.
.
.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2003.
REGISTRATION NO. 333-110951 REGISTRATION NO. 333-110957
================================================================= =================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 WASHINGTON, D.C. 20549
------------------------------------------ ------------------------------------------
AMENDMENT NO. 1 AMENDMENT NO. 1
TO TO
FORM F-10 FORM F-4
REGISTRATION STATEMENT UNDER REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 THE SECURITIES ACT OF 1933
------------------------------------------ ------------------------------------------
GERDAU AMERISTEEL CORPORATION GUSAP PARTNERS
(Exact name of Registrant as specified in its charter) AND THE SUBSIDIARY GUARANTORS LISTED ON THE TABLE OF ADDITIONAL
REGISTRANTS
(Exact name of Registrant as specified in its charter)
ONTARIO 3312 59-792436 SEE TABLE 3312 SEE TABLE
- ---------------------------------------------------------------- ---------------------------------------------------------------
(State or other (Primary Standard (I.R.S. Employer (State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification jurisdiction of Industrial Identification
incorporation or Classification Number (if applicable)) incorporation or Classification Number)
organization) Code Number organization) Code Number)
(if applicable))
HOPKINS STREET SOUTH
WHITBY, ONTARIO
L1N 5T1 SEE TABLE
(905) 668-3535
(Address and telephone number of Registrant's principal (Address, including zip code, and telephone number, including
executive offices) area code, of each Registrant's principal executive offices)
------------------------------------------ ------------------------------------------
TOM J. LANDA, CHIEF FINANCIAL OFFICER TOM J. LANDA, CHIEF FINANCIAL OFFICER
C/O GERDAU AMERISTEEL US INC. C/O GERDAU AMERISTEEL US INC.
5100 WEST LEMON STREET, SUITE 312 5100 WEST LEMON STREET, SUITE 312
TAMPA, FLORIDA TAMPA, FLORIDA
UNITED STATES 33609 UNITED STATES 33609
(813) 286-8383 (813) 286-8383
(Name, address (including zip code) and telephone number (Name, address, including zip code, and telephone number,
(including area code) of agent for service in the United States) including area code, of agent of service for each Registrant)
------------------------------------------ ------------------------------------------
COPY TO: COPY TO:
ANDREW J. BECK, ESQ. ANDREW J. BECK, ESQ.
TORYS LLP TORYS LLP
237 PARK AVENUE 237 PARK AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10017
(212) 880-6000 (212) 880-6000
------------------------------------------ ------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
The exchange will occur as soon as practicable after this SECURITIES TO THE PUBLIC:
Registration Statement becomes effective. The exchange will occur as soon as practicable after this
Registration Statement becomes effective.
PROVINCE OF ONTARIO, CANADA
(Principal jurisdiction regulating this offering)
------------------------------------------ ------------------------------------------
It is proposed that this filing shall become effective (check If this Form is filed to register additional securities for an
appropriate box below): offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
A. [ ] upon filing with the Securities and Exchange Commission, for the same offering. [ ]
pursuant to Rule 467(a) (if in connection with an offering
being made contemporaneously in the United States and Canada). If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box
B. [X] at some future date (check appropriate box below) and list the Securities Act registration statement number of the
1. [ ] pursuant to Rule 467(b) on (date) at (time) (designate earlier effective registration statement for the same offering.
a time not sooner than 7 calendar days after filing). [ ]
2. [ ] pursuant to Rule 467(b) on (date) at (time) THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON
(designate a time 7 calendar days or sooner after filing) SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
because the securities regulatory authority in the review DATE UNTIL THE CO-REGISTRANTS SHALL FILE A FURTHER AMENDMENT
jurisdiction has issued a receipt or notification of WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
clearance on (date). THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
3. [X] pursuant to Rule 467(b) as soon as practicable after SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
notification of the Securities and Exchange Commission by EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a) OF THE
the registrants or the Canadian securities regulatory SECURITIES ACT OF 1933, MAY DETERMINE.
authority of the review jurisdiction that a receipt or
notification of clearance has been issued with respect -----------------------------------------
hereto.
TABLE OF ADDITIONAL REGISTRANTS
4. [ ] after the filing of the next amendment to this Form
(if preliminary material is being filed). The following subsidiaries of Gerdau Ameristeel Corporation have
fully and unconditionally guaranteed the 10 3/8% Senior Notes due
If any of the securities being registered on this form are to be 2011 of Gerdau Ameristeel Corporation and GUSAP Partners and are
offered on a delayed or continuous basis pursuant to the home included in this Form F-4 Registration Statement as registrants.
jurisdiction's shelf prospectus offering procedures, check the
following box. [ ]
STATE OR
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH EXACT NAME OF OTHER I.R.S.
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE ADDITIONAL JURISDICTION ADDRESS AND EMPLOYER
UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE AS REGISTRANT AS OF INCOR- TELEPHONE NUMBER IDENTI-
PROVIDED IN RULE 467 UNDER THE SECURITIES ACT OF 1933 OR ON SUCH SPECIFIED IN ITS PORATION OR OF PRINCIPAL FICATION
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT CHARTER(1) ORGANIZATION EXECUTIVE OFFICES NUMBER
TO SECTION 8(a) OF THE SECURITIES ACT OF 1933, MAY DETERMINE. ---------------- ------------ ------------------- ----------
GUSAP Partners Delaware c/o Corporation 51-0397010
------------------------------------------ Trust Company
1209 Orange Street
Wilmington,
Delaware 19801
(813) 286-8383
-----------------------------------------------------------------
PASUG LLC Delaware c/o Corporation Not
Trust Company Applicable
1209 Orange Street
Wilmington,
Delaware 19801
(813) 286-8383
-----------------------------------------------------------------
Gerdau Delaware 1013 Centre Road 22-2137967
Ameristeel Wilmington,
Sayreville Inc. Delaware 19805
(732) 721-6600
-----------------------------------------------------------------
Gerdau New Jersey c/o Co-Steel 22-2179712
Ameristeel Raritan Inc.
Perth Amboy Inc. 225 Elm Street
P.O. Box 309
Perth Amboy,
New Jersey 08862
(732) 442-1600
-----------------------------------------------------------------
Gerdau Delaware 100 West Tenth 16-1155094
Ameristeel Street
Lake Wilmington,
Ontario Inc. Delaware 19801
(813) 286-8383
-----------------------------------------------------------------
Porter Bros. North Dakota 314 East Thayer 45-0440850
Corporation Avenue
Bismark, North
Dakota 58501
(701) 223-0339
-----------------------------------------------------------------
MFT Acquisition, Delaware Lexis Document 62-1830380
Corp. Services Inc.
30 Old Rudnick
Lane, Suite 100
Dover,
Delaware 19904
(813) 286-8383
-----------------------------------------------------------------
Gerdau Saskatchewan Bank of Montreal Not
Ameristeel Building Applicable
MRM Special 700-2103
Sections Inc. 11th Avenue
Regina,
Saskatchewan
S4P 4G1 Canada
(204) 482-3241
-----------------------------------------------------------------
1062316 Ontario Ontario 1801 Hopkins Not
Limited Street South Applicable
Whitby, Ontario
L1N 5T1 Canada
(905) 668-3535
-----------------------------------------------------------------
Co-Steel Benefit Ontario 1801 Hopkins Not
Plans Inc. Street South Applicable
Whitby, Ontario
L1N 5T1 Canada
(905) 668-3535
-----------------------------------------------------------------
1300554 Ontario Ontario 1801 Hopkins Not
Limited Street South Applicable
Whitby, Ontario
L1N 5T1 Canada
(905) 668-3535
-----------------------------------------------------------------
1551533 Ontario Ontario 1801 Hopkins Not
Limited Street South Applicable
Whitby, Ontario
L1N 5T1 Canada
(905) 668-3535
-----------------------------------------------------------------
3038482 Nova Nova Scotia 1100-1959 Upper Not
Scotia Company Water Street Applicable
Halifax,
Nova Scotia
B3J 3E5 Canada
(902) 421-6262
-----------------------------------------------------------------
Gerdau USA Inc. Delaware c/o Corporation 51-0394818
Trust Company
1209 Orange Street
Wilmington,
Delaware 19801
(813) 286-8383
-----------------------------------------------------------------
Gerdau Florida 5100 West Lemon 59-0792436
Ameristeel Street,
US Inc. Suite 312
Tampa, Florida
33609
(813) 286-8383
-----------------------------------------------------------------
Co-Steel C.S.M. Delaware c/o Corporation 51-0352794
Corp. Trust Company
1209 Orange Street
Wilmington,
Delaware 19801
(813) 286-8383
-----------------------------------------------------------------
Raritan River New Jersey 28 West State 22-2280490
Urban Street
Renewal Corp. Trenton, New
Jersey 08608
(732) 721-6600
-----------------------------------------------------------------
Co-Steel Benefit Delaware c/o United 22-2137967
Plans USA Inc. Corporate
Services, Inc.
15 East North
Street Dover,
Delaware 19901
(813) 286-8383
-----------------------------------------------------------------
N.J.S.C. New Jersey 61-67 Main Street, Not
Investment Sayreville, Applicable
Co., Inc. New Jersey 08872
(732) 721-6600
-----------------------------------------------------------------
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
PROSPECTUS
OFFER TO EXCHANGE $405 MILLION 10 3/8% SENIOR NOTES DUE 2011 (THE "EXISTING
NOTES") FOR $405 MILLION 10 3/8% SENIOR NOTES DUE 2011 (THE "EXCHANGE NOTES"),
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OF
(GERDAU AMERISTEEL LOGO)
GERDAU AMERISTEEL CORPORATION
AND
GUSAP PARTNERS
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JANUARY 23, 2004 (THE "EXPIRATION DATE"), UNLESS
EXTENDED.
------------------------
Terms of the exchange offer:
- The Exchange Notes are being registered with the Securities and Exchange
Commission (the "SEC") and are being offered in exchange for the
Existing Notes that were previously issued in an offering exempt from
the SEC's registration requirements. The terms and conditions of the
exchange offer (the "Exchange Offer") are summarized below and more
fully described in this prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal").
- Gerdau Ameristeel Corporation (the "Company") and GUSAP Partners
(together with the Company, the "Issuers") will exchange all Existing
Notes that are validly tendered and not withdrawn prior to the
Expiration Date.
- You may withdraw tenders of Existing Notes at any time prior to the
Expiration Date.
- We believe that the exchange of Existing Notes will not be a taxable
event for U.S. or Canadian federal income tax purposes, but you should
see "Certain United States Federal Tax Considerations", on page 164, and
"Certain Canadian Federal Income Tax Considerations", on page 168, for
more information.
- We will not receive any proceeds from the Exchange Offer.
- The terms of the Exchange Notes are substantially identical to the
Existing Notes, except that the Exchange Notes are registered under the
Securities Act and the transfer restrictions and registration rights
applicable to the Existing Notes do not apply to the Exchange Notes.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 26 FOR A DISCUSSION OF THE RISKS THAT
SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR EXISTING NOTES. OUR
EARNINGS COVERAGE RATIO FOR THE TWELVE MONTH PERIOD ENDED SEPTEMBER 30, 2003 IS
LESS THAN 1:1. SEE "CALCULATION OF EARNINGS COVERAGE".
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
The Company is permitted to make this offering under a multijurisdictional
disclosure system adopted by the United States and to prepare this prospectus in
accordance with the disclosure requirements of Canada. Prospective investors
should be aware that such requirements are different from those of the United
States. Financial statements included or incorporated herein have been prepared
in accordance with Canadian generally accepted accounting principles, and may be
subject to Canadian auditing and auditor independence standards, and thus may
not be comparable to financial statements of United States companies.
Prospective investors should be aware that the acquisition of the
securities described herein may have tax consequences both in the United States
and in Canada. Such consequences for investors who are resident in, or citizens
of, the United States may not be described fully herein.
The enforcement by investors of civil liabilities under the federal
securities laws may be affected adversely by the fact that the Company is
incorporated under the laws of Canada, that some or all of the underwriters or
experts named in the registration statement may be residents of Canada, and that
all or a substantial portion of the assets of the Company and said persons may
be located outside the United States.
------------------------
The date of this prospectus is December 18, 2003.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
--------
CERTAIN REFERENCES...................... 2
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS............ 4
EXCHANGE RATE INFORMATION............... 6
MARKET AND INDUSTRY DATA................ 6
DOCUMENTS INCORPORATED BY REFERENCE..... 7
INFORMATION ABOUT GUSAP PARTNERS........ 8
PROSPECTUS SUMMARY...................... 9
RISK FACTORS............................ 26
THE REFINANCING......................... 42
USE OF PROCEEDS......................... 43
CALCULATION OF EARNINGS COVERAGE........ 43
CAPITALIZATION.......................... 44
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA........... 45
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA........................ 46
SELECTED CONSOLIDATED FINANCIAL DATA.... 54
</Table>
<Table>
<Caption>
PAGE NO.
--------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 61
BUSINESS................................ 83
MANAGEMENT AND DIRECTORS................ 99
DESCRIPTION OF OTHER INDEBTEDNESS....... 108
THE EXCHANGE OFFER...................... 110
DESCRIPTION OF NOTES.................... 118
BOOK-ENTRY SETTLEMENT AND CLEARANCE..... 162
CERTAIN UNITED STATES AND CANADIAN TAX
CONSIDERATIONS........................ 164
CERTAIN ERISA CONSIDERATIONS............ 170
PLAN OF DISTRIBUTION.................... 172
LEGAL MATTERS........................... 172
AUDITORS, TRANSFER AGENT AND
REGISTRAR............................. 172
EXPERTS................................. 173
DOCUMENTS FILED AS PART OF THE
REGISTRATION STATEMENT................ 173
INDEX TO FINANCIAL STATEMENTS........... F-1
</Table>
CERTAIN REFERENCES
In this prospectus, unless the context otherwise requires, "Gerdau
Ameristeel" refers to Gerdau Ameristeel Corporation, and "we", "us", "our" and
the "Company" refer to Gerdau Ameristeel, its subsidiaries, including GUSAP
Partners, and our 50%-owned joint ventures; "initial purchasers" refers to the
J.P. Morgan Securities Inc., Banc of America Securities LLC and CIBC World
Markets Corp.; and "our subsidiaries" or "subsidiaries" refers to subsidiaries
of Gerdau Ameristeel Corporation, including GUSAP Partners. "Subsidiary
Guarantors" refers to Co-Steel Benefit Plans Inc., Co-Steel Benefit Plans USA
Inc., Co-Steel C.S.M. Corp., Gerdau Ameristeel Lake Ontario Inc., Gerdau
Ameristeel MRM Special Sections Inc., Gerdau Ameristeel Perth Amboy Inc., Gerdau
Ameristeel Sayreville Inc., Gerdau Ameristeel US Inc., Gerdau USA Inc., MFT
Acquisition, Corp., N.J.S.C. Investment Co., Inc., PASUG LLC, Proter Bros.
Corporation, Raritan River Urban Renewal Corporation, 1062316 Ontario Limited,
1300554 Ontario Limited, 1551533 Ontario Limited, 3038482 Nova Scotia Company,
and any Restricted Subsidiary created or acquired by the Company after the Issue
Date, that is required to issue a Subsidiary Guarantee or that elects to issue a
Subsidiary Guarantee. "Subsidiary Guarantees" refers to the guarantees issued
pursuant to the Exchange Offer by each of the Subsidiary Guarantors. "Notes"
refers to the Existing Notes and the Exchange Notes, collectively. "Gallatin"
and "Gallatin Steel" refer to our 50%-owned joint venture Gallatin Steel
Company. In addition, "$" and "dollars" refer to U.S. dollars; and "Cdn$" refers
to Canadian dollars.
2
On October 23, 2002, Gerdau S.A. combined its North American operations,
referred to in some places in this prospectus as Gerdau North America, with
Co-Steel Inc. to form Gerdau Ameristeel Corporation. Gerdau North America's
operations included: our mills in Cambridge, Ontario; Cartersville, Georgia;
Charlotte, North Carolina; Jackson, Tennessee; Jacksonville, Florida; Knoxville,
Tennessee; and Selkirk, Manitoba; our downstream operations (including two joint
ventures); and a portion of our recycling facilities. Co-Steel's operations
included: our mills in Perth Amboy, New Jersey; Sayreville, New Jersey; and
Whitby, Ontario; our Gallatin Steel Company joint venture; and a portion of our
recycling operations. Our historical financial results are the financial results
for Gerdau North America, the predecessor company for accounting purposes, with
the results of the former Co-Steel, including the Gallatin Steel Company, added
for the period since October 23, 2002. This accounting treatment results from
the use of the reverse-take-over method of purchase accounting. This method is
appropriate because the controlling shareholder of Gerdau North America became
the owner of more than 50% of the voting shares of the combined entity,
Co-Steel, renamed Gerdau Ameristeel, on a fully-diluted basis following the
transaction. We have included in this prospectus historical financial
information for Co-Steel to allow you to review its financial results prior to
October 23, 2002. We have also included in this prospectus pro forma information
which gives effect to the combination of Gerdau North America and Co-Steel, the
acquisition of all shares of our subsidiary AmeriSteel Corporation not
previously owned by us, and the refinancing described on page 42, as if those
transactions had taken place on January 1, 2002. We have presented this
information because we believe it is informative disclosure with respect to our
operations. However, this pro forma information does not purport to represent
what actual operating results would have been during those periods, or to
project what our future results will be in any future periods.
Our financial information, as well as the financial information for
Co-Steel, is prepared in accordance with Canadian generally accepted accounting
principles, referred to as Canadian GAAP. Canadian GAAP differs from U.S.
generally accepted accounting principles, referred to as U.S. GAAP, in several
respects. The material differences between Canadian GAAP and U.S. GAAP are
described in note 21 to our consolidated financial statements and note 10 to our
unaudited consolidated financial statements for the nine months ended September
30, 2002 and 2003 included elsewhere in this prospectus and under the heading
"Management's discussion and analysis of financial condition and results of
operations -- Gerdau Ameristeel Corporation -- Material differences between
Canadian GAAP and U.S. GAAP". For Co-Steel, the material differences between
Canadian GAAP and U.S. GAAP are described in note 17 to the financial statements
of Co-Steel and note 10 to the unaudited financial statements for Co-Steel for
the nine months ended September 30, 2001 and 2002 included elsewhere in this
prospectus. One significant difference is that under Canadian GAAP, our three
50%-owned joint ventures (Gallatin Steel Company, which was a Co-Steel joint
venture, and Bradley Steel Processors Inc. and SSS/MRM Guide Rail Inc., which
were Gerdau North America joint ventures) are proportionately consolidated
(except in the U.S. GAAP financial information presented in this prospectus),
which means that 50% of individual items such as assets, net sales, cost of
sales, interest, depreciation and amortization are included in our results. In
addition, to be consistent with the presentation of our financial information,
information on tons shipped and other production information in this prospectus
includes our 50% share of the joint ventures' operations. Information on net
sales and tons shipped only includes net sales or tons shipped to third parties.
In this prospectus, "EBITDA" is net income plus interest, taxes,
depreciation and amortization, minority interest and other (gain) loss. EBITDA
does not represent and should not be considered as an alternative to net income
or cash flow from operations, as determined by generally accepted accounting
principles, and our calculations thereof may not be comparable to that reported
by other companies. EBITDA is included in this prospectus because it is a
measure we use to assess our liquidity position and because certain covenants in
our borrowing arrangements are tied to similar measures. We also believe that it
is widely accepted that EBITDA provides useful information regarding a company's
ability to service and/or incur indebtedness. This belief is based on our
negotiations with our lenders who have indicated that the amount of indebtedness
we will be permitted to incur will be based, in part, on our EBITDA. EBITDA does
not take into account our working capital requirements, debt service
requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available for discretionary use.
Canadian GAAP EBITDA is higher than U.S. GAAP EBITDA because of the
difference in the accounting for joint ventures. In particular, under both U.S.
GAAP and Canadian GAAP, net income (loss), which is the starting point for
calculating EBITDA, includes our 50% share of the net income of our joint
ventures; however, we add the interest, depreciation and amortization from the
joint ventures to net income (loss) under Canadian GAAP, but not under U.S.
GAAP.
3
The information set out in relation to sections of this prospectus
describing clearing arrangements, including the section entitled "Book-Entry
Settlement and Clearance," is subject to any change in or reinterpretation of
the rules, regulations and procedures of Euroclear, Clearstream Banking or The
Depository Trust Company (together, the "clearing systems") currently in effect.
While the Issuers and the Subsidiary Guarantors accept responsibility for the
accurate summarization of such information and data, they accept no further
responsibility in respect of such information. The Issuers and the Subsidiary
Guarantors will have no responsibility or liability for any aspect of the
records relating to, or payments made on account of, book-entry interests held
through the facilities of a clearing system or for maintaining, suspending or
removing any records relating to such book-entry interests.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Existing Notes where
such Exchange Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. Each of the Issuers and
the Subsidiary Guarantors have agreed that, starting on the Expiration Date and
ending on the close of 180 days after the Expiration Date, it will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution".
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some statements included and incorporated by reference in this prospectus
constitute forward-looking statements. The words "anticipate," "intend,"
"believe," "estimate," "plan," "seek," "project," "expect," "may," "will," or
"should" and similar expressions, as they relate to us or our management, are
intended to operate as "forward-looking statements". Such forward-looking
statements may also be included in various filings that we make with the SEC.
These forward-looking statements are not historical facts but reflect our
current expectations concerning future results and events. While we always
intend to express our best judgment when we make statements about what we
believe will occur in the future, and although we base these statements on
assumptions that we believe to be reasonable when made, these forward-looking
statements are not a guarantee of performance, and you should not place undue
reliance on such statements. Forward-looking statements are subject to many
uncertainties and other variable circumstances, many of which are outside of our
control, that could cause our actual results and experience to differ materially
from those we thought would occur.
The following listing represents some, but not necessarily all, of the
factors that may cause actual results to differ from those anticipated or
predicted:
- the highly competitive nature of the global steel industry;
- our level of indebtedness;
- the substantial capital investment and similar expenditures required in
our business;
- steel imports;
- changes in market supply and demand for steel;
- increases in the cost of steel scrap, energy and other raw materials;
- joint ventures that we do not control;
- the cost of compliance with environmental laws;
- our ability to fund our pension plans;
- our ability to renegotiate collective bargaining agreements and avoid
labor disruptions;
- our ability to successfully integrate our operations after the
combination of Gerdau North America and Co-Steel;
- adverse currency fluctuations;
- unexpected equipment failures and plant interruptions or outages;
4
- the accidental melting of radioactive scrap metal;
- competition from substitute products;
- goodwill impairment;
- our participation in consolidation in the industry;
- interest rate risk;
- the loss of key employees; and
- the impact of having a controlling shareholder.
We also believe that you should read the many factors described in "Risk
Factors" immediately following the "Prospectus Summary" to better understand the
risks and uncertainties inherent in our business and underlying any
forward-looking statements.
Any forward-looking statements which we make in this prospectus speak only
as of the date of such statement, and we undertake no ongoing obligation to
update such statements. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of future
performance, unless expressed as such, and should only be viewed as historical
data. All subsequent written or oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained in this prospectus.
5
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the high and low
exchange rates for U.S. $1.00 expressed in Canadian dollars, the average of
these exchange rates on the last day of each month within each period presented,
and the exchange rate at the end of that period, and for the months indicated,
the high and low exchange rates for U.S. $1.00 expressed in Canadian dollars, in
each case based upon the noon buying rate in New York City for cable transfers
in foreign currencies as announced by the U.S. Federal Reserve Bank of New York.
These rates are presented for information purposes and are not the same as the
rates that are used for purposes of translating Canadian dollars into U.S.
dollars in our financial statements.
<Table>
<Caption>
HIGH LOW AVERAGE PERIOD END
------- ------- ------- ----------
(Canadian dollars)
Year ended December 31,
1998.................................................. $1.5770 $1.4075 $1.4894 $1.5375
1999.................................................. 1.5302 1.4440 1.4827 1.4440
2000.................................................. 1.5600 1.4350 1.4827 1.4995
2001.................................................. 1.6023 1.4933 1.5519 1.5925
2002.................................................. 1.6134 1.5110 1.5704 1.5726
Quarter ended September 30, 2003...................... 1.4114 1.3368 1.3810 1.3507
</Table>
On December 17, 2003 the exchange rate for U.S. $1.00 expressed in Canadian
dollars was Cdn$1.3250 based on the noon buying rate in New York City for cable
transfers in foreign currencies as announced by the U.S. Federal Reserve Bank of
New York.
MARKET AND INDUSTRY DATA
This prospectus includes industry data that we obtained from industry
publications noted in this prospectus. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but there can be no assurance as to the accuracy or completeness
of included information. We have not independently verified any of the data from
third party sources, nor have we ascertained the underlying economic assumptions
relied upon therein.
6
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, filed by Gerdau Ameristeel with the various
securities commissions or similar regulatory authorities in each of the
provinces of Canada, are specifically incorporated by reference in and form an
integral part of this short form prospectus:
(a) Gerdau Ameristeel's Management Information Circular dated March 31,
2003 relating to or distributed in connection with the Annual and
Special Meeting of Gerdau Ameristeel's shareholders held on May 6, 2003
(the "Management Information Circular");
(b) Gerdau Ameristeel's Annual Information Form for the year ended December
31, 2002 dated May 20, 2003;
(c) Gerdau Ameristeel's Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31,
2002 found at pages 10 to 19 of Gerdau Ameristeel's Annual Report to
Shareholders for the year ended December 31, 2002;
(d) Gerdau Ameristeel's audited consolidated financial statements for the
year ended December 31, 2002, together with the notes thereto and the
auditor's report thereon, dated January 24, 2003, except for certain
information contained in Notes 3 and 20, as to which the date is April
4, 2003 found at pages 20 to 39 of Gerdau Ameristeel's Annual Report to
Shareholders for the year ended December 31, 2002;
(e) a material change report dated June 9, 2003 with respect to the
announcement of Gerdau Ameristeel's intention to raise $400 million
through a private offering of Senior Secured Notes due 2011;
(f) a material change report dated July 2, 2003 with respect to the
pricing and closing of the private offering of the Existing Notes;
(g) Gerdau Ameristeel's 2003 First Quarter Report to Shareholders for the
three month period ended March 31, 2003;
(h) Gerdau Ameristeel's 2003 Second Quarter Report to Shareholders for the
six month period ended June 30, 2003; and
(i) Gerdau Ameristeel's 2003 Third Quarter Report to Shareholders for the
nine month period ended September 30, 2003.
ANY DOCUMENTS OF THE TYPE REFERRED TO IN THE PRECEDING PARAGRAPH AND ANY
MATERIAL CHANGE REPORTS (EXCEPT CONFIDENTIAL MATERIAL CHANGE REPORTS)
SUBSEQUENTLY FILED BY GERDAU AMERISTEEL WITH A SECURITIES COMMISSION OR ANY
SIMILAR AUTHORITY IN CANADA, AFTER THE DATE OF THIS SHORT FORM PROSPECTUS AND
PRIOR TO THE TERMINATION OF THIS EXCHANGE OFFER, SHALL BE DEEMED TO BE
INCORPORATED BY REFERENCE INTO THIS SHORT FORM PROSPECTUS.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED
FOR PURPOSES OF THIS SHORT FORM PROSPECTUS TO THE EXTENT THAT A STATEMENT
CONTAINED HEREIN OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS OR IS
DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR SUPERSEDES SUCH
STATEMENT. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT BE DEEMED, EXCEPT
AS SO MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS SHORT FORM
PROSPECTUS.
Gerdau Ameristeel is subject to the informational requirements of the
United State Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith files reports and other information with the SEC.
Such reports and other information, when filed by Gerdau Ameristeel in
accordance with such requirements, can be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, Room 1024 and at the following regional office of
the SEC: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained at prescribed rates form the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. As a foreign private issuer, Gerdau Ameristeel is exempt from the
Exchange Act rules regarding the provision and control of proxy statement and
regarding short-swing profit reporting and liability.
Gerdau Ameristeel "incorporates by reference" information into this
prospectus which means that important business and financial information about
Gerdau Ameristeel is disclosed by referring to another document filed separately
with the SEC. The information incorporated by reference is deemed a part of this
prospectus, except for any information superseded by information contained
directly in this prospectus. This prospectus incorporates by reference the
following documents filed by Gerdau Ameristeel with the SEC:
1. Our Annual Report on Form 40-F for the year ended December 31, 2002;
2. Our Current Reports on Form 6-K filed April 10, 2003, April 11, 2003,
April 17, 2003, April 22, 2003, May 30, 2003, June 9, 2003, June 24,
2003, June 30, 2003, July 3, 2003, July 9, 2003 and October 22, 2003.
7
All documents filed by Gerdau Ameristeel with the SEC from the date of this
prospectus to the completion of the Exchange Offer under this document,
including filings under sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
and all Current Reports on Form 6-K, shall also be deemed to be incorporated
herein by reference.
You may also request a copy of any of these filings, at no cost, by writing
or telephoning us at the following address or phone number:
Gerdau Ameristeel Corporation
5100 West Lemon Street
Tampa, Florida
U.S.A. 33609
(813) 286-8383
Attention: Tom J. Landa
Vice President, Finance, Chief Financial Officer and Secretary
Exhibits to the filings will not be sent, however, unless those exhibits
have specifically been incorporated by reference in this document.
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THIS INFORMATION NO
LATER THAN 5 BUSINESS DAYS BEFORE YOU MAKE YOUR INVESTMENT DECISION.
Gerdau Ameristeel has filed with the SEC a Registration Statement on Form
F-10 under the U.S. Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Exchange Notes of which this prospectus is a part. GUSAP
Partners and the Subsidiary Guarantors have filed with the SEC a Registration
Statement on Form F-4 under the Securities Act with respect to the Subsidiary
Guarantees of the Exchange Notes. The term "Registration Statement" means the
combined Registration Statement of Gerdau Ameristeel on Form F-10 and GUSAP
Partners and the Subsidiary Guarantors on Form F-4 and includes all amendments,
exhibits and schedules thereto. This prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to Gerdau Ameristeel, GUSAP Partners, the Subsidiary
Guarantors, the Exchange Notes and the Subsidiary Guarantees.
INFORMATION ABOUT GUSAP PARTNERS
GUSAP is a partnership formed under Delaware law, between two Canadian
corporations (the Corporation and its wholly-owned subsidiary, Gerdau Ameristeel
MRM Special Sections Inc.). GUSAP Partners is a financing subsidiary that was
created for the purpose of borrowing and providing funds to Gerdau Ameristeel
and its subsidiaries. GUSAP is not eligible to file a short form prospectus in
connection with its offering of Exchange Notes. However, if the Corporation were
the guarantor of the Exchange Notes rather than the co-issuer, GUSAP would have
been eligible to file a short form prospectus in connection with its offering of
Exchange Notes. Pursuant to relief granted by the Ontario Securities Commission,
GUSAP Partners was exempted from the qualification criteria for a short form
prospectus and the prospectus disclosure requirements set out in National
Instrument 44-101, on the basis of the Company's compliance with the foregoing
qualification criteria and provided that certain disclosure be included in the
prospectus. Consequently, the prospectus does not contain disclosure on GUSAP
Partners that complies with National Instrument 44-101.
Each of the Company and GUSAP Partners is a reporting issuer in the
Province of Ontario where this prospectus is filed. The Company is also a
reporting issuer or has acquired equivalent status in each of the other
provinces of Canada. Pursuant to applicable securities legislation, the Company
satisfies the continuous disclosure requirements of securities legislation in
these Provinces by: (i) complying with applicable requirements of the securities
laws applicable to it; (ii) filing its continuous disclosure documents with the
securities commissions or similar regulatory authorities in each of the
Provinces of Canada in the manner and in the time required under securities
laws; and (iii) where applicable, delivering the continuous disclosure documents
to securityholders of the Company (which will include holders of the Exchange
Notes upon completion of this Exchange Offer) having an address in any of the
above Provinces. Pursuant to relief granted by the Ontario Securities
Commission, GUSAP Partners will be exempt from the continuous disclosure
requirements under Ontario securities laws provided that, among other things,
the Company files its continuous disclosure documents with the Ontario
Securities Commission on behalf of GUSAP Partners and, where applicable,
delivers such documents to holders of the Exchange Notes resident in Ontario.
8
PROSPECTUS SUMMARY
This prospectus summary highlights important information about our business
and about this offering of the Exchange Notes. For a more complete understanding
of our business and the Exchange Offer, you should read this entire prospectus,
including the section entitled "Risk Factors" and our consolidated financial
statements and the related notes contained elsewhere in this prospectus.
In this prospectus, unless the context otherwise requires, "Gerdau
Ameristeel" refers to Gerdau Ameristeel Corporation, and "we", "us", "our" and
the "Company" refer to Gerdau Ameristeel, its subsidiaries, including GUSAP
Partners, and our 50%-owned joint ventures; "initial purchasers" refers to the
J.P. Morgan Securities Inc., Banc of America Securities LLC and CIBC World
Markets Corp.; and "our subsidiaries" or "subsidiaries" refers to subsidiaries
of Gerdau Ameristeel Corporation, including GUSAP Partners. "Subsidiary
Guarantors" refers to Co-Steel Benefit Plans Inc., Co-Steel Benefit Plans USA
Inc., Co-Steel C.S.M. Corp., Gerdau Ameristeel Lake Ontario Inc., Gerdau
Ameristeel MRM Special Sections Inc., Gerdau Ameristeel Perth Amboy Inc., Gerdau
Ameristeel Sayreville Inc., Gerdau Ameristeel US Inc., Gerdau USA Inc., MFT
Acquisition, Corp., N.J.S.C. Investment Co., Inc., PASUG LLC, Porter Bros.
Corporation, Raritan River Urban Renewal Corporation, 1062316 Ontario Limited,
1300554 Ontario Limited, 1551533 Ontario Limited, 3038482 Nova Scotia Company,
and any Restricted Subsidiary created or acquired by the Company after the Issue
Date, that is required to issue a Subsidiary Guarantee or that elects to issue a
Subsidiary Guarantee. "Subsidiary Guarantees" refers to the guarantees issued
pursuant to the Exchange Offer by each of the Subsidiary Guarantors. "Notes"
refers to the Existing Notes and the Exchange Notes, collectively. "Gallatin"
and "Gallatin Steel" refer to our 50%-owned joint venture, the Gallatin Steel
Company. In addition, "$" and "dollars" refer to U.S. dollars; and "Cdn$" refers
to Canadian dollars.
Our financial results are the financial results for Gerdau North America,
the predecessor company for accounting purposes, with the results of the former
Co-Steel added for the period since October 23, 2002. We also present pro forma
financial and operating information which gives effect to the combination of
Gerdau North America and Co-Steel, the acquisition of all shares of Ameristeel
not previously owned by us using newly-issued common shares, and the
refinancing, as if those transactions had taken place on January 1, 2002. Our
financial information is prepared in accordance with Canadian GAAP, which
differs from U.S. GAAP in several respects. The material differences are
described in "Management's discussion and analysis of financial condition and
results of operations -- Gerdau Ameristeel Corporation -- Material differences
between Canadian GAAP and U.S. GAAP" and the notes to our financial statements.
The results of our three 50%-owned joint ventures, including Gallatin Steel
Company, are proportionately consolidated in our financial information, except
in the U.S. GAAP financial information presented in this prospectus. In
addition, to be consistent with the presentation of our financial information,
information on tons shipped or similar production information in this prospectus
includes our 50% share of the joint ventures' operations. "Tons" refers to U.S.
short or "net" tons (i.e. 2,000 pounds). Unless otherwise noted, information on
net sales and tons shipped only includes net sales and tons shipped to third
parties. In this prospectus, all dollar amounts are expressed in U.S. dollars
unless otherwise indicated.
OUR COMPANY
We are the second largest minimill steel producer in North America with
annual manufacturing capacity of over 6.8 million tons of mill finished steel
products. Through our vertically integrated network of 11 minimills (including
one 50%-owned minimill), 13 scrap recycling facilities and 26 downstream
operations, we primarily serve customers in the eastern half of North America.
Our products are generally sold to steel service centers, fabricators, or
directly to original equipment manufacturers, or OEMs, for use in a variety of
industries, including construction, automotive, mining and equipment
manufacturing. For the twelve months ended September 30, 2003, we generated pro
forma net sales of $1.8 billion, pro forma income from operations of $14.6
million and pro forma net loss of $14.3 million.
Our operations are segmented into two operating divisions, minimills and
downstream operations.
Minimills. ($1.2 billion of net sales for the nine months ended September
30, 2003.) We own and operate seven minimills in the United States and three in
Canada. We also have a 50% interest in an eleventh minimill located in Kentucky
that is a joint venture with Dofasco Inc. We manufacture and market a wide range
of steel products, including reinforcing steel bar (rebar), merchant bars,
structural shapes, beams, special sections, coiled wire rod (rod), and flat
rolled sheet. For the twelve months ended September 30, 2003, on a pro forma
basis, we shipped approximately 4.6 million tons of mill finished steel
products. Over 90% of the raw material feed for our
9
minimill operations is recycled steel scrap, making us the second largest steel
recycler in North America. Four of our mills are provided scrap from our network
of 13 scrap recycling facilities. We believe our recycling operations provide a
stable supply of these mills' primary raw material.
Downstream operations. ($224.0 million of net sales for the nine months
ended September 30, 2003.) We have secondary value-added steel businesses which
we refer to as downstream operations. These steel fabricating and product
manufacturing operations process steel principally produced in our minimills.
Our downstream operations consist of the following:
- Rebar fabrication and epoxy coating -- We operate one of the largest
rebar fabricating and epoxy coating operations in North America. Our
network, consisting of 14 rebar fabricating facilities and three epoxy
coating plants, services the concrete construction industry in the
eastern half of the United States and Canada. Our rebar facilities have
the capacity to produce over 650,000 tons of fabricated and epoxy coated
rebar per year. The fabricating facilities purchase the majority of
their rebar from our mills, at market prices, and cut and bend it to
meet our customers' engineering, architectural and other end-product
specifications. Our epoxy coating plants apply epoxy coating to rebar
for use in construction projects requiring rust resistant steel,
including bridge and tunnel construction.
- Railroad spike operations -- Our two railroad spike operations forge
steel square bars produced at our Charlotte mill into track spikes. We
manufacture and distribute these spikes on an annual contract basis to
the railroad industry throughout North America.
- Cold drawn plants -- Our two cold drawn plants process hot rolled
merchant and light structural steel bars into cold drawn bars with
improved physical characteristics. The cold drawn plants purchased 37%
of their raw material requirements from our minimills during the twelve
months ended September 30, 2003.
- Super light beam processing and elevator guide rails -- In accordance
with rigid customer specifications, we process super light steel beams
into cross members for the truck trailer industry and process steel
guide rail sections for elevator manufacturers.
- Wire mesh and collated nails -- We produce small-diameter drawn wire
from coiled steel rod. The wire is woven into sheets and rolls of wire
mesh for concrete pavement reinforcement or converted into collated
nails for use in high-speed nail machines.
COMPETITIVE STRENGTHS
We combined Gerdau North America and Co-Steel in order to create a company
with the financial strength, operational critical mass, geographic and product
range and experienced management team to succeed in the competitive North
American steel market. We believe the following strengths will enable us to
compete more effectively in our strategic markets:
GEOGRAPHIC REACH AND PRODUCT DIVERSITY. Through our network of minimills
located throughout the eastern half of the United States and Canada, we are able
to efficiently service our customers over a broad geographical segment of the
North American steel market. Our manufacturing capacity and wide range of shapes
and sizes of bar steel products enable us to meet a wide variety of our
customers' steel and fabricated product needs. Our facilities are strategically
located near our customers, who often seek to fulfill all of their steel supply
requirements from a small number of suppliers. Our centralized order management
system, which offers one of the broadest ranges of bar products and shapes
available, facilitates our ability to provide one-stop shopping for our
customers.
DOWNSTREAM VALUE-ADDED PROCESSING AND VERTICAL INTEGRATION. Our minimills
are integrated with our 26 downstream steel fabricating and specialty product
facilities. The downstream integration provides a market for a significant
portion of our mill production and valuable market information on the end-use
demand for steel products. In the twelve months ended September 30, 2003 on a
pro forma basis, our downstream businesses accounted for 12% of our shipments of
mill finished steel products and generated 14% of our pro forma net sales. Our
downstream operations balance some of the cyclicality and volatility of our base
minimill business and enable us to capture additional value-added margins on the
steel produced by our mills. We also have 13 scrap recycling facilities that
provide a portion of our scrap needs, thereby decreasing our dependency on
third-party scrap suppliers.
ABILITY TO GENERATE SUBSTANTIAL COST SAVINGS. We expect that we will
achieve approximately $23 million of annual cost savings in the near term from
the integration of the operations of Co-Steel and Gerdau North America
10
through freight rationalization, product scheduling efficiencies, consolidated
procurement activities and efficiencies in administrative and management
functions. We believe we may achieve additional synergies and cost savings over
the mid to longer term from these sources, as well as from operational
improvements through the adoption of best operating practices, the coordination
of manufacturing technologies, knowledge-sharing and the fostering of an
operating culture focused on continuous improvement.
STRONG SPONSORSHIP. We have access to the knowledge base of, and
sponsorship from, our parent company, Gerdau S.A., one of the largest long steel
producers in the world, with a history of over 100 years in the steel industry.
We expect to continue to benefit from Gerdau S.A.'s management experience and
its expertise in manufacturing steel bar, rod and nails. Gerdau S.A. and its
subsidiaries, including us (together, the Gerdau group), have global annual
manufacturing capacity of 12.8 million tons of mill finished steel products and
20 steel plants, 19 of which are minimills, plus one 50%-owned minimill and one
38%-owned minimill. With the talent depth, technical support and financial
strength of Gerdau S.A., we believe our company is strategically positioned to
grow and succeed within the North American steel industry.
DISCIPLINED BUSINESS SYSTEM PLATFORM. Our employees are our most valuable
resource and are key to maintaining our competitive advantage. Our corporate
culture is geared toward engaging all of our employees in a common, disciplined
business system focused on Total Quality Management. We have implemented the
Gerdau Ameristeel business system which identifies global industry benchmarks
for key operational and safety measures. This system includes training and
safety programs and performance-based incentives that are designed to improve
performance and motivate our employees.
EXPERIENCED MANAGEMENT TEAM. We have an experienced senior leadership team
with extensive knowledge of modern management tools and skills. Our senior
management has an average of over 25 years of experience in the steel industry
and a proven track record in successfully managing and integrating acquisitions.
OUR STRATEGY
By focusing on achieving our strategic goals, we believe we will improve
our operational efficiency, increase our customers' satisfaction and enhance our
corporate culture. Our strategy involves the following components:
CONTINUE TO OFFER EXTENSIVE PRODUCT CAPABILITIES TO OUR CUSTOMERS. We
believe that we distinguish ourselves from our competitors through our product
diversity and quality, delivery performance, centralized order management
system, and ability to fill orders quickly from multiple inventory sources. We
have one of the widest bar product ranges in North America and we regularly add
to our product mix in response to our customers' requirements. We believe many
of our customers consider us one of their key suppliers for a wide range of
their product needs. Through our network of minimills and downstream facilities,
we believe that we can distinguish our company by offering one of the broadest
ranges of long steel products in the eastern half of North America, and through
our extensive geographic coverage and our commitment to providing market-leading
customer service.
PROMOTE SHARING OF BEST PRACTICES AND PURSUE OPPORTUNITIES FOR
SYNERGIES. We promote the sharing of best practices throughout the worldwide
operations of the Gerdau group in order to enhance and improve operational
efficiencies. Drawing on the operational experience of Gerdau S.A., we will
continue to regularly pursue opportunities for operational synergies between
each of our mills and vertical integration synergies between our scrap recycling
facilities, our steel mills and our downstream operations. As part of our
integration of Co-Steel, we have been rationalizing our rolling mill production
schedules, improving our inventory management, exploring common procurement
opportunities and pursuing logistical efficiencies.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. We believe that there is
significant opportunity for future growth through selective acquisitions, given
the pace of consolidation in the steel industry and the increasing trend of our
customers to focus on fewer key suppliers. We intend to continue to pursue a
selective and disciplined acquisition strategy, which is focused on improving
our financial performance in the long-term and expanding our product lines and
geographic reach. In our downstream business we are focused on enhancing our
product offering and strengthening our market position. As a result of our scale
and prior successes in managing and integrating acquisitions, we believe we are
strategically positioned to assume an active role in the consolidation of the
North American steel industry.
FOCUS ON EMPLOYEE COMMUNICATION AND PARTICIPATION. We believe that a high
level of employee involvement is a key factor in the success of our operations
and our pursuit of a Total Quality Management platform. We intend
11
to continue to foster a corporate culture that encourages our employees to
communicate with management in order to achieve operational improvement. Through
open and effective communication, we promote the sharing of best operating
practices throughout our organization and the creation of a learning environment
geared toward attaining escalating performance benchmarks. In addition, we
regularly review our incentive-based compensation arrangements for employees and
senior management to ensure that our employees' financial interest is aligned
with that of our shareholders and competitive within the marketplace.
INDUSTRY
The global steel industry is highly cyclical and competitive due to the
large number of steel producers, the dependence upon cyclical end markets and
the high volatility of raw material and energy prices. The North American steel
industry is currently facing a variety of challenges, including volatile
pricing, stagnant demand, high fixed costs, low-priced imports, the diminution
of the effect of U.S. tariffs and challenges to the industry's ability to
attract new management talent. The future success of North American steel
producers is dependent upon numerous factors, including general economic
conditions, levels and prices of steel imports and the strength of the U.S.
dollar.
Beginning in mid-2000 and throughout 2001, the North American steel
industry experienced a severe downward cycle due to excess global production
capacity, high import levels at low prices, including prices that were below the
combined costs of production and shipping, and weak general economic conditions.
These forces resulted in lower domestic steel prices and significant domestic
capacity closures. Prices for many steel products reached 10-year lows in late
2001. Rebar and merchant bar quality products prices averaged $275 per ton and
$303 per ton, respectively, in December 2001, a decline from average prices of
$315 per ton and $347 per ton, respectively, in April 2000. Monthly average
hot-rolled sheet prices fell from $340 per ton in April 2000 to $215 per ton in
November 2001. As a result of these conditions, over 20 U.S. steel companies
sought protection under Chapter 11 of the United States Bankruptcy Code since
the beginning of 2000.
In response to these conditions, in March 2002, President Bush imposed a
series of tariffs and quotas on certain imported steel products under Section
201 of the Trade Act of 1974. These measures were intended to give the domestic
steel industry an opportunity to strengthen its competitive position through
restructuring and consolidation. The duties were imposed for a period of three
years and decrease each year they are in effect. For flat rolled products and
various merchant and special bar quality products, the tariff was set at 30%,
24% and 18% for the first, second and third year, respectively. For rebar
products, the tariff was set at 15%, 12% and 9% for the first, second and third
year, respectively. These tariffs have had varying levels of impact on different
companies. For example, we do not believe that the tariffs have had a
significant impact on our results of operations. On November 10, 2003, the World
Trade Organization (WTO) Appellate Body issued a ruling that upheld an initial
WTO panel ruling that declared the Section 201 tariffs on steel imports to be in
violation of WTO rules concerning safeguard measures. On December 4, 2003,
President Bush signed a proclamation terminating the steel safeguard tariffs,
and announced that the tariffs were being terminated as they had achieved their
purpose and changed economic circumstances indicated it was time to terminate
them. However, it is not known whether the termination of the safeguard tariffs
is permanent as President Bush also announced that the steel import licensing
and monitoring program will continue its work in order to be able to respond to
future import surges that could unfairly damage the United States steel
industry.
