-----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, PGneN48O59XGysuhTV7Fiu8eRr/96j64nOTQ2nS36EOxHZDb+lFZwnC0t8qyEe3X C7YEv8YMzHNYwIgRCYe8VQ== 0000950144-99-002840.txt : 19990319 0000950144-99-002840.hdr.sgml : 19990319 ACCESSION NUMBER: 0000950144-99-002840 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 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-K405 SEC ACT: SEC FILE NUMBER: 033-80618 FILM NUMBER: 99567889 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-K405 1 GS TECHNOLOGIES FORM 10-K405 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, 1998 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 [ ] - ------------------------------------------------------------------------------- 1 2 As of March 1, 1999, 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 1, 1999, 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 50 sequentially numbered pages. The exhibit index can be found on page 45 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)
PAGE ---- PART I Item 1: Business............................................................................. 4 Item 2: Properties...........................................................................10 Item 3: Legal Proceedings....................................................................11 Item 4: Submission of Matters to a Vote of Security Holders..................................11 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters..............................................................................12 Item 6: Selected Financial Data..............................................................13 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................15 Item 7A: Quantitative and Qualitative Disclosure about Market Risk............................25 Item 8: Financial Statements and Supplementary Data..........................................26 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................26 PART III Item 10: Directors and Executive Officers of the Registrant...................................27 Item 11: Executive Compensation...............................................................30 Item 12: Security Ownership of Certain Beneficial Owners and Management.......................38 Item 13: Certain Relationships and Related Transactions.......................................40 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, and certain high quality wire products. The Company's 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 the furniture industry 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 was incorporated in 1993 to effect the November 1993 acquisition of certain operating units, investments in joint ventures and wholly-owned subsidiaries of Armco, Inc. ("Armco"). In October 1995, the Company acquired Georgetown Industries, Inc. ("Georgetown"). The Company is a wholly-owned subsidiary of GS Industries, Inc. ("GSI") and has fully and unconditionally guaranteed senior notes in the aggregate principal amount of $250.0 million which were issued by the Company's wholly-owned subsidiary, GS Technologies Operating Co., Inc. ("GSTOC"). 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 recognized tax benefits of approximately $17.1 million related to this sale consisting of $15.4 million as a deferred tax asset recorded in purchase accounting and $1.7 million netted against the loss on discontinued operations. In 1998, a portion of the net operating loss generated in 1997 was carried back to earlier tax years resulting in a refund of taxes previously paid of $9.3 million. The current operating structure of the Company is as follows: [CHART] 4 5 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 for the furniture industry and wire rope and pre-stressed concrete strand ("PC Strand") for the construction industry. In 1998, the Company shipped approximately 1.4 million tons of wire rod of which 1.3 million tons were to third party purchasers. End use applications of the Company's wire rod shipments were as follows: 1998 WIRE ROD SHIPMENTS (BY MARKET)
Percent of Total Sales ---------------------- Furniture/Bedding............................................................................ 30% Industrial................................................................................... 28% Construction................................................................................. 18% Automotive................................................................................... 17% Other........................................................................................ 7% --- Total.................................................................................... 100% ---
The Company focuses on providing high quality, high carbon and special grades of wire rod. These products generally command higher selling prices 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 operations from the Kansas City facility. In 1998, Leggett & Platt purchased approximately 322,000 tons, or 22.8% of the total wire rod tonnage shipped by the Company. Approximately 28.62% of the Company's total revenues for 1998 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-wide 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. 5 6 Grinding media and mill liners are generally sold under contract. The Company's grinding media contracts are typically one to three years in duration and at fixed prices. Under the terms of certain of the Company's contracts, raw material price changes are passed through as price adjustments to the customer. The Company's principal customers for mineral processing products are domestic and international mining companies. The following chart details shipments of grinding media, including mill liners, categorized by mineral processed, through both its consolidated subsidiaries and its joint ventures: 1998 GRINDING MEDIA SHIPMENTS (BY MINERAL)
Percent of Total ---------------- Copper........................................................ 49% Gold.......................................................... 22% Iron Ore...................................................... 15% Other......................................................... 14% --- Total............................................ 100% ===
In 1998, the Company shipped 476,000 tons of grinding media and mill liners from its consolidated subsidiaries and 237,000 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: 1998 GRINDING MEDIA SHIPMENTS (BY REGION)
Percent of Total ---------------- United States......................................................... 37% South America......................................................... 28% Philippines, Australia................................................ 14% Canada and Mexico..................................................... 12% Other................................................................. 9% --- 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, Europe and the Philippines, grinding media is fabricated from purchased bars and sold by the Company's foreign subsidiaries and its Italian joint venture. In Canada, Mexico 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. 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 6 7 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 required to reduce it to powder), and (iii) macro-economic consumption of the mineral which leads to increased mining activity. As 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 1998, the Company shipped approximately 126,000 tons of wire products. Financial information related to the Company's domestic and foreign subsidiaries is provided in Note 17 to the Company's Consolidated Financial Statements. 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 32% of the total domestic market for wire rod in 1998. 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. 7 8 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 2,400 employees, of whom approximately 1,800 are hourly production employees. Approximately 60% of the Company's employees are covered by collective bargaining agreements. 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. 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 8 9 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 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." AVAILABLE INFORMATION The Company files annual, quarterly and special reports, and other information with the Securities and Exchange Commission (the "Commission"). Such reports and information relate to the Company's business, financial condition and other matters. You may read and copy any materials filed by the Company with the Commission at the Public Reference Room of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Commission's Public Reference Room by calling the Commission at 1-800-SEC-0330. Copies may be obtained from the Commission upon payment of the prescribed fees. The Commission maintains an Internet web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. 9 10 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: [GRAPH]
Location Square Feet Products Own or Lease - -------------------------------------------------------------------------------------------------------------------------- CORPORATE HEADQUARTERS: Charlotte, NC (1) 19,000 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 29,000 Grinding media Own Lima, Peru 33,000 Grinding media Own Manila, Philippines 86,000 Grinding media Lease Mezzomerico, Italy 58,000 Grinding media Own JOINT VENTURES (MANUFACTURING LOCATIONS): Kamloops, Canada 35,000 Grinding media Own Guadalajara, Mexico 40,800 Grinding media Lease Perth, Townsville, and Newcastle, Australia 54,100 Grinding media Own Chimbote, Peru 5,776,000 Rebar, Flat Rolled Steel Own Convent, LA 1,525,000 DRI Own Piombino, Italy 44,000 Grinding media Lease SALES AND OTHER OFFICES: Minneapolis, MN 18,700 N/A Own Santiago, Chile 7,300 N/A Own
10 11 (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 leases with Armco with varying expiration dates. 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. The Company believes that it has substantial and meritorious defenses and will defend itself accordingly. The Company's subsidiary, Georgetown Steel Corporation, is the defendant in three related suits filed in 1998 by certain private plaintiffs in the Court of Common Pleas for the County of Georgetown, South Carolina. The plaintiffs allege trespass, nuisance, negligence and violation of State and Federal law in connection with the escape of "mill dust" and gases from Georgetown's steel mill into the atmosphere and onto the plaintiffs' property in Georgetown, South Carolina. The plaintiffs seek certification as a class in each case. The plaintiffs in these actions seek unspecified actual, compensatory and punitive damages. The Company believes the actions lack merit and intends to defend them vigorously. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 12 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 1, 1999, 100 shares of common stock of GST were outstanding, all of which were owned by GSI, and there were 43 record holders of the Common Stock of GSI. 12 13 ITEM 6: SELECTED FINANCIAL DATA The following table sets forth selected historical financial data and other operating data of the Company for the five-year period ending December 31, 1998. The selected financial data have been derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere herein. 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.
YEAR ENDED DECEMBER 31, (DOLLARS IN MILLIONS) -------------------------------------------------------------------------------- 1994 1995 (1) 1996 (1) 1997 (1)(11) 1998 ------------ ---------- ----------- ------------ ----------- STATEMENT OF OPERATIONS DATA: Net Sales $ 455.3 $ 539.8 $ 815.9 $ 809.7 $ 831.8 Operating Costs and Expenses: Cost of Products Sold 389.3 457.3 704.0 691.2 749.9 Selling, General and Administrative Expenses 30.6 35.3 46.3 44.7 44.1 Depreciation and Amortization 3.6 10.5 27.0 29.6 30.3 Non-recurring Costs of Combining Operations (2) 4.9 ---------- ---------- ----------- ----------- ----------- Operating Profit (Loss) 31.8 31.8 38.6 44.2 7.5 Net Interest Expense (8.9) (22.9) (42.4) (41.1) (41.0) Equity in Income (Loss) of Joint Ventures 3.4 4.1 5.6 6.2 (1.8) Fees From Joint Ventures 1.4 1.4 2.4 2.7 3.5 Gain (Loss) on Disposition of Properties (.1) 6.1 Other, Net 0.2 (.6) .2 1.0 1.1 ---------- ---------- ----------- ----------- ----------- Income (Loss) From Continuing Operations Before Income Tax And Cumulative Effect of Accounting Change 27.9 13.8 4.3 13.0 (24.6) Income Tax Provision (12.4) (7.1) (3.8) (6.5) (.7) ---------- ---------- ----------- ----------- ----------- Income (Loss) From Continuing Operations Before Cumulative Effect of Accounting Change $ 15.5 $ 6.7 $ 0.5 $ 6.5 $ (25.3) ========== ========== =========== =========== =========== Net Income (Loss) $ 13.5 (3) $ 6.1 (4) $ 6.4 (5) $ (16.1) (6) $ (25.3) ========== ========== =========== =========== =========== BALANCE SHEET DATA AT PERIOD END: Total Assets $ 259.6 $ 715.2 $ 715.7 $ 646.3 $ 634.1 Total Debt 158.2 378.1 385.1 346.2 345.3 Stockholder's Equity (Deficit) (29.9) 106.6 112.8 95.2 68.9 OTHER OPERATING DATA: EBITDA (7) $ 41.7 $ 47.3 $ 74.0 $ 83.4 $ 45.5 Net Cash Provided by (Used in): Operating Activities (8) 21.8 8.4 40.8 16.8 21.8 Investing Activities (8) (12.3) (187.5) (49.8) 21.9 (9) (17.2) Financing Activities (8) 1.9 170.2 7.0 (40.1) (9) 4.5 Capital Expenditures (10) 34.5 48.3 42.2 25.1 22.1
13 14 (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. The data for 1994 and 1995 are not comparable as the operations of Georgetown are not included prior to the October 5, 1995 acquisition date. (2) Represents non-recurring charge for the costs of combining the operations of GST and Georgetown. (3) Net of $2.0 million non-cash after-tax write-off of debt issuance costs. (4) Includes net loss from discontinued operations of $0.6 million, net of related taxes. (5) Reflects effect of a change in accounting for spare parts and supplies inventories of $3.6 million, net of related taxes. See Note 3 to the Consolidated Financial Statements. Also includes net income from discontinued operations of $2.4 million, net of related taxes. (6) Includes net income from discontinued operations of $1.4 million, net of related taxes, and loss on disposal of discontinued operations of $24.0 million, net of related taxes. (7) 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. (8) This cash flow information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation." (9) Includes $56.0 million in proceeds from sale of the West Coast Wire Business which were used to pay off outstanding debt. (10) Excludes purchases of businesses and joint venture investments. (11) 1997 results were impacted by work stoppages which are estimated to have cost the Company $28.7 million in pre-tax earnings. 14 15 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. RESULTS OF OPERATIONS The following table sets forth, for the years indicated, the Company's selected income statement data:
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN MILLIONS) --------------------------------------- 1996 1997 1998 --------- --------- --------- Net Sales $ 815.9 $ 809.7 $ 831.8 Cost of Products Sold 704.0 691.2 749.9 Selling, General and Administrative Expenses 46.3 44.7 44.1 Depreciation and Amortization 27.0 29.6 30.3 --------- --------- --------- Operating Profit 38.6 44.2 7.5 Net Interest Expense (42.4) (41.1) (41.0) Gain (Loss) on Disposition of Properties (.1) 6.1 Other Income (1) 8.2 9.9 2.8 --------- --------- --------- Income (Loss) From Continuing Operations Before Income Tax and Cumulative Effect of Accounting Change 4.3 13.0 (24.6) Income Tax Provision (3.8) (6.5) (.7) --------- --------- --------- Income (Loss) from Continuing Operations Before Cumulative Effect of Accounting Change 0.5 6.5 (25.3) Discontinued Operations 2.3 (22.6) Cumulative Effect of Accounting Change 3.6 --------- --------- --------- Net Income (Loss) $ 6.4 $ (16.1) $ (25.3) ========= ========= ========= PERCENTAGE OF NET SALES: Net Sales 100.0% 100.0% 100.0% Cost of Products Sold 86.3 85.4 90.2 Selling, General and Administrative Expenses 5.7 5.5 5.3 Depreciation and Amortization 3.3 3.7 3.6 --------- --------- --------- Operating Profit 4.7 5.4 .9 Net Interest Expense (5.2) (5.1) (4.9) Gain (Loss) on Disposition of Properties .7 Other Income (1) 1.0 1.3 .3 --------- --------- --------- Income (Loss) From Continuing Operations Before Income Tax 0.5 1.6 (3.0) Income Tax Provision (0.4) (0.8) --------- --------- --------- Income (Loss) From Continuing Operations Before Cumulative Effect of Accounting Change 0.1 0.8 (3.0) Discontinued Operations 0.3 (2.8) Cumulative Effect of Accounting Change 0.4 --------- --------- --------- Net Income (Loss) 0.8% (2.0)% (3.0)% ========= ========= =========
