Claymont Steel 10-K/A 2006 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K/A

(Amendment No. 2)

ANNUAL REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number 1-33212

CLAYMONT STEEL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-2928495
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4001 Philadelphia Pike

Claymont, Delaware 19703

(302) 792-5400

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock par value $0.001 per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

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. x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨         Accelerated filer ¨         Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No

The aggregate market value of the registrant’s voting and non-voting shares of common stock held by non-affiliates of the registrant on the last day of the registrant’s most recently completed second fiscal quarter, June 29, 2007, was $213,991,228 based on $21.39 per share, the last reported sale price on the NASDAQ Global Market on that date.

As of July 23, 2007, there were 17,566,754 shares of the registrant’s common stock par value $0.001 per share outstanding.

TABLE OF CONTENTS

Item			Page
EXPLANATORY NOTE			1
PART II	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
	Item 8.	Financial Statements and Supplementary Data	18
PART IV	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	42
SIGNATURES			43
EXHIBIT INDEX			44

i

EXPLANATORY NOTE

We are filing this Amendment No. 2 to our Form 10-K for the fiscal year ended December 31, 2006 (the “Form 10-K”), originally filed with the Securities and Exchange Commission on April 2, 2007, for the purpose of restating our long-term and short-term debt. We previously classified our $75.0 million Senior Secured Pay-in-Kind Notes as long-term debt. However, in connection with our initial public offering of common stock in December 2006, we called the pay-in-kind notes for redemption and used proceeds from our initial public offering to redeem the pay-in-kind notes in February 2007. Therefore, we are amending our Form 10-K to reclassify the $75.0 million pay-in-kind notes from long-term debt to short-term debt.

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of each of Items 7 and 8 of Part II is set forth below and Item 15 of Part IV is amended to contain updated certifications from our Chief Executive Officer and Chief Financial Officer. This Amendment No. 2 speaks as of the original filing date of the Form 10-K and reflects only the changes to Part II and Part IV discussed above. No other information included in the Form 10-K, including the information set forth in Part I and Part III, has been modified or updated in any way.

The terms “we”, “us”, “our” and the “Company” refer to Claymont Steel Holdings, Inc. and its subsidiaries.

PART II

Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Cautionary Note Regarding Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include, the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

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

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

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

• the level of global demand for steel;

• the level of imports of steel into the United States;

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

• intense competition in the steel industry;

• currency fluctuations;

• environmental regulations;

• unionization of our workforce, related work stoppages, and equipment failures;

• loss of key personnel; and

• other factors described in this annual report on Form 10-K. See Item 1A—”Risk Factors.”

We believe the forward-looking statements in this annual report on Form 10-K are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Overview

The consolidated financial statements include the results of the Company’s wholly-owned subsidiary, Claymont Steel, Inc. All significant inter-company balances and transactions have been eliminated.

The Company has one division which manufactures and sells custom discrete steel plate in North America. The Company operates a steel mini-mill in Claymont, Delaware.

On June 10, 2005, the Company’s wholly-owned subsidiary was acquired from its former owner, CITIC USA Holdings, Inc., for $74.4 million plus working capital and other adjustments by H.I.G. SteelCo, Inc., an affiliate of H.I.G. Capital LLC, a private equity firm focused on management buyouts and recapitalizations of leading middle market companies as well as growth capital investments. We refer to this transaction throughout this annual report as the “Acquisition.”

For purposes of this Management’s Discussion and Analysis, the results for the year ended December 31, 2006 are compared to a pro forma presentation for the year ended December 31, 2005 and 2004 which assume that the Acquisition occurred at the beginning of those pro forma periods.

2

The Company’s operating results in 2006 were positively impacted by a 17.4% increase in tons shipped from 2005, prior to toll processing, and a 1.2% increase in average selling price. Results were negatively impacted by an 11.6% increase in cost of goods sold per ton shipped from 2005 which was largely driven by higher costs for scrap, higher fixed costs per ton due to reduced melt shop productivity, increased usage of purchased slabs and higher maintenance expenses. Selling, general and administrative costs increased $10.6 million from 2005 mostly as a result of $7.6 million of non-recurring charges.

The Company expects to spend approximately $12 million on capital improvements in 2007 mainly focused on improving performance and capacity in the melt shop, including completing a new scarfing facility, a reheat station and replacement of old, less efficient, transformers. These capital expenditures are expected to enhance melt shop capacity and efficiency.

Operations

The following table sets forth, for the periods indicated, the percentage of sales represented by selected income statement items and information regarding selected balance sheet data. Results for the year ended December 31, 2004 and 2005 are shown on a pro forma basis, as if the Acquisition occurred at the beginning of those periods.

	Pro Forma
	2004				2005				2006
	$		%		$		%		$		%
Sales	239,556		100.0	%	278,370		100.0	%	333,408		100.0	%
Cost of Goods Sold	163,835		68.4	%	177,706		63.8	%	233,170		69.9	%
Gross Profit	75,721		31.6	%	100,664		36.2	%	100,238		30.1	%
Selling, General and Administrative Expenses	10,371		4.3	%	9,950		3.6	%	20,572		6.2	%
Income From Operations	65,350		27.3	%	90,714		32.6	%	79,666		23.9	%
Other Income (Expense):
Interest Income	47		0.0	%	243		0.1	%	2,222		0.7	%
Interest Expense	(22,726	)	(9.5	)%	(25,430	)	(9.1	)%	(29,272	)	(8.8	)%
Other Non-Operating Income	147		0.1	%	101		0.0	%	138		0.0	%
Total Other Income (Expense)	(22,532	)	(9.4	)%	(25,086	)	(9.0	)%	(26,912	)	(8.1	)%
Income Before Income Taxes	42,818		17.9	%	65,629		23.6	%	52,754		15.8	%
Income Tax Expense	(13,678	)	(5.7	)%	(24,025	)	(8.6	)%	(20,758	)	(6.2	)%
Net Income	29,139		12.2	%	41,603		14.9	%	31,996		9.6	%
Interest (Income) Expense, net	22,679		9.5	%	25,187		9.0	%	27,050		8.1	%
Income Tax Expense	13,678		5.7	%	24,025		8.6	%	20,758		6.2	%
Depreciation and Amortization	2,936		1.2	%	2,936		1.1	%	4,279		1.3	%
EBITDA	68,433		28.6	%	93,751		33.7	%	84,083		25.2	%

EBITDA, which we define as earnings before interest (income) expense, net income tax expense, depreciation and amortization, is not a measure of financial performance under GAAP. EBITDA does not represent and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. We believe, however, that EBITDA is a valuable measure of the operating performance of our business and can assist in comparing our performances on a consistent basis without regard to depreciation and amortization.

2006 Compared to 2005

Discussion and Analysis of Income

					Change
	2006		2005		Amount		%
Sales
Custom	$	227,459	$	204,341	$	23,118	11.3	%
Standard		103,109		74,029		29,080	39.3	%
Toll Processing		2,840		—		2,840
Total	$	333,408	$	278,370	$	55,038	19.8	%

3

					Change
	2006		2005		Amount		%
Tons
Custom		265,916		240,570		25,346	10.5	%
Standard		129,108		96,041		33,067	34.4	%
Toll Processing		12,158		—		12,158
Total		407,182		336,611		70,571	21.0	%
Average Selling Price
Custom	$	855	$	849	$	6	0.7	%
Standard		799		771		28	3.6	%
Total	$	837	$	827	$	10	1.2	%

Note: Total average selling price excludes toll processing.

Sales

Sales increased 19.8% in 2006 as a result of a 17.4% increase in tons shipped (excluding toll processing) coupled with a 1.2% increase in average selling price. Increased customer demand led by growth in domestic construction and manufacturing, continued economic expansion, and a decline in steel plate imports drove higher shipments. The Company’s capital expenditure program, including the installation of a new electrical drive system, increased plate mill and shipping capacity, which provided for the significant increase in plate tons rolled and shipped in 2006. However, melt shop production did not keep pace with the plate mill and the Company consumed 62% more purchased slabs in 2006. Capital expenditures in 2007 are expected to be primarily directed at expanding melt shop capacity and efficiency in order to reduce reliance on purchased slabs.

Average selling price increased 1.2% driven by increased prices for custom and standard sizes. Custom sizes continue to command a price premium, averaging 7.0% in 2006, over standard sizes.

Average selling price declined modestly in the first quarter of 2007 and should increase in the second quarter as the Company is implementing a $25 per ton price increase and an additional $35 per ton in raw material surcharge.

Cost of Goods Sold and Gross Profit

							Change
	2006			2005			$			%
Cost of Goods Sold		233,170			177,706			55,464		31.2	%
Gross Profit		100,238			100,664			(426	)	(0.4	)%
Gross Profit Margin		30.1	%		36.2	%				(6.1	)%
Cost of Goods Sold per Ton Shipped	$	589		$	528		$	61		11.6	%
Raw Materials per Ton Shipped	$	337		$	284		$	53		18.7	%
Energy per Ton Shipped	$	77		$	88		$	(11	)	(12.5	)%
Labor	$	72		$	70		$	2		2.9	%
Parts	$	42		$	40		$	2		5.0	%
Service	$	31		$	17		$	14		82.4	%

Note: 2006 Cost of Goods Sold per Ton Shipped excludes toll processing of 12,158 tons and cost of goods sold of $500,000.

Cost of Goods Sold increased 31.2% in 2006 as a result of a 17.4% increase in tons shipped coupled with an 11.6% increase in cost of goods sold per ton shipped. Cost of goods sold per ton shipped increased to $589 largely because of a $53 per shipped ton increase in raw material costs and a $14 per shipped ton increase in service costs, partially offset by an $11 per shipped ton drop in energy costs.

Raw material costs are comprised of scrap steel, purchased slabs and alloy and flux. In 2006, scrap steel accounted for 64% of raw material costs, a decrease from 67% in 2005 as more purchased slabs were used by the plate mill, and averaged $201 per ton of scrap purchased, an increase of $31 per ton purchased from 2005. Scrap prices began to rise in April 2006 as domestic demand for steel plate grew and higher levels of scrap were being exported from the United States. Scrap reached $216 per purchased ton in the second quarter of 2006 and then dropped to $204 in the fourth quarter. Scrap prices increased to $233 per purchased ton in the first quarter of 2007 and are expected to continue to rise until mid-second quarter when scrap exports should tail-off leading to a modest decline in prices.

4

Purchased slabs accounted for 20% of raw material costs in 2006, an increase from 17% in 2005 as 62% more purchased slab tons were used by the plate mill, and averaged $490 per purchased ton, an increase of $37 per purchased ton from 2005. Purchased slab prices rose from $370 per purchased ton in the fourth quarter of 2005 to $550 per purchased ton in the fourth quarter of 2006 as world-wide demand increased. In 2006, the Company used 55,000 tons of purchased slabs in the plate mill which increased cost of goods sold $4.2 million above what it would have cost to internally produce those slabs. In 2005, the Company used 34,000 tons of purchased slabs which added an incremental $3.5 million to cost of goods sold. 2007 capital improvements in the melt shop are expected to increase capacity and lower costs and lower the Company’s reliance on purchased slabs. The Company estimates that increased third party slab consumption and higher fixed costs per ton resulting from lower production cost as much as $7.2 million in 2006.

Alloy and flux accounted for 16% of raw material costs in 2006, the same percentage in 2005.

Energy costs declined $11 per shipped ton in 2006 largely as a result of lower electricity rates.

Labor, parts and service costs increased a total of $18 per shipped ton in 2006 partially as a result of the planned two week plate mill shut down in March 2006 for maintenance which added $2.3 million in maintenance-related costs. Costs increased as a result of the implementation of an ongoing scheduled maintenance program in the melt shop and plate mill, designed to increase capacity and improve productivity.

Additionally, in 2006 cost of goods sold was negatively impacted by lower production levels in the melt shop caused by problems with the electrical system supporting the electric arc furnace which forced a reduction in power levels. This significantly decreased productivity, decreasing gross profit by approximately $5.0 million. Capital improvements in the fourth quarter of 2006 and first quarter of 2007 enabled the melt shop to return to normal operations.

Gross profit declined $0.4 million, or 0.4%, in 2006 as a result of the 31.2% increase in cost of goods sold, offset by a 19.8% increase in revenues. Gross profit in 2006 declined to 30.1% from 36.2% in 2005 as cost of goods sold per shipped ton increased $61 while average selling prices increased $10. As costs rose in 2006 from internal operational difficulties, including the electrical field problem and the increase in purchased slabs, the Company was unable to significantly increase selling prices due to overall market constraints.

Selling, General and Administrative Expenses

					Change
	2006		2005		$		%
Selling, general and administrative expense	$	20,572	$	9,950	$	10,622	106.8	%

Selling, general and administrative expenses increased $10.6 million, or 106.8%, in 2006 largely as a result of non-recurring transaction-related and litigation-related expenses and partially from increased costs associated with expanded capacity. Total non-recurring costs in 2006 were $7.6 million and included $2.0 million for the settlement of litigation with CITIC Holdings USA, Inc., our former owner, $4.1 million paid to H.I.G. Capital, a major stockholder, to terminate a management agreement and for a transaction fee, $0.7 million paid in management fees- prior to cancellation of the agreement- to H.I.G., and $0.7 million to write-off the Company’s prior trade name.

