that the Optionee will have until the tenth anniversary of the date of this Option Agreement to exercise the Option with respect to the Executive Option Shares as to which the Option has vested pursuant to paragraph 3(a) above during the Option Period. 2 3 (c) Unless otherwise provided herein, the Option may be exercised by the Optionee only in accordance with the terms and conditions of the Plan. (d) The Exercise Option Price upon the exercise of the Option shall be payable to the Company in full either (i) in cash or its equivalent, or (ii) by tendering previously acquired shares of Common Stock having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Option Price (provided that the shares of Common Stock so tendered shall have been held by the Optionee for at least six months prior to such tender), in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof, or (iii) by a combination of (i) and (ii). (e) The Committee, in its sole discretion, also may, where applicable, allow the Optionee to make cashless exercises as permitted under Federal Reserve Board Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the purpose of this Option Agreement, the Plan and applicable law. (f) Within 15 days after the Exercise Date, subject to the receipt of payment of the Exercise Option Price and of any payment in cash of federal, state or local income tax withholding or other employment tax that may be due upon the issuance of the Executive Option Shares as determined and computed by the Company pursuant to paragraph 4 below, the Company shall issue to the Optionee the number of shares of Common Stock with respect to which such Option shall be so exercised and shall deliver to the Optionee a certificate or certificates therefor. (g) The Option is personal to the Optionee and is not transferable by the Optionee except to a Permitted Transferee (as defined in the Plan). Only the Optionee or a Permitted Transferee is entitled to exercise the Option, except as permitted by the Plan. (h) The Company will not be required (i) to transfer on its books any Executive Option Shares which have been sold or transferred in violation of any of the provisions set forth in this Option Agreement, or (ii) to treat as owner of such shares, to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares have been transferred in violation of this Option Agreement. 4. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his Option with respect to any of the Executive Option Shares in accordance with the provisions of paragraph 3 above, the Optionee shall pay to the Company upon exercise of the Option, in addition to the Exercise Option Price, the amount of any federal, state or local income tax withholding or other employment tax that may be due upon such exercise. The determination of the amount of any such federal, state or local income tax withholding or other employment tax due in such event shall be made by the Company and shall be binding upon the Optionee. 3 4 5. SECURITIES LAWS RESTRICTIONS. The Optionee hereby represents that when the Optionee exercises the Option he will be purchasing Executive Option Shares for the Optionee's own account and not on behalf of others. The Optionee understands and acknowledges that federal and state securities laws govern and restrict the Optionee's right to offer, sell or otherwise dispose of any Executive Option Shares unless the Optionee's offer, sale or other disposition thereof is registered under the 1933 Act and state securities laws or, in the opinion of the Company's counsel, such offer, sale or other disposition is exempt from registration thereunder. The Optionee agrees that he will not offer, sell or otherwise dispose of any Executive Option Shares in any manner which would: (i) require the Company to file any registration statement (or similar filing under state law) with the Securities and Exchange Commission or to amend or supplement any such filing or (ii) violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state or federal law. The Optionee further understands that the certificates for any Executive Option Shares the Optionee purchases will bear the legend set forth in the Plan or such other legends as the Company deems necessary or desirable in connection with the 1933 Act or other rules, regulations or laws. 6. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises under, or as a result of, or pursuant to, this Option Agreement shall be determined by the Committee in its absolute and uncontrolled discretion, and any such determination or other determination by the Committee under or pursuant to this Option Agreement, and any interpretation by the Committee of the terms of this Option Agreement, shall be final, binding and conclusive on all parties affected thereby. 