- ------------------ (1) Other Income includes Equity in Income of Joint Ventures, Fees from Joint Ventures and Other, Net. 15 16 SIGNIFICANT 1998 EVENTS RECENT MARKET CONDITIONS. The United States steel industry was adversely affected during 1998. Distressed economic conditions in other countries, particularly Asia, have resulted in record levels of imported steel products into the domestic market causing dramatic declines in selling prices industry-wide. While demand for the Company's wire rod products continued to be strong during 1998, average selling prices declined sharply. In December 1998, the Company, along with six other U.S. companies and the United Steelworkers of America, filed a petition with the U.S. International Trade Commission seeking action to limit wire rod imports which have caused serious harm to the industry. The Company's average wire rod selling prices declined 17% from the fourth quarter of 1997 to the fourth quarter of 1998. AMERICAN IRON REDUCTION LLC ("AIR"). The Company has a 50% interest in a Direct Reduced Iron ("DRI") joint venture which commenced operations in January 1998. This facility is capable of producing 1.2 million metric tons of DRI annually. However, during 1998, production was scaled back as market conditions caused scrap and scrap substitute demand and pricing to fall dramatically. The Company realized a net equity loss from this joint venture of $3.9 million. Additionally, sales of DRI to third parties were at negative margins of $7.4 million in 1998 and the high cost per metric ton of DRI utilized in the Company's steelmaking facilities contributed to an overall deterioration of gross margins. ANTITRUST CLAIM SETTLEMENT. The Company reached a settlement with one of its suppliers of electrodes arising out of antitrust investigations and claims against the supplier. As a result, the Company realized $7.6 million in pre-tax gains in 1998 from the combination of cash, settlement of outstanding invoices, and credits taken against current purchases from this supplier. The Company anticipates additional settlements from other electrode suppliers in 1999. JACKSONVILLE WORK STOPPAGE. The Company's collective bargaining agreement at its Jacksonville, Florida facility expired in April 1998. The Company was unable to reach agreement with the union and a work stoppage commenced. The Company re-staffed the facility with permanent replacement workers and production has returned to normal levels. In July 1998, the union notified the Company that the striking workers had accepted the Company's final offer as proposed by management before the work stoppage began. The striking workers were placed on a recall list and rehired, as positions became available. PROPERTY DISPOSITIONS. In June 1998, the Company completed the sale of its wholly-owned Peruvian subsidiary, Tubos Y Alcantarillas S.A., for $9.5 million resulting in a pre-tax gain on disposition of $5.2 million. Also in June 1998, the Company sold an idle plant in Cividale, Italy for $1.9 million resulting in a pre-tax gain on disposition of $1.1 million. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 NET SALES. Net sales for the year ended December 31, 1998 were $831.8 million compared to $809.7 million for the year ended December 31, 1997, an increase of $22.1 million or 2.7%. 16 17 Wire rod volume in 1998 exceeded 1997 volume by approximately 36,000 tons, however, due to the significant decline in average wire rod selling prices of $24 per ton year to year, total wire rod sales increased only $2.1 million in 1998 to $409.9 million. Grinding media sales were $277.4 million in 1998 compared to $269.7 million in 1997. Domestically, volume was up approximately 9,200 tons reflecting recovery of volume lost during the 1997 Kansas City work stoppage. Internationally, volume was up 10,000 tons resulting primarily from significant expansion in the mining industry in South America where the Company has increased its market share. The Company's wire products sales were $84.4 million in 1998 compared to $86.7 million in 1997 resulting from an increase in volume of 3,500 tons, offset by a 5.4 % decrease in average selling prices. COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of net sales increased to 90.2% in 1998 from 85.4% in 1997. Margins were affected by declining average selling prices, losses on DRI sales and an approximate 5% increase in conversion costs, as partially offset by decreases in the average cost of scrap. The increase in the Company's conversion costs was caused, in part, by temporary production curtailments due to electrical power interruptions and shortages during the summer months of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expense as a percent of sales decreased to 5.3% in 1998 from 5.5% in 1997 as a result of the Company's continuous focus on cost reductions. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for 1998 increased $0.7 million from 1997 to $30.3 million. This increase resulted from routine capital additions and improvements. NET INTEREST EXPENSE. Net interest expense remained constant at $41.0 million for 1998 compared to $41.1 million for 1997. Of this total, $1.8 million represents amortization of debt issuance costs for each year presented. OTHER INCOME. Other income, which is primarily equity income and fees from joint ventures, decreased to $2.8 million for 1998 from $9.9 million for 1997 due primarily to inclusion in 1998 of equity losses from AIR. INCOME TAXES. Income tax expense for 1998 was $0.7 million on a pre-tax loss of $24.6 million resulting in an effective tax rate which is not meaningful. Income taxes for 1997 were $6.5 million on pre-tax earnings from continuing operations of $13.0 million, an effective rate of 50.3%. The effective tax rate for the Company is effected by limitations on the Company's ability to currently utilize foreign tax credits and the non-deductibility of amortization and depreciation expense associated with the Georgetown acquisition. Changes in the mix of U.S. and foreign earnings also affect the rate of taxation. NET INCOME (LOSS). As a result of the factors discussed above, the Company had a net loss of $25.3 million in 1998 compared to income from continuing operations of $6.5 million in 1997. 17 18 SIGNIFICANT 1997 EVENTS 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. 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. Management estimates that the strike resulted in a negative impact on pre-tax earnings of $21.9 million. 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 in December 1997. The Company and the USWA were unable to agree on the terms of a new agreement and a work stoppage commenced. In January 1998, the union 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 in pre-tax earnings. CONCEPCION RATIFICATION OF NEW LABOR AGREEMENT. The collective bargaining agreement with employees at the Company's facility in Concepcion, Chile expired in December 1997. The Company successfully negotiated a new contract which extends until December 2002. SOUTH AMERICAN EXPANSION. In 1997, the Company began capital projects at its existing South American grinding media operations that are expected to double the Company's previous capacity within the region. This expansion involves both new equipment and improvements to existing facilities. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 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 18 19 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 160,000 tons shipped, 115,000 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. 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 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. 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 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 $6.5 million for 1997 compared to $0.5 million for 1996. 19 20 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had total cash and cash equivalents of $10.7 million, an increase of $7.3 million from December 31, 1997. Operating activities provided $21.8 million of cash during 1998 composed primarily of a net loss of $25.4 million, non-cash depreciation and amortization of $30.3 million and a non-cash gain on disposition of properties of $6.1 million. Dividends from joint ventures were $6.5 million. Changes in deferred taxes provided $5.1 million of operating cash and changes in current assets and liabilities for the year provided operating cash of $8.0 million. The Company used $17.2 million in investing activities composed of capital improvements of $22.1 million and investment in joint ventures of $6.5 million as partially offset by proceeds of $11.3 million from the dispositions discussed above. Financing activities provided $4.5 million from net borrowings. 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 1999, management continues to evaluate alternative sources of funds. There are fluctuations in the Company's working capital needs over the course of 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 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 that cash flows from operations, after being adversely impacted in late 1998 and early 1999 by depressed market conditions as discussed herein, will begin to improve due to the ongoing benefits 20 21 of its business strategy, planned pricing increases, 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, 1998, the unused availability under the Revolving Credit Facility was $42.0 million, and $10.0 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 certain future costs and liabilities associated with environmental matters. As of December 31, 1998, the Company had recorded a reserve of approximately $2.4 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 requirements. The amount of any such liability could be material. Although the Company endeavors to carefully manage its wastes, 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 due to the fact that liability under CERCLA is strict and retroactive. 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, SC 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 Georgetown, SC facilities are subject to Consent Orders with the state environmental agency regarding air and wastewater matters. The Kansas City mini-mill is involved in a water discharge permit renewal process with the state environmental agency, which is currently on administrative 21 22 appeal. The Jacksonville, FL facility is subject to a Consent Order regarding soil and groundwater cleanup. The Sanderson, FL facility is subject to a Unilateral Administrative Order from the United States Environmental Protection Agency (the "USEPA") regarding stormwater discharges. Georgetown Steel Corporation, GSTOC and MEI have signed a Consent Order with the USEPA regarding remediation at the Palmerton Superfund Site. The Tempe, Arizona facility is involved in air emissions permit discussions. Several of the Company's properties are listed in CERCLIS or equivalent state 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. The Company has agreed to indemnify the purchaser of its former Tree Island Industries facility with respect to the Operating Industries Superfund Site matter involving remediation at Monterey Park, CA. 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. Georgetown Steel Corporation is the defendant in three related suits filed in 1998 by certain private plaintiffs in Georgetown, South Carolina. The plaintiffs allege that their properties have been damaged from the escape of "mill dust" from Georgetown's steel mill. The plaintiffs seek class action status for all owners of real property, cars and boats within a five-mile radius of the steel mill and recovery of unspecified actual, compensatory and punitive damages. See "Legal Proceedings" for additional information regarding these suits. 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 with respect to some soil contamination at the Jacksonville, FL site and has indemnified the Company for groundwater contamination at the Jacksonville, FL and Sanderson, FL facilities. Horsehead Resource Development Corporation has indemnified the Company in connection with the Palmerton Superfund Site in which Georgetown Steel Corporation, GSTOC and MEI are involved. AmeriSteel Corporation, Nucor Corporation and Nucor Yamata Steel Company have indemnified the Company regarding the Stoller Chemical Superfund Site. 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. YEAR 2000 The Company is pursuing an organized program to assure that the Company's information technology systems and related infrastructure will be Year 2000 compliant. All operating locations and the corporate headquarters are specifically addressing the Business Information Systems, the Process Control Systems, the local infrastructure systems and the relationships with their customers, suppliers and other business partners. 22 23 The Year 2000 program has been designed around phases which include management awareness, system inventory and assessment, modification or replacement, testing, contingency planning, business partner communication, an external audit, and employee awareness. A Year 2000 team has been established at each location. Specific action plans and timelines have been established at each of the locations and periodic meetings are held to monitor progress. The Company has completed the phases of management awareness, systems inventory, and assessment. Critical systems have been identified and prioritized and decisions have been made relative to the modification vs. replacement of systems deemed to be non-compliant. Where systems can be modified utilizing existing or contract labor, the cost of modifications is being charged to current operations. In cases where the systems must be replaced with new applications, the cost is being capitalized. The Company is currently in the program modification and replacement phase of its program. Business systems are being addressed at the local level and process systems are being addressed, with the assistance of system vendors, on a local as well as a corporate level for information sharing. The Company expects to have this modification/replacement phase of its program completed by the end of the second quarter 1999 (with the exception of the implementation of a new system in its steelmaking shops, which should be completed by the end of the third quarter 1999). Testing of individual systems is conducted as the systems are changed or modified. Test plans for integrated systems indicate that this stage of testing will be completed during the second quarter of 1999. By June 30, 1999 the Company expects to have its Year 2000 program complete for local manufacturing, infrastructure, support and facility systems except as noted above. At that point, an audit will be conducted to verify compliance. This time frame will allow for the completion of further testing as required and the presentation of an employee awareness training session to assure that all employees, from the factory floor to the executive offices, are familiar with the Year 2000 situation and are prepared for any undiscovered possibilities. Management has determined that the costs for correction of the Year 2000 issues, including any software and hardware changes required by these issues as well as the cost of personnel dedicated to this project will be approximately $3 million, with approximately one-half of this amount expended to-date. The Company's Year 2000 program includes communications with its outside business partners to prepare for Year 2000 readiness. The Company is using letters to request information from it suppliers and other partners to determine their Year 2000 compliance. If a business partner indicates that it will not be ready for the Year 2000, the Company will develop a contingency plan to address the issue, which might include changing partners. At the present time, the Year 2000 team is developing contingency plans assuming a variety of possible scenarios. These scenarios will include the possibilities of non-compliance difficulties from the standpoint of a customer, supplier, or internal manufacturing support function. How these scenarios are used will depend on the results of the testing programs over the next six to nine months. The Company's goal is to have a completed contingency plan in place in the third quarter 23 24 of 1999, based on information received from its customers and suppliers relative to their compliance with Year 2000 issues. TAX MATTERS 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, the Company has repatriated only a portion of the earnings of its foreign subsidiaries and joint ventures. 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 loss carryforwards of $102.0 million as of December 31, 1998 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. RISK FACTORS During 1998 and continuing into early 1999, the Company's results have been negatively impacted by market conditions within the domestic steel industry. Distressed economic conditions in other countries, particularly in Asia, have resulted in record levels of low priced steel imported into the U.S. causing dramatic declines in selling prices industry-wide. In December 1998, the Company, along with other U.S. companies and the Untied Steelworkers of America, filed a petition with the U.S. International Trade Commission seeking action to limit wire rod imports which have caused serious harm to the industry. Until such time as the U.S. government intervenes with trade sanctions or the foreign economic situation improves, the Company's financial performance could continue to be adversely impacted by these factors. The Company is currently in compliance with its debt covenants (see Note 10 to the Consolidated Financial Statements of the Company "Notes Payable and Long Term Debt"). However, should market conditions experience further deterioration, the Company could violate one or more of its covenants within the next twelve months. The Company is evaluating its alternatives in the event that it is unable to comply with its debt covenants. Due primarily to the market conditions previously discussed, AIR produced at a level of approximately 54% of its design capacity during 1998. Consequently, under existing market conditions, the Company is paying prices for DRI to AIR to cover the cash cost of production plus interest and capital requirements that exceed the current depressed market price for DRI and other scrap substitutes. Until these market conditions improve, the Company may be exposed to continuing losses associated with AIR which could be material to the Company's financial 24 25 performance. The financial statements do not reflect any accrual for any future loss exposures related to AIR, or any adjustments to the carrying value of the Company's investment in AIR. See Note 6 to the Consolidated Financial Statements of the Company for additional information. In March 1999, several of the Company's competitors announced increases in wire rod selling prices by $15 to $25 per ton. Additionally, a new bill, which would impose quota limits on steel imports and enhance the steel import monitoring system was introduced to the U.S. Congress. The new bill is expected to be brought to the full floor of Congress for a vote in March 1999 and if passed, could significantly relieve the industry's pressure from imports. The Company has announced similar wire rod price increases effective April 1, 1999 and considers the recent pricing and legislative activity to be the beginning of a general recovery for the domestic steel industry. The Company intends to aggressively pursue reductions in its conversion costs, particularly at its Kansas City mini-mill. The Company will also continue to carefully evaluate capital spending and invest only when anticipated economic returns clearly exceed cost and when necessary to ensure proper maintenance of equipment. OTHER MATTERS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and displaying comprehensive income and its components. ITEM 7 A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The market risk inherent in the Company's financial instruments represents potential changes in interest rates. The Company manages interest rate risks maintaining certain ratios of fixed to variable rate debt. The Company does not currently use derivative financial instruments. At December 31, 1998, the Company had variable rate borrowings of $85.4 million. Assuming a hypothetical change in interest rates of 10%, the Company would incur an additional $0.4 million in interest expense on variable rate borrowings. 25 26 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements which appears on page 49 herein. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 26 27 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 GSI 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 of Directors of GSI 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 as of March 1, 1999.