To support continued growth, the Company added 5 salespeople and 3 administrative people in 2006, bringing total selling, general and administrative headcount to 47. In total, compensation expense increased $1.8 million in 2006 as a result of increased headcount, normal salary increases and a full-year of our CEO’s salary and bonus. In addition, legal, accounting and tax services increased by $0.7 million as the Company issued and registered its notes and effected an initial public offering of its common stock.

Interest Income and Expense

							Change
	2006			2005			$		%
Interest Income	$	2,222		$	243		$	1,979	814.4	%
Interest Expense		(29,272	)		(25,430	)		3,842	15.1	%

Interest income is earned on short-term investment securities and overnight deposits of available cash balances and increased in 2006 as earnings accumulated and the Company held a portion of dividends paid by its wholly-owned subsidiary in August 2005 prior to paying dividends to its stockholders in June 2006. The Company ended 2006 with $26.4 million of available cash balances and $94.8 million of short term investments.

5

Interest expense is comprised of interest, amortization of original issue discount and amortization of deferred financing fees on the Company’s pay-in-kind notes and Claymont Steel’s floating rate notes. Interest expense increased by $3.8 million in 2006 primarily as a result of the issuance of the pay-in-kind 15% fixed rate notes in July 2006, which led to $6.0 million of interest expense in 2006, partially offset by the fact that 2005 included $2.9 million of interest expense from the write-off of deferred financing fees related to the original acquisition debt which was refinanced by the floating rate notes in August 2005. The interest rate on the floating rate notes averaged 11.6% in 2005 and 12.6% in 2006.

The Company used the proceeds from its initial public offering to redeem the pay-in-kind notes in February 2007. On February 15, 2007, the Company completed a refinancing of the floating rate notes. As part of the refinancing, the Company entered into an $80 million senior secured credit facility consisting of a $20 million term loan and a $60 million revolving credit facility. The Company also completed the sale of $105 million of 8.875% senior notes due 2015. As a result, the floating rate notes were redeemed in full on March 19, 2007. Interest expense for 2007 is expected to total $15 million.

Income Tax Expense

							Change
	2006			2005			$			%
Income Tax Expense	$	(20,758	)	$	(24,025	)	$	(3,267	)	(13.6	)%

Income tax expense declined by $3.3 million in 2006 as a result of a $12.9 million decline in pre-tax income. The Company had an effective tax rate of 39.3% in 2006 and 36.6% in 2005. The effective tax rate increased in 2006 as a result of the recognition of certain state tax liabilities.

Net Income

					Change
	2006		2005		$			%
Net Income	$	31,996	$	41,603	$	(9,607	)	(23.1	)%

Net income declined $9.6 million in 2006 as a result of a decline of $11.0 million in income from operations, principally as a result of $7.6 million in non-recurring selling, general and administrative expenses.

EBITDA

EBITDA, which we define as earnings before interest (income) expense, net income tax expense, depreciation and amortization, is not a measure of financial performance under GAAP. EBITDA does not represent and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. We believe, however, that EBITDA is a valuable measure of the operating performance of our business and can assist in comparing our performances on a consistent basis without regard to depreciation and amortization. The following table sets forth a reconciliation of EBITDA from net income, which management believes is the most nearly equivalent measure under GAAP for the reporting periods indicated:

					Change
	2006		2005		$			%
Net Income	$	31,996	$	41,603	$	(9,607	)	(23.1	)%
Interest (Income) Expense, net		27,050		25,187		1,863		7.4	%
Income Tax Expense		20,758		24,025		(3,267	)	(13.6	)%
Depreciation and Amortization		4,279		2,936		1,343		45.7	%
EBITDA	$	84,083	$	93,751	$	(9,668	)	(10.3	)%

EBITDA declined by $9.7 million in 2006 largely as a result of $7.6 million of non-recurring selling, general and administrative expenses coupled with expenses incurred to support sales growth. Adjusted EBITDA includes the add back of non-cash compensation as a result of vesting of stock options and restricted stock awards under the Company’s equity compensation programs. These amounts totaled $0.3 million in 2006 and are expected to increase significantly in 2007.

6

2005 Compared to 2004

Discussion and Analysis of Income

					Change
	2005		2004		$			%
Sales
Custom	$	204,341	$	177,068	$	27,273		15.4	%
Standard		74,029		62,488		11,541		18.5	%
Total	$	278,370	$	239,556	$	38,814		16.2	%
Tons
Custom		240,570		253,615		(13,045	)	(5.1	)%
Standard		96,041		90,143		5,898		6.5	%
Total		336,611		343,758		(7,147	)	(2.1	)%
Average Selling Price
Custom	$	849	$	698		151		21.7	%
Standard	$	771	$	693		78		11.2	%
Total	$	827	$	697		130		18.7	%

Sales

Sales increased 16.2% in 2005 as a result of an 18.7% increase in average selling price partially offset by a 2.1% decline in tons shipped. Selling prices increased significantly through 2004, from an average of $481 per ton in the first quarter to $809 per ton in the fourth quarter, as customer demand increased and scrap and energy costs rose. Selling prices remained relatively stable from the fourth quarter of 2004 through the second quarter of 2005 and then declined to $773 per ton in the third quarter. Then, prices began to rise again, averaging $806 in the fourth quarter of 2005.

Cost of Goods Sold and Gross Profit

							Change
	2005			2004			$		%
Cost of Goods Sold		177,706			163,835			13,871	8.5	%
Gross Profit		100,664			75,721			24,943	32.9	%
Gross Profit Margin		36.2	%		31.6	%			4.6	%
Cost of Goods Sold per Ton Shipped	$	528		$	477		$	51	10.7	%
Raw Materials per Ton Shipped	$	284		$	280		$	4	1.4	%
Energy per Ton Shipped	$	88		$	59		$	29	49.2	%
Labor	$	70		$	59		$	11	18.6	%
Parts	$	40		$	30		$	10	33.3	%
Service	$	17		$	15		$	2	13.3	%

Cost of goods sold increased 8.5% in 2005 as a result of a 10.7% increase in cost of goods sold per shipped ton partially offset by a 2.1% decline in tons shipped. Cost of goods sold per shipped ton increased to $528 largely because of a $29 per shipped ton increase in energy costs, an $11 per shipped ton increase in labor costs and a $10 per shipped ton increase in parts.

Energy costs per ton shipped increased 49% in 2005 as a result of significantly higher electricity rates which increased from $0.037 per KWH in January 2004 to $0.060 in December 2004. Rates declined somewhat at the beginning of 2005, until July when rates rose dramatically, reaching $0.100 in December 2005.

Labor and parts costs per ton shipped increased in 2005 as the Company transitioned from its previous owner and implemented a more rigorous and regular plant maintenance program.

Gross profit increased $24.9 million, or 32.9%, in 2005 as a result of the 18.7% increase in average selling price, partially offset by the 10.7% increase in cost of goods sold per shipped ton. As a result, gross margins in 2005 increased to 36.2% from 31.6% in 2004 as average selling price increased by $130 per shipped ton and cost of good sold increased only $51 per shipped ton.

7

Selling, General and Administrative Expense

					Change
	2005		2004		$			%
Selling, General and Administrative Expense	$	9,950	$	10,371	$	(421	)	(4.1	)%

Selling, general and administrative expenses declined 4.1% in 2005 primarily as a result of 2004 including $0.6 million of litigation-related legal fees and $0.5 million for asset retirements. These expenses did not recur in 2005 and were partially offset by normal raises and cost increases.

Interest Income and Expense

							Change
	2005			2004			$		%
Interest Income	$	242		$	47		$	195	414.9	%
Interest Expense		(25,430	)		(22,726	)		2,703	11.9	%

Interest expense increased by $2.7 million in 2005 primarily as a result of $3.3 million of deferred financing costs written-off in 2005 related to the refinancing of the original acquisition debt with the notes.

Income Tax Expense

							Change
	2005			2004			$		%
Income Tax Expense	$	(24,025	)	$	(13,678	)	$	10,347	75.6	%

Income tax expense increased by $10.3 million in 2005 as a result of pre-tax income growing $22.8 million from 2004 and due to the effective tax rate increasing to 36.6%, from 31.9% in 2004. The effective tax rate increased in 2005 as a result of the Company’s prior net operating loss carry forward being fully utilized in 2004.

Net Income

					Change
	2005		2004		$		%
Net Income	$	41,603	$	29,139	$	12,464	42.8	%

Net income increased $12.5 million in 2005 as a result of a $25.4 million increase in income from operations partially offset by higher interest and income tax expenses.

EBITDA

EBITDA, which we define as earnings before interest (income) expense, net income tax expense, depreciation and amortization, is not a measure of financial performance under GAAP. EBITDA does not represent and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. We believe, however, that EBITDA is a valuable measure of the operating performance of our business and can assist in comparing our performances on a consistent basis without regard to depreciation and amortization. The following table sets forth a reconciliation of EBITDA from net income, which management believes is the most nearly equivalent measure under GAAP for the reporting periods indicated:

					Change
	2005		2004		$		%
Net Income	$	41,631	$	29,139	$	12,492	42.9	%
Interest (Income) Expense, net		25,188		22,679		2,508	11.1	%
Income Tax Expense		23,996		13,678		10,318	75.4	%
Depreciation and Amortization	��	2,936		2,936		—	0.0	%
EBITDA	$	93,751	$	68,433	$	25,318	37.0	%

EBITDA increased by $25.3 million in 2005 largely as a result of the 10.7% increase in average selling price offset by a 10.5% increase in cost of goods sold per ton shipped.

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Liquidity and Capital Resources

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

Our ongoing working capital requirements are largely driven by our level of accounts receivable and inventory and our capital expenditures. Ongoing accounts receivable balances will be determined by future sales and customer payment terms. Customer payment terms are expected to remain at the current level of 30 to 45 days with certain customers given a small discount for more rapid payment. Inventory balances will largely be determined by levels of scrap and purchased slab inventory. We carefully control our scrap purchases in order to match inventory levels to production requirements and may, from time to time, take advantage of opportunities to purchase excess scrap at advantageous pricing. Likewise, we attempt to match slab purchases to production requirements. Slab purchases typically require long lead times, and we may also purchase excess slab inventory at advantageous pricing.

At December 31, 2006, Claymont Steel’s liquidity consisted of cash and funds available under the $20.0 million Claymont Steel credit agreement totaling approximately $39.6 million. Net working capital at December 31, 2006 decreased $21.2 million to $90.3 million from $111.5 million at December 31, 2005 primarily due to the classification of the $75.0 million Holdings pay-in-kind notes as short-term debt since the notes were redeemed in February 2007 with proceeds from our initial public offering of common stock. The redemption of $68.3 million of investment securities used to pay the $69.6 million cash dividend paid to stockholders in June 2006 was partially offset by receipt of net proceeds of $97.6 million from our initial public offering of common stock. In addition, a $71.2 million cash dividend was paid to stockholders in July 2006 from the proceeds of the issuance of the Holdings Notes. The percentage of long-term debt to total capital was 120% at December 31, 2006 and 122% at December 31, 2005. We believe the funds provided by operations, together with borrowings under the Claymont Steel credit agreement will be adequate to meet future capital expenditure and working capital requirements for existing operations for at least the next twelve months.

Cash Flows

Operating Activities. Net cash flows provided by operating activities were $29.8 million for the year ended December 31, 2006, $29.3 million for the period of June 10, 2005 to December 31, 2005, $36.5 million for the period from January 1 to June 9, 2005, and $24.9 million for fiscal 2004.

During the year ended December 31, 2006 net income adjusted for non-cash items provided $40.0 million in cash from operating activities, and growth in inventory to support accelerating sales used $4.7 million of cash. This increase was partially offset by $5.7 million increase in interest payable. Also, a decrease in accounts receivable used $2.3 million of cash as sales increased 20% and the Company maintained days-sales outstanding at 48 days through the period. Further, the Company used $6.2 million in cash to settle the CITIC litigation regarding the working capital adjustment in connection with the Acquisition. $4.3 million of the CITIC settlement was applied to the due to seller liability and $1.9 million was charged to operating expense.

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

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

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

Investing Activities. Cash flows used by investing activities were $38.3 million for the year ended December 31, 2006. Cash flows used in investing activities were $175.1 million for the period of June 10, 2005 to December 31, 2005, $0.4 million for the period from January 1 to June 9, 2005 and $1.4 million in fiscal 2004.

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During the year ended December 31, 2006, we purchased investment securities for $94.8 million from the net initial public offering proceeds and redeemed investment securities, net of purchases, of $68.3 million, which was used to pay a dividend to our stockholders. We spent $11.9 million on capital expenditures during this period. Major capital projects in this period included completing the upgrade to the plate mill electrical drive system, enhancing the plate mill reheat furnace, replacing the 2 hi motor in the plate mill and renovating office space.

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

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

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

Financing Activities. Cash flows provided by financing activities were $26.0 million for the year ended December 31, 2006. Cash flows provided by financing activities were $117.4 million for the period from June 10, 2005 to December 31, 2005. Cash flows used in financing activities were $9.3 million for the period from January 1 to June 9, 2005 and $19.9 million in fiscal 2004.

During the year ended December 31, 2006, we issued $75.0 million of Holdings pay-in-kind notes and received net proceeds of $97.6 million from the initial public offering, intended to be used to redeem the Holdings pay-in-kind notes. We also paid cash dividends to our stockholders of $140.7 million from the proceeds of the Claymont Steel floating rate notes offering and the Holdings Notes offering, and incurred $4.3 million of deferred financing fees related to the issuance of the Holdings Notes.