7. MISCELLANEOUS PROVISIONS. (a) Notices. Any notice provided for in this Option Agreement must be in writing and must be personally delivered, received by certified mail, return receipt requested, or sent by guaranteed overnight delivery service, to the Investors (as defined in the Plan) at the addresses indicated in the Company's records and to the other recipients at the address indicated below: To the Company: GS Industries, Inc. 1901 Roxborough Road Charlotte, North Carolina 28211 Attention: Chief Financial Officer To Optionee: Mark G. Essig 11420 Grandstone Lane Cincinnati, Ohio 45249 4 5 With a copy to: William H. Schorling Klett, Lieber, Rooney & Schorling 28th Floor One Logan Square Philadelphia, Pennsylvania 19103 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Option Agreement will be deemed to have been given when so delivered or mailed. (b) Severability. Whenever possible, each provision of this Option Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Option Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or the effectiveness or validity of any provision in any other jurisdiction, and this Option Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (c) Complete Agreement. This Option Agreement (including the Plan which is incorporated herein) embodies the complete agreement and understanding among the parties and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (d) Counterparts. This Option Agreement may be executed in separate counterparts, each of which will be deemed to be an original and all of which taken together will constitute one and the same agreement. (e) Successors and Assigns. This Option Agreement is intended to bind and inure to the benefit of and be enforceable by the Optionee, the Company, the Investors and their respective successors and assigns; provided, however, that the Optionee may not assign any of his rights or obligations, except as expressly provided by the terms of this Option Agreement. (f) Governing Law. All issues concerning the enforceability, validity and binding effect of this Option Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of Delaware. 5 6 (g) Remedies. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Option Agreement and that any party hereto will have the right to injunctive relief, in addition to all of its other rights and remedies at law or in equity, to enforce the provisions of this Option Agreement. (h) Third Party Beneficiaries. The parties hereto acknowledge and agree that the Investors are third party beneficiaries of this Option Agreement. This Option Agreement will inure to the benefit of and be enforceable by the Investors and their respective successors and assigns. [SIGNATURES APPEAR ON FOLLOWING PAGE] 6 7 IN WITNESS WHEREOF, the parties have executed this Option Agreement as of the day and year first above written. GS INDUSTRIES, INC. By: /s/ Roger Regelbrugge ---------------------------- Title: Chairman ---------------------------- /s/ Mark G. Essig ----------------------------------- Mark G. Essig 7 EX-10.39 5 FORM OF CHANGE OF CONTROL 1 EXHIBIT 10.39 FORM OF STATE OF NORTH CAROLINA EXECUTIVE SEVERANCE COUNTY OF MECKLENBURG AGREEMENT THIS EXECUTIVE SEVERANCE AGREEMENT (this "Agreement") is made this the ______ day of December, 1997, by and between GS Industries, Inc., a Delaware corporation (the "Company"), and __________________ ("Executive"). WHEREAS, the Company and its Board of Directors have determined that its best interests and those of its shareholders will be served by reinforcing and encouraging the continued dedication of key executives to their assigned duties without distractions arising from a potential change in control of the Company; and WHEREAS, this Agreement is intended to remove such distraction and to reinforce the continued attention and dedication of senior management to their assigned duties. NOW, THEREFORE, as provided herein, the parties hereby agree as follows: I. ELIGIBILITY FOR BENEFITS Section 1.1. Qualifying Termination. The Company shall not be required to provide any benefits to the Executive pursuant to this Agreement unless a Qualifying Termination occurs before this Agreement expires in accordance with Section 5.2 hereof. For purposes of this Agreement, a Qualifying Termination shall occur only if (a) a Change in Control occurs after January 1, 1998, and (b) within two years after the Change in Control, (i) the Company terminates the Executive's employment other than for Cause; or (ii) the Executive terminates his employment with the Company for Good Reason; provided, that a Qualifying Termination shall not occur if the Executive's employment with the Company terminates by reason of the Executive's Disability, death, or voluntary retirement. Section 1.2. Change in Control. A Change in Control shall be deemed to occur when and only when any individuals, firms, corporations or other entities other than a Major Stockholder on the date of this Agreement, acting in concert ("Person"), together with all Affiliates and Associates of such Person, acquire (including by purchase, exchange, merger or other business combination, or any combination of the foregoing) beneficial ownership of securities of the Company representing 50 percent or more of the combined voting power of the 2 Company's then outstanding voting securities; provided, that no Change of Control will be deemed to have occurred if such acquisition is in connection with a sale by the Company or an Affiliate of its equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. For purposes of this Section 1.2, the terms "Affiliates" and "Associates" shall have the meanings set forth in Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 (the Exchange Act"); the terms "beneficial ownership" and "beneficially owned" shall have the meaning set forth in section 13(d) of the Exchange Act, as amended, and in Rule 13d-3 promulgated thereunder, the term "Major Stockholder" shall mean the current stockholders of the Company that are listed on Schedule 1 hereto. Section 1.3. Termination for Cause. The Company shall have Cause to terminate the Executive's employment with the Company for purposes of Section l.1 hereof only if the Executive (a) engages in unlawful acts intended to result in the substantial personal enrichment of the Executive at the Company's expense, (b) is convicted of a crime involving