Name Age Position - ---- --- -------- Roger R. Regelbrugge 68 Chairman and Director Mark G. Essig 41 President, Chief Executive Officer and Director Luis E. Leon 46 Senior Vice President - Finance Chief Financial Officer, Treasurer and Assistant Secretary David M. Yarborough 48 Senior Vice President - Mining Products David O. Shelley 49 Vice President and Controller Richard Luzzi 47 Vice President - Human Resources Ronald S. Mulhauser 63 Vice President - Purchasing and Transportation George A. Goller 54 Vice President - Technology and Product Development Paul B. Edgerley 43 Director John J. O'Malley 51 Director
27 28 ROGER R. REGELBRUGGE has been a Director and Chairman of GST and GSTOC since the Georgetown acquisition. From the Georgetown acquisition until the appointment of Mr. Essig, 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 from 1977 to 1996 and as a director of Georgetown from 1975 to 1996. 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 has been a Director, President and Chief Executive Officer of GST and GSTOC since January 1998. Prior to joining the Company, Mr. Essig served in various capacities at AK Steel Corporation. Most recently, Mr. Essig was Executive Vice President, having joined AK Steel in 1992 as Vice President-Employee Relations and Assistant to the Chief Executive Officer. He became Vice President of Sales and Marketing of AK Steel 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 Chief Financial Officer for Washington Steel Corporation in Washington, Pennsylvania. LUIS E. LEON has been Senior Vice President - Finance, Chief Financial Officer, Treasurer and Assistant Secretary of GST and GSTOC since October 1995. Mr. Leon joined the Company in November 1994 as Vice President, Chief Financial Officer and Treasurer. 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). 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. 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. RICHARD D. LUZZI has been Vice President - Human Resources since June 1998. Mr. Luzzi joined the Company after serving as Vice President of Human Resources for Lukens, Inc. from 1993 to 1998. Prior to that Mr. Luzzi held various positions in Human Resources during his 13-year career with Rockwell International. 28 29 RONALD S. MULHAUSER has been Vice President - Purchasing and Transportation since May 1998. From 1994 to 1997 Mr. Mulhauser was Vice President - Purchasing and Transportation for AK Steel Corporation. Prior to that Mr. Mulhauser held various management positions at US Steel Corporation. 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 a division of Armco. From 1964 to 1992, Mr. Goller served in various capacities with Armco, 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., Steel Dynamics, Inc., American Pad & Paper, Walco International, Anthony Crane, Midwest of Cannon Falls and Sealy. 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 Wesley Jessen Vision Care, Inc. 29 30 ITEM 11: EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS Set forth below is information for the fiscal years ended December 31, 1996, 1997 and 1998 with respect to compensation for services to the Company of the following individuals: (1) the Chief Executive Officer of GST and GSTOC, (2) the Chairman and Director of GST and GSTOC and (3) the three most highly compensated executive officers of GST and GSTOC (other than the Chief Executive Officer) during 1998. 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) - ----------------------------------------------------------------------------------------------------------------------------- Mark G. Essig 1998 $550,000 $450,000 $11,658 $814,054 President, Chief 1997 (4) 450,000 Executive Officer 1996 and Director Roger R. Regelbrugge 1998 $650,000 $195,000 $26,727 $ 34,397 Chairman and Director 1997 $650,000 $694,950$ 9,754 25,000 $ 34,397 1996 $612,500 $339,938$ 8,958 --- $ 34,397 Luis E. Leon 1998 $255,833 $ 51,167 $17,352 $11,572 Senior Vice President - 1997 $245,000 $174,628 $12,329 20,000 $11,498 Finance, Chief Financial 1996 $220,000 $ 81,400 $49,420 --- $57,019 Officer and Assistant Secretary David M. Yarborough 1998 $242,833 $ 48,567 $16,808 $ 3,424 Senior Vice President- 1997 $227,500 $196,616 $56,155 20,000 $ 3,238 Mining Products 1996 $190,000 $ 52,725 $ 5,267 --- $ 2,680 Richard D.Luzzi 1998 (5) $ 96,462 $ 14,469 $ 4,816 90,000 $ 1,359 Vice President 1997 Human Resources 1996 --- --- --- --- ---
-------------------- (1) Other annual compensation reflects certain incidental perquisites and benefits. (2) For additional information concerning the grant of options in 1998, see "-- Stock Options" below. Options shown are options to purchase common stock of GSI. (3) Other Compensation paid to Mr. Essig in 1998 consists of $333,334 which is part of a $1,000,000 payment to be paid over a three year period in connection with his initial employment, a payment of $350,000 which was a part of a bonus program at AK Steel which he forfeited by joining the Company and reimbursement of certain relocation expenses of $127,148. Other compensation paid to Mr. Regelbrugge consists of certain life insurance premiums paid by the Company on Mr. Regelbrugge's behalf in the amount of $30,825 in 1998, 1997 and 1996. See "--Mr. Regelbrugge's Employment Arrangements." The amount shown for 1996 for Mr. Leon includes reimbursement of certain relocation expenses of $49,519. Mr. Leon participates in a 401(k) plan with a Company match. The amounts related to this plan for 1998 and 1997 were $4,800 and for 1996 the amount was $4,500. Mr. Leon also participates in a profit sharing plan and contributions on his behalf in 1998 and 1997 were $3,200 and for 1996 the amount was $3,000. (4) Mr. Essig joined the Company in January 1998. (5) Mr. Luzzi joined the Company in June 1998. His 1998 compensation relates to amounts paid from his employment date. Mr. Luzzi's annual salary is $190,000. 30 31 STOCK OPTIONS OF GSI The following table sets forth information regarding stock options in the Common Stock of GSI granted during the Company's fiscal year ended December 31, 1998. OPTION GRANTS IN 1998
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES INDIVIDUAL GRANTS OF STOCK PRICE -------------------------------------------------------------------- APPRECIATION FOR NUMBER OF PERCENT OF TOTAL OPTION TERM (2) SECURITIES OPTIONS GRANTED EXERCISE OR -------------------- UNDERLYING TO EMPLOYEES IN BASE PRICE EXPIRATION NAME OPTIONS(#) (1) FISCAL YEAR (%) ($ PER SHARE) DATE 5% ($) 10% ($) - ----------------------------------------------------------------------------------------- --------------------- Richard D. Luzzi 90,000 42.45% $7.00 6/29/08 $410,481 $653,623
----------------------------------- (1) Such options were granted on June 29, 1998 pursuant to a stock option agreement between GSI and the above named executive. The options vest and become exercisable at 5% per quarter beginning on September 30, 1998. (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 $2.80 per share as of the grant date. The following table sets forth information concerning outstanding options in the Common Stock of GSI held by Mr. Essig and the other named executives during the Company's fiscal year ended December 31, 1998. No executive officer exercised options during 1998. AGGREGATED OPTION EXERCISABLE IN 1998 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($) (1) --------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Mark G. Essig 90,000 360,000 -- -- Roger R. Regelbrugge 339,286 10,714 -- -- Luis E. Leon 126,000 74,000 -- -- David Yarborough 78,000 42,000 -- -- Richard D. Luzzi 9,000 81,000 -- --
(1) Year end value is based on an assumed fair market value of $2.80 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. 31 32 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. 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 and GSTOC. 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 and GSTOC. 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. 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 of GSI. 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 are parties to an Employment Agreement (the "Essig Agreement") dated December 11, 1997 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 32 33 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, and (iii) 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 provided to the other directors and officers of GSI. 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 of GSI 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 33 34 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 the Management Agreement provides that (i) the GSI 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 GSI 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 GSI 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 GSI Common Stock and options to purchase GSI 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." Mr. Yarborough entered into a separate stock option agreement with GSI 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 provides 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 GSI Common Stock held by the Bain Funds as of the date of the stock option agreement. Mr. Luzzi entered into a stock option agreement (the "Stock Option Agreement") with GSI whereby Mr. Luzzi received certain stock options in accordance with the GS Industries, Inc. 1997 34 35 Stock Option Plan (the "Stock Option Plan"). Pursuant to the terms of the Stock Option Agreement and 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, 1998 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 GSI 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 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 GSI 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. In accordance with the employment agreements with Messrs. Yarborough and Luzzi, in the event Messrs. Yarborough's and Luzzi's employment is terminated for any reason other than for cause, Mr. Yarborough's salary and benefits will be continued for one year and Mr. Luzzi will receive one year's salary. Messrs. Leon, Yarborough, Luzzi, 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. PENSION AND RETIREMENT PLANS Messrs. Essig, Regelbrugge, Yarborough and Luzzi are participants in the GSI Employees Pension Plan (the "GSI Pension Plan") and Messrs. Regelbrugge and Essig 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 35 36 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 1998. 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 1998 was $130,000. 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 Mr. Regelbrugge will be further reduced by the annual benefit value of the lump sum payment received by Mr. Regelbrugge from the GSI SERP on October 5, 1995. The benefit payable to Mr. Essig under the GSI SERP shall not exceed 75% of his highest annual base salary. As of December 31, 1998, Mr. Regelbrugge has 24 years of credited service under the GSI Pension Plan and 25 years of credited service under the GSI SERP and Mr. Essig had one year of credited service under each plan. 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. Messrs. Regelbrugge's and Essig's combined net annual benefit payable under these plans at December 31, 1998 would be $302,000 and $466,000, respectively. In addition, Mr. Regelbrugge has the option to receive the GSI SERP benefit in a lump sum amount upon his retirement. Messrs. Luzzi and Yarborough participate in the GSI Pension Plan. At December 31, 1998, Messrs. Luzzi and Yarborough had one and three years of credited service, respectively. The following table shows the projected annual benefits payable for a single life annuity as of December 31, 1998 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 $27,300 $36,400 $45,500 $54,600 $63,700 150,000 33,300 44,400 55,500 66,600 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. 36 37 If employment were continued until normal retirement age of 65 at their 1998 rates of pay, Messrs. Luzzi and Yarborough would receive yearly pensions of $41,800 and $44,000, respectively, under the GSI Pension Plan. 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, 1998 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, 1998, Mr. Leon had 4 years of credited service under the GST SERP.
GST RETIREMENT 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 1998 rate of compensation, Mr. Leon would receive a yearly pension of $108,000 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 1998 of $160,000. The Company's contribution in 1998 for Mr. Leon under this plan was 37 38 $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 ($10,000 in 1998). 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 $5,000 in 1998. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1998, 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, Abdullah Al-Gabandi and James E. Haas. Mr. Regelbrugge, Chairman and Director, did not participate in decisions regarding his compensation. There were no fees paid to the directors of GST or GSTOC during 1998. No executive officer employed by the Company serves or served on the compensation committee of another entity during 1998 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 Capital, Inc. 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 Capital, Inc. Bain Capital, Inc. received certain fees from the Company in 1994, 1995, 1996, 1997 and 1998 and, it is 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, 1999 by (i) each person or entity who beneficially owns five percent or more of the GSI 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 GSI Common Stock. 38 39
NUMBER OF PERCENTAGE SHARES OF OF SHARES OF NAME AND ADDRESS COMMON STOCK COMMON STOCK ---------------- ------------ ------------ PRINCIPAL STOCKHOLDERS: Bain Funds (1) 11,741,917.93 57.67% c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116 General Electric Capital Corporation 3,986,692.90 19.58% 190 South LaSalle Street Suite 2740 Chicago, Illinois 60603 Leggett & Platt, Incorporated 1,993,346.45 9.79% No. 1 Leggett Road Carthage, Missouri 64836 Robert A. Cushman 1,366,488.00 (3) 6.34% 64 Yorkshire Drive Wexford Plantation Hilton Head Island, SC 29928 DIRECTORS AND EXECUTIVE OFFICERS: Mark G. Essig 112,500.00 (2) * Roger R. Regelbrugge 341,964.33 (2) 1.65% Luis E. Leon 132,555.56 (2) * David M. Yarborough 79,000.00 (2) * Richard D. Luzzi 13,500.00 (2) * Paul B. Edgerley (1) 11,741,917.93 57.67% John J. O'Malley 66,666.67 * All current directors and executive officers as a group (11 persons) (1) 12,960,137.87 (2) 60.74%
- ------------------- * 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 39 40 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, 1999: Mark G. Essig 112,500.00 Roger R. Regelbrugge 341,964.33 Luis E. Leon 127,000.00 David M. Yarborough 79,000.00 Richard D. Luzzi 13,500.00
(3) Includes 131,250 shares held by the Cushman Trust and 18,750 shares held by Kathleen Cushman Slack. 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. 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 GST Class P Common Stock held by them for $8.10 per share, the shares of GST 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 a recapitalization of GST, the GST Class A Common Stock and GST Class P Common Stock were reclassified as Common Stock. Pursuant to the GST Merger, the common stock of GST held by the parties described above was converted into GSI Common Stock. 40 41 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 this recapitalization. Mr. Paul B. Edgerley is a managing director of Bain Capital, Inc., 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 Capital, Inc. 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 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 of Directors, 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 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 Rights 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. 41 42 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 1998 representing 10% of the Company's total net sales. Bain Capital, Inc., the management company for certain of the Bain Funds, received from the Company an annual fee in 1998 for professional services rendered in the aggregate amount of $900,000. Bain Capital, Inc. 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 Capital, Inc. 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 Capital, Inc. 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, 1998, the weighted average interest rate under the Revolving Credit Facility was 8.7%. See "-- Description of Indebtedness." 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. As of December 31, 1998, the Borrowing Base was approximately $109.0 million. Outstanding borrowings under the Revolving Credit Facility bear interest at varying margins over the Base Rate or at varying margins over the London Interbank Offered Rate ("LIBOR"). Outstanding borrowings under the Term Loan Facility will bear interest at fixed margins over either (i) the Base Rate or (ii) LIBOR. 42 43 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, 2000. 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, 2001. 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 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". 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 is 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. 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. 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, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued interest to up but excluding 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
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 is 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 43 44 and September 1 of each year, commencing March 1, 1995. The 12% Notes will mature on September 1, 2004 and 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 at the following Redemption Prices (expressed as percentages of principal amount) plus accrued interest to but excluding the Redemption Date:
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 customary covenants and defined events of default. 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. 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, 1997 and 1998 ....................................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 ............................................... F-3 Consolidated Statements of Cash Flows for the Years Ended December 31 1996, 1997 and 1998 ....................................................................... F-4 Consolidated Statement of Changes in Stockholder's Equity of the Company for the Years Ended December 31, 1996, 1997 and 1998 ................................... F-5 Notes to Consolidated Financial Statements ..................................... F-6
(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 45 46 designated by reference to their exhibit numbers in prior filings, are incorporated herein as exhibits by such reference and made a part hereof. (b) No reports on Form 8-K were filed during the year ended December 31, 1998.
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 State Street Bank and Trust Company, as successor trustee, relating to the 12% Notes (including the form of 12% Note) (4) 4.2 Form of Pledge Agreement between GSTOC, GST and State Street Bank and Trust Company, as successor Collateral Trustee, relating to the 12% Notes (1) 4.3 First Supplemental Indenture dated October 5, 1995 among GSTOC, GST State Street Bank and Trust Company, as successor trustee, as Trustee, relating to the 12% Notes (3) 4.4 Second Supplemental Indenture dated August 15, 1996 among GSTOC, GST and State Street Bank and Trust Company, as successor trustee, relating to the 12% Notes (7) 4.5 Indenture between GSTOC, GST and State Street Bank and Trust Company, as successor 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 (7) 4.8 Amendment No. 2, dated December 20, 1996, to Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein (7)
46 47 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 Rights 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) 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)
48 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) 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 (7)
48 49 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 (8) 10.37 Essig Employment Agreement dated December 11, 1997 (8) 10.38 Essig Stock Option Agreement dated December 11, 1997 (8) 10.39 Form of Change of Control Agreement between GSI and each of Messrs. Essig, Daily, Yarborough and Leon dated December 11, 1997(8) 10.40 Amendment No.3, dated March 18, 1997, to Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein 10.41 Amendment No. 4, dated as of December 1, 1997, to Loan Agreement dated October 5, 1995 among GSTOC, GECC and the Lenders named therein 10.42 Amendment No. 5, dated September 30, 1998, to Loan Agreement dated October 5, 1995 among GSTOC, GECC, and the Lenders named therein 21.1 List of Subsidiaries of GST and GSTOC 27.1 Financial Data Schedule
(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). (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 (7) Incorporated by reference to the Registrant's Annual Report on Form 10-K for year ended December 31, 1996 (File No. 33-80618) (8) Incorporated by reference to the Registrant's Annual Report on Form 10-K for year ended December 31, 1997 (File No. 33-80618) 49 50 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants ........................................................... F-1 Consolidated Balance Sheets of the Company as of December 31, 1997 and 1998 ................................................................................. F-2 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 ......................................................... F-3 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 ............................................................................ F-4 Consolidated Statement of Changes in Stockholder's Equity of the Company for the Years Ended December 31, 1996, 1997 and 1998 ......................................... F-5 Notes to Consolidated Financial Statements .................................................. F-6 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
50 51 REPORT OF INDEPENDENT ACCOUNTANTS March 12, 1999 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 operations, 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, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, 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. F-1 52 GS TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, December 31, 1997 1998 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 3,362 $ 10,664 Receivables less allowance of $1,838 and $2,196 92,804 86,387 Receivables from related parties (Note 6 and 14) 8,448 5,939 --------- --------- Total receivables 101,252 92,326 --------- --------- Inventories (Note 3) 144,063 138,615 Prepaid expenses and other current assets 6,495 6,861 Taxes recoverable from parent (Note 12) 9,297 Income taxes receivable (Note 12) 3,474 Deferred tax benefit (Note 12) 1,023 --------- --------- Total current assets 256,195 261,237 Investments in joint ventures (Note 6) 41,639 38,590 Properties, net (Note 7) 260,957 254,876 Acquisition premium (Note 2) 60,713 59,102 Other assets (Note 2) 26,773 23,148 --------- --------- Total assets $ 646,277 $ 636,953 ========= ========= Liabilities and Stockholder's Equity Current liabilities: Notes payable (Note 10) $ 10,794 $ 8,568 Current portion of long-term debt (Note 10) 500 518 Income taxes payable (Notes 2 and 12) 1,261 Payables to related parties (Note 6) 2,365 8,161 Payables and accrued liabilities (Note 8) 135,734 134,903 --------- --------- Total current liabilities 150,654 152,150 Long-term debt (Note 10) 334,888 336,241 Loans from parent (Note 14) 4,900 Post retirement benefit obligations other than pensions (Note 11) 26,848 28,231 Deferred income taxes payable (Note 12) 7,098 11,639 Other long-term liabilities 31,628 34,896 Commitments and contingencies (Note 15) --------- --------- Total liabilities 551,116 568,057 --------- --------- Stockholder's equity (Note 13): Common stock, $.01 par value, 1,000 shares authorized, and 100 shares issued and outstanding at December 31, 1997 and 1998 1 1 Additional paid in capital 132,166 132,716 Accumulated deficit (33,845) (59,196) Accumulated other comprehensive income (loss) (3,161) (4,625) --------- --------- Total stockholder's equity 95,161 68,896 --------- --------- Total liabilities and stockholder's equity $ 646,277 $ 636,953 ========= =========
See accompanying notes to consolidated financial statements F-2 53 GS TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)