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

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

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

Capital Expenditures

Capital expenditures were $11.8 million in the year ended December 31, 2006, compared to $5.9 million in the period of June 10 to December 31, 2005. We are undertaking a number of deferred capital projects including capacity enhancement and efficiency improvement projects. Capital expenditures are projected to be at least $12.0 million in 2007 and 2008. The planned capital expenditures for 2007 and 2008 are a result of our initiatives to increase plant capacity and to reduce operating costs.

Indebtedness

15% Senior Secured Pay-In-Kind Notes due 2010.On July 6, 2006, we issued $75.0 million aggregate principal amount of Senior Secured Pay-In-Kind Notes due 2010. In February 2007, we redeemed all of the outstanding Holdings Notes for approximately $88.9 million using proceeds from our initial public offering of common stock.

Senior Secured Floating Rate Notes due 2010.In August 2005, Claymont Steel issued $172.0 million of the Claymont Steel floating rate notes. In March 2007, Claymont Steel redeemed all of its outstanding floating rate notes for approximately $176.4 million with the proceeds from Claymont Steel’s new senior notes in aggregate principal amount of $102.4 million, a term loan in the amount of $20.0 million, borrowings of $43.7 million under a senior secured revolving credit facility and existing cash.

Senior Notes due 2015.In February 2007, Claymont Steel issued $105.0 million of its senior notes. The Claymont Steel senior notes are senior unsecured obligations of Claymont Steel and rank senior in right of payment to all of Claymont Steel’s subordinated indebtedness and pari passu in right of payment with all of Claymont Steel’s existing and future senior indebtedness. Interest on the Claymont Steel senior notes accrues at 8.875% per annum. Interest is payable semiannually in arrears on February 15 and August 15. The Claymont Steel senior notes will mature on February 15, 2015.

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

For the period below:	Percentage
On or after February 15, 2011	104.438	%
On or after February 15, 2012	102.219	%
On or after February 15, 2013	100.000	%

Upon a change in control, each holder has the right to require Claymont Steel to repurchase such holder’s Claymont Steel senior notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase.

The indenture governing the Claymont Steel senior notes imposes certain restrictions that limit the ability of Claymont Steel and its restricted subsidiaries to, among other things: incur debt; restrict dividend or other payments from its subsidiaries; issue and sell capital stock of its subsidiaries; engage in transactions with affiliates; create liens on its assets to secure indebtedness; transfer or sell assets; and consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries.

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

• non-payment of interest and additional interest;

• non-payment of principal or premium;

• violations of certain covenants;

• non-payment of certain judgments

• certain bankruptcy-related events; and

• invalidity of any guarantee.

The foregoing summary of certain terms of the Claymont Steel senior notes is qualified in its entirety by reference to the complete terms contained in the indenture governing the Claymont Steel senior notes.

Credit Agreement. In August 2005, Claymont Steel entered into a $20 million senior secured revolving credit facility. In February 2007, Claymont Steel amended its credit agreement and increased the facility into an $80 million senior secured revolving credit facility, including a $60 million revolving credit facility, with a $10 million letter of credit subfacility, and a $20 million term loan. The Claymont Steel credit agreement is secured by a first priority perfected security interest in existing and future tangible and intangible assets, real and personal. The Claymont Steel credit agreement matures on February 15, 2012.

Under the revolving credit facility, Claymont Steel will be able to make borrowings based on a percentage of its eligible accounts receivable and inventory. Interest accrues on amounts outstanding under the revolving credit facility at floating rates equal to either the prime rate of interest in effect from time to time (plus .25% in certain circumstances) or LIBOR plus 1.00% to 1.75% based on the amount of availability under the Claymont Steel credit agreement. The Claymont Steel credit agreement contains certain customary fees, including servicing fees, unused facility fees and pre-payment fees.

Under the term loan, payments of principal will amortize in equal monthly installments over 36 months. In addition, the term loan will require quarterly mandatory prepayments in an amount equal to 50% of our excess cash flow, based on financial statements. Final payment will be due on the third anniversary of the senior secured revolving credit facility. Interest accrues on amounts outstanding under our term loan at floating rates equal to either the prime rate of interest in effect from time to time or LIBOR plus 2.50%.

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

• declare dividends;

• prepay, redeem or purchase debt;

• incur liens;

• make loans and investments;

• make capital expenditures;

• incur additional indebtedness;

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• engage in mergers, acquisitions and asset sales;

• enter into transactions with affiliates; and

• engage in businesses that are not related to our business.

The Claymont Steel credit agreement also includes financial covenants that, among others, require us to maintain minimum availability under the revolving credit facility and maintain fixed charge coverage ratios.

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

• non-payment of principal, interest or fees;

• violations of certain covenants;

• certain bankruptcy-related events;

• inaccuracy of representations and warranties in any material respect; and

• cross defaults with certain other indebtedness and agreements.

Contractual Obligations

The following is a summary of our significant contractual obligations by year as of December 31, 2006.

	Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(in thousands)
Pension obligations(1)		N/A	$	—		N/A		N/A		N/A
Operating lease obligations	$	1,193		395	$	594	$	204	$	—
Service agreement(2)		2,418		322		645		645		806
Letters of credit		550		550		—		—		—
Management agreement(3)		—		—		—		—		—
Claymont Steel credit agreement and related interest(4)		167		100		67		—		—
Claymont Steel floating rate notes and related interest(5)		251,184		22,114		44,228		184,842		—
Claymont Steel Holdings pay-in-kind notes(6)		88,906		88,906		—		—		—
	$	344,418	$	112,387	$	45,534	$	185,691	$	806

⁽¹⁾ With the exception of 2006, which is $ 0, we are not able to reasonably estimate future obligations.

⁽²⁾ Service agreement relates to a contract with a third party for the scarfing of slabs.

⁽³⁾ The management agreement was canceled in connection with our IPO by a $3.0 million payment to an affiliate of our principal stockholder.

⁽⁴⁾ Unused commitment fee on the Claymont Steel credit agreement, calculated at 0.5% multiplied by the $20.0 million commitment. The credit agreement was amended in February 2007.

⁽⁵⁾ All of the outstanding Claymont Steel floating rate notes were redeemed in March 2007 for approximately $176.4 million with the proceeds of new senior notes in aggregate principal amount of $102.4 million, a term loan in the amount of $20.0 million, borrowings of $43.7 million under a senior secured revolving credit facility and existing cash.

⁽⁶⁾ All of the outstanding Holdings notes were redeemed in February 2007, with proceeds from the Holdings initial public offering of common stock, for approximately $88.9 million.

Pension Plan

The Company maintains a noncontributory defined benefit pension plan which covers substantially all full-time employees. The plan is over-funded at December 31, 2006 as the fair value of the plan assets exceeds the present value of the benefit obligation. The over-funded amount, net of tax, is recorded in other comprehensive income.

We use the following assumptions and estimates, which are determined by our pension committee in consultation with our external actuary, in determining our pension liability:

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	Successor		Predecessor
	December 31, 2006		December 31, 2005		June 9, 2005		December 31, 2004
Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate	6.05	%	5.70	%	5.75	%	6.00	%
Rate of compensation increase	3.0	%	3.0	%	3.0	%	3.0	%

	December 31, 2006			December 31, 2005
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31:
Discount rate		5.70	%		5.70	%
Expected return on plan assets		8.0			8.0
Rate of compensation increase		3.0			3.0
Minimum required contribution	$	0		$	0

Our pension plan had the following effect on results of operations for the year ended December 31, 2006 and for the period of June 10 to December 31, 2005, January 1 to June 9, 2005 and for the year ended December 31, 2004 (amounts in thousands):

				Successor			Predecessor
	2006			June 10 to December 31, 2005			January 1 to June 9, 2005			2004
Service cost	$	651		$	409		$	194		$	548
Interest cost		576			366			176			473
Expected return on plan assets		(809	)		(392	)		(219	)		(532	)
Amortization of transition obligation											6
Amortization of gain and loss and prior year costs								25			63
Net periodic pension cost	$	418		$	383		$	176		$	558

The Company’s pension plan had no effect on cash flow or liquidity for the year ended December 31, 2006 and for the period of June 10 to December 31, 2005 since we made no payments to the plan nor did we take any distributions from the plan during those periods. The Company made a $2,456,000 contribution to the pension plan in the period of January 1 to June 9, 2005 and an $821,000 contribution in the year ended December 31, 2004.

For the year ended December 31, 2006, the Company recognized a $715,000 gain, net of income tax, in other comprehensive income representing the excess of fair value of the plan assets over the projected benefit obligation.

There have been no material variations between the Company’s actual experience with the pension plan and the expected results based on the assumptions. There are no expected changes in trends or assumptions.

The Company does not anticipate making a contribution to the pension plan in the year ended December 31, 2007 and can not reasonable project required contributions in future years. At December 31, 2006 the Company had no unrecognized losses on pension assets.

Intangible Assets

Intangible assets are comprised of our customer relationships, which are being amortized over a five-year life, and the Company’s prior trade name, which was written-off in the third quarter of 2006 when we changed our name to Claymont Steel. Intangible assets were valued at the Acquisition date. Customer relationships were valued at $7.0 million based on the estimated discounted after-tax cash flow derived from the customers we had at the acquisition date, assuming an average five-year customer life. Annual amortization of $1.4 million is charged to selling, general and administrative expense for the customer relationships. Our prior trade name (CitiSteel USA, Inc.) was valued at $0.6 million based on the estimated discounted after-tax cost we would have had to incur if we paid a royalty to a third-party for use of a comparable name.

Environmental Matters

In October 2006, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Notice of Conciliation and Secretary’s Order requiring the Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions. The DNREC plans to make a determination on further

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dust control requirements upon review of the study in May 2007. Accordingly, the outcome cannot be determined at this time.

In 2006, Claymont Steel performed an emissions test that indicated that mercury emissions were higher than previously calculated by it using information supplied by the United States Environmental Protection Agency. In November 2006, DNREC issued a Secretary’s Order, which requires Claymont Steel to monitor and reduce mercury emissions. The Order requires Claymont Steel to implement a quarterly testing program and to develop a plan to reduce the mercury contained in the feed to the electric arc furnace. Mercury-containing scrap is an industry-wide problem. Automobile scrap may contain mercury switches that have not been removed during the recycling process, and thus mercury can be emitted when Claymont Steel smelts recycled scrap steel products, including used automobiles, to produce custom steel plate products. Claymont Steel has already taken steps to reduce mercury levels in the feed—it is no longer using municipal solid waste scrap, is partially funding a rational mercury switch removal program through an industry trade association and is increasing its purchases of automobile-free scrap. The Order also requires Claymont Steel to elect one of the alternatives set forth in the Order for reducing mercury emissions and notify DNREC of the alternative selected by January 31, 2007. The alternatives include source reduction of mercury in the scrap, installation of a carbon injection system or alternative emission control system, some combination of source reduction and emission controls, or ceasing operation of the electric arc furnace. On January 30, 2007, Claymont Steel notified DRNEC that it elected to implement a combination of source reduction and emission controls. The Order requires Claymont Steel to have the selected alternative operational by December 31, 2008. At this time, Claymont Steel cannot estimate the cost of any corrective measures. If Claymont Steel were ultimately required to install and operate a carbon injection system, it does not believe the associated costs would have a material effect on its results of operations or financial condition.

Claymont Steel is also working with DNREC to investigate potential PCB and PAH contamination in the active scrap yard area. An investigative work plan was submitted in late October for some additional sampling, and Claymont Steel is awaiting review comments from DNREC. Claymont Steel believes any requirements for remediation will not have a material effect on the Company’s financial statements.

The Company recorded a $550,000 asset retirement reserve on the December 31, 2005 balance sheet to cover replacement and remediation of certain assets.

Critical Accounting Policies and Estimates

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

Investment Securities. Investment securities represented 39% and 39% of our total assets at December 31, 2006 and December 31, 2005, respectively. Investment securities are carried at fair value and have maturities of less than three months at December 31, 2005. Fair value is approximated based on market value of the securities at the balance sheet date.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable represented 17% and 22% of our total assets at December 31, 2006 and December 31, 2005, respectively. Accounts receivable, net of a reserve for doubtful accounts, are carried at net realizable value, which is estimated based on the expected collectibility of each individual customer account. We establish reserves for doubtful accounts on a case-by-case basis when we believe the payment of amounts owed to us is unlikely to occur. In establishing these reserves, we consider our historical experience, changes in our customer’s financial position, and any disputes with customers. We derive a significant portion of our revenues from steel service centers and fabricators and construction-related industries and our receivables are concentrated in those industries. If the financial condition of our clients were to deteriorate, additional allowances may be required. During the year ended December 31, 2006, we decreased the allowance for doubtful accounts through expense of $0.9 million. For the period from June 10 to December 31, 2005, we increased the reserve by $0.3 million. In fiscal 2004, we increased the reserve by $0.8 million. The allowance was decreased for write-offs and recoveries of specifically identified uncollectible accounts by $0.7 million, $0.0 million and $0.6 million, respectively.

The reserve for doubtful accounts totaled $0.4 million at December 31, 2006, $1.3 million at December 31, 2005 and $1.0 million at each of June 9, 2005 and December 31, 2004.