moral turpitude, or (c) after specific written notice from the Board of Directors or Chief Executive Officer of the Company setting forth the particular duty or obligation required of the Executive, and after a reasonable time to cure, the Executive's continued, material failure to perform a duty or obligation reasonably required of the Executive; provided, that such duty or obligation does not represent a material diminution of Executive's responsibilities as they existed prior to the Change of Control. Section 1.4. Termination for Good Reason. The Executive shall have a Good Reason for terminating employment with the Company only if one or more of the following occurs in anticipation of, or after, a Change in Control: (a) a change in the Executive's position or responsibilities with the Company that represents a material diminution from, and is not substantially equivalent to, the Executive's position or responsibilities in effect immediately before the Change in Control; (b) transfer of the Executive to a location in excess of twenty-five miles from Charlotte, North Carolina, without fully compensating the Executive for all expenses related to relocating the Executive and his family to the new location; (c) layoff or involuntary termination of the Executive's employment, except in connection with the termination of the Executive's employment for Cause or as a result of the Executive's Disability, death or voluntary retirement; (d) a material reduction by the Company in the Executive's base salary as in effect at the time of the Change in Control; 2 3 (e) the failure by the Company to continue in effect any Plan in which the Executive is participating at the time of the Change in Control (or plans or arrangements providing the Executive with substantially equivalent benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control; (f) any action or inaction by the Company that would adversely affect the Executive's continued participation in any Plan on at least as favorable a basis as was the case at the time of the Change in Control, or that would materially reduce the Executive's benefits in the future under the Plan or deprive him of any material benefits that he enjoyed at the time of the Change in Control, except to the extent that such action or inaction by the Company is required by the terms of the Plan as in effect immediately before the Change in Control, or is necessary to comply with applicable law or to preserve the qualification of the Plan under the Internal Revenue Code; (g) the Company's failure to obtain the express assumption of this Agreement by any successor to the Company as provided by Section 5.4 hereof; or (h) any material violation by the Company of any agreement (including this Agreement) between it and the Executive. Notwithstanding the foregoing, no action by the Company shall give rise to a Good Reason if it results from the Executive's termination for Cause, death or voluntary retirement, and no action by the Company specified in paragraphs (a) through (i) above shall give rise to a Good Reason if it results from the Executive's Disability. A Good Reason shall not be deemed to be waived solely by reason of the Executive's continued employment as long as the termination of the Executive's employment occurs within the time prescribed by Section 1.1(b) hereof. For purposes of this Section 1.4, "Plan" means any compensation plan, such as an incentive or stock option plan or incentive bonus plan, or any employee benefit plan, such as a thrift, pension, profit-sharing, stock bonus, long-term performance award, medical, disability, accident, or life insurance plan, or any other plan, program or policy of the Company that is intended to benefit employees. Section 1.5 Disability. For purposes of this Agreement, "Disability" shall mean illness or injury that prevents the Executive from performing the essential functions of his duties (as they existed immediately before the illness or injury) on a full-time basis, with or without reasonable accommodations, for six consecutive months. Section 1.6. Notice. If a Change in Control occurs, the Company shall notify the Executive of the occurrence of the Change in Control within two weeks after the Change in Control. 3 4 II. BENEFITS AFTER A QUALIFYING TERMINATION Section 2.1 Basic Severance Payment. If the Executive incurs a Qualifying Termination following a Change in Control that occurs on or before termination of this Agreement as provided in Section 5.2 hereof, the Company shall pay within 30 days after the date of the Qualifying Termination to the Executive a single lump sum cash amount equal to (i) two (2) times the greater of his annual base salary in effect immediately preceding termination or immediately preceding the Change of Control and (ii) an amount equivalent to an incentive bonus for the two years following termination which assumes the Company achieves the results outlined in its Annual Business Plan and based on either the terms of the incentive plan immediately preceding the Change of Control or immediately preceding termination, whichever gives the greater result. Section 2.2 Benefits and Perquisites. If the Executive incurs a Qualifying Termination following a Change in Control that occurs on or before termination of this Agreement as provided in Section 5.2 hereof, the Company shall provide the Executive, at the Company's expense, for a two year period beginning on the date of the Qualifying Termination, all benefits and perquisites that the Executive received immediately preceding the termination