The North American steel industry has recently experienced some
consolidation. Bankrupt steel companies, once overburdened with underfunded
pension, healthcare and other legacy costs, are being relieved of obligations
and purchased by other steel producers. This consolidation, including the
purchases of the assets of LTV Corporation, Bethlehem Steel Corporation, Trico
Steel Co. LLC and National Steel Corporation, has created a lower operating cost
structure for the resulting entities and a less fragmented industry. In the bar
sector, Nucor Corporation's acquisition of Birmingham Steel and the combination
of Gerdau North America and Co-Steel significantly consolidated the market. We
believe that continued consolidation in the North American steel industry will
occur over the next several years, resulting in the creation of larger steel
companies, the reduction of operating cost structures and further
rationalization among steel producers.
In 2002, the pricing environment for most steel products improved from the
depressed pricing levels of late 2001. Rebar, merchant bar quality products and
hot-rolled sheet pricing averaged $293 per ton, $323 per ton, and $320 per ton,
respectively, in 2002. In the beginning of 2003, leading bar producers announced
price increases of $35 per ton on rebar and merchant bar, which thus far have
had a positive effect on pricing. For the first three quarters of
12
2003, rebar and merchant bar quality products prices averaged $280 per ton and
$319 per ton, respectively. Hot-rolled sheet prices, however, have dropped in
the first three quarters of 2003, averaging $285 per ton, primarily due to the
restart of previously idled hot-rolled sheet capacity.
CORPORATE STRUCTURE
We conduct our operations directly and indirectly through subsidiaries and
joint ventures in Canada and the United States. Following the completion of the
refinancing discussed under the heading "The Refinancing", we reorganized our
subsidiaries to more efficiently integrate our operations and bring our U.S.
operations within the same U.S. group. The following chart shows Gerdau
Ameristeel Corporation, our principal subsidiaries and joint ventures (including
GUSAP Partners), their respective operations and their jurisdictions of
incorporation. Unless otherwise indicated, all entities are 100%-owned and are
owned directly or indirectly through an intermediate holding company.
Chart
- ---------------
(1) Our Cambridge and Whitby mills and our scrap recycling operations.
(2) GUSAP Partners is a financing subsidiary that was created for the purpose
of borrowing and providing funds to Gerdau Ameristeel and its subsidiaries.
(3) Our Selkirk mill.
(4) Our Perth Amboy mill.
(5) Our Sayreville mill.
(6) Our Cartersville, Charlotte, Jackson, Jacksonville and Knoxville mills, as
well as most of our downstream operations.
HISTORY
Gerdau Ameristeel is an indirect subsidiary of, and controlled by,
Brazilian steelmaker Gerdau S.A., a leading producer of long steel products in
Brazil, Chile, Uruguay, Argentina, and, through us, Canada and the United
States. Gerdau S.A.'s history spans over 100 years, during which it grew from
having one nail manufacturing facility to being one of the top twenty steel
companies in the world. Gerdau S.A. had an approximately 48% market share of the
long steel market in Brazil in the third quarter of 2003 based on total
production. As of September 30, 2003, the Gerdau group had global annual
manufacturing capacity of 12.8 million tons of mill-finished steel products,
over 19,000 employees and total assets exceeding $5 billion. For the nine months
ended September 30, 2003, Gerdau S.A. had approximately $1.3 billion in
consolidated net sales and had a market capitalization of over $2 billion.
Over the last 14 years, Gerdau S.A. has increased its investment abroad,
including its investment in North America. Gerdau S.A. made its initial
investment in the North American steel market in 1989 by acquiring
13
Courtice Steel Inc. (now part of Gerdau Ameristeel), which operates our minimill
in Cambridge, Ontario, Canada. In 1995, it acquired MRM Steel Inc. (now our
subsidiary Gerdau Ameristeel MRM Special Sections Inc.), which operates our
minimill in Selkirk, Manitoba, Canada. In 1999, it acquired an indirect majority
interest in AmeriSteel Corporation (now our subsidiary Gerdau Ameristeel US
Inc.), which we refer to as Ameristeel, which owned four minimills and operated
rebar fabricating plants and epoxy coating plants. In April 2001, AmeriSteel
Bright Bar, Inc., our 80%-owned subsidiary, acquired the assets of American
Bright Bar, a manufacturer of cold drawn steel bars in Orrville, Ohio. In
December 2001, Ameristeel acquired our Cartersville mill in Georgia from
Birmingham Steel Corporation, which expanded Ameristeel's structural bar size
range and added beams to its product line. In June 2002, Ameristeel acquired
certain assets and assumed certain liabilities of Republic Technologies' cold
drawn plant in Cartersville, Georgia, a producer of cold drawn merchant bar
products, to expand our cold drawn operations and complement the operations of
AmeriSteel Bright Bar.
On October 23, 2002, the parent company of Gerdau S.A.'s North American
operations, referred to as Gerdau North America, acquired Co-Steel Inc. Co-Steel
was a Canadian public company that owned and operated three minimills,
participated in a 50/50 joint venture that ran a fourth minimill in Kentucky and
was a major participant in the sourcing, trading and processing of scrap metal
in the northeastern North American steel market. Through the combination,
Co-Steel acquired all of the issued and outstanding shares of the companies
included in Gerdau North America, in exchange for Co-Steel common shares
representing approximately 74% of Co-Steel's total common shares and changed its
name to Gerdau Ameristeel Corporation. Under reverse-take-over accounting,
Gerdau North America was deemed to be the acquiror and was assumed to be
purchasing the assets and liabilities of Co-Steel.
On December 31, 2002, Ameristeel was our 87%-owned subsidiary. In March
2003, we effected an exchange, which we refer to as the minority exchange, in
which we acquired the shares of Ameristeel not previously owned by us using
newly-issued common shares, making Ameristeel a wholly-owned subsidiary.
Following the transaction with Co-Steel and the acquisition of the shares of
Ameristeel, Gerdau S.A. indirectly holds approximately 69% of our common shares.
14
SUMMARY OF EXCHANGE OFFER
On June 27, 2003, we completed the private offering of $405 million
aggregate principal amount of 10 3/8% Senior Notes due 2011. As part of that
offering, we entered into a registration rights agreement with the initial
purchasers of the Existing Notes in which we agreed, among other things, to
deliver this prospectus to you and to complete an Exchange Offer for the
Existing Notes. Below is a summary of the Exchange Offer.
SECURITIES OFFERED.............Up to $405 million aggregate principal amount of
new 10 3/8% Senior Notes due 2011, which have
been registered under the Securities Act. The
form and terms of these Exchange Notes are
identical in all material respects to those of
the Existing Notes. The Exchange Notes, however,
will not contain transfer restrictions and
registration rights applicable to the Existing
Notes.
EXCHANGE OFFER.................We are offering to exchange $1,000 principal
amount of the Existing Notes for $1,000 principal
amount of Exchange Notes which have been
registered under the Securities Act. In order to
exchange your Existing Notes, you must properly
tender them and we must properly accept your
tender. We will exchange all outstanding Existing
Notes that are validly tendered and not validly
withdrawn. The terms of the Exchange Notes will
be identical in all material respects to the
terms of the Existing Notes, except for certain
transfer restrictions and exchange and
registration rights relating to the Existing
Notes. As of the date of this prospectus, there
are $405 million principal amount of Existing
Notes outstanding.
REGISTRATION RIGHTS............If you do not exchange your Existing Notes for
Exchange Notes in this Exchange Offer, you will
have very limited registration rights.
EXPIRATION DATE................This Exchange Offer will expire at 5:00 p.m., New
York City time, on January 23, 2004 unless we
decide to extend this Exchange Offer, in which
case the term "Expiration Date" shall mean the
latest date and time to which this Exchange Offer
is extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND EXISTING
NOTES..........................The Exchange Notes will bear interest from the
most recent date to which interest has been paid
on the Existing Notes. If your Existing Notes are
accepted for exchange, then you will receive
interest on the Exchange Notes and not on the
Existing Notes.
CONDITIONS TO THIS EXCHANGE
OFFER..........................The Exchange Offer is subject to customary
conditions. We may assert or waive these
conditions in our sole discretion. If we
materially change the terms of the Exchange
Offer, we will resolicit tenders of the Existing
Notes.
WITHDRAWAL RIGHTS..............You may withdraw the tender of your Existing
Notes at any time prior to 5:00 p.m., New York
City time on the Expiration Date.
PROCEDURES FOR TENDERING
EXISTING NOTES.................Except as described in the section titled "The
Exchange Offer -- Guaranteed Delivery
Procedures", a tendering holder must, on or prior
to the Expiration Date:
- transmit a properly completed and duly executed
Letter of Transmittal, including all other
documents required by the Letter of
Transmittal, to SouthTrust Bank at the address
listed in this prospectus; or
15
- if Existing Notes are tendered in accordance
with the book-entry procedures described in
this prospectus, the tendering holder must
transmit an agent's message to the Exchange
Agent at the address listed in this prospectus.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS..............If your Existing Notes are registered in someone
else's name, you should contact such person
promptly and instruct such person to tender your
Existing Notes on your behalf.
GUARANTEED DELIVERY
PROCEDURES.....................If you wish to tender your Existing Notes and you
cannot deliver your Existing Notes, the Letter of
Transmittal or any other required documents to
the Exchange Agent before the Expiration Date,
you may tender your Existing Notes by following
the guaranteed delivery procedures under the
heading "The Exchange Offer -- Guaranteed
Delivery Procedures".
ACCEPTANCE OF EXISTING NOTES
AND DELIVERY OF EXCHANGE
NOTES..........................Subject to the conditions stated in the section
"The Exchange Offer -- Conditions to the Exchange
Offer" of this prospectus, we will accept for
exchange any and all Existing Notes which are
properly tendered in the Exchange Offer before
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes will be delivered
promptly after the Expiration Date.
RESALES OF EXCHANGE NOTES IN
THE UNITED STATES..............We believe that the Exchange Notes may be offered
for resale, resold and otherwise transferred by
you without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that:
- you acquire such Exchange Notes in the ordinary
course of your business;
- you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate,
in a distribution of such Exchange Notes; and
- you are not one of our "affiliates" (as defined
in Rule 405 under the Securities Act).
If you are an affiliate of ours, are engaged in
or intend to engage in or have any arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes:
- you cannot rely on the applicable
interpretations of the staff of the SEC; and
- you must comply with the registration
requirements of the Securities Act in
connection with any resale transaction.
Each broker or dealer that receives Exchange
Notes for its own account in exchange for
Existing Notes that were acquired as a result of
market-making or other trading activities must
acknowledge that it will comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
offer to resell, resale, or other transfer of the
Exchange Notes issued in the Exchange Offer,
including the delivery of a prospectus that
contains information with respect to any selling
holder required by the Securities Act in
connection with any resale of the Exchange Notes.
16
Furthermore, any broker-dealer that acquired any
of its Existing Notes directly from us:
- may not rely on the applicable interpretation
of the staff of the SEC's position contained in
Exxon Capital Holdings -- Corp., SEC no-action
letter (April 13, 1988), Morgan, Stanley & Co.,
Inc., SEC no-action letter (June 5, 1991) and
Shearman & Sterling, SEC no-action letter (July
2, 1983); and
- must also be named as a selling noteholder in
connection with the registration and prospectus
delivery requirements of the Securities Act
relating to any resale transaction.
If our belief is inaccurate and you transfer
Exchange Notes without delivering a prospectus
meeting the requirements of the Securities Act or
without an exemption from registration of such
Exchange Notes, you may incur liability under the
Securities Act. We do not assume, or indemnify
you against, such liability.
EXCHANGE AGENT.................The Exchange Agent with respect to this Exchange
Offer is SouthTrust Bank. The address, telephone
number and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent" and in the Letter of Transmittal
accompanying this Prospectus.
USE OF PROCEEDS................We will not receive any proceeds from the
issuance of the Exchange Notes pursuant to this
Exchange Offer. We will pay all expenses incident
to the Exchange Offer.
CERTAIN UNITED STATES AND
CANADIAN FEDERAL INCOME TAX
CONSEQUENCES...................We believe that the exchange of Existing Notes
for Exchange Notes will not be a taxable exchange
for United States or Canadian federal income tax
purposes. See the discussion below under the
heading "Certain United States and Canadian Tax
Considerations" for more information regarding
the tax consequences of the Exchange Offer.
17
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes and the Existing Notes are
identical in all material respects, except that transfer restrictions and
registration rights applicable to the Existing Notes do not apply to the
Exchange Notes. The Exchange Notes will evidence the same debt as the Existing
Notes and will be governed by the same Indenture. See "Description of Notes".
ISSUERS........................Gerdau Ameristeel Corporation and GUSAP Partners.
EXCHANGE NOTES OFFERED.........$405 million aggregate principal amount of
10 3/8% Senior Notes due 2011.
MATURITY.......................July 15, 2011.
INTEREST PAYMENT DATES.........January 15 and July 15, commencing July 15, 2004.
OPTIONAL REDEMPTION............The Exchange Notes will be redeemable at our
option, in whole or in part, at any time on or
after July 15, 2007, at the redemption prices set
forth in this prospectus, together with accrued
and unpaid interest, if any, to the date of
redemption.
At any time prior to July 15, 2006, we may redeem
up to 35% of the original principal amount of the
Exchange Notes with the net cash proceeds of one
or more equity offerings of our common shares at
a redemption price of 110.75% of the principal
amount of the Exchange Notes, together with
accrued and unpaid interest, if any, to the date
of redemption provided, that, (1) at least 65% of
the original principal amount of the Exchange
Notes remain outstanding after such redemption;
and (2) such redemption occurs within 60 days
after the closing of such equity offering.
SPECIAL TAX REDEMPTION.........We may also redeem all but not part of the
Exchange Notes if there are specified changes in
tax law at a redemption price equal to 100% of
the principal amount of the Exchange Notes
together with accrued and unpaid interest and
premium, if any, to the date of redemption. See
"Description of Notes -- Special Tax Redemption".
SUBSIDIARY GUARANTEES..........The Exchange Notes will be guaranteed on a senior
unsecured basis by our Subsidiary Guarantors,
which are most of the direct or indirect
wholly-owned subsidiaries of Gerdau Ameristeel.
The Subsidiary Guarantors are also providing
Subsidiary Guarantees under our senior secured
credit facility. The Subsidiary Guarantees will
be unsecured senior indebtedness of our
Subsidiary Guarantors and will have the same
ranking with respect to indebtedness of our
Subsidiary Guarantors as the Exchange Notes will
have with respect to our indebtedness.
On a pro forma basis after giving effect to the
combination of Gerdau North America and Co-Steel,
the minority exchange and the refinancing
(including this offering, the application of the
net proceeds of this offering and the initial
borrowings under the senior secured credit
facility, as more fully described in "Use of
proceeds"), our non-guarantor subsidiaries and
joint ventures would have represented
approximately 14.0% and 11.5% of our net sales,
29.0% and 24.9% of our EBITDA on a Canadian GAAP
basis (31.9% and 32.4% of our EBITDA on a U.S.
GAAP basis) for the year ended December 31, 2002
and the nine months ended September 30, 2003,
respectively, and would have had approximately
$98.8 million of total assets and $35.1 million
of total liabilities as of September 30, 2003.
18
RANKING........................The Exchange Notes will be general, unsecured
obligations of the Issuers and will:
- rank senior in right of payment to all existing
and future subordinated Indebtedness of the
Issuers;
- rank equally in right of payment with all
existing and future Indebtedness of the Issuers
that is not subordinated; and
- be effectively subordinated to all of our
secured Indebtedness and Indebtedness of the
Company's Restricted Subsidiaries (other than
GUSAP Partners) that do not guarantee the
Exchange Notes.
Each Subsidiary Guarantee will be a general,
unsecured obligation of the Subsidiary Guarantor
granting the Subsidiary Guarantee and will:
- rank senior in right of payment to all existing
and future subordinated Indebtedness of the
Subsidiary Guarantor granting the Subsidiary
Guarantee;
- rank equally in right of payment with all
existing and future Indebtedness of such
Subsidiary Guarantor that is not subordinated;
and
- be effectively subordinated to all secured
indebtedness of such Subsidiary Guarantor to
the extent of the value of the assets securing
such Indebtedness.
COVENANTS......................We will issue the Exchange Notes under an
indenture with SouthTrust Bank as trustee. The
indenture will, among other things, limit our
ability and the ability of our Restricted
Subsidiaries (as defined under the heading
"Description of Notes") to:
- incur additional debt;
- issue redeemable stock and preferred stock;
- repurchase capital stock;
- make other restricted payments including,
without limitation, paying dividends and making
investments;
- create liens;
- redeem debt that is junior in right of payment
to the Exchange Notes;
- sell or otherwise dispose of assets, including
capital stock of subsidiaries;
- enter into agreements that restrict dividends
from subsidiaries;
- enter into mergers or consolidations;
- enter into transactions with affiliates;
- guarantee indebtedness; and
- enter into sale/leaseback transactions.
These covenants will be subject to a number of
important exceptions and qualifications. For more
details, see "Description of Notes."
CHANGE OF CONTROL..............The occurrence of a change of control will be a
triggering event requiring us to offer to
purchase from you all or a portion of your
Exchange Notes at a price equal to 101% of their
principal amount, together with accrued and
unpaid interest, if any, to the date of purchase.
19
ASSET DISPOSITION..............Certain asset dispositions will be triggering
events which may require us to use the proceeds
from those asset dispositions to make an offer to
purchase the Exchange Notes at 100% of their
principal amount, together with accrued and
unpaid interest, if any, to the date of purchase
if such proceeds are not otherwise used within
361 days to repay senior secured indebtedness, to
repay indebtedness under our senior secured
credit facility (with a corresponding reduction
in commitment) or to invest in assets related to
our business.
TRUSTEE........................SouthTrust Bank
GOVERNING LAW..................New York
ADDITIONAL AMOUNTS.............Any payments made by us with respect to the Notes
will be made without withholding or deduction for
Canadian taxes unless required by law. If we are
required by law to withhold or deduct for
Canadian taxes with respect to a payment to the
holders of Notes, we generally will pay the
additional amount necessary so that the net
amount received by the holders of Notes after the
withholding is not less than the amount that they
would have received in the absence of the
withholding. See the section entitled
"Description of Notes -- Canadian Withholding
Taxes."
20
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
GERDAU AMERISTEEL CORPORATION
Our financial results are the results for the Gerdau North America
operations, and include results for the Co-Steel operations, including our
Gallatin joint venture, for the period beginning on October 23, 2002, which
represents the period subsequent to the date of acquisition. The summary
historical financial data presented below as of December 31, 2001 and 2002, and
for each of the years in the three-year period ended December 31, 2002, have
been derived from our consolidated financial statements included elsewhere in
this prospectus. The summary historical financial data as of December 31, 2000,
have been derived from our consolidated financial statements not included in
this prospectus. The summary historical financial data presented below as of
September 30, 2003, and for the nine months ended September 30, 2002 and 2003,
have been derived from our unaudited consolidated financial statements as of
that date and for those periods, included elsewhere in this prospectus. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim periods
have been included. Results for the nine months ended September 30, 2002 and
2003 are not necessarily indicative of results to be expected for the full year
or any future period. For example, results for the nine months ended September
30, 2002 do not include the results of Co-Steel, as such acquisition occurred
subsequent to such period. The summary pro forma financial data presented below
for the twelve months ended September 30, 2003, have been derived from our
unaudited pro forma condensed consolidated financial data and notes thereto,
included elsewhere in this prospectus. However, this pro forma information does
not purport to represent what actual operating results would have been during
this period or to project what our future results will be in any future periods.
The following data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Gerdau
Ameristeel Corporation," our consolidated financial statements and notes thereto
and our pro forma combined condensed financial data and notes thereto, included
elsewhere in this prospectus. The following data should also be read in
conjunction with the financial information relating to Co-Steel included
elsewhere in this prospectus, including "Selected Consolidated Financial Data --
Co-Steel Inc.," the financial statements of Co-Steel and notes thereto and the
related management's discussion and analysis of financial condition and results
of operations.
Our financial information is prepared in accordance with Canadian GAAP.
Canadian GAAP differs from U.S. GAAP in several respects. The material
differences between Canadian GAAP and U.S. GAAP are described in note 21 to our
consolidated financial statements, note 10 to our unaudited interim consolidated
financial statements for the nine months ended September 30, 2002 and 2003 and
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Gerdau Ameristeel Corporation -- Material
differences between Canadian GAAP and U.S. GAAP". One significant difference is
that under Canadian GAAP our three 50%-owned joint ventures (Gallatin Steel
Company, Bradley Steel Processors Inc. and SSS/MRM Guide Rail Inc.) are
proportionately consolidated (except in the U.S. GAAP financial information
presented in this prospectus), which means that 50% of individual items such as
assets, net sales, cost of sales, interest, depreciation and amortization are
included in our results. In addition, to be consistent with the presentation of
our financial information, information on tons shipped and other production
information in this prospectus includes our 50% share of the joint ventures'
operations. Information on net sales and tons shipped only includes net sales or
tons shipped to third parties.
21
<Table>
<Caption>
NINE MONTHS PRO FORMA
ENDED TWELVE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, ENDED
-------------------------- ------------------- SEPTEMBER 30,
2000 2001 2002 2002 (1) 2003 2003
------ ------ -------- -------- -------- -------------
(Dollars in millions except per ton, tons in thousands)
STATEMENT OF OPERATIONS DATA UNDER
CANADIAN GAAP:
Net sales (2).......................... $899.7 $840.8 $1,036.1 $697.6 $1,401.2 $1,792.1
Cost of sales.......................... 722.0 680.1 867.1 571.3 1,283.9 1,622.7
------ ------ -------- ------ -------- --------
Gross profit........................... 177.7 160.7 169.0 126.3 117.3 169.4
Selling and administrative............. 57.4 56.4 62.2 45.4 59.3 77.8
Depreciation and amortization (3)...... 57.6 61.5 58.7 38.5 60.4 82.9
Other operating expense (income) (4)... 2.8 (0.5) (5.1) 1.0 0.1 (5.9)
------ ------ -------- ------ -------- --------
Income (loss) from operations.......... 59.9 43.3 53.2 41.4 (2.5) 14.6
Interest expense and amortization of
deferred financing costs (5)......... 51.8 50.0 39.8 31.4 34.3 53.2
Other (gain) loss (6).................. (0.2) 1.0 0.2 0.4 0.2 --
------ ------ -------- ------ -------- --------
Income (loss) before income taxes...... 8.3 (7.7) 13.2 9.6 (37.0) (38.6)
Income tax expense (benefit)........... 2.2 (2.6) 0.4 0.6 (21.5) (24.3)
Minority interest (7).................. (2.2) (1.0) (1.7) (1.4) 0.2 --
------ ------ -------- ------ -------- --------
Net income (loss)...................... $ 3.9 $ (6.1) $ 11.1 $ 7.6 $ (15.3) $ (14.3)
OTHER DATA UNDER CANADIAN GAAP:
Net cash provided by (used in)
operating activities................. $ 28.6 $102.6 $ 34.1 $ 9.5 $ 3.2
Net cash used in investing
activities........................... (87.8) (78.8) (21.4) (30.0) (40.4)
Net cash provided by (used in)
financing activities................. 61.1 (24.7) (1.4) 23.9 41.3
EBITDA (8)............................. 117.5 104.8 111.9 79.9 57.9 97.5
Ratio of earnings to fixed charges
(9).................................. 1.1x 0.8x 1.8x 1.2x 0.1x 0.8x
Capital expenditures................... $ 52.7 $ 28.4 $ 33.5 $ 21.8 $ 40.5
OTHER OPERATIONAL DATA:
Mill finished steel shipments (tons)... 1,898 1,906 2,548 1,666 3,687 4,569
Fabricated steel shipments (tons)...... 580 588 566 438 479 607
Average price per ton -- mill finished
steel shipments...................... $ 308 $ 284 $ 285 $ 289 $ 303 $ 298
Average price per ton -- fabricated
steel shipments...................... $ 457 $ 430 $ 440 $ 442 $ 433 $ 433
U.S. GAAP DATA:
Gross sales (10)....................... $929.9 $885.0 $1,053.8 $740.2 $1,317.9 $1,665.1
Income (loss) from operations.......... 57.8 41.6 46.9 40.4 (7.8) (0.7)
Net income (loss)...................... 3.6 (6.4) 11.0 7.5 (23.3) (22.4)
EBITDA (8, 11)......................... 115.9 103.5 107.2 79.1 49.8 89.7
Interest expense and amortization of
deferred financing cost (5).......... 51.8 50.0 41.5 31.9 44.9 66.2
Ratio of earnings to fixed charges
(9).................................. 1.1x 0.8x 1.2x 1.1x -- --
Ratio of total debt to EBITDA.......... 6.4x 7.0x 5.6x -- 13.3x 7.4x
Ratio of EBITDA to interest expense and
amortization of deferred financing
costs................................ 2.3x 2.1x 2.4x 2.5x 1.1x 1.4x
</Table>
22
<Table>
<Caption>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
2000 2001 2002 2003
-------- -------- -------- -------------
(Dollars in millions)
BALANCE SHEET DATA UNDER CANADIAN GAAP:
Cash and cash equivalents.............................. $ 6.0 $ 5.1 $ 16.4 $ 20.4
Working capital........................................ 116.7 120.7 203.3 338.2
Total assets........................................... 1,074.6 1,061.9 1,571.4 1,709.0
Total debt (12)........................................ 757.5 723.6 519.2 595.4
Shareholders' equity (13).............................. 57.0 49.8 593.1 650.1
Minority interest (7).................................. 29.6 30.6 33.3 --
U.S. GAAP DATA:
Total assets........................................... $1,072.1 $1,058.6 $1,513.7 $1,698.0
Total debt (12)........................................ 759.6 725.1 564.5 662.9
Shareholders' equity (13).............................. 55.8 47.7 493.2 535.2
</Table>
- ---------------
(1) Results for the nine months ended September 30, 2002 do not include the
results for Co-Steel, which was acquired on October 23, 2002. See page 45
for pro forma financial data for the nine months ended September 30, 2002
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of our results for the nine months
ended September 30, 2003 compared to the nine months ended September 30,
2002 on an actual and a pro forma basis.
(2) Our sales are reported net of freight costs.
(3) On January 1, 2002, we adopted CICA Handbook Section 3062, Goodwill and
Other Intangible Assets. This section requires that goodwill and intangible
assets with indefinite lives not be amortized, but rather their fair value
be assessed at least annually and written down for any impairment in value.
(4) Other operating expense (income) over the periods for which financial data
is presented includes: income related to electric power rebates from
Ontario utilities, an insurance settlement reimbursing environmental
clean-up costs incurred in 1997 and 1998 and cash settlements from graphite
electrode suppliers; and expense related to start-up costs associated with
new process automation controls at the Knoxville rolling mill, costs
associated with closing two fabricating plants, losses on investments and
claims deductible.
(5) Interest expense under Canadian GAAP does not include interest on the
convertible debentures of $1.0 million in the year ended December 31, 2002,
$4.3 million in the nine months ended September 30, 2003 and $5.4 million
pro forma for the twelve months ended September 30, 2003. Under Canadian
GAAP we record interest expense, net of taxes, as an after-tax charge to
reinvested earnings. In addition, interest expense under Canadian GAAP does
not include the ineffective portion of our interest rate swaps, which was
$(0.5) million, $(1.6) million and $0.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively, $(0.4) million and $(3.0)
million for each of the nine months ended September 30, 2002 and 2003,
respectively, and $1.6 million pro forma for the twelve months ended
September 30, 2003. Under U.S. GAAP, we would be required to record any
ineffective portion of our swaps as interest expense in any applicable
period. Through September 30, 2003, this would have required us to record
an aggregate of $3.1 million of charges. It is our intention to keep the
swaps in place with new counterparties after the refinancing. If we cannot
do so then we would be required to pay $6.0 million to counterparties and
would take a $6.0 million pre-tax charge to net income under Canadian GAAP.
Under U.S. GAAP, we would have a $4.0 million cash charge, in addition to
the $3.1 million charge that would have already been taken on the
ineffective portion.
(6) Other gain (loss) includes foreign exchange gains and losses, losses on
marketable securities and losses on investments.
(7) Minority interest is the income attributable to the minority shareholders
of Ameristeel. On March 31, 2003, we completed an exchange of shares of
Ameristeel held by minority shareholders for 13,198,501 of our shares.
(8) "EBITDA" is net income plus interest, taxes, depreciation and amortization,
minority interest and other (gain) loss. EBITDA does not represent and
should not be considered as an alternative to net income or cash flow from
operations, as determined by generally accepted accounting principles, and
our calculations thereof may not be comparable to that reported by other
companies. EBITDA is included in this prospectus because it is a measure we
use to assess our liquidity position and because certain covenants in our
borrowing arrangements are tied to similar measures. We also believe that
it is widely accepted that EBITDA provides useful information regarding a
company's ability to service and/or incur indebtedness. This belief is
based on our negotiations with our lenders who have indicated that the
amount of indebtedness we will be permitted to incur will be based, in
part, on our EBITDA. EBITDA does not take into account our working capital
requirements, debt service requirements and other commitments and,
accordingly, is not necessarily indicative of amounts that may be available
for discretionary use. EBITDA includes our share of the earnings of our
joint ventures, a significant portion of which is derived from our Gallatin
joint venture. We do not control our joint ventures and cannot, without
agreement from our partner, cause any joint venture to distribute its
income from operations to us. In addition, Gallatin's existing financing
agreement prohibits it from distributing cash to us unless specified
financial covenants are satisfied.
23
The following table reconciles Canadian GAAP EBITDA with net income and cash
flow from operations for the periods indicated:
<Table>
<Caption>
PRO FORMA PRO FORMA
NINE MONTHS NINE MONTHS TWELVE
YEAR ENDED ENDED ENDED MONTHS
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, ENDED
------------------------ ------------- --------------- SEPTEMBER 30,
2000 2001 2002 2002 2003 2002 2003 2003
------ ------ ------ ----- ----- ------ ------ -------------
(Dollars in millions)
CANADIAN GAAP
EBITDA...................................... $117.5 $104.8 $111.9 $79.9 $57.9 $135.1 $ 57.9 $ 97.5
Depreciation and amortization expense....... (57.6) (61.5) (58.7) (38.5) (60.4) (57.2) (60.4) (82.9)
Interest expense and amortization of
deferred financing costs.................. (51.8) (50.0) (39.8) (31.4) (34.3) (43.5) (42.7) (53.2)
Other gain (loss)........................... 0.2 (1.0) (0.2) (0.4) (0.2) (5.7) (0.2) --
Minority interest........................... (2.2) (1.0) (1.7) (1.4) 0.2 -- -- --
Income taxes................................ (2.2) 2.6 (0.4) (0.6) 21.5 (4.4) 24.9 24.3
------ ------ ------ ----- ----- ------ ------ ------
Net income (loss)........................... 3.9 (6.1) 11.1 7.6 (15.3) $ 24.3 $(20.5) $(14.3)
------ ------ ------
Depreciation and amortization expense....... 57.6 61.5 58.7 38.5 60.4
Changes in working capital and other
operating items........................... (32.9) 47.2 (35.7) (36.6) (41.9)
------ ------ ------ ----- -----
Net cash used in operating activities....... $ 28.6 $102.6 $ 34.1 $ 9.5 $ 3.2
------ ------ ------ ----- -----
</Table>
The following table reconciles U.S. GAAP EBITDA with net income for the
periods indicated:
<Table>
<Caption>
PRO FORMA PRO FORMA
NINE MONTHS NINE MONTHS TWELVE
YEAR ENDED ENDED ENDED MONTHS
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, ENDED
------------------------ -------------- -------------- SEPTEMBER 30,
2000 2001 2002 2002 2003 2002 2003 2003
------ ------ ------ ----- ------ ------ ----- -------------
(Dollars in millions)
U.S. GAAP
EBITDA...................................... $115.9 $103.5 $107.2 $79.1 $ 49.8 $121.7 $49.8 $ 89.7
Depreciation and amortization expense....... (57.0) (60.9) (55.3) (38.1) (52.2) (47.3) (52.2) (70.6)
Interest expense and amortization of
deferred financing costs.................. (51.8) (50.0) (41.5) (31.9) (44.9) (48.8) (53.3) (66.2)
Other loss.................................. (0.3) (1.9) (0.2) (0.2) (0.5) (5.5) (0.2) (0.1)
Minority interest........................... (2.2) (1.0) (1.7) (1.4) 0.2 -- -- --
Income taxes................................ (1.0) 3.9 2.5 -- 24.3 (0.3) 27.7 24.8
------ ------ ------ ----- ------ ------ ----- ------
Net income (loss)........................... $ 3.6 $ (6.4) $ 11.0 $ 7.5 $(23.3) $ 19.8 $28.2 $(22.4)
------ ------ ------ ----- ------ ------ ----- ------
</Table>
(9) For the purposes of calculating our ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes plus distributions
received from joint ventures and fixed charges. Fixed charges consist of
interest expense, whether expensed or capitalized, on all indebtedness and
deferred financing costs plus interest on the convertible debentures and an
interest component equal to 25% of rental expense, representing that
portion of rental expense that management believes is attributable to
interest. Under Canadian GAAP, earnings did not cover fixed charges by $8.6
million in the year ended December 31, 2001 and by $33.2 million in the
nine months ended September 30, 2003. Under U.S. GAAP, earnings did not
cover fixed charges by $10.3 million in the year ended December 31, 2001,
by $44.1 million for the nine months ended September 30, 2003 and by $22.0
million in the twelve months ended September 30, 2003 on a pro forma basis.
(10) Under U.S. GAAP, we would report gross sales and include freight costs in
cost of sales. Under Canadian GAAP, sales are reported net of freight
costs. In addition, under Canadian GAAP, we proportionately consolidate our
50% interest in our joint ventures, resulting in higher sales and EBITDA
under Canadian GAAP. Under U.S. GAAP, the joint ventures are accounted for
using the equity method.
(11) Canadian GAAP EBITDA is higher than U.S. GAAP EBITDA because of the
difference in the accounting for joint ventures described in footnote 10
above. In particular, under both U.S. GAAP and Canadian GAAP, net income
(loss), which is the starting point for calculating EBITDA, includes our
50% share of the net income of our joint ventures; however, we add the
interest, depreciation and amortization from the joint ventures to net
income (loss) under Canadian GAAP as the results of operations for our
joint ventures are proportionately consolidated, but not under U.S. GAAP.
(12) Total debt includes long-term borrowings, current portion of long-term
borrowings, bank indebtedness and related party borrowings. Under Canadian
GAAP, total debt excludes our convertible debentures; our convertible
debentures are included in total debt under U.S. GAAP. Under Canadian GAAP,
we had $92.6 million of convertible debentures outstanding as of September
30, 2003. Under U.S. GAAP, our convertible debentures were recorded at
$55.2 million as of December 31, 2002 and $73.0 million as of September 30,
2003, in each case net of the purchase price fair value adjustment
resulting from the combination with Co-Steel. Because our convertible
debentures are denominated in Canadian dollars, the value of our
convertible debentures fluctuates with the exchange rate between the U.S.
dollar and the Canadian dollar. The increase in the value of our
convertible debentures between December 31, 2002 and September 30, 2003 was
due to
24
the appreciation in the Canadian dollar relative to the U.S. dollar. As of
September 30, 2003 on a pro forma basis, total debt includes gross proceeds
of $397.1 million from the issuance of $405 million of aggregate principal
amount of the Existing Notes at a price of 98.001% of the face amount.
(13) Under Canadian GAAP shareholders' equity includes our convertible
debentures. We had $92.6 million of convertible debentures outstanding as
of September 30, 2003. We record the interest, net of taxes, on our
convertible debentures as an after-tax charge to reinvested earnings. Under
U.S. GAAP, the debentures would be recorded as a liability and the interest
costs as interest expense.
25
RISK FACTORS
The Exchange Notes involve a high degree of risk. You should carefully
consider the risks described below as well as other information and data
included in this prospectus. If any of the events described in the risk factors
below occur, our business, financial condition, operating results and prospects
could be materially adversely affected, which in turn could adversely affect our
ability to repay the Exchange Notes.
RISKS RELATING TO THE EXCHANGE OFFER
HOLDERS MAY HAVE DIFFICULTY SELLING THE EXISTING NOTES THAT THEY DO NOT
EXCHANGE.
If the Existing Notes are not exchanged for Exchange Notes in the Exchange
Offer, holders of the Existing Notes will continue to be subject to the
restrictions on transfer of the Existing Notes described in the offering
memorandum for the Existing Notes. The restrictions on transfer of the Existing
Notes arise because the Existing Notes were issued under exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable US state securities law. In general, holders of the Existing
Notes may only offer or sell the Existing Notes if the Existing Notes are
registered under the Securities Act and applicable state securities laws, or
offered and sold under an exemption from these requirements. The Issuers do not
intend to register the Existing Notes under the Securities Act. To the extent
Existing Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Existing Notes would be adversely affected. See "The
Exchange Offer -- Consequences of Exchanging or Failing to Exchange Existing
Notes".
NO FURTHER OBLIGATION OF ISSUERS TO REGISTER THE EXISTING NOTES UPON COMPLETION
OF THE EXCHANGE OFFER.
The obligations of Issuers under the Registration Rights Agreement to
exchange the Existing Notes for registered Exchange Notes or to register the
Existing Notes pursuant to an effective registration statement are satisfied
once the Exchange Offer is complete. Except for holders of Existing Notes who
are ineligible to participate in the Exchange Offer, holders who do not exchange
their Existing Notes in the Exchange Offer will have no further right against
Issuers to register the Existing Notes which are not exchanged in the Exchange
Offer and the additional interest provisions in the Existing Notes will not
apply.
SOME HOLDERS WHO EXCHANGE THEIR EXISTING NOTES MAY BE DEEMED TO BE UNDERWRITERS.
If the Existing Notes are exchanged in the Exchange Offer for the purposes
of participating in a distribution of the Exchange Notes, some holders may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
RISKS RELATED TO OUR BUSINESS
THE GLOBAL STEEL INDUSTRY IS HIGHLY COMPETITIVE AND HAS EXCESS PRODUCTION
CAPACITY, WHICH COULD CAUSE US TO BECOME UNCOMPETITIVE.
We compete with numerous foreign and domestic steel producers, including
both integrated and minimill producers. Some of our competitors have greater
financial and capital resources than we do, and continue to invest heavily to
achieve increased production efficiencies, increased capacity and improved
product quality. We primarily compete with other steel producers based on the
delivered price of finished products to our customers. Although freight costs
for steel can often make it uneconomic for distant steel producers to compete
with us, to the extent that they have lower cost of sales, such as lower labor
or energy costs, they may be able to successfully compete. Our labor and energy
costs are higher than many foreign producers. Although we are continually
striving to improve our operating costs, we may not be successful in achieving
labor and energy costs or gaining operating efficiencies that may be necessary
to remain competitive.
The domestic steel industry has excess production capacity due to
relatively stable domestic demand and increased foreign imports. Due to
unfavorable foreign economic conditions, excess foreign capacity and a strong
U.S. dollar, imports of steel products to the U.S. and Canadian markets have
reached high levels and, in some cases, have been sold at prices below their
combined production and export costs. From 1995 to 2003, U.S. steel industry
production capacity utilization levels ranged from a high of 93.3% in 1995 to a
low of 79.2% in 2001 and were 84.9% in the first quarter of 2003. Recently, a
number of domestic flat rolled steel facilities that had been closed or idled
have become operational again, contributing to the overcapacity in that market
segment. This excess capacity has
26
resulted in more competitive product pricing and increased pressure on industry
profit margins. Additionally, there are several recently-idled flat rolled steel
mills that, if restarted, could exacerbate the problems caused by overcapacity.
Over 35 U.S. steel companies have sought protection under Chapter 11 of the
United States Bankruptcy Code since the beginning of 1997. Many of these
companies have continued to operate, while reducing prices to maintain volumes
and cash flow, and obtaining concessions from their labor unions and suppliers.
Some companies have even expanded and modernized while in bankruptcy. Upon
emerging from bankruptcy, these companies, or new entities that purchased their
facilities through the bankruptcy process, have been relieved of many
obligations, including environmental, employee, and retiree benefit and other
obligations, commonly referred to as legacy costs. As a result, they may be able
to operate with lower fixed costs than us.
In addition, our business is very capital intensive, requiring us to
maintain a large fixed cost base. The high levels of fixed costs of operating a
minimill encourage mill operators to maintain high levels of output, even during
periods of reduced demand, which exacerbates the pressure on profit margins. Our
profitability is dependent, in part, on our ability to spread fixed costs over
an increasing number of tons shipped. The highly competitive nature of our
industry has in recent periods exerted, and may continue to exert, downward
pressure on prices for certain of our products, which could adversely affect our
sales and our profitability.
All of our production facilities are minimills, which produce steel by
melting scrap metal in electric arc furnaces. The competitiveness of minimills
relative to integrated mills (production facilities that produce steel from coke
and iron ore) is influenced by the cost of scrap, which represents a significant
production cost for minimills. If scrap prices were to increase significantly
without a commensurate increase in finished steel selling prices, the
competitive position of minimills compared to integrated mills could be
materially adversely affected, making us uncompetitive relative to integrated
producers and causing our sales and profitability to decline. Additionally, the
competitiveness of minimills relative to integrated producers will be driven by
the efficiency of integrated producers. Recently, certain integrated steel
producers have succeeded in reducing their costs. For example, in connection
with the ongoing consolidation and restructuring within the U.S. steel industry,
some integrated producers have been able to reduce significant legacy costs,
making them much more competitive relative to minimills, which historically have
had much smaller legacy costs.
OUR LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL
CAPITAL TO FUND OUR OPERATIONS, LIMIT OUR ABILITY TO REACT TO CHANGES IN THE
ECONOMY OR OUR INDUSTRY AND PREVENT US FROM MEETING OUR OBLIGATIONS UNDER THE
EXCHANGE NOTES.
We are highly leveraged. As of September 30, 2003, our total indebtedness
was approximately $595.4 million. The following chart shows our level of
indebtedness and certain other information as of September 30, 2003:
<Table>
<Caption>
AS AT
SEPTEMBER 30, 2003
---------------------
(Dollars in millions)
Senior secured credit facility (1).......................... $150.0
Existing Notes (2).......................................... 397.1
Other....................................................... 48.3
Total debt................................................ 595.4
Convertible debentures...................................... 92.6
</Table>
- ---------------
(1) Includes an additional $61.6 million of letters of credit under the senior
secured credit facility (most of which will be used to secure industrial
revenue bonds). Our senior secured credit facility provides for commitments
of up to $350 million. We will be able to borrow under the senior secured
credit facility (a) the lesser of (i) the committed amount, and (ii) the
borrowing base (which is based upon a portion of the inventory and accounts
receivable held by PASUG LLC, GUSAP Partners, Gerdau Ameristeel, Gerdau
Ameristeel MRM Special Sections, Gerdau Ameristeel Lake Ontario Inc., MFT
Acquisition, Corp., Porter Bros. Corporation, Ameristeel, Gerdau Ameristeel
Perth Amboy and Gerdau Ameristeel Sayreville less certain reserves), minus
(b) outstanding loans, letter of credit obligations and other obligations
owing under the senior secured credit facility. Since the borrowing base
under our senior secured credit facility will be based on our actual
inventory and accounts receivable levels, available borrowings under the
facility will fluctuate, and these fluctuations could be significant.
(2) $405 million aggregate principal amount of Existing Notes issued at a price
of 98.001% of the face amount.
27
<Table>
<Caption>
PRO FORMA
TWELVE MONTHS ENDED
SEPTEMBER 30, 2003
-------------------
Ratio of earnings to fixed charges.......................... 0.8x
</Table>
Our high degree of leverage could have important consequences for you,
including the following:
- it may limit our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions and general corporate or other purposes;
- a substantial portion of our cash flows from operations must be
dedicated to the payment of principal and interest on our indebtedness
and is not available for other purposes, including our operations,
capital expenditures and future business opportunities;
- the debt service requirements of our other indebtedness could make it
more difficult for us to make payments on the Exchange Notes;
- certain of our borrowings, including borrowings under our senior secured
credit facility, are at variable rates of interest, exposing us to the
risk of increased interest rates;
- it may limit our ability to adjust to changing market conditions and
place us at a competitive disadvantage compared to our competitors that
have less debt; and
- we may be vulnerable in a downturn in general economic conditions or in
our business, or we may be unable to carry out capital spending that is
important to our growth.
We had $53.2 million of interest expense in the twelve months ended
September 30, 2003 on a pro forma basis, excluding $5.4 million of interest on
our convertible debentures, which is classified as a charge to reinvested
earnings under Canadian GAAP.
OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL INVESTMENT, OPERATING LEASES, CAPITAL
COMMITMENTS AND MAINTENANCE EXPENDITURES THAT WE MAY BE UNABLE TO FULFILL.
Our operations are capital intensive. Our total capital expenditures were
$64.3 million, $44.5 million and $44.7 million on a combined basis for the years
ended December 31, 2000, 2001 and 2002, respectively. Capital expenditures in
2003 are expected to be approximately $60.6 million, a portion of which will be
spent on the former Co-Steel operations. In the years prior to the combination
of Gerdau North America and Co-Steel, Co-Steel had maintained capital spending
at low levels in order to conserve cash. As a result, we believe that future
capital expenditures on the former Co-Steel operations will be higher than
historical levels.
As of December 31, 2002, we were obligated to make aggregate lease payments
of $46.3 million under operating leases over the next five years.
As of December 31, 2002, in addition to our commitments under our long term
debt, convertible debentures and industrial revenue bonds, we had contingent
obligations consisting of: letters of credit for financial assurance of
approximately $56.0 million; pension liabilities that can fluctuate materially
due to investment returns, changes in interest rates and other matters beyond
our control; and interest rate swaps under which we currently pay a fixed rate
in exchange for variable rate interest, as a result of which changes in interest
rates could adversely effect our costs. Additionally, environmental laws and
regulations may impose liability for costs of investigation and clean-up,
regardless of fault or the legality of the original disposal. Clean-up costs
could be substantial and could have a material adverse effect on our results of
operations.
As a general partner of Gallatin, we could potentially be liable for all
its indebtedness if neither Gallatin nor our joint venture partner is able to
satisfy those obligations. Gallatin is party to a $40.0 million revolving credit
facility, under which $0.0 million was outstanding as of September 30, 2003.
Gallatin had other bank indebtedness of $5.9 million as of September 30, 2003.