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Inventories. Inventories represented 17% and 20% of our total assets at December 31, 2006 and December 31, 2005, respectively. Inventories include raw materials consisting of scrap steel, alloys and flux and work-in-process consisting of steel slabs, finished plate, manufacturing supplies and spare parts. Inventories also include labor and overhead and are recorded at the lower of cost (first-in, first-out method) or market. We review whether the realizable value of this inventory is lower than its book value. If our valuation is lower than its book value, we take a charge to expense and directly reduce the value of the inventory. We do not maintain a separate inventory reserve account.

Property, Plant and Equipment. Property, plant and equipment represented 10% and 8% of our total assets at December 31, 2006 and December 31, 2005, respectively. We determine the carrying value of these assets based on our property and equipment accounting policies, which incorporate our estimates, assumptions and judgments relative to capitalized costs and useful lives of our assets.

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

Revenue Recognition. We recognize revenue when the steel plate is shipped to our customers. We ship plate after we determine that it meets customer specifications. We establish reserves for sales returns and allowances based on our historical experience and future expectations. During the year ended December 31, 2006, we increased the allowance for sales returns and allowances through charges to expense of $1.3 million, and for the period from June 10 to December 31, 2005, we increased the reserve by $0.2 million. For the period of January 1 to June 9, 2005, we increased the reserve by $0.1 million, and in fiscal 2004, we increased the reserve by $1.4 million. The allowance was decreased for actual returns and allowances by $0.7 million, $0.2 million, $0.7 million and $0.6 million, respectively.

The reserve for sales returns and allowances totaled $0.3 million at December 31, 2006, $0.2 million at December 31, 2005, $0.2 million at June 9, 2005 and $0.9 million at December 31, 2004.

Long-Lived Assets—The Company’s long-lived assets are comprised of intangible assets, which represented 2% and 4% of our total assets at December 31, 2006 and December 31, 2005, respectively. Intangible assets are comprised of our customer relationships, which are being amortized over a five-year life, and the Company’s prior trade name, which was written-off in the third quarter of 2006 when we changed our name to Claymont Steel. Intangible assets were valued at the Acquisition date. Customer relationships were valued based on the estimated discounted after-tax cash flow derived from the customers we had at the acquisition date, assuming an average five-year customer life. Our prior trade name (CitiSteel USA, Inc.) was valued based on the estimated discounted after-tax cost we would have had to incur if we paid a royalty to a third-party for use of a comparable name.

The Company evaluates the carrying value of long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluation relies on a number of factors, including operating results, future anticipated cash flows, business plans and certain economic projections. In addition, the Company’s evaluation considers non-financial data such as changes in operating environment, competitive information, market trends and business relationships. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Income Taxes—The Company’s income tax receivable represents 1% of our total assets at December 31, 2006 and our income tax payable represents 1% of our total liabilities at December 31, 2005. Our income tax receivable will be realized as the Company earns taxable income in 2007.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Valuation allowances, if any, are provided when a portion or all of a deferred tax asset may not be realized. The Company’s deferred tax assets and liabilities represented less than 1% of our total assets and total liabilities at December 31, 2006 and December 31, 2005. The Company expects to realize our deferred tax assets as we earn table income in 2007 and future years.

Pensions—The Company has a noncontributory defined benefit pension plan which covers substantially all full-time employees. The plan is over-funded at December 31, 2006 as the fair value of the plan assets exceeds the present value of the benefit obligation. The over-funded amount, net of tax, is recorded in other comprehensive income.

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Recently Issued Accounting Pronouncements

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

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

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

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”), which is effective no later than the end of fiscal years ending after December 15, 2005. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143,Accounting for Asset Retirement Obligations (“SFAS No. 143”). Conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. At the adoption of FIN No. 47, the Company recorded a $550,000 asset retirement liability on the December 31, 2005 balance sheet to cover replacement and remediation of certain assets, including removal and replacement of transformers containing PCB’s and removal of certain contaminated smoke stacks.

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

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

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement clarifies when servicing rights should be separately accounted for, requires companies to account for separately recognized servicing rights initially at fair value, and gives companies the option of

16

subsequently accounting for these servicing rights at either fair value or under the amortization method. This Statement will be effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt this Statement effective January 1, 2007. Based on our current evaluation of this Statement, we do not expect the adoption of SFAS No. 156 to have a material effect on our financial statements.

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

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

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. We adopted SFAS No. 158 in December 2006 and its adoption resulted in a $715,000 increase in other comprehensive income.

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

Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements.

17

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Claymont Steel Holdings, Inc. (formerly CitiSteel USA Holdings, Inc.)

Claymont, Delaware

We have audited the accompanying consolidated balance sheets of Claymont Steel Holdings, Inc. (formerly CitiSteel USA Holdings, Inc.) (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2006, for the periods from June 10, 2005 to December 31, 2005 and January 1, 2005 to June 9, 2005 and the year ended December 31, 2004. These consolidated 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and cash flows for the year ended December 31, 2006, the periods of June 10, 2005 to December 31, 2005 and January 1, 2005 to June 9, 2005 and the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

In 2006, the Company adopted Statement of Financial Accounting Standards No. 158—Employers’ Accounting for Defined Benefit Pension and other Post Retirement Benefit Plans.

As discussed in Note 21, the Company restated its long-term and short-term debt disclosed in the accompanying consolidated financial statements.

CROWE CHIZEK AND COMPANY LLC

Lexington, Kentucky

April 2, 2007, except for Notes 10 and 21 as to which the date is July 23, 2007

18

CLAYMONT STEEL HOLDINGS, INC.

(FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2006

(Amounts in thousands, except per share data)

	December 31, 2006 (As Restated, See Note 21)			December 31, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	20,120		$	2,619
Investment securities		94,774			68,317
Accounts receivable, less allowance for doubtful accounts of $420 and $1,335 for December 31, 2006 and 2005, respectively		41,081			38,745
Inventories		40,698			35,952
Prepaid expenses		515			805
Income taxes receivable		2,949
Deferred income taxes		795			1,144
Total current assets		200,932			147,582
Property, plant, and equipment—net		24,103			14,615
Deferred financing costs		9,583			7,912
Intangible assets		4,975			6,862
Other assets		472
TOTAL ASSETS	$	240,065		$	176,971
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	75,000		$
Accounts payable		17,117			16,517
Accrued expenses		2,425			3,941
Accrued profit sharing		3,115			2,205
Accrued interest payable		12,958			7,167
Due to seller					4,814
Income taxes payable					1,394
Total current liabilities		110,615			36,038
Long-term debt		168,848			170,452
Other long-term liabilities					285
Deferred income taxes		916			410
Total liabilities		280,379			207,185
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS’ DEFICIT:
Common stock, $0.001 par value, in December 31, 2006 and 2005 and $1 par value, in June 9, 2005—authorized 20,000,000 and issued and outstanding, 17,566,754 shares in 2006, 11,316,754 shares in 2005		6
Additional paid-in capital		97,602
(Accumulated deficit) retained earnings		(138,637	)		(30,214	)
Accumulated other comprehensive loss		715
Total stockholders’ deficit		(40,314	)		(30,214	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	240,065		$	176,971

See notes to consolidated financial statements.

19

CLAYMONT STEEL HOLDINGS, INC.

(FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND FOR THE PERIODS OF JUNE 10, 2005 TO DECEMBER 31, 2005 AND

JANUARY 1, 2005 TO JUNE 9, 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2004

(Amounts in thousands, except per share data)

	Successor						Predecessor
	2006			June 10 to December 31, 2005			January 1 to June 9, 2005			2004
SALES	$	333,408		$	149,683		$	128,687		$	239,556
COST OF SALES		233,170			114,136			78,762			167,029
GROSS PROFIT		100,238			35,547			49,925			72,527
OPERATING EXPENSES—Selling, general and administrative		20,572			8,041			2,535			8,303
INCOME FROM OPERATIONS		79,666			27,506			47,390			64,224
OTHER INCOME (EXPENSE):
Interest income		2,222			968			228			47
Interest expense		(29,272	)		(11,632	)		—			(568	)
Other non-operating income		138			101			—			147
Total other income (expense)		(26,912	)		(10,563	)		228			(374	)
INCOME BEFORE INCOME TAXES		52,754			16,943			47,618			63,850
INCOME TAX EXPENSE		(20,758	)		(6,058	)		(17,583	)		(21,881	)
NET INCOME	$	31,996		$	10,885		$	30,035		$	41,969
NET EARNINGS PER COMMON SHARE—basic	$	2.80		$	0.97		$	30,035		$	41,081
NET EARNINGS PER COMMON SHARE—diluted	$	2.79		$	0.96		$	30,035		$	41,081
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		11,407,770			11,241,303			1,000			1,000
Diluted		11,476,067			11,316,754			1,000			1,000

See notes to consolidated financial statements.

20

CLAYMONT STEEL HOLDINGS, INC.

(FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2006 AND FOR THE PERIODS OF JUNE 10, 2005 TO DECEMBER 31, 2005 AND JANUARY 1, 2005

TO JUNE 9, 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2004

(Dollar amounts in thousands)

	Common Stock			Series B Cumulative Preferred Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
Predecessor
BALANCE—January 1, 2004	1,000	$	1	166	$	33,200	$	16,999	$	(15,229	)	$	(663	)	$	34,308
Comprehensive income:
Net income										41,969						41,969
Other comprehensive income:
Adjustment to unrealized gains on short-term investments													(138	)		(138	)
Minimum pension liability adjustment net of income tax benefit of $78													101			101
Total comprehensive income																41,932
Predecessor
BALANCE—December 31, 2004	1,000	$	1	166	$	33,200	$	16,999	$	26,740		$	(700	)	$	76,240

See notes to consolidated financial statements.

21

CLAYMONT STEEL HOLDINGS, INC.

(FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2006 AND FOR THE PERIOD OF JUNE 10, 2005 TO DECEMBER 31, 2005 AND JANUARY 1, 2005

TO JUNE 9, 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2004

(Dollar amounts in thousands)

	Common Stock			Series B Cumulative Preferred Stock				Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares		Amount
Predecessor
BALANCE—January 1, 2005	1,000	$	1		166	$	33,200	$	16,999	$	26,740		$	(700	)	$	76,240
Dividends											(9,267	)					(9,267	)
Comprehensive income:
Net income											30,035						30,035
Other comprehensive income (loss):
Minimum pension liability adjustment net of income taxes														(517	)		(517	)
Total Comprehensive Income																	29,518
Predecessor
BALANCE—June 9, 2005	1,000	$	1		166	$	33,200	$	16,999	$	47,508		$	(1,217	)	$	96,491
Successor
BALANCE—June 10, 2005	11,316,754		—		—		—		—		—			—			—
Net income											10,885						10,885
Dividends											(41,099	)					(41,099	)
BALANCE—December 31, 2005	11,316,754		—		—		—		—	$	(30,214	)		—		$	(30,214	)
Issuance of Common Stock	6,250,000		6		—		—		97,602	$				—		$	97,608
Dividends											(140,678	)					(140,678	)
Charge for vesting of restricted stock											259						259
Comprehensive income:
Net income											31,996						31,996
Adoption of SFAS 158, net of tax														715			715
Total Comprehensive Income																	32,711
BALANCE—December 31, 2006	17,566,754	$	6	$		$		$	97,602	$	(138,637	)	$	715		$	(40,314	)

See notes to consolidated financial statements.

22

CLAYMONT STEEL HOLDINGS, INC.

(FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2006 AND FOR THE PERIOD OF JUNE 10, 2005 TO DECEMBER 31, 2005 AND JANUARY 1, 2005

TO JUNE 9, 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2004

(Amounts in thousands)

	Successor						Predecessor
	2006			June 10 to December 31, 2005			January 1 to June 9, 2005			2004
OPERATING ACTIVITIES:
Net income	$	31,996		$	10,885		$	30,035		$	41,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,170			5,449			1,816			4,737
Loss on disposal of equipment											519
Gain on sale of short-term investments											(144	)
Provision for (recoveries of) bad debt					300						258
Stock Compensation		259
Changes in assets and liabilities which provided (used) cash:
Accounts receivable		(2,336	)		(8,808	)		693			(18,459	)
Income taxes receivable		(2,949	)		573			(337	)		(236	)
Inventories		(4,746	)		9,860			5,278			(14,604	)
Prepaid expenses		290			51			723			(934	)
Accounts payable		600			8,429			(4,761	)		2,328
Accrued expenses and profit sharing		(606	)		1,971			(904	)		3,307
Accrued interest payable		5,791			7,167						(68	)
Income taxes payable		(1,394	)		69			4,377			3,322
Due to seller		(4,814	)		500
Deferred taxes		855			(5,376	)		132			3,001
Other assets and liabilities		(42	)		(1,778	)		(519	)		(52	)
Net cash provided by operating activities		29,815			29,292			36,533			24,949
INVESTING ACTIVITIES:
Purchase of investment securities		(94,774	)		(136,065	)		—			—
Maturities of investment securities		68,317			67,748			—			—
Acquisition of property, plant, and equipment		(11,884	)		(5,926	)		(416	)		(1,638	)
Purchases of short-term investments					—			—
Proceeds from sale of short-term investments					—			—			259
Business acquisition		—			(100,825	)		—			—
Net cash used in investing activities		(38,341	)		(175,068	)		(416	)		(1,379	)
FINANCING ACTIVITIES:
Proceeds from initial public offering		97,608
Proceeds from pay-in-kind note offering		75,000
Net repayments of line of credit											(16,511	)
Proceeds from note payable—related party
Repayments of note payable—related party											(3,400	)
Proceeds from senior secured notes					25,253
Repayments of senior secured notes		(1,890	)		(25,253	)
Dividends		(140,678	)		(41,099	)		(9,267	)
Borrowings under senior secured floating rate notes					170,453
Deferred financing costs		(4,272	)		(11,986	)
Net cash (used in) provided by financing activities		26,027			117,368			(9,267	)		(19,911	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		17,501			(28,408	)		26,850			3,654
CASH AND CASH EQUIVALENTS—Beginning of year		2,619			31,027			4,177			523
CASH AND CASH EQUIVALENTS—End of year	$	20,120		$	2,619		$	31,027		$	4,177
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION— Cash paid during the year for:
Interest	$	20,890		$	1,199		$	0		$	637
Income taxes	$	23,604		$	11,411		$	13,423		$	15,794

See notes to consolidated financial statements.