or Change in Control, whichever is higher, including, but not limited to the same (or equivalent if such insured plans do not allow participation by former employees) medical, accident, disability, life and any other insurance coverage as was provided to him by the Company immediately before the Change in Control (or, if greater, as in effect immediately before the Qualifying Termination occurs), except that continued benefit accrual or participation under any Company Qualified Benefit Plans, intended to qualify under Internal Revenue Code Sections 401 and 501, shall not continue post-termination, to the extent that such accrual or participation is not permitted under the terms of those Qualified Benefit Plans. Section 2.3. Nonduplication. Nothing in this Agreement shall require the Company to make any payment or to provide any benefit or service credit that the Company is otherwise required to provide under any other contract, agreement, policy, plan, or arrangement. 4 5 III. EFFECT ON SEVERANCE POLICY Section 3.1. Effect on Severance Policy. If the Executive becomes entitled to receive benefits hereunder, the Executive shall not be entitled to any benefits under any other Company severance policy. IV. TAX MATTERS Section 4.1. Withholding. The Company may withhold from any amount payable to the Executive hereunder all federal, state or other taxes that the Company may reasonably determine are required to be withheld pursuant to any applicable law or regulation. Section 4.2. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive that is considered paid or payable or distributed or distributable in connection with a Change in Control (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being collectively the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes on the Gross-up Payment (including, without limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments (as determined without regard to the Gross-Up Payment). All determinations required to be made under this Section 4.2, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by a nationally recognized independent accounting firm selected by the Company (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within 30 business days following the date of the Qualifying Termination, if applicable, or such earlier time as the Company may request. All fees and expenses of the Accounting Firm shall be borne by the Company. The Gross-Up Payment, if any, as determined pursuant to this Section 4.2, shall be paid to the Executive within ten days following receipt by the Company of the Accounting Firm's determination. The Accounting Firm shall either make the determination that a Payment is subject to the Excise Tax or it shall furnish the Executive with an opinion that failure to report the Excise Tax on the Executive's applicable Federal income tax return would not result in the imposition of a negligence or similar penalty, and, in the latter case (subject to the last sentence of this paragraph), no Gross-Up Payment shall be required. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment") or that Gross-Up Payments which have been made by the Company should not have been made (an "Overpayment"), consistent with the calculations required to be made 5 6 hereunder. The Accounting firm shall determine the amount of any Underpayment or Overpayment that has occurred and (i) an amount equal to any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive and (ii) any amount refunded to the Executive as a result of such Overpayment shall be promptly paid by the Executive to the Company in an amount which will result in the Executive being made whole on an after-tax basis. V. GENERAL PROVISIONS Section 5.1. Nature of Payments. All payments to the Executive under this Agreement shall be considered either payments in consideration of his continued service to the Company or severance payments in consideration of his past services thereto. Section 5.2. Term of Agreement. This Agreement shall become effective on the Commencement Date of the Employment Agreement between the Company and Executive of even date herewith and shall continue in effect until the earliest of (a) October 1, 2000, if no Change in Control has occurred before that date; provided, however, that commencing on October 2, 2000 and each October 2 thereafter, the term of this Agreement shall automatically be extended for an additional year unless, not later than June 30 of the same year, the Company shall have given notice that it does not wish to extend this Agreement; (b) the termination of the Executive's employment with the Company for any reason prior to a Change in Control; (c) the Company's termination of the Executive's employment for Cause, or the Executive's resignation for other than Good Reason, following a Change in Control and the Company's and the Executive's fulfillment of all of their obligations hereunder; and (d) the expiration following a Change in Control of two years and the fulfillment by the Company and the Executive of all of their obligations hereunder. Furthermore, nothing in this Article V shall cause this Agreement to terminate before both the Company and the Executive have fulfilled all of their obligations hereunder. Section 5.3. Governing Law. Except as otherwise expressly provided herein, this Agreement and the rights and obligations hereunder shall be construed and enforced in accordance with the laws of the State of North Carolina. Section 5.4. Successor to the Company. This Agreement shall inure to the benefit of and shall be binding upon and