In addition, as a general partner of Gallatin, we are required to make capital
contributions to the partnership unless its EBITDA meets certain specified
targets. We are obligated to fund 50% of Gallatin's capital expenditures if its
EBITDA is less than $10 million. We are also required to make capital
contributions to Gallatin equal to 50% of the lease payments it makes on its
property. Gallatin may, however, elect to fund its lease payments out of its
working capital if its EBITDA at the time of such payment exceeds $20 million,
and it would not, as a result of such payment, exceed certain stipulated
thresholds under its existing financing
28
agreement. Although Gallatin has historically elected to fund its lease payments
out of its working capital, this may change and we may be required to fund them
in the future.
Our business may not generate sufficient operating cash flow and external
financing sources may not be available in an amount sufficient to enable us to
make anticipated capital expenditures, satisfy our lease obligations, service or
refinance our indebtedness or fund other liquidity needs. Since the borrowing
base under our senior secured credit facility will be based on our actual
inventory and accounts receivable levels, available borrowings under the
facility will fluctuate, and these fluctuations could be significant.
Additionally, beginning March 27, 2004, the calculation of our borrowing base
may include a smaller portion of the value of our inventory, which would reduce
our available borrowings under the senior secured credit facility.
HIGH LEVELS OF LOW-PRICE IMPORTS MAY NEGATIVELY AFFECT OUR RESULTS OF
OPERATIONS.
Steel imports to the United States accounted for an estimated 26% of the
domestic steel market in 2002 and 24% in 2001. Partly as a result of the high
levels of low-priced imports, the average industry-wide selling prices for rebar
and merchant bar, which comprise the majority of our finished steel shipments,
have decreased. Average selling prices for rebar had fallen from $315 per ton in
April 2000 to a low of $275 per ton in December 2001, while prices for merchant
bar quality products had fallen from $347 per ton in April 2000 to a low of $303
per ton in December 2001. While prices have recently improved from these lows,
these imports have had, and may continue to have, a negative impact on domestic
prices.
On March 5, 2002 President Bush announced that trade remedies under Section
201 of the Trade Act of 1974 would be imposed as temporary safeguards relating
to steel imports entering the United States on and after March 20, 2002. The
Section 201 tariffs were intended to provide protection against imports from
certain countries for a period of three years, although many of our products are
not in categories that are protected by tariffs or are in categories, such as
rebar, that are currently protected by only 12% tariffs as opposed to higher
tariffs on other steel products. On November 10, 2003 the World Trade
Organization (WTO) Appellate Body issued a ruling that upheld an initial WTO
panel ruling that declared the Section 201 tariffs on steel imports to be in
violation of WTO rules concerning safeguard measures. On December 4, 2003,
President Bush signed a proclamation terminating the steel safeguard tariffs,
and announced that the tariffs were being terminated as they had achieved their
purpose and changed economic circumstances indicated it was time to terminate
them. However, it is not known whether the termination of the safeguard tariffs
is permanent as President Bush also announced that the steel import licensing
and monitoring program will continue its work in order to be able to respond to
future import surges that could unfairly damage the United States steel
industry.
Duties may from time to time mitigate the risk of unfairly traded steel
products but may not prove to be a permanent solution to the risks associated
with imported steel products. The tariffs imposed by the United States may not
reduce imports or, even if they do, the negative pressure on prices may not be
alleviated. For example, we do not believe that the Section 201 trade remedies
announced have had a material impact on our operations. In addition, the U.S.
safeguard remedies exempt numerous products, will be reduced in 2003 and 2004,
will expire in 2005 and may be changed. In addition, Canada and Mexico have been
excluded from tariffs imposed by the United States. As a result, producers in
Canada and Mexico believe that steel imports initially destined for the United
States may be re-routed to Canada and Mexico. Such re-routing could result in a
substantial surge of imports into Canada and Mexico, causing a further price
depression in these countries.
In March 2002, the Government of Canada directed the Canadian International
Trade Tribunal (CITT) to investigate whether increased imports of certain steel
products were causing -- or threatening to cause -- injury to Canadian steel
producers. On August 19, 2002 the CITT made a finding of serious injury in
respect of five categories of steel products and recommended that Canada impose
a 15% declining tariff on imports of rebar and a tariff rate quota on imports of
discrete plate, cold-rolled sheet and coil, standard pipe, and angles, shapes
and sections. On October 6, 2003 the Government of Canada decided against
implementing tariffs and tariff rate quotas on certain steel imports as
recommended by the CITT.
In a joint statement released on October 7, 2003 following the annual
meeting of the North American Free Trade Agreement (NAFTA) Commission, Canada,
the United States and Mexico announced the establishment of a North American
Steel Trade Committee (NASTC). The objective of the NASTC is to reduce remaining
distortions in the North American steel market, to promote continued cooperation
among members on international
29
steel policy matters, and to serve as a consultative mechanism regarding matters
of mutual interest. The NASTC's inaugural meeting is scheduled to take place on
November 21, 2003.
Continued negative worldwide economic conditions, a further economic
downturn and an increase in the strength of the U.S. dollar or Canadian dollar
relative to other currencies could all increase imports. It therefore is
possible that more unfairly priced imports could enter into the North American
markets at a future date, resulting in further price depressions, which would
adversely affect our ability to compete, our sales levels and our profitability.
THE CYCLICAL NATURE OF THE STEEL INDUSTRY AND NEGATIVE ECONOMIC CONDITIONS IN
NORTH AMERICA AND WORLDWIDE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION OR RESULTS OF OPERATIONS.
The steel industry is highly cyclical in nature and is affected
significantly by prevailing economic conditions in the major world economies. We
are particularly sensitive to trends in cyclical industries such as the North
American construction, appliance, machinery and equipment, and transportation
industries, which are significant markets for our products. In addition, certain
of our customers have been adversely affected by the continuing North American
and worldwide economic downturn, which has resulted, and may in the future
result, in defaults in the payment of accounts receivable owing to us and
reduced sales levels.
Market conditions for steel products in the North American market have
fluctuated over the years and have been difficult since the third quarter of
2000. For example, we estimate that 40% of our products is used in the
construction industry, notably the private commercial sector and the public
infrastructure sector, which have both experienced lower demand in recent
periods. Demand for our finished steel products, notably rebar and structural
shapes, will continue to be significantly affected by the relative strength of
the construction sector in North America. The private commercial sector is not
expected to improve in North America for several quarters. Events or conditions
having an adverse effect on the steel industry in general or on our markets in
particular would have a material adverse effect on our financial condition or
results of operations. Future economic downturns, a stagnant economy or currency
fluctuations, such as an increase in the strength of the dollar, which would
lead to a decrease in the cost of imported products, may adversely affect our
business, results of operations and financial condition.
OUR PROFIT MARGINS COULD BE ADVERSELY AFFECTED BY A SIGNIFICANT INCREASE IN OUR
RAW MATERIAL AND ENERGY COSTS.
All of our minimills produce steel by melting scrap metal in electric arc
furnaces. As a result, our operating results are strongly linked to the cost of
scrap metal, which is the primary raw material for our minimill facilities. For
the twelve months ended September 30, 2003, scrap costs represented
approximately 36% of our pro forma costs of sales. Approximately half of all
steel products in North America are currently produced in electric arc furnaces
that utilize steel scrap. The availability of and prices for scrap are subject
to market forces largely beyond our control, including demand by North American
and international steel producers, freight costs, and speculation. Prices for
scrap metal in the past year have increased as a result of rising demand causing
prices for #1 Chicago Heavy Melt scrap (which is a common grade of scrap) to
rise from $65 per ton in December 2001 to $135 per ton in September 2003.
In addition, the prices for scrap vary significantly, and these
fluctuations do not always match fluctuations in the price of our products. For
example, scrap metal prices are relatively higher during the winter months due
to the impact of weather on collection and supply efforts. Realized selling
prices for our end products cannot always be adjusted in the short-term to
recover the cost of increases in scrap metal prices. If scrap prices were to
increase significantly without a commensurate increase in finished steel selling
prices, our profit margins would be materially adversely affected. Future
increases in the prices paid for scrap and other inputs without a commensurate
increase in prices for our finished steel products would materially adversely
affect our operating margins and our results of operations.
Electricity and natural gas represented approximately 9.0% and 4.2%,
respectively, of our pro forma cost of sales for the twelve months ended
September 30, 2003. Most of our facilities operate under long-term electricity
supply contracts with major utilities. These contracts typically have two
components to them: a firm portion and an interruptible portion. The firm
portion supplies a base load for critical equipment and auxiliary services. The
interruptible portion supplies the majority of our requirements, including the
electric arc furnace load. The interruptible portions of the contracts generally
represent over 70% of the total load and, for the most part, are based on a
spot-market price of electricity at the time it is being used. We therefore have
significant exposure to the
30
variances of the electricity spot market. Energy costs in the northeastern
United States, where two of our minimills are located, are typically
significantly higher than in other parts of North America.
We do not have long-term contracts for natural gas and are therefore
subject to market variables and pricing swings for that energy source that could
materially affect our operating margins and results of operations. Prices for
natural gas have been very volatile in the recent past. For example, in 2002,
the average NYMEX natural gas price was $3.22/mmBtu compared to $5.66/mmBtu
which was the average price as of September 30, 2003. This reflects a 75% price
increase. We spent approximately $42.1 million and $53.7 million for our natural
gas requirements in the nine months ended September 30, 2003 and the twelve
months ended September 30, 2003 on a pro forma basis, respectively. If prices
remain at current levels or increase further, our profitability will continue to
be adversely affected. Any interruption in the supply of energy, whether
scheduled or unscheduled, could materially adversely affect our sales and
earnings.
We have not always been able to pass on increases in the price of steel
scrap, other raw materials or energy to our customers, and may not be successful
in doing so in the future; consequently, any such increases may adversely impact
our profitability.
WE RELY ON OUR JOINT VENTURES FOR A PORTION OF OUR INCOME AND EBITDA, BUT WE DO
NOT CONTROL THEM OR THEIR DISTRIBUTIONS.
We have three 50%-owned joint ventures that make a contribution to our
financial results but that we do not control. These joint ventures contributed
$0.5 million and $6.3 million to our net income under Canadian GAAP and $75.3
million and $6.3 million under U.S. GAAP for the nine months ended September 30,
2003 and the year ended December 31, 2002, respectively, and $13.2 million and
$11.0 million of EBITDA on a Canadian GAAP basis for those periods ($0.5 million
and $6.3 million of EBITDA on a U.S. GAAP basis). Additionally, our Gallatin
joint venture, which we acquired in our combination with Co-Steel, contributed
$20.4 million of Co-Steel's net income under U.S. GAAP and Canadian GAAP for the
nine months ended September 30, 2002 and $32.5 million of Co-Steel's EBITDA on a
Canadian GAAP basis ($32.5 million of EBITDA on a U.S. GAAP basis). We received
$3.6 million and $21.5 million of cash distributions from our joint ventures in
the nine months ended September 30, 2003 and the year ended December 31, 2002,
respectively, and Co-Steel received $6.5 million of cash distributions from
Gallatin in the nine months ended September 30, 2002. However, we do not control
the joint ventures and cannot, without agreement from our partner, cause any
joint venture to distribute its income from operations to us. In addition,
Gallatin's existing financing agreement prohibits it from distributing cash to
us unless specified financial covenants are satisfied. Additionally, since we do
not control our joint ventures, they may not be operated in a manner that we
believe would be in the joint ventures', or our, best interests. To the extent
that we enter into other joint ventures as part of our acquisition strategy,
these risks may have a greater impact on us.
COMPLIANCE WITH ENVIRONMENTAL LAWS IS COSTLY AND ONEROUS AND MAY REDUCE OUR
PROFITABILITY.
Our business units are required to comply with an evolving body of
environmental laws and regulations. These laws and regulations concern, among
other things, air emissions, discharges to soil, surface water and groundwater,
noise control, the generation, handling, storage, transportation, and disposal
of hazardous substances, and the clean-up of contamination. These laws and
regulations vary by location and can fall within federal, provincial, state, or
municipal jurisdictions.
We generate certain wastes, primarily electric arc furnace dust (EAF dust),
that are classified as hazardous wastes and must be properly managed under
applicable environmental laws and regulations. In the United States and Canada,
certain environmental laws and regulations impose joint and several liability on
certain classes of persons for the costs of investigation and clean-up of
contaminated properties. Liability may attach regardless of fault or the
legality of the original disposal. Some of our present and former facilities
have been in operation for many years and, over such time, have used substances
and disposed of wastes that may require clean-up. We could be liable for the
costs of such clean-ups. Clean-up costs for any contamination, whether known or
not yet discovered, could be substantial and could have a material adverse
effect on our results of operations.
Some of our North American operations in the U.S. are responsible for the
remediation of certain sites where EAF dust was generated and/or disposed.
Although the ultimate costs associated with the remediation are not known
precisely, we have estimated the total remaining costs as of December 31, 2002
to be approximately $6.3 million, with these costs recorded as a liability in
our financial statements. An additional liability of $8.6 million
31
was recorded in 2002 with respect to certain environmental obligations which
were triggered by the change in control of Co-Steel in certain jurisdictions in
which Co-Steel operated.
Changes, such as new laws or enforcement policies, including potential
restrictions on the emissions of mercury and other pollutants, or an incident at
one of our properties or operations, could have a material adverse effect on our
business, financial condition, or results of operations. Our business units are
required to have governmental permits and approvals. Any of these permits or
approvals may be subject to denial, revocation, or modification under various
circumstances. Failure to obtain or comply with the conditions of permits and
approvals may adversely affect our results of operations and may subject us to
penalties. In addition, we may be required to obtain additional operating
permits or governmental approvals and incur additional costs. We may not be able
to meet all applicable regulatory requirements. Moreover, we may be subject to
fines, penalties, or other liabilities arising from actions imposed under
environmental legislation or regulations. In addition, our environmental capital
expenditures could materially increase in the future.
OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED AND WE HAVE TO MAKE CASH PAYMENTS,
WHICH MAY BE GREATER IN THE FUTURE, REDUCING THE CASH AVAILABLE FOR OUR
BUSINESS.
We have suffered from the devaluation of equity markets over the past three
years, which has reduced our plan assets. In addition, the market rate for
high-quality fixed income investments is much lower than previous years,
compelling us to lower our assumed discount rate from 7.0% in 2000 to 6.75% in
2002 for our U.S. plans and from 7.5% in 2000 to 6.5% in 2002 for our Canadian
plans. A lower discount rate increases the present value of benefit obligations
and increases pension expense. Pension expense is also negatively affected by
lower anticipated returns on assets. Under U.S. GAAP, the increase in pension
obligations and the reduction in plan assets could generate a minimum pension
liability adjustment. We are not required to recognize an additional minimum
liability under Canadian GAAP. As a result, a number of our pension plans were
underfunded when their assets and liabilities were last computed. As of December
31, 2002, the aggregate value of our pension plan assets (including supplemental
retirement plans) was $206.1 million, while the aggregate projected benefit
obligation was $301.4 million, resulting in an aggregate deficit of $95.3
million. We anticipate the identified deficiencies may be larger at this time
based on the recent performance of equity markets. We will have to make cash
payments in the range of $15 million to $20 million to fund our underfunded
pension plans in 2003. We expect that the cash payments for 2004 and 2005 will
not be materially different than the requirements for 2003, so long as long-term
expectations of fund performance are met. However, funding requirements in
future years may be higher, depending on market conditions, and may restrict the
cash available for our business. Our funding requirements may also be
significantly higher beginning in 2005 if temporary funding relief provisions
enacted by the United States Congress are not extended.
WE MAY NOT BE ABLE TO SUCCESSFULLY RENEGOTIATE COLLECTIVE BARGAINING AGREEMENTS
WHEN THEY EXPIRE AND OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED BY LABOR
DISRUPTIONS.
We have approximately 5,000 employees, of which approximately 1,300
employees are represented by unions under a number of collective bargaining
agreements. The agreements with our mill employees have different expiration
dates beginning February 2004. The collective agreements for our recycling
facilities have different expiration dates beginning in 2006. We may be unable
to successfully negotiate new collective bargaining agreements without any labor
disruption. For example, in the first quarter of 2001, we experienced a
three-month labor disruption at our Whitby mill, which had a financial impact
estimated at Cdn$25 million of direct costs and caused other significant
indirect costs such as market erosion, lost production and other opportunity
costs. Additionally, in the second quarter of 2002, we experienced a 13-day
labor disruption at our Selkirk mill, which had a financial impact estimated at
Cdn$2.4 million, consisting of lost production, additional costs relating to
strike preparation and the strike, offset by labor savings during the strike. In
both cases, these disruptions were a result of our collective agreement
negotiations.
Labor organizing activities could occur at one or more of our other
facilities and labor disruptions could occur at any of our facilities. Our
customers, or companies upon which we are dependent for raw materials,
transportation, or other services, could also be affected by labor difficulties.
Any such activities, disruptions or difficulties could result in a significant
loss of production and sales and have a material adverse effect on our financial
condition or results of operations.
32
THE INTEGRATION OF GERDAU NORTH AMERICA AND CO-STEEL MAY NOT BE SUCCESSFUL AND
MAY REDUCE OUR PROFITABILITY.
The process of combining the businesses and operations of Gerdau North
America and Co-Steel involves risks. We may have difficulty integrating the
business, operations, products, and services of Gerdau North America and
Co-Steel and may incur unanticipated expenses related to that integration. The
difficulties of combining operations may be magnified by integrating personnel
with differing business backgrounds and corporate cultures. Completion of the
transaction required, and the continuing integration of Gerdau North America
with Co-Steel requires, a substantial amount of management's time. Directing the
focus of management to the integration, as well as problems that may arise in
connection with the integration of the operations, may have a material adverse
impact on our business and results of operations.
The integration of Gerdau North America and Co-Steel may take longer and be
more disruptive to our business than originally anticipated. Integration may
also result in additional unanticipated expenses, which could reduce our
profitability. For example, we realized a pro forma net loss of $20.6 million
for the nine months ended September 30, 2003 compared to pro forma net income of
$24.3 million for the nine months ended September 30, 2002. The combination
transaction was intended to create a company with the financial strength,
operational critical mass, and management team to succeed in the competitive
North American market. We may not realize all of the anticipated operating
efficiencies, cost savings and other benefits of the transaction or be more
competitive.
CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS OR
COMPETITIVE POSITION.
We report our results in U.S. dollars. For the year ended December 31, 2002
and the nine months ended September 30, 2003, respectively, on a pro forma
basis, approximately 4.0% and 5.0%, respectively, of our net sales and 11.6% and
12.0%, respectively, of our operating costs were in Canadian dollars. As a
result, fluctuations in the exchange rate between the U.S. dollar, and the
Canadian dollar will affect our reported results. The percentage of our costs
that are denominated in Canadian dollars is greater than the percentage of our
sales, which means our results are negatively affected when the Canadian dollar
strengthens compared to the U.S. dollar. In addition, our Canadian operations
compete with U.S. producers and are less competitive as the Canadian dollar
strengthens relative to the U.S. dollar. To the extent we have borrowings that
are denominated in Canadian dollars, our results of operations are also affected
by fluctuations in the exchange rate.
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Our manufacturing processes are dependent upon critical steelmaking
equipment, such as furnaces, continuous casters, rolling mills, and electrical
equipment (such as transformers), and this equipment may incur downtime as a
result of unanticipated failures. We have experienced, and may in the future
experience, plant shutdowns or periods of reduced production as a result of such
equipment failures. Unexpected interruptions in our production capabilities
would adversely affect our productivity and results of operations for the
affected period.
THE PRESENCE OF RADIOACTIVE MATERIALS IN THE SCRAP THAT WE MELT IN OUR ELECTRIC
ARC FURNACES IN OUR MILLS PRESENTS A SIGNIFICANT ECONOMIC EXPOSURE AND MAY
PRESENT A RISK TO OUR WORKERS.
The potential presence of radioactive materials in our scrap supply
presents a significant economic exposure and may present a safety risk to our
workers. The cost to clean up the contaminated material and the loss of revenue
resulting from the loss in production time can be material. If we fail to detect
radioactive material in the scrap we receive, we may incur significant costs to
clean up the contamination of our facilities and to dispose of the contaminated
material. While we have several detection devices at each of our mills,
occasionally radioactive scrap may go undetected. For example, in July 2001, a
small amount of cesium was included among scrap material we received from a
scrap supplier and accidentally melted in our Jacksonville mill furnace. Melt
shop activities at that mill were halted for over three weeks until
approximately 700 tons of contaminated material had been removed for proper
disposal and equipment had been cleaned. The cost of clean-up and business
interruption was approximately $10.5 million; all but $0.4 million of this
amount was paid for by our insurer.
BECAUSE OUR PRODUCTS COMPETE WITH OTHER MATERIALS, OUR NET SALES COULD DECLINE
AS A RESULT OF CHANGES IN THE INDUSTRIES OF THOSE COMPETITIVE MATERIALS.
In the case of certain product applications, steel competes with a number
of other materials such as plastic, aluminum, and composite materials.
Improvements in the technology, production, pricing or acceptance of these
33
competitive materials relative to steel or other changes in the industries for
these competitive materials could cause our net sales to decline.
WE MAY HAVE TO TAKE A CHARGE TO OUR EARNINGS IF OUR GOODWILL IS IMPAIRED.
We are required to test our goodwill for impairment at least annually. The
difference between the book value of a company and its market value may indicate
that an impairment exists. The goodwill impairment test was completed in
September 2003 and did not require any writedown.
OUR PARTICIPATION IN CONSOLIDATION OF THE STEEL INDUSTRY COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that there continues to be significant opportunity for future
growth through selective acquisitions given the pace of consolidation in the
steel industry and the increasing trend of our customers to focus on fewer key
suppliers. As a result, we intend to continue to apply a selective and
disciplined acquisition strategy. Possible future acquisitions will likely
involve some or all of the following risks:
- the difficulty of integrating the acquired operations and personnel into
our existing business;
- the potential disruption of our ongoing business;
- the diversion of resources, including management's time and attention;
- incurrence of additional debt;
- the inability of management to maintain uniform standards, controls,
procedures and policies;
- the difficulty of managing the growth of a larger company;
- the risk of entering markets in which we have little experience;
- the risk of becoming involved in labor, commercial or regulatory
disputes or litigation related to the new enterprise;
- the risk of contractual or operational liability to our venture
participants or to third parties as a result of our participation;
- the inability to work efficiently with joint venture or strategic
alliance partners; and
- the difficulties of terminating joint ventures or strategic alliances.
Many of the available acquisition targets have incurred operating losses in
recent years and may require significant capital and operating expenditures to
return them to profitability. Financially distressed steel companies typically
do not maintain their assets adequately. Such assets may need significant
repairs and improvements. We may also have to buy sizable amounts of raw
materials, spare parts and other materials for these facilities before they can
resume profitable operation. Many potential acquisition candidates are
financially distressed steel companies that may not have maintained appropriate
environmental programs. These problems may require significant expenditures.
Future acquisitions may be required for us to remain competitive, but we
cannot assure you that we can complete any such transactions on favorable terms
or that we can obtain financing, if necessary, for such transactions on
favorable terms. We also cannot assure you that future transactions will improve
our competitive position and business prospects as anticipated; if they do not,
our results of operations may be adversely affected.
OUR VARIABLE RATE INDEBTEDNESS SUBJECTS US TO INTEREST RATE RISK, WHICH COULD
CAUSE OUR DEBT SERVICE OBLIGATIONS TO INCREASE SIGNIFICANTLY.
Certain of our borrowings, primarily borrowings under our senior secured
credit facility, are at variable rates of interest and expose us to interest
rate risk. If interest rates increase, our debt service obligations on the
variable rate indebtedness would increase and our net income would decrease. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Gerdau Ameristeel Corporation -- Quantitative and Qualitative
Disclosures About Market Risk".
WE DEPEND ON OUR SENIOR MANAGEMENT AND WE MAY BE UNABLE TO REPLACE KEY
EXECUTIVES IF THEY LEAVE.
Our operations and prospects depend in large part on the performance of our
senior management team. We cannot assure you that such individuals will remain
with us as employees. In addition, we cannot assure you that we
34
would be able to find qualified replacements for any of these individuals if
their services were no longer available. The loss of the services of one or more
members of our senior management team or our difficulty in attracting, retaining
and maintaining additional senior management personnel could have a material
adverse effect on our business, financial condition and results of operations.
GERDAU S.A. AND ITS CONTROLLING SHAREHOLDERS CONTROL US AND THEIR INTERESTS MAY
BE DIFFERENT FROM YOURS.
Gerdau S.A. beneficially owns 69% of our outstanding common shares. Gerdau
S.A., in turn, is controlled by the Gerdau Johannpeter family. Three of the nine
directors on our board of directors are members of the controlling family. As a
result, Gerdau S.A. and the controlling family significantly influence decisions
affecting us, including the election of our board of directors, control of our
management and policies, and determination of the outcome of any corporate
transactions or other matters that require shareholder approval (such as
mergers, consolidations or the sale of all or substantially all of our assets).
The interests of Gerdau S.A. and the controlling family may be different from
your interests and they may exercise their control over us in a manner
inconsistent with your interests.
RISKS RELATED TO THE EXCHANGE NOTES
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH TO SERVICE ALL OF OUR
INDEBTEDNESS, INCLUDING THE EXCHANGE NOTES, AND BE FORCED TO TAKE OTHER ACTIONS
TO SATISFY OUR OBLIGATIONS UNDER OUR INDEBTEDNESS, WHICH MAY NOT BE SUCCESSFUL.
Our ability to make scheduled payments or to refinance our debt obligations
depends on our financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond our control. We may not be able to maintain a
level of cash flows from operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness. See "Cautionary
Statement Regarding Forward-Looking Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Gerdau Ameristeel
Corporation -- Liquidity and Capital Resources."
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets, seek additional capital or restructure or refinance our
indebtedness, including the Exchange Notes. These alternative measures may not
be successful and may not permit us to meet our scheduled debt service
obligations. In addition, the senior secured credit facility and the indenture
governing the Exchange Notes will restrict our ability to dispose of assets and
use the proceeds from the disposition. We may not be able to consummate those
dispositions or to obtain the proceeds which we could realize from them and
these proceeds may not be adequate to meet any debt service obligations then
due. See "Description of Other Indebtedness" and "Description of Notes."
RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.
The senior secured credit facility and the indenture governing the Exchange
Notes each contain various covenants that limit our ability to engage in
specified types of transactions. These covenants limit our ability to, among
other things:
- incur additional debt, provide guarantees in respect of obligations of
other persons or issue redeemable preferred stock;
- pay dividends or make other equity distributions, repurchase capital
stock or subordinated debt;
- make some types of investments;
- incur liens;
- engage in sale/leaseback transactions;
- restrict distributions from our subsidiaries;
- sell assets and capital stock of our subsidiaries;
- consolidate or merge with or into, or sell substantially all of our
assets to, another person; and
- enter into new lines of business.
The restrictions in the senior secured credit facility are different in
some respects than the indenture governing the Exchange Notes and are, for the
most part, more restrictive than the indenture.
35
The senior secured credit facility requires that we maintain a fixed charge
coverage ratio of at least 1.10 to 1.00 on a rolling twelve months basis. If we
fail to maintain this ratio, we will be in default of the senior secured credit
facility unless we maintain $60.0 million of excess availability until March 27,
2004 and $40.0 million of excess availability thereafter. Excess availability is
the difference between (a) the lesser of (i) the committed amount of the senior
secured credit facility, and (ii) the borrowing base (which will be based upon a
portion of the inventory and accounts receivable held by PASUG LLC, GUSAP
Partners, Gerdau Ameristeel, Gerdau Ameristeel MRM Special Sections, Gerdau
Ameristeel Lake Ontario Inc., MFT Acquisition, Corp., Porter Bros. Corporation,
Ameristeel, Gerdau Ameristeel Perth Amboy and Gerdau Ameristeel Sayreville less
certain reserves), minus (b) outstanding loans, letter of credit obligations and
other obligations owing under the senior secured credit facility. If we fail to
maintain $80.0 million of excess availability until March 27, 2004 and $70.0
million of excess availability thereafter, or if we are in default under the
senior secured credit facility, the lenders will exercise dominion and control
over all collections of accounts receivable and other amounts under lock-box and
blocked-account arrangements. If we fail to maintain $75.0 million of excess
availability, the lenders under the facility may (x) require us to make changes
to the funding among the companies in our group that restrict payments and
restrict intra-company loans and advances, (y) require us to implement lock-box
arrangements and (z) restrict the type of loans that can be made to certain
borrowers under the senior secured credit facility.
A breach of any of the restrictions or covenants in the indenture or the
senior secured credit facility could result in a default under our senior
secured credit facility and/or the Exchange Notes. Upon the occurrence of an
event of default under our senior secured credit facility, the lenders could
declare all amounts outstanding under our senior secured credit facility to be
immediately due and payable and terminate all commitments to extend further
credit. If we were unable to repay those amounts, the lenders under our senior
secured credit facility could proceed against the collateral granted to them to
secure that indebtedness. We have pledged certain of our assets as collateral
under our senior secured credit facility. If the lenders under our senior
secured credit facility accelerate the repayment of borrowings, we cannot assure
you that we will have sufficient assets to repay our senior secured credit
facility and our other indebtedness, including the Exchange Notes. See
"Description of Other Indebtedness -- Senior Secured Credit Facility."
IF WE DEFAULT ON OUR OBLIGATIONS TO PAY OUR OTHER INDEBTEDNESS WE MAY NOT BE
ABLE TO MAKE PAYMENTS ON THE EXCHANGE NOTES.
Any default under the agreements governing our other indebtedness,
including a default under our senior secured credit facility that is not waived
by the required lenders, and the remedies sought by the holders of such
indebtedness could make us unable to pay principal, premium, if any, and
interest on the Exchange Notes and substantially decrease the market value of
the Exchange Notes. If we are unable to generate sufficient cash flow and are
otherwise unable to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on our indebtedness, or if we otherwise
fail to comply with the various covenants, including financial and operating
covenants, in the instruments governing our indebtedness (including covenants in
our indenture and our senior secured credit facility), we could be in default
under the terms of the agreements governing such indebtedness, including our
senior secured credit facility and our indenture. In the event of such default,
the holders of such indebtedness could elect to declare all the funds borrowed
thereunder to be due and payable, together with accrued and unpaid interest, the
lenders under our senior secured credit facility could elect to terminate their
commitments thereunder, cease making further loans and institute foreclosure
proceedings against our assets, and we could be forced into bankruptcy or
liquidation. If our operating performance declines we may in the future need to
obtain waivers from the required lenders under our senior secured credit
facility to avoid being in default. If we breach our covenants under our senior
secured credit facility and seek a waiver, we may not be able to obtain a waiver
from the required lenders. If this occurs, we would be in default under our
senior secured credit facility, the lenders could exercise their rights, as
described above, and we could be forced into bankruptcy or liquidation. See
"Description of Other Indebtedness" and "Description of Notes."
We obtained a waiver for the period from March 31, 2003 until June 29, 2003
from a restriction in the Ameristeel credit facility that prohibits the borrower
from exceeding a 3.75 to 1 leverage ratio, as defined in the credit agreement.
We also obtained a waiver from a leverage ratio restriction under the Gerdau
Canada credit facility as of December 31, 2002 and for the first three quarters
of 2003. In addition, from March 31, 2001 to February 19, 2002, Co-Steel was in
breach of financial covenants contained in its credit agreements and as a result
its debt was reclassified as current liabilities. Principal payments amounting
to Cdn$12.5 million due on July 15,
36
2001 and Cdn$15 million due on January 15, 2002 were not made. On February 19,
2002, Co-Steel reached an agreement in principle with its senior lenders to
amend the Co-Steel credit agreements, and executed amendments and permanently
repaid a portion of its facilities in May 2002.
A SIGNIFICANT PORTION OF OUR ASSETS ARE OWNED, AND A SIGNIFICANT PERCENTAGE OF
OUR REVENUES ARE EARNED, BY DIRECT AND INDIRECT SUBSIDIARIES OF GERDAU
AMERISTEEL (INCLUDING GUSAP). OUR ABILITY TO REPAY THE EXCHANGE NOTES DEPENDS
UPON THE PERFORMANCE OF THESE SUBSIDIARIES AND THEIR ABILITY TO MAKE
DISTRIBUTIONS.
A significant portion of our operations are conducted by our subsidiaries
and, therefore, our cash flow and our ability to service indebtedness, including
our ability to pay the interest on and principal of the Exchange Notes when due,
will be dependent upon cash dividends and distributions or other transfers from
our subsidiaries. Payments to us by our subsidiaries will be contingent upon our
subsidiaries' earnings.
Our subsidiaries are separate and distinct legal entities and, except for
the existing and future subsidiaries that will be Subsidiary Guarantors of the
Exchange Notes, they will have no obligation, contingent or otherwise, to pay
amounts due under the Exchange Notes or to make any funds available to pay those
amounts, whether by dividend, distribution, loan or other payments.
CLAIMS OF NOTEHOLDERS ARE STRUCTURALLY SUBORDINATE TO CLAIMS OF CREDITORS OF OUR
SUBSIDIARIES THAT WILL NOT GUARANTEE THE EXCHANGE NOTES AND OUR JOINT VENTURES.
The Exchange Notes will not be guaranteed by our joint ventures or by any
of our subsidiaries that are not providing guarantees under our senior secured
credit agreement. Accordingly, claims of holders of the Exchange Notes will be
structurally subordinate to the claims of creditors of these non-guarantors,
including trade creditors. All obligations of our non-guarantor subsidiaries
will have to be satisfied before any of the assets of such subsidiaries would be
available for distribution, upon a liquidation or otherwise, to us or a
guarantor of the Exchange Notes. As of September 30, 2003, our non-guarantor
subsidiaries and joint ventures had total indebtedness of $8.7 million,
including $5.9 million owed by our Gallatin joint venture. Our non-guarantor
subsidiaries and joint ventures accounted for approximately 14.0% and 11.5% of
our net sales, and approximately 29.0% and 24.9% of our EBITDA on a Canadian
GAAP basis (31.9% and 32.4% on a U.S. GAAP basis) for the year ended December
31, 2002 and the nine months ended September 30, 2003, respectively, and had
approximately $98.8 million of total assets and $35.1 million of total
liabilities as of September 30, 2003. We also have joint ventures, whose
creditors will also have claims that are structurally senior to claims of
noteholders.
THE EXCHANGE NOTES AND THE SUBSIDIARY GUARANTEES WILL BE EFFECTIVELY SUBORDINATE
TO ALL OF OUR SECURED DEBT AND IF A DEFAULT OCCURS, WE MAY NOT HAVE SUFFICIENT
FUNDS TO FULFILL OUR OBLIGATIONS UNDER THE EXCHANGE NOTES AND THE SUBSIDIARY
GUARANTEES.
The Exchange Notes will be general senior unsecured obligations that will
rank equally in right of payment with all of our existing and future unsecured
and unsubordinated indebtedness. The Exchange Notes will be effectively
subordinate to all our and our Subsidiary Guarantors' secured indebtedness to
the extent of the value of the assets securing that indebtedness. As of
September 30, 2003, we had approximately $150.0 million of secured indebtedness
under our senior secured credit facility excluding an additional $61.6 million
represented by letters of credit under the facility (most of which will be used
to secure industrial revenue bonds) to which the Exchange Notes would have been
effectively subordinated, and an additional maximum availability of up to $107.0
million under our senior secured credit facility. In addition, the indenture
governing the Exchange Notes will, subject to some limitations, permit us to
incur additional secured indebtedness and your Exchange Notes will be
effectively junior to any additional secured indebtedness we may incur.
In the event of our bankruptcy, liquidation, reorganization or other
winding up, our assets that secure our secured indebtedness will be available to
pay obligations on the Exchange Notes only after all secured indebtedness,
together with accrued interest, has been repaid in full from our assets.
Likewise, because our senior secured credit facility is a secured obligation,
our failure to comply with the terms of the senior secured credit facility would
entitle those lenders to declare all the funds borrowed thereunder, together
with accrued interest, immediately due and payable. If we were unable to repay
such indebtedness, the lenders could foreclose on substantially all of our
assets which serve as collateral. In this event, our secured lenders would be
entitled to be repaid in full from the proceeds of the liquidation of those
assets before those assets would be available for distribution to other
creditors, including
37
holders of the Exchange Notes. Holders of the Exchange Notes will participate in
our remaining assets ratably with all holders of our unsecured indebtedness that
is deemed to be of the same class as the Exchange Notes, and potentially with
all of our other general creditors. There may not be sufficient assets remaining
to pay amounts due on any or all the Exchange Notes then outstanding. The
Subsidiary Guarantees of the Exchange Notes will have a similar ranking with
respect to secured and unsecured senior indebtedness of the subsidiaries as the
Exchange Notes do with respect to our secured and unsecured senior indebtedness,
as well as with respect to any unsecured obligations expressly subordinated in
right of payment to the Subsidiary Guarantees.
WE MAY NOT BE ABLE TO REPURCHASE THE EXCHANGE NOTES UPON A CHANGE OF CONTROL.
Upon the occurrence of specific kinds of change of control events, we will
be required to offer to repurchase all outstanding Exchange Notes at 101% of
their principal amount. We may not be able to repurchase the Exchange Notes upon
a change of control because we may not have sufficient funds. Our senior secured
credit facility also provides that a change of control will be a default that
permits lenders to accelerate the maturity of borrowings thereunder.
Accordingly, we may not be able to satisfy our obligations to purchase your
Exchange Notes unless we are able to refinance or obtain waivers under our
senior secured credit facility. Our failure to repurchase the Exchange Notes
upon a change of control would cause a default under the indenture. Any of our
future debt agreements may contain similar provisions.
In addition, the change of control provisions in the indenture may not
protect you from certain important corporate events, such as a leveraged
recapitalization (which would increase the level of our indebtedness),
reorganization, restructuring, merger or other similar transaction, unless such
transaction constitutes a "Change of Control" under the indenture. Such a
transaction may not involve a change in voting power or beneficial ownership or,
even if it does, may not involve a change in the magnitude required under the
definition of "Change of Control" in the indenture to trigger our obligation to
repurchase the Exchange Notes. Therefore, if an event occurs that does not
constitute a "Change of Control," we will not be required to make an offer to
repurchase the Exchange Notes and you may be required to continue to hold your
Exchange Notes despite the event. See "Description of Other Indebtedness" and
"Description of Notes -- Change of Control."
DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY
MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit us
or our subsidiaries from doing so. If we incur any additional indebtedness that
ranks equally with the Exchange Notes, the holders of that debt will be entitled
to share ratably with you in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding up of us.
This may have the effect of reducing the amount of proceeds paid to you. Our
senior secured credit facility provides commitments of up to $350 million. If
new debt is added to our current debt levels, the related risks that we and our
subsidiaries now face could intensify.
YOUR ABILITY TO TRANSFER THE EXCHANGE NOTES MAY BE LIMITED BY THE ABSENCE OF AN
ACTIVE TRADING MARKET, AND THERE IS NO ASSURANCE THAT ANY ACTIVE TRADING MARKET
WILL DEVELOP FOR THE EXCHANGE NOTES.
We do not intend to have the Exchange Notes listed on a national securities
exchange. The initial purchasers have advised us that they intend to make a
market in Exchange Notes as permitted by applicable laws and regulations;
however, the initial purchasers are not obligated to make a market in the
Exchanges Notes, and they may discontinue their market-making activities at any
time without notice. Therefore, we cannot assure you that an active market for
the Exchange Notes will develop or, if developed, that it will continue.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Exchange Notes. We cannot assure you that the market, if any, for
the Exchange Notes will be free from similar disruptions or that any such
disruptions may not adversely affect the prices at which you may sell your
Exchange Notes. In addition, the Exchange Notes may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar notes, our performance and other factors.
38
The Existing Notes have been designated for trading by qualified buyers in
the Private Offerings, Resales and Trading through Automatic Linkages market of
the National Association of Securities Dealers, Inc.
Unless you are:
- an "affiliate" of each of the Issuers within the meaning of Rule 405
under the Securities Act;
- a broker-dealer that acquired Existing Notes as a result of
market-making activities or other trading activities; or
- a broker-dealer that acquired Existing Notes directly from us for resale
pursuant to Rule 144A or another available exemption under the
Securities Act;
you are generally permitted to resell or otherwise transfer your Exchange Notes
without compliance with the registration requirements under the Securities Act.
Even though the Exchange Notes have been registered under the Securities Act,
holders who are affiliates of each of the Issuers may publicly offer for sale or
resell the Exchange Notes only in compliance with the provisions of Rule 144
under the Securities Act or any other available exemptions under the Securities
Act.
YOUR RIGHTS UNDER THE INDENTURE GOVERNING THE EXCHANGE NOTES AND THE SUBSIDIARY
GUARANTEES AND RIGHT TO FORECLOSE UPON THE SUBSIDIARY GUARANTEES UPON AN EVENT
OF DEFAULT WILL BE SUBJECT TO LIMITATIONS UNDER CANADIAN BANKRUPTCY LAWS.
Gerdau Ameristeel Corporation is incorporated under the laws of Ontario,
Canada and certain of the guarantors are incorporated under the laws of Canada
or other provinces of Canada. Any insolvency proceedings by or against us or the
guarantors could be brought in Canada or the United States. Any proceedings
brought in Canada will likely be based on Canadian federal and provincial
insolvency laws which may, at a minimum, postpone the enforcement of your rights
against us or the guarantors with respect to the Exchange Notes and the
guarantees.
We and/or the guarantors could seek protection under the Canadian
Companies' Creditors Arrangement Act (the CCAA). Protection can and is often
sought with little to no notice to creditors, and the court which hears the
initial application will generally grant a 30-day stay of any proceedings in
respect of claims against the debtor (and in some rare circumstances, may even
expand that stay to third parties) in order to allow the debtor some relief to
attempt to restructure. The stay of proceedings granted is typically extremely
broad, and in all likelihood would stay any and all proceedings (including,
without limitation, restraining further proceedings and prohibiting the
commencement of any action, suit or proceeding) of any person including
creditors against us and the guarantors. In addition, after the initial 30-day
stay period, the court may on further application extend the stay of proceedings
for an indefinite period. Affected creditors are permitted, at any time, to
request that the stay of proceedings be terminated, or that a further stay of
proceedings not be granted, or make an application to have the stay not
specifically apply to them. Generally, however, the Canadian bankruptcy court
will allow a debtor with a realistic chance of restructuring to continue under
the protection of the court, so long as the interests of major creditors and
other stakeholders are not being unduly prejudiced.
Alternatively, we and/or one or more of the guarantors may seek protection
under the proposal provisions of the Canadian Bankruptcy and Insolvency Act. The
stay of proceedings under this statute is automatic on the filing of a proposal,
or a notice of an intention to make a proposal, to creditors. The initial stay
is 30 days. However, the stay can only be extended for 45 days at any time, and
in any event not beyond six months (including the initial 30-day period). While
the stay of proceedings invoked by a filing under this statute would generally
be narrower than a stay of proceedings under the CCAA, in either case the
exercise of creditors' remedies against us or the guarantors would effectively
be prevented during the stay period without leave of the court. Consequently,
whether proceedings are brought under the CCAA or the Bankruptcy and Insolvency
Act, it is possible that even if payments are not made under the Exchange Notes,
the trustee may not be able to exercise its rights under the indenture governing
the Exchange Notes and the holders may not be compensated for delays in
payments, if any, of principal and interest on the Exchange Notes. It is
unlikely that payments under the Exchange Notes would be made following
commencement of or during proceedings under the CCAA or the Bankruptcy and
Insolvency Act, whether or when the trustee could exercise is rights under the
indenture governing the Exchange Notes, and whether and to what extent holders
of the Exchange Notes would be compensated for delays in payments, if any of
principal and interest on the Exchange Notes.
39
Canada also has regimes which are invoked for the liquidation of debtor's
assets or business, as opposed to a restructuring. These regimes may also
involve a stay of proceedings, equally as broad as the stays of proceedings
referred to above, and thus may also result in the trustee being unable to
exercise its remedies under the indenture despite non-payment on the Exchange
Notes.
In addition, in the event of the bankruptcy of the guarantors, a trustee in
bankruptcy or a creditor under the Bankruptcy and Insolvency Act could, among
other things, apply to a Canadian court to have the Subsidiary Guarantees set
aside as fraudulent preferences which prefer the holders of Exchange Notes over
other creditors of those Subsidiary Guarantors if:
- the Subsidiary Guarantee was given within three months on the bankruptcy
of such entity;
- such entity was insolvent at the time of giving the Subsidiary
Guarantee; and
- the guarantor intended to prefer the holders of the Exchange Notes
(which presumption is assumed but may be rebutted) and the Subsidiary
Guarantee has the effect in fact of preferring the holders of Exchange
Notes over the creditors of such Subsidiary Guarantor.
In such circumstances, in order for the Subsidiary Guarantees not to be set
aside, it would be necessary to prove that the Subsidiary Guarantee was given
not to prefer the holders of Exchange Notes but rather to achieve the closing of
the offering of the Existing Notes and the receipt of the net proceeds from such
offering. If a Subsidiary Guarantee were set aside, or held to be unenforceable,
holders of Exchange Notes would cease to have any claim against the guarantor.
Consequently, the holders of Exchange Notes would remain creditors of us and any
guarantor whose Subsidiary Guarantee was not voided and not creditors of those
guarantors whose Subsidiary Guarantee was voided. The Subsidiary Guarantees
could also be challenged on a similar basis under applicable Canadian provincial
creditor protection laws.
Finally, under the terms of the indenture governing the Exchange Notes, if
an event of default occurs and is continuing, the repayment of all amounts
outstanding on the Exchange Notes can only be accelerated by written notice to
us given by the trustee or by the holders of at least 25% in aggregate principal
amount of the then outstanding Exchange Notes. If the event of default involves
guarantor's bankruptcy or insolvency, court approval may be required under the
Canadian insolvency laws in order to provide the required written notice of
acceleration.
FEDERAL AND STATE FRAUDULENT TRANSFER LAWS PERMIT A COURT TO VOID THE EXCHANGE
NOTES AND THE SUBSIDIARY GUARANTEES, AND, IF THAT OCCURS, YOU MAY NOT RECEIVE
ANY PAYMENTS ON THE EXCHANGE NOTES.
The issuance of the Exchange Notes and the Subsidiary Guarantees may be
subject to review under U.S. federal and state fraudulent transfer and
conveyance statutes. While the relevant laws may vary from state to state, under
such laws the payment of consideration will be a fraudulent conveyance if (1) we
paid the consideration with the intent of hindering, delaying or defrauding
creditors or (2) we or any of our guarantors, as applicable, received less than
reasonably equivalent value or fair consideration in return for issuing either
the Exchange Notes or a Subsidiary Guarantee, and, in the case of (2) only, one
of the following is also true:
- we or any of our guarantors were or was insolvent or rendered insolvent
by reason of the incurrence of the indebtedness; or
- payment of the consideration left us or any of our guarantors with an
unreasonably small amount of capital to carry on the business; or
- we or any of our guarantors intended to, or believed that we or it
would, incur debts beyond our or its ability to pay as they mature.