Year Ended --------------------------------------------- December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Net sales $ 719,865 $ 726,495 $ 734,612 Net sales - related party (Note 14) 96,052 83,239 97,233 --------- --------- --------- 815,917 809,734 831,845 --------- --------- --------- Operating costs and expenses: Cost of products sold 703,958 691,200 749,910 Selling, general and administrative expenses 46,331 44,749 44,062 Depreciation and amortization 26,989 29,587 30,371 --------- --------- --------- 777,278 765,536 824,343 --------- --------- --------- Operating profit 38,639 44,198 7,502 Other income (expense): Interest income 925 986 663 Interest expense (43,361) (42,056) (41,673) Equity in income (loss) of joint ventures (Note 6) 5,500 6,195 (1,815) Fees from joint ventures (Note 6) 2,399 2,743 3,541 Gain (loss) on disposition of properties (Note 7) (110) 40 6,082 Other, net 300 864 1,089 --------- --------- --------- (34,347) (31,228) (32,113) Income (loss) from continuing operations before income tax and cumulative effect of accounting change 4,292 12,970 (24,611) Income tax (provision) (Notes 2 and 12) (3,815) (6,523) (740) --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change 477 6,447 (25,351) Discontinued operations (Note 4): Income from discontinued operations, net of taxes 2,402 1,402 Loss on disposal of discontinued operations, net of taxes (23,965) --------- --------- --------- Income (loss) before cumulative effect of accounting change 2,879 (16,116) (25,351) Cumulative effect of change in accounting for spare parts and supplies inventories, net of taxes (Note 3) 3,556 --------- --------- --------- Net income (loss) $ 6,435 $ (16,116) $ (25,351) ========= ========= =========
See accompanying notes to consolidated financial statements F-3 54 GS TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended ------------------------------------------- December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Operating activities: Net income (loss) $ 6,435 $ (16,116) $ (25,351) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change (3,556) Depreciation and amortization 26,989 29,587 30,371 Loss on disposal of discontinued operations 23,965 Net cash from discontinued operations 7,843 (3,095) (Gain) loss on disposition of properties 110 (40) (6,082) Deferred income taxes 3,091 (9,321) 5,114 Equity in (income) loss of joint ventures (5,500) (6,195) 1,815 Dividends from joint ventures 4,519 3,640 6,526 Post retirement benefit obligations accrued in excess of cash paid 1,524 1,055 1,383 Changes in operating assets and liabilities: Receivables (4,379) 12,053 10,094 Inventories 2,902 (15,087) 7,209 Payables and accrued liabilities 5,106 (12,302) 2,133 Income taxes (1,972) 7,638 (14,130) Other (2,336) 1,020 2,713 --------- --------- --------- Net cash provided by operating activities 40,776 16,802 21,795 --------- --------- --------- Investing activities: Proceeds from disposal of discontinued operations 55,998 Purchase of properties (42,225) (25,112) (22,080) Investment in joint ventures (11,484) (9,049) (6,538) Proceeds from disposals of properties 3,924 40 11,264 Other 190 --------- --------- --------- Net cash provided by (used in)investing activities (49,785) 21,877 (17,164) --------- --------- --------- Financing activities: Borrowings under revolving credit facility 223,684 200,339 218,245 Repayments on revolving credit facility (226,695) (234,994) (216,374) Repayments of long-term debt (500) (500) (500) Proceeds from (payments on) notes payable, net 10,541 (4,923) (2,327) Borrowings from parent 4,900 Contribution from parent 550 --------- --------- --------- Net cash provided by (used in) financing activities 7,030 (40,078) 4,494 --------- --------- --------- Effect of exchange rate changes on cash (563) (2,986) (1,823) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (2,542) (4,385) 7,302 Cash and cash equivalents: Beginning of period 10,289 7,747 3,362 --------- --------- --------- End of period $ 7,747 $ 3,362 $ 10,664 ========= ========= ========= Supplemental disclosure of cash flow information Cash paid during the period for interest $ 45,230 $ 39,057 $ 40,111 Cash paid during the period for taxes $ 1,082 $ 6,613 $ 4,335
See accompanying notes to consolidated financial statements F-4 55 GS TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Dollars in thousands)
Accumulated Additional Other Total Common Stock Paid in Accumulated Comprehensive Stockholder's Shares Amount Capital Deficit Income (Loss) Equity ------ ------- ---------- ----------- ------------- ------------- Balance at December 31, 1995 100 $ 1 $132,166 $ (24,164) $ (1,394) $ 106,609 --- ---- -------- ---------- ---------- ----------- Comprehensive income: Net income (loss) 6,435 6,435 Foreign currency translation adjustment (283) (283) --- ---- -------- ---------- ---------- ----------- Balance at December 31, 1996 100 1 132,166 (17,729) (1,677) 112,761 --- ---- -------- ---------- ---------- ----------- Comprehensive income (loss): Net income (loss) (16,116) (16,116) Foreign currency translation adjustment (1,484) (1,484) --- ---- -------- ---------- ---------- ----------- Balance at December 31, 1997 100 1 132,166 (33,845) (3,161) 95,161 --- ---- -------- ---------- ---------- ----------- Contribution from parent 550 550 Comprehensive income (loss): Net income (loss) (25,351) (25,351) Foreign currency translation adjustment (1,464) (1,464) --- ---- -------- ---------- ---------- ----------- Balance at December 31, 1998 100 $ 1 $132,716 $ (59,196) $ (4,625) $ 68,896 === ==== ======== ========== ========== ===========
See accompanying notes to consolidated financial statements F-5 56 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 1. BUSINESS AND ORGANIZATION 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. ORGANIZATION The Company is a wholly-owned subsidiary of GS Industries, Inc. ("GSI") and has fully and unconditionally guaranteed senior notes of $250 million which were issued by the Company's wholly-owned subsidiary, GS Technologies Operating Co., Inc. ("GSTOC"). The Company was incorporated in 1993 to affect the acquisition of certain operations and accounts of certain operating units, investments in certain joint ventures, and wholly-owned subsidiaries of Armco, Inc. ("Armco"), and, in October 1995 acquired Georgetown Industries, Inc. 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. F-6 57 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) CASH AND CASH EQUIVALENTS 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 for the inventories of the Italian operations which 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 3-20 Buildings and improvements 4-30 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. Amortization of this premium aggregated $1.7 million for each of the three years ended December 31, 1998. Other assets include debt issuance costs of $11.9 million and $10.1 million at December 31, 1997 and 1998, respectively, which are being amortized over the lives of the corresponding debt agreements. Amortization of these costs aggregated $1.8 million, $1.7 million, and $1.8 million for the years ended December 31, 1996, 1997 and 1998, 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 $4.6 million and $2.9 million at December 31, 1997 and 1998, 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. F-7 58 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) INCOME TAXES 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 expense or benefit 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. 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 comprising the caption, other comprehensive income. EARNINGS PER SHARE Earnings per share amounts are not presented, as the Company's common stock is not publicly traded. F-8 59 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income for the Company represents net income (loss) adjusted for foreign currency translation adjustments. Comprehensive income (loss) was $6.2 million, $(17.6) million and $(26.8) million for the years ended December 31, 1996, 1997, and 1998, respectively. 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, 1997 1998 ------------ ------------ Inventories at FIFO and average cost: Finished and semi-finished $ 81,871 $ 75,020 Raw materials 60,870 62,612 -------- -------- Total 142,741 137,632 -------- -------- Inventories at LIFO: Finished and semi-finished 1,382 1,093 Adjustment to state inventories at LIFO value (60) (110) -------- -------- Total 1,322 983 -------- -------- $144,063 $138,615 ======== ========
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. 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 F-9 60 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) been classified as discontinued operations for all periods presented. The Company recorded a net tax benefit of $17.1 million on the transaction; of this amount, $15.4 million was recorded in 1997 as a deferred tax asset in connection with finalizing the purchase accounting. The remaining tax benefit of $1.7 million was netted against the loss from discontinued operations. The loss on discontinued operations contributed to an overall net operating loss for U.S. tax purposes in 1997. In 1998, a portion of the net operating loss generated in 1997 was carried back to earlier tax years resulting in a refund of taxes previously paid. 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, 1997 1998 ------------ ------------ Current assets $191,164 $198,595 Noncurrent assets 337,626 311,870 -------- -------- Total assets $528,790 $510,465 ======== ======== Current liabilities $100,405 $105,998 Noncurrent liabilities 371,485 381,263 -------- -------- Total liabilities 471,890 487,261 -------- -------- Stockholder's equity 56,900 23,204 -------- -------- Total liabilities and equity $528,790 $510,465 ======== ========
Year Ended -------------------------------------------- December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Net sales $ 638,359 $ 618,664 $ 642,927 Cost of products sold 569,139 544,954 608,428 Selling, general & administrative expenses 24,026 24,629 25,624 Depreciation and amortization 23,365 25,761 26,266 --------- --------- --------- Operating profit (loss) 21,829 23,320 (17,391) Interest expense (39,950) (39,434) (40,304) Equity in loss of joint venture (3,850) Fees from joint ventures 3,132 3,636 4,325 Interest income and other, net 386 322 (141) --------- --------- --------- Income (loss) from continuing operations before income tax and cumulative effect of accounting change (14,603) (12,156) (57,361) Income tax (expense) benefit 6,256 3,910 1,900 --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change (8,347) (8,246) (55,461) Discontinued operations: Income from discontinued operations 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) $ (2,389) $ (30,809) $ (55,461) ========= ========= =========
F-10 61 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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 1997 1998 --------- ----------- ------------ Donhad Pty. Ltd (Australia) 40.0% $ 5,965 $ 6,627 Moly-Cop Canada (Canada) 50.0% 3,985 3,622 GST Philippines (Philippines) 37.5%(1) 121 SIMEC-Moly-Cop (Mexico) 50.0% 2,495 2,021 Sidercorp, S.A. (Peru) 33.3% 14,827 10,292 American Iron Reduction LLC ("AIR") (U.S.) 50.0% 13,553 15,166 Lucchini Siderurgica, SpA (Italy and Sweden) 49.0% 693 862 ---------- ---------- $ 41,639 $ 38,590 ========== ==========
(1) In December 1998, the Company purchased the additional 62.5% of this operation from its joint venture partners for $1.0 million. Accordingly, GST Philippines is now a wholly-owned subsidiary and its results of operations subsequent to the purchase date are included in consolidated results. F-11 62 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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:
December 31, 1996 and the year then ended ------------------------------------ Foreign U.S. (AIR) Total ------- ---------- ----- 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. (AIR) 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 Long-term debt 152,881 183,908 311,027 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
December 31, 1998 and the year then ended ------------------------------------ Foreign U.S. (AIR) Total ------- ---------- ----- Current assets $199,689 $ 30,097 $ 229,786 Properties 157,519 195,231 352,750 Total assets 393,220 234,426 627,646 Current liabilities 194,692 19,187 213,879 Long-term debt 113,797 184,908 298,705 Total liabilities 330,871 204,095 534,966 Net sales 291,362 94,671 386,033 Operating profit 30,591 3,604 34,195 Net income (loss) 6,988 (9,700) (2,712)
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 owns one-third of the outstanding capital stock of Sidercorp. Under the terms of the acquisition, Acerco is the operating partner of Siderperu. 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. In June 1996, the Company entered into an agreement to form an Italian joint venture called GSI Lucchini SpA. The joint venture, 49% owned by the Company, manufactures and sells grinding media. F-12 63 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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 has a 50% interest in American Iron Reduction, L.L.C. ("AIR"), a joint venture company producing direct reduced iron ("DRI"). AIR started operations in January 1998 and has a rated capacity of approximately 1.2 million metric tons of DRI annually. DRI is a substitute for high quality steel scrap used in steel making facilities. The Company has made equity contributions of $20 million ($6.5 million during 1998) to AIR. Under certain circumstances, the Company may be required to make additional contributions of up to $7.5 million. The Company is also party to a DRI purchase agreement with AIR with a term of approximately 12 years, subject to cancellation or extension as provided for in the agreement, pursuant to which the Company agrees, subject to the terms of the agreement, to purchase up to a maximum of 600,000 metric tons of DRI annually, if produced and tendered by AIR. In 1998 AIR produced and tendered to the Company and the Company purchased from AIR 304,000 metric tons of DRI for $46.4 million. The Company used 107,000 metric tons of the DRI purchased from AIR in its own steelmaking operations and sold the balance to third parties resulting in negative gross margins of $7.4 million. The Company's cost of acquiring DRI from AIR approximates AIR's total cash cost which excludes depreciation and amortization and includes reserves for capital expenditures, interest and a fixed predetermined future amount which would allow AIR to service its debt. The Company accounts for DRI purchased from AIR and resold to others as components of net sales and cost of products sold and accounts for DRI used in its own steelmaking operations as a component of production cost. Income or losses from joint ventures, including AIR, are reported in the statement of operations under the caption "Equity in income (loss) of joint ventures". During 1998 and continuing into early 1999, market conditions within the domestic steel industry, and in particular the scrap and scrap substitute supply segment of the steel industry, which includes DRI, have experienced significant downward economic pressure largely due to market sales price declines that have resulted from high volumes of lower priced steel imported into the United States at prices which are substantially below the domestic industry's cost. These forces have driven current market sales prices to levels below many domestic producers' cost, and as a result, some manufacturing facilities have curtailed production and/or ceased operations. Due primarily to the market conditions described above, AIR produced at a level of approximately 54% of its design capacity during 1998. AIR has demonstrated in production runs during 1998 that it can produce at or in excess of its design capacity. However, the lower level of production at which AIR actually produced was an intentional reaction to market conditions and an attempt to mitigate losses attributable to the negative gross margins. During 1998 AIR's average per ton cash cost of production plus interest and capital requirements exceeded the currently depressed market sales price of DRI and other scrap substitutes currently available. Consequently, under existing market conditions, the Company is paying to AIR prices for DRI that exceed the current depressed market sales price for DRI and other scrap substitutes. Until these market conditions improve and there can be no assurance that market conditions will improve, the Company could be exposed to losses associated with AIR which could become material to the Company's financial performance and potentially to its liquidity and financial position. These financial statements do not reflect any accrual for any future losses related to AIR, or any adjustments to the carrying value of the Company's investment in AIR ($15.2 million at December 31, 1998) or the aforementioned equity contribution. Under the terms of AIR's loan agreement, the construction loan was to be converted to term loan status by October 31, 1998 upon the successful achievement of certain production milestones, and the completion of an adjacent bulk materials handling facility owned and operated by a third party subject to a contractual arrangement to provide materials handling services to AIR's operations. In June 1998, an incident occurred F-13 64 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) during testing of the third party handling facility's primary unloading crane resulting in significant structural damage and delays to this facility's construction completion schedule. During 1998 and until the third party handling facility construction is completed as originally designed, alternative freight and handling services have been used and will continue to be used with respect to the terminal facility at a cost in excess of that which was originally provided under the contract arrangement with the third party handling facility. An alternative crane has now been installed by the third party material handling facility and is expected to be operational in the first quarter of 1999. It is expected that this crane will provide substantial savings over the current arrangement and can handle AIR's needs until a larger and faster crane is installed. Because of the construction problems with the handling facility, the date for the conversion of AIR's construction loan to term loan status has been extended until March 31, 1999. Discussions are currently underway with AIR's lenders regarding structure and timing of conversion of the construction loan to permanent long-term status. It is management's opinion that acceptable long term financing for AIR's conversion of its construction loan can be negotiated with AIR's lenders and that the newly installed crane will adequately handle AIR's needs until the larger and faster crane is installed. However there can be no assurance that negotiations with AIR's lenders will be successful or completed on terms that will not have an adverse impact on the Company's future cost of DRI or on the Company's cash flows or on the ability of AIR to continue as a going concern. If AIR's construction loan had been converted to a term loan on the original conversion date of October 31, 1998 the following would have represented the amortization of principal payments under the term loan which would have been due from AIR in amounts which range from 4.8% of the initial principal balance (in year 2) to 13.28% of the initial principal balance (in year 10). Interest rates vary from LIBOR plus 1.25% or NationsBank Prime plus .5% during the construction phase, and vary from LIBOR plus 1.375% to 2.125% or NationsBank Prime plus .625% to 1.375% during the working capital and term loan phase. As of December 31, 1998, the effective rate ranged from 6.820% to 6.95%. The Company's recorded investment in equity companies is approximately $0.8 million less than its share of the underlying equity of the associated companies at December 31, 1998. The difference results from acquisition accounting 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. The Company has related party accounts receivable from its joint venture affiliates of $2.0 million and $1.6 million as of December 31, 1997 and 1998, respectively. The Company has related party accounts payable of $2.4 million and $8.2 million at December 31, 1997 and 1998, respectively, including amounts due to AIR of $3.7 million at December 31, 1998. 7. PROPERTIES Properties consist of the following:
December 31, December 31, 1997 1998 ------------ ------------ Land and leaseholds $ 13,895 $ 13,277 Buildings and improvements 49,421 51,988 Machinery and equipment 256,102 273,542 Construction in progress 7,388 10,870 --------- --------- 326,806 349,677 Less accumulated depreciation (65,849) (94,801) --------- --------- $ 260,957 $ 254,876 ========= =========
F-14 65 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) In June 1998, the Company completed the sale of its wholly-owned subsidiary, Tubos Y Alcantarillas S. A., ("Tubos") for $9.5 million resulting in a gain on disposition of $5.2 million. Tubos was created in March 1998, and was capitalized by the Company through the contribution of certain manufacturing assets located in Peru. In June 1998, the Company sold an idle plant located in Cividale, Italy for $1.9 million resulting in a gain on disposition of $1.1 million. The manufacturing assets from this facility were transferred into an Italian joint venture in October 1996. 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 no interest during 1997 or 1998. 8. PAYABLES AND ACCRUED LIABILITIES Payables and accrued liabilities consist of the following:
December 31, December 31, 1997 1998 ------------ ------------ Trade payables $ 83,650 $ 84,170 Salaries and wages 12,936 11,052 Accrued interest payable 10,509 10,072 Other 28,639 29,609 -------- -------- $135,734 $134,903 ======== ========
9. ANTITRUST CLAIM SETTLEMENT The Company reached a settlement with one of its suppliers of electrodes arising out of antitrust investigations and claims against the supplier. As a result, the Company realized pre-tax gains of $4.2 million in the third quarter of 1998 and $3.4 million in the fourth quarter of 1998 from the combination of cash, settlement of certain outstanding invoices, and credits taken against current purchases from this supplier. The Company anticipates additional settlements from other electrode suppliers in 1999. 10. NOTES PAYABLE AND LONG-TERM DEBT International short-term debt exists under several uncollateralized credit lines in Chile, Peru, and Italy. This debt is incurred for general corporate purposes and working capital requirements. This short-term debt totaled $8.6 million at December 31, 1998 with remaining borrowing availability of $21.5 million. F-15 66 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) Long-term debt consists of the following:
December 31, December 31, 1997 1998 ------------ ------------ 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 and subsidiaries. Interest payable monthly/quarterly at the Company's option based upon fixed margin over LIBOR or the prime rate (8.7% at December 31, 48,875 48,375 1998) $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 (8.7% at December 31, 1998) 22,058 24,575 $8,000 Unsecured MEI term note due in quarterly installments commencing March 31, 2000 to December 31, 2001, interest payable quarterly based upon varying margins over LIBOR or the prime rate (6.4% at December 31, 1998) 8,000 8,000 $9,000 Unsecured MEI revolving credit agreement due June 30, 2000, interest payable quarterly based upon varying margins over LIBOR or the prime rate (7.3% at December 31, 1998) 4,381 4,259 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 (7.2% at December 31, 1998) 2,026 1,535 Other 48 15 -------- -------- 335,388 336,759 Less current portion (500) (518) -------- -------- $334,888 $336,241 ======== ========
The fair value of the 12% Notes and the 12 1/4% Notes is $85.0 million and $83.8 million, respectively, based on the market trading price at December 31, 1998. 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, 1998, $10.0 million of letters of credit were outstanding, and unused availability under the facility at December 31, 1998 was $42.0 million. The facility requires payment of a commitment fee on the unused portion of the line of credit. F-16 67 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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 $4.7 million at December 31, 1998. 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 such as minimum cash flows and net worth requirements. The Company is in compliance with these covenants at December 31, 1998. The aggregate maturities of long-term debt at December 31, 1998 are as follows: 1999 $ 518 2000 10,291 2001 29,075 2002 46,875 2003 - Thereafter 250,000 ----------- $ 336,759 ===========
11. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT 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 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 current and future salaried retirees hired prior to January 1, 1990. 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.