23

CLAYMONT STEEL HOLDINGS, INC. (FORMERLY CITISTEEL USA HOLDINGS, INC.) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006 AND 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2006 AND FOR THE PERIOD OF JUNE 9, 2005 TO

DECEMBER 31, 2005 AND JANUARY 1, 2005 TO JUNE 9, 2005 AND FOR THE YEAR ENDED DECEMBER 31, 2004

1. NATURE OF BUSINESS

Claymont Steel Holdings, Inc. (formerly CitiSteel USA Holdings, Inc.) (Holdings) is a corporation incorporated in the State of Delaware. Holdings’ results are consolidated with its wholly owned subsidiary Claymont Steel, Inc. and its wholly owned subsidiary, CitiSteel PA, Inc., (collectively the “Company”). Holdings’ is a publicly traded corporation listed on the NASDAQ national market under the symbol “PLTE.” Holdings affected an initial public offering on December 22, 2006. Prior to that date Holdings was an affiliate of H.I.G. Capital, LLC, a private equity firm focused on management buyouts and recapitalizations of leading middle market companies as well as growth capital investments. The Company manufactures and sells carbon steel plates throughout the continental United States and Canada. Holdings was incorporated on May 19, 2005 and had no activity until the acquisition of Claymont Steel, Inc. on June 10, 2005.

2. BASIS OF PRESENTATION

These financial statements contain consolidated financial statements for Claymont Steel, Inc. (formerly CitiSteel USA, Inc.) (the predecessor company) and for Claymont Steel Holdings, Inc. (formerly CitiSteel USA Holdings, Inc.) (the successor company) for the periods described below. Consolidated financial statements for Claymont Steel, Inc. are shown for periods prior to the acquisition which took place on June 10, 2005 as of December 31, 2004 and for the year ended December 31, 2004 and for the period from January 1 to June 9, 2005. Consolidated financial statements for Claymont Steel Holdings, Inc. are shown for periods subsequent to the acquisition. The consolidated financial statements for Claymont Steel Holdings, Inc. are presented as of December 31, 2006 and 2005 and for the period from June 10, 2005 to December 31, 2005. No material expenses were incurred on the predecessor company’s behalf by its parent company.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements include the results of operations and financial position of the Company. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents—The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2005, the Company had three bank accounts with balances in excess of federally insured limits. Cash and cash equivalents at December 31, 2006 includes $870,000 in a segregated escrow account for the benefit of Jeff Bradley, the Company’s CEO, related to dividends declared on restricted stock. The escrow balance was distributed to Mr. Bradley in January 2007.

Investment Securities—The Company may classify its investment security portfolio into three categories: trading securities, securities available for sale, and securities held for maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading or held to maturity. Investment securities available for sale are carried at fair value. Adjustments from amortized cost to fair value are recorded in capital, net of related income tax, under accumulated other comprehensive income. For debt securities, cost is adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method. Purchases and sales of investment securities are recorded as of the trade date. Gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.

Accounts Receivable and Allowance for Doubtful Accounts—The Company records accounts receivable at amounts billed to customers net of an allowance for doubtful accounts. The allowance is determined based on historical collection experience and specific customer collection issues. The Company does not charge interest on receivables. Receivables are written off when they are considered uncollectible. No receivables are sold and all trade receivables are related to customer billings. All trade receivables serve as collateral for borrowings under the Company’s credit facility.

Inventories—Inventories include material, labor and overhead and are recorded at the lower of cost (first-in, first-out method) or market.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Maintenance and repairs are expensed as incurred and costs of improvements are capitalized. Property, plant and equipment are depreciated by the straight-line method over the following estimated useful lives:

24

	Successor Years	Predecessor Years
Buildings and improvements	15–30	31 1/2
Furniture, fixtures and equipment	3–8	5–10

Income Taxes—The Company’s method of accounting for income taxes conforms to SFAS No. 109,Accounting for Income Taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Valuation allowances, if any, are provided when a portion or all of a deferred tax asset may not be realized (see Note 14).

Long-Lived Assets—The Company evaluates the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluation relies on a number of factors, including operating results, future anticipated cash flows, business plans and certain economic projections. In addition, the Company’s evaluation considers non-financial data such as changes in operating environment, competitive information, market trends and business relationships. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Fair Value of Financial Instruments— The financial instruments of the Company consist mainly of cash and cash equivalents, marketable securities, trade receivables, short-term debt and long-term debt. The fair value of cash and cash equivalents, trade receivables and short-term debt approximates their carrying values due to the relatively short-term nature of the instruments. The fair value of marketable securities are based on the Company’s amortized cost, which approximates fair value due to the frequent resetting of interest rates resulting in repricing of the investments. The fair value of long-term debt is estimated based on current rates available to the Company for debt with similar characteristics.

Intangible Assets—The Company records intangible assets at fair value and amortizes the assets over their useful lives. The carrying values are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Accumulated amortization of intangible assets was $1.9 million and $0.7 million at December 31, 2006 and 2005, respectively.

Deferred Financing Fees—The Company records deferred financing fees at fair value and amortizes the asset over the life of the related debt. The carrying value is evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Accumulated amortization of deferred financing fees was $2.8 million and $0.6 million at December 31, 2006 and 2005.

Revenue Recognition—Revenue from sales, net of discounts, estimated returns and allowances, is recognized when product title and risk of loss pass to the customer at the time of shipment. Returns, discounts and allowances totaled $2,125,000, $568,000, $387,000 and $1,879,000 for 2006 and the period of June 10, 2005 to December 31, 2005, January 1, 2005 to June 9, 2005 and in 2004, respectively. Shipping and handling fees billed to customers are recorded as revenue and the related costs are recorded to cost of sales.

Comprehensive Income (Loss)—Other comprehensive income or loss items are revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income and reflected as a component of stockholder’s equity, including minimum pension liability adjustments and unrealized gains and losses on investments.

Environmental Remediation—Environmental expenditures that relate to current operations are expensed. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.

Earnings per Share—The computation of basic earnings per share is based on the weighted average number of shares and common stock units that were outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of restricted stock grants.

Stock Based Compensation—The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock Based Compensation, as amended by SFAS

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No. 148,Accounting for Stock-Based Compensation—Transition and Disclosureand SFAS No. 123R,Share Based Payment.The Company measures compensation costs in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. The Company adopted a stock incentive plan in December 2006 concurrently with its initial public offering and granted 82,352 restricted share units and granted options to purchase 106,465 shares. No awards were outstanding as of December 31, 2005 and 2004. The Company granted Jeff Bradley, the Company’s chief executive officer, restricted stock on June 10, 2005. The Company recorded compensation expense of $89,000 and $275,000 for a dividend payment related to the restricted stock award in the period ended December 31, 2006 and 2005.

New Accounting Pronouncements—The FASB issued SFAS No. 151,Inventory Costs, which amends the guidance in ARB No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company’s adoption of SFAS No. 151 in 2006 did not have a significant impact on the Company’s consolidated financial position or results of operations.

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

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

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”), which is effective no later than the end of fiscal years ending after December 15, 2005. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143,Accounting for Asset Retirement Obligations (“SFAS No. 143”). Conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The Company’s adoption of FIN No. 47 did not have a material impact on its consolidated financial condition or results of operations.

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

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

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans (“SFAS No. 158”). This Statement requires an employer to recognize the overfunded or underfunded

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status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 amends SFAS No. 87,Employers’ Accounting for Pensions, SFAS No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Terminated Benefits,SFAS No. 106,Employers’ Accounting for Postretirement Benefits other than Pensions,and SFAS No. 132R, Employers’ Disclosures about Pensions and other Postretirement Benefits. The effect of adoption of SFAS No. 158 on the financial statements is quantified in Note 15, Employee Benefit Plans.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The adoption of SAB 108 had no effect on the Company’s financial statements for the year ending December 31, 2006.

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140.This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156,Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Management does not expect the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this standard.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company has not completed its evaluation of the impact of adoption of EITF 06-4.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,Accounting for Purchases of Life Insurance—Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the

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surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of this issue will have a material impact on the financial statements.

Valuation and Qualifying Accounts—Valuation account balances and activity consist of the following (amounts in thousands):

	Balance at Beginning of Period		Charged to Costs and Expenses			Charged to Other Accounts		Deductions			Balance at End of Period
Provision for Sales Returns & Allowances
Predecessor
For the year ended December 31, 2004	$	107	$	1,360		$	—	$	(593	)	$	874
For the period of January 1, 2005 to June 9, 2005	$	874	$	78		$	—	$	(706	)	$	246
Successor
For the period of June 10, 2005 to December 31, 2005	$	246	$	160		$	—	$	(239	)	$	167
For the year ended December 31, 2006	$	167	$	1,251		$	—	$	(1,129	)	$	289
Provision for Doubtful Accounts
Predecessor
For the year ended December 31, 2004	$	777	$	849		$	—	$	(591	)	$	1,035
For the period of January 1, 2005 to June 9, 2005	$	1,035	$			$		$			$	1,035
	Balance at Beginning of Period		Charged to Costs and Expenses			Charged to Other Accounts		Deductions			Balance at End of Period
Successor
For the period of June 10, 2005 to December 31, 2005	$	1,035	$	300		$		$			$	1,335
For the year ended December 31, 2006	$	1,335	$	(254	)	$	—	$	(661	)	$	420
Valuation Reserve for Deferred Taxes
Predecessor
For the year ended December 31, 2004	$	2,300	$	(2,300	)	$	—	$	—		$	—
For the period of January 1, 2005 to June 9, 2005	$	—									$	—
Successor
For the period of June 10, 2005 to December 31, 2005	$	—									$	—
For the year ended December 31, 2006	$		$			$	—	$			$

4. ACQUISITION

On June 10, 2005, 100% of the outstanding shares of preferred and common stock of Claymont Steel, Inc. (formerly CitiSteel USA, Inc.) and subsidiary (a wholly owned subsidiary of CITIC USA Holding, Inc.) were acquired for $74,400,000 plus working capital and other adjustments by H.I.G. SteelCo, Inc., an affiliate of H.I.G. Capital, LLC, a private equity firm focused on management buyouts and recapitalizations of leading middle market companies as well as growth capital investments.

The aggregate purchase price was $105,477,000, which included the $74,400,000 paid to CITIC USA Holding, Inc., a working capital adjustment of $19,247,000 and $11,830,000 of acquisition-related costs. The following table summarizes the allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (amounts in thousands).

Current assets	$	108,517
Property, plant, and equipment		9,578
Intangible assets		7,563
Total assets acquired		125,658
Current liabilities		13,240
Deferred taxes		4,643
Accrued pension		2,298
Total liabilities assumed		20,181
Net assets acquired	$	105,477

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Intangible assets—Of the $7,563,000 of acquired intangible assets, $600,000 was assigned to the trade name which is not subject to amortization. This $600,000 was written-off in the third quarter of 2006 when the Company changed its name to Claymont Steel. The remaining $6,963,000 of acquired intangible assets relates to customer relationships and has a weighted-average useful life of approximately five years. The difference between the aggregate purchase price and the estimated fair values of the assets acquired and liabilities assumed was approximately $103,204,000. This negative goodwill was used to reduce the value of property, plant and equipment and intangible assets. Intangible asset amortization is expected to total $1,393,000 per year in 2007 through June 30, 2010. The expected future amortization charge and accumulated amortization balances for the years ended December 31 are:

	Amortization Expense	Accumulated Amortization
2007	1,393,000	3,381,000
2008	1,393,000	4,774,000
2009	1,393,000	6,167,000
2010	796,000	6,963,000

Unaudited Supplemental Pro Forma Results

The following table presents pro forma unaudited information as if the acquisition had occurred at the beginning of 2005 and 2004. The pro forma information includes adjustments for interest expense on the notes, amortization of intangible assets arising from the acquisition, depreciation expense on the basis of the acquired assets, transaction fees and management fees related to the acquisition and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates.

	Pro Forma 2005		Pro Forma 2004
Sales	$	278,370	$	239,556
Income from operations	$	75,205	$	64,978
Net income	$	31,677	$	29,258
Net earnings per common share—basic	$	2.82	$	2.60
Net earnings per common share—diluted	$	2.80	$	2.59

5. BUSINESS SEGMENT DATA

The Company operates one business segment, the production and sale of steel plates. As a result, all assets, operating revenues, operating income and net income shown in the Company’s consolidated financial statements relate to this business segment. No one customer accounts for more than 7% of operating revenue.