If a court were to find that the issuance of the Exchange Notes or a
Subsidiary Guarantee was a fraudulent conveyance, the court could void the
payment obligations under the Exchange Notes or such Subsidiary Guarantee or
further subordinate the Exchange Notes or such Subsidiary Guarantee to presently
existing and future indebtedness of ours or such guarantor, or require the
holders of the Exchange Notes to repay any amounts received with respect to the
Exchange Notes or such Subsidiary Guarantee. In the event of a finding that a
fraudulent conveyance occurred, you may not receive any repayment on the
Exchange Notes. Further, the voidance of the Exchange Notes could result in an
event of default with respect to our other debt and that of our subsidiaries
that could result in acceleration of such debt.
40
Generally, an entity would be considered insolvent if, at the time it
incurred indebtedness:
- the sum of its debts, including contingent liabilities, was greater than
the fair salable value of all its assets; or
- the present fair salable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts and liabilities, including contingent liabilities, as they become
absolute and mature; or
- it could not pay its debts as they become due.
We cannot be certain as to the standards a court would use to determine
whether or not we or the guarantors were solvent at the relevant time, or
regardless of the standard that a court uses, that the issuance of the Exchange
Notes and the Subsidiary Guarantees would not be subordinated to our or any
guarantor's other debt.
If the Subsidiary Guarantees were legally challenged, any Subsidiary
Guarantee could also be subject to the claim that, since the Subsidiary
Guarantee was incurred for our benefit, and only indirectly for the benefit of
the guarantor, the obligations of the applicable guarantor were incurred for
less than fair consideration. A court could thus void the obligations under the
Subsidiary Guarantees, subordinate them to the applicable guarantor's other debt
or take other action detrimental to the holders of the Exchange Notes.
BECAUSE GERDAU AMERISTEEL CORPORATION IS A CANADIAN COMPANY, THERE MAY BE
LIMITATIONS ON THE ENFORCEMENT OF CERTAIN CIVIL LIABILITIES AND JUDGMENTS
OBTAINED IN THE UNITED STATES AGAINST US.
Gerdau Ameristeel is incorporated under the laws of the province of
Ontario, Canada and certain of our subsidiaries, as well as a substantial
portion of our assets, are located outside of the United States. Many of our
directors and officers, our principal shareholder, and certain of the experts
named elsewhere in this prospectus are residents of Canada or of Brazil. All or
a substantial portion of our assets and the assets of these persons are located
outside of the United States. As a result, it may be difficult for a shareholder
to initiate a lawsuit within the United States against these non-U.S. residents,
or to enforce in the United States judgments that are obtained in a U.S. court
against us or these persons. It may also be difficult for shareholders to
enforce a U.S. judgment in Canada or other non-U.S. jurisdictions or to succeed
in a lawsuit in a non-U.S. jurisdiction based only on violations of U.S.
securities laws.
AS A "FOREIGN PRIVATE ISSUER" WE WILL PROVIDE YOU WITH LESS INFORMATION THAN YOU
WOULD OTHERWISE RECEIVE UNDER U.S. SECURITIES LAWS.
Although we are subject to the periodic reporting requirement of the
Exchange Act, the periodic disclosure required of foreign private issuers under
the Exchange Act is more limited than the periodic disclosure required of U.S.
issuers. Therefore, there may be less publicly available information about us
than is regularly published by or about other public companies in the United
States, including, for example, information regarding compensation of, and
certain transactions involving, our officers and directors. In addition, as a
foreign private issuer, we are exempt from certain other sections of the
Exchange Act that U.S. issuers would otherwise be subject to, including the
requirement to provide you with Information Statements or Proxy Statements that
comply with U.S. securities laws and to file reports under Section 16 of the
Exchange Act.
41
THE REFINANCING
The offering of the Existing Notes was part of a financing plan designed to
refinance our existing credit facilities and other indebtedness. Each of the
transactions discussed below, which we collectively refer to as the refinancing,
was contingent upon the successful completion of all the other transactions. The
refinancing was part of a larger restructuring designed to streamline our
operations. The refinancing was completed on June 27, 2003 and consisted of the
following transactions:
- Offering of Existing Notes. On June 27, 2003, we issued an aggregate of
$405 million principal amount of the Existing Notes. $35 million
aggregate principal amount of the Existing Notes were sold to an
indirect wholly-owned subsidiary of our parent, Gerdau S.A., in this
offering.
- Senior secured credit facility. We entered into a new senior secured
revolving credit facility, with a term of five years, which provided
commitments of up to $350 million. We will be able to borrow under the
senior secured credit facility (a) the lesser of (i) the committed
amount, and (ii) our borrowing base (which is based upon a portion of
the inventory and accounts receivable held by PASUG LLC, GUSAP Partners,
Gerdau Ameristeel, Gerdau Ameristeel MRM Special Sections, Gerdau
Ameristeel Lake Ontario Inc., MFT Acquisition, Corp., Porter Bros.
Corporation, Ameristeel, Gerdau Ameristeel Perth Amboy and Gerdau
Ameristeel Sayreville less certain reserves), minus (b) outstanding
loans, letter of credit obligations and other obligations owing under
the senior secured credit facility. Since the borrowing base under our
senior secured credit facility is based on our actual inventory and
accounts receivable levels, available borrowings under the facility will
fluctuate, and these fluctuations could be significant. Additionally,
beginning March 27, 2004, the calculation of our borrowing base may
include a smaller portion of the value of our inventory, which would
reduce our available borrowings under the senior secured credit
facility. The senior secured credit facility requires that we maintain a
fixed charge coverage ratio of at least 1.10 to 1.00 on a rolling twelve
months basis and, at any time that we fail to do so, we will be in
default of the senior secured credit facility unless we maintain $60.0
million of excess availability until March 27, 2004 and $40.0 million of
excess availability thereafter. If we fail to maintain $80.0 million of
excess availability until March 27, 2004 and $70.0 million of excess
availability thereafter, or if we are in default under the senior
secured credit facility, the lenders will exercise dominion and control
over all collections of accounts receivable and other amounts under
lock-box and blocked-account arrangements. If we fail to maintain $75.0
million of excess availability, the lenders under the facility may (x)
require us to make changes to the funding among the companies in our
group that restrict payments and restrict intra-company loans and
advances, (y) require us to implement lock-box arrangements and (z)
restrict the type of loans that can be made to certain borrowers under
the senior secured credit facility. The senior secured credit facility
is secured by certain of our assets. As of September 30, 2003, our
initial borrowing base supported borrowings of approximately $257.0
million under our senior credit facility, of which $150.0 million was
drawn and an additional $61.6 million was represented by letters of
credit under the facility (most of which would have been used to secure
industrial revenue bonds), leaving approximately $107.0 million of
borrowing availability. See "Description of Other Indebtedness -- Senior
Secured Credit Facility."
- Repayment of existing indebtedness. With the net proceeds of the sale
of the Existing Notes and the drawn portion of the senior secured credit
agreement, we repaid $498.0 million of our existing indebtedness and
paid $11.9 million of related fees and expenses.
42
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of our obligations under
the Registration Rights Agreement entered into in connection with the sale of
the Existing Notes. We will not receive any proceeds from the issuance of the
Exchange Notes offered in this Exchange Offer. In consideration for issuing the
Exchange Notes as contemplated in the prospectus, we will receive, in exchange,
an equal number of Existing Notes in like principal amount.
We will retire and cancel Existing Notes surrendered in exchange for
Exchange Notes. We will not reissue such Existing Notes.
CALCULATION OF EARNINGS COVERAGE
The Company's interest requirements, after giving effect to the issue of
the Notes, amounted to $53.6 million for the 12 months ended September 30, 2003.
The Company's earnings before interest and income taxes calculated in accordance
with Canadian GAAP for the 12 months ended September 30, 2003 was $4.7 million,
which is 0.1 times the Company's interest requirements for this period. As a
result, for the twelve months ended September 30, 2003, earnings did not cover
interest requirements by $48.9 million. The Company's interest requirements,
after giving effect to the issue of the Notes under the short form prospectus,
amounted to $42.7 million for the 12 months ended December 31, 2002. The
Company's earnings before interest and income taxes for the 12 months ended
December 31, 2002 was $50.1 million, which is 1.2 times the Company's interest
requirements for this period.
43
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2003
and capitalization as of such date as adjusted to reflect the refinancing. The
table should be read in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus.
<Table>
<Caption>
SEPTEMBER 30, 2003
---------------------
(Dollars in millions)
Cash and cash equivalents (1)............................... $ 20.4
========
Bank indebtedness and current portion of long-term
borrowings
Ameristeel industrial revenue bonds (2)................... $ 9.4
AmeriSteel Bright Bar (3)................................. 0.7
Joint venture bank indebtedness -- Gallatin (4)........... 2.8
Other..................................................... 0.7
--------
Total bank indebtedness and current portion of
long-term borrowings.................................. 13.6
Long-term borrowings, less current portion
Existing Notes net of discount (5)........................ 397.1
Senior secured credit facility (6)........................ 150.0
Ameristeel industrial revenue bonds (2)................... 27.4
AmeriSteel Bright Bar (3)................................. 2.8
Other..................................................... 4.5
--------
Total long-term borrowings, less current portion....... 581.8
Total debt (7).............................................. 595.4
Shareholders' equity
Capital stock............................................. 547.6
Convertible debentures (7)................................ 92.6
Retained deficit (8)...................................... (16.8)
Cumulative translation adjustment......................... 26.8
--------
Total shareholders' equity............................. 650.2
--------
Total capitalization................................... $1,245.6
========
</Table>
- ---------------
(1) Includes our equity interest of $5.7 million of cash which is held by
Gallatin and is not available to us unless it is distributed.
(2) We had $36.8 million of industrial revenue bonds outstanding as of
September 30, 2003. These bonds were issued to construct facilities in
Tennessee, North Carolina and Florida. The interest rates on the bonds
range from 50% to 70% of the prime rate. The bonds mature in the fourth
quarter of 2003, 2014, 2017 and 2018 and are secured by letters of credit
issued pursuant to our senior secured credit facility.
(3) As of September 30, 2003, the AmeriSteel Bright Bar, Inc. facility had a
$3.5 million term loan outstanding.
(4) Our joint venture, Gallatin, has $5.9 million of bank indebtedness
outstanding as of September 30, 2003. Under Canadian GAAP, 50% of the
indebtedness is reflected on our consolidated balance sheet. As a general
partner of Gallatin, we would be liable for all of the indebtedness of
Gallatin in the event that neither Gallatin nor our joint venture partner
is able to satisfy those obligations.
(5) Gross proceeds from the issuance of $405 million of aggregate principal
amount of Existing Notes at a price of 98.001% of the face amount. $35.0
million aggregate principal amount of the Existing Notes were sold to an
indirect wholly-owned subsidiary of our parent, Gerdau S.A.
(6) Total commitments under the senior secured credit facility are $350
million. As of September 30, 2003, our borrowing base supported borrowings
of approximately $257 million under our senior secured credit facility, of
which $150.0 million was drawn and an additional $61.6 million was
represented by letters of credit (most of which were used to secure
industrial revenue bonds), leaving approximately $107.0 million of
borrowing availability.
(7) Under Canadian GAAP, our convertible debentures are classified as an equity
instrument. Under U.S. GAAP, our convertible debentures would be classified
as long-term borrowings.
(8) Adjusted for the after tax effect of the write-off of $2.0 million of
deferred finance costs.
44
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
earnings (loss) for Gerdau Ameristeel Corporation give effect to (i) the
combination of Gerdau North America and Co-Steel, (ii) the acquisition of all
shares of Ameristeel not previously owned by us using newly-issued common shares
and (iii) the refinancing, and are based on the historical consolidated
financial statements of Co-Steel and Gerdau Ameristeel Corporation for the nine
months ended September 30, 2002, the nine months ended September 30, 2003, the
twelve months ended September 30, 2003, and the year ended December 31, 2002, as
if the acquisition of the shares of Ameristeel, the combination of Gerdau North
America and Co-Steel and the refinancing all had occurred as of January 1, 2002.
The unaudited Gerdau Ameristeel pro forma combined condensed financial data
have been prepared based upon currently available information and assumptions
deemed appropriate by management. The unaudited pro forma condensed consolidated
financial data are for informational purposes only and are not necessarily
indicative of either the financial position or the results of operations that
would have been achieved had the transactions for which we are giving pro forma
effect actually occurred on the dates referred to above, nor are such pro forma
data necessarily indicative of the results of future operations, because such
unaudited pro forma consolidated condensed financial data are based on estimates
of financial effects that may prove to be inaccurate over time.
The unaudited pro forma financial data for Gerdau Ameristeel have been
prepared in accordance with Canadian GAAP, which has been adjusted and presented
in accordance with U.S. GAAP. The material differences between Canadian GAAP and
U.S. GAAP are described in note 10 to the unaudited pro forma financial data.
45
GERDAU AMERISTEEL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS (LOSS)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------
PRO FORMA
GERDAU ACQUISITION PRO FORMA
AMERISTEEL ADJUSTMENTS(4) SUBTOTAL REFINANCE(5)
---------- -------------- ------------ ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales........................................ $1,401,270 $ -- $ 1,401,270 $ --
---------- ----- ------------ -------
Cost of sales................................ 1,283,916 -- 1,283,916 --
Depreciation and amortization................ 60,467 -- 60,467 --
Selling and administrative................... 59,312 -- 59,312 --
Other operating expense (income)............. 144 -- 144 --
---------- ----- ------------ -------
1,403,839 1,403,839 --
---------- ----- ------------ -------
(Loss) income from operations and
amortization................................ (2,569) (2,569) --
---------- ----- ------------ -------
Interest expense -- net...................... 34,277 34,277 8,418
Other expense -- net......................... 186 186
---------- ----- ------------ -------
34,463 34,463 8,418
---------- ----- ------------ -------
Loss before income taxes..................... (37,032) (37,032) (8,418)
Income tax (benefit)......................... (21,525) (21,525) (3,368)
Loss before earnings in joint ventures and
minority interest........................... (15,507) (15,507) (5,050)
Earnings in joint ventures................... -- --
Minority interest............................ 217 (217)(a) --
---------- ----- ------------ -------
Net loss..................................... $ (15,290) $(217) $ (15,507) $(5,050)
---------- ----- ------------ -------
Pro forma basic loss per share............... $ (0.09)
Diluted...................................... $ (0.09)
Weighted average number of common shares
outstanding................................. 198,090,861
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------
PRO FORMA U.S. GAAP
COMBINED ADJUSTMENTS(7) PRO FORMA
CONDENSED --------------------- COMBINED
CANADIAN JOINT CONDENSED
GAAP VENTURES(A) OTHER U.S. GAAP
------------ ----------- ------- ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales........................................ $ 1,401,270 $(163,072) $79,702(h) $ 1,317,900
------------ --------- ------- ------------
Cost of sales................................ 1,283,916 (145,280) 79,702(h) 1,218,338
Depreciation and amortization................ 60,467 (12,266) 4,020(i) 52,221
Selling and administrative................... 59,312 (4,344) -- 54,968
Other operating expense (income)............. 144 (238) 238 144
------------ --------- ------- ------------
1,403,839 (162,128) 83,960 1,325,671
------------ --------- ------- ------------
(Loss) income from operations and
amortization................................ (2,569) (944) (4,258) (7,771)
------------ --------- ------- ------------
Interest expense -- net...................... 42,695 (198) 10,776(j) 53,273
Other expense -- net......................... 186 -- 186
------------ --------- ------- ------------
42,881 (198) 10,776 53,459
------------ --------- ------- ------------
Loss before income taxes..................... (45,450) (746) (15,034) (61,230)
Income tax (benefit)......................... (24,893) (214) (2,619)(k) (27,726)
Loss before earnings in joint ventures and
minority interest........................... (20,557) (532) (12,415) (33,504)
Earnings in joint ventures................... -- 532 4,745(l) 5,277
Minority interest............................ -- --
------------ --------- ------- ------------
Net loss..................................... $ (20,557) $ -- $(7,670) $ (28,227)
------------ --------- ------- ------------
Pro forma basic loss per share............... $ (0.12) $ (0.14)
Diluted...................................... (0.12)
Weighted average number of common shares
outstanding................................. 198,090,861 198,090,861
</Table>
46
GERDAU AMERISTEEL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS (LOSS)
<Table>
<Caption>
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------
PRO FORMA
GERDAU CO- ACQUISITION PRO FORMA
AMERISTEEL STEEL(6) ADJUSTMENTS(4) SUBTOTAL REFINANCE(5)
---------- -------- -------------- ------------ ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales............................ $1,739,703 $52,382 $ $ 1,792,085 $
---------- ------- ------- ------------ --------
Cost of sales.................... 1,579,709 41,250 1,699(b) 1,622,658
Depreciation and amortization.... 80,631 2,584 (315)(b) 82,900
Selling and administrative....... 76,116 5,578 (3,848)(b) 77,846
Other operating income
(expense)....................... (5,935) (5,935)
---------- ------- ------- ------------ --------
1,730,521 49,412 (2,464) 1,777,469
---------- ------- ------- ------------ --------
Income from operations........... 9,182 2,970 2,464 14,616
---------- ------- ------- ------------ --------
Interest expense -- net.......... 42,606 (1,626) 108(b) 41,088 12,107
Other expense -- net............. 30 -- --(b) 30
---------- ------- ------- ------------ --------
42,636 (1,626) 108 41,118 12,107
---------- ------- ------- ------------ --------
Income (loss) before income
taxes........................... (33,454) 4,596 2,356 (26,502) (12,107)
Income tax (benefit) expense..... (21,750) 2,738 (435)(b) (19,447) (4,843)
Income (loss) before earnings in
joint ventures and minority
interest........................ (11,704) 1,858 2,791 (7,055) (7,264)
Earnings in joint ventures....... -- -- --
Minority interest................ (63) -- 63(a) --
---------- ------- ------- ------------ --------
Net income (loss)................ $ (11,767) $ 1,858 $ 2,854 $ (7,055) $ (7,264)
---------- ------- ------- ------------ --------
Pro forma basic loss per share... $ (0.05)
Diluted.......................... $ (0.05)
Weighted average number of common
shares outstanding.............. 198,090,861
<Caption>
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------
PRO FORMA U.S. GAAP
COMBINED ADJUSTMENT(7) PRO FORMA
CONDENSED ----------------------- COMBINED
CANADIAN JOINT CONDENSED
GAAP VENTURES(A) OTHER U.S. GAAP
------------ ----------- --------- ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales............................ $ 1,792,085 $(221,163) $ 94,162(m) $ 1,665,084
------------ --------- --------- ------------
Cost of sales.................... 1,622,658 (189,538) 94,645(n) 1,527,765
Depreciation and amortization.... 82,900 (17,025) 4,691(o) 70,566
Selling and administrative....... 77,846 (4,805) -- 73,041
Other operating income
(expense)....................... (5,935) 109 238 (5,588)
------------ --------- --------- ------------
1,777,469 (211,259) 99,574 1,665,784
------------ --------- --------- ------------
Income from operations........... 14,616 (9,904) (5,412) (700)
------------ --------- --------- ------------
Interest expense -- net.......... 53,195 1,593 11,422(p) 66,210
Other expense -- net............. 30 52 -- 82
------------ --------- --------- ------------
53,225 1,645 11,422 66,292
------------ --------- --------- ------------
Income (loss) before income
taxes........................... (38,609) (11,549) (16,834) (66,992)
Income tax (benefit) expense..... (24,290) 213 (697) (24,774)
Income (loss) before earnings in
joint ventures and minority
interest........................ (14,319) (11,762) (16,137) (42,218)
Earnings in joint ventures....... -- 11,762 8,094(r) 19,856
Minority interest................ -- -- --
------------ --------- --------- ------------
Net income (loss)................ $ (14,319) $ -- $ (8,043) $ (22,362)
------------ --------- --------- ------------
Pro forma basic loss per share... $ (0.09) $ (0.11)
Diluted.......................... $ (0.09)
Weighted average number of common
shares outstanding.............. 198,090,861 198,090,861
</Table>
47
GERDAU AMERISTEEL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS (LOSS)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------------------
PRO FORMA
GERDAU CO-STEEL ACQUISITION PRO FORMA
AMERISTEEL PROFORMA(6) ADJUSTMENTS(4) SUBTOTAL REFINANCE(5)
---------- ------------ -------------- ------------ ------------
(Dollars in thousands, except
per share amounts)
(Unaudited)
Sales.......................... $697,622 $587,740 $ $ 1,285,362 $
-------- -------- -------- ------------ --------
Cost of sales.................. 571,298 520,530 (1,206)(b) 1,090,622
Depreciation and
amortization.................. 38,520 32,146 (13,500)(b) 57,166
Selling and administrative..... 45,369 17,330 (57)(b) 62,642
Other operating expense
(income)...................... 1,007 (3,995) (2,988)
-------- -------- -------- ------------ --------
656,194 566,011 (14,763) 1,207,442
-------- -------- -------- ------------ --------
Income from operations......... 41,428 21,729 14,763 77,920
-------- -------- -------- ------------ --------
Interest expense -- net........ 31,441 16,834 (16,167)(b) 32,108 11,392
Other expense -- net........... 386 5,780 (436) 5,730 --
-------- -------- -------- ------------ --------
31,827 22,614 (16,603) 37,838 11,392
-------- -------- -------- ------------ --------
Income (loss) before income
taxes......................... 9,601 (885) 31,366(b) 40,082 (11,392)
Income tax (benefit) expense... 565 (2,547) 10,908(b) 8,926 (4,557)
Income (loss) before earnings
in joint ventures and minority
interest...................... 9,036 1,662 20,458 31,156 (6,835)
Earnings in joint ventures..... -- --
Minority interest.............. (1,430) 1,430 --
-------- -------- -------- ------------ --------
Net income (loss).............. $ 7,606 $ 1,662 $ 21,888 $ 31,156 $ (6,835)
-------- -------- -------- ------------ --------
Pro forma basic income per
share......................... $ 0.16
Diluted........................ $ 0.14
Weighted average number of
common shares outstanding..... 198,090,861
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------
PRO FORMA U.S. GAAP
COMBINED ADJUSTMENTS(7) PRO FORMA
CONDENSED --------------------- COMBINED
CANADIAN JOINT CONDENSED
GAAP VENTURES(A) OTHER U.S. GAAP
------------ ----------- ------- ------------
(Dollars in thousands, except
per share amounts)
(Unaudited)
Sales.......................... $ 1,285,362 $(168,013) $87,038(s) $ 1,204,387
------------ --------- ------- ------------
Cost of sales.................. 1,090,622 (127,743) 88,082(t) 1,050,961
Depreciation and
amortization.................. 57,166 (11,924) 2,013(u) 47,255
Selling and administrative..... 62,642 (6,130) -- 56,512
Other operating expense
(income)...................... (2,988) -- -- (2,988)
------------ --------- ------- ------------
1,207,442 (145,797) 90,095 1,151,740
------------ --------- ------- ------------
Income from operations......... 77,920 (22,216) (3,057) 52,647
------------ --------- ------- ------------
Interest expense -- net........ 43,500 (2,271) 7,532(v) 48,761
Other expense -- net........... 5,730 (193) -- 5,537
------------ --------- ------- ------------
49,230 (2,464) 7,532 54,298
------------ --------- ------- ------------
Income (loss) before income
taxes......................... 28,690 (19,752) (10,589) (1,651)
Income tax (benefit) expense... 4,369 (426) (3,654)(w) 289
Income (loss) before earnings
in joint ventures and minority
interest...................... 24,321 (19,326) (6,935) (1,940)
Earnings in joint ventures..... -- 19,326 2,463(x) 21,789
Minority interest.............. -- --
------------ --------- ------- ------------
Net income (loss).............. $ 24,321 $ -- $(4,472) $ 19,849
------------ --------- ------- ------------
Pro forma basic income per
share......................... $ 0.12 $ 0.10
Diluted........................ $ 0.11
Weighted average number of
common shares outstanding..... 198,090,861 198,090,861
</Table>
48
GERDAU AMERISTEEL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS (LOSS)
<Table>
<Caption>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
--------------------------------------------------------------------
PRO FORMA
GERDAU CO- ACQUISITION PRO FORMA
AMERISTEEL STEEL(6) ADJUSTMENTS(4) SUBTOTAL REFINANCE(5)
---------- -------- -------------- ------------ ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales.............................. $1,036,055 $640,121 $ $ 1,676,176 $
Cost of sales...................... 867,091 561,780 493(b) 1,429,364
Depreciation and amortization...... 58,683 34,730 (13,815)(b) 79,598
Selling and administrative......... 62,173 22,908 (3,906)(b) 81,175
Other operating income (expense)... (5,072) (3,995) (9,067)
---------- -------- -------- ------------ --------
982,875 615,423 (17,228) 1,581,070
---------- -------- -------- ------------ --------
Income from operations............. 53,180 24,698 17,228 95,106
---------- -------- -------- ------------ --------
Interest expense -- net............ 39,770 15,208 (16,059)(b) 38,919 15,081
Other expense-net.................. 230 5,780 (436)(b) 5,574 --
---------- -------- -------- ------------ --------
40,000 20,988 (16,495) 44,493 15,081
---------- -------- -------- ------------ --------
Income (loss) before income
taxes............................. 13,180 3,710 33,723 50,613 (15,081)
Income tax expense (benefit)....... 341 191 10,473(b) 11,005 (6,032)
Income before earnings in joint
ventures and minority interest.... 12,839 3,519 23,250 39,608 (9,049)
Earnings in joint ventures......... -- --
Minority interest.................. (1,707) 1,707(a) --
---------- -------- -------- ------------ --------
Net income (loss).................. $ 11,132 $ 3,519 $ 24,957 $ 39,608 $ (9,049)
---------- -------- -------- ------------ --------
Pro forma basic and diluted loss
per share......................... $ 0.18
Weighted average number of common
shares outstanding................ 198,090,861
<Caption>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
-----------------------------------------------------
PRO FORMA U.S. GAAP
COMBINED ADJUSTMENTS(7)
CONDENSED ---------------------- PRO FORMA
CANADIAN JOINT COMBINED
GAAP VENTURES(A) OTHER CONDENSED
------------ ----------- -------- ------------
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales.............................. $ 1,676,176 $(226,104) $101,498(y) $ 1,551,570
Cost of sales...................... 1,429,364 (172,001) 103,025(z) 1,360,388
Depreciation and amortization...... 79,598 (16,682) 2,684(aa) 65,600
Selling and administrative......... 81,175 (6,592) 74,583
Other operating income (expense)... (9,067) 346 (8,721)
------------ --------- -------- ------------
1,581,070 (194,929) 105,709 1,491,850
------------ --------- -------- ------------
Income from operations............. 95,106 (31,175) (4,211) 59,720
------------ --------- -------- ------------
Interest expense -- net............ 54,000 (479) 8,179(bb) 61,700
Other expense-net.................. 5,574 (141) 5,433
------------ --------- -------- ------------
59,574 (620) 8,179 67,133
------------ --------- -------- ------------
Income (loss) before income
taxes............................. 35,532 (30,555) (12,390) (7,413)
Income tax expense (benefit)....... 4,973 (4,260)(cc) 713
Income before earnings in joint
ventures and minority interest.... 30,559 (30,555) (8,130) (8,126)
Earnings in joint ventures......... -- 30,555 3,284(dd) 33,839
Minority interest.................. -- -- -- --
------------ --------- -------- ------------
Net income (loss).................. $ 30,559 $ -- $ (4,846) 25,713
------------ --------- -------- ------------
Pro forma basic and diluted loss
per share......................... $ 0.14 $ 0.13
Weighted average number of common
shares outstanding................ 198,090,861 198,090,861
</Table>
49
GERDAU AMERISTEEL CORPORATION
NOTES TO PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
(Unaudited)
1. BASIS OF PRESENTATION
The pro forma condensed consolidated financial statements of earnings (loss)
give effect to (i) the combination of Gerdau North America and Co-Steel, (ii)
the acquisition of all shares of Ameristeel not previously owned by us prior
to September 30, 2003 using newly-issued common shares in the minority
exchange and (iii) the refinancing described elsewhere in this prospectus
under the heading "The Refinancing."
On October 23, 2002, the ultimate parent company of Gerdau North America
entered into a transaction agreement with Co-Steel which resulted in Co-Steel
acquiring all of the issued and outstanding shares of the companies included
in Gerdau North America, along with Gerdau North America's indirect 87%
interest in Ameristeel, in exchange for Co-Steel common shares representing
approximately 74% of Co-Steel's total common shares. Gerdau North America's
operations included: our mills in Cambridge, Ontario; Cartersville, Georgia;
Charlotte, North Carolina; Jackson, Tennessee; Jacksonville, Florida; and
Selkirk, Manitoba; our downstream operations (including two joint ventures),
and a portion of our recycling facilities. Co-Steel's operations included:
our mills in Perth Amboy, New Jersey; Sayreville, New Jersey; and Whitby,
Ontario; our Gallatin Steel Company joint venture; and a portion of our
recycling operations. As part of this transaction, certain related party
loans payable of Gerdau North America were converted into equity in October
2002. The transaction was accounted for using the reverse-take-over method of
purchase accounting. Gerdau North America was deemed to be the acquiror and
was assumed to be purchasing the assets and liabilities of Co-Steel, since
the original shareholder of Gerdau North America became owner of more than 50
percent of the voting shares of Co-Steel on a fully-diluted basis following
the transaction. As a result, Gerdau North America's historical accounts
became the historical accounts of Co-Steel for all periods prior to the date
of merger. In connection with the merger, Co-Steel's name was changed to
Gerdau Ameristeel Corporation. Subsequent to the combination, Gerdau
Ameristeel exchanged newly issued common shares for the approximately 13% of
the issued and outstanding shares of Ameristeel held by non-controlling
shareholders. Gerdau Ameristeel issued 133,388,400 shares in exchange for
Gerdau North America and 13,198,501 shares in the minority exchange.
The pro forma statements of earnings (loss) for the year ended December 31,
2002, the nine months ended September 30, 2003 and September 30, 2002 and the
twelve months ended September 30, 2003 give effect to the combination between
Gerdau North America and Co-Steel, the minority exchange and the refinancing
as though they had taken place on January 1, 2002.
The pro forma statements are not necessarily indicative of what the results
of operations and financial position would have been, nor do they purport to
project the company's results of operations for any future periods. The pro
forma statements should be read in conjunction with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the selected consolidated financial data, the summary
consolidated financial and operating data and the other financial statements
that appear elsewhere in this prospectus. In the opinion of management of
Gerdau Ameristeel, these unaudited pro forma statements include all
adjustments necessary for a fair presentation.
2. ACCOUNTING TREATMENT FOR THE BUSINESS COMBINATION AND MINORITY EXCHANGE
The combination of Gerdau North America and Co-Steel was accounted for using
the reverse-take-over method of purchase accounting. Gerdau North America was
deemed to be the acquiror and was assumed to have purchased the assets and
liabilities of Co-Steel, since the original shareholders of Gerdau North
America, as a group, became owners of more than 50 percent of the voting
shares of Co-Steel (now Gerdau Ameristeel) on a fully-diluted basis following
the combination. The results of operations of Co-Steel are included in the
Gerdau Ameristeel results from October 23, 2002, the date of the combination.
Subsequent to the combination of Gerdau North America and Co-Steel,
non-controlling shareholders holding, in the aggregate, approximately 13% of
the issued and outstanding shares of AmeriSteel Corporation, had their
holdings exchanged for Gerdau Ameristeel common shares at a ratio of 9.4617
Gerdau Ameristeel shares for each common share of Ameristeel exchanged. The
acquisition of the minority interest of Ameristeel was accounted for as a
step acquisition under the purchase method of accounting, whereby the
purchase price of the shares is allocated to the net assets acquired based
upon their relative fair values. Goodwill of $2.2 million arose from
reporting the minority interest exchange.
3. FOREIGN CURRENCY TRANSLATION OF CO-STEEL
For the purposes of the pro forma financial statements, the audited and
unaudited financial statements of Co-Steel have been translated from Canadian
dollars into U.S. dollars, as this is the company's primary reporting
currency subsequent to the combination. The current rate method has been used
for translation, with the statements of earnings (loss) converted at the
average exchange rate of $1.00 equal Cdn$1.5703 for the year ended December
31, 2002, Cdn $1.4645 for the twelve months ended September 30, 2003 and Cdn
$1.4295 for the nine months ended September 30, 2003. The actual exchange
rate used to account for the combination on October 23, 2002 was Cdn $1.5603.
50
4. ACQUISITION ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (LOSS)
The Canadian GAAP columns of the pro forma condensed consolidated statements
of earnings (loss) reflect the following pro forma adjustments:
(a) The elimination of minority interest as if the minority exchange had
occurred on the first day of the applicable period.
(b) The allocation of the purchase price from the combination of Gerdau North
America and Co-Steel to Co-Steel's assets and liabilities according to
the purchase accounting method. As a result, historical book values were
restated to market values, creating negative goodwill which was then
allocated to reduce the book values of long-term assets and liabilities.
Negative goodwill has been allocated to property, plant and equipment and
associated deferred income taxes.
The pro forma acquisition adjustments on the Canadian GAAP columns of the pro
forma condensed consolidated statements of earnings (loss) reflect the
following adjustments:
<Table>
<Caption>
TWELVE NINE
MONTHS MONTHS
ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2003 2002 2002
------------- ------------- ------------
(Dollars in thousands)
Adjustment to reflect unfavorable lease costs and other
purchase adjustments...................................... $ 1,699 $ (1,206) $ 493
Adjust depreciation to reflect purchase accounting
adjustments............................................... (315) (13,500) (13,815)
Adjustment for transaction costs recorded by Co-Steel prior
to the acquisition........................................ (3,848) (57) (3,906)
Interest on related party debt converted to equity.......... 108 (16,167) (16,059)
Adjust foreign exchange associated with conversion of
related party debt to equity.............................. -- (436) (436)
Adjust income tax expense to tax effect certain pro forma
adjustments noted above................................... (435) 10,908 10,473
Net income (loss) before minority interest.................. $ 2,791 $ 20,458 $(23,250)
</Table>
5. REFINANCING ADJUSTMENTS TO PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (LOSS)
The Canadian GAAP columns of the pro forma condensed consolidated statements
of earnings (loss) reflect annualized interest expense and other financial
costs associated with the refinancing as follows:
<Table>
<Caption>
ANNUALIZED
PRO FORMA
INTEREST EXPENSE
---------------------
(Dollars in millions)
Interest on $405 million of Existing Notes net of discount
of $8.1 million, with an effective interest rate of
10 3/4%................................................... $42.7
Interest on senior secured credit facility, assuming
LIBOR+275 bps and drawn portion of $113.0 million......... 7.5
Interest expense associated with interest rate swaps
(net)..................................................... 3.7
Interest on existing indebtedness (i.e. industrial revenue
bonds, AmeriSteel Bright Bar, Inc. facility and capital
leases)................................................... 2.3
Deferred finance costs...................................... 1.8
-----
$58.0
=====
</Table>
A 12.5 basis points change in interest rates would result in less than a $0.1
million change in annual interest expense subsequent to the refinancing.
For each of the periods for which a pro forma combined condensed statement of
earnings (loss) is presented, the following are the refinance adjustments:
<Table>
<Caption>
NINE TWELVE NINE
MONTHS MONTHS YEAR MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2003 2002 2002
------------- ------------- ------------ -------------
(Dollars in thousands)
Pro forma interest expense............................... $44,270 $58,770 $58,000 $43,500
Add actual credits:
Interest on tax refund................................. -- (2,900) (2,900) --
Purchase accounting adjustment......................... -- (1,100) (1,100) --
Adjust for fixed rate debt make-whole accrual............ (1,575) (1,575) -- --
------- ------- ------- -------
Net pro forma interest expense........................... $42,695 $53,195 $54,000 $43,500
======= ======= ======= =======
</Table>
51
6. CO-STEEL ADJUSTMENTS
The Canadian GAAP columns of the pro forma combined condensed statements of
earnings (loss) reflect adjustments to include the Co-Steel operations from
the beginning of the applicable period. The Co-Steel operations are
consolidated in our results from October 23, 2002 forward.
7. DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP
The preceding notes have been prepared in accordance with Canadian GAAP. The
material differences between Canadian GAAP and U.S. GAAP are described in
note 21 to our audited financial statements, note 8 to our unaudited
financial statements for the nine months ended September 30, 2002 and 2003
and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Gerdau Ameristeel Corporation -- Material
Differences Between Canadian GAAP and U.S. GAAP."
The following adjustments are reflected in the U.S. GAAP columns:
JOINT VENTURES
(a) The deconsolidation of our joint ventures, which are accounted for under
the equity method under U.S. GAAP.
OTHER ADJUSTMENTS -- STATEMENT OF EARNINGS (LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2003
(h) The reclassification of freight costs of $79.7 million from sales to cost
of sales.
(i) The increase in depreciation expense by $4.0 million due to the higher
property, plant and equipment under U.S. GAAP resulting from the
differences in allocation of negative goodwill.
(j) Recording of $3.0 million of interest expense for the ineffective
portion of our interest rate swaps, $3.5 million in amortization of the
fair value adjustment relating to convertible debentures and $4.3
million of interest expense on convertible debentures under U.S. GAAP.
(k) Income tax benefit of $2.6 million on the U.S. GAAP adjustments.
(l) Increase in earnings in joint ventures of $4.7 million due to
differences in accounting treatment of the purchase price allocation.
TWELVE MONTHS ENDED SEPTEMBER 30, 2003
(m) The reclassification of freight costs of $94.2 million from sales to cost
of sales.
(n) The reclassification of freight costs of $94.2 million from sales to cost
of sales and increase in pension expense of $0.5 million due to a U.S.
GAAP pension adjustment under Statement of Financial Accounting Standards
No. 87.
(o) The increase in depreciation expense by $4.7 million due to higher
property, plant and equipment under U.S. GAAP resulting from the
differences in the allocation of negative goodwill.
(p) Recording of $1.6 million of interest expense for the ineffective portion
of our interest rate swaps, $4.4 million in amortization of the fair
value adjustment relating to convertible debentures and $5.4 million of
interest expense on convertible debentures.
(q) Income tax benefit of $0.7 million on the U.S. GAAP adjustments.
(r) Increase in earnings in joint ventures of $8.1 million due to
differences in accounting treatment of the purchase price allocation.
NINE MONTHS ENDED SEPTEMBER 30, 2002
(s) The reclassification of freight costs of $87.0 million from sales to
cost of sales.
(t) The reclassification of freight costs of $87.0 million from sales to
cost of sales and increase in pension expense of $1.0 million due to a
U.S. GAAP pension adjustment under Statement of Financial Accounting
Standards No. 87.
(u) The increase in depreciation expense by $2.0 million due to higher
property, plant and equipment under U.S. GAAP resulting from the
differences in the allocation of negative goodwill.
(v) Recording of $0.4 million of interest expense for the ineffective
portion of our interest rate swaps, $3 million in amortization of the
fair value adjustment relating to convertible debentures and $4.1
million of interest expense on convertible debentures.
(w) Income tax benefit of $3.7 million on the U.S. GAAP adjustments.
(x) Increase in earnings in joint ventures of $2.5 million due to
differences in accounting treatment of purchase price allocation.
YEAR ENDED DECEMBER 31, 2002
(y) The reclassification of freight costs of $101.5 million from sales to
cost of sales.
(z) The reclassification of freight costs of $101.5 million from sales to
cost of sales and increase in pension expense of $1.5 million due to a
U.S. GAAP pension adjustment under the Statement of Financial Accounting
Standards No. 87.
(aa) The increase in depreciation expense by $2.7 million due to higher
property, plant and equipment under U.S. GAAP resulting from the
differences in the allocation of negative goodwill.
52
(bb) Recording of $0.6 million of interest income for the ineffective portion
of our interest rate swaps, $3.6 of amortization of the fair value
adjustment relating to convertible debentures and $5.2 million of
interest expense on convertible debentures.
(cc) Income tax of $4.3 million on the U.S. GAAP adjustments.
(dd) Increase in earnings in joint ventures of $3.3 million due to
differences in accounting treatment of the purchase price allocation.
53
SELECTED CONSOLIDATED FINANCIAL DATA
GERDAU AMERISTEEL CORPORATION
Our financial results are the results for the Gerdau North America
operations, and include results for the Co-Steel operations for the period from
October 23, 2002, which represents the period subsequent to the combination. The
selected financial data presented below as of December 31, 2001 and 2002, and
for each of the years in the three-year period ended December 31, 2002, have
been derived from our consolidated financial statements, included elsewhere in
this prospectus. The selected consolidated financial data as of December 31,
1998, December 31, 1999 and December 31, 2000 have been derived from our
consolidated financial statements not included in this prospectus. The selected
consolidated financial data for the fiscal years ended December 31, 1998 and
December 31, 1999 have been derived from our unaudited combined financial
statements which have been prepared in accordance with U.S. GAAP and are
unaudited. The selected consolidated financial data presented below as of
September 30, 2003, and for the nine months ended September 30, 2002 and 2003,
have been derived from our unaudited consolidated financial statements as at
that date and for those periods, included elsewhere in this prospectus. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the two years ended
December 31, 1999 and 1998 and the interim periods have been included. Results
for the nine months ended September 30, 2002 and 2003, are not necessarily
indicative of results to be expected for the full year or any future period. For
example, results for the nine months ended September 30, 2002 do not include the
results of Co-Steel, as such acquisition occurred subsequent to such period. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Gerdau Ameristeel
Corporation," our consolidated financial statements and notes thereto and our
pro forma condensed consolidated financial data and notes thereto, included
elsewhere in this prospectus.
Our financial results are prepared in accordance with Canadian GAAP. The
material differences between Canadian GAAP and U.S. GAAP are described in note
21 to our audited consolidated financial statements, note 10 to our unaudited
consolidated financial statements for the twelve months ended September 30, 2003
and 2002 and under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Gerdau Ameristeel Corporation --
Material Differences Between Canadian GAAP and U.S. GAAP".
The following data should also be read in conjunction with the financial
information relating to Co-Steel included elsewhere in this prospectus,
including "-- Co-Steel Inc.", the consolidated financial statements of Co-Steel
and notes thereto and the related management's discussion and analysis of
financial condition and results of operations.
54
<Table>
<Caption>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- ------------------------
2000 2001 2002 2002 (1) 2003
-------- -------- ---------- ---------- -----------
(Dollars in millions except per ton, tons in thousands)
STATEMENT OF OPERATIONS DATA UNDER CANADIAN GAAP:
Net sales (2)...................................... $899.7 $840.8 $1,036.1 $697.6 $1,401.2
Cost of sales...................................... 722.0 680.1 867.1 571.3 1,283.9
------ ------ -------- ------ --------
Gross profit....................................... 177.7 160.7 169.0 126.3 117.3
Selling and administrative......................... 57.4 56.4 62.2 45.4 59.3
Depreciation and amortization (3).................. 57.6 61.5 58.7 38.5 60.4
Other operating expense (income) (4)............... 2.8 (0.5) (5.1) 1.0 0.1
------ ------ -------- ------ --------
Income (loss) from operations...................... 59.9 43.3 53.2 41.4 (2.5)
Interest expense and amortization of deferred
financing costs (5).............................. 51.8 50.0 39.8 31.4 34.3
Other (gain) loss (6).............................. (0.2) 1.0 0.2 0.4 0.2
------ ------ -------- ------ --------
Income (loss) before income taxes.................. 8.3 (7.7) 13.2 9.6 (37.0)
Income tax expense (benefit)....................... 2.2 (2.6) 0.4 0.6 (21.5)
Minority interest (7).............................. (2.2) (1.0) (1.7) (1.4) 0.2
------ ------ -------- ------ --------
Net income (loss).................................. $ 3.9 $ (6.1) $ 11.1 $ 7.6 $ (15.3)
Earnings per share -- basic and diluted............ $ 0.03 $(0.05) $ 0.07 $ 0.06 $ (0.09)
OTHER DATA UNDER CANADIAN GAAP:
Net cash provided by operating activities.......... $ 28.6 $102.6 $ 34.1 $ 9.5 $ 3.2
Net cash used in investing activities.............. (87.8) (78.8) (21.4) (30.0) (40.4)
Net cash provided by (used in) financing
activities....................................... 61.1 (24.7) (1.4) 23.9 41.3
EBITDA (8)......................................... 117.5 104.8 111.9 79.9 57.9
Ratio of earnings to fixed charges (9)............. 1.1x 0.8x 1.8x 1.2x 0.1x
Capital expenditures............................... $ 52.7 $ 28.4 $ 33.5 $ 21.8 $ 40.5
OTHER OPERATIONAL DATA:
Mill finished steel shipments (tons)............... 1,898 1,906 2,548 1,666 3,687
Fabricated steel shipments (tons).................. 580 588 566 438 479
Average price per ton -- mill finished steel
shipments........................................ $ 308 $ 284 $ 285 $ 289 $ 303
Average price per ton -- fabricated steel
shipments........................................ $ 457 $ 430 $ 440 $ 442 $ 433
U.S. GAAP DATA:
Gross sales (10)................................... $929.9 $885.0 $1,053.8 $740.2 $1,317.9
Income (loss) from operations...................... 57.8 41.6 46.9 40.4 (7.8)
Net income (loss).................................. 3.6 (6.4) 11.0 7.5 (23.3)
EBITDA (8,11)...................................... 115.9 103.5 107.2 79.1 49.8
Interest expense and amortization of deferred
financing cost (5)............................... 51.8 50.0 41.5 31.9 44.9
Ratio of earnings to fixed charges (9)............. 1.1x 0.8x 1.2x 1.1x --
Ratio of total debt to EBITDA...................... 6.4x 7.0x 5.6x -- 13.3x
Ratio of EBITDA to interest expense and
amortization of deferred financing costs......... 2.3x 2.1x 2.4x 2.5x 1.1x
</Table>
55
<Table>
<Caption>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
2000 2001 2002 2003
-------- -------- -------- -------------
(Dollars in millions)
BALANCE SHEET DATA UNDER CANADIAN GAAP:
Cash and cash equivalents............................. $ 6.0 $ 5.1 $ 16.4 $ 20.4
Working capital....................................... 116.7 120.7 203.3 338.2
Total assets.......................................... 1,074.6 1,061.9 1,571.4 1,709.0
Total debt (12)....................................... 757.5 723.6 519.2 595.4
Shareholders' equity (13)............................. 57.0 49.8 593.1 650.1
Minority interest (7)................................. 29.6 30.6 33.3 --
U.S. GAAP DATA:
Total assets.......................................... $1,072.1 $1,058.6 $1,513.7 $1,698.0
Total debt (12)....................................... 759.6 725.1 564.5 662.9
Shareholders' equity (13)............................. 55.8 47.7 493.2 535.2
</Table>
SELECTED CONSOLIDATED FINANCIAL DATA UNDER U.S. GAAP:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
------- -------------
(Dollars in millions
except per share data)
STATEMENT OF OPERATIONS DATA UNDER U.S. GAAP:
Sales....................................................... $264.0 $408.7
Income from Operations...................................... 48.2 60.3
Income from Continuing Operations........................... 48.2 60.3
Net (loss) Income........................................... 18.5 21.9
Net (loss) Income from Continuing Operations per Share...... $ 0.13 $ 0.15
</Table>
<Table>
<Caption>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
(Dollars in millions)
BALANCE SHEET DATA UNDER U.S. GAAP:
Total Assets................................................ $ 249.2 $ 1,246.8
Invested Capital............................................ (11.5) 69.5
Number of Common Shares Outstanding -- Pro forma............ 146,588,194 146,588,194
</Table>
- ---------------
(1) Results for the nine months ended September 30, 2002 do not include the
results for Co-Steel, which was acquired on October 23, 2002. See page 49
for pro forma financial data for the nine months ended September 30, 2002
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of our results for the nine months
ended September 30, 2003 compared to the nine months ended September 30,
2002 on an actual and a pro forma basis.