Pension Benefits Other Benefits ----------------------- ----------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Change in projected benefit obligation Benefit obligation at beginning of year $ 40,896 $ 62,113 $ 19,788 $ 23,689 Service cost 3,728 4,112 528 506 Interest cost 3,852 4,575 1,664 1,887 Amendments 11,208 648 Actuarial (gain) loss 4,414 (1,956) 2,609 2,213 Transfers (542) Benefits paid (1,443) (2,122) (900) (1,000) -------- -------- -------- -------- Benefit obligation at end of year $ 62,113 $ 67,370 $ 23,689 $ 27,295 -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year $ 42,398 $ 54,484 $ $ Actual return on assets 7,342 8,596 Employer contributions 6,752 5,159 900 1,000 Transfers (565) Benefits paid (1,443) (2,122) (900) (1,000) -------- -------- -------- -------- Fair value of plan assets at end of year $ 54,484 $ 66,117 $ $ -------- -------- -------- --------
F-17 68 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted)
Pension Benefits Other Benefits ------------------------ ----------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Funded status $ (7,629) $ (1,253) $(23,689) $(27,295) Unrecognized actuarial (gain) loss (4,168) (11,004) (3,159) (936) Unrecognized prior service cost 10,802 10,459 -------- -------- -------- -------- Net amount recognized $ (995) $ (1,798) $(26,848) $(28,231) ======== ======== ======== ======== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 3,374 $ 2,759 $ $ Accrued benefit liability (4,369) (4,557) (26,848) (28,231) Additional minimum liability (9,471) (6,152) Intangible asset 9,471 6,152 -------- -------- -------- -------- Net amount recognized $ (995) $ (1,798) $(26,848) $(28,231) ======== ======== ======== ======== Weighted-average assumptions as of December 31 Discount rate 7.50% 7.25% 7.50% 7.25% Expected return on plan assets 9.50 9.50 Rate of compensation increase 5.25 3.00
For measurement purposes, a nine-percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to five-percent for 2002 and remain at that level thereafter.
Pension Benefits Other Benefits ----------------------------------- ----------------------------------- 1996 1997 1998 1996 1997 1998 ------- ------- ------- ------- ------- ------- Components of net periodic benefit cost Service cost $ 3,630 $ 3,728 $ 4,112 $ 469 $ 528 $ 506 Interest cost 3,020 3,852 4,575 1,445 1,664 1,887 Expected return on plan assets (3,254) (4,197) (5,181) Amortization of prior service cost 25 406 990 Recognized actuarial (gain) loss 444 1,770 765 (390) (237) (11) Union accrual 737 ------- ------- ------- ------- ------- ------- Net periodic benefit cost $ 3,865 $ 5,559 $ 5,998 $ 1,524 $ 1,955 $ 2,382 ======= ======= ======= ======= ======= =======
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $49.9 million, $49.9 million, and $45.6 million, respectively, as of December 31, 1998 and $44.8 million, $44.8 million, and $37.5 million, respectively, as of December 31, 1997. Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 364 $ (293) Effect on post retirement benefit obligations $ 3,910 $ (3,191)
F-18 69 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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. With respect to the accrued pension expense, $12.2 million and $10.0 million were recorded in noncurrent liabilities at December 31, 1997 and 1998, respectively. At December 31, 1997 and 1998, $11.2 million and $8.0 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 contributions to the plan during 1998 were $0.1 million. The Company's funding policy is to meet or exceed the minimum amount required under ERISA. 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 $0.6 million and $0.7 million at December 31, 1997 and 1998, respectively. DEFINED CONTRIBUTION PLANS The Company's subsidiaries have various defined contribution plans that cover substantially all of the salaried and hourly employees. The Company recorded expense related to those plans of $0.5 million, $0.6 million and $0.3 million for the years ended December 31, 1996, 1997 and 1998, respectively. 12. INCOME TAXES TAX EXPENSE Total income tax expense (benefit) was allocated as follows:
Year Ended --------------------------------------- December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Income from continuing operations $3,815 $6,523 $ 740 Income (loss) from discontinued operations 98 97 Loss on disposal of discontinued operations (1,704) Cumulative effect of change in accounting $2,444 ------ ------ ------- $6,357 $4,916 $ 740 ====== ====== =======
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, 1996 1997 1998 ------------ ------------ ------------ Current State and Local $ 514 $ 140 $ (999) Foreign 3,097 3,657 5,382 ------- ------- ------- Total current 3,611 3,797 4,383 ------- ------- -------
F-19 70 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted)
Year Ended ---------------------------------------- December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Deferred Federal 283 308 (6,273) State and Local (1,214) (388) 551 Foreign 1,135 2,806 2,079 --------- ------ ------- Total deferred 204 2,726 (3,643) --------- ------ ------- Total income tax expense $ 3,815 $6,523 $ 740 ========= ====== =======
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, 1996 1997 1998 ------------ ------------ ------------ Income tax expense using the US statutory rate $ 1,502 $ 4,540 $(8,613) Difference in rates on earnings of foreign subsidiaries and joint ventures 212 (1,789) (2,167) Unremitted earnings of foreign subsidiaries and joint ventures 4,711 3,725 6,818 State income taxes, net (455) (161) (291) Change in valuation allowance (2,065) Other (90) 208 4,993 ------- ------- ------- Total $ 3,815 $ 6,523 $ 740 ======= ======= =======
Deferred Taxes Deferred tax liabilities (assets) are comprised of the following:
December 31, December 31, 1997 1998 ------------ ------------ Inventory $ 3,826 $ 3,201 Basis in foreign subsidiaries 15,285 17,272 Intangibles 1,422 1,596 Properties 45,184 46,460 -------- -------- Gross deferred tax liabilities 65,717 68,529 -------- -------- Long-term employee health obligations (9,999) (11,068) NOL, AMT credit and ITC credit carryovers (52,695) (45,197) Book liabilities not currently deductible for tax (2,713) (4,624) Deferred compensation and other employee benefits (1,679) (3,100) Vacation accrual (1,667) (1,723) Other, net 201 (88) -------- -------- Gross deferred tax assets (68,552) (65,800) -------- -------- Deferred tax asset valuation allowance 8,910 8,910 -------- -------- Net deferred tax liability $ 6,075 $ 11,639 ======== ========
F-20 71 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) At December 31, 1998, the Company has NOL carryforwards for U.S. federal income tax purposes of approximately $102.0 million, which are available to offset future federal taxable income. Under existing tax laws net operating losses can be carried forward for 20 years. The Company's net operating losses will expire in the years 2011 through 2019. 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 valuation allowance for net operating losses for the year ended December 31, 1997 remained unchanged at December 31, 1998. Management has determined based upon evidence available to the Company that it is more likely than not that the Company will realized the gross deferred tax assets (principally net operating loss carryforwards), as adjusted for the valuation allowance. 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 $16.3 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 $0.4 million would be payable upon the remittance of the portion of unremitted earnings considered to be invested indefinitely. As discussed in Note 2, the Company is a party to a tax sharing agreement and files a consolidated U.S. federal tax return with GSI and other members of GSI's consolidated U.S. federal income tax return. Among other things, if the Company generates a net operating loss or other tax attribute that it is unable to use in the current year, the Company will be allowed to carry forward, but not carry back any unused net operating or tax attribute for purposes of computing the Company's separate federal income tax liability. However, during 1998, GSI elected to carry back certain of the Company's net operating losses and recover federal income taxes previously paid by the Company. As a result the Company currently has an income tax receivable of approximately $9.2 million due from GSI. F-21 72 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 13. 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, which have ten-year terms, 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. 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 Options granted 212,000 $ 7.00 Options cancelled (80,350) (15,552) $ 7.01 --------- --------- Outstanding at December 31, 1998 3,691,422 1,898,798 $ 4.12 ========= ========= 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 Exercisable at December 31, 1998 2,618,558 1,575,044 $ 3.48
At December 31, 1998 there were 234,686 options outstanding, which have been approved by the Board of Directors, but not yet granted. Exercise prices have not been determined for these options. F-22 73 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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:
1996 1997 1998 ---- ---- ---- Pro forma net income after adjustment for stock option expense $6,040 $(16,633) $(25,999)
The weighted Black-Scholes value of options granted during 1996, 1997 and 1998 was $1.55, $2.38, and $.08. Value was estimated using an expected life of 6 years, no dividends, volatility of .27, .27 and .22, and risk-free interest rates of 6.2%, 6.2%, and 5.5% in 1996, 1997 and 1998. 14. RELATED PARTY TRANSACTIONS TRANSITION SERVICES AND OTHER ANCILLARY AGREEMENTS The officers, directors, and management employees of GSI provide management services to GST. The cost and expenses of these services are charged to GST under a management services agreement and included in selling, general and administrative expenses. This charge amounted to $13.4 million, $11.8 million, and $11.2 million in 1996, 1997, and 1998 respectively. At December 31, 1998 GST has a note payable to GSI of $4.9 million which bears interest at 8.7% and is payable on demand. 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 is a lender and 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, 1996, 1997 and 1998 comprised 11.8%, 10.3%, and 11.7% of the Company's consolidated sales, respectively. The Company has related party accounts receivable as of December 31, 1997 and December 31, 1998 of $6.5 million and $4.3 million, respectively, related to this 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. F-23 74 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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. The Company believes that it has substantial and meritorious defenses and will defend itself accordingly. The Company's subsidiary, Georgetown Steel Corporation, is the defendant in three related suits filed in 1998 by certain private plaintiffs in the Court of Common Pleas for the County of Georgetown, South Carolina. The plaintiffs allege trespass, nuisance, negligence and violation of State and Federal law in connection with the escape of "mill dust" and gases from Georgetown's steel mill into the atmosphere and onto the plaintiffs' property in Georgetown, South Carolina. The plaintiffs seek certification as a class in each case. The plaintiffs in these actions seek unspecified actual, compensatory and punitive damages. The Company believes the actions lack merit and intends to defend them vigorously. 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. 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 F-24 75 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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 1997 and 1998, the Company spent $0.1 million and $0.2 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 and 1998, $2.7 million and $2.4 million were 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. 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 1999 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 successfully negotiated a new contract which extends until November 2003. 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. 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 that extends until December 2002. The Company's collective bargaining agreement at the Jacksonville, Florida facility expired on April 30,1998. The Company was unable to reach agreement with the union and a work stoppage commenced. The Company re-staffed the facility with permanent replacement workers and production has returned to normal levels. In July 1998, the union notified the Company that striking workers had accepted the Company's final offer as proposed by management before the work stoppage began. The striking workers have been placed on a recall list for rehire, as positions become available. F-25 76 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) COMMITMENTS The Kansas City operations have entered a ten year agreement, expiring in 2004, with a third party that will staff and manage its computer operations for $0.9 million per year. The Company is party to a DRI purchase agreement with a term of approximately twelve years as discussed in Note 5. Rent expense under equipment operating leases was $4.1 million, $2.4 million and $3.3 million for the years ended December 31, 1996, 1997 and 1998, respectively. The Company has future minimum noncancelable operating lease commitments of the following at December 31, 1998: 1999 $3,305 2000 2,596 2001 1,625 2002 970 2003 701 Thereafter 586
16. RISK FACTORS, LIQUIDITY AND UNCERTAINTIES The following forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results of the Company to differ from those matters expressed in or implied by such forward-looking statements. During 1998 and continuing into early 1999, the Company's results have been negatively impacted by market conditions within the domestic steel industry. Distressed economic conditions in other countries, particularly in Asia, have resulted in record levels of low priced steel imported into the U.S. causing dramatic declines in selling prices industry-wide. In December 1998, the Company, along with other U.S. companies and the United Steelworkers of America, filed a petition with the U. S. International Trade Commission seeking action to limit wire rod imports which have caused serious harm to the industry. Until such time as the U. S. government intervenes with trade sanctions or the foreign economic situation improves, the Company's financial performance could continue to be adversely impacted by these factors. The Company is currently in compliance with its debt covenants (see Note 9 "Long Term Debt"). However, should market conditions experience further or prolonged deterioration, the Company could violate one or more of its covenants within the next twelve months. The Company is evaluating its alternatives in the event that it is unable to comply with its debt covenants. However, there can be no assurance that appropriate alternatives will be available to the Company. As discussed in Note 5, the Company's 50% owned DRI joint venture has experienced recent losses due to unusually low prices for scrap and scrap substitutes, resulting in lower than optimal production levels and costs of producing DRI exceeding current market prices. Continuation of these market conditions could have a material adverse impact on the Company's future financial performance and potentially on its liquidity and financial condition. 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 1999, management continues to evaluate alternative sources of funds. There are fluctuations in the Company's working capital needs over the course of a year, generally influenced by various factors such as seasonality, inventory levels, the timing of raw material purchases, and capital expenditures. 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. F-26 77 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 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 Company manages its liquidity needs on a consolidated basis with borrowings available under the Revolving Credit Facility (see Note 10). Management believes the additional borrowing availability under the Credit Facility 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. 17. 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. Other includes the Company's operations in Europe (principally Italy), Canada and other joint venture interests around the world (Note 6).