Net sales by geographical area are presented below (amounts in thousands):

	Successor				Predecessor
	2006		June 10 to December 31, 2005		January 1 to June 9, 2005		2004
United States	$	314,297	$	137,645	$	115,759	$	204,826
Canada		19,111		12,038		12,928		34,730
	$	333,408	$	149,683	$	128,687	$	239,556

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6. INVESTMENT SECURITIES

Investment securities available for sale at December 31, 2006 and 2005 are as follows (amounts in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
December 31, 2006:
Municipal and tax-exempt agencies obligations	$	62,616	$	—	$	—	$	62,616
Closed end funds	$	32,158	$	—	$	—	$	32,158
Total	$	94,774	$	—	$	—	$	94,774
December 31, 2005:
U.S. agency obligations maturing on March 21, 2006	$	68,317	$	—	$	—	$	68,317

Although contractual maturities of the Company’s debt securities may be greater than one year, the investments are classified as current assets in the Consolidated Balance Sheet due to the Company’s expected holding period of less than one year. The investments held on December 31, 2006 carry interest rates that are re-set on a weekly basis. The contractual maturities of the Company’s investment securities were as follows:

	2006
	Amortized Cost		Estimated Fair Value
Due in less than one year	$	32,158	$	32,158
Due after 5 years		62,616		62,616
Total investment securities	$	94,774	$	94,774

7. INVENTORIES

Inventories, net of any reserves, consist of the following (amounts in thousands):

	December 31, 2006		December 31, 2005
Raw materials	$	6,252	$	5,256
Work-in-process		9,720		10,928
Finished goods		17,182		12,635
Supplies		6,514		5,844
Parts		1,030		1,289
	$	40,698	$	35,952

8. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of the following (amounts in thousands):

	December 31, 2006			December 31, 2005
Land and land improvements	$	1,603		$	1,728
Buildings		2,928			1,892
Furniture, fixtures, and equipment		22,859			11,885
Total		27,390			15,505
Accumulated depreciation		(3,287	)		(890	)
Net property, plant, and equipment	$	24,103		$	14,615

Depreciation charged to operating expense amounted to $2,397,000, $890,000, $1,816,000 and $4,737,000 for the year ended December 31, 2006 and for the period of June 10, 2005 to December 31, 2005, January 1, 2005 to June 9, 2005 and for the year ended December 31, 2004. During 2004, the Company wrote off equipment with a net book value of $519,000.

9. LINE OF CREDIT

In conjunction with the acquisition transaction in June 2005, described in Note 4, the Company established a $70 million Bank Debt Facility with U.S. Bank National Association (“US Bank”) comprised of a $15 million Term A Loan and a $55 million maximum available revolver. The Bank Debt Facility was repaid on August 25, 2005 and replaced with a new

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$20 million revolving credit facility with US Bank under which the Company may borrow, repay and reborrow funds, as needed, subject to a total maximum amount equal to the lesser of (a) a borrowing base determined from eligible accounts receivable and eligible inventory or (b) the respective maximum available revolver amounts shown above. The revolving facility matures on August 25, 2008. Interest is payable on the first of every month at the Company’s option of U.S. Bank’s prime rate or LIBOR plus 1.75%. The interest rate is subject to increase should the Company’s excess revolving credit availability, calculated in accordance with the loan agreement, decrease below predetermined levels. There was no amount outstanding under the revolving credit facility at December 31, 2006 and 2005 and the interest rate was 8.25% and 7.25% at December 31, 2006 and 2005, respectively. The weighted average interest rate for the period of June 10, 2005 to December 31, 2005 was 6.6%. The average amount outstanding on the revolver during that period was $9,370,000. No amounts were outstanding on the revolver during 2006.

The Revolving Credit Facility contains certain financial covenants, including minimum borrowing availability and fixed charge coverage. At December 31, 2006 and 2005 the Company was in compliance with the covenants. CitiSteel PA, Inc. guaranteed payment of the revolving credit facility and letters of credit.

Prior to the acquisition transaction, the Company also maintained a revolving line of credit with a bank. The line of credit bore interest at a prime rate plus 1% (6.25% at December 31, 2004). The weighted average interest rate was 5.3% in 2004. The average amount outstanding on the line of credit in 2004 was $8,367,000.

10. LONG-TERM DEBT

In conjunction with the acquisition transaction in June 2005, the Company established a $70,000,000 Bank Debt Facility—comprised of a $15,000,000 Term A Loan and a $55 million maximum available revolver—and issued $25,253,000 of Senior Secured Notes.

On August 25, 2005 Claymont Steel, Inc. issued $172,000,000 of Senior Secured Floating Rate Notes described below. The proceeds of the Notes were used to repay all of outstanding debt, including the Senior Secured Notes, Term A Loan and the revolver referenced above. The Company also entered into a new credit agreement for a $20 million senior revolving credit described below. The balance of the proceeds was used to pay a $108,725,000 dividend on August 25, 2005 to Claymont Steel Holdings, Inc. and pay fees and expenses relating to the transaction. The Company paid $5,160,000 to an investment banking firm to underwrite the notes and charged the amount to deferred financing fees.

The Company expensed $2.9 million of deferred financing fees in August 2005 relating to the repayment of the Bank Debt Facility and the Senior Secured Notes.

The Senior Secured Floating Rate Notes due 2010—The notes mature on August 25, 2010. Interest is payable at six month LIBOR plus 7.5% semiannually on March 1 and September 1. There are no scheduled principal payments prior to the maturity date. The interest rate for the first interest payment period on March 1, 2006 is 11.6%. The Notes were issued at a 1% discount to face value. The discount is being amortized over the expected life of the Notes.

The notes contain certain financial covenants, including limitations on additional indebtedness and restricting certain defined payments. In addition, there is an Excess Cash Flow covenant that requires the Company, after the end of each fiscal year, to offer to repurchase a portion of the senior secured floating rate notes at 102% of principal plus accrued interest up to a maximum of 75% of the excess cash flow, as defined. $1,890,000 of the Notes were redeemed through the excess cash flow offer in 2006. The Company exchanged the Notes for new Notes registered with the Securities and Exchange Commission in April 2006. The new notes contain substantially the same terms as the existing notes. CitiSteel PA, Inc. guaranteed payment of the notes.

The senior secured floating rate notes are secured by a lien on substantially all the assets of the Company.

On July 6, 2006, Claymont Steel Holdings issued $75 million of Senior Secured Pay-in-Kind Notes. The proceeds were used to pay a $71.2 million dividend ($6.29 per share) to its stockholders. The notes are classified as short-term debt on the December 31, 2006 balance sheet as they were redeemed in February 2007 with proceeds from our initial public offering of common stock.

The Senior Secured Pay-in-Kind Notes mature on October 1, 2010. Interest is payable at 15% semiannually on April 1 and October 1. The Company may, at its discretion, for the first two interest payment periods pay interest by the issuance of additional Senior Secured Pay-in-Kind Notes. The Notes were issued at par. The Company paid $2,250,000 to an investment banking firm to underwrite the notes and charged the amount to deferred financing fees.

The Senior Secured Pay-in-Kind Notes contain certain covenants, including limitations on additional indebtedness and restricting certain defined payments. In addition, there is an Excess Cash Flow covenant that requires the Company, after the

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end of each fiscal year beginning in 2008, to offer to repurchase a portion of the Senior Secured Pay-in-Kind Notes at 102% of principal plus accrued interest up to a maximum of 75% of the excess cash flow, as defined. In addition, the Company must offer to purchase the Notes at 110% of principal plus accrued interest upon the completion of an initial public offering. As such, the Notes will be redeemed in February 2007.

The Senior Secured Pay-in-Kind Notes are secured by a lien on substantially all the assets of Claymont Steel Holdings, which principally consist of the capital stock of Claymont Steel.

Long-term debt at December 31, 2006 and 2005 consists of the following (amounts in thousands):

	2006			2005
Revolving Credit Facility due August 25, 2008	$	0		$	0
Secured floating rate notes, due August 25, 2010, net		170,110			172,000
Unamortized original issue discount		(1,262	)		(1,548	)
Senior Secured Pay-in-Kind Notes, due October 1, 2010, net		75,000
		243,848			170,452
Less current portion of long-term debt		75,000			0
	$	168,848		$	170,452

Future maturities of long-term debt total $75,000,000 for the year ended December 31, 2007 and $170,110,000 for the year ended December 31, 2010.

The Company incurred fees and expenses in connection with arranging the Revolving Credit Facility and the Senior Secured Floating rate Notes of $8.7 million in August 2005. This amount has been deferred and included on the statement of financial condition. The Company is amortizing the fees and expenses over the expected life of the debt. Fees and expenses associated with the exchange offer were charged to operating expense in 2006. The Company incurred fees and expenses in connection with the Senior Secured Pay-in-Kind Notes of $3.5 million in July 2006. This amount has been deferred and included on the statement of financial condition. The Company is amortizing the fees and expenses over the expected life of the debt.

11. STOCKHOLDERS’ TRANSACTIONS

Preferred Stock—The rights, preferences and dividend rates of the preferred stock are to be set by the Company’s Board of Directors. As of December 31, 2004, these rights, preferences and dividend rates have not been set.

Series B Cumulative Preferred Stock—The Company’s Board of Directors has authorized the issuance of up to a maximum of 500 shares of Series B preferred stock with a par value of $200,000 per share. Dividends are payable on a quarterly basis at a rate of 100 basis points above LIBOR (effective rate is 2.7% at December 31, 2004, 2.2% at December 31, 2003, and 2.4% at December 31, 2002) and are cumulative from the date of issue. The stock is nonvoting and redeemable at any time at the option of the Company at par value plus accumulated dividends.

At June 9, 2005, December 31, 2004 and 2003 all Series B cumulative preferred stock was held by CITIC USA Holding, Inc. and approximately $0, $9,266,789 ($55,824 per share) and $8,379,000 ($50,476 per share), respectively of cumulative undeclared dividends were in arrears. In February 2005, the Company made a payment of $9,266,789 from outstanding dividends paying all cumulative undeclared dividends at December 31, 2004. All cumulative undeclared dividends were forgiven by the CITIC USA Holding at June 9, 2005.

On June 10, 2005, in concert with the acquisition, all preferred stock was cancelled.

Common Stock—The Company had 17,566,754 and 11,316,754 shares of common stock, par value $0.01 per share, outstanding at December 31, 2006 and 2005, respectively. On September 23, 2005 a dividend of $41,375,000 ($3.66 per share) was paid by the Company to its shareholders. $276,000 of this dividend was paid to Jeff Bradley, the Company’s Chief Executive Officer, and was charged to compensation expense. On June 14, 2006, the Company paid a $69,970,000 dividend ($6.18 per share) to its stockholders. $89,000 of this dividend was paid to Jeff Bradley and charged to compensation expense. On July 12, 2006, the Company paid a $71,652,000 dividend ($6.33 per share) to its stockholders. In total for the year ended December 31, 2006, the Company paid common stock dividends of $12.51 per share to its stockholders.

Claymont Steel Inc.’s senior secured floating rate notes generally prohibit Claymont Steel, Inc. from paying dividends in excess of 25% of the cumulative consolidated net income earned during the period beginning on the first day of the first fiscal quarter after September 1, 2007 and ending on the last day of Claymont Steel Inc.’s most recent fiscal quarter ending

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prior to the date of the dividend. These agreements also permit the payment of dividends from the proceeds of equity issuances and up to $2.0 million from other sources.

Initial Public Offering—The Company effected an initial public offering of its common stock, issuing 6,250,000 primary shares at $17.00 per share, on December 18, 2006. The Company’s shares trade on the NASDAQ national market under the symbol “PLTE.” The Company received $97.6 million in net proceeds which were used to redeem the Senior Secured Pay-in-Kind Notes. The offering also included 3,755,000 of secondary shares sold by affiliates of H.I.G. Capital, LLC. Subsequent to the initial public offering the Company had 17,566,754 shares outstanding.

12. RELATED PARTY TRANSACTIONS

On June 10, 2005 the Company entered into a management agreement with H.I.G. Capital, LLC, its 42.6% stockholder. Pursuant to the term of this agreement, H.I.G. Capital, LLC provided management, consulting and financial services to the Company, subject to the supervision of the Company’s board of directors. In exchange for these services we agreed to pay H.I.G. Capital, LLC an annual management fee of $675,000. In addition to the fee, H.I.G. Capital, LLC was also entitled to additional compensation for the introduction or negotiation of any transaction not in the ordinary course of business or pursuant to which the Company acquired or disposed of any business operations. In connection with Holdings’ initial public offering in December 2006, the Company made a $3 million payment to H.I.G. in exchange for canceling any further obligations under the management agreement. The Company also made a $1,062,500 payment to H.I.G. in December 2006, as specified in the management agreement, for a transaction fee related to the initial public offering.

The Company paid $340,000 in directors’ fees to the former board of directors in connection with the acquisition.

The Company entered into a 12-month management services agreement with CITIC as part of the acquisition for the provision of services by a certain executive. The agreement calls for total payments of $551,000 plus a contingent payment of $500,000 if the Company achieves a certain level of earnings. The Company met the earnings threshold and accrued for the $500,000 payment on the December 31, 2005 balance sheet in due to seller. The Company made the year-end payment in March 2006. During the period from June 10, 2005 to December 31, 2005, the Company paid $230,000 to CITIC for services under this agreement.