(2) Our sales are reported net of freight costs.
(3) On January 1, 2002, we adopted CICA Handbook Section 3062, Goodwill and
Other Intangible Assets. This section requires that goodwill and intangible
assets with indefinite lives not be amortized, but rather their fair value
be assessed at least annually and written down for any impairment in value.
(4) Other operating expense (income) over the periods for which financial data
is presented includes: income related to electric power rebates from
Ontario utilities, an insurance settlement reimbursing environmental
clean-up costs incurred in 1997 and 1998 and cash settlements from graphite
electrode suppliers; and expense related to start-up costs associated with
new process automation controls at the Knoxville rolling mill, costs
associated with closing two fabricating plants, losses on investments and
claims deductible.
(5) Interest expense under Canadian GAAP does not include interest on the
convertible debentures of $1.0 million in the year ended December 31, 2002,
$4.3 million in the nine months ended September 30, 2003 and $5.4 million
pro forma for the twelve months ended September 30, 2003. Under Canadian
GAAP we record interest expense, net of taxes, as an after-tax charge to
reinvested earnings. In addition, interest expense under Canadian GAAP does
not include the ineffective portion of our interest rate swaps, which was
$(0.5) million, $(1.6) million and $0.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively, $(0.4) million and $(3.0)
million for each of the nine months ended September 30, 2002 and 2003,
respectively, and $1.6 million pro forma for the twelve months ended
September 30, 2003. Under U.S. GAAP, we would be required to record any
ineffective portion of our swaps as interest expense in any applicable
period. Through September 30, 2003, this would have required us to record
an aggregate of $3.1 million of charges. It is our intention to keep the
swaps in place with new counterparties after the refinancing. If we cannot
do so then we would be required to pay $6.0 million to counterparties and
would take a $6.0 million pre-tax charge to net income under Canadian GAAP.
Under
56
U.S. GAAP, we would have a $4.0 million cash charge, in addition to the
$3.1 million charge that would have already been taken on the ineffective
portion.
(6) Other gain (loss) includes foreign exchange gains and losses, losses on
marketable securities and losses on investments.
(7) Minority interest is the income attributable to the minority shareholders
of Ameristeel. On March 31, 2003, we completed an exchange of shares of
Ameristeel held by minority shareholders for 13,198,501 of our shares.
(8) "EBITDA" is net income plus interest, taxes, depreciation and amortization,
minority interest and other (gain) loss. EBITDA does not represent and
should not be considered as an alternative to net income or cash flow from
operations, as determined by generally accepted accounting principles, and
our calculations thereof may not be comparable to that reported by other
companies. EBITDA is included in this prospectus because it is a measure we
use to assess our liquidity position and because certain covenants in our
borrowing arrangements are tied to similar measures. We also believe that
it is widely accepted that EBITDA provides useful information regarding a
company's ability to service and/or incur indebtedness. This belief is
based on our negotiations with our lenders who have indicated that the
amount of indebtedness we will be permitted to incur will be based, in
part, on our EBITDA. EBITDA does not take into account our working capital
requirements, debt service requirements and other commitments and,
accordingly, is not necessarily indicative of amounts that may be available
for discretionary use. EBITDA includes our share of the earnings of our
joint ventures, a significant portion of which is derived from our Gallatin
joint venture. We do not control our joint ventures and cannot, without
agreement from our partner, cause any joint venture to distribute its
income from operations to us. In addition, Gallatin's existing financing
agreement prohibits it from distributing cash to us unless specified
financial covenants are satisfied.
The following table reconciles Canadian GAAP EBITDA with net income and
cash flow from operations for the periods indicated:
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
2000 2001 2002 2002 2003
------ ------ ------ ------ ------
(Dollars in millions)
CANADIAN GAAP
EBITDA...................................................... $117.5 $104.8 $111.9 $ 79.9 $ 57.9
Depreciation and amortization expense..................... (57.6) (61.5) (58.7) (38.5) (60.4)
Interest expense and amortization of deferred financing
costs................................................... (51.8) (50.0) (39.8) (31.4) (34.3)
Other gain (loss)......................................... 0.2 (1.0) (0.2) (0.4) (0.2)
Minority interest......................................... (2.2) (1.0) (1.7) (1.4) 0.2
Income taxes.............................................. (2.2) 2.6 (0.4) (0.6) 21.5
------ ------ ------ ------ ------
Net income (loss)........................................... 3.9 (6.1) 11.1 7.6 (15.3)
Depreciation and amortization expense..................... 57.6 61.5 58.7 38.5 60.4
Changes in working capital and other operating items...... (32.9) 47.2 (35.7) (36.6) (41.9)
------ ------ ------ ------ ------
Net cash used in operating activities....................... $ 28.6 $102.6 $ 34.1 $ 9.5 $ 3.2
====== ====== ====== ====== ======
</Table>
The following table reconciles U.S. GAAP EBITDA with net income for the
periods indicated:
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
2000 2001 2002 2002 2003
------ ------ ------ ----- ------
(Dollars in millions)
U.S. GAAP
EBITDA...................................................... $115.9 $103.5 $107.2 $79.1 $ 49.8
Depreciation and amortization expense..................... (57.0) (60.9) (55.3) (38.1) (52.2)
Interest expense and amortization of deferred financing
costs................................................... (51.8) (50.0) (41.5) (31.9) (44.9)
Other (loss) gain......................................... (0.3) (1.9) (0.2) (0.2) (0.5)
Minority interest......................................... (2.2) (1.0) (1.7) (1.4) 0.2
Income taxes.............................................. (1.0) 3.9 2.5 -- 24.3
------ ------ ------ ----- ------
Net income (loss)........................................... $ 3.6 $ (6.4) $ 11.0 $ 7.5 $(23.3)
====== ====== ====== ===== ======
</Table>
(9) For the purposes of calculating our ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes plus distributions
received from joint ventures and fixed charges. Fixed charges consist of
interest expense, whether expensed or capitalized, on all indebtedness and
deferred financing costs plus interest on the convertible debentures and an
interest component equal to 25% of rental expense, representing that
portion of rental expense that management believes is attributable to
interest. Under Canadian GAAP, earnings did not cover fixed charges by $8.6
million in the year ended December 31, 2001 and by $33.2 million in the
nine months ended September 30, 2003. Under U.S. GAAP, earnings did not
cover fixed charges by $10.3 million in the year ended December 31, 2001
and by $44.1 million for the nine months ended September 30, 2003 and by
$22.0 million in the twelve months ended September 30, 2003 on a pro forma
basis.
57
(10) Under U.S. GAAP, we would report gross sales and include freight costs in
cost of sales. Under Canadian GAAP, sales are reported net of freight
costs. In addition, under Canadian GAAP, we proportionately consolidate our
50% interest in our joint ventures, resulting in higher sales and EBITDA
under Canadian GAAP. Under U.S. GAAP, the joint ventures are accounted for
using the equity method.
(11) Canadian GAAP EBITDA is higher than U.S. GAAP EBITDA because of the
difference in the accounting for joint ventures described in footnote 10
above. In particular, under both U.S. GAAP and Canadian GAAP, net income
(loss), which is the starting point for calculating EBITDA, includes our
50% share of the net income of our joint ventures; however, we add the
interest, depreciation and amortization from the joint ventures to net
income (loss) under Canadian GAAP as the results of operations for our
joint ventures are proportionately consolidated, but not under U.S. GAAP.
(12) Total debt includes long-term borrowings, current portion of long-term
borrowings, bank indebtedness and related party borrowings. Under Canadian
GAAP, total debt excludes our convertible debentures; our convertible
debentures are included in total debt under U.S. GAAP. Under Canadian GAAP,
we had $92.6 million of convertible debentures outstanding as of September
30, 2003. Under U.S. GAAP, our convertible debentures were recorded at
$55.2 million as of December 31, 2002 and $73.0 million as of September 30,
2003, in each case net of the purchase price fair value adjustment
resulting from the combination with Co-Steel. Because our convertible
debentures are denominated in Canadian dollars, the value of our
convertible debentures fluctuates with the exchange rate between the U.S.
dollar and the Canadian dollar. The increase in the value of our
convertible debentures between December 31, 2002 and September 30, 2003 was
due to the appreciation in the Canadian dollar relative to the U.S. dollar.
As of September 30, 2003 on a pro forma basis, total debt includes gross
proceeds of $397.1 million from the issuance of $405 million of aggregate
principal amount of the Existing Notes at a price of 98.001% of the face
amount.
(13) Under Canadian GAAP shareholders' equity includes our convertible
debentures. We had $92.6 million of convertible debentures outstanding as
of September 30, 2003. We record the interest, net of taxes, on our
convertible debentures as an after-tax charge to reinvested earnings. Under
U.S. GAAP, the debentures would be recorded as a liability and the interest
costs as interest expense.
<Table>
<Caption>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2002 2002 2002 2002 2003 2003 2003
--------- -------- ------------- ------------ --------- -------- -------------
(Dollars in millions)
QUARTERLY DATA UNDER
CANADIAN GAAP:
Net sales.................. $218.0 $245.1 $234.5 $338.4 $444.4 $471.6 $485.3
Income (loss) from
operations............... 11.7 18.1 11.6 11.8 (3.9) 4.8 (3.5)
Net income (loss).......... 1.3 3.8 2.5 3.5 (5.0) (1.6) (8.7)
Earnings per share -- basic
and diluted.............. $ 0.01 $ 0.03 $ 0.02 $ 0.02 $(0.03) $(0.01) $(0.05)
</Table>
58
CO-STEEL INC.
The selected financial data presented below as of December 31, 2000 and
2001, and for each of the years in the two-year period ended December 31, 2001,
have been derived from Co-Steel's financial statements, included elsewhere in
this prospectus. The selected financial data presented below as of September 30,
2002 and for the nine months ended September 30, 2001 and 2002 have been derived
from the unaudited consolidated financial statements of Co-Steel Inc. (renamed
Gerdau Ameristeel Corporation) as of that date and for those periods, included
elsewhere in this prospectus. This financial data includes only the results of
Co-Steel Inc. and its subsidiaries and Gallatin joint venture. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the interim periods have been
included. The following data should also be read in conjunction with the
financial information relating to Gerdau Ameristeel Corporation included
elsewhere in this prospectus, including the consolidated financial statements of
Gerdau Ameristeel Corporation and notes thereto and the related management's
discussion and analysis of financial condition and results of operations.
Co-Steel's financial information is presented in Canadian dollars and in
accordance with Canadian GAAP. Exchange rates for U.S. dollars, expressed in
Canadian dollars, are presented under the heading "Exchange Rate Information"
near the beginning of this prospectus. The material differences between Canadian
GAAP and U.S. GAAP are described in note 17 to the financial statements of
Co-Steel included elsewhere in this prospectus and note 10 to the unaudited
Financial Statements for Co-Steel for the nine months ended September 30, 2001
and 2002. One significant difference is that Co-Steel's 50%-owned joint venture,
Gallatin, is proportionately consolidated, which means that 50% of individual
items such as assets, net sales and cost of sales, interest, depreciation and
amortization are included in Co-Steel's results.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Co-Steel Inc.", Co-Steel's consolidated financial statements and notes thereto
and our pro forma combined condensed financial data and notes thereto, included
elsewhere in this prospectus.
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ----------------------
2000 2001 2001 2002
---------- ---------- --------- ----------
(Canadian dollars in millions except per ton,
tons in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $1,278.8 $1,047.6 $ 811.0 $ 922.8
Cost of sales............................................. 1,121.6 1,017.9 786.4 817.3
Gross profit.............................................. 157.2 29.7 24.6 105.5
Selling, administrative................................... 36.7 41.0 28.8 27.2
Depreciation and amortization (1)......................... 71.0 76.9 55.5 50.5
Other operating expense (income) (2)...................... -- 8.2 13.0 (6.3)
-------- -------- ------- --------
Income (loss) from operations............................. 49.5 (96.4) (72.7) 34.1
Interest expense and amortization of deferred financing
costs................................................... 32.9 40.1 29.7 26.4
Other (loss) gain (3)..................................... -- (23.3) (18.0) (9.1)
-------- -------- ------- --------
Income (loss) before income taxes......................... 16.6 (159.8) (120.4) (1.4)
Income tax expense (benefit).............................. (3.5) (44.0) (31.2) (4.0)
-------- -------- ------- --------
Net income from continuing operations..................... 20.1 (115.8) (89.2) 2.6
Net earnings of discontinued operations (4)............... 18.4 -- -- --
-------- -------- ------- --------
Net income (loss)......................................... $ 38.5 $ (115.8) $ (89.2) $ 2.6
OTHER DATA:
Net cash provided by (used in) operating activities....... $ 14.6 $ (6.7) $ 9.4 $ 15.2
Net cash provided by (used in) investing activities....... 65.4 (18.8) (21.0) (21.5)
Net cash (used in) provided by financing activities....... (88.5) 56.1 50.0 (18.6)
EBITDA (5)................................................ 120.5 (19.5) (17.2) 84.6
Capital expenditures...................................... $ 17.3 $ 25.0 $ 20.2 $ 17.5
OTHER OPERATIONAL DATA:
Finished goods shipped -- thousands....................... 2,742 2,354 1,822 1,914
</Table>
59
<Table>
<Caption>
DECEMBER 31,
------------------- SEPTEMBER 30,
2000 2001 2002
-------- -------- -------------
(Canadian dollars in millions)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3.9 $ 34.5 $ 9.6
Working capital............................................. 60.7 (205.6) 212.3
Total assets................................................ 1,229.8 1,187.0 1,124.4
Total debt (6).............................................. 340.7 421.9 335.6
Shareholders' equity (7).................................... 688.6 600.8 598.2
</Table>
- ---------------
(1) On January 1, 2002, Co-Steel adopted CICA Handbook Section 3062, Goodwill
and Other Intangible Assets. This section requires that goodwill and
intangible assets with indefinite lives are not amortized, but rather their
fair value be assessed at least annually and written down for any
impairment in value.
(2) Other operating expense (income) for the year ended December 31, 2001 and
nine months ended September 30, 2001 includes pension curtailment charges
of $13 million. A gain on the sale of land of $4.8 million is also included
for the year ended December 31, 2001. In the nine months ended September
30, 2002, Co-Steel received $6.3 million relating to settlements with
electrode suppliers for price fixing violations.
(3) Other (loss) gain represents write-down of portfolio investments relating
to ASW Holdings PLC, a manufacturer of steel products in the United
Kingdom.
(4) Discontinued operations relate to exited European operations.
(5) "EBITDA" is net income plus interest, taxes, depreciation and amortization,
minority interest and other (gain) loss. EBITDA does not represent and
should not be considered as an alternative to net income or cash flow from
operations, as determined by generally accepted accounting principles, and
Co-Steel's calculations thereof may not be comparable to that reported by
other companies. EBITDA for Co-Steel is included in this prospectus to
supplement the information we provide on Gerdau Ameristeel. EBITDA includes
Co-Steel's share of the earnings of Co-Steel's Gallatin joint venture.
The following table reconciles Canadian GAAP EBITDA with net income and
cash flow from operations for the periods indicated:
<Table>
<Caption>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ---------------
2000 2001 2001 2002
------ ------- ------ ------
(Canadian dollars in millions)
CANADIAN GAAP
EBITDA...................................................... $120.5 $ (19.5) $(17.2) $ 84.6
Depreciation and amortization expense....................... (71.0) (76.9) (55.5) (50.5)
Interest expense and amortization of deferred financing
costs..................................................... (32.9) (40.1) (29.7) (26.4)
Other gain (loss)........................................... 18.4 (23.3) (18.0) (9.1)
Income taxes................................................ 3.5 44.0 31.2 4.0
------ ------- ------ ------
Net income (loss)........................................... 38.5 (115.8) (89.2) 2.6
Depreciation and amortization expense....................... 71.0 76.9 55.5 50.5
Changes in working capital and other operating items........ (94.9) 32.2 43.1 (37.9)
------ ------- ------ ------
Net cash used in (provided by) operating activities......... $ 14.6 $ (6.7) $ 9.4 $ 15.2
====== ======= ====== ======
</Table>
(6) Total debt includes short-term and long-term debt and bank indebtedness but
excludes convertible debentures.
(7) Under Canadian GAAP shareholders' equity includes Co-Steel's convertible
debentures. Co-Steel recorded the interest, net of taxes, on its
convertible debentures as an after-tax charge to reinvested earnings. Under
U.S. GAAP, the debentures would be recorded as a liability and the interest
costs as interest expense.
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
2002 2002 2002
--------- -------- -------------
(Canadian dollars in millions)
QUARTERLY DATA:
Net sales................................................... $285.4 $312.9 $324.6
Net (loss) earnings......................................... (1.7) (4.2) 8.5
</Table>
60
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GERDAU AMERISTEEL CORPORATION
The following discussion contains forward looking statements that involve
numerous risks and uncertainties. Our actual results could differ materially
from those discussed in the forward looking statements as a result of these
risks and uncertainties, including those set forth in this prospectus under
"Forward-looking statements" and under "Risk factors". You should read the
following discussion in conjunction with "Selected Consolidated Financial Data'
and our consolidated financial statements and notes appearing elsewhere in this
prospectus. You should also read the following discussion in conjunction with
the Unaudited Pro Forma Condensed Consolidated Financial Data and notes
appearing elsewhere in this prospectus. Our financial information is prepared in
accordance with Canadian GAAP. Canadian GAAP differs from U.S. GAAP in several
respects. The material differences between Canadian GAAP and U.S. GAAP are
described in "-- Material differences between Canadian GAAP and U.S. GAAP", note
21 to our consolidated financial statements, and note 10 to our unaudited
consolidated financial statements for the nine months ended September 30, 2002
and 2003. One significant difference is that our three 50% owned joint ventures
(Gallatin Steel Company, Bradley Steel Processors Inc. and SSS/MRM Guide Rail
Inc.) are proportionately consolidated, which means that 50% of individual items
such as assets, net sales, cost of sales, interest, depreciation and
amortization are included in our results. In addition, to be consistent with the
presentation of our financial information, information on tons shipped and other
production information in this prospectus includes our 50% share of the joint
ventures' production. In addition, "$" and "dollars" refer to U.S. dollars; and
"Cdn$" refers to Canadian dollars.
OVERVIEW
We are the second largest minimill steel producer in North America with
annual manufacturing capacity of over 6.8 million tons of mill finished steel
products. Through our vertically integrated network of 11 minimills (including
one 50%-owned minimill), 13 scrap recycling facilities and 26 downstream
operations, we primarily serve customers in the eastern half of North America.
Our products are generally sold to steel service centers, fabricators, or
directly to OEMs for use in a variety of industries, including construction,
automotive, mining and equipment manufacturing. For the twelve months ended
September 30, 2003, we generated pro forma net sales of $1.8 billion, pro forma
income from operations of $14.6 million and pro forma net loss of $14.3 million.
During the same period, pro forma EBITDA was $97.5 million on a Canadian GAAP
basis and $89.7 million on a U.S. GAAP basis.
Our results of operations are largely dependent on the level of
construction and general economic activity in the North American market. The
factors that influence our net sales are tons shipped, product mix and related
pricing. Our net sales are determined by subtracting product returns, sales
discounts, return allowances, claims and our freight costs from total sales. We
charge premium prices for certain grades of steel, dimensions of product, or in
some cases, for smaller volumes. Our sales are seasonal, with sales in the
fiscal quarters ending June 30 and September 30 generally being stronger than in
the rest of the year.
Our investments in Gallatin Steel, Bradley Steel Processors and SSS/MRM
Guide Rail are 50%-owned joint ventures and are proportionately consolidated
under Canadian GAAP, which means that individual items such as assets, net
sales, cost of sales, interest, depreciation and amortization are reflected in
our results. These joint ventures contributed $11.8 million to our pro forma
income from operations for the twelve months ended September 30, 2003. For this
period we received $3.6 million pro forma of cash distributions from the joint
ventures. Under U.S. GAAP, joint ventures are accounted for under the equity
method. We do not control these joint ventures and cannot, without agreement
from our partner, cause any joint venture to distribute its income from
operations to us. In addition, Gallatin's existing financing agreement prohibits
it from distributing cash to us unless specified financial covenants are
satisfied. In addition, we may, under certain circumstances, be required to make
capital contributions to Gallatin, which contributed the largest portion of the
joint ventures' income from operations in the twelve months ended September 30,
2003.
Our cost of sales includes the cost of our primary raw material, scrap
metal, and the cost of converting the scrap to finished steel products,
including the cost of natural gas and electricity we use and warehousing and
freight costs. Natural gas and electricity represented approximately 4.2% and
9.0%, respectively, of our production costs for the twelve months pro forma
ended September 30, 2003. We assign our production costs to our inventory
produced. When that inventory is sold those costs are reflected in costs of
sales. Accordingly, there is a gap, typically one to
61
three months, between when we incur our production costs and when we record them
in our cost of sales for any given product. Most of our facilities operate under
long-term electricity supply contracts with major utilities. These contracts
typically have two components to them: a firm portion and an interruptible
portion. The interruptible portion represents up to 70% to 90% of the total
load, and, for the most part, is based on a spot-market price of electricity at
the time it is being used. We therefore have significant exposure to the
variances of the electricity spot market. Furthermore, we do not have any
long-term contracts for natural gas, and are therefore subject to market
variables and pricing swings for that energy source that have in the recent
past, and could in the future, materially affect operating margins and results
of operations.
The prices of scrap metal, natural gas and electricity have demonstrated
significant historical volatility. Although the deregulation of both natural gas
and wholesale electricity have afforded opportunities for lower costs resulting
from competitive market forces, prices for both of these energy sources have
become even more volatile in the recent past. We try to pass increases in our
costs to our customers; however, the market prices of our products do not always
comport with the fluctuations in the prices of our raw materials and energy and
price increases, if achieved, can lag the cost increases we experience.
The following table demonstrates the average market prices of scrap metal,
natural gas, electricity, rebar, merchant bar and structurals for the periods
indicated.
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------ -------------
Scrap ($/ton) (1)............... 133.00 132.00 111.27 95.65 97.42 76.45 93.72 137.00
Natural Gas ($/MMBTU) (2)....... 2.67 2.48 2.08 2.27 4.30 3.96 3.37 4.48
Electricity ($/Megawatt hour)
(3)........................... 23.40 27.03 46.40 51.80 37.75 35.40 27.60 22.32
Rebar ($/ton) (1)............... 313.00 327.00 327.00 303.00 295.00 288.00 293.42 280.01
Merchant Bar Quality ($/ton)
(1)........................... 344.30 359.70 359.70 333.30 324.50 316.80 322.76 327.28
Structurals ($/ton) (1)......... 404.00 376.00 355.00 287.00 305.00 312.00 345.42 307.17
</Table>
- ---------------
(1) Source: Metal Strategies, American Metal Market. #1 Chicago Heavy Melt
scrap price per gross ton delivered.
(2) Source: Bloomberg. Henry Hub natural gas spot price. Expressed in dollars
per million of British Thermal Units.
(3) Source: Bloomberg. Firm on-peak day ahead electricity spot price main.
Note: All prices averaged for periods indicated.
After the cost of scrap and energy, the largest contributor to our cost of
sales is our labor costs, followed by the cost of warehousing and handling
finished steel products. Sales are made based on local market prices. Freight
costs charged to customers are limited to the freight costs that are charged by
competitors who may be in closer proximity to our customers' locations. Our
sales are reported net of our freight costs.
We primarily compete with other steel producers based on the delivered
price of finished products to our customers. Although freight costs for steel
can often make it uneconomic for distant steel producers to compete with us, to
the extent that they have had lower costs of sales, such as lower labor or
energy costs, they have successfully competed with us. Our labor and energy
costs are higher than many foreign and some domestic producers. For example,
energy costs in the northeastern United States, where two of our minimills are
located, are typically significantly higher than in other parts of North
America. Although we are continually striving to improve our operating costs, we
may not be successful in achieving labor and energy costs or gaining operating
efficiencies that may be necessary to remain competitive.
OUTLOOK
The North American steel industry is currently facing a variety of
challenges including volatile pricing, stagnant demand, high fixed costs,
low-priced imports, the diminution of the effect of U.S. tariffs and challenges
to the industry's ability to attract new management talent. As a significant
participant in the North American steel industry, we are also subject to these
challenges and risks.
The bar manufacturing sector of the steel industry has undergone
significant recent consolidation, with the Nucor Corporation acquisition of
Birmingham Steel in December 2002, and the combination of Gerdau North
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America and Co-Steel. There has also been some rationalization of inefficient
capacity. We believe this rationalization may lead to more rational market
behavior, from which we are well-positioned to benefit.
For the nine months ended September 30, 2003, we reported a net loss of
$15.3 million on net sales of $1,401.3 million. Pro forma net income for the
nine months ended September 30, 2002 was $24.3 million on net sales of $1,285.4
million. We reported EBITDA of $57.9 million for the nine months ended September
30, 2003 ($49.8 million on a U.S. GAAP basis) compared to $135.1 million pro
forma for the nine months ended September 30, 2002 ($121.7 million on a U.S.
GAAP basis).
Relative to volume trends in steel demand, the order inquiries for
quotations reflect an increased level of activity for our steel mills and for
our primary service center customers of merchant products. Seasonal efforts to
complete pending construction projects have also sustained customer activity
levels for concrete reinforcing steel products. Considering the late season
timing of this trend, the short term outlook for the winter is relatively upbeat
compared to the past two years. A secondary bullish factor is the relatively low
levels of finished inventory within our ten bar mills and production scheduling
limitations over the holiday season. This favorable volume climate for end use
customers and overall steel supply/demand will be subjected to several external
influences that could impact the balance of steel supply and market pricing.
The key issues for the approaching winter season encompass potential
weather impacts on energy costs, political decisions on the retention of import
safeguard tariffs, global steel trading patterns and currency exchange rate
fluctuations. The Presidential decision of December 4, 2003 to terminate the
safeguard tariffs put in place in March 2002, and the Canadian CITT decision not
to impose parallel safeguard restrictions, could increase the level of steel
import activity and market supply. Global steel trading in scrap raw materials
and finished steel products will be a function of continued strong demand from
China and the relative valuation of the US dollar versus the currencies of
Europe, Japan, Canada and other major steel trading countries. The weakening
valuation trend for the dollar is favorable relative to import pricing of
finished steel products but increases the attractiveness of scrap material
exports.
In the September 2003 quarter, escalating prices for scrap and energy have
been the driving forces behind recent market price increases for steel products.
The consolidation of industry competitors has also improved the market
discipline in recovering these rising cost elements. Cash flow liquidity and
earnings pressure have contributed to the structural change in market discipline
within the industry. The key question is whether this competitive stability will
withstand the adversity of import surges or harsh winter impacts on steel demand
until the spring season emerges. A secondary concern is the stress of rising
steel prices on downstream customers that are struggling to pass on these final
product costs in a slow economic environment. This downstream margin compression
is clearly evident in Gerdau Ameristeel's rebar fabrication and other downstream
business.
In the December 2003 quarter, we have scheduled outages for the Jackson and
Charlotte mills to complete equipment upgrades and to complete annual
maintenance projects. Production and shipments are expected to trend downward in
the December quarter reflecting the normal seasonality of our business. Prices
are expected to be firm or up for all our products and we would expect improved
margins in the December quarter.
HISTORY
Gerdau Ameristeel is an indirect subsidiary of, and controlled by,
Brazilian steelmaker Gerdau S.A., a leading producer of long steel products in
Brazil, Chile, Uruguay, Argentina, and, through us, Canada and the United
States. Gerdau S.A.'s history spans over 100 years, during which it grew from
having one nail manufacturing facility to being one of the top twenty steel
companies in the world. Gerdau S.A. has an approximately 48% market share of the
long steel market in Brazil, based on total production. As of September 30,
2003, the Gerdau group had global annual manufacturing capacity of 12.8 million
tons of mill-finished steel products, over 19,000 employees and total assets
exceeding $5 billion. For the nine months ended September 30, 2003, Gerdau S.A.
had approximately $1.3 billion in consolidated net sales and had a market
capitalization of over $2.0 billion.
Over the last 14 years, Gerdau S.A. has increased its investment abroad,
including its investment in North America. Gerdau S.A. made its initial
investment in the North American steel market in 1989 by acquiring Courtice
Steel Inc. (now part of Gerdau Ameristeel), which operates our minimill in
Cambridge, Ontario, Canada. In 1995, it acquired MRM Steel Inc. (now our
subsidiary Gerdau Ameristeel MRM Special Sections Inc.), which operates our
minimill in Selkirk, Manitoba, Canada. In 1999, it acquired an indirect majority
interest in Ameristeel Corporation (now our subsidiary Gerdau Ameristeel US
Inc.), which we refer to as Ameristeel, which owned four
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minimills and operated rebar fabricating plants and epoxy coating plants. In
April 2001, AmeriSteel Bright Bar, Inc., our 80%-owned subsidiary, acquired the
assets of American Bright Bar, a manufacturer of cold drawn steel bars in
Orrville, Ohio. In December 2001, Ameristeel acquired our Cartersville mill in
Georgia from Birmingham Steel Corporation, which expanded Ameristeel's
structural bar size range and added beams to its product line. In June 2002,
Ameristeel acquired certain assets and assumed certain liabilities of Republic
Technologies' cold drawn plant in Cartersville, Georgia, a producer of cold
drawn merchant bar products, to complement the operations of AmeriSteel Bright
Bar.
On October 23, 2002, the parent company of Gerdau S.A.'s North American
operations, referred to as Gerdau North America, combined with Co-Steel Inc.
Co-Steel was a Canadian public company that owned and operated there minimills,
participated in a 50/50 joint venture that ran a fourth minimill in Kentucky and
was a major participant in the sourcing, trading and processing of scrap metal
in the northeastern North American steel market. Through the combination,
Co-Steel acquired all of the issued and outstanding shares of the companies
included in Gerdau North America, in exchange for Co-Steel common shares
representing approximately 74% of Co-Steel's total common shares and changed its
name to Gerdau Ameristeel Corporation. Under reverse-take-over accounting,
Gerdau North America was deemed to be the acquiror and was assumed to be
purchasing the assets and liabilities of Co-Steel.
On December 31, 2002, Ameristeel was our 87%-owned subsidiary. In March
2003, we effected an exchange, which we refer to as the minority exchange, in
which we acquired the shares of Ameristeel not previously owned by us using
newly-issued common shares, making Ameristeel a wholly-owned subsidiary.
Following the transaction with Co-Steel and the acquisition of the shares of
Ameristeel, Gerdau S.A. indirectly holds approximately 69% of our common shares.
We conduct our operations directly and indirectly through subsidiaries and
joint ventures in Canada and the United States. Or current credit facilities
prevent us from reorganizing the relatively complex corporate structure of our
operations. Following the completion of the refinancing discussed under the
heading "The Refinancing", we reorganized our subsidiaries to more efficiently
integrate our operations and bring our U.S. operations within the same U.S.
group. The following chart shows Gerdau Ameristeel Corporation, our principal
subsidiaries and joint ventures (including GUSAP Partners), their respective
operations and their jurisdictions of incorporations. Unless otherwise
indicated, all entities are 100%-owned and may be owned directly or indirectly
through an intermediate holding company.
(Chart)
- ---------------
(1) Our Cambridge and Whitby mills and our scrap recycling operations.
64
(2) GUSAP Partners is a financing subsidiary that was created for the purpose
of borrowing and providing funds to Gerdau Ameristeel and its subsidiaries.
(3) Our Selkirk mill.
(4) Our Perth Amboy mill.
(5) Our Sayreville mill.
(6) Our Cartersville, Charlotte, Jackson, Jacksonville and Knoxville mills, as
well as most of our downstream operations.
CRITICAL ACCOUNTING POLICIES
The following accounting policies affect the preparation of our
consolidated financial statements:
USE OF ESTIMATES: The preparation of financial statements in conformity
with Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
COMBINATION WITH CO-STEEL: The combination transaction was accounted for
using the reverse-take-over method of purchase accounting. Gerdau North America
was deemed to be the acquiror and was assumed to have purchased the assets and
liabilities of Co-Steel, since the original shareholder of Gerdau North America,
became the owner of more than 50% of the voting shares of the combined entity,
Co-Steel (renamed Gerdau Ameristeel), on a fully-diluted basis, following the
transaction. As a result, Gerdau North America's historical accounts became our
historical accounts for all periods prior to the date of combination. For the
year ended December 31, 2002, our results include full year results for Gerdau
North America's operations, and results for the former Co-Steel operations for
the period from October 23, 2002 through December 31, 2002. For the nine months
ended September 30, 2003, our results include the operations of Gerdau North
America and Co-Steel for the entire period. Please see "-- Co-Steel -- Results
of Operations" for a discussion of the results of operations of Co-Steel for the
nine months ended September 30, 2001 and 2002 and the years ended December 31,
2000 and 2001.
JOINT VENTURES AND OTHER INVESTMENTS: Our investments in Gallatin Steel,
Bradley Steel Processors and SSS/MRM Guide Rail are 50% joint ventures, and are
proportionately consolidated (i.e., we record 50% of each line item, such as
assets, sales, costs of sales, interest, depreciation and amortization). Other
investments where we do not exercise significant influence are accounted for by
the cost method. We evaluate the carrying value of the investments to determine
if there has been an impairment in value considered other than temporary, which
is assessed by review of cash flows and operating income, and takes into
consideration trading values on recognized stock exchanges. If impairment is
considered other than temporary, a provision is recorded.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: We recognize
revenues from sales and the allowance for estimated costs associated with
returns from these sales when the product is shipped and title is transferred to
the buyer. Sales are reported net of freight costs. Provisions are made for
estimated product returns and customer claims based on estimates and actual
historical experience. If the historical data used in the estimates does not
reflect future returns and claims trends, additional provisions may be
necessary. An allowance for doubtful accounts is maintained for estimated losses
resulting from the inability of customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in the
impairment of their ability to make payments, additional allowances may be
required.
INVENTORIES: Billets and finished goods are valued at the lower of cost or
market value. Scrap, consumables and spare parts are valued at the lower of cost
(calculated on an average basis) or replacement value. Consumables include
rolls, which are recorded at cost and amortized based on usage.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS: We accrue our obligations
under employee benefit plans and the related costs, net of plan assets. We have
adopted the following policies:
- The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected benefit method prorated on
service and management's best estimate of expected plan investment
performance for funded plans, salary escalation, retirement ages of
employees and expected health care costs. The discount rate used for
determining the liability for future benefits is the current interest
rate at the balance sheet date on high quality fixed income investments
with maturities that match the expected maturity of the obligations.
- Pension assets are valued at fair market value.
65
- Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at
the date of amendment.
- The excess of the net actuarial gain or loss over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized
over the average remaining service period of the active employees.
- A plan curtailment will result if there has been a significant reduction
in the expected future service of present employees. A net curtailment
loss is recognized when the event is probable and can be estimated, a
net curtailment gain is deferred until realized.
FINANCIAL LIABILITIES: We have interest rate derivatives that swap
variable rate interest expense for fixed interest rate payments. Under Canadian
GAAP, changes in the market values of the swaps are not reflected in the
financial statements.
ENVIRONMENTAL LIABILITIES: We reserve for potential environmental
liabilities based on the best estimates of potential clean-up and remediation
estimates for known environmental sites. We employ a staff of environmental
experts to administer all phases of our environmental programs, and use outside
experts where needed. These professionals develop estimates of potential
liabilities at these sites based on projected and known remediation costs. This
analysis requires us to make significant estimates, and changes in facts and
circumstances could result in material changes in the environmental accrual.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION: The consolidated
financial statements have been prepared in U.S. dollars as the majority of our
transactions occur in this currency. Assets and liabilities of Canadian
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date. Operating revenue and expense items are translated at
average exchange rates prevailing during the applicable period. Any
corresponding foreign exchange gains and losses are deferred and disclosed
separately as part of shareholders' equity and are recognized in earnings when
the ownership interest in the Canadian operations is reduced. Gains or losses
arising from these translations are included in earnings, with the exception of
unrealized foreign exchange gains or losses on long-term monetary items that
hedge net investments in foreign operations which are accumulated in the foreign
currency translation adjustment account in shareholders' equity, until there is
a reduction in the net investment in the foreign operation.
RESULTS OF OPERATIONS
Nine months ended September 30, 2003 Compared to Nine months ended September 30,
2002
Net sales: Finished tons shipped for the nine months ended September 30,
2003 were 4,165,973 tons compared to 3,992,127 tons for the nine months ended
September 30, 2002 on a pro forma basis, an increase of 4.4%. Net sales for the
nine months ended September 30, 2003 were $1,401.3 million compared to $697.6
million on a historical basis and $1,285.4 million on a pro forma basis for the
nine months ended September 30, 2002, an increase of $703.7 million, or 100.9%,
and $116.0 million, or 9.0%, respectively. Compared to last year's historical
results, the October 2002 merger with Co-Steel contributed additional net sales
of $575.0 million for the nine months ended September 30, 2003.
Average mill finished goods selling prices were $303 per ton for the nine
months ended September 30, 2003, up by approximately $23 per ton, or 8.3%, from
the average pro forma selling prices for the same period in 2002. However,
selling price increases were more than offset by scrap raw material costs that
also increased $23 per ton, or 25.6% to $110 per ton for the nine months ended
September 30, 2003 compared to $88 per ton on a pro forma basis, for the same
period last year.
Cost of sales: Cost of sales as a percentage of net sales increased to
91.6% for the nine months ended September 30, 2003 compared to 81.9% for the
nine months ended September 30, 2002 on a historical basis and 84.9% on a pro
forma basis. Cost of sales for the nine months ended September 30, 2003 was
$1,283.9 million compared to $1,090.6 million for the nine months ended
September 30, 2002 on a pro forma basis, an increase of $119.8 million, or
17.7%.
Higher cost of goods sold reflects a sharp increase in scrap raw material
and energy costs. Scrap costs typically account for approximately 35% to 45% of
mill production costs. In the nine months ended September 30, 2003, average
scrap costs were approximately $23 per ton higher than in the nine months ended
September 30, 2002 on a pro forma basis and represented approximately 44% of
mill production costs in the nine months ended September 30, 2003, compared to
approximately 41% for the same period in 2002. For the first nine months of
2003,
66
energy costs averaged $37 per ton of steel produced, an increase of
approximately 23% compared to the same period last year.
Selling and administrative: Selling and administrative expenses as a
percentage of net sales for the nine months ended September 30, 2003 were 4.2%
compared to 6.5% for the same period in the prior year and 4.9% on a pro forma
basis. Selling and administrative expenses for the nine months ended September
30, 2003 were $59.3 million compared to $45.4 million for the nine months ended
September 30, 2002 on a historical basis, and $62.6 million on a pro forma basis
for that period, an increase of $13.9 million and a decrease of $3.3 million,
respectively. Compared to pro forma results for last year, the $3.3 million
saving reflects the elimination of redundant overhead and economies of scale of
the merged company.
Depreciation: Depreciation for the nine months ended September 30, 2003
was $60.5 million compared to $38.5 million for the nine months ended September
30, 2002 on a historical basis, and $57.2 million on a pro forma basis, an
increase of $22.0 million and $3.3 million, respectively.
Other operating expense: Other operating expense for the nine months ended
September 30, 2003 was approximately $0.1 million. This includes a $1.8 million
charge from a settlement of environmental warranties from the May 2000 sale of
Co-Steel's Mayer Parry Recycling unit in England, asset write-downs of $0.8
million, $0.5 million charge relating to start-up costs associated with new
process automation controls at the Knoxville rolling mill and fabricating plant
shutdown expenses of $0.3 million. The charges were offset by income of $3.5
million in electric power rebates from the Province of Ontario. Other operating
expense for the nine months ended September 30, 2002 was $1.0 million relating
to the closing of certain of our fabricating plants.
Interest expense and amortized deferred financing costs: Interest expense
and amortized deferred financing costs were $34.3 million for the nine months
ended September 30, 2003 compared to $31.4 million on a historical basis for the
nine months ended September 30, 2002 and $32.1 million on a pro forma basis
before giving effect to the refinancing. Included in deferred finance costs for
the nine months ended September 30, 2003 was a charge of $2.1 million relating
to the write-off of unamortized costs relating to debt extinguished in the June
refinancing. The remaining decrease of $0.8 million on a historical basis is due
primarily to the conversion of related party debt to equity in September 2002 in
connection with the combination with Co-Steel ($12.3 million), offset by the
interest expense on the assumed debt of Co-Steel ($6.7 million) and increased
amortization expense in 2003 on the debt refinancing that occurred on June 27,
2003.
Income taxes: Our effective income tax rate in the United States
(including both federal and state) and Canada (including federal and provincial)
was approximately 40% and 35%, respectively, for the nine months ended September
30, 2003 and 2002. We have tax credits that offset income tax expense by
approximately $2.5 million per quarter.
Segments: We have two primary business unit segments: (a) mills and (b)
downstream:
Mill operating profits for the nine months ended September 30, 2003 were
$1.8 million compared to $43.3 million on a historical basis for the nine months
ended September 30, 2002, a decrease of $41.5 million. The acquisition of the
former Co-Steel mills resulted in increased volumes of 1,042,000 tons of
finished steel in the nine months ended September 30, 2003.
On a pro forma basis, shipments of mill finished steel products increased
by 208,000 tons reflecting the ramp-up of merchant and structural shipments from
the Cartersville mill which was acquired from Birmingham Steel in December 2001
and increased bar shipments in advance of the April 1, 2003 price increases.
Average mill selling prices also improved by approximately $23 per ton in the
nine months ended September 30, 2003 compared to the nine months ended September
30, 2002 on a pro forma basis. The favorable volume and price variances were
more than offset by distressed demand and higher scrap and energy costs to the
extent that mill operating income was unfavorably impacted by approximately
$83.0 million in additional costs in the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002.
Inclement weather and stagnant demand in the construction and manufacturing
sectors of the U.S. economy have negatively impacted the typically higher margin
downstream fabrication segment. Operating profits from the downstream segment
were $4.3 million for the nine months ended September 30, 2003 compared to $12.2
million for the nine months ended September 30, 2002, a decrease of $7.9
million. Because the fabricating division's backlog represents approximately
nine months of shipments, price increases lag the stock rebar market while rebar
price increases from the mill are immediately realized. Rebar fabricating
profits declined as a result of lower prices
67
and higher material costs in the nine months ended September 30, 2003. The
combination of lower shipments and higher rebar costs resulted in profits in the
nine months ended September 30, 2003 being $2.7 million lower than in the same
period in 2002. Other downstream operations were not significantly different in
the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales: Net sales for the year ended December 31, 2002 were $1,036.1
million compared to $840.8 million in the year ended December 31, 2001, an
increase of $195.2 million. Finished tons shipped for the year ended December
31, 2002 were 3,190,000 tons compared to 2,516,000 tons shipped in 2001. The
acquisition of the Cartersville mill in December 2001 resulted in additional net
sales of $84.1 million and an additional 283,686 tons shipped and the merger
with Co-Steel in October 2002 resulted in additional net sales of $122.4 million
in 2002 and an additional 374,137 tons shipped. Excluding Cartersville and the
former Co-Steel operations, net sales declined by $11.2 million, and finished
tons shipped remained relatively flat in the year ended December 31, 2002
compared to 2001 due to the decline in U.S. domestic economic activity and
related steel demand. In addition, net sales for 2002 reflect the fact that the
Section 201 safeguard tariffs have not generated any material change in the U.S.
domestic supply/demand imbalance. Average mill finished goods selling prices
were $285 per ton in the year ended December 31, 2002, up by less than 2% from
the 2001 average. Fabricating sales were down approximately 3% in 2002 compared
to 2001.
Cost of sales: Cost of sales as a percentage of net sales for the year
ended December 31, 2002 was 83.7% compared to 80.9% for 2001. Cost of sales for
the year ended December 31, 2002 was $867.1 million compared to $680.1 million
for the year ended December 31, 2001, an increase of $187.0 million. The
addition of the Cartersville mill in December 2001 resulted in increased cost of
sales of $83.3 million in 2002, while the October 2002 acquisition of Co-Steel
resulted in $110.5 million additional cost of sales in 2002. Excluding
Cartersville and Co-Steel, scrap costs increased by approximately $8 per ton in
the year ended December 31, 2002 compared to the year ended December 31, 2001.
Costs have increased as a result of higher demand for scrap in both export and
other U.S. steel markets as the Section 201 tariff relief has resulted in
increased production at U.S. mills, primarily in the flat rolled market, which
has resulted in inflationary pressure on scrap prices. These increased scrap
costs have compressed spreads for our bar products to historical lows.
Selling and administrative: Selling and administrative expenses as a
percentage of net sales for the year ended December 31, 2002 was 6.0% compared
to 6.7% for 2001. Selling and administrative expenses for the year ended
December 31, 2002 were $62.1 million compared to $56.4 million for the year
ended December 31, 2001, an increase of $5.7 million, due primarily to the
addition of the Cartersville mill ($0.7 million) and Co-Steel ($3.8 million).
Higher professional fees relating to consulting engagements for strategic
development initiatives, improved performance incentive pay, severance pay and
the incremental costs associated with the acquisition of AmeriSteel Bright Bar,
Inc. accounted for the rest of the increase.
Depreciation: Depreciation for the year ended December 31, 2002 was $58.7
million compared to $54.9 million for the year ended December 31, 2001, an
increase of $3.8 million, due primarily to the addition of Co-Steel operations
($7.0 million) and Cartersville ($0.9 million), which were partially offset by a
change in estimated useful lives of the property, plant and equipment at one of
the Canadian mills.
Goodwill amortization: Due to changes in accounting standards, goodwill is
not subject to amortization after fiscal 2001, therefore there was no goodwill
amortization expense recorded for the year ended December 31, 2002 compared to
$6.6 million for the year ended December 31, 2001.
Other operating income: Other operating income for the year ended December
31, 2002 relates to a $6.1 million insurance settlement in the fourth quarter of
2002 which was a reimbursement of environmental clean-up costs we incurred in
1997 and 1998, partially offset by $1.0 million in costs associated with the
closing of the Wilmington and St. Albans fabricating plants. Other operating
income for the year ended December 31, 2001 consists of a non-recurring net gain
of $2.8 million from cash settlements from graphite electrode suppliers and a
prior year tax refund of $0.7 million. These were partially offset by a charge
of $2.6 million relating to a loss on investment and a $0.4 million charge
relating to insurance claims deductibles in connection with the melting of a
small amount of cesium in our Jacksonville mill.
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Income from operations: Income from operations for the year ended December
31, 2002 was $53.2 million compared to $43.3 million for the year ended December
31, 2001, an increase of $9.9 million for the reasons described above.