Year ended December 31, 1996 -------------------------------------------------- United South States America Other Total --------- ------- ------- -------- Net sales $ 704,425 $86,203 $25,289 $815,917 Operating profit 28,413 8,177 2,049 38,639 Equity in income of joint ventures 3,421 1,068 1,011 5,500 Net income (loss) (1,652) 6,054 2,033 6,435
Year ended December 31, 1997 -------------------------------------------------- United South States America Other Total --------- ------- ------- -------- Net sales $ 690,758 $106,664 $12,312 $809,734 Operating profit 33,657 9,982 559 44,198 Equity in income of joint ventures 2,679 3,003 513 6,195 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
Year ended December 31, 1998 -------------------------------------------------- United South States America Other Total --------- ------- ------- -------- Net sales $ 715,785 $108,784 $ 7,276 $831,845 Operating profit (6,555) 14,028 29 7,502 Equity in income (loss) of joint venture (2,359) 557 (13) (1,815) Net income (loss) (38,852) 11,514 1,987 (25,351) Identifiable assets 551,417 67,111 18,425 636,953 Total liabilities 520,884 39,238 7,935 568,057 Net assets 30,533 27,873 10,490 68,896
F-27 78 GS TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) 18. SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED (DOLLARS IN MILLIONS)
1997 1998 ---------------------------------------------- ---------------------------------------------- 1(st) 2(nd) 3(rd) 4(th) 1(st) 2(nd) 3(rd) 4(th) -------- -------- -------- -------- -------- -------- -------- -------- Net sales $ 208.9 $ 184.5 $ 216.9 $ 199.4 $ 216.7 $ 224.7 $ 196.6 $ 193.8 Operating profit (loss) 13.1 (4.0) 18.3 16.8 13.3 2.8 (5.1) (3.6) Income (loss) from continuing operations 3.0 (6.0) 5.2 4.3 2.7 (0.1) (13.2) (14.7) Discontinued operations (22.6) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ (19.6) $ (6.0) $ 5.2 $ 4.3 $ 2.7 $ (0.1) $ (13.2) $ (14.7) ======== ======== ======== ======== ======== ======== ======== ========
F-28 79 Report of Independent Accountants on Financial Statement Schedules March 12, 1999 To the Board of Directors of GS Technologies Corporation Our audits of the consolidated financial statements referred to in our report dated March 12, 1999 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. S-1 80 Schedule 1 GS TECHNOLOGIES CORPORATION CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY BALANCE SHEETS (Dollars in thousands)
December 31, December 31, 1997 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 15 $ 8 Other receivables 63 108 Recoverable income taxes 137 4,612 Deferred Income Taxes 853 1,036 --------- --------- Total current assets 1,068 5,764 Loans to affiliates 3,500 Investment in consolidated subsidiaries 111,155 94,287 Investment in joint ventures 8,585 8,675 --------- --------- Total assets $ 120,808 $ 112,226 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Payables to affiliates 3,476 4,669 Payables and accrued liabilities (505) 588 --------- --------- Total current liabilities 2,971 5,257 Deferred income taxes payable 19,109 28,808 Other long-term liabilities 3,567 7,435 --------- --------- Total liabilities 25,647 41,500 --------- --------- Stockholder's equity Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares issued and outstanding at December 31, 1997 and 1998 1 1 Additional paid-in capital 132,166 132,716 Retained earnings (accumulated deficit) (33,845) (59,196) Cumulative translation adjustment (3,161) (2,795) --------- --------- Total stockholder's equity 95,161 70,726 --------- --------- Total liabilities and stockholder's equity $ 120,808 $ 112,226 ========= =========
See notes to Condensed Financial Information S-2 81 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 December December 31, 31, 31, 1996 1997 1998 --------- ---------- ---------- Equity in income (loss)of consolidated subsidiaries $ 10,385 $(12,093) $(22,732) Equity in income of joint ventures 3,421 1,530 1,490 Gain (loss) on disposition of properties 5,176 Other, net (1,853) (1,262) (1,606) -------- -------- -------- Income (loss) before income tax 11,953 (11,825) (17,672) Income tax (provision) (5,518) (4,291) (7,679) -------- -------- -------- Net income (loss) $ 6,435 $(16,116) $(25,351) ======== ======== ========
See notes to Condensed Financial Information S-3 82 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, 1996 1997 1998 ------------ ------------ ------------ Operating activities: Net income (loss) $ 6,435 $(16,116) $(25,351) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in (income) loss of consolidated subsidiaries (10,385) 12,093 22,732 Equity in (income) loss of joint ventures (3,421) (1,530) (1,490) Dividends from joint ventures 3,141 1,018 1,434 Gain on disposition of properties (5,176) Deferred income taxes 10,085 (3,436) 9,516 Changes in operating assets and liabilities: Receivables 913 272 (45) Payables and accrued liabilities (5,289) 79 2,286 Income taxes (6,606) 6,469 (4,475) Other 1,506 498 (918) -------- -------- -------- Net cash provided by (used in) operating activities (3,621) (653) (1,487) -------- -------- -------- Investing activities: Investment in consolidated subsidiaries (11,849) (10,730) (21,765) Purchase of additional interest in Moly-Cop Philippines (1,000) Dividends received from consolidated subsidiaries 16,778 10,761 17,695 Proceeds from disposition of properties 9,500 Loan to affiliate (3,500) Change in receivable/payable to affiliates 1,727 -- -------- -------- -------- Net cash provided by (used in) investing activities 6,656 31 930 -------- -------- -------- Financing activities: Repayments of long-term debt (2,400) -- Contribution from GSI -- 550 -------- -------- -------- Net cash provided by (used in) financing activities (2,400) -- 550 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 635 (622) (7) Cash and cash equivalents: Beginning of period 2 637 15 -------- -------- -------- End of period $ 637 $ 15 $ 8 ======== ======== ========
See notes to Condensed Financial Information S-4 83 Schedule 1 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, 1998 and 1997, 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 84 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, 1997 Allowance for doubtful accounts $1,828 $ 457 $ (447) $1,838 Year ended December 31, 1998 Allowance for doubtful accounts $1,838 $1,311 $(103) $ (850) $2,196
S-6 85 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 12th day of March, 1999. GS TECHNOLOGIES CORPORATION AND GS TECHNOLOGIES OPERATING CO., INC. By: /s/ Luis E. Leon ------------------------------------------- Luis E. Leon, Senior Vice President-Finance Chief Financial Officer, Treasurer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant 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/ Luis E. Leon - ------------------------- Senior Vice President - Finance Luis E. Leon Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer) /s/ David O. Shelley Vice President and Controller - ------------------------- (Principal Accounting Officer) David O. Shelley /s/ Roger R. Regelbrugge Chairman and Director - ------------------------- Roger R. Regelbrugge /s/ Paul B. Edgerley Director - ------------------------- Paul B. Edgerley
86 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 1999. EX-10.40 2 AMENDMENT #3 TO LOAN AGREEMENT 1 AMENDMENT NO. 3 TO LOAN AGREEMENT AMENDMENT NO. 3, dated as of March 18, 1997, among GS TECHNOLOGIES OPERATING CO., INC., a Delaware corporation ("GSTOC"), and its direct and indirect Subsidiaries, CI (U.S.) CORP (formerly Control International, Inc.), a Utah corporation ("CII"), GEORGETOWN STEEL CORPORATION, a Delaware corporation ("GSC"), FLORIDA WIRE AND CABLE, INC., a Delaware corporation ("FWCC"), GEORGETOWN WIRE COMPANY, INC., a Delaware corporation ("GWC"), and K-LATH CORPORATION, INC., a California corporation ("K-Lath")) (GSTOC, CII, GSC, FWCC, GWC and K-Lath, individually a "Borrower", and collectively "Borrowers"), the Lenders (as defined herein), MELLON BANK. N.A., a national banking association ("Mellon") as documentation agent for the Lenders (Mellon, in such capacity, being "Documentation Agent"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as agent for the Lenders (GE Capital, in such capacity, being "Agent"). Borrowers, Agent, Documentation Agent and Lenders are parties to a Loan Agreement, dated as of October 5, 1995, as amended by Amendment No. 1 to Loan Agreement dated July 8, 1996 and Amendment No. 2 to Loan Agreement dated as of December 20, 1996 (the "Loan Agreement"). Borrowers, Agent, Documentation Agent and the Lenders desire to amend the Loan Agreement in certain respects, and, accordingly, Borrowers, Agent, Documentation Agent and Lenders agree as follows: 1. DEFINITIONS. Except as otherwise provided herein, the terms defined in the Loan Agreement are used herein as defined therein. 2. AMENDMENT. Effective as of the date hereof, subsection B of Section 7.11 of the Loan Agreement is restated as follows: B) GSTOC (i) may sell the assets or stock of Tree Island, provided that the Net Cash Proceeds are delivered to Agent for application (1) first, to the repayment in full of all amounts owed by Tree Island pursuant to the Tree Island Credit Facility, (2) second, to the repayment of the Revolving Credit Loan, and (3) third, any remaining balance, to the repayment of the Term Loans, and (ii) may sell the assets or stock of GWC or the assets of any of the operating units or divisions of GWC (including the assets or stock of K-Lath), provided that the Net Cash Proceeds are delivered to Agent for application (1) first, to the repayment of the Revolving Credit Loan, and (2) second, any remaining balance, to the repayment of the Term Loans; and 3. RELEASE OF LIEN AND GWC AND K-LATH. (a) Simultaneously with the closing of the sale of the assets or stock of Tree Island, Agent agrees to release its Lien on such assets or stock in order to permit Borrower to effect such sale, and to execute and deliver to Borrower appropriate UCC-3 termination statements and other releases as reasonably requested by Borrower. (b) Simultaneously with the closing of the sale of the assets or stock of GWC or the assets of any of the operating units or divisions of GWC (including the assets, or stock of K-Lath), Agent agrees to release its lien on such assets or stock in order to permit Borrower to effect 2 such sale, and, if the sale is of the stock of GWC or K-Lath, to release GWC or K-Lath from any and all Loan Documents to which GWC or K-Lath is a party, and to execute and deliver to Borrower appropriate UCC-3 termination statements and other releases as reasonably requested by Borrower. 4. CONFIRMATION OF REPRESENTATIONS AND WARRANTIES. Borrowers hereby confirm that the representations and warranties of Borrowers contained in the Loan Documents were correct in all material respects as to Borrowers and their Subsidiaries taken as a whole on and as of October 5, 1995, and that such representations and warranties are correct as to Borrowers and their Subsidiaries taken as a whole on the date hereof, except (i) to the extent that any such representation or warranty expressly relates to an earlier date, and (ii) for changes resulting from transactions contemplated or permitted by the Loan Documents and changes occurring in the ordinary course of business that in the aggregate are not materially adverse. 5. NO DEFAULT. Borrowers represent and warrant that no Default or Event of Default exists as of the date hereof. 6. MISCELLANEOUS. The Loan Agreement is, and shall be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date of this Amendment No. 3 (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment No. 3, and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment No. 3. The execution, delivery and effectiveness of this Amendment No. 3 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or any Lender under the Loan Agreement or any other Loan Document, nor constitute a waiver of any provision of the Loan Agreement or any other Loan Document. This Amendment No. 3 and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. 7. COUNTERPARTS. This Amendment No. 3 may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. [SIGNATURES FOLLOW ON NEXT PAGE] 2 3 IN WITNESS WHEREOF, this Amendment No. 3 has been duly executed as of the date of the date first written above. GS TECHNOLOGIES OPERATING CO., INC. By: /s/ Luis E. Leon ------------------------------------------------ Name: Luis E. Leon Title: Senior Vice President & Chief Financial Officer CI (U.S.) CORP. (FORMERLY CONTROL INTERNATIONAL, INC.) GEORGETOWN STEEL CORPORATION FLORIDA WIRE AND CABLE, INC. GEORGETOWN WIRE COMPANY, INC. K-LATH CORPORATION, INC. By: /s/ Luis E. Leon ------------------------------------------------ Name: Luis E. Leon Title: Vice President 3 4 Agreed to and accepted as of the date first above written. GENERAL ELECTRIC CAPITAL MELLON BANK, N.A., as Documentation CORPORATION, as Agent and Lender Agent and Lender By: /s/ Abigail Wolf By: /s/ Dwayne R. Finney --------------------------------- --------------------------------------- Name: Name: Dwayne R. Finney ------------------------------- ------------------------------------- Title: Duly Authorized Signatory Title: Assistant Vice President ------------------------------- ------------------------------------- NATIONSBANK, N.A., as Lender PILGRIM PRIME RATE TRUST, as Lender By: /s/ Mark D. Halmrast By: /s/ Howard Tiffen --------------------------------- --------------------------------------- Name: Mark D. Halmrast Name: Howard Tiffen ------------------------------- ------------------------------------- Title: Vice President Title:Senior Vice President ------------------------------- ------------------------------------- NBD BANK ASSOCIATION, as Lender PNC BANK, NATIONAL ASSOCIATION, as Lender By: /s/ T. Thomas Cheng By: /s/ Lynn Koncz --------------------------------- --------------------------------------- Name: T. Thomas Cheng Name:Lynn Koncz ------------------------------- ------------------------------------- Title: First Vice President Title: Vice President ------------------------------- ------------------------------------- LASALLE NATIONAL BANK, as Lender HARRIS TRUST AND SAVINGS BANK, as Lender By: /s/ Michael Burton By: /s/ John M. Dillon --------------------------------- --------------------------------------- Name: Michael Burton Name: John M. Dillon ------------------------------- ------------------------------------- Title: First Vice President Title: Vice President ------------------------------- ------------------------------------- SCOA PLANT FINANCING COMPANY, as Lender By: Sumitomo Corporation of America, General Partner By: /s/ Masahiko Nakagawa ------------------------------ Name: Masahiko Nakagawa ----------------------- Title: Senior Vice President ----------------------- and General Manager -----------------------------
4 EX-10.41 3 AMENDMENT #4 TO LOAN AGREEMENT 1 AMENDMENT NO. 4 TO LOAN AGREEMENT AND AMENDMENT NO. 1 TO REVOLVING CREDIT SECURITY AGREEMENT AMENDMENT, dated as of December 1, 1997, among GS TECHNOLOGIES OPERATING CO., INC., a Delaware corporation ("GSTOC"), and its direct and indirect Subsidiaries, CI (U.S.) CORP. (formerly Control International, Inc.), a Utah corporation ("CII"), GEORGETOWN STEEL CORPORATION, a Delaware corporation ("GSC"), and FLORIDA WIRE AND CABLE, INC., a Delaware corporation ("FWCC"), (GSTOC, CII, GSC and FWCC, individually a "Borrower", and collectively "Borrowers"), the Lenders (as defined herein), MELLON BANK, N.A., a national banking association ("Mellon") as documentation agent for the Lenders (Mellon, in such capacity, being "Documentation Agent"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as agent for the Lenders (GE Capital, in such capacity, being "Agent"). Borrowers, Agent, Documentation Agent and Lenders are parties to a Loan Agreement, dated as of October 5, 1995, as amended by Amendment No. 1 to Loan Agreement dated July 8, 1996, Amendment No. 2 to Loan Agreement dated as of December 20, 1996, and Amendment No. 3 to Loan Agreement dated as of March 18, 1997 (the "Loan Agreement"). Pursuant to the Loan Agreement, Borrowers executed and delivered a certain Revolving Credit Security Agreement in favor of Agent dated as of October 5, 1995 (the "Revolving Credit Security Agreement"). Borrowers, Agent, Documentation Agent and the Lenders desire to amend the Loan Agreement and the Revolving Credit Security Agreement in certain respects and, accordingly, Borrowers, Agent, Documentation Agent and Lenders agree as follows: 1. DEFINITIONS. Except as otherwise provided herein, the terms defined in the Loan Agreement are used herein as defined therein. 