During 2004, the Company paid management fees and rent expense amounting to $600,000 and $60,000 to a related party. During the period of January 1 to June 9, 2005 the Company paid no management fees. During the period of June 10 to December 31, 2005 the Company paid $737,000 to CITIC for services pursuant to a management agreement with CITIC.

13. STOCK BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share Based Payment.The Company adopted SFAS No. 123R on June 10, 2005, the Acquisition date. The Company has issued no stock-based compensation awards prior to the Acquisition date.

The Company granted Jeff Bradley, the Company’s chief executive officer, 75,451 shares of restricted stock on July 11, 2005. The shares can not be sold or transferred and are subject to forfeiture if Mr. Bradley is terminated from the Company for any reason. The restricted shares vest, and the restrictions lapse, as follows: One-half of the restricted shares vest according to the following time schedule: 25% on June 23, 2006; 25% on June 23, 2007; 25% on June 23, 2008; and, 25% on June 23, 2009. The other one-half of the shares vest on the following dates based on achieving certain EBITDA targets for each of the 12-month periods ended on each of the vesting dates: 25% on June 30, 2006; 25% on June 30, 2007; 25% on June 30, 2008; and, 25% on June 30, 2009. As of December 31, 2006, one quarter of the restricted shares vested. The fair value of the restricted shares on the date of grant was estimated to be $703,000 and was determined based on the aggregate purchase price of the Acquisition of $105,477,000. The fair value of the restricted shares is being charged to compensation expense over the four year vesting period of the restricted shares. The valuation was made by the Company contemporaneously with the granting of the restricted stock based on the opening balance sheet values.

Common stock dividend payments on Mr. Bradley’s restricted shares are subject to certain vesting provisions. Mr. Bradley received common stock dividends of $276,000 in the period of June 10, 2005 to December 31, 2005 and $89,000 in the year ended December 31, 2006. These amounts were charged to compensation expense in the period paid to Mr. Bradley. The Company withheld payment of $377,000 of declared dividends from Mr. Bradley from Holdings’ June 2006 common stock dividend and $478,000 from the July 2006 dividend. The withheld dividends were distributed to Mr. Bradley in January 2007. The withheld dividends will be charged to compensation expense over the two year vesting period beginning in July 2007.

In December 2006, the Company adopted a stock incentive plan concurrently with its initial public offering in order to encourage employees and non-employee directors to remain with the Company and to more closely align their interests with those of Holdings’ shareholders. As of December 31, 2006, awards under the program consisted of stock options and

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restricted stock units (“RSUs”). The Company currently issues the shares related to its stock incentive plan from the Company’s authorized and unissued shares of common stock. As of December 31, 2006, 450,000 shares of common stock have been authorized for this stock incentive plan.

For the year ended December 31, 2006, the Company incurred stock-based compensation expense under SFAS No. 123R of $259,000 ($158,000 after tax) in the Consolidated Statement of Earnings. The $259,000 expense was recorded in selling, general and administrative expenses and the tax benefit of $101,000 was recorded in income tax expense. No stock-based compensation expense was recorded in 2005.

Stock Options

Generally, options expire seven years from the date of grant. Options granted in 2006, vest in equal annual installments over a four-year period based on continued employment or service on the board of directors. For the year ended December 31, 2006 the fair value of options granted was $8.23. The fair value of each option award on the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:

	2006
Expected dividend yield	—
Expected stock price volatility	51	%
Weighted average risk-free interest rate	4.57
Expected life of options (years)	6.25

The expected life of the employee options was calculated using the shortcut method allowed by the provisions of SFAS No. 123R and interpreted by SAB No. 107. The expected volatility is estimated by the Company utilizing volatility statistics from peer groups and other factors. The risk-free interest rate is based on the continuous rates provided by the U.S. Treasury with a term approximating the expected life of the option. The expected dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

A summary of the Company’s stock option plan as of December 31, 2006, and changes during the year is presented as follows:

	Options	Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	0
Granted	106,465	$	17.00
Outstanding at December 31, 2006	106,465	$	17.00	7.0	$	147,968
Exercisable at December 31, 2006	0		0	0		0

As of December 31, 2006 the Company had $868,000 of total unrecognized compensation expense related to unvested stock options that will be recognized over the weighted average period of 4 years.

Restricted Stock and Restricted Stock Units (RSUs)

RSUs granted in 2006 vest in equal annual installments over a four-year period based on the continued employment or service on the board of directors. The cost of the RSUs, generally determined to be the fair market value of the shares at the date of grant, is charged to compensation expense ratably over the vesting period of the award.

A summary of the status of the Company’s RSUs, and the restricted stock granted to Mr. Bradley in July 2005, as of December 31, 2006 and 2005, and changes during the years then ended, is presented below:

	Units/Shares		Weighted Average Grant Date Fair Value (per share)		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding at June 10, 2005	0
Granted	75,451		$	9.32
Outstanding at December 31, 2005	75,451		$	9.32
Granted	82,352		$	17.00
Vested	(18,863	)	$	9.32
Outstanding at December 31, 2006	138,940		$	13.87	3.4	$	2,555,107

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For the year ended December 31, 2006, the aggregate grant date fair value of RSUs and restricted stock that vested was $175,800. As of December 31, 2006, the Company had $1,831,000 of total unrecognized compensation expense related to RSUs and restricted stock that will be recognized over the weighted average period of 3.6 years.

14. INCOME TAXES

Claymont Steel, Inc. is a wholly-owned subsidiary of Holdings and is included in Holdings’ consolidated tax returns. The predecessor company participated in a tax sharing agreement with CITIC whereby consolidated income tax expense or benefit was allocated to the predecessor company based on the proportion of the predecessor company’s taxable income or loss to CITICs’ consolidated total. CITIC was obligated to make payment to the predecessor company with respect to any tax benefit derived by CITIC from the inclusion of the predecessor company in the consolidated federal income tax return.

The income tax expense consists of the following (amounts in thousands):

			Successor			Predecessor
	2006		June 10 to December 31, 2005			January 1 to June 9, 2005		2004
Current:
Federal	$	15,885	$	9,573		$	15,082	$	16,291
State		4,478		1,861			2,369		2,589
Total current		20,363		11,434			17,451		18,880
Deferred—federal and state		395		(5,376	)		132		3,001
Total	$	20,758	$	6,058		$	17,583	$	21,881

The tax effects of temporary differences are as follows (amounts in thousands):

	December 31, 2006			December 31, 2005
Deferred tax asset—current:
Accounts receivable	$	165		$	518
Sales allowances		113			65
Employee-related costs		201			160
Accrued environmental costs		25			144
Other		291			257
Total deferred tax asset—current		795			1,144
Deferred tax liability—noncurrent:
Property and equipment		1,496			2,248
Intangible assets		(1,951	)		(2,658	)
Minimum pension liability		(461	)
Total deferred tax liability—noncurrent		(916	)		(410	)

A reconciliation of the federal statutory tax rate to the total provision for income taxes is as follows (dollar amounts in thousands):

						Successor								Predecessor
	2006					June 10 to December 31, 2005			June 10 to December 31, 2005					January 1 to June 9, 2005					2004
	Amount			%		Amount			%		Amount			%		Amount			%
Taxes computed at statutory rate	$	18,488		35		$	5,930		35		$	16,666		35.00		$	22,348		35.00
State income taxes—net of federal income tax benefit		2,946		5.58			613		3.62			1,533		3.22			1,871		2.93
Change in valuation allowance																	(2,299	)	(3.60	)
Other—net		(676	)	(1.28	)		(485	)	(2.86	)		(616	)	(1.29	)		(39	)	(0.06	)
Provision for income taxes	$	19,979		37.83		$	6,058		35.76		$	17,583		36.93		$	21,881		34.27

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15. EMPLOYEE BENEFIT PLANS

The Company has a noncontributory defined benefit pension plan which covers substantially all full-time employees. Pension benefits are based on years of service and annual earnings. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974.

Effective December 31, 2006, the Company adopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”)SFAS 158 requires recognition of the funded status of a benefit plan in the statement of financial position and recognition in other comprehensive earnings of certain gains and losses that arise during the period, but are deferred under pension accounting rules.

The Pension Protection Act of 2006 (“the Act”) was enacted on August 17, 2006. Most of its provisions will become effective in 2008. The Act significantly changes the funding requirements for single-employer defined benefit pension plans. The funding requirements will not largely be based on a plan’s calculated funded status, with faster amortization of any shortfalls or surpluses. The Act directs the U.S. Treasury Department to develop a new yield to discount pension obligations for determining the funded status of a plan when calculating the funding requirements.

The measurement dates for the following table are December 31 of each year. The change in benefit obligation and the change in plan assets for 2005 show the change for the successor company and cover the period from June 10, 2005 to December 31, 2005. The following table sets forth the plan’s status and the amounts recognized on the consolidated statement of financial position at December 31, 2006 and 2005 (amounts in thousands):

	December 31, 2006			December 31, 2005
Actuarial present value of benefit obligation, accumulated benefit obligation	$	9,898		$	9,573
Change in projected benefit obligation:
Projected benefit obligation at the beginning of the year	$	10,355		$	9,607
Service cost		651			409
Interest cost		575			366
Actuarial loss (gain)		(777	)		81
Benefits paid		(182	)		(108	)
Projected benefit obligation at the end of the year	$	10,622		$	10,355
Change in plan assets:
Fair value of plan assets at the beginning of the year	$	10,215		$	7,400
Employer contributions		0			2,304
Actual return on plan assets		1,061			619
Benefits paid		(182	)		(108	)
Fair value of plan assets at the end of the year	$	11,094		$	10,215
Net amount recognized:
Funded status	$	472		$	(140	)
Unrecognized net (gain), net of tax		(1,175	)		(146	)
Unrecognized transition obligation and prior service cost
Net amount recognized	$	(703	)	$	(286	)
Amounts recognized in the consolidated statement of financial position:
Accrued benefit cost	$	0		$	(286	)
Other comprehensive income, net of tax		(715	)
Deferred pension asset		472
Deferred tax liability		(460	)
Net amount recognized	$	(703	)	$	(286	)

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The amount recorded in other comprehensive income in 2006 relates entirely to a net gain and does not include any amounts for prior service cost or transition obligations.

The adoption of SFAS 158 did not have a material impact on the Company’s results of operations and cash flows. The following table illustrates the incremental effect of applying SFAS 158 on individual line items on the Consolidated Statement of Financial Position as of December 31, 2006:

	Before Application of SFAS No. 158			Adjustments			After Application of SFAS No. 158
Deferred pension asset	$	0		$	472		$	472
Liability for pension benefits	$	703		$	(703	)	$	0
Deferred income taxes	$	274		$	(274	)	$	0
Total liabilities	$	977		$	(977	)	$	0
Accumulated other comprehensive income	$	0		$	715		$	715
Total Stockholders’ deficit	$	(62,341	)	$	715		$	(61,626	)

The components of net periodic pension cost for the year ended December 31, 2006 and the period of June 10 to December 31, 2005, January 1 to June 9, 2005 and for the year ended December 31, 2004 are as follows (amounts in thousands):

				Successor			Predecessor
	2006			June 10 to December 31, 2005			January 1 to June 9, 2005			2004
Service cost	$	651		$	409		$	194		$	548
Interest cost		576			366			176			473
Expected return on plan assets		(809	)		(392	)		(219	)		(532	)
Amortization of transition obligation											6
Amortization of gain and loss and prior year costs								25			63
Net periodic pension cost	$	418		$	383		$	176		$	558

The estimated net gain that will be amortized from accumulated other comprehensive earnings into net period benefit cost over the next year is $5,000. No amounts for transition obligations or prior service costs are expected to be amortized.

	Successor				Predecessor
	December 31, 2006		December 31, 2005		June 9, 2005		2004
Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate	6.05	%	5.70	%	5.75	%	6.00	%
Rate of compensation increase	3.0	%	3.0	%	3.0	%	3.0	%

	December 31, 2006			December 31, 2005
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31:
Discount rate		5.70	%		5.70	%
Expected return on plan assets		8.0			8.0
Rate of compensation increase		3.0			3.0
Minimum required contribution	$	0		$	0

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Plan assets at December 31, 2006 and December 31, 2005 are as follows:

	2006		2005
Equity securities	42	%	45	%
Bonds—fixed income	40		39
Money market funds	18		16
	100	%	100	%

Investment Policy and Strategy—The policy, as established by the Pension Plan Committee, is to provide for growth of capital with a moderate level of volatility by investing assets per the allocations stated above. The assets will be reallocated quarterly to meet the above target allocations. The investment policy will be reviewed on a regular basis, under the advisement of a certified investment advisor, to determine if the policy should be changed.

Determination of Expected Long-term Rate of Return—The expected long-term rate of return for the plan’s total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation for each class. Equity securities are expected to return 10% to 12% over the long-term, while cash and fixed income are expected to return between 5% to 7%.

Expected employer contributions for the year ended December 31, 2007	$	0
Estimated future benefit payments reflecting expected future service for:
2007	$	266,000
2008		305,000
2009		335,000
2010		380,000
2011		406,000
2012–2016		3,141,000

CitiSteel USA, Inc. 401(k) Plan—The Company has a tax-deferred 401(k) savings plan which covers substantially all full-time employees. The Company’s contribution to the plan, which is computed based on a percentage of employee compensation, was approximately $210,000, $118,000, $88,000 and $212,000 for the year ended December 31, 2006 and for the periods of June 10 to December 31, 2005 and January 1 to June 9, 2005 and for the year ended December 31, 2004, respectively.