Interest expense: Interest expense was $38.6 million for the year ended
December 31, 2002 compared to $48.9 million for the year ended December 31,
2001, a decrease of $10.3 million, due primarily to the conversion of $325.8
million of related party debt to equity in connection with the combination with
Co-Steel. Related party interest expense, net of interest income, was $14.0
million for the year ended December 31, 2002 compared to $25.0 million for the
year ended December 31, 2001, a decrease of $11.0 million, due primarily to the
conversion of debt to equity. The debt relating to the former Co-Steel
operations added a $4.0 million interest expense during the period from October
23 through December 31, 2002. Lower interest rates on our LIBOR denominated debt
and normal day-to-day fluctuations in borrowings accounted for approximately
$3.3 million of savings compared to the prior year.
Income taxes: Our effective income tax rate in the United States
(including both federal and state) and Canada (including federal and provincial)
was approximately 40% and 35%, respectively for the years ended December 31,
2002 and 2001. We have tax credits that offset income tax expense of
approximately $1.0 million per quarter ($2.5 million per quarter since the
combination with Co-Steel).
Segments: We have two primary business unit segments: (a) mills and (b)
downstream:
Mill operating profits for the year ended December 31, 2002 were $50.0
million compared to $42.9 million for the year ended December 31, 2001, an
increase of $7.1 million. The acquisition of the Cartersville mill in December
2001 resulted in increased volumes of approximately 283,000 tons of finished
steel in 2002 and Cartersville essentially broke even at an operating income
level. The former Co-Steel mills, included from October 23, 2002, resulted in
increased volumes of 370,000 tons of finished steel and also essentially broke
even at an operating level for the period from October 23, 2002 through December
31, 2002. Ameristeel's mill operating profits for the year ended December 31,
2002 were $20.6 million compared to $19.7 million in the year ended December 31,
2001 an increase of $0.9 million, largely due to improved pricing in merchant
bar products. Profits from the Canadian mills were $28.9 million for the year
ended December 31, 2002 compared to $23.2 million for the year ended December
31, 2001, an increase of $5.7 million. Improved merchant bar prices, and to a
lesser extent rebar prices, combined to add approximately $2.2 million to the
Canadian mill segment profits, and a change in estimated useful lives of
property plant and equipment in one of the Canadian mills resulted in a $3.2
million reduction of depreciation expense.
Profits from the downstream segment were $8.8 million for the year ended
December 31, 2002 compared to $13.0 million for the year ended December 31,
2001, a decrease of $4.2 million. Rebar fabricating profits also declined as a
result of lower prices and higher material costs in the year ended December 31,
2002. Because the fabricating division's backlog is approximately nine months of
shipments, rebar price increases are not immediately passed along to customers.
The combination of lower shipments and higher rebar costs resulted in $5.6
million lower profits in the year ended December 31, 2002 compared to the prior
year. Partially offsetting declines in rebar fabrication were improved results
in the other downstream operations which include rail spike operations, a wire
mesh and collated nail plant, and cold drawn plants. These business units added
approximately $2.7 million to downstream segment profits in 2002 compared with
2001 through a combination of higher prices and volumes. The closure of two
redundant rebar fabricating plants in the U.S. resulted in a charge of $1.0
million in 2002.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales: Net sales in the year ended December 31, 2001 were $840.8
million compared to $899.7 million in the year ended December 31, 2000, a
decrease of $58.9 million. Finished tons shipped in the year ended December 31,
2001 were 2,516,000 tons compared to 2,481,000 tons in 2000. Average mill
finished goods selling prices were $284 per ton in the year ended December 31,
2001 compared to $308 per ton in the year ended December 31, 2000. Fabricating
sales were down approximately 6% in 2001 compared to 2000. Selling prices
declined significantly in the year ended December 31, 2001 from the prior year
due to a combination of high levels of imports and the slowing North American
economy. In the United States, average rebar prices remained relatively flat
compared with the prior year, however prices remained near ten-year lows.
Merchant bar prices declined to levels not seen since the late 1980s. The
weakening of the Canadian dollar in 2001 negatively affected Canadian dollar
denominated sales when translated into U.S. dollars.
69
Cost of sales: Cost of sales as a percent of net sales increased slightly
to 80.9% for 2001 from 80.3% in 2000, largely as a result of the reduction in
average selling prices of finished products. Cost of sales for the year ended
December 31, 2001 was $680.1 million compared to $722.1 million for the year
ended December 31, 2000, a decrease of $42.0 million. Scrap costs were
approximately $15 per ton lower in the year ended December 31, 2001 compared to
the prior year. This was largely due to the slowdown in steel production caused
by increased imports of low-priced steel. There were also improvements in
conversion costs, which are the costs of manufacturing scrap into finished
goods, due to production efficiencies and best practices benchmarking.
Selling and administrative: Selling and administrative expenses as a
percentage of net sales for the year ended December 31, 2001 was 6.7%,
relatively unchanged from the year ended December 31, 2000. Selling and
administrative expenses for the year ended December 31, 2001 were $56.4 million
compared to $58.1 million for the year ended December 31, 2000, a decrease of
$1.7 million. Increases in incentive based payroll in the U.S. operations were
partially offset by lower outside service fees relating to environmental issues
in the United States, coupled with overhead reduction initiatives in the
Canadian operations.
Depreciation: Depreciation for the year ended December 31, 2001 was $54.9
million compared to $51.4 million for the year ended December 31, 2000, an
increase of $3.5 million. This increase was due to mill modernization and other
capital expenditures over the preceding years.
Goodwill amortization: Goodwill amortization for the year ended December
31, 2001 was $6.6 million compared to $6.3 million for 2000.
Other operating (income) expense: Other operating income for the year
ended December 31, 2001 consists of a non-recurring net gain of $2.8 million
from cash settlements from graphite electrode suppliers and a prior year tax
refund of $0.7 million. These were partially offset by a charge of $2.6 million
relating to a loss on investment and a $0.4 million charge relating to insurance
claims deductibles in connection with the melting of a small amount of cesium at
the Jacksonville mill. Other operating expense in the year ended December 31,
2000 consists of $3.0 million in start-up costs associated with the
modernization of the Knoxville melt shop partially offset by $0.3 million from
cash settlements from graphite electrode suppliers.
Income from operations: Income from operations for the year ended December
31, 2001 was $43.3 million compared to $59.9 million, a decrease of $16.6
million for the reasons described above.
Interest expense: Interest expense as a percentage of net sales for the
year ended December 31, 2001 was 5.8% compared to 5.6% for the year ended
December 31, 2000. Interest expense was $48.9 million for the year ended
December 31, 2001 compared to $50.4 million for the year ended December 31,
2000. The decrease of $1.5 million was due to declining interest rates
throughout 2001 on the portion of Gerdau North America's debt that carries
floating rates.
Income taxes: Our effective income tax rate in the United States
(including both federal and state income taxes) was approximately 40% for the
years ended December 31, 2001 and 2000. In Canada, for the year ended December
31, 2001, our effective federal and provincial income tax rate was 43% compared
to 45% in 2000.
Segments: Gerdau North America is organized into two primary business unit
segments: (a) mills and (b) downstream:
Mill operating profits for the year ended December 31, 2001 were $42.9
million compared to $52.1 million for the year ended December 31, 2000, a
decrease of $9.2 million. This decrease was due primarily to a decline in our
average selling prices for finished goods to $283 per ton in 2001 from $308 per
ton in 2000. This was partially offset by lower scrap costs, which declined
about $26 per ton in 2001 compared to 2000.
In 2001, the downstream operations represented approximately 33.0% of our
total net sales compared with 31.4% in the year ended December 31, 2000.
Downstream operating profits represented 23% of our total operating profits in
2001 compared to 31% in the year ended December 31, 2000, representing a decline
of $10.1 million year over year. High volumes of imports and the weak economy
caused fabricated rebar prices to decline to an average of $425 per ton for the
year ended December 31, 2001 from an average of $437 per ton in the year ended
December 31, 2000, resulting in a decline in operating income of over $7
million. Reduced pricing for the wire mesh and collated nails as a result of
declining rod prices resulted in a decline of over $2 million in operating
income from 2000 to 2001.
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MATERIAL DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP
Our financial information is prepared in accordance with Canadian GAAP.
Canadian GAAP differs from U.S. GAAP in several respects. The material
differences between Canadian GAAP and U.S. GAAP are described in note 21 to our
audited consolidated financial statements and note 10 to our unaudited interim
consolidated financial statements for the nine months ended September 30, 2002
and 2003. The following is a summary of these differences:
- We classify our convertible debentures as an equity instrument under
Canadian GAAP and record the interest, net of taxes, of the equity
component of the convertible debentures as an after-tax charge to
reinvested earnings. Under U.S. GAAP, the convertible debentures would
be accounted for entirely as a liability and, accordingly, interest
costs would be recorded as interest expense. For U.S. GAAP the liability
would be classified as long term debt for 2002, 2001 and 2000.
- We proportionately consolidate our joint ventures under Canadian GAAP
which means that we record 50% of each line item, such as individual
assets and liabilities, sales, costs of sales, interest, depreciation
and amortization. Under U.S. GAAP, joint ventures are accounted for
using the equity method. This means, among other differences, that we do
not report depreciation expense associated with our joint venture under
U.S. GAAP.
- As a result of our proportionate consolidation of our joint ventures,
under Canadian GAAP there is no equity investment account in long term
assets to which allocations of negative goodwill can be made under the
purchase method of accounting. Therefore, in the business combination
with Co-Steel, we allocated the negative goodwill only against property,
plant and equipment which lowers depreciation expense. Under U.S. GAAP,
joint ventures are accounted for under the equity method and therefore
negative goodwill is allocated to both equity investment and property,
plant and equipment. As a result, we have higher depreciation expense
under U.S. GAAP.
- We do not report comprehensive income under Canadian GAAP. Under U.S.
GAAP, comprehensive income represents the change in equity during a
reporting period from transactions and other events and circumstances
from non-shareholder sources. Components of comprehensive income include
items such as net earnings (loss), changes in the fair value of
investments not held for trading, minimum pension liability adjustments,
derivative instruments and foreign currency translation gains and
losses.
- We are not required to mark-to-market our interest rate swap agreements
under Canadian GAAP. Under U.S. GAAP, unrealized gains and losses on the
mark-to-market valuation of the swaps are recorded in other
comprehensive income and the swap recorded at fair value. Any
ineffective portion is recorded against income. In 2002, under U.S.
GAAP, we would have recorded a portion of the U.S. interest rate swap
mark-to-market value as interest expense.
- U.S. GAAP requires that certain equity investments not held for trading
be recorded at fair value with unrealized holding gains and losses
excluded from the determination of earnings and reported as a separate
component of other comprehensive income. At December 31, 2001, we had an
investment held for sale which was below market value.
- U.S. GAAP, we would recognize an additional minimum pension liability
charged to other comprehensive income in shareholders' equity to the
extent that the unfunded accumulated benefit obligation (ABO) exceeds
the fair value of the plan assets and this amount is not covered by the
pension liability already recognized in the balance sheet. The
calculation of the ABO is based on the actuarial present value of the
vested benefits to which the employee is currently entitled, based on
the employee's expected date of separation or retirement. We are not
required to recognize an additional minimum liability under Canadian
GAAP.
- We record sales net of freight costs for delivery under Canadian GAAP.
U.S. GAAP would require that freight costs be included in cost of sales.
Under U.S. GAAP our sales and cost of sales would each increase by $70.6
million in 2002, $58.3 million in 2001 and $56.4 million in 2000.
If permitted under Canadian securities laws, we may, in the future, prepare
our financial statements under U.S. GAAP.
71
LIQUIDITY AND CAPITAL RESOURCES
Cash flows
Operating activities: Net cash provided by operations for the nine months
ended September 30, 2003 was $3.2 million compared to net cash provided by
operations of $9.5 million for the nine months ended September 30, 2002. The
change in fiscal 2003 is the result of increased working capital, primarily
increased accounts receivable.
Investing activities: Net cash used in investing activities was $40.4
million in the nine months ended September 30, 2003 compared to $30.0 million in
the nine months ended September 30, 2002, an increase of $10.4 million. For the
nine months ended September 30, 2003, capital expenditures totalled $40.5
million. Capital projects included a new warehouse at the Cartersville mill, a
rolling mill electrical control system upgrade at the Charlotte mill, a caster
upgrade at the Jackson mill and a new pollution control system at the Cambridge
mill. In June 2002, we spent $8.4 million to acquire the assets of our
Cartersville, Georgia cold drawn plant.
Financing activities: Net cash provided by financing activities was $41.3
million in the nine months ended September 30, 2003 compared to cash provided by
financing activities of $23.9 million in the nine months ended September 30,
2002. The increase in debt is primarily to support increasing accounts
receivable and capital expenditures made in fiscal 2003.
Credit facilities and indebtedness
On June 27, 2003, we refinanced most of our outstanding debt by issuing
$405 million of 10 3/8% Senior Notes due 2011 and entered into a $350 million
Senior Secured Credit Facility with a syndicate of lenders. The proceeds were
used to repay existing indebtedness under several lending arrangements and to
pay costs associated with the refinancing. Following the refinancing, the
principal sources of liquidity will be cash flow generated from operations and
borrowings under the new Senior Secured Credit Facility. The principal liquidity
requirements are working capital, capital expenditures and debt service. We do
not have any off-balance sheet financing arrangements or relationships with
unconsolidated special purpose entities.
The following is a summary of existing credit facilities and other long
term debt:
Senior Secured Credit Facility: The Senior Secured Credit Facility
provides commitments of up to $350 million. We will be able to borrow under the
Senior Secured Credit Facility the lesser of (i) the committed amount, and (ii)
the borrowing base (which is based upon a portion of the inventory and accounts
receivable held by most of our operating units less certain reserves), minus
outstanding loans, letter of credit obligations and other obligations owed under
the Senior Secured Credit Facility. Since the borrowing base under the Senior
Secured Credit Facility will be based on actual inventory and accounts
receivable levels, available borrowings under the facility will fluctuate. The
borrowings under the Senior Secured Credit Facility are secured by our inventory
and accounts receivable. At September 30, 2003, approximately $107.0 million was
available under the Senior Secured Credit Facility.
Loans under the Senior Secured Credit Facility bear interest at a per annum
rate equal to one of several rate options (LIBOR, federal funds rate, bankers'
acceptance or prime rate) based on the facility chosen at the time of borrowing
plus an applicable margin determined by excess availability from time to time.
Borrowings under the Senior Secured Credit Facility may be made in U.S. dollars
or Canadian dollars, at our option.
The senior secured credit facility is secured by certain of our assets
which are described under the heading "Description of Other Indebtedness --
Senior Secured Credit Facility."
Our senior secured credit facility contains restrictive covenants that
limit our ability to engage in specified types of transactions without the
consent of the lenders. These covenants limit our ability to, among other
things:
- incur additional debt;
- issue redeemable stock and preferred stock or make other equity
distributions;
- pay dividends on our common shares;
- repurchase shares;
- make other restricted payments including, without limitation,
investments and loans;
- incur liens;
72
- sell or otherwise dispose of assets, including shares of subsidiaries;
- enter into agreements that restrict dividends from subsidiaries;
- enter into mergers or consolidations;
- enter into transactions with affiliates;
- guarantee indebtedness; and
- enter into sale/leaseback transactions.
The senior secured credit facility requires that we maintain a fixed charge
coverage ratio of at least 1.10 to 1.00 on a rolling twelve months basis and, at
any time that we fail to do so, we will be in default of the senior secured
credit facility unless we maintain $60.0 million of excess availability until
March 27, 2004 and $40.0 million of excess availability thereafter. If we fail
to maintain $80.0 million of excess availability until March 27, 2004 and $70.0
million of excess availability thereafter, or if we are in default under the
senior secured credit facility, the lenders will exercise dominion and control
over all collections of accounts receivable and other amounts under lock-box and
blocked-account arrangements. If we fail to maintain $75.0 million of excess
availability, the lenders under the facility may (x) require us to make changes
to the funding among the companies in our group that restrict payments and
restrict intra-company loans and advances, (y) require us to implement lock-box
arrangements and (z) restrict the type of loans that can be made to certain
borrowers under the senior secured credit facility.
Loans under the senior secured credit agreement bear interest at a per
annum rate equal to one of several rate options (LIBOR, federal funds rate,
bankers' acceptance or prime rate) based on the facility chosen at the time of
borrowing plus an applicable margin determined by excess availability from time
to time. Borrowings under the senior secured credit facility may be made in U.S.
dollars or Canadian dollars, at our option. Borrowings in U.S. dollars bear
interest at a rate equal to the higher of the bank's prime rate or 0.5% plus the
federal funds rate plus the applicable margin (which ranges from nil to 0.5% per
annum) or, at our option, LIBOR plus the applicable margin (which ranges from
2.00% to 2.75%). Borrowings in Canadian dollars bear interest at a rate equal to
the bank's prime rate plus the applicable margin (which ranges from 0.25% to
1.0% per annum) or, at our option, at the bankers' acceptance rate plus the
applicable margin (which ranges from 2.00% to 2.75% per annum). The weighted
average interest rate on the senior secured credit facility at September 30,
2003 was 4.7% and at December 31, 2002 would have been approximately 4.5%, on a
pro forma basis.
Senior notes: As of September 30, 2003, we had $405 million of 10 3/8
Notes due 2011. The Notes were issued on June 27, 2003 and mature on July 15,
2011. The notes were issued at 98% of face value. The notes are unsecured, are
effectively junior to secured debt to the extent of the value of the assets
securing such debt, rank equally with all existing and future unsecured
unsubordinated debt, and are senior to any future senior subordinated or
subordinated debt. Interest on the notes accrues at 10 3/8% per annum (10.75%
effective rate) and is payable semi-annually on July 15 and January 15. At any
time prior to July 15, 2006, we may redeem up to 35% of the original principal
amount of the notes with the proceeds of one or more equity offerings of common
shares at a redemption price of 110.75% of the principal amount of the notes,
together with accrued and unpaid interest, if any, to the date of redemption.
The Indenture governing the Exchange Notes permits us and our Restricted
Subsidiaries to incur additional indebtedness, including secured indebtedness,
subject to certain limitations. In addition, the Indenture limits our ability
to:
- incur additional debt;
- issue redeemable stock and preferred stock or make other equity
distributions;
- pay dividends on our common shares;
- repurchase shares;
- make other restricted payments including, without limitation,
investments and loans;
- incur liens;
- sell or otherwise dispose of assets, including shares of subsidiaries;
- enter into agreements that restrict dividends from subsidiaries;
- enter into mergers or consolidations;
- enter into transactions with affiliates;
73
- guarantee indebtedness; and
- enter into sale/leaseback transactions.
Other: Our other credit facilities, which are described under the heading
"Description of Other Indebtedness", are:
- Convertible debentures: We have unsecured, subordinated convertible
debentures in the principal amount of Cdn$125.0 million, which bear
interest at 6.5% per annum, mature on April 30, 2007, and, at the
holders' option, are convertible into our common shares at a conversion
price of Cdn$26.25 per share. Under the terms of the trust indenture for
the convertible debentures, no adjustment to the conversion price is
required if we issue common shares in a customary offering. The
debentures are redeemable, at our option, at par plus accrued interest
and we have the right to settle the principal amount by the issuance of
common shares based on their market value at the time of redemption.
Since the convertible debentures can be redeemed by the issuance of
common shares, the debenture obligations are classified as shareholders'
equity. Interest on the shareholders' equity component, net of related
income taxes, is charged to reinvested earnings, and is deducted from
the net earnings or added to net loss in calculating basic earnings per
share.
- Industrial revenue bonds: We have $36.8 million of industrial revenue
bonds outstanding as of September 30, 2003. $33.2 million of the bonds
were issued by Gerdau Ameristeel US Inc. in prior years to construct
facilities in Jackson, Tennessee; Charlotte, North Carolina;
Jacksonville, Florida; and Plant City, Florida. We assumed an industrial
revenue bond in the amount of $3.6 million with the acquisition of the
Cartersville cold drawn facility in September 2002. The interest rates
on these bonds range from 50% to 75% of the prime rate. The industrial
revenue bonds mature on November 1, 2003 and December 15, 2003 and in
2014, 2017 and 2018. These bonds are secured by letters of credit issued
under the Senior Secured Credit Facility.
- Joint venture facility: Our joint venture, Gallatin Steel, has a $40.0
million revolving credit facility with $5.9 million outstanding as of
September 30, 2003. Under Canadian GAAP, 50% of the indebtedness is
reflected on Gerdau Ameristeel's consolidated balance sheet.
- AmeriSteel Bright Bar, Inc. Term Loan: As of September 30, 2003, the
AmeriSteel Bright Bar, Inc. had a $3.5 million term loan outstanding.
The loan bears interest at a fixed rate of 6% and matures in September
2011.
- Capital leases: Gerdau Ameristeel has $2.5 million of capital leases,
including our 50% share of the Gallatin capital leases.
Leases
As of September 30, 2003 we had approximately $76.4 million of future lease
commitments. Of this amount, $54.1 million relates to leased real estate
including warehouses and $9.9 million relates to railcar leases with the
remainder being general equipment leases.
Capital expenditures
Capital expenditures: We spent $40.5 million on capital projects in the
nine months ended September 30, 2003 compared to $21.8 million in the same
period in 2002. We made $52.7 million of capital expenditures for the year ended
December 31, 2000, $28.4 million for the year ended December 31, 2001, and $33.4
million for the year ended December 31, 2002. $3.5 million of our capital
expenditures in 2002 were made on Cartersville, which was acquired in December
2001 and $2.8 million were made at the former Co-Steel operations between
October 23, 2002 and December 31, 2002.
We anticipate spending approximately $60.6 million on capital expenditures
in the year ended December 31, 2003. These capital projects include rolling mill
electrical control system upgrades at the Charlotte, Knoxville and Whitby bar
mills; a new warehouse at the Cartersville mill; a new melt shop emissions
control system at the Cambridge mill; and a caster upgrade at the Jackson mill.
74
INFLATION
We believe that inflation has not had a material effect on our results of
operations.
COMMITMENTS AND CONTINGENCIES
Contractual obligations and other commercial commitments: The following
table sets forth our contractual obligations and other commercial commitments as
of September 30, 2003, not including related interest expense, if any, for the
periods presented:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
----------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4 YEARS
------ --------- --------- -------
(Dollars in millions)
CONTRACTUAL OBLIGATIONS
Long term debt (1).......................................... $595.4 $10.6 $ 1.1 $ 583.7
Leases (2).................................................. 76.4 13.9 22.4 40.1
Industrial revenue bonds.................................... 36.8 9.4 -- 27.4
Convertible debentures (3).................................. 92.6 -- -- 92.6
------ ----- ----- -------
Total contractual cash obligations.......................... $801.2 $33.9 $23.5 $ 743.8
====== ===== ===== =======
</Table>
- ---------------
(1) Does not give effect to the refinancing.
(2) Includes leases of $54.1 million relating to real estate and $9.9 million
relating to railcars.
(3) Cdn$125.0 of convertible debentures, translated into U.S. dollars at an
exchange rate of $0.7405 on September 30, 2003. These are convertible at
the holders' option into our common shares at a price of Cdn$26.25 per
share. These are redeemable at our option at par plus accrued interest.
Environmental liabilities: We generate certain wastes, primarily EAF dust,
that are classified as hazardous wastes and must be properly managed under
applicable environmental laws and regulations. In the United States and Canada,
certain environmental laws and regulations impose joint and several liability on
certain classes of persons for the costs of investigation and clean up of
contaminated properties. Liability may attach regardless of fault or the
legality of the original disposal. Some of our present and former facilities
have been in operation for many years and, over such time, have used substances
and disposed of wastes that may require cleanup. We could be liable for the
costs of such clean-ups. Clean-up costs for any contamination, whether known or
not yet discovered, could be substantial and could have a material adverse
effect on our results of operations.
Some of our North American operations in the U.S. are responsible for the
remediation of certain sites where EAF dust was generated and/or disposed. In
general, our estimate of remediation costs is based on our review of each site
and the nature of the anticipated remediation activities to be undertaken. Our
process for estimating such remediation costs includes determining for each site
the expected remediation methods, and the estimated cost for each step of the
remediation. In such determinations, we may employ outside consultants and
providers of such remedial services to assist in making such determinations.
Although the ultimate costs associated with the remediation are not known
precisely, we estimated the total remaining costs as of December 31, 2002 to be
approximately $6.3 million (2001 -- $2.9 million), with these costs recorded as
a liability in our financial statements. An additional liability of $8.6 million
was recorded in 2002 with respect to certain environmental obligations which
were triggered by the change in control of Co-Steel in certain jurisdictions in
which Co-Steel operated.
Carbon monoxide and other emissions at our Perth Amboy mill exceeded
permitted levels on several occasions during 2001 and 2002, and carbon monoxide
emissions continue to periodically exceed current permit levels. We are
conducting investigations to determine the cause of these episodes, what steps
can be taken to reduce emissions and whether the Perth Amboy mill's
environmental permits require modification. Discussions with the New Jersey
Department of Environmental Protection to resolve these permit and compliance
issues are continuing. Penalty assessments of approximately $250,000 were
received for the third and fourth quarters of 2001. Additional penalties will
likely be assessed in connection with efforts to resolve these matters. Penalty
assessments of approximately $400,000 have been accrued.
In April 2001, we were notified by the Environmental Protection Agency, the
EPA, of an investigation that identifies us as a potential responsible party
(PRP) in a Superfund Site in Pelham, Georgia. The Pelham site was a
75
fertilizer manufacturer in operation from 1910 through 1992, lastly operated by
Stoller Chemical Company, a now bankrupt corporation. We are included in this
action because we shipped EAF dust to this property. The EPA offered a
settlement to the named PRPs under which our allocation was approximately $1.8
million. We object to our inclusion as a PRP in this site, have asserted
defenses and are pursuing legal alternatives, including the addition to the
allocation of larger third parties which we believe were incorrectly excluded
from the original settlement offer. The EPA has filed suit with us named as a
defendant. As the ultimate exposure to us, if any, is uncertain, no liability
has been accrued for this site.
In July 2001, a small amount of cesium, a radioactive source, was included
among scrap material we received from a scrap supplier and accidentally melted
in our Jacksonville mill furnace. Melt shop activities in that mill were halted
for approximately 25 days until approximately 700 tons of contaminated material
had been removed for proper disposal and equipment had been cleaned. The cost of
clean-up was approximately $10.5 million; all but $0.4 million of this amount
was paid by our insurer.
Pension liabilities: Our pension and retirement plans are in compliance
with applicable Canadian and United States regulatory and funding requirements
and filings. However, a number of our pension plans were under funded when their
assets and liabilities were last computed. As of December 31, 2002, the
aggregate value of plan assets of our pension plans (including supplemental
retirement plans) was $206.1 million, while the aggregate projected benefit
obligation was $301.4 million, resulting in an aggregate deficit of $95.3
million. We anticipate the identified deficiencies to be larger at this time
based on the recent performance of equity markets. We will have to make cash
payments in the range of $15 million to $20 million to fund our under funded
pension plans in 2003. Funding requirements in future years may be higher,
depending on market conditions, and may restrict the cash available for our
business. Our funding requirements may also be significantly higher commencing
in 2005 if temporary relief provisions enacted by the United States Congress are
not extended.
We have post-retirement medical plans with unfunded liabilities of
approximately $32 million as of December 31, 2002. These plans are not
pre-funded, as is typical. During the year ended December 31, 2002, our benefit
cost relating to our post-retirement medical plans was $1.2 million.
The total liability for benefits provided through our supplementary
retirement plans is approximately $19 million as of December 31, 2002. The
combined total fair market value of the plan assets is $8 million as of December
31, 2002, resulting in an unfunded liability of $11 million.
Under U.S. GAAP (but not Canadian GAAP) we recorded an after-tax charge to
accumulated unfunded pension liability in other comprehensive income in the
amount of approximately $16.9 million in the fourth quarter of 2002, because of
the decline in the stock market returns on plan assets, coupled with lower
interest rates and therefore lower discount factors. Additionally, the former
Co-Steel operations recorded a fair valuation acquisition pre-tax adjustment of
$36.8 million.
For year-end purposes, and for the above valuation purposes, we estimated
our liability for future benefits using a 6.5% discount rate for our Canadian
plans and a 6.75% discount rate for our U.S. plans. Each half percentage change
in the discount factor corresponds to an approximate 7%-9% inverse change in the
pension obligations, which were approximately $300 million at December 31, 2002.
A half percentage change in our assumed rate of return on plan assets
corresponds to an inverse change in pension expense of approximately $1.0
million.
Gallatin contingent obligations: As a general partner of Gallatin Steel,
we are required to make capital contributions to that partnership unless its
EBITDA meets certain specified targets. We are obligated to fund 50% of
Gallatin's capital expenditures if its EBITDA is less than $10 million. We are
also obligated to make capital contributions to Gallatin equal to 50% of the
lease payments it pays to Gallatin County, Kentucky. Gallatin may, however,
elect to fund its lease payment out of its working capital if its EBITDA at the
time of such payment exceeds $20 million, and it would not as a result of such
payment exceed certain stipulated thresholds under its financing arrangements.
Although Gallatin has historically elected to fund its lease payments out if its
working capital, it is not obligated to do so, and we therefore could be
obligated to fund them in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest rates charged on our debt are predominantly variable, the
majority of which is based on LIBOR (London Interbank Offered Rate). In November
1999, Gerdau Ameristeel Cambridge (now part of Gerdau Ameristeel) hedged $68.0
million of its debt (the "notional amount") via interest rate swaps that in
effect resulted
76
in fixed interest rates on the notional amount. Under two separate swap
arrangements, the notional amounts declined on predetermined dates by
predetermined amounts. The first swap ran for a period of three years and
terminated on November 4, 2002. The second swap terminates in September 2004.
The notional amount swapped is currently $17.0 million. In late 2001, Ameristeel
hedged $55.0 million of its debt using interest rate swaps that in effect
resulted in a fixed interest rate on $55.0 million for a period of four to five
years. As a result, Ameristeel has reduced its exposure to fluctuations in
interest rates so that approximately 33% of the U.S. operations' debt is subject
to changes in interest expense due to fluctuations of interest rates in the
markets. A 10% change in interest rates would result in a change in annual
interest expense of less than $0.5 million. The value of our interest rate swaps
changes from period to period due to changes in the swap yield curve relative to
the swap yield curve on the date it was entered into, and adjusted for the
shortened duration. Generally the market value of the swap instrument will
decline if interest rates remain lower than forecasted and will increase in
value if interest rates rise faster than anticipated.
We have interest rate derivatives that swap variable rate interest expense
for fixed interest rate payments. As of September 30, 2003, the nominal
principal value of the swaps to which the interest rates apply was $69.0
million. We pay fixed interest on the swaps as follows: 6.425% on $14 million;
4.86% on $30.0 million; 5.4% on $15 million and 5.03% on $10 million. In all
cases, we receive a variable interest rate based on LIBOR in return for fixed
payments. Because interest rates are markedly lower than they were when the
swaps were arranged and the swap yield curves have remained low, the market
value of the swaps result in a liability of $5.4 million as of September 30,
2003. Under Canadian GAAP, changes in the market values of the swaps are not
reflected in the financial statements. Under U.S. GAAP, according to FAS 133, a
portion of the swaps which is deemed to be an effective hedge is preferentially
treated whereby the market value is recorded as an asset or liability, and the
after tax market value reflected in other comprehensive income in shareholders'
equity. Any market value that is deemed to be ineffective is charged to income,
which would have resulted in our taking a charge in the aggregate of $3.5
million pro forma for the twelve months ended September 30, 2003. After
completion of the refinancing, all $69.0 million of our interest rate swaps
became effective and therefore the market value will be reflected in accumulated
other comprehensive income.
We sometimes use natural gas forward purchase contracts to partially manage
our exposure to price risk of natural gas which we use during the manufacturing
process. Our use of these contracts is immaterial for all periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
There are no recently issued accounting standards applicable under Canadian
GAAP that have not been adopted and reflected in our financial statements. The
following are recently issued accounting standards under U.S. GAAP:
In April 2002, the Financial Accounting Standards Board, referred to as
FASB, issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The
statement addresses, among other things, the income statement treatment of gains
and losses related to debt extinguishments, requiring that such expenses no
longer be treated as extraordinary items, unless the items meet the definition
of extraordinary per APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". Upon adoption, any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented, that does not meet the criteria in APB Opinion
No. 30 for classification as an extraordinary item, is required to be
reclassified. We are required to adopt this statement no later than its fiscal
year beginning January 1, 2003. Upon adoption of SFAS 145, net losses on the
repayment of debt will no longer qualify as extraordinary items.
In June 2002, FASB issued SFAS No. 146, ("SFAS 146") "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses issues relating to
the recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities, and nullifies the
guidance in Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 is effective
for exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The adoption of SFAS 146 would not have a material
impact on our results of operations, financial condition and cash flows.
77
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation -- Transition and Disclosure and Amendment of FASB
No. 123," which amends FASB Statement No. 123 ("SFAS 123"). "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. It
is effective for all such activities initiated after fiscal years beginning
after December 15, 2002.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation will significantly
change current practice in the accounting for and disclosure of guarantees.
Guarantees meeting the characteristics described in the Interpretation are
required to be initially recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is probable
and reasonably estimable. The Interpretation's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Interpretation also requires a
guarantor to make significant new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote. The Interpretation's disclosure requirements are effective for
December 31, 2002 financial statements.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Many variable interest entities have commonly been
referred to as special-purpose entities or off-balance sheet structures, but
this Interpretation applies to a larger population of entities. In general, a
variable interest entity is any legal structure used for business purposes that
either (i) does not have equity investors with voting rights or (ii) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. Until now, one
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
Interpretation changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of this Interpretation apply to variable interest entities created
after January 31, 2003 and apply to existing variable interest entities in the
first fiscal year or interim period beginning after December 15, 2003. We are
currently evaluating the impact of the new standard on our financial reporting.
In December 2001, the Accounting Standards Board, referred to as the AcSB,
released Accounting Guideline 13, "Hedging Relationships," ("AcG 13"). The
primary purpose of the Guideline is to set criteria that an entity must meet in
order to use "hedge accounting". AcG 13 requires an entity to document hedging
strategies, relationships and effectiveness assessments in much greater detail
than existing GAAP. AcG 13 will prohibit entities from applying hedge accounting
for certain hedging strategies, such as so-called "macro hedge" accounting.
Under the Guideline, derivatives and other hedging instruments generally must be
matched, one for one, to individual assets, liabilities or anticipated
transactions, or groups of similar assets, liabilities and anticipated
transactions. This Guideline is effective for years starting on or after July 1,
2003. We do not believe the adoption of this would have an impact on our
results.
In September 2003, the AcSB released amendments to Section 3870
"Stock-Based Compensation and Other Stock-Based Payments" that would require the
expensing of all stock-based compensation awards for fiscal years beginning on
or after January 1, 2004. These amendments provide the same alternative methods
of transition as in the United States for voluntary adoption of the fair value
based method of accounting and allow for retroactive or prospective application.
We are currently evaluating the impact of the new standard on our financial
reporting.
In November 2003, the AcSB approved, subject to written ballot, a revision
to Handbook Section 3860, "Financial Instruments -- Disclosure and
Presentation". The revision would require certain obligations that must or could
be settled with an entity's own equity instruments to be presented as a
liability. The revisions should be effective for all fiscal years beginning on
or after November 1, 2004, with earlier adoption encouraged. This would result
in the Company's convertible debt being classified as debt and the interest
thereon being a charge to income.
78
CO-STEEL INC.
The following discussion and analysis of the financial condition and
results of operations of Co-Steel, including Gallatin, is based on public
filings by Co-Steel. This discussion and analysis should be read in conjunction
with "Selected historical financial data -- Co-Steel" and Co-Steel's financial
statements and related notes which are included elsewhere in this prospectus.
The analysis is intended to provide additional information about Co-Steel's past
performance. As of October 23, 2002, Co-Steel's financial results are included
in our results. Co-Steel's results of operations are presented in Canadian
dollars and in accordance with Canadian GAAP. Exchange rates for U.S. dollars,
expressed in Canadian dollars, are presented under the heading "Exchange rate
information" near the beginning of this prospectus. Canadian GAAP differs from
U.S. GAAP in several respects. The material differences between Canadian GAAP
and U.S. GAAP are described in note 17 to the financial statements of Co-Steel
and note 10 to the unaudited financial statements of Co-Steel for the nine
months ended September 30, 2001 and 2002 included elsewhere in this prospectus.
OVERVIEW
On October 23, 2002, Co-Steel merged with the North American operations of
Gerdau S.A. to form Gerdau Ameristeel. The financial results and management's
discussion and analysis of Co-Steel include only the former Co-Steel operations,
consisting of four minimills, in Whitby, Ontario; Perth Amboy, New Jersey;
Sayreville, New Jersey; and Gallatin County, Kentucky (through a 50% owned joint
venture). Co-Steel's operations also included the sourcing, trading and
processing of scrap for Co-Steel's own use and for sale to third parties.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001.
Net sales: Net sales for the nine months ended September 30, 2002 were
Cdn$922.8 million compared to Cdn$811.0 million for the nine months ended
September 30, 2001. Finished tons shipped for the nine months ended September
30, 2002 were 1,914,000 tons, compared to 1,822,000 tons for the same period in
2001. This 5% increase in tons shipped in 2002 was primarily attributable to
increased demand for flat rolled products from the Gallatin joint venture and
increased shipments from the Whitby facility, which was impacted by a three
month labor disruption during the nine months ended September 2001.
Average mill finished goods selling prices were Cdn$482 per ton for the
nine months ended September 30, 2002, an increase of Cdn$37 per ton from the
same period of 2001. Selling prices were higher during the nine months ended
September 30, 2002 on most of Co-Steel's product lines than in the nine months
ended September 30, 2001, including flat rolled sheet produced by Gallatin,
which rose to $288.6 per ton compared to $233.1 per ton for the nine months
ended September 30, 2001.
Cost of sales: Cost of sales as a percentage of net sales decreased to
88.6% for the nine months ended September 30, 2002, compared to 96.9% for the
nine months ended September 30, 2001. Cost of sales for the nine months ended
September 30, 2002 were Cdn$817.3 million compared to Cdn$786.4 million for the
nine months ended September 30, 2001. This change was primarily attributable to
the impact of the three month labor disruption at the Whitby mill which occurred
during the first quarter of 2001. Direct costs related to the labor disruption
of approximately Cdn$12 million were charged to cost of sales during the nine
months ended September 30, 2001. In addition, energy costs for the nine months
ended September 30, 2002 were approximately Cdn$8 per ton less than for the
prior period due to lower natural gas prices. These cost savings were partially
offset by an increase in the cost of scrap. The average cost of scrap consumed
during the nine months ended September 30, 2002 was approximately Cdn$134 per
ton, or Cdn$16 per ton higher than during the nine months ended September 30,
2001. Additionally, unforeseen maintenance costs and an extended summer shutdown
at the Whitby facility resulted in increased costs.
Selling, administrative: Selling and administrative expenses for the nine
months ended September 30, 2002 were Cdn$27.2 million compared to Cdn$28.8
million for the nine months ended September 30, 2001, due to cost reduction
efforts.
Depreciation and amortization: Depreciation and amortization for the nine
months ended September 30, 2002 was Cdn$50.5 million compared to Cdn$55.5
million for the nine months ended September 30, 2001, primarily due to a change
in accounting for goodwill to conform to new recommendations of the Canadian
Institute of Chartered Accountants. Pursuant to those recommendations, no
amortization expense was recorded for the nine
79
months ended September 30, 2002. The financial statements for the nine months
ended September 30, 2001 have not been adjusted, and include Cdn$3.2 million of
goodwill amortization expense.
Other operating expense (income): Other operating expense (income) for the
nine months ended September 30, 2002 includes Cdn$6.3 million received relating
to settlements with electrode suppliers for price fixing violations. For the
nine months ended September 30, 2001, Co-Steel recorded Cdn$13.0 million of
pretax pension curtailment charges relating to special retirement benefits
offered to hourly employees at its Whitby mill under its March 2001 collective
bargaining agreement.
Interest expense and deferred financing charges: For the nine months ended
September 30, 2002, interest expense and deferred financing charges were
Cdn$26.4 million, or Cdn$3.3 million less than for the nine months ended
September 30, 2001. This decrease was a result of lower outstanding indebtedness
as well as lower interest rates during the nine months ended September 30, 2002.
Co-Steel incurred default interest rates in 2001 while it was in noncompliance
with covenants contained in its credit agreements.
Other (loss) gain: Co-Steel recorded a loss of Cdn$9.1 million during the
nine months ended September 30, 2002 to write-off its remaining investment in
ASW Holdings PLC ("ASW"), which went into receivership in July 2002. Included in
the results for the nine months ended September 30, 2001 was a charge of
Cdn$18.0 million that also resulted from a write-down of ASW shares. Co-Steel
carried its investment in ASW as a result of its 1999 sale of Co-Steel
Sheerness, and accounted for it as a portfolio investment. As of September 30,
2002, Co-Steel carried no further investment in ASW.
Income tax expense (benefit): Co-Steel recorded a tax benefit of Cdn$4.0
million for the nine months ended September 30, 2002, compared to Cdn$31.2
million for the nine months ended September 30, 2001. Co-Steel financed its U.S.
operations through its European subsidiaries, and its tax provision was
influenced by the statutory rates of the countries in which it operated.
Segments: Co-Steel had three primary business units: (a) long products,
(b) flat rolled sheet and (c) recycling operations.
Income from operations for the long products group was Cdn$6.1 million for
the nine months ended September 30, 2002 compared to a loss of Cdn$51.6 million
for the nine months ended September 30, 2001. Results for the nine months ended
September 30, 2001 were impacted by the three month labor disruption at the
Whitby mill, low-priced imports that drastically reduced profit margins, and
high energy costs.
The flat rolled sheet operations saw a dramatic increase in income from
operations during the nine months ended September 30, 2002, realizing a gain of
Cdn$32.5 million compared to an operating loss of Cdn$15.1 million during the
prior year. A reduction in the supply of flat rolled sheet in the North American
steel industry, primarily due to the Section 201 tariffs, caused selling prices
to rise by over $130 per ton during the nine months ended September 30, 2002.
Income from operations for Co-Steel's recycling operations remained steady
at Cdn$4.2 million for the nine months ended September 30, 2002, compared to
Cdn$3.8 million for the nine months ended September 30, 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales: Net sales for the year ended December 31, 2001 were Cdn$1,047.6
million compared to Cdn$1,278.8 million for the year ended December 31, 2000.
The strong U.S. dollar attracted steel imports into North America. The low
prices at which the imported steel was sold, coupled with a slowing North
American economy, forced domestic producers to reduce selling prices to maintain
market share. On average, Co-Steel's selling prices decreased by Cdn$21 per ton
from 2000 levels. Shipments of finished steel in the year ended December 31,
2001 were also negatively impacted by a three month labor disruption at
Co-Steel's Whitby mill in the year ended December 31, 2001.
Cost of Sales: Cost of sales as a percent of net sales increased to 97.1%
for the year ended December 31, 2001 from 87.7% for the year ended December 31,
2000. Margins decreased by approximately Cdn$44 per ton to Cdn$13 per ton,
compared to Cdn$57 per ton a year earlier. Conversion costs averaged Cdn$207 per
ton for the year ended December 31, 2001, an increase from Cdn$192 per ton for
the year ended December 31, 2000. The increase in conversion costs was the
result of lower production volumes. Partially offsetting this increase was a
reduction in scrap costs, which were Cdn$145 per ton for the year ended December
31, 2001 compared to Cdn$163 per ton for the year ended December 31, 2000.
80
Selling, administrative: Selling and administrative costs for the year
ended December 31, 2001 increased by approximately Cdn$4.2 million compared to
the year ended December 31, 2000 due to legal expenses related to trade cases. A
provision was also made for estimated future lease commitments associated with
the relocation of Co-Steel's corporate office to Whitby, Ontario in January
2002.
Depreciation and amortization: Depreciation and amortization for the year
ended December 31, 2001 was Cdn$76.9 million, compared to Cdn$71.0 million for
the year ended December 31, 2000, an increase of approximately Cdn$5.9 million,
due to a change in the estimated life of goodwill arising from the acquisition
of subsidiary companies. Co-Steel reduced the relevant amortization period from
40 years to 20 years.
Other operating expense (income): For the nine months ended September 30,
2001, Co-Steel sold 22 acres of surplus land at a gain of Cdn$4.8 million. That
gain was offset by Cdn$13.0 million of pretax pension curtailment charges,
relating to special retirement benefits offered to hourly employees at
Co-Steel's Whitby mill under its March 2001 collective bargaining agreement.
Interest expense, and deferred financing costs: Interest expense and
deferred financing costs were Cdn$40.1 million for the year ended December 31,
2001 compared to Cdn$32.9 million for the year ended December 31, 2000. The
increase resulted from default rates that Co-Steel was obligated to pay while in
breach of covenants contained in its credit agreements.
Other (loss) gain: Co-Steel recorded a loss of Cdn$23.3 million during the
year ended December 31, 2001 to write-off its investment in ASW Holdings PLC
("ASW"). Co-Steel carried the investment in ASW as a result of its 1999 sale of
Co-Steel Sheerness, and accounted for it as a portfolio investment.
Income tax expense (benefit): Co-Steel recorded a consolidated income tax
recovery in the year ended December 31, 2001 of Cdn$44.0 million. Co-Steel
financed its foreign operations through its European subsidiaries pursuant to
tax treaties between certain European countries, Canada and the United States.
Segments: Co-Steel had three primary business units: (a) long products,
(b) flat rolled sheet, and (c) recycling operations.
The long products segment included Co-Steel's Whitby, Perth Amboy and
Sayreville mills. In general, low priced imports, lower demand, high energy
prices (at the start of the year) and a three-month labor disruption all
negatively impacted margins in Co-Steel's core operations for the year ended
December 31, 2001. On average, margins for the long products segment were Cdn$38
per ton lower for the year ended December 31, 2001 than for the year ended
December 31, 2000.
Gallatin Steel faced similar challenges in 2001: high imports, high energy
costs and low demand. Average selling prices declined by $50 per ton from the
prior year. Conversion costs also dropped by $3 per ton and scrap costs
decreased by $16 per ton. Gallatin incurred significant losses and on December
31, 2001, was in noncompliance with certain of its financial covenants under its
credit agreement. In 2002, Gallatin obtained a waiver of the covenant violations
and amended its financing agreement. As of December 31, 2001, Co-Steel's portion
of cash at Gallatin was Cdn$4.0 million. Cash held at Gallatin was for the sole
use of its operations.
Income from operations for Co-Steel's recycling operations for the year
ended December 31, 2001 were Cdn$4.3 million compared to Cdn$6.2 million for the
year ended December 31, 2000. Increased shipments of scrap, along with a
disciplined approach to inventory management, resulted in the operations
maintaining positive earnings during a period in which scrap prices fell
dramatically and shipments to the Whitby mill were lower.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows
Operating activities: Net cash provided by operations for the nine months
ended September 30, 2002 was Cdn$15.2 million compared to Cdn$9.4 million for
the nine months ended September 30, 2001. Net cash used for operations for the
year ended December 31, 2001 was Cdn$6.7 million, compared to net cash provided
for operations of Cdn$14.6 million for the year ended December 31, 2000.