2. AMENDMENTS TO PERMIT COMMODITY PRICE PROTECTION AGREEMENTS. Effective as of the date hereof, the following amendments shall be made to the Loan Agreements and the Revolving Credit Security Agreement: (a) The following definition is inserted in Section 1 of the Loan Agreement immediately following the definition of "Commission": "COMMODITY PRICE PROTECTION AGREEMENT" shall mean any commodity price protection agreement (including, without limitation, commodity price swaps, futures, options, caps, floors, collars and similar agreements), and/or other types of commodity price hedging agreements with respect to raw materials that are used by any of the Borrowers or their Subsidiaries or the DRI Entity in the production of steel rod, wire rod, grinding media and/or direct reduced iron, to 2 or under which any Borrower or any Subsidiary of a Borrower is or becomes a party or a beneficiary. (b) The definition of "Indebtedness" in Section 1 of the Loan Agreement is hereby amended by deleting the word "and" at the end of item (e), replacing the period at end of item (f) with a semicolon and inserting the word "and" after the semicolon, and inserting immediately after item (f) a new item (g) as follows: (g) all obligations or liabilities under Permitted Commodity Price Protection Agreements. (c) The definition of "Obligations" in Section 1 of the Loan Agreement is hereby amended and restated as follows: "OBLIGATIONS" shall mean all loans, advances, letter of credit reimbursement obligations, obligations and liabilities under Permitted Commodity Price Protection Agreements, debts, liabilities, and obligations for monetary amounts (whether or not such amounts are liquidated or determinable) owing by any or all Borrowers or any or all of their Subsidiaries or all of them to Lenders or Agent or L/C Issuer, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under any of the Loan Documents or any Permitted Commodity Price Protection Agreement. This term includes, without limitation, all interest, the Financing Fee, charges, expenses, attorneys' fees and any other sum chargeable to Borrowers or any or all of their Subsidiaries under any of the Loan Documents. (d) The following definition is inserted in Section 1 of the Loan Agreement immediately following the definition of "PBGC": "PCPPA SECURED AMOUNT" shall mean, at any time, the stated secured amount under an outstanding Permitted Commodity Price Protection Agreement, which amount shall be mutually agreed upon by the applicable Revolving Credit Lender and the Borrower or a Subsidiary of Borrower, and acknowledged in writing by Agent, and which amount is secured by the Revolving Credit Collateral pursuant to the Revolving Credit Security Agreement. (e) The following definition is inserted in Section 1 of the Loan Agreement immediately following the definition of "Permanent Advance": "PERMITTED COMMODITY PRICE PROTECTION AGREEMENT" of any Person shall mean any Commodity Price Protection Agreement (i) 2 3 entered into with one or more of the Revolving Credit Lenders acting as the financial institution provider(s), (ii) for which the applicable Borrower or Subsidiary has received the prior written consent of the Agent, (iii) which is unsecured or, if secured, the amount of the obligations thereunder which are secured is limited to a stated amount (the "PCPPA Secured Amount") and such secured obligations are only secured by a Lien on the Revolving Credit Collateral pursuant to the Revolving Credit Security Agreement, and (iv) for which the Agent has established a reserve against the Revolving Credit Loan in an amount equal to the PCPPA Secured Amount. (f) Section 2.15 of the Loan Agreement is hereby amended and restated as follows: If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Term Loans or the Revolving Credit Loan made by it, or on account of a Permitted Commodity Price Protection Agreement provided by it, in excess of its ratable share of payments on account of the Term Loans or the Revolving Credit Loan made by all Lenders, or the Permitted Commodity Price Protection Agreements provided by all Lenders, such Lender shall forthwith purchase from each other Lender such participations in the Term Loans or the Revolving Credit Loan, or in the Permitted Commodity Price Protection Agreement, as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each other Lender; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of Borrowers in the amount of such participation. (g) Section 2.16 of the Loan Agreement is hereby amended by amending and restating the third sentence thereof as follows: 3 4 In the absence of a specific determination by Agent and Lenders with respect thereto, the same shall be applied in the following order: (i) then due and payable fees and expenses; (ii) then due and payable interest payments on the Revolving Credit Loan and the Term Loans; (iii) then due and payable principal payments on the Revolving Credit Loan and the Term Loans; and (iv) then due and payable obligations under Permitted Commodity Price Protection Agreements; provided that payments arising out of the Revolving Credit Collateral shall be first applied to then due and payable interest and principal payments on the Revolving Credit Loan and to other Revolving Credit Obligations and then to then due and payable obligations under Permitted Commodity Price Protection Agreements (up to but not exceeding the PCPPA Secured Amount), and payments arising out of the Term Loan Collateral shall be first applied to then due and payable interest and principal payments on the Term Loans and to other Term Loan Obligations. (h) Section 7.3(a) of the Loan Agreement is hereby amended by deleting "and (xii)" in Line 21 thereof and inserting the following in lieu thereof: "(xii) Indebtedness pursuant to any Permitted Commodity Price Protection Agreement, and (xiii)" (i) Section 7.9 of the Loan Agreement is hereby amended by deleting the word "and" at the end of subsection (f), replacing the period at the end of subsection (g) with a semicolon and inserting the word "and" after the semicolon, and inserting immediately after subsection 7.9(g) a new subsection (h) as follows: (h) Liens on the Revolving Credit Collateral in connection with any Permitted Commodity Price Protection Agreement. (i) The definition of "Secured Obligations" in the Revolving Credit Security Agreement is amended and restated as follows: "Secured Obligations" shall mean (i) all of the unpaid principal amount of, and accrued interest on, the Revolving Credit Notes, (ii) all commitment and other fees owing by Grantors under the Loan Agreement to Revolving Credit Lenders and Agent, (iii) all other Revolving Credit Obligations owing from Grantors to Revolving Credit Lenders, Agent or any of them, and (iv) all other Indebtedness, liabilities and obligations of Grantors to Revolving Credit Lenders and Agent, whether now existing or hereafter incurred, and whether created under, arising out of or in connection with the Loan Agreement, this Security Agreement, any of the other Loan 4 5 Documents or otherwise, including any PCPPA Secured Amounts but excluding any other obligations under any Permitted Commodity Price Protection Agreement, and excluding the Term Loan Obligations. 3. AMENDMENT TO DEFINITION OF ELIGIBLE ACCOUNTS RECEIVABLE. Effective as of the date hereof, the definition of "Eligible Accounts Receivable in Section 1 of the Loan Agreement is hereby amended by deleting subparagraph (j) thereof and inserting the following in lieu thereof: "(i) the sale represented by such Account Receivable is on terms longer than 45 days, as to an Account Receivable billed on standard terms of payment, or 60 days as to an Account Receivable billed on dating terms of payment by FWCC, or 120 days as to an Account Receivable billed on dating terms of payment by any other Borrower, provided that Accounts Receivable billed on dating terms of payment by FWCC shall be limited to $5,000,000, and by GSTOC shall be limited to $3,000,000, and by GSC shall be limited to $3,000,000, and by any other Borrower shall be limited to $1,000,000." 4. DECREASE IN CONSOLIDATED NET WORTH REQUIREMENT. Effective as of the date hereof, Section 6.3 of the Loan Agreement is hereby amended by deleting subparagraph (d) thereof and inserting the following in lieu thereof: "(d) at the end of each Fiscal Quarter, a Consolidated Net Worth of not less than $22,500,000." 5. CONFIRMATION OF REPRESENTATIONS AND WARRANTIES. Borrowers hereby confirm that the representations and warranties of Borrowers contained in the Loan Documents were correct in all material respects as to Borrowers and their Subsidiaries taken as a whole on and as of October 5, 1995, and that such representations and warranties are correct as to Borrowers and their Subsidiaries taken as a whole on the date hereof, except (i) to the extent that any such representation or warranty expressly relates to an earlier date, and (ii) for changes resulting from transactions contemplated or permitted by the Loan Documents and changes occurring in the ordinary course of business that in the aggregate are not materially adverse. 6. NO DEFAULT. Borrowers represent and warrant that no Default or Event of Default exists as of the date hereof. 7. MISCELLANEOUS. The Loan Agreement is, and shall be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date of this Amendment No. 4 (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment No. 4, and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan 5 6 Agreement shall mean the Loan Agreement as amended by this Amendment No. 4. The execution, delivery and effectiveness of this Amendment No. 4 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or any Lender under the Loan Agreement or any other Loan Document, nor constitute a waiver of any provision of the Loan Agreement or any other Loan Document. This Amendment No. 4 and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. 8. COUNTERPARTS. This Amendment No. 4 may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. [SIGNATURES FOLLOW ON NEXT PAGE] 6 7 IN WITNESS WHEREOF, this Amendment No. 4 has been duly executed of the date first written above. GS TECHNOLOGIES OPERATING CO., INC. By: /s/ Luis E. Leon ----------------------------------------------- Name: Luis E. Leon Title: Senior Vice President & Chief Financial Officer CI (U.S.) CORP. (FORMERLY CONTROL INTERNATIONAL, INC.) By: /s/ Luis E. Leon ----------------------------------------------- Name: Luis E. Leon Title: Vice President GEORGETOWN STEEL CORPORATION By: /s/ Luis E. Leon ----------------------------------------------- Name: Luis E. Leon Title: Vice President FLORIDA WIRE AND CABLE, INC. By: /s/ Luis E. Leon ----------------------------------------------- Name: Luis E. Leon Title: Vice President 7 8 Agreed to and accepted as of the date first above written. GENERAL ELECTRIC CAPITAL MELLON BANK, N.A., as Documentation CORPORATION, as Agent and Lender Agent and Lender By: /s/ Abigail Wolf By: /s/ Dwayne R. Finney -------------------------------------------- ------------------------------------------ Name: Name: Dwayne R. Finney ----------------------------------------- Title: Title: Assistant Vice President --------------------------------------- NATIONSBANK, N.A., as Lender PILGRIM AMERICA PRIME RATE TRUST, as Lender By: /s/ Mark D. Halmrast By: /s/ Howard Tiffen -------------------------------------------- ------------------------------------------ Name: Mark D. Halmrast Name: Howard Tiffen ------------------------------------------ ---------------------------------------- Title: Vice President Title: FVP ----------------------------------------- --------------------------------------- THE FIRST NATIONAL BANK OF CHICAGO, as Lender PNC BANK, NATIONAL ASSOCIATION, as Lender By: /s/ Lori J. McCarthy By: /s/ George Briris -------------------------------------------- ------------------------------------------ Name: Lori J. McCarthy Name: George Briris ------------------------------------------ ---------------------------------------- Title: Vice President Title: Executive Vice President ----------------------------------------- --------------------------------------- LASALLE NATIONAL BANK, as Lender HARRIS TRUST AND SAVINGS BANK, as Lender By: /s/ Christine M. Williamson By: /s/ John M. Dillon -------------------------------------------- ------------------------------------------ Name: Christine M. Williamson Name: John M. Dillon ------------------------------------------ ---------------------------------------- Title: Assistant Vice President Title: Vice President ----------------------------------------- --------------------------------------- SCOA PLANT FINANCING COMPANY, as Lender By: Sumitomo Corporation of America, General Partner By: /s/ Masahiko Nakagawa --------------------------------------- Name: Masahiko Nakagawa --------------------------------- Title: Senior Vice President and ------------------------- General Manager ---------------
8 EX-10.42 4 AMENDMENT #5 TO LOAN AGREEMENT 1 AMENDMENT NO. 5 TO LOAN AGREEMENT AMENDMENT NO. 5, dated as of September 30, 1998, among GS TECHNOLOGIES OPERATING CO., INC., a Delaware corporation ("GSTOC"), and its direct and indirect Subsidiaries, CI (U.S.) CORP. (formerly Control International, Inc.), a Utah corporation ("CII"), GEORGETOWN STEEL CORPORATION, a Delaware corporation ("GSC"), and FLORIDA WIRE AND CABLE, INC., a Delaware corporation ("FWCC") (GSTOC, CII, GSC, and FWCC, individually a "Borrower", and collectively "Borrowers"), the Lenders (as defined herein), MELLON BANK, N.A., a national banking association ("Mellon") as documentation agent for the Lenders (Mellon, in such capacity, being "Documentation Agent"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as agent for the Lenders (GE Capital, in such capacity, being "Agent"). Borrowers, Agent, Documentation Agent and Lenders are parties to a Loan Agreement, dated as of October 5, 1995, as amended by Amendment No. 1 to Loan Agreement dated July 8, 1996, Amendment No. 2 to Loan Agreement dated as of December 20, 1996, Amendment No. 3 to Loan Agreement dated as of March 18, 1997, and Amendment No. 4 to Loan Agreement dated as of December 1, 1997 (as amended, the "Loan Agreement"). Borrowers, Agent, Documentation Agent and the Lenders desire to amend the Loan Agreement in certain respects, and, accordingly, Borrowers, Agent, Documentation Agent and Lenders agree as follows: 1. DEFINITIONS. Except as otherwise provided herein, the terms defined in the Loan Agreement are used herein as defined therein. 2. AMENDMENT TO DEFINITION OF "APPLICABLE REVOLVING CREDIT LOAN MARGIN." Effective as of the date hereof, the definition of "Applicable Revolving Credit Loan Margin" in Section 1 of the Loan Agreement is hereby amended as follows: (a) The following language shall be inserted immediately prior to the schedule currently contained in the definition of "Applicable Revolving Credit Loan Margin": "(a) For the period beginning on October 1, 1998, and ending on December 31, 1999, the following schedule will apply:" (b) The schedule currently contained in the definition of "Applicable Revolving Credit Loan Margin" is hereby amended by deleting in its entirety the last row of the schedule stating "Less than 1.75 to 1.00 1.25% 2.50%" and inserting in lieu thereof the following: "Less than 1.75 to 1.00 1.75% 3.00%" 2 (c) The following shall be inserted immediately following the schedule currently contained in the definition of "Applicable Revolving Credit Loan Margin": "(b) For all periods beginning after December 31, 1999, the following schedule will apply:
RANGE OF APPLICABLE MARGIN (% P.A.) CONSOLIDATED INTEREST -------------------------- COVERAGE RATIO INDEX RATE LOANS LIBOR RATE LOANS -------------- ---------------- ---------------- 3.75 or more to 1.00 0% 1.25% Less than 3.75 to 1.00, 0.25% 1.50% but not less than 3.25 to 1.00 Less than 3.25 to 1.00, 0.50% 1.75% but not less than 2.75 to 1.00 Less than 2.75 to 1.00, 0.75% 2.00% but not less than 2.25 to 1.00 Less than 2.25 to 1.00, 1.00% 2.25% but not less than 1.75 to 1.00 Less than 1.75 to 1.00, 1.25% 2.50% but not less than 1.25 to 1.00 Less than 1.25 to 1.00, 1.50% 2.75% but not less than 1.00 to 1.00 Less than 1.00 to 1.00, 1.75% 3.00% but not less than 0.75 to 1.00 Less than 0.75 to 1.00 2.00% 3.25%"
2 3 3. AMENDMENT AND RESTATEMENT OF DEFINITION OF "CONSOLIDATED CASH FLOW". Effective as of the date hereof, the definition of "Consolidated Cash Flow" in Section 1 of the Loan Agreement is hereby amended and restated as follows: "CONSOLIDATED CASH FLOW" shall mean, with respect to any Person for any period, the aggregate amount of sales and other operating revenues of such Person and its consolidated Subsidiaries for such period, less the cost of goods sold and selling, general and administrative expenses for such period before extraordinary items, interest, taxes, depreciation, amortization and other non-cash charges including non-cash SFAS-106 provisions, and, as to Borrowers, before cash expenses and costs directly related to the Acquisition, and the consummation of the transactions contemplated by the Loan Documents of such Person during such period, and, as to Borrowers, plus cash receipts for technical fees, plus other cash receipts actually received from GST in an amount not to exceed cash received by GST from the GST Subsidiaries during such period consisting of the earnings of such GST Subsidiaries, plus equity losses from the investment in the DRI Entity, and minus any payments pursuant to clause (iv) of Section 7.14 based upon Permanent Advances or a percentage of the cumulative retained earnings of GSTOC and its consolidated Subsidiaries, and minus equity income from the investment in the DRI Entity. Notwithstanding the foregoing, Consolidated Cash Flow shall not include any unrealized foreign currency translation gains or losses resulting from the remeasurement of United States dollar denominated indebtedness (including, without limitation, the Revolving Credit Loans, the Term Loans and the Letter of Credit Obligations hereunder) of any Person into the functional currency of such Person (if such currency is a currency other than United States dollars) for financial reporting purposes. 4. AMENDMENT TO DEFINITION OF "CONSOLIDATED NET WORTH." Effective as of the date hereof, the definition of "Consolidated Net Worth" in Section 1 of the Loan Agreement is hereby amended by deleting the period following "GAAP" in the last line and adding the following: "and, in addition, such calculation shall exclude non-cash losses on the sale, transfer, write-down or other disposition by GSTOC of assets or investments after the date hereof up to an aggregate maximum amount of "$20,000,000." 5. AMENDMENT TO DEFINITION OF "ELIGIBLE INVENTORY". Effective as of the date hereof, the definition of "Eligible Inventory" in Section 1 of the Loan Agreement is hereby amended by deleting the word "or" following clause (h), by changing the period at the end of clause (i) to a semicolon, and by adding the following: 3 4 "or (j) it consists of equipment spares and Agent shall have determined, in its reasonable discretion, following an appraisal of the Inventory, that equipment spares shall not be deemed eligible." 6. DEFINITION OF "GSTOC CONSOLIDATED CASH FLOW." Effective as of the date hereof, the following definition is added to Section 1 of the Loan Agreement in alphabetical order: "GSTOC CONSOLIDATED CASH FLOW" shall mean, with respect to GSTOC for any period, the aggregate amount of sales and other operating revenues of GSTOC and its consolidated Subsidiaries for such period, less the costs of goods sold and selling, general and administrative expenses for such period before extraordinary items, interest, taxes, depreciation, amortization and other non-cash charges including non-cash SFAS-106 provisions of GSTOC and its consolidated Subsidiaries during such period, and, as to GSTOC and its consolidated Subsidiaries, plus cash receipts for technical fees, plus equity losses from the investment in the DRI Entity, and minus any payments pursuant to clause (iv) of Section 7.14 based upon Permanent Advances or a percentage of the cumulative retained earnings of GSTOC and its consolidated Subsidiaries, and minus equity income from the investment in the DRI Entity. Notwithstanding the foregoing, GSTOC Consolidated Cash Flow shall not include any unrealized foreign currency translation gains or losses resulting from the remeasurement of United States dollar denominated indebtedness (including, without limitation, the Revolving Credit Loans, the Term Loans and the Letter of Credit Obligations hereunder) of GSTOC or its consolidated Subsidiaries into the functional currency of such Person (if such currency is a currency other than United States dollars) for financial reporting purposes. 7. AMENDMENT TO DEFINITION OF "TERM LOAN LIBOR RATE". Effective as of the date hereof, the definition of "Term Loan LIBOR Rate" in Section 1 of the Loan Agreement is hereby amended and restated as follows: "TERM LOAN LIBOR RATE" shall mean the LIBOR Rate during the LIBOR Rate Interest Period, plus an applicable margin, which shall be (a) 3.25% for the period beginning on October 1, 1998 and ending on December 31, 1999, and (b) for all periods beginning after December 31, 1999, an amount which shall be adjusted as of the first day of the applicable Fiscal Quarter based on the Consolidated Interest Coverage Ratio of GSTOC and its Subsidiaries for the 12-month period then ended, as follows: 4 5