enforceable by the Company and any successor thereto, including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the business or assets of the Company, whether by merger, consolidation, sale or otherwise, but shall not otherwise be assignable by the Company. As used in this Agreement, "Company" shall mean the Company as heretofore defined and any successor to all or substantially all of its business or assets that executes and delivers the agreement provided for in this Section 5.4 or that becomes bound by this Agreement either pursuant to this Agreement or by operation of law. 6 7 Section 5.5. Successor to the Executive. This Agreement shall inure to the benefit of and shall be binding upon and enforceable by the Executive and his personal and legal representatives, executors, administrators, heirs, distributees, legatees and, subject to the Section 5.7 hereof, his designees ("Successors"). If the Executive should die while amounts are or may be payable to him under this Agreement, references hereunder to the "Executive" shall, where appropriate, be deemed to refer to his Successors; provided that nothing in this Section 5.5 shall supersede the terms of any plan or arrangement (other than this Agreement) that is affected by this Agreement. Section 5.6. Nonalienability. No right of or amount payable to the Executive under this Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance, charge, execution, attachment, levy or similar process or to setoff against any obligations or to assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall be void. However, this Section 5.6 shall not prohibit the Executive from designating one or more persons, on a form satisfactory to the Company, to receive amounts payable to him under this Agreement in the event that he should die before receiving them. Section 5.7. Notices. All notices provided for in this Agreement shall be in writing. Notices to the Company shall be deemed given when personally delivered or sent by certified or registered mail or overnight delivery service to GS Industries, Inc., 1901 Roxborough Road, Suite 200, Charlotte, North Carolina 28211, Attention: Chief Executive Officer. Notices to the Executive shall be deemed given when personally delivered or sent by certified or registered mail or overnight delivery service to the last address for the Executive shown on the records of the Company. Either the Company or the Executive may, by notice to the other, designate an address other than the foregoing for the receipt of subsequent notices. Section 5.8. Amendment. No amendment to this Agreement shall be effective unless in writing and signed by both the Company and the Executive. Section 5.9. Waivers. No waiver of any provision of this Agreement shall be valid unless approved in writing by the party giving such waiver. No waiver of a breach under any provision of this Agreement shall be deemed to be a waiver of such provision or any other provision of this Agreement or any subsequent breach. No failure on the part of either the Company or the Executive to exercise, and no delay in exercising, any right or remedy conferred by law or this Agreement shall operate as waiver of such right or remedy, and no exercise or waiver, in whole or in part, or any right or remedy conferred by law or herein shall operate as a waiver of any other right or remedy. Section 5.10. Severability. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part, such invalidity or unenforceability shall not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect. 7 8 Section 5.11. Captions. The captions to the respective articles and sections of this Agreement are intended for convenience of reference only and have no substantive significance. Section 5.12. Counterparts. This Agreement may be executed in a number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute a single instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GS INDUSTRIES, INC. By ------------------------------ ------------------------------ 8 EX-21.1 6 LIST OF SUBSIDIARIES OF GST & GSTOC 1 EXHIBIT 21.1 SUBSIDIARIES* OF THE COMPANY Name of Corporation Jurisdiction of Incorporation - ------------------- ----------------------------- UNITED STATES SUBSIDIARIES CI (U.S.) Corp. Utah Florida Wire and Cable, Inc. Delaware Georgetown Steel Corporation Delaware GS Technologies Operating Co., Inc. Delaware ME-West Castings, Inc. Arizona ME International, Inc. Michigan UNITED STATES JOINT VENTURE American Iron Reduction LLC (50%) Louisiana FOREIGN SUBSIDIARIES Acerco S.A. Peru Aceros del Sur S.A. (68% directly owned by the Company, and 8% directly owned by the Company's wholly-owned subsidiary, Acerco S.A.) Peru GS Technologies Europa GmbH Germany GST Europa AB Sweden GST Europa S.p.A. Italy GST Europe Ltd. United Kingdom GST Europe S.A. Belgium Inversiones en Molienda S.A. Chile MolyCop Chile S.A. Chile MolyCop Steel, Inc. Canada FOREIGN JOINT VENTURES Donhad Pty. Ltd. (40%) Western Australia Empresa Siderurgica del Peru S.A. (96.46% owned by Sidercorp S.A.) Peru GST Philippines, Inc. (37.5%) Philippines Sidercorp S.A. (33.3%) Peru SIMEC MolyCop S.A. de C.V. (49%) Mexico MolyCop Canada (50%) Canada GSI Lucchini S.p.A. (49%) Italy - ------------ * Subsidiaries are wholly-owned unless otherwise noted. EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,362 0 101,252 0 144,063 256,195 260,957 0 646,277 150,654 334,888 0 0 1 95,160 646,277 809,734 809,734 691,200 74,336 (10,828) 0 42,056 12,970 6,523 6,447 (22,563) 0 0 (16,116) 0 0 Amounts presented are net
-----END PRIVACY-ENHANCED MESSAGE-----