For the nine months ended September 30, 2002, working capital used Cdn$33.6
million (accounts receivable used Cdn$40.6 million, inventory used Cdn$22.6
million and accounts payable and accruals provided Cdn$29.5 million), while for
the nine months ended September 30, 2001, working capital provided Cdn$49.9
million (accounts receivable used Cdn$17.1 million, inventories provided
Cdn$75.0 million and accounts
81
payable and accruals used Cdn$8.1 million). For the year ended December 31, 2001
working capital provided Cdn$45.8 million (accounts receivable provided Cdn$7.1
million, inventories provided Cdn$79.6 million and accounts payable and accruals
used Cdn$40.8 million), while for the year ended December 31, 2000, working
capital used Cdn$63.3 million (accounts receivable provided Cdn$14.6 million,
inventories used Cdn$29.1 million and accounts payable and accruals used
Cdn$48.9 million).
Due to the high number of bankruptcies in the North American steel industry
and Co-Steel's distressed financial situation, suppliers to the steel industry
demanded faster payment terms from Co-Steel during 2001, which required it to
use significant amounts of cash. At the beginning of the year ended December 31,
2001, Co-Steel reduced inventory levels to generate liquidity. After it amended
its credit facilities in 2002, it made capital expenditures to slightly raise
inventory levels.
Investing activities: In order to conserve cash, Co-Steel maintained low
capital spending levels. For the nine months ended September 30, 2002, investing
activities used Cdn$21.5 million compared to Cdn$21.0 million for the same
period of the prior year. For the year ended December 31, 2001 investing
activities used Cdn$18.8 million compared to Cdn$19.6 million for the year ended
December 31, 2000 (excluding the proceeds received from the sale of Mayer Parry
Recycling). Major capital spending projects were related to the development of
Co-Steel's downstream initiative.
Financing activities: Due in part to deteriorating steel market
conditions, Co-Steel breached the financial covenants under its credit
agreements in March 2001. At that time, Co-Steel's lenders refused to extend
further credit and Co-Steel managed short-term liquidity needs with cash on
hand. Co-Steel eventually reached agreements with its senior lenders to cure
existing defaults and increase its total credit facilities by Cdn$20 million.
Under the arrangement, the term of the financing was extended to January 15,
2004.
On March 12, 2002, Co-Steel sold 20.9 million common shares at a price of
Cdn$3.35 per share to a group of underwriters. Two-thirds of the proceeds were
used to permanently reduce debt, while one-third was used to repay Co-Steel's
revolving line of credit and for working capital purposes.
Effective December 2000, Co-Steel's quarterly dividend was cancelled and
restrictions were placed on its payment of dividends under the terms of the new
credit arrangements.
82
BUSINESS
Gerdau Ameristeel Corporation is incorporated in Ontario, Canada. GUSAP
Partners is a Delaware partnership, all of the interest of which are owned by
wholly-owned subsidiaries of Gerdau Ameristeel Corporation. The registered
office of Gerdau Ameristeel Corporation is located at Hopkins Street South,
Whitby, Ontario, Canada, L1N 5T1 and our telephone number at that address is
(905) 668-3535. Gerdau Ameristeel Corporation's principal executive office is
located at 5100 West Lemon Street, Tampa, Florida, USA, 33609 and our telephone
number at that address is (813) 286-8383. The registered office of GUSAP
Partners is c/o Corporation Trust Company, 1209 Orange Street, Delaware, USA,
19801 and its head office is located at Hopkins Street South, Whitby, Ontario,
Canada, L1N 5T1.
OUR COMPANY
We are the second largest minimill steel producer in North America with
annual manufacturing capacity of over 6.8 million tons of mill finished steel
products. Through our vertically integrated network of 11 minimills (including
one 50%-owned minimill), 13 scrap recycling facilities and 26 downstream
operations, we primarily serve customers in the eastern half of North America.
Our products are generally sold to steel service centers, fabricators, or
directly to OEMs, for use in a variety of industries, including construction,
automotive, mining and equipment manufacturing. For the twelve months ended
September 30, 2003, we generated pro forma net sales of $1.8 billion, pro forma
income from operations of $14.6 million and pro forma net loss of $14.3 million.
During the same period, pro forma EBITDA was $97.5 million on a Canadian GAAP
basis and $89.7 million on a U.S. GAAP basis.
Our operations are segmented into two operating divisions, minimills and
downstream operations.
Minimills. ($1.2 billion of net sales for the nine months ended September
30, 2003.) We own and operate seven minimills in the United States and three in
Canada. We also have a 50% interest in an eleventh minimill located in Kentucky
that is a joint venture with Dofasco Inc. We manufacture and market a wide range
of steel products, including reinforcing steel bar rebar, merchant bars,
structural shapes, beams, special sections, rod, and flat rolled sheet. For the
twelve months ended September 30, 2003, on a pro forma basis, we shipped
approximately 4.6 million tons of mill finished steel products. Over 90% of the
raw material feed for our minimill operations is recycled steel scrap, making us
the second largest steel recycler in North America. Four of our mills are
provided scrap from our network of 13 scrap recycling facilities. We believe our
recycling operations provide a stable supply of these mills' primary raw
material.
Downstream operations. ($224.0 million of net sales for the nine months
ended September 30, 2003.) We have secondary value-added downstream operations.
These steel fabricating and product manufacturing operations process steel
principally produced in our minimills. Our downstream operations consist of the
following:
- Rebar fabrication and epoxy coating -- We operate one of the largest
rebar fabricating and epoxy coating operations in North America. Our
network, consisting of 14 rebar fabricating facilities and three epoxy
coating plants, services the concrete construction industry in the
eastern half of the United States and Canada. Our rebar facilities have
the capacity to produce over 650,000 tons of fabricated and epoxy coated
rebar per year. The fabricating facilities purchase the majority of
their rebar from our mills, at market prices, and cut and bend it to
meet our customers' engineering, architectural and other end-product
specifications. Our epoxy coating plants apply epoxy coating to rebar
for use in construction projects requiring rust resistant steel,
including bridge and tunnel construction.
- Railroad spike operations -- Our two railroad spike operations forge
steel square bars produced at our Charlotte mill into track spikes. We
manufacture and distribute these spikes on an annual contract basis to
the railroad industry throughout North America.
- Cold drawn plants -- Our two cold drawn plants process hot rolled
merchant and light structural steel bars into cold drawn bars with
improved physical characteristics. The cold drawn plants purchased 37%
of their raw material requirements from our minimills during the twelve
months ended September 30, 2003.
- Super light beam processing and elevator guide rails -- In accordance
with rigid customer specifications, we process super light steel beams
into cross members for the truck trailer industry and process steel
guide rail sections for elevator manufacturers.
83
- Wire mesh and collated nails -- We produce small-diameter drawn wire
from coiled steel rod. The wire is woven into sheets and rolls of wire
mesh for concrete pavement reinforcement or converted into collated
nails for use in high-speed nail machines.
OUR STRATEGY
By focusing on achieving our strategic goals, we believe we will improve
our operational efficiency, increase our customer's satisfaction and enhance our
corporate culture. Our strategy involves the following components:
CONTINUE TO OFFER EXTENSIVE PRODUCT CAPABILITIES TO OUR CUSTOMERS. We
believe that we distinguish ourselves from our competitors through our product
diversity and quality, delivery performance, centralized order management
system, and ability to fill orders quickly from multiple inventory sources. We
have one of the widest bar product ranges in North America and we regularly add
to our product mix in response to our customers' requirements. We believe many
of our customers consider us one of their key suppliers for a wide range of
their product needs. Through our network of minimills and downstream facilities,
we believe that we can distinguish our company by offering one of the broadest
ranges of long steel products in the eastern half of North America, and through
our extensive geographic coverage and our commitment to providing market-leading
customer service.
PROMOTE SHARING OF BEST PRACTICES AND PURSUE OPPORTUNITIES FOR
SYNERGIES. We promote the sharing of best practices throughout the worldwide
operations of the Gerdau group in order to enhance and improve operational
efficiencies. Drawing on the operational experience of Gerdau S.A., we will
continue to regularly pursue opportunities for operational synergies between
each of our mills and vertical integration synergies between our scrap recycling
facilities, our steel mills and our downstream operations. As part of our
integration of Co-Steel, we have been rationalizing our rolling mill production
schedules, improving our inventory management, exploring common procurement
opportunities and pursuing logistical efficiencies.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. We believe that there is
significant opportunity for future growth through selective acquisitions, given
the pace of consolidation in the steel industry and the increasing trend of our
customers to focus on fewer key suppliers. We intend to continue to pursue a
selective and disciplined acquisition strategy, which is focused on improving
our financial performance in the long-term and expanding our product lines and
geographic reach. In our downstream business we are focused on enhancing our
product offering and strengthening our market position. As a result of our scale
and prior successes in managing and integrating acquisitions, we believe we are
strategically positioned to assume an active role in the consolidation of the
North American steel industry.
FOCUS ON EMPLOYEE COMMUNICATION AND PARTICIPATION. We believe that a high
level of employee involvement is a key factor in the success of our operations
and our pursuit of a Total Quality Management platform. We intend to continue to
foster a corporate culture that encourages our employees to communicate with
management in order to achieve operational improvement. Through open and
effective communication, we promote the sharing of best operating practices
throughout our organization and the creation of a learning environment geared
toward attaining escalating performance benchmarks. In addition, we regularly
review our incentive-based compensation arrangements for employees and senior
management to ensure that our employees' financial interest is aligned with that
of our shareholders and competitive within the marketplace.
84
PRODUCTS
The following table shows the breakdown of our pro forma tons shipped to
third parties and average net selling prices by product for the two years ended
December 31, 2001 and 2002:
<Table>
<Caption>
PRO FORMA
PRO FORMA AVERAGE NET
TONS SHIPPED SELLING PRICES (1)
-------------- ------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------- ------------------
2001 2002 2001 2002
----- ----- ------- -------
(Thousands) (Per ton)
Merchant bar/special sections............................... 1,553 1,859 $305 $295
Stock rebar................................................. 1,203 1,275 264 251
Rods........................................................ 741 653 265 291
Flat rolled (2)............................................. 667 710 228 299
----- -----
Total mill finished goods................................... 4,164 4,497
Fabricated steel............................................ 683 656 441 433
----- -----
Total finished goods........................................ 4,847 5,153
----- -----
Billets..................................................... 131 -- 182 --
----- -----
Total....................................................... 4,978 5,153
===== =====
</Table>
- ---------------
(1) Selling prices are net of freight.
(2) Includes 50% of Gallatin's pro forma tons shipped.
MERCHANT BARS/SPECIAL SECTIONS
Merchant bars/special sections refers to merchant bars, structural
products, special sections and special bar quality products.
- Merchant bars consist of rounds, squares, flats, angles, and channels
that are less than three inches in dimension. Merchant bars are
generally sold to steel service centers and to manufacturers who
fabricate the steel to meet engineering or end-product specifications.
Merchant bars are used to manufacture a wide variety of products,
including gratings, transmission towers, floor and roof joists, safety
walkways, ornamental furniture, stair railings, and farm equipment.
Merchant bars typically require more specialized processing and handling
than rebar, including straightening, stacking, and specialized bundling.
Due to their greater variety of shapes and sizes, merchant bars
typically are produced in short production runs, necessitating frequent
changeovers in rolling mill equipment.
- Structural products consist of angles, channels and beams that are three
inches and larger in size. Structural products are used in construction
and in a wide variety of manufacturing applications, including housing,
trailers, structural support for buildings. Like smaller merchant bars,
structural products typically require specialized processing and
handling, and are produced in short production runs. Structural products
are generally sold to service centers, fabricators and OEMs.
- Special sections are bar products with singular applications, as
compared to merchant bar products, which can be used in a variety of
applications. Special sections include custom shapes for use in the
earth moving, material handling and transportation industries. Our
special sections products include grader blades for tractors, elevator
guide rails, light rails for crane and mine applications, and super
light weight beams for truck trailer cross members.
- Special bar quality products or SBQs are merchant bar shapes that have
stringent chemical and dimensional tolerance requirements, and therefore
are often more costly to produce and command a higher margin than
smaller dimension bar products. SBQ are widely used in industries such
as mining and automobile production, and are generally sold to OEMs.
85
STOCK REBAR
Stock rebar refers to straight reinforcing steel bars, ranging from 20 to
60 feet and from 3/8(th) of an inch to 2 1/4 inches in diameter. Stock rebar is
sold to companies that either fabricate it themselves or warehouse it for sale
to others who fabricate it for reinforced concrete construction. Rebar products
are used primarily in two sectors of the construction industry: private
commercial building projects, such as institutional buildings, retail sites,
commercial offices, apartments, condominiums, hotels, manufacturing facilities
and sports stadiums; and infrastructure projects, such as highways, bridges,
utilities and water and waste treatment facilities.
ROD
Rod is coiled wire rod. We produce industrial quality rod products that are
sold to customers in the automotive, agricultural, industrial fastener, welding,
appliance, and construction industries. We sell rod to downstream manufacturers
who further process it by cold drawing it into various shapes, including twisted
or welded configurations such as coat hangers, supermarket baskets and chain
link fences. We sell most of our rod to end users and depending on market
conditions, use the remaining portion in our downstream operations to
manufacture wire mesh and collated nails. Other end uses of wire rod products
include the manufacture of fences, fine wire, chain, welding wire, plating wire,
fasteners and springs.
FLAT ROLLED STEEL
Flat rolled sheet is steel that is rolled flat onto coils. Gallatin Steel,
our 50%-owned joint venture with Dofasco Inc., is our only mill that produces
flat rolled sheet. Flat rolled sheet is used in the construction, automotive,
appliance, machinery, equipment and packaging industries.
FABRICATED STEEL
Fabricated steel is any steel that is further processed after being rolled
by a mill. As a result of the further processing, fabricated steel generally
receives a higher price in the market than mill finished products. Our stock
rebar is fabricated by cutting it to size and bending it into various shapes,
and used in reinforced concrete constructions, such as bridges, roads and
buildings. We also process flats and squares at our cold drawn plants, and guide
rails, super light beams, wire mesh and nails at other downstream facilities.
BILLETS
Billets are rectangular sections of steel that are semi-finished in a
casting process and cut to various lengths. Billets can be sold to other steel
producers or further finished into steel products and sold to downstream users.
Our melt shops produce billets for conversion in our rolling mills into the
finished products listed above, such as rebar, merchant bar, structural shapes
and special sections. A small portion of our billet production is sold in the
open market to other steel producers for rolling into finished products.
OUR OPERATIONS
MINIMILLS
We operate minimills, which are steel mills that use electric arc furnaces
that melt scrap metal by charging it with electricity. Upon melting the scrap
metal, we add alloys and other ingredients (such as fluxes) in measured
quantities to achieve desired metallurgical properties. The resulting molten
steel is cast into long strands called billets in a continuous casting process.
The billets are typically cooled and stored, and then transferred to a rolling
mill where they are reheated, passed through roughing mills for size reduction,
and then rolled into products such as rebar, merchant bars, structural shapes,
rods or special sections. These products emerge from the rolling mill and are
uniformly cooled on a cooling bed. Most merchant and structural products then
pass through automated straightening and stacking equipment. Finished products
are neatly bundled prior to shipment to customers, typically by rail or truck.
In some cases, we ship finished products by rail to a depot before delivery to
our customers.
86
The following picture shows the typical steel production process in our
mills:
(Production Process)
All of our mills are located on our owned property, typically located with
convenient access to our raw materials, means of transportation (road, and in
some cases, rail and water) and customers. In general, our scrap is supplied by
owned or third party scrap recycling operations located within 500 miles of our
mills. Four of our mills are vertically integrated with 13 scrap recycling
facilities that supply a portion of their scrap needs. Our rebar deliveries are
generally concentrated within 350 miles of our mills, and our merchant bar
deliveries are generally concentrated within 500 miles. Some products, such as
special sections produced by our Selkirk mill, are shipped greater distances,
including overseas.
87
The table below presents information regarding our mills, including the
estimated annual production capacity and actual production for the year ended
December 31, 2002. We calculate annual melting and rolling capacities based on
our best historical months of production and best rolling mill cycles,
respectively, both annualized and assuming 18 days per year for maintenance
shutdown. Actual capacity may vary significantly from annual capacity due to
changes in customer requirements; sizes, grades and types of products rolled;
and production efficiencies. Our capacity calculations may also change from year
to year because of these factors. We do not present manufacturer's design
capacity information because we do not consider it a relevant measure due to
differences in the product mix and production efficiency assumptions.
<Table>
<Caption>
YEAR ENDED YEAR ENDED
APPROX. DECEMBER 31, APPROX. DECEMBER 31,
ANNUAL 2002 CAPACITY ANNUAL 2002 CAPACITY
MELTING MELTING UTILIZATION ROLLING ROLLING UTILIZATION
CAPACITY PRODUCTION PERCENTAGE CAPACITY PRODUCTION PERCENTAGE
-------- ------------ ----------- -------- ------------ -----------
(thousands of tons) (thousands of tons)
Cambridge, Ontario........... 360 333 92.5% 325 313 96.3%
Cartersville, Georgia........ 860 368 42.8 600 288 48.0
Charlotte, North Carolina.... 460 330 71.7 400 319 79.8
Gallatin, Kentucky (1)....... 1,500 714 95.2 1,500 706 94.1(2)
Jackson, Tennessee........... 670 498 74.3 600 446 74.3
Jacksonville, Florida........ 640 621 97.0 640 620 96.9
Knoxville, Tennessee......... 455 415 91.2 500 413 82.6
Perth Amboy, New Jersey...... 900 596 66.2 1,000 654 65.4
Sayreville, New Jersey....... 800 595 74.4 600 450 75.0
Selkirk, Manitoba............ 385 334 86.8 330 294 89.1
Whitby, Ontario.............. 960 667 69.5 1,100 644 58.5
----- ----- ---- ----- ----- ----
Total........................ 7,990(1) 5,471 75.6%(2) 7,595(1) 5,147 75.2%(2)
===== ===== ==== ===== ===== ====
</Table>
- ---------------
(1) Includes 100% of the capacity and 50% of production of the Gallatin mill,
which is a 50%-owned joint venture.
(2) Utilization % includes the Gallatin mill, calculated by dividing our 50%
share of production by 50% of total capacity.
We operate our mills so that inventory levels maintained within targeted
ranges do not generally utilize 100% of our capacity. Although it is generally
advantageous to run mills at full production levels to achieve the lowest unit
costs, producing to targeted inventory levels balances production with marketing
and gives management sufficient flexibility to limit maintenance delays and
other downtime. This approach also results in better working capital management.
In addition, some of our mills are run in ways that diverge from the assumptions
used in calculating production capacity. For example, our Cambridge mill
produces a large number of different products, which requires frequent switching
of rolling equipment. Furthermore, the mills operated by Co-Steel prior to our
combination have historically had lower capacity utilization for a variety of
reasons. As market conditions in the steel industry improve, we expect that we
will be able to improve the capacity utilization at those facilities, as well as
at our Cartersville mill, so that their performance will be more consistent with
that of our other facilities.
Cambridge Mill
Cambridge mill began operations in 1980. It is located on a 32 acre site in
Cambridge, Ontario, 100 kilometers west of Toronto. It produces merchant bar,
SBQ products and rebar. Approximately 15% of the Cambridge mill's production is
rebar, which is sold primarily to fabricators and service centers in Canada.
Approximately 75% of the Cambridge mill's production is merchant bars and
structural shapes. It generally produces smaller sizes in smaller production
runs targeted to niche markets that earn higher margins than commodity merchant
bars. Approximately 10% of the mill's production consists of SBQ products. The
mill's melt shop was rebuilt in 1986 and includes a 45-ton electric arc furnace
and a 3-strand continuous caster. The rolling mill was commissioned in 1987 and
includes a 75-tons per hour reheat furnace, an 18 in-line stand rolling mill, a
256 foot cooling bed, an in-line cut-to-length shear, and a straightening,
stacking, and bundling finishing end. We have recently replaced the mill's
baghouse and the new unit is operational.
88
Cartersville Mill
The Cartersville mill began its melting operations in 1989 and its rolling
operations in 1999. It is located on a 264 acre site in Cartersville, Georgia.
In addition to a wide range of merchant bars, the mill produces structural
shapes and beams. The mill's melt shop has a 140-ton electric arc furnace, a
ladle refining station and a 6-strand billet caster. Construction of a 63,000
square foot finished product warehouse was completed in October, 2003.
Charlotte Mill
The Charlotte mill began operations in 1961. It is located on a 112 acre
site in Charlotte, North Carolina. It produces rebar and merchant bars that are
sold primarily within the eastern seaboard states from Florida to Pennsylvania.
The mill's melting equipment includes a 75-ton electric arc furnace, a
continuous scrap feeding and preheating system, and a ladle refining station.
The melting facilities also include a 3-strand continuous caster and material
handling equipment. Charlotte's rolling mill includes an 80-tons per hour reheat
furnace, 15 in-line mill stands, a 200-foot cooling bed, an in-line straightener
and flying cut-to-length shear, and an automatic stacker for merchant bars and
rebar. Charlotte and the project should be completed in mid-December 2003.
Gallatin Mill
The Gallatin mill began operations in 1995. It is our 50%-owned joint
venture with Dofasco Inc. The mill is located in Gallatin County, Kentucky, 40
miles southwest of Cincinnati, on a 1,000-acre site that Gallatin Steel owns. It
produces principally hot band rolled steel products that are used in the
construction, automotive, appliance, machinery, equipment and packaging
industries. The mill operates a direct current twin-shell 350-ton electric arc
furnace with a ladle refining station and a thin slab caster. The rolling mill
is a high-speed tandem rolling mill (which means the billets are rolled
immediately after being melted without being cooled and reheated) and a cut-
to-length operation.
Jackson Mill
The Jackson mill began operations in 1981. It is located on a 283 acre site
in Jackson, Tennessee. This mill is our largest single producer of merchant bars
and also produces some larger size rebar. The merchant bars are marketed
primarily in the southeastern United States, as well as southern Illinois,
Indiana and Ohio. The Jackson mill's melting equipment includes a 140-ton
electric arc furnace and a 4-strand continuous billet caster. The rolling mill
consists of a 120-tons per hour reheat furnace, 16 vertical and horizontal
in-line quick-change mill stands, a cooling bed, an in-line straightener, a
cut-to-length product shear and an automatic stacker. The Jackson mill has a
shredder that it uses to process scrap purchased from third parties. We are in
the process of upgrading the caster at the Jackson mill and the project should
be completed by the end of December 2003.
Jacksonville Mill
The Jacksonville mill began operations in 1976. It is located on an
approximately 550 acre site in Jacksonville, Florida and produces rebar and
rods. The rebar is marketed primarily in Florida, the nearby Gulf Coast states
and Puerto Rico, and coiled rebar is shipped throughout the eastern United
States. The rod products are sold throughout the southeastern United States.
Jacksonville's melting equipment consists of a 100-ton electric arc furnace and
a 4-strand continuous caster. The rolling mill includes a 100 tons per hour
reheat furnace, 16 in-line horizontal rolling mill, a 10-stand rod block, a
cooling bed for straight bars and a controlled cooling line for coiled products,
a cut-to-length product shear, and automatic bundling and tying equipment for
straight bars and coils. 40% of the scrap needs of the Jacksonville mill is
supplied by an on-site recycling facility owned and operated by a division of
OmniSource Corporation, solely for the benefit of the mill.
Knoxville Mill
The Knoxville mill began operations in 1984. It is located on a 52 acre
site in Knoxville, Tennessee and produces almost exclusively rebar. The rebar is
marketed throughout Ohio and Kentucky and parts of Illinois, Indiana, New
Jersey, Maryland, Virginia, West Virginia, Tennessee, North and South Carolina,
Georgia and Alabama. Knoxville's melt shop completed a $34.5 million
modernization in July 2000. The new facility includes a 95-ton electric arc
furnace, a continuous scrap feeding system and a preheating system. The rolling
mill consists of a 90-tons per hour reheat furnace, 17 in-line mill stands
utilizing an in-line heat treating process, a cooling bed and a cut-to-length
shear line. The rolling mill electrical control system was upgraded in April
2003 at the Knoxville mill.
89
Perth Amboy Mill
The Perth Amboy mill began operations in 1980. It is located on a 93 acre
site in Perth Amboy, New Jersey. It produces industrial quality rod products
that are sold to customers in the automotive, agricultural, industrial fastener,
welding, appliance and construction industries in the northeastern United
States. The Perth Amboy mill has a 150-ton electric arc furnace, a ladle arc
refining unit, a 5-strand continuous caster, and a rod mill.
Sayreville Mill
The Sayreville mill began operations in 1972 and constructed a new melt
shop and caster in 1997. It is located on a 116.5 acre site in Sayreville, New
Jersey, 30 miles south of New York City and 6 miles from our Perth Amboy mill.
It produces principally merchant bar, structural shapes and rebar, which are
generally sold to fabricators in the northeastern United States. The Sayreville
mill operates a 135-ton electric arc furnace, a continuous scrap feeding and
preheating system, a ladle arc refining unit, a 6-strand continuous caster, and
a bar mill.
Selkirk Mill
The Selkirk mill began operations in 1917. It is located on a 529 acre site
in Selkirk, Manitoba. It produces special sections, merchant bars and stock
rebar. Approximately 15% of the Selkirk mill's production is rebar which is sold
primarily to fabricators and service centers in Canada. Up to 15% of its
production is merchant bars and structurals. In 2001, the Selkirk mill increased
production capabilities to include flats with a width of more than 10 inches.
Approximately 75% of the Selkirk mill's shipments are special sections sold to
the earth moving, material handling and transportation industries. The Selkirk
mill has a 65-ton electric arc furnace, a ladle refining station, and a 3-strand
continuous caster, which was installed in 1998. Selkirk operates two rolling
mills. Rolling mill #1 has a 15-stand rolling mill. Rolling mill #2 includes two
in-line stands, one horizontal (installed in 1998) and the other vertical
(installed in 2000), along with a cooling bed (installed in 2000). The mill is
vertically integrated with four scrap recycling facilities located in North
Dakota that collect and/or process scrap for use by the mill and sale to third
parties. The mill also has its own shredder and shears for processing scrap. The
mill's scrap facilities can supply all of the mill's scrap needs. However,
depending on market conditions, the mill may from time to time purchase a
portion of its scrap needs from third parties and sell some of its collected
scrap to third parties.
Whitby Mill
The Whitby mill began operations in 1964. It is located on a 357 acre site
in Whitby, Ontario, 35 miles east of Toronto. It produces principally merchant
bar, structural shapes and rebar, which are generally sold to fabricators. The
Whitby mill has a 150-ton electric arc furnace, a ladle refining unit, a
5-strand continuous caster, a bar mill, and a structural mill. We are planning
to build a warehouse at the Whitby mill in the next six months. The mill is
vertically integrated with five scrap recycling facilities in southern Ontario
that collect and/or process scrap for use by the mill and sale to third parties.
100% of the mill's scrap needs are supplied by its scrap facilities. The
electrical control system at the Whitby bar mill was upgraded in August 2003.
Depots
We lease depots in Chicago, Illinois; North Jackson, Ohio; and Montreal,
Quebec; and own a warehouse in Milton, Ontario. We ship finished product by rail
from several of our mills to these depots, where it is stored before being
shipped to customers. The following table provides information on these
facilities:
<Table>
<Caption>
LOCATION ACREAGE EXPIRY OF LEASE
- -------- ------- ---------------
Milton, Ontario............................................. 32.27 N/A
Montreal, Quebec............................................ 1.89 June 30, 2007
Chicago, Illinois........................................... 8.88 June 30, 2017
North Jackson, Ohio......................................... 21.75 May 31, 2016
</Table>
We expect that we will not renew our leases on these facilities when they
expire, and will thereafter ship directly from our mills rather than using
depots.
DOWNSTREAM OPERATIONS
We have secondary value-added steel businesses, which we refer to as
downstream operations. These steel fabricating and product manufacturing
operations process steel principally produced in our minimills.
90
Rebar Fabrication
We operate one of the largest rebar fabricating and epoxy coating groups in
North America, and have a 50-year history of quality workmanship and service.
Our network, consisting of 14 rebar fabricating plants and three epoxy coating
plants, services the concrete construction industry in the eastern half of the
United States. Our rebar fabricating capacity is over 500,000 tons per year. The
fabricating facilities purchase rebar from our mills at competitive market
prices, and cut and bend it to meet our customers' engineering, architectural
and other end-product specifications. The fabricating plants purchase the
majority of their rebar from our Jacksonville, Knoxville, Charlotte and
Sayreville mills. We estimate capacity based on our best historical months of
production, annualized. The following table shows our rebar fabricating plant
locations and their respective approximate annual capacities:
<Table>
<Caption>
REBAR FABRICATING PLANT (1) CAPACITY
- --------------------------- ---------
(In tons)
Plant City (Tampa), Florida................................. 45,000
Jacksonville, Florida....................................... 40,000
Ft. Lauderdale, Florida..................................... 40,000
Orlando, Florida............................................ 15,000
Charlotte, North Carolina................................... 40,000
Raleigh, North Carolina..................................... 35,000
Duluth (Atlanta), Georgia................................... 40,000
Aiken, South Carolina....................................... 15,000
Knoxville, Tennessee........................................ 50,000
Nashville, Tennessee........................................ 35,000
Collierville (Memphis), Tennessee........................... 20,000
Louisville, Kentucky........................................ 35,000
York, Pennsylvania.......................................... 60,000
Milton, Pennsylvania........................................ 15,000
Baltimore, Maryland......................................... 30,000
-------
Total....................................................... 515,000
=======
</Table>
- ---------------
(1) On May 30, 2003, we announced the closure of our Sayreville fabricating
plant which had an annual fabricating capacity of approximately 30,000
tons. The plant and property were sold as of November 26, 2003.
In addition to the fabricating plants listed above, we operate three epoxy
coating plants that are located in: Knoxville, Tennessee; Milton, Pennsylvania;
and Sayreville, New Jersey. These facilities apply epoxy coating to fabricated
rebar for rust applications, and have a combined annual coating capacity of
approximately 150,000 tons.
Railroad Spike Operations
We own two railroad spike facilities: a 52,000 square foot facility on 41
acres of land in Lancaster, South Carolina and a 23,000 square foot facility on
7.7 acres of land in Paragould, Arkansas. Our railroad spike operations forge
steel square bars produced at the Charlotte mill into track spikes. These track
spikes are generally sold on an annual contract basis to the major railroad
companies in North America. We are one of the leading rail spike producers, and
sold over 50,000 tons of track spikes in the year ended December 31, 2002.
Cold Drawn Plants
We have two cold drawn plants. Our Orrville, Ohio plant is a 45,000 square
foot greenfield facility built on 6.5 acres of land in 2000. The Orrville plant
is owned by AmeriSteel Bright Bar, Inc., of which we own 80% and the remaining
20% is owned by members of management. It has the capacity to produce 30,000
tons of cold drawn flats and squares per year.
Our Cartersville, Georgia cold drawn plant is located two miles away from
the Cartersville mill. This 90,000 square foot facility was constructed in 1989
and was acquired in June 2002. The Cartersville cold drawn plant expanded our
product offering to include rounds and hexagons. The plant has the capacity to
produce up to 45,000 tons of cold drawn bars per year.
The Jackson, Cambridge and Cartersville mills, along with third party
mills, supply the Orrville and Cartersville cold drawn facilities. The cold
drawn business, with two producing locations, expands our product
91
offering and provides a downstream shipping opportunity for the our minimills.
We sell cold drawn bars primarily to steel service centers.
Super Light Beam Processing and Elevator Guide Rails
We operate a super light beam processing facility in Memphis, Tennessee,
where we fabricate and coat super light beams purchased from a third party into
cross members for the truck trailer industry. This facility is located on leased
property, for which the lease expires on August 31, 2007. Bradley Steel
Processors Inc., our 50%-owned joint venture with Buhler Industries Inc., also
operates a super light beam processing facility. Bradley's facility is located
on leased property in Winnipeg, Manitoba, near our Selkirk mill, and processes
beams produced by that mill. Bradley's lease expires on September 30, 2008.
SSS/MRM Guide Rail Inc., our 50%-joint venture with Monteferro S.p.A.,
processes our Selkirk mill's guide rail sections for elevator manufacturers.
SSS/MRM carries on business under the name Monteferro North America and has two
facilities, one in Steinbach, Manitoba and the other in Birds Hill, Manitoba.
Both the Steinbach and Birds Hill facilities are located on leased property, for
which the leases expire in June 30, 2008 and May 31, 2007, respectively. SSS/MRM
Guide Rail also has a 50% interest in a guide rail processing facility in
Brazil.
Wire Mesh and Collated Nails
Our facility in New Orleans, Louisiana produces small-diameter drawn wire
from coiled steel rod. The wire is then either manufactured into wire mesh for
concrete pavement reinforcement or converted into collated nails for use in
high-speed nail machines. We lease a 120,000 square foot wire fabric and nail
facility on five acres of land in New Orleans, Louisiana. The lease was renewed
on August 31, 2003 and renews annually, unless terminated by the Company.
OUR JOINT VENTURES
We have three 50%-owned joint ventures. The Gallatin mill is our 50%-owned
joint venture with Dofasco Inc., located in Gallatin County, Kentucky. It
produces hot rolled steel products. Bradley Steel Processors Inc. is our
50%-owned joint venture with Buhler Industries Inc., which processes super light
beams. SSS/MRM Guide Rail is our 50%-joint venture with Monteferro S.p.A., which
processes the Selkirk mill's guide rail sections for elevator manufacturers.
Under Canadian GAAP, our three 50%-owned joint ventures are proportionately
consolidated, which means that 50% of individual items such as assets, sales and
cost of sales are included in our results. In addition, to be consistent with
the presentation of our financial information, information on tons shipped and
other production information includes our 50% share of the joint ventures'
production.
In 1994, Co-Steel and Dofasco Inc. established the Gallatin joint venture
by investing $75.0 million each into Co-Steel Dofasco LLC. This initial
investment was used to purchase $150.0 million of industrial revenue bonds from
Gallatin County, Kentucky. The investment and issuance of the bonds were
structured to effectively reduce the amount of property taxes payable by
Gallatin Steel. The bonds bear interest at a rate of 10%, mature in 2024 and can
be prepaid without penalty. Gallatin County used the proceeds from the
industrial revenue bonds to construct the Gallatin steel mill, which is being
leased from Gallatin County by Gallatin Steel. Gallatin Steel makes lease
payments to Gallatin County, which in turn redeems bonds and makes interest
payments on the bonds to Co-Steel Dofasco LLC. As of September 30, 2003, there
were approximately $73 million of bonds outstanding. All proceeds received by
Co-Steel Dofasco LLC from Gallatin County are distributed equally between
Dofasco and our company.
MARKETING
Our products are generally sold to steel service centers, fabricators, or
directly to OEMs east of the Mississippi River. Our products are used in a
variety of industries, including construction, mining, automotive, commercial,
cellular and electrical transmission, metal building manufacturing, and
equipment manufacturing. We also sell fabricated rebar to contractors performing
work in both private (commercial) and public (road, bridge and other
construction or infrastructure) projects.
In our rebar fabrication business, the market areas we cover are those east
of the Mississippi River, with plants located in or near most major cities in
the eastern United States. Our long-standing strategy is to have our
92
production facilities located in close proximity to the job-sites we supply.
Normally we are within 200 miles of our customers' job-sites, so we can provide
quick response times to satisfy their reinforcing steel needs.
The following table shows information on our customers during 2001 and 2002
on a pro forma basis:
<Table>
<Caption>
PERCENTAGE OF
NET SALES
BY CUSTOMER
-------------
2001 2002
----- -----
Fabricators................................................. 43% 41%
Steel service centers....................................... 31 35
Wire drawing................................................ 17 15
Transportation.............................................. 7 7
Other....................................................... 2 2
--- ---
Total..................................................... 100% 100%
=== ===
</Table>
In the year ended December 31, 2002, on a pro forma basis, we sold products
to over 1,000 customers. Given the diversity of our products and markets, no one
customer comprises 3% or greater of our consolidated net sales on a pro forma
basis. Our five largest customers comprised 7% of our total consolidated pro
forma net sales in the year ended December 31, 2002. The following table
provides a percentage breakdown of total net sales by customer location on a pro
forma basis for 2001 and 2002:
<Table>
<Caption>
PERCENTAGE OF NET
SALES BY COUNTRY
------------------
2001 2002
------- -------
United States............................................... 82.6% 80.3%
Canada...................................................... 16.9 19.2
Other....................................................... 0.5 0.5
----- -----
100.0% 100.0%
===== =====
</Table>
In general, sales of mill finished products to U.S. customers are centrally
handled by our Tampa sales office, and sales to Canadian customers are centrally
handled by our Whitby sales office. We also have sales offices in Perth Amboy,
New Jersey, where rod sales are handled, and Selkirk, Manitoba, where sales of
special sections are handled. Metallurgical service representatives at our mills
provide technical support to our sales force but are not considered sales
representatives.
In general, sales of our cold drawn, rod and super light beam products are
handled by sales representatives located at our relevant facilities. Our
fabricated rebar and elevator guide rails are generally sold through a bidding
process in which employees at our facilities work closely with each of our
customers to tailor product requirements, shipping schedules and prices.
STEEL-MAKING TECHNOLOGY AND CAPITAL EXPENDITURES
Our manufacturing processes are dependent upon critical steelmaking
equipment, such as furnaces, continuous casters and rolling equipment, as well
as electrical equipment. Like many minimill steel producers, we do not have a
formal research and development program, since steel-making technology is
readily available for purchase. However we are continuously implementing process
and operational improvements and applying new technology in our operations. Over
the last several years, we have introduced modern technologies in our minimills,
such as high-power transformers, water-cooled side-walls and roofs, oxygen lance
manipulators, and slag foaming and ladle furnaces. In our rolling mills, we have
introduced automatic furnace control continuous rolling mills, high-speed
finishing blocks, thermex heat treatment, stelmor wire rod processing, automatic
tying machines and slit rolling, among others. Most of the sophisticated
production equipment that we use is supplied by international machinery builders
and steel technology companies. Such suppliers generally enter into technology
transfer agreements with purchasers, and provide extensive technical support and
staff training in connection with the installation and commissioning of the
equipment. We have entered into technology transfer agreements with Corus, Kyoei
Steel and BSW.
93
We made $33.4 million of capital expenditures for the year ended December
31, 2002. We anticipate spending approximately $60.6 million on capital
expenditures in the year ended December 31, 2003. The capital projects include
rolling mill electrical control system upgrades at the Charlotte, Knoxville and
Whitby bar mills; a new warehouse at the Cartersville mill; a new melt shop
emissions control system at the Cambridge mill; and a caster upgrade at the
Jackson mill.
SCRAP, ENERGY AND OTHER RAW MATERIALS
Steel scrap is the primary raw material consumed in steel-making, and
comprises approximately 30% to 45% of our cost of sales, depending on the mill
and product mix. Scrap availability is a major factor in our ability to operate.
Direct reduced iron, hot briquetted iron and pig iron can substitute for a
limited portion of the steel scrap used in electric furnace minimill steel
production. We do not use scrap substitutes in our long-product minimills,
except for the small portion we use for their chemical properties in our rod
facilities and to manufacture certain special sections. Scrap metal is readily
available in the regions where we operate, but prices may become volatile from
time to time due to various factors. Four of our mills are integrated with our
recycling operations that supply a portion of their scrap needs. The balance of
our scrap metal requirements are purchased in the open market either directly by
our personnel or by brokers who procure and aggregate scrap as a business on our
behalf.
Electricity and natural gas represented approximately 9.0% and 4.2%,
respectively, of our pro forma cost of sales for the twelve months ended
September 30, 2003. Most of our facilities operate under long-term electricity
supply contracts with major utilities. These contracts typically have two
components to them: a firm portion and an interruptible portion. The firm
portion supplies a base load for critical equipment and auxiliary services. The
interruptible portion supplies the majority of our requirements including the
electric arc furnace load. The interruptible portions of the contracts generally
represent over 70% of the total load and, for the most part, are based on a
spot-market price of electricity at the time it is being used. Energy costs in
the northeastern United States, where two of our minimills are located, are
typically significantly higher than in other parts of North America.
We therefore have significant exposure to the variances of the electricity
spot market. We do not have long-term contracts for natural gas, and are
therefore subject to market variables and pricing swings for that energy source
that could materially affect our operating margins and results of operations.
Prices for natural gas have been very volatile in the recent past. For example,
in 2002, the average NYMEX natural gas price was $3.22/mmBtu compared to
$5.66/mmBtu which was the average price as of September 30, 2003. This reflects
a 75% price increase when compared to average prices paid in 2002. We spent
approximately $42.2 million and $53.7 million for our natural gas requirements
in the nine months ended September 30, 2003 and the twelve months ended
September 30, 2003 on a pro forma basis, respectively. If prices remain at
current levels or increase further, our profitability will continue to be
adversely affected. Any interruption in the supply of energy, whether scheduled
or unscheduled, could materially adversely affect our sales and earnings.
Although deregulation of both natural gas and wholesale electricity have
afforded opportunities for lower costs resulting from competitive market forces,
prices for both of these energy sources have become more volatile in the recent
past and may continue to be. Volatility in the electric power and natural gas
markets generally reflects extremes in weather conditions or physical
disruptions to the supply system. As such, these sources of volatility are
beyond our immediate control.
Various domestic and foreign firms supply other important raw materials or
operating supplies required for our business, including refractories,
ferroalloys and carbon electrodes. We have historically obtained adequate
quantities of such raw materials and supplies at competitive market prices to
permit efficient mill operations. We are not dependent on any one supplier as a
source for any particular material and believe there are adequate alternative
suppliers available in the marketplace should the need arise to replace an
existing one.
COMPETITION
LOCAL COMPETITION
Our geographic market encompasses the eastern half of Canada and the United
States, predominantly throughout the eastern seaboard, the Southeast and the
Midwest. We experience substantial competition in the sale of each of our
products from numerous competitors in our markets. Rebar, merchant bars, and
structural shapes are commodity steel products for which price is the primary
competitive factor. Due to the high cost of freight relative to the value of
steel products, competition from non-regional producers is somewhat limited.
Proximity of product
94
inventories to customers, together with competitive freight costs and low-cost
manufacturing processes, are key to maintaining margins on rebar and merchant
bar products. Our rebar deliveries are generally concentrated within a 350 mile
radius of our mills and our merchant bar deliveries are generally concentrated
within a 500 miles. Some products, such as special sections produced by our
Selkirk mill, are shipped greater distances, including overseas. Except in
unusual circumstances, the customer's delivery expense is limited to freight
charges from the nearest competitive mill, and the supplier absorbs any
incremental freight charges.
We believe our principal competitors include Ispat Sidbec Inc., Stelco Inc.
and Ivaco Inc. in Canada; and Bayou Steel Corporation, Commercial Metals
Corporation, Marion Steel Company, NorthStar Steel Company, Nucor Corporation,
Roanoke Electric Steel Corporation, Sheffield Steel Corporation, and Steel
Dynamics Inc. in the United States. Our Gallatin joint venture competes with
numerous other integrated and minimill steel producers.
Despite the commodity characteristics of the rebar, merchant bar and
structural markets, we believe that we distinguish ourselves from our
competitors due to our large product range, product quality, consistent delivery
performance, capacity to service large orders, and ability to fill most orders
quickly from inventory. We believe that we produce one of the largest ranges of
bar products and shapes east of the Mississippi River. Our product diversity is
an important competitive advantage in a market in which we believe our customers
are looking to fulfill most of their requirements from a few key suppliers.
FOREIGN COMPETITION
We and other North American steel producers have experienced significant
and, we believe in some cases, unfair competition from foreign finished steel
bar producers during the past several years. Due to unfavorable foreign economic
conditions and global excess capacity, imports of steel bar products into the
United States' and Canadian markets reached historically high levels in recent
years, with a corresponding negative impact on domestic prices.
In September 2001, the International Trade Commission unanimously found
steel imports to be a major cause of material injury to the domestic steel
industry, and sent proposed remedies to President Bush in December 2001. On
March 5, 2002, President Bush imposed a series of tariffs relating to some
imported steel products that were intended to give the domestic steel industry
an opportunity to strengthen its competitive position through restructuring and
consolidation, and that progressively decline in the month of March in the three
years they were to be in effect prior to the termination of the safeguard
tariffs on December 4, 2003.
The following table summarizes the duties imposed for certain steel
products:
<Table>
<Caption>
SECTION 201 IMPORT TARIFFS BY PRODUCT
------------------------------------------------------
TYPE SEPTEMBER 2003 SEPTEMBER 2004 SEPTEMBER 2005
- ---- ---------------- ---------------- ----------------
Slab............................................. 30% after first 24% after first 18% after first
5.4 million tons 5.9 million tons 6.4 million tons
Finished flat products (plate, hot-rolled sheet,
cold-rolled sheet, coated sheet)............... 30% 24% 18%
Hot-rolled bar................................... 30 24 18
Cold-finished bar................................ 30 24 18
Rebar............................................ 15 12 9
</Table>
- ---------------
Source: Office of The United States Trade Representative.
Many products and countries were not covered by these tariffs, and numerous
foreign steel manufacturers received specific product exemptions from these
tariffs. According to published reports, the exemptions are estimated to cover
approximately 5.4 million of the original 13.1 million tons of imported steel
products that were covered by the tariffs. The majority of the most recent
exemptions were granted to products made by European Union and Japanese
producers. To date, the Office of the United States Trade Representative and the
United States Department of Commerce have granted 1,022 exclusion requests with
respect to the Section 201 tariffs temporarily imposed on steel imports as a
safeguard measure. According to the American Iron and Steel Institute (AISI),
the number of exclusions granted is one reason the tariffs have not yet
effectively reduced steel imports. The AISI does point to some early indications
that the President's program worked, including improved operating performance,
95
new stock offerings, increased consolidation activity and partial price
restoration for some flat-rolled steel products; however, some analysts
attribute these developments to other factors such as diminished domestic
supply, higher domestic demand, the lower value of the United States dollar and
recent successful anti-dumping cases. For the first nine months of 2002, steel
imports were 23.9 million tons versus 22.1 million tons for the first nine
months of 2001, according to the U.S. Census Bureau. The Bush administration
subsequently announced its intention to review the impact of these tariffs and
determine whether they should be ended prior to their scheduled expiration. In
November 2003, the World Trade Organization (WTO) Appellate Body announced that
the U.S. tariffs imposed to protect the U.S. steel industry from imports are
illegal under trading rules. On December 4, 2003, President Bush signed a
proclamation terminating the steel safeguard tariffs, and announced that the
tariffs were being terminated as they had achieved their purpose and changed
economic circumstances indicated it was time to terminate them. However, it is
not known whether the termination of the safeguard tariffs is permanent as
President Bush also announced that the steel import licensing and monitoring
program will continue its work in order to be able to respond to future import
surges that could unfairly damage the United States steel industry.