Profit Sharing Plans—The Company has executive and employee profit sharing plans. Awards are determined based on meeting certain performance measures as defined in the plans. As of December 31, 2006 and 2005 and June 9, 2005 the Company has accrued for awards amounting to $3,115,000, $2,203,000 and $1,028,000, respectively. There were no awards made under these plans in 2004.

16. EARNINGS PER SHARE

The following table represents the calculation of net earnings per common share—basic and diluted (in thousands, except earnings per share):

			Successor		Predecessor
	2006		June 10 to December 31, 2005		January 1 to June 9, 2005		2004
Weighted average common shares outstanding		11,407,770		11,241,303		1,000		1,000
Dilutive effect of outstanding restricted stock and options		68,297		75,451		—		—
Weighted average common and common equivalent shares outstanding		11,476,067		11,316,754		1,000		1,000
Net earnings per common share—basic	$	2.80	$	0.97	$	30,035	$	41,081
Net earnings per common and common equivalent share—diluted	$	2.79	$	0.96	$	30,035	$	41,081
Net income	$	31,996	$	10,885	$	30,035	$	41,969
Accrued dividends on cumulative preferred stock	$			—		—	$	(888	)
Net earnings available for common shares	$	31,996	$	10,885	$	30,035	$	41,081

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17. COMMITMENTS AND CONTINGENCIES

Service Agreements—The Company maintains an agreement with an independent contractor to perform surface conditioning for slabs produced by the Company. Under the agreement, the Company is required to make minimum monthly amounts for the availability of the equipment as well as additional monthly payments depending on the actual net tonnage of slabs conditioned. The minimum monthly payments are subject to semi-annual cost adjustments based on labor and material factors. The initial term of the agreement was five years, commencing February 1991. Since then, the agreement has been renewed in 1996, 2001, 2003 and more recently, in 2004 with an expiration date of July 31, 2007. Monthly payments made by the Company approximated $323,000, $182,000, $127,000 and $305,000 for the years ended December 31, 2006 and for the periods of June 10 to December 31, 2005, January 1 to June 9, 2005 and the year ended December 31, 2004, respectively. Additional payments relating to the actual net tonnage of slabs conditioned amounted to approximately $1,268,000, $727,000, $556,000 and $1,434,000 for the year ended December 31, 2006 and for the periods of June 10 to December 31, 2005, January 1 to June 9, 2005 and the year ended December 31, 2004, respectively. As a part of the service agreement, certain equipment has been committed for use by the Company. The Company is accounting for this component of the agreement as an operating lease. The estimated future minimum payments under the service agreement are approximately $323,000 and $323,000 in 2007 and 2008, respectively.

The Company also has an agreement with an outside service company to provide vaporized liquid products to the Company for the ten-year period that ended January 31, 2003. The agreement has been extended through January 31, 2008. Under the terms of the agreement, the Company is required to pay monthly amounts based on the total standard cubic foot of product provided by the service company. The agreement is subject to price adjustments. Payments made by the Company under the agreement approximated $4,850,000, $1,778,000, $1,398,000 and $3,393,000 for the year ended December 31, 2006 and for the periods of June 10 to December 31, 2005, January 1 to June 9, 2005 and for the year ended December 31, 2004, respectively.

Employment Contracts—The Company has employment contract with several key executives that specify minimum annual salaries and provide for severance and other benefits upon termination.

Litigation and Environmental—In October 2006, the Delaware Department of Natural Resources and Environmental Control (DNREC) issued a Notice of Conciliation and Secretary’s Order requiring the Claymont Steel to fund an independent study to determine engineering and operational options to control dust and other particulate emissions. The DNREC plans to make a determination on further dust control requirements upon review of the study in May 2007. Accordingly, the outcome cannot be determined at this time.

In 2006, Claymont Steel performed an emissions test that indicated that mercury emissions were higher than previously calculated by it using information supplied by the United States Environmental Protection Agency. In November 2006, DNREC issued a Secretary’s Order, which requires Claymont Steel to monitor and reduce mercury emissions. The Order requires Claymont Steel to implement a quarterly testing program and to develop a plan to reduce the mercury contained in the feed to the electric arc furnace. Mercury-containing scrap is an industry-wide problem. Automobile scrap may contain mercury switches that have not been removed during the recycling process, and thus mercury can be emitted when Claymont Steel smelts recycled scrap steel products, including used automobiles, to produce custom steel plate products. Claymont Steel has already taken steps to reduce mercury levels in the feed—it is no longer using municipal solid waste scrap, is partially funding a rational mercury switch removal program through an industry trade association and is increasing its purchases of automobile-free scrap. The Order also requires Claymont Steel to elect one of the alternatives set forth in the Order for reducing mercury emissions and notify DNREC of the alternative selected by January 31, 2007. The alternatives include source reduction of mercury in the scrap, installation of a carbon injection system or alternative emission control system, some combination of source reduction and emission controls, or ceasing operation of the electric arc furnace. On January 30, 2007, Claymont Steel notified DRNEC that it elected to implement a combination of source reduction and emission controls. The Order requires Claymont Steel to have the selected alternative operational by December 31, 2008. At this time, Claymont Steel cannot estimate the cost of any corrective measures. If Claymont Steel were ultimately required to install and operate a carbon injection system, it does not believe the associated costs would have a material effect on its results of operations or financial condition.

Claymont Steel is also working with DNREC to investigate potential PCB and PAH contamination in the active scrap yard area. An investigative work plan was submitted in late October for some additional sampling, and Claymont Steel is awaiting review comments from DNREC. Claymont Steel believes any requirements for remediation will not have a material effect on the Company’s financial statements.

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The Company recorded a $550,000 asset retirement reserve on the December 31, 2005 balance sheet to cover replacement and remediation of certain assets.

As part of the acquisition of the Company from CITIC USA Holding, Inc. (“CITIC Holding”) and pursuant to the Purchase Agreement, the Company is required to pay CITIC Holding monies subsequent to the closing date related to a working capital adjustment and the settlement of a specifically calculated tax liability. The parties agreed to settle the working capital adjustment for $14.9 million. The Company paid CITIC Holding $8 million in June 2005 and $6.9 million in August 2005 to settle the working capital adjustment. The Company estimated the tax liability to be $4.3 million and has recorded the liability on its balance sheet as of December 31, 2005. On September 6, 2006, the CITIC litigation regarding the working capital adjustment in connection with the acquisition was settled for $6.2 million. The difference between the $6.2 million settlement and the $4.3 million reserve was charged to expense in September 2006.

In addition, certain claims and suits have been filed or are pending against the Company. In the opinion of management, all matters are adequately covered by insurance or, if not covered, involve such amounts, which would not have a material effect on the consolidated financial position or results of operations of the Company if disposed of unfavorably.

18. STOCK SPLIT

The Company’s board of directors authorized and the Company effected an 11.241303 for 1 stock split (in the form of a 10.241303 for 1 share stock dividend) on December 5, 2006. All references to shares of common stock for the successor company in these consolidated financial statements and notes to consolidated financial statements have been restated to reflect the effect of this stock split on a retroactive basis as if it had occurred on June 10, 2005.

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per share amounts)	First Quarter		Second Quarter Successor			Second Quarter Predecessor		Third Quarter		Fourth Quarter
2006:
Revenue	$	81,340	$	82,382			NA	$	83,984	$	85,702
Gross profit		25,698		27,767			NA		24,850		21,923
Operating income		22,948		24,324			NA		18,113		14,281
Net earnings		11,384		11,841			NA		6,387		2,384
Basic EPS	$	1.00	$	1.04				$	0.56	$	0.20
Diluted EPS	$	1.00	$	1.04				$	0.55	$	0.20
2005:
Revenue	$	72,269	$	14,438		$	56,418	$	60,878	$	74,367
Gross profit		25,847		(1,151	)		24,078		13,526		23,172
Operating income		24,549		(3,217	)		22,841		10,921		19,802
Net earnings		15,714		(2,191	)		14,321		3,497		9,579
Basic EPS	$	15,714.00	($	0.19	)	$	14,321.00	$	0.31	$	0.85
Diluted EPS	$	15,714.00	($	0.19	)	$	14,321.00	$	0.31	$	0.84

Results for the first quarter of 2005 is for the predecessor company, results for the second quarter 2005 have been separated between the predecessor company—for the period of April 1 to June 9, 2005—and the successor company—for the period of June 10 to July 1, 2005. Results for the third quarter 2005 and all subsequent quarters are for the successor company.

Net earnings for the first quarter of 2005 include $2.3 million of pre-tax charges related to a two-week planned shut down of the plate mill for scheduled maintenance.

Net earnings for the third quarter of 2006 include $2.0 million of pre-tax charges related to the settlement of litigation with the Company’s former owner and $0.7 million of pre-tax charges related to the write-off of the Company’s prior trade name.

Net earnings for the fourth quarter of 2006 include $3.0 million of pre-tax charges related to the fee paid to H.I.G. Capital to terminate the management agreement and $0.8 million of tax expense related to the recognition of a certain state tax liability.

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Net earnings for the successor company’s second quarter 2005 include $1.5 million of pre-tax charges related to a transaction fee paid to H.I.G. Capital and $5.3 million of pre-tax charges related to the write-off of the purchase accounting write-up of inventory on the opening balance sheet to net realizable value.

Net earnings for the third quarter 2005 include $8.7 million of pre-tax charges related to the write-off of the purchase accounting write-up of inventory on the opening balance sheet to net realizable value.

20. SUBSEQUENT EVENTS

In February 2007, Claymont Steel issued $105 million of new senior notes, due in 2015, bearing interest at 8.875%. The terms of the notes require Claymont Steel to register the notes with the Securities and Exchange Commission through an exchange offer within 180 days of the issuance date. In addition, Claymont Steel replaced its existing bank debt facility with an $80 million senior secured revolving credit facility, including a $60 million revolving credit facility, with a $10 million letter of credit sub-facility, and a $20 million term loan. Proceeds of the note issuance and the senior secured revolving credit facility were used to redeem the existing floating rate notes.

In February 2007, Holdings used proceeds from its initial public offering to redeem its pay-in-kind notes.

21. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

In July 2007, management determined that the classification of debt between short-term and long-term included in the previously filed consolidated financial statements needed to be restated. In the previous consolidated balance sheet, the Company classified its senior secured pay-in-kind notes as long-term debt. Because these notes were called for redemption in December 2006 and subsequently redeemed in February 2007 with proceeds from our initial public offering of common stock, the Company is restating the December 31, 2006 consolidated balance sheet to classify the notes as short-term debt. The restatement does not have any effect on net income, cash flows or liquidity. A summary of the effects of the restatement is as follows:

	December 31, 2006
	As Previously Reported		As Restated
Long-Term Debt	$	243,848	$	243,848
Current portion of long-term debt				75,000
Net long-term debt	$	243,848	$	168,848

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PART IV

Item 15. Exhibits, Financial Statements, Financial Statement Schedule, and Reports on Form 8-K

(a) (3) Exhibits.

Reference is made to the Index to Exhibits on Page 44.

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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 this 23rd day of July, 2007.

By:	/S/    JEFF BRADLEY
	Jeff Bradley Chief Executive Officer and Director (Principal Executive Officer)

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the Annual Report on Form 10-K of Claymont Steel Holdings, Inc. filed with the Commission on April 2, 2007)
3.2	Amended and Restated By-laws (previously filed as Exhibit 3.2 to the Annual Report on Form 10-K of Claymont Steel Holdings, Inc. filed with the Commission on April 2, 2007)
10.1	Employment Agreement between Jeff Bradley and H.I.G. SteelCo Holdings, Inc. (previously filed as Exhibit 10.8 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-131812-01) of Claymont Steel, Inc. filed with the Commission on April 21, 2006)
10.2	Restricted Shares Agreement between Jeff Bradley and H.I.G. SteelCo Holdings, Inc. (previously filed as Exhibit 10.9 to Amendment No 1 to Registration Statement on Form S-4 (File No. 333-131812-01) of Claymont Steel, Inc. filed with the Commission on April 21, 2006)
10.3	Tax Sharing Agreement, dated July 6, 2006 among CitiSteel USA Holdings, Inc., CitiSteel USA, Inc. and CitiSteel PA, Inc. (previously filed as Exhibit 4.6 to Registration Statement on Form S-1 (File No. 333-136352) of Claymont Steel Holdings, Inc. filed with the Commission on August 7, 2006)
10.4	Claymont Steel Holdings, Inc. 2006 Stock Incentive Plan (previously filed as Exhibit 4.6 to Amendment No. 3 to Registration Statement on Form S-1 (File No. 333-136352) of Claymont Steel Holdings, Inc. filed with the Commission on November 29, 2006)
14.1	Code of Conduct (previously filed as Exhibit 14.1 to the Annual Report on Form 10-K of Claymont Steel Holdings, Inc. filed with the Commission on April 2, 2007)
21.1	List of subsidiaries of the Company (previously filed as Exhibit 21.1 to the Annual Report on Form 10-K of Claymont Steel Holdings, Inc. filed with the Commission on April 2, 2007)
23.1†	Consent of Crowe Chizek and Company LLC
31.1†	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
31.2†	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
32.1†	Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer and Chief Financial Officer)

† Filed herewith. All other exhibits previously filed

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