RANGE OF CONSOLIDATED INTEREST COVERAGE RATIO APPLICABLE MARGIN AMOUNT -------------- ------------------------ 1.25 or more to 1.00 2.75% Less than 1.25 to 1.00, 3.00% but not less than 1.00 to 1.00 Less than 1.00 to 1.00 3.25%
8. YEAR 2000 DEFINITIONS. Effective as of the date hereof, the following definitions are added to Section 1 of the Loan Agreement in alphabetical order: "GSTOC AUTOMATED STEEL-MAKING SYSTEM" shall mean the automated steel-making system software and components to be implemented by GSC and the GST Steel Division of GSTOC commencing in January 1999. "THIRD PARTY INTERACTIVES" shall mean all Persons (i) with whom any Borrower exchanges data electronically in the ordinary course of business and (ii) which are material to the operations of any Borrower, including, without limitation, material customers, suppliers, third-party vendors, subcontractors, processors-converters, shippers and warehousemen. "YEAR 2000 ASSESSMENT" shall mean a comprehensive written assessment of the nature and extent of each Borrower's Year 2000 Problems and Year 2000 Date-Sensitive Systems/Components. "YEAR 2000 CORRECTIVE ACTIONS" shall mean, as to each Borrower, all actions necessary to eliminate such Borrower's Year 2000 Problems, including, without limitation, computer code enhancements and revisions, upgrades and replacements of Year 2000 Date-Sensitive Systems/Components. "YEAR 2000 CORRECTIVE PLAN" shall mean, with respect to each Borrower, a comprehensive plan to eliminate all of its Year 2000 Problems on or before 5 6 October 31, 1999, including without limitation (i) computer code enhancements or revisions, (ii) upgrades or replacements of Year 2000 Date-Sensitive Systems/Components, (iii) test and validation procedures, (iv) an implementation time line and budget, (v) designation of specific employees who will be responsible for planning, coordinating and implementing each phase or subpart of the Year 2000 Corrective Plan, and (vi) communication with all Third Party Interactives to assess Year 2000 Problems of any such Third Party Interactive which, if not timely corrected, could reasonably be expected to materially and adversely affect the operations of any Borrower, and to determine what steps that such Third Party Interactives are taking to address such problems. "YEAR 2000 DATE-SENSITIVE SYSTEM/COMPONENT" shall mean, as to any Person, any system software, network software, applications software, data base, computer file, embedded microchip, firmware or hardware that accepts, creates, manipulates, sorts, sequences, calculates, compares or outputs calendar-related data accurately; such systems and components shall include, without limitation, mainframe computers, file server/client systems, computer workstations, routers, hubs, other network-related hardware, and other computer-related software, firmware or hardware and information processing and delivery systems of any kind and telecommunications systems and other communications processors, security systems, alarms, elevators and HVAC systems. "YEAR 2000 IMPLEMENTATION TESTING" shall mean, as to each Borrower, (i) the performance of test and validation procedures regarding Year 2000 Corrective Actions on a unit basis and on a systemwide basis; (ii) the performance of test and validation procedures regarding data exchanges among the Borrowers' Year 2000 Date-Sensitive Systems/Components, and (iii) the design and 6 7 implementation of additional Corrective Actions, the need for which has been demonstrated by test and validation procedures. "YEAR 2000 PROBLEMS" shall mean, with respect to each Borrower, limitations on the capacity or readiness of any such Borrower's Year 2000 Date-Sensitive Systems/Components to accurately accept, create, manipulate, sort, sequence, calculate, compare or output calendar date information with respect to calendar year 1999 or any subsequent calendar year beginning on or after January 1, 2000 (including leap year computations), including, without limitation, exchanges of information among Year 2000 Date-Sensitive Systems/Components of the Borrowers and functionality of peripheral interfaces, firmware and embedded microchips. 9. AMENDMENT TO CASH MANAGEMENT SYSTEMS. Effective as of the date hereof, the first sentence of Section 2.21(b) of the Loan Agreement is amended and restated as follows: "In the event of a Default, unless cured or waived, or in the event the Revolving Credit Availability is less than $30,000,000, upon notice by Agent, given in Agent's sole discretion or at the direction of the Required Revolving Credit Lenders, all amounts deposited in the Lock Box Accounts shall, on the same day as such funds shall have been cleared by the banks at which the Lock Box Accounts are located, be deposited via wire transfer, in immediately available funds, into a bank account in the name of Agent and maintained at Bankers Trust Company or another bank designated by Agent (the "Concentration Account")." 10. YEAR 2000 COMPLIANCE. Effective as of the date hereof, the following Sections 4.28 and 6.16 are added to the Loan Agreement: 4.28 YEAR 2000 ASSESSMENT AND CORRECTIVE PLAN. Each Borrower has completed a Year 2000 Assessment and a Year 2000 Corrective Plan, copies of which shall be delivered to Agent on or prior to December 15, 1998. 6.16 YEAR 2000 PROBLEMS. Each Borrower shall complete Year 2000 Corrective Actions and Year 2000 Implementation Testing on 7 8 all of such Borrower's material Year 2000 Date-Sensitive System/Components, other than the GSTOC Automated Steel-Making System, on or before June 30, 1999, and on all of such Borrower's other Year 2000 Date-Sensitive System/Components, including but not limited to the GSTOC Automated Steel-Making System, on or before October 31, 1999. On or before October 31, 1999, each Borrower shall eliminate all Year 2000 Problems, except where the failure to correct the same could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. 11. INVENTORY APPRAISAL. Effective as of the date hereof, the following subsection (n) is added to Section 5.1 of the Loan Agreement: (n) On or before January 31, 1999, Borrowers shall obtain and deliver to Agent an appraisal of the Inventory prepared by an appraiser approved by Agent. If requested by Agent, Borrowers shall from time to time thereafter obtain and deliver to Agent updated appraisals of the Inventory. 12. AMENDMENT AND RESTATEMENT OF FINANCIAL COVENANTS. Effective as of the date hereof, Section 6.3 of the Loan Agreement is hereby amended and restated as follows: 6.3 FINANCIAL COVENANTS. GSTOC and its Subsidiaries shall have, on a consolidated basis: (a) at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending March 31, 2000, a Consolidated Fixed Charges Coverage Ratio equal to or greater than (A) 0.90 to 1.00 for the 3-month period ended March 31, 2000, (B) 1.00 to 1.00 for the 6-month period ended June 30, 2000, (C) 1.20 to 1.00 for the 9-month period ended September 30, 2000, (D) 1.40 to 1.00 for the 12-month period ended December 31, 2000, (E) 1.50 to 1.00 for the 12-month period ended March 31, 2001, and (F) 1.60 to 1.00 for the 12-month period ended June 30, 2001 and for each 12-month period thereafter. (b) a Consolidated Cash Flow equal to or greater than (A) $1,500,000 for the 3-month period ended December 31, 1998, (B) $4,600,000 for the 3-month period ended March 31, 1999, (C) $11,500,000 for the 6-month period ended June 30, 1999, (D) $20,500,000 for the 9-month period ended September 30, 1999, and (E) $30,900,000 for the 12-month period ended December 31, 1999. 8 9 (c) a GSTOC Consolidated Cash Flow equal to or greater than (A) $3,200,000 for the 3-month period ended March 31, 1999, (B) $8,000,000 for the 6-month period ended June 30, 1999, (C) $14,300,000 for the 9-month period ended September 30, 1999, and (D) $21,600,000 for the 12-month period ended December 31, 1999. (d) at all times, a Consolidated Current Ratio equal to or greater than 1.00 to 1.00. (e) at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending March 31, 1999, a Consolidated Secured Funded Debt to Consolidated Cash Flow Ratio for the four Fiscal Quarters then ended equal to or less than: 4.50 to 1.00 for the Fiscal Quarter ending March 31, 1999; 6.90 to 1.00 for the Fiscal Quarter ending June 30, 1999; 5.70 to 1.00 for the Fiscal Quarter ending September 30, 1999; 5.00 to 1.00 for the Fiscal Quarter ending December 31, 1999; 4.80 to 1.00 for the Fiscal Quarter ending March 31, 2000; 4.40 to 1.00 for the Fiscal Quarter ending June 30, 2000; 4.00 to 1.00 for the Fiscal Quarter ending September 30, 2000; and 3.70 to 1.00 for the Fiscal Quarter ending December 31, 2000 and each Fiscal Quarter ending thereafter." (f) at the end of each Fiscal Quarter, a Consolidated Net Worth of not less than $22,500,000. 13. AMENDMENT AND RESTATEMENT OF INVESTMENTS COVENANT. Effective as of the date hereof, Section 7.2 of the Loan Agreement is amended and restated as follows: 7.2 INVESTMENTS; LOANS AND ADVANCES. Except as otherwise permitted by Sections 7.3, 7.4 or 7.18 hereof, and except for an equity investment by GSTOC or any Subsidiary of GSTOC in a DRI Entity in an amount not to exceed $27,500,000, and except for an investment by GSTOC in a Securitization Subsidiary in an amount not to exceed $12,750,000, no Borrower shall or shall permit any of its Subsidiaries to make any investment in, or make or accrue loans or advances of money to any Person, through the direct or indirect holding of securities or otherwise; provided, however, that Borrowers may make loans to Parent or GST, subject to the limitations set forth in Section 7.14 hereof. 9 10 14. AMENDMENT TO DRI ENTITY PERMITTED INVESTMENT AMOUNT. Effective as of the date hereof, Section 7.14 of the Loan Agreement is hereby amended by amending the definition of "Restricted Payments Limit" contained in Section 7.14 to delete the references to "$30,000,000" in subsections (A)(3) and (B)(3) of such definition and to insert "$27,500,000" in lieu thereof. 15. AMENDMENT AND RESTATEMENT OF CAPITAL EXPENDITURES COVENANT. Effective as of the date hereof, Section 7.10 of the Loan Agreement is hereby amended and restated as follows: 7.10 CAPITAL EXPENDITURES. Borrowers shall not and shall not permit their Subsidiaries to make capital expenditures that, in the aggregate, exceed (a) $20,000,000 for the Fiscal Year ending December 31, 1998, (b) $35,000,000 for the Fiscal Year ending December 31, 1999, (c) for the Fiscal Year ending December 31, 2000, $30,000,000 plus any permitted amount up to $10,000,000 which was identified for a specific project, but not expended in the Fiscal Year ended December 31, 1999, and (d) $30,000,000 for each Fiscal Year thereafter. 16. SPECIAL RESERVE. A special reserve in the amount of $25,000,000 is hereby established, which shall be deducted from the lesser of the Maximum Revolving Credit Loan and an amount equal to the aggregate Borrowing Base of all Borrowers in determining Revolving Credit Availability. 17. AMENDMENT FEE. In order to induce the Lenders to enter into this Amendment No. 5 to Loan Agreement, GSTOC hereby agrees to pay to the Agent for the benefit of the Lenders an amendment fee (the "Amendment Fee") equal to 0.25% of the sum of (i) the balance outstanding under each of the Term Loans as of the effective date of this Amendment No. 5, plus (ii) the Maximum Revolving Credit Amount, which Amendment Fee will be paid by GSTOC to Agent promptly after execution and delivery of this Amendment No. 5 by the Required Lenders. 18. CONFIRMATION OF REPRESENTATIONS AND WARRANTIES. Borrowers hereby confirm that the representations and warranties of Borrowers contained in the Loan Documents were correct in all material respects as to Borrowers and their Subsidiaries taken as a whole on and as of October 5, 1995, and that such representations and warranties are correct as to Borrowers and their Subsidiaries taken as a whole on the date hereof, except (i) to the extent that any such representation or warranty expressly relates to an earlier date, and (ii) for changes resulting from transactions contemplated or permitted by the Loan Documents and changes occurring in the ordinary course of business that in the aggregate are not materially adverse. 10 11 19. NO DEFAULT. Borrowers represent and warrant that no Default or Event of Default exists as of the date hereof. 20. MISCELLANEOUS. The Loan Agreement is, and shall be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date of this Amendment No. 5 (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment No. 5, and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment No. 5. The execution, delivery and effectiveness of this Amendment No. 5 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or any Lender under the Loan Agreement or any other Loan Document, nor constitute a waiver of any provision of the Loan Agreement or any other Loan Document. This Amendment No. 5 and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. 21. COUNTERPARTS. This Amendment No. 5 may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. [SIGNATURES FOLLOW ON NEXT PAGE] 11 12 IN WITNESS WHEREOF, this Amendment No. 5 has been duly executed as of the date first written above. GS TECHNOLOGIES OPERATING CI (U.S.) CORP. (FORMERLY CO., INC., as Borrower CONTROL INTERNATIONAL, INC.), as Borrower By: /s/ Luis E. Leon By: /s/ Luis E. Leon -------------------------------------- ---------------------------------- Name: Luis E. Leon Name: Luis E. Leon Title: Senior Vice-President Title: Vice-President GEORGETOWN STEEL CORPORATION, FLORIDA WIRE AND CABLE, INC., as Borrower as Borrower By: /s/ Luis E. Leon By: /s/ Luis E. Leon -------------------------------------- ---------------------------------- Name: Luis E. Leon Name: Luis E. Leon Title: Vice-President Title: Vice-President GENERAL ELECTRIC CAPITAL MELLON BANK, N.A., CORPORATION, as Agent and Lender as Documentation Agent and Lender By: /s/ Abigail Wolf By: ------------------------------- ---------------------------------- Name: Name: ------------------------------- --------------------------- Title: Duly authorized signatory Title: ------------------------------ ---------------------------
[SIGNATURES CONTINUED ON NEXT PAGE] S-1 13 NATIONSBANK, N.A., as Lender PILGRIM PRIME RATE TRUST, as Lender By: /s/ Andrew M. Halmrast By: /s/ Jason T. Grahm -------------------------------------------- -------------------------------------- Name: Andrew M. Halmrast Name: Jason T. Grahm -------------------------------------- -------------------------------- Title: Title: Assistant Vice President -------------------------------------- ------------------------------- NBD BANK, as Lender PNC BANK, NATIONAL ASSOCIATION, as Lender By: /s/ Lori J. McCarthy By: /s/ Lynn Koncz -------------------------------------------- -------------------------------------- Name: Lori J. McCarthy Name: Lynn Koncz -------------------------------------- -------------------------------- Title: Vice President Title: PNC Bank -------------------------------------- ------------------------------- LASALLE NATIONAL BANK, HARRIS TRUST AND SAVINGS BANK, as Lender as Lender By: /s/ David G. Killmer By: -------------------------------------------- -------------------------------------- Name: David G. Killmer Name: -------------------------------------- -------------------------------- Title: Vice President Title: -------------------------------------- ------------------------------- SCOA PLANT FINANCING COMPANY, as Lender By: Sumitomo Corporation of America, General Partner By: /s/ T. Ichino --------------------------------------- Name: T. Ichino --------------------------------- Title: Group Product Manager --------------------------------- Plant & Machinery Systems No. 1 ---------------------------------
S-2 EX-21.1 5 LIST OF SUBSIDIARIES OF GST AND GSTOC 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
Name of Corporation Jurisdiction of Incorporation - ------------------- ----------------------------- UNITED STATES SUBSIDIARIES - -------------------------- 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 GST Philippines, Inc. Philippines FOREIGN JOINT VENTURES - ---------------------- Donhad Pty. Ltd. (40%) Western Australia Empresa Siderurgica del Peru S.A. (96.46% owned by Sidercorp S.A.) Peru 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 - ---------------------------------------------------------------------- o Subsidiaries are wholly-owned unless otherwise noted.
EX-27.1 6 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GS INDUSTRIES FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-01-1998 1 10,664 0 92,326 0 138,615 261,237 254,876 0 636,953 152,150 336,241 0 0 1 68,895 636,953 831,845 831,845 749,910 74,433 (9,560) 0 41,673 (24,611) 740 (25,351) 0 0 0 (25,351) 0 0 Amounts presented are net
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