One of our subsidiaries, Gerdau Ameristeel Perth Amboy Inc. (formerly
Co-Steel Raritan), was party to a U.S. wire rod anti-dumping and countervailing
duty case against a number of countries and steel producers. In October 2002,
the U.S. Department of Commerce (DOC) made a determination of injury against
wire roll producers in seven foreign countries with respect to both anti-dumping
and countervailing duties that range from 4% to 369%. Although there have been
recent increases in rod pricing following the imposition of these duties, a
considerable amount of imported rod continues to enter U.S. markets.
The Organization for Economic Cooperation and Development (OECD) recently
initiated a process to address worldwide overcapacity in the steel industry.
Although meetings have been held by the OECD Steel Committee to discuss methods
to reduce this steel surplus, there is no certainty that such efforts will lead
to a satisfactory resolution of this issue. Continuing overcapacity in the steel
industry would adversely affect our ability to compete and our levels of sales.
The tariffs imposed in the United States and any similar actions that may
be taken in Canada may not have a material positive impact on the North American
steel industry and may not reduce the volume or negative impact of imports.
Global overcapacity, a strong U.S. dollar, the strength of the North American
economy relative to the rest of the world, numerous exemptions under the
tariffs, the short term (three years) duration of the tariffs, the decline in
tariff rates after the first year, and the disparity of tariff rates across
different product lines are all factors that may negate any benefits of the
tariffs.
EMPLOYEES
We believe that we have been, and continue to be, proactive in establishing
and fostering a climate of positive employee relations. We have an "open book"
management system and provide opportunities for our employees to participate in
employee involvement teams. We believe high employee involvement is a key factor
in the success of our operations. We are currently reviewing the compensation
plans for our employees and our senior management. We are revising our programs
in the United States and expect to do the same in Canada once that review is
complete. Our objective is to ensure that our compensation programs are designed
to make employees' financial interests congruous with those of our shareholders
and competitive within the market place.
Safety is our most important corporate value and we make every effort to
put safety first in our operations. We also strive to involve employees in our
safety programs and in improving our operations. We have implemented the Gerdau
Ameristeel business system, in which we identify benchmarks for key operational
and safety measures and then develop processes to improve our performance
relative to these benchmarks. Our training and safety programs are currently
embedded within this initiative. We have adopted plans at our former Gerdau and
Ameristeel mills and fabricating facilities to visibly demonstrate our
commitment to these safety and operating measures. We are now implementing this
system at the former Co-Steel mills.
We currently employ approximately 5,000 employees (including 50% of the
employees at our joint ventures), of which approximately 3,200 employees work in
our minimills, 1,400 work in our downstream, fabricating facilities and
recycling operations and 200 work in our corporate and sales offices. These
figures include 50% of those employed at our joint ventures. Approximately 1,300
employees are represented by unions under a number of different collective
bargaining agreements. The agreements with our mill employees have different
expiration dates with the earliest being the agreement with our Whitby mill
employees which expires on February 27, 2004. The
96
collective agreements for our recycling operations have different expiration
dates beginning in 2006. Bradley Steel Processors Inc. employs 60 people, 57 of
whom are represented by the United Steel Workers of America, (the USWA) and
SSS/MRM Guide Rail employs 88 people, 39 of whom are represented by the USWA.
In the first quarter of 2001, a three-month labor disruption occurred at
the Whitby mill, and in the second quarter of 2002, a 13-day labor disruption
occurred at the Selkirk mill.
We believe that our relations with our employees are generally good at
those mills Gerdau North America has been operating over the years. We are
confident that we will be able to establish a similar trust level with our
employees at the former Co-Steel facilities.
OTHER PROPERTIES
In addition to our owned and leased facilities that are used in our
operations, we own two closed minimills in Florida and industrial property in
New Jersey, as set out below. An agreement has been reached for the sale of our
Keasby, New Jersey property to a recycling corporation, which we expect to close
in September 2003. We also lease our 37,000 square foot executive office located
in Tampa, Florida under a lease that expires in May 2005.
<Table>
<Caption>
LOCATION USE ACREAGE
- -------- --- -------
Tampa, Florida.............................................. Closed minimill 40.0
Indiantown, Florida......................................... Closed minimill 151.5
Keasby, New Jersey.......................................... Industrial property 26.8
</Table>
On May 30, 2003 we announced the closing of our Sayreville fabricating
plant. The plant and property were sold as of November 26, 2003.
ENVIRONMENTAL AND REGULATORY MATTERS
Our business units are required to comply with an evolving body of
environmental laws and regulations concerning, among other things, air
emissions, discharges to soil, surface water and groundwater, noise control, the
generation, handling, storage, transportation, and disposal of toxic and
hazardous substances, and the cleanup of contamination. These laws and
regulations vary by location and can fall within federal, provincial, state, or
municipal jurisdictions.
We generate certain wastes, primarily electric arc furnace dust and other
contaminants, that are classified as hazardous and must be properly controlled
and disposed of under applicable environmental laws and regulations. In the
United States and Canada, certain environmental laws and regulations impose
joint and several liability on certain classes of persons for the costs of
investigation and cleanup of contaminated properties, regardless of fault, the
legality of the original operation or disposal, or the ownership of the site.
Some of our present and former facilities have been in operation for many years
and, over such time, the facilities have used substances and disposed of wastes
(both on-site and off-site) that may require cleanup for which we could be
liable. Appropriate reserves have been made for the clean-up of sites of which
we have knowledge. However, there is no assurance that the costs of such
cleanups or the cleanup of any potential contamination not yet discovered will
not materially adversely affect us.
In 2000, our Perth Amboy and Sayreville mills took part in the EPA's Steel
Minimill Audit Initiative Program. Both New Jersey minimills conducted a
comprehensive, third party, multi-media environmental audit. The results of this
audit were disclosed to the EPA along with a list of corrective actions, all of
which are expected to be completed by the first half of 2003. None of the
identified and disclosed items have resulted, or will result, in material costs
being incurred.
In meeting our overall environmental goals and government-imposed standards
in 2002 and 2001, we incurred operating costs of approximately $30.3 million and
spent $16.5 million on capital improvements. Our anticipated capital
expenditures for pollution control in 2003 and 2004 are $1.4 million and $8.0
million respectively.
In April 2001, we were notified by the EPA of an investigation that
identifies us as a PRP in a Superfund Site in Pelham, Georgia. The Pelham site
was a fertilizer manufacturer in operation from 1910 through 1992, last operated
by Stoller Chemical Company, a now bankrupt corporation. We are included in this
action because we shipped EAF dust to this property. The EPA offered a
settlement to the named PRPs under which our allocation was approximately $1.8
million. We object to our inclusion as a PRP at this site, have asserted
defenses and are
97
pursuing legal alternatives, including the addition to the allocation of larger
third parties which we believe were incorrectly excluded from the original
settlement offer. The EPA has filed suit with us named as a defendant. As the
ultimate exposure to us, if any, is uncertain, no liability has been accrued for
this site.
The potential presence of radioactive materials in our scrap supply
presents a significant economic exposure and may present a safety risk to our
workers. In addition to the risk to our workers and the public, the cost to
clean up the contaminated material and the loss of revenue resulting from the
loss in production time can be material. Radioactive materials are usually in
the form of: sealed radioactive sources, typically installed in measurement
gauges used in manufacturing operations or in hospital equipment; scrap from
decommissioned nuclear power and U.S. Department of Energy facilities; and
imported scrap. Current regulations for generally licensed devices do not
provide for tracking of individual owners. This lack of accountability makes it
easy for licensees to negligently discard sealed sources in scrap and evade
prosecution. In response to this regulatory gap, we have installed sophisticated
radiation detection systems at all of our minimills to monitor all incoming
shipments of scrap. If we fail to detect radioactive material in the scrap we
receive, and accidentally melt that material in our EAFs, we incur significant
costs to clean up the contamination of our facilities and to dispose of the
contaminated material. While we have several detection devices at all of our
mills, occasionally radioactive scrap may go undetected. For example, in July
2001, a small amount of cesium, a radioactive source, was included among scrap
material we received from a scrap supplier and accidentally melted in our
Jacksonville mill furnace. Melt shop activities in that mill were halted for
approximately 25 days until approximately 700 tons of contaminated material had
been removed for proper disposal and equipment had been cleaned. The cost of
clean-up was approximately $10.5 million; all but $0.4 million of this amount
was paid for by our insurer. As a result of this accident, we reviewed our
radiation detection systems to reduce the risk of a similar accident in the
future.
No assurance can be given that regulatory changes, such as new laws or
enforcement policies, including potential restrictions on the emission of
mercury and other pollutants, or an incident at one of our properties or
operations, will not have a material adverse effect on the business, financial
condition, or results of our operations. Our business units are required to have
governmental permits and approvals. Any of these permits or approvals may be
subject to denial, revocation or modification under various circumstances.
Failure to obtain or comply with the conditions of permits and approvals may
adversely affect our operations and may subject us to penalties. In addition, we
may be required to obtain additional operating permits or governmental approvals
and incur additional costs. There can be no assurance that we will be able to
meet all applicable regulatory requirements. There is no assurance that our
environmental capital expenditures will not materially increase in the future.
Moreover, we may be subject to fines, penalties or other liabilities arising
from actions imposed under environmental legislation or regulations.
LEGAL PROCEEDINGS
Except as follows, there are no material pending legal proceedings, other
than routine litigation incidental to our business, to which we are a party or
in which any of our property is the subject, and no such proceedings are known
to be contemplated.
Carbon monoxide and other emissions at our Perth Amboy mill exceeded
permitted levels on several occasions during 2001 and 2002, and carbon monoxide
continues to periodically exceed current permit levels. We are conducting
investigations to determine the cause of these episodes, what steps can be taken
to reduce emissions and whether the Perth Amboy mill's environmental permits
require modification. Discussions with the NJDEP to resolve these permit and
compliance issues are continuing. Penalty assessments of approximately $250,000
were received for the third and fourth quarters of 2001. Additional penalties
will likely be assessed in connection with efforts to resolve these matters.
Penalty assessments of approximately $400,000 have been accrued.
We received notice this year of a lawsuit brought by neighbors with respect
to a waste disposal site in Louisiana that was operated by Safety Kleen, to
which wastes from clean-up activities at our former dust processing division at
our Jackson, Tennessee mill were sent during approximately one month in 1999. We
have retained counsel and believe we have valid defenses, but cannot yet
evaluate the extent of any costs that may be incurred to resolve this matter.
98
MANAGEMENT AND DIRECTORS
Our board of directors currently consists of nine directors. The following
table sets forth certain information regarding our directors and executive
officers:
<Table>
<Caption>
OWNERSHIP OF PERCENTAGE
NAME AND MUNICIPALITY OF RESIDENCE AGE POSITION SECURITIES OWNERSHIP
- ---------------------------------- --- -------- ------------ ----------
ANDRE BEAUDRY................................ 45 Vice President, 41,697 *
Tampa, Florida, U.S. Steel Product Sales
PAULO F. BINS DE VASCONCELLOS................ 58 Vice President, Steel Mill -- --
Tampa, Florida, U.S. Northeast Operations
PHILLIP E. CASEY (3)(7)...................... 60 Director, Chief Executive 8,387,490 4.3%
Tampa, Florida, U.S. Officer and President
KENNETH W. HARRIGAN (1)(4)(6)................ 76 Director 1,000 *
Oakville, Ontario, Canada
JOSEPH J. HEFFERNAN (1)(3)(5)(6)............. 57 Director 5,200 *
Toronto, Ontario, Canada
JORGE GERDAU JOHANNPETER (2)................. 66 Director and Chairman of the -- --
Porto Alegre, Rio Grande do Sul, Brazil Board of Directors
FREDERICO C. GERDAU JOHANNPETER (2).......... 60 Director -- --
Porto Alegre, Rio Grande do Sul, Brazil
ANDRE BIER JOHANNPETER (2)(7)................ 40 Vice President, Business -- --
Tampa, Florida, U.S. Development, Director
TOM J. LANDA................................. 52 Vice President, Finance, 228,822 *
Tampa, Florida, U.S. Chief Financial Officer and
Secretary
J. SPENCER LANTHIER (1)(4)................... 62 Director 2,043 *
Toronto, Ontario, Canada
GARRY A. LEACH............................... 56 Vice President, -- --
St. Paul, Manitoba, Canada MRM Special Sections
MICHAEL MUELLER.............................. 56 Vice President, Steel Mill 22,214 *
Tampa, Florida, U.S. Southeast Operations
ARTHUR SCACE (1)(4)(5)....................... 65 Director 15,000 *
Toronto, Ontario, Canada
DR. MICHAEL D. SOPKO (1)..................... 64 Director 1,000 *
Oakville, Ontario, Canada
</Table>
- ---------------
(1) Independent director.
(2) The Gerdau Johannpeter family indirectly controls Metalurgica Gerdau S.A.,
collectively holding 71.8% of the voting capital and 23.9% of the total
capital, and Metalurgica Gerdau S.A. and its controlled companies hold 85%
of the voting capital of Gerdau S.A. Gerdau S.A. beneficially owns
indirectly approximately 67.3% of our common shares.
(3) Mr. Phillip E. Casey owns 2,906,328 common shares directly and the
remaining 5,481,162 common shares indirectly. Mr. Joseph J. Heffernan owns
5,000 common shares directly and the remaining 200 common shares
indirectly.
(4) Member of the Audit Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Human Resources Committee.
(7) Member of Safety, Health and Environmental Committee.
* Less than one percent.
ANDRE BEAUDRY has been our Vice President, Steel Product Sales since
October 2002. Prior to that, Mr. Beaudry was Vice President, Mill Product Sales,
of Ameristeel from September 2001. Mr. Beaudry was employed by Gerdau Ameristeel
Cambridge Inc. starting as Vice President Sales and Marketing in 1991 and
serving as President from April 1998 through September 2001. Mr. Beaudry has
over 20 years experience in the steel industry.
99
PAULO F. BINS DE VASCONCELLOS has been working with the Gerdau group since
1972. He has been our Vice President, Steel Mill Northeast Operations since
August 2003. Prior to that Mr. Vasconcellos was an Executive Vice President of
Gerdau S.A.
PHILLIP E. CASEY has been our President and Chief Executive Officer and a
director since October 2002. Prior to that he was Chief Executive Officer and a
director of Ameristeel starting in June 1994 and President of Ameristeel
starting in September 1999. Mr. Casey was Chairman of the Board of Ameristeel
from June 1994 until September 1999.
KENNETH W. HARRIGAN has been a director of Gerdau Ameristeel since 1994.
Mr. Harrigan is also Chairman of K. W. Harrigan Consultants and a director of a
number of other Canadian public companies. Prior to that, he was Chairman and
Chief Executive Officer of and consultant to Ford Motor Company of Canada,
Limited.
JOSEPH J. HEFFERNAN has been a director of Gerdau Ameristeel since 1996. He
was Vice-Chairman of Gerdau Ameristeel (when it was Co-Steel) from 1999 until
October 2002. Mr. Heffernan is also Chairman of Rothmans Inc., Chairman of
Clairvest Group Inc. and a director of a number of other Canadian public
companies.
JORGE GERDAU JOHANNPETER has been working for the Gerdau group since 1954.
Mr. Jorge Johannpeter became an executive officer of Gerdau S.A. in 1973 and was
appointed President in 1983. Mr. Johannpeter became a director and was appointed
Chairman of the Board of Directors of Gerdau Ameristeel in October 2002.
FREDERICO C. GERDAU JOHANNPETER has worked for the Gerdau group since 1961.
Mr. Johannpeter became an executive officer of Gerdau S.A. in 1973 and was
appointed Vice President in 1983. Mr. Johannpeter became a director of Gerdau
Ameristeel in October 2002.
ANDRE BIER JOHANNPETER became a director of Gerdau Ameristeel in October
2002 and was appointed Vice President, Business Development of Gerdau Ameristeel
in September 2003. He has been working for the Gerdau group since 1980. Mr.
Andre Johannpeter became an executive officer of Gerdau S.A. in 1998 when he was
appointed Director of Information Systems of Gerdau S.A. In 1999, he became
Director of New Business Development of Gerdau S.A., in 2002 he was appointed
Executive Vice President, North American Operations of Gerdau S.A. and in
October 2002 he was appointed Vice President, Chief Operating Officer of Gerdau
Ameristeel.
TOM J. LANDA has been our Vice President, Finance, Chief Financial Officer
and Secretary since October 2002. Prior to that, Mr. Landa was Chief Financial
Officer, Vice President and Secretary of Ameristeel starting in April 1995. Mr.
Landa was elected a director of Ameristeel in March 1997. Before joining
Ameristeel, Mr. Landa spent over 19 years in various financial management
positions with Exxon Corporation and its affiliates worldwide.
J. SPENCER LANTHIER has been a director of Gerdau Ameristeel since 2000.
Mr. Lanthier is also Vice-Chairman and a director of TSX Group Inc. and a
director of a number of other Canadian public companies.
GARRY A. LEACH became a Vice President of Gerdau Ameristeel in October
2002. He was a director from October 2002 to May 2003. Prior to October 2002, he
held the position of President of Gerdau MRM since December 1988. Mr. Leach
became the President of Mandak Metal Processors in 1978.
MICHAEL MUELLER became our Vice President, Steel Mill Southeast Operations
in October 2002. Prior to that, he was Group Vice President, Steel Mill
Operations of Ameristeel, since April 2001. Prior to that, Mr. Mueller served as
President and Chief Executive Officer of Auburn Steel from September 1998. Mr.
Mueller previously worked for Ameristeel as Vice President, General Manager from
October 1997 through September 1998. Prior to 1997, Mr. Mueller served as a Vice
President for Birmingham Steel Corporation for three years. Mr. Mueller has over
32 years of steel industry experience.
ARTHUR SCACE was elected to the board of Gerdau Ameristeel on May 6, 2003.
Mr. Scace is a partner at McCarthy Tetrault LLP, a Canadian law firm, and is the
former national chairman and managing partner of the firm. He is a director of
several corporations, including the Bank of Nova Scotia.
DR. MICHAEL D. SOPKO has been a director of Gerdau Ameristeel since 1997.
Dr. Sopko is also a director of a number of Canadian public companies, including
The Toronto-Dominion Bank and Voisey's Bay Nickel Company Limited.
Messrs. Jorge and Frederico Johannpeter are brothers. Andre Johannpeter is
the son of Jorge Johannpeter. None of the other directors are related to one
another.
100
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
The tables and descriptive information set forth below are being furnished
with respect to (i) those persons who were our Chief Executive Officer during
the most recent financial year, (ii) our four other most highly compensated
executive officers whose salary and bonus earned during the financial year ended
December 31, 2002 exceeded Cdn$100,000, and (iii) those persons who were not our
executive officers on December 31, 2002 because they left their positions during
the year, but would have been among the most highly paid if they had been
executive officers on December 31, 2002 (collectively the "named executive
officers"). For Mr. Casey and Mr. Leach, the compensation below represents
compensation for the 2.25 month period from October 23, 2002, the date on which
they became our officers, to December 31, 2002.
SUMMARY COMPENSATION TABLE
The summary compensation table details compensation information for the
named executive officers for the three financial years ended December 31, 2002.
The information includes: salary earned in each applicable year, incentive
bonuses earned in each applicable year, annual compensation which represents
amounts reimbursed for the payment of taxes, and all other compensation not
reported elsewhere.
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------- -------------------------------------
SECURITIES
UNDER EXECUTIVE
CURRENCY OF OPTIONS STOCK
FINANCIAL PAYMENT & ANNUAL GRANTED LONG-TERM PURCHASE ALL OTHER
NAME AND PRINCIPAL POSITION YEAR DISCLOSURE SALARY BONUS (#) INCENTIVE(8) PLAN(9) COMPENSATION
- --------------------------- --------- ----------- -------- ------- ---------- ------------ --------- ------------
PHILLIP E. CASEY (1).......... 2002 $67,500 21,104 -- -- -- --
President and
Chief Executive Officer
TERRY G. NEWMAN (2)........... 2002 Cdn $552,025 161,563 -- 379,775 276 38,066
Former President and 2001 Cdn $550,000 -- -- -- 7,137 45,486
Chief Executive Officer 2000 Cdn $500,000 228,125 -- 184,875 4,800 54,869
LORIE WAISBERG (3)............ 2002 Cdn $437,500 138,163 -- 243,579 200 1,986,190
Former Executive Vice
President 2001 Cdn $500,000 -- -- -- 20,040 44,405
Finance and Administration 2000 Cdn $197,917 90,299 -- 54,885 4,575 16,820
LOUIS F. HAGAN JR. (4)........ 2002 $196,872 34,738 -- 40,828 8,330 627,108
Former Senior Vice
President, 2001 $214,167 -- -- -- 4,996 19,964
U.S. Steel Operations 2000 $200,000 54,750 -- 22,185 2,150 13,772
R. STEPHEN GRESHAM (5)........ 2002 $173,000 38,775 -- 34,180 -- 955,553
Former Vice President,
Sales, 2001 $173,000 -- -- -- 1,380 25,180
Specialty Products 2000 $165,000 60,225 -- 18,303 1,785 20,773
RONALD L. WITZIG (6).......... 2002 $161,076 28,422 -- 33,405 2,820 518,676
Former Vice President, 2001 $174,167 -- -- -- 8,280 9,151
General Manager, 2000 $165,000 45,169 -- 18,303 1,785 9,301
Co-Steel Raritan
GARRY A. LEACH (7)............ 2002 Cdn $53,065 49,114 -- 4,475 -- --
Vice President, Gerdau
Ameristeel
MRM Special Sections Inc.
</Table>
- ---------------
(1) Mr. Casey became our President and Chief Executive Officer on October 23,
2002.
(2) Prior to August 24, 1999, Mr. Newman was Senior Vice President, Chief
Operating Officer, North America, Co-Steel Inc. Mr. Newman became our
Vice-Chairman on October 23, 2002 and retired in May 2003.
(3) Lorie Waisberg became an officer on August 1, 2000 and left on October 22,
2002. "All Other Compensation" includes a termination payment of
Cdn$1,948,666.
(4) Prior to August 1, 2001, Louis F. Hagan Jr. was Vice President and Plant
Manager, Co-Steel Sayreville. Mr. Hagan left effective November 23, 2002.
"All Other Compensation" includes a termination payment of $604,096.
(5) Mr. Gresham left effective December 31, 2002. "All Other Compensation"
includes a termination payment of $943,338.
(6) Prior to August 1, 2001, Ron Witzig was General Manager, Steel Production,
Co-Steel Raritan and Co-Steel Sayreville, and prior to January 2001, he was
General Manager, Support Services, Co-Steel Sayreville and Co-Steel
Raritan. Mr. Witzig left effective November 23, 2002. "All Other
Compensation" includes a termination payment of $491,002.
(7) Mr. Leach became Vice President on October 23, 2002.
101
(8) In the year ended December 31, 2002, payouts under the long-term incentive
plan to executive officers, other than Mr. Leach, were cash payments that
vested immediately, as a result of the transaction with Co-Steel. Mr.
Leach's long-term incentive plan award represents phantom options granted
in respect of the value of Gerdau Ameristeel MRM Special Sections Inc.
(2,801) and in respect of ADRs of Gerdau S.A. (1,674). These options were
out of the money as of December 31, 2002.
(9) Our Executive Share Purchase Plan allowed each executive officer to
contribute up to 5% of the executive officer's salary to purchase common
shares, with our matching the executive officer's contribution. Our portion
of the Executive Share Purchase Program does not vest for a period of 5
years. This plan has been terminated.
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
<Table>
<Caption>
MARKET VALUE
OF SECURITIES
% OF TOTAL UNDERLYING
OPTIONS/SARS OPTIONS/SARS
SECURITIES UNDER GRANTED TO EXERCISE OR ON THE
OPTIONS/SARS EMPLOYEES IN BASE PRICE DATE OF GRANT EXPIRATION
NAME GRANTED (#) FINANCIAL YEAR ($/SECURITY) ($/SECURITY) DATE
- ---- ---------------- -------------- ------------ ------------- ----------
PHILLIP E. CASEY................ -- -- -- -- --
TERRY G. NEWMAN................. -- -- -- -- --
LORIE WAISBERG.................. -- -- -- -- --
LOUIS F. HAGAN JR............... -- -- -- -- --
R. STEPHEN GRESHAM.............. -- -- -- -- --
RONALD L. WITZIG................ -- -- -- -- --
GARRY A. LEACH (1).............. (a)2,801 68% (a)Cdn$9.30 (a)(2) February
(b)1,674 (b)$9.74 (b)$9.74(3) 2009
</Table>
- ---------------
(1) Item (a) shows grants of phantom options in respect of shares of MRM. Item
(b) shows grants in respect of ADRs of Gerdau S.A. Grants vest as to 10% at
the end of the first year after grant, as to 20% at the end of the second
year, as to 30% at the end of the third year and as to 40% at the end of
the fourth year.
(2) The value of MRM, for purposes of these phantom options, is calculated by
MRM based on its financial performance over the three preceding years.
(3) Average trading price for the first seven trading days in February 2002 on
the New York Stock Exchange.
AGGREGATED OPTION/SAR EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL
YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES
<Table>
<Caption>
VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SECURITIES AGGREGATE OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON VALUE AT FY-END (#) AT FY-END ($) (2)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ -------------------------- --------------------------
PHILLIP E. CASEY.............. -- -- --/-- --/--
TERRY G. NEWMAN............... -- -- 70,000/-- --/--
LORIE WAISBERG................ -- -- --/-- --/--
LOUIS F. HAGAN JR............. -- -- 20,000/-- --/--
R. STEPHEN GRESHAM............ -- -- 27,600/-- --/--
RONALD L. WITZIG.............. -- -- 12,000/-- --/--
GARRY A. LEACH (1)............ -- -- (a)20,125/25,465 (a)--/--
-- -- (b)12,709/13,091 (b)21,471/--
</Table>
- ---------------
(1) Item (a) shows Mr. Leach's holding of phantom options granted in respect of
shares of MRM. Item (b) shows Mr. Leach's holding of phantom options
granted in respect of ADRs of Gerdau S.A.
(2) Except for Mr. Leach's phantom options in respect of ADRs of Gerdau S.A.,
all options/SARs were out of the money. The value of MRM, for purposes of
these phantom options, is calculated by MRM based on its financial
performance over the three preceding years. The price of the ADRs of Gerdau
S.A. on the New York Stock Exchange on January 2, 2003 was $9.38.
RETIREMENT PLANS
Mr. Newman and Mr. Waisberg
The Corporation provides pensions for Messrs. Newman and Waisberg in excess
of what is provided under the general pension plans that cover all employees.
102
Mr. Newman will be entitled to receive an annual pension commencing June 1,
2003 in the amount of Cdn$283,662. The pension benefit will be partially offset
by a portion of the Canada Pension Plan benefit. The pension is increased
annually after retirement by 80% of the annual percentage change in the Consumer
Price Index, subject to a maximum increase of 4% per year. The normal form of
retirement benefit for Mr. Newman is joint and survivor. On Mr. Newman's death,
monthly payments equal to 60% of the pension being paid continue to be made for
life to his surviving spouse.
Mr. Waisberg will be entitled to receive an annual pension commencing on
November 1, 2005 in the amount of Cdn$367,500. The pension is increased annually
after retirement by 80% of the annual percentage change in the Consumer Price
Index, subject to a maximum increase of 4% per year. The normal form of
retirement benefit for Mr. Waisberg is joint and survivor. On Mr. Waisberg's
death, monthly payments equal to 60% of the pension being paid continue to be
made for life to his surviving spouse.
Mr. Casey
Mr. Casey participates in a tax qualified non-contributory defined benefit
pension plan (the "Retirement Plan"). The table below sets forth the estimated
annual benefits, payable as a single life annuity beginning at retirement at age
65, at various remuneration levels and for representative years of service at
normal retirement date.
<Table>
<Caption>
YEARS OF SERVICE
--------------------------------------------------------
FINAL AVERAGE COMPENSATION 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
- -------------------------- -------- -------- -------- -------- --------
100,000..................................... $25,603 $32,004 $38,405 $44,806 $ 49,806
150,000..................................... 40,603 50,754 60,905 71,056 78,556
200,000..................................... 55,603 69,504 83,405 97,306 107,306
</Table>
Under the Retirement Plan, the compensation taken into account generally
includes all salary, bonuses and other taxable compensation, subject to an
annual compensation limit, which currently is $200,000. As of December 31, 2002,
Mr. Casey's final average compensation for purposes of the Retirement Plan was
$172,000 and he had eight years of credited service. The benefits under the
Retirement Plan are not subject to any deduction for Social Security or other
offset amounts.
Mr. Leach
Mr. Leach participates in the Pension Plan for Salaried Employees of the
MRM Steel Division of Gerdau Ameristeel MRM Special Sections Inc. (the "Salaried
Employees Plan"), and a supplementary pension plan. The supplementary plan
effectively tops up the amount payable under the Salaried Employees Plan to the
levels that would be available if the Income Tax Act did not impose a maximum.
The Salaried Employees Plan is a defined contribution plan. The employer
matches each employee's contributions to the plan. Contributions are held in
accounts for each employee. The total contributions at the retirement date are
used to purchase an annuity. The plan provides for a benefit commencing the
first month after retirement, normally in the form of a monthly annuity for the
longer of the employee's life and 10 years after the employee commences
retirement. The current estimated annual benefit payable to Mr. Leach under the
Salaried Employees Plan is Cdn$50,696. However, this amount is expected to
increase in future years as new contributions are made under the plan.
In addition, if Mr. Leach is employed through his 56th birthday but not
later than 60th birthday, Mr. Leach will receive a supplemental pension benefit
for 180 months following the date of retirement. If Mr. Leach dies before 180
months following his retirement, the monthly payment will be payable to his
surviving spouse (or to his estate, if no spouse survives him). The monthly
benefit payable is generally the difference between: (a) the monthly benefit
payable under the Salaried Employees Plan or, if greater, the amount Mr. Leach
would be paid if he elected to receive his benefits under the Salaried Pension
Plan in the form of a joint and 60% survivor annuity commencing at the time of
retirement; and (b) the lesser of: (i) 2% of the monthly base salary at the time
of retirement times his years of service; and (ii) 60% of the average base
salary for the three years immediately preceding retirement, divided by 12. The
current estimated annual amount payable to Mr. Leach under the supplementary
plan is Cdn$131,206.
103
EMPLOYMENT AGREEMENTS
Mr. Casey does not have an employment agreement.
The employment agreements with Messrs. Newman, Waisberg, Hagan, Gresham and
Witzig are substantially identical except for the compensation provisions. The
employment of all of these officers has been terminated and they have received
termination payments pursuant to their agreements. Mr. Newman's termination
payment equal to approximately $2.2 million. For the other officers please see
"-- Summary Compensation Table".
Mr. Leach has an employment agreement with Gerdau MRM Inc., which is now
our wholly-owned subsidiary, MRM. Mr. Leach is also entitled, pursuant to an
unwritten arrangement with us, to receive phantom options which track the value
of MRM and the value of the shares of Gerdau S.A. Awards of phantom options are
made by investing Mr. Leach's base salary on the date of grant in notional
shares of MRM and Gerdau S.A. ADRs. The phantom options vest as to 10% at the
end of the first year, as to 20% at the end of the second year, as to 30% at the
end of the third year and as to 40% at the end of the fourth year after grant.
Upon exercise, Mr. Leach is entitled to a cash payment equal to the increase, if
any, in value of the shares and ADRs of MRM and Gerdau S.A., respectively,
multiplied by the number of notional shares and ADRs held by Mr. Leach. The
phantom options expire after seven years.
Mr. Leach's compensation also includes an annual bonus based on MRM's net
income before taxes for such fiscal year with a minimum guaranteed bonus equal
to 1% of such net income. If Mr. Leach's employment is terminated other than for
just cause, as defined in the agreement, or for the incapacity or death of Mr.
Leach, he will be entitled to receive Cdn$543,333 and a pro rata annual bonus,
that is not less than 1% of the portion of MRM's net income before tax that was
earned during the portion of the fiscal year that has elapsed through the date
of termination. Mr. Leach's agreement also contains non-competition and
non-solicitation covenants that run for a minimum of 20 months and 3 years,
respectively, following his employment.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
As of September 30, 2003, the aggregate indebtedness of all of our senior
officers, directors and employees and all of our former officers, directors and
employees made in connection with the purchase of our securities was
approximately Cdn$2.0 million, all of which loans were made prior to 2002. This
indebtedness represents loans to executives pursuant to the Co-Steel Long-Term
Incentive Plan (which has been terminated), which are secured by the common
shares purchased with the loan proceeds and, in some cases, life insurance.
104
The following table sets forth loans made by Gerdau Ameristeel to any
person who is, or at any time during the year ended December 31, 2002 was, a
director, executive officer or senior officer of our company, entered into in
connection with their purchases of our securities:
<Table>
<Caption>
AMOUNT SECURITY FOR
OUTSTANDING INDEBTEDNESS
LARGEST AMOUNT AS AT (COMMON SHARES OF
OUTSTANDING SEPTEMBER 30, GERDAU AMERISTEEL
DURING 2002 2003 CORPORATION)
-------------- ------------------ -----------------
TERRY G. NEWMAN................................... Cdn$732,200 Cdn$732,200 55,899
Former President and Chief Executive Officer
LORIE WAISBERG.................................... 736,321 736,321 68,394
Former Executive Vice President Finance and
Administration
RAYMOND LEPP...................................... 82,500 82,500 13,870
Former Senior Vice President, Canadian Steel
Operations
LOUIS F. HAGAN JR................................. 73,640 73,640 4,875
Former Senior Vice President, U.S. Steel
Operations
R. STEPHEN GRESHAM................................ 60,753 60,753 4,023
Former Vice President, Sales, Specialty Products
RONALD L. WITZIG.................................. 60,753 60,753 4,023
Former Vice President, General Manager, Gerdau
Ameristeel Perth Amboy Inc.
ANDREW W. BOULANGER............................... 42,592 42,592 2,896
Former Vice President, Chief Financial Officer
BRETT A. RICHARDS................................. 42,592 42,592 2,896
Former Vice President, Human Resources
MATTHEW C. YEATMAN................................ 49,560 49,560 8,400
Vice President, Canadian Scrap Operations
</Table>
The only other indebtedness of any officer, director or employee or former
officer, director or employee of Gerdau Ameristeel or its subsidiaries
outstanding since January 1, 2002, is the loan to Andre Beaudry, which is
described under "Certain Relationships and Related Party Transactions".
COMPENSATION OF DIRECTORS
Non-executive directors are currently paid an annual retainer of
Cdn$25,000, a fee of Cdn$1,500 per board and committee meeting and an annual
retainer of Cdn$5,000 for any director who acts as chair of a committee.
Directors are also reimbursed for their reasonable expenses incurred to attend
meetings.
In the past, non-executive directors were provided the opportunity to defer
their remuneration by receiving deferred share units in lieu of cash. A deferred
share unit is a book keeping entry that is economically equivalent to ownership
of a common share. The number of deferred share units credited to accounts
maintained for each director is determined by dividing the compensation to be
deferred by the market value of a common share at the date of the grant. Upon
retirement from the board, the director is entitled to a cash payment determined
by multiplying the number of deferred share units credited to the director's
account by the market value of a common share at the date of retirement. In the
year ended December 31, 2002, Messrs. Korthals, Heffernan and Schipper elected
to defer all or a portion of their compensation in deferred share units.
105
The following table shows the deferred share units granted in 2002 to the
directors, as well as their aggregate number of units and their value on
December 31, 2002.
<Table>
<Caption>
DEFERRED SHARE AGGREGATE NUMBER OF
UNITS GRANTED UNITS HELD ON YEAR END
DIRECTOR DURING FISCAL 2002 DECEMBER 31, 2002 VALUE (1)
- -------- ------------------ ------------------- ---------------
KENNETH W. HARRIGAN................................ -- 5,460 Cdn$ 12,613
JOSEPH J. HEFFERNAN................................ 7,700 19,068 Cdn$ 44,047
ROBERT W. KORTHALS................................. 18,527 47,469 Cdn$109,653
J. SPENCER LANTHIER................................ -- 5,683 Cdn$ 13,128
LIONEL H. SCHIPPER................................. 8,315 18,945 Cdn$ 43,763
</Table>
- ---------------
(1) Based on the closing price on the Toronto Stock Exchange on December 31,
2002 of Cdn$2.31.
In the future, directors will all receive 50% of their compensation in the
form of deferred share units.
None of our executive officers received compensation for services rendered
to or on behalf of us in his capacity as a director for the most recently
completed fiscal year.
SENIOR OFFICERS
The following table sets forth information regarding our senior officers as
of September 30, 2003:
<Table>
<Caption>
YEARS OF STEEL
NAME TITLE INDUSTRY EXPERIENCE
- ---- ----- -------------------
ANDRE BEAUDRY.......................... Vice President, Steel Products Sales 20
GLEN A. BEEBY.......................... Vice President Administration, Canada 21
and Assistant Secretary; Vice
President, Cambridge Mill
PAULO F. BINS DE VASCONCELLOS.......... Vice President, Steel Mill Northeast 35
Operations
ROBERT L. BULLARD...................... Vice President, Perth Amboy Mill 32
PHILLIP E. CASEY....................... Chief Executive Officer and President 18
ANDRE B. JOHANNPETER................... Vice President, Business Development 23
TOM J. LANDA........................... Vice President, Finance, and Chief 8
Financial Officer
GARRY A. LEACH......................... Vice President, MRM Special Sections 24
WILBURN G. MANUEL...................... Vice President, Jackson Steel Mill 38
J. NEAL MCCULLOHS...................... Vice President, Fabricated Reinforcing 25
Steel Products
MICHAEL MUELLER........................ Vice President, Steel Mill Southeast 32
Operations
ROBERT P. MUHLHAN...................... Vice President, Procurement, Logistics 35
and Government Affairs
JAMES F. OLIVER........................ Vice President, Strategic Development 35
ROGER PAIVA............................ Vice President, Whitby Mill 21
ARLAN PIEPHO........................... Vice President, Knoxville Steel Mill 36
ANTHONY S. READ........................ Vice President, Charlotte Steel Mill 18
WILLIAM E. RIDER....................... Vice President, Sayreville Mill 28
JAMES S. ROGERS........................ Vice President, Human Resources 28
DONALD R. SHUMAKE...................... Vice President, Jacksonville Steel Mill 41
EDWARD C. WOODROW...................... Vice President, Cartersville Mill 11
MATTHEW C. YEATMAN..................... Vice President, Canadian Scrap 18
Operations
</Table>
106
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following related party transactions occurred during the period from
January 1, 2002:
- $325.8 million of related party debt of Gerdau North America was
converted to equity in connection with the combination with Co-Steel.
Related party interest expense, net of interest income, was $14.0
million for the year ended December 31, 2002 compared to $25.0 million
for the year ended December 31, 2001, a decrease of $11.0 million, due
primarily to the conversion of debt to equity on October 23, 2002.
- 13,198,501 of our common shares were exchanged with minority
shareholders of Ameristeel, including approximately 8.3 million which
were exchanged with members of our senior management, including Phillip
Casey, our Chief Executive Officer.
- During the year ended December 31, 2002, we paid $2.1 million in
royalties and management fees to our parent company or its affiliates.
The arrangements under which these payments were made terminated prior
to the combination with Co-Steel on October 23, 2002.
- In 2001, we loaned $500,000 to Andre Beaudry, our Vice President, Steel
Product Sales, as a retention/ incentive package. The terms of the loan
provided that the loan would be forgiven if Mr. Beaudry remained in our
employment for a period of five years. We forgave the loan in the fourth
quarter of 2002.
- In January and February 2003, wholly-owned subsidiaries of Gerdau S.A.
made loans totaling $30 million to our subsidiaries to increase
liquidity within the group. These loans were intended to be used for
working capital purposes and bear interest at the rate of 6.5%. Interest
expense associated with these loans in the nine months ended September
30, 2003 was approximately $0.3 million. The loans did not have a stated
maturity but we repaid these loans with the proceeds of the offering of
the Existing Notes and the related borrowing under the senior secured
credit facility.
- An indirect wholly-owned subsidiary of Gerdau S.A. bought $35.0 million
aggregate principal amount of the Existing Notes.
107
DESCRIPTION OF OTHER INDEBTEDNESS
Other than the Exchange Notes, the following indebtedness remains
outstanding:
Senior Secured Credit Facility: Our senior secured credit facility
provides commitments of up to $350 million. We are able to borrow under the
senior secured credit facility the (a) lesser of (i) the committed amount, and
(ii) our borrowing base (which is based upon a portion of the inventory and
accounts receivable held by PASUG LLC, GUSAP Partners, Gerdau Ameristeel, Gerdau
Ameristeel MRM Special Sections, Gerdau Ameristeel Lake Ontario Inc., MFT
Acquisition, Corp., Porter Bros. Corporation, Ameristeel, Gerdau Ameristeel
Perth Amboy and Gerdau Ameristeel Sayreville less certain reserves), minus (b)
outstanding loans, letter of credit obligations and other obligations owing
under the senior secured credit facility. Since the borrowing base under our
senior secured credit facility is based on our actual inventory and accounts
receivable levels, available borrowings under the facility will fluctuate, and
these fluctuations could be significant. Additionally, beginning March 27, 2004,
the calculation of our borrowing base may include a smaller portion of the value
of our inventory, which would reduce our available borrowings under the senior
secured credit facility. Our senior secured credit facility includes a Canadian
swingline facility permitting swingline borrowings of up to $15 million and a
U.S. swingline facility permitting swingline borrowings of up to $25 million. In
Canada, we are limited in our borrowing to the Canadian borrowing base minus
such portion of the Canadian borrowing base allocated to the United States, and
in the United States, we are limited in our borrowing to the U.S. borrowing base
plus such portion of the Canadian borrowing base allocated to the United States.
We will also be subject to an allocation of commitments between Canada and the
United States which can be changed from time to time upon our request. The
administrative agent under the senior secured credit facility may make advances
to us after a default or in certain other circumstances of up to 10% of the
relevant borrowing base to preserve the collateral or enhance repayment.
Borrowings under this facility are limited to our available borrowing base
described above. As of September 30, 2003, our borrowing base supported
borrowings of approximately $257.0 million under our senior secured credit
facility, of which $150.0 million was drawn and an additional $61.6 million was
represented by letters of credit (most of which are used to secure industrial
revenue bonds), leaving approximately $107.0 million of borrowing availability.
All of these borrowings under this facility are secured indebtedness. The senior
secured credit facility consists of a U.S. dollar denominated credit facility
and a Canadian dollar denominated credit facility, at our option) which matures
in June 2008 and can be extended for successive one year terms.
The senior secured credit facility is secured by certain of our assets
including all of our accounts receivable, inventory and other goods held for
sale or lease, accounts (including inter- company loans), chattel paper,
documents of title, instruments, general intangibles (including intellectual
property rights and supporting obligations), bank accounts (including collateral
proceeds accounts and investment accounts), books and records, and the capital
stock in all of our subsidiaries (with certain exceptions), and all products and
proceeds from all of the foregoing.
Our senior secured credit facility contains restrictive covenants that
limit our ability to engage in specified types of transactions without the
consent of the lenders. These covenants limit our ability to, among other
things:
- incur additional debt;
- issue redeemable stock and preferred stock;
- pay dividends on our common shares or make other equity distributions;
- repurchase shares;
- make other restricted payments including, without limitation,
investments and loans;
- incur liens;
- sell or otherwise dispose of assets, including shares of subsidiaries;
- enter into agreements that restrict dividends from subsidiaries;
- enter into mergers or consolidations;
- enter into transactions with affiliates;
- guarantee indebtedness; and
- enter into sale/leaseback transactions.
108
The senior secured credit facility requires that we maintain a fixed charge
coverage ratio of at least 1.10 to 1.00 on a rolling twelve months basis and, at
any time that we fail to do so, we will be in default of the senior secured
credit facility unless we maintain $60.0 million of excess availability until
March 27, 2004 and $40.0 million of excess availability thereafter. If we fail
to maintain $80.0 million of excess availability until March 27, 2004 and $70.0
million of excess availability thereafter, or if we are in default under the
senior secured credit facility, the lenders will exercise dominion and control
over all collections of accounts receivable and other amounts under lock-box and
blocked-account arrangements. If we fail to maintain $75.0 million of excess
availability, the lenders under the facility may (x) require us to make changes
to the funding among the companies in our group that restrict payments and
restrict intra-company loans and advances, (y) require us to implement lock-box
arrangements and (z) restrict the type of loans that can be made to certain
borrowers under the senior secured credit facility.
Loans under the senior secured credit agreement bear interest at a per
annum rate equal to one of several rate options (LIBOR, federal funds rate,
bankers' acceptance or prime rate) based on the facility chosen at the time of
borrowing plus an applicable margin determined by financial tests from time to
time. Borrowings under the senior secured credit facility may be made in U.S.
dollars or Canadian dollars, at our option. Borrowings in U.S. dollars bear
interest at a rate equal to the higher of the bank's prime rate or 0.5% plus the
federal funds rate plus the applicable margin (which ranges from nil to 0.5% per
annum) or, at our option, LIBOR plus the applicable margin (which ranges from
2.00% to 2.75%). Borrowings in Canadian dollars bear interest at a rate equal to
the bank's prime rate plus the applicable margin (which ranges from 0.25% to
1.0% per annum) or, at our option, at the bankers' acceptance rate plus the
applicable margin (which ranges from 2.00% to 2.75% per annum). The weighted
average interest rate on the senior secured credit facility at September 30,
2003 was 4.7% and at December 31, 2002 would have been approximately 4.5% on a
pro forma basis.
Convertible debentures: Our unsecured, subordinated convertible debentures
in the principal amount of Cdn$125 million bear interest at 6.5% per annum,
mature on April 30, 2007, and, at the holders' option, are convertible into our
common shares at a conversion price of Cdn$26.25 per share. Under the terms of
the trust indenture for the convertible debentures, no adjustment to the
conversion price is required if we issue common shares in a customary offering.
The debentures are redeemable after April 30, 2002, at our option at par plus
accrued interest. We have the right to settle the principal amount by the
issuance of common shares based on their market value at the time of redemption.
Since the convertible debentures can be redeemed by us by the issuance of common
shares, the debenture obligations are classified as shareholders' equity.
Interest on the shareholders' equity component, net of related income taxes, is
charged to reinvested earnings, and is deducted from the net earnings or added
to net loss in calculating basic earnings per share.
Industrial revenue bonds: We had $36.8 million of industrial revenue bonds
outstanding as of September 30, 2003. $33.2 million of these bonds were issued
by Gerdau Ameristeel US Inc. in prior years to construct facilities in Jackson,
Tennessee; Charlotte, North Carolina; Jacksonville, Florida; and Plant City,
Florida. The latest bond, in the amount of $3.6 million, is associated with the
Cartersville cold drawn facility we acquired from Republic Technologies in
September 2002. The interest rates on these bonds range from 50% to 75% of the
prime rate. The industrial revenue bonds mature on November 1, 2003 and December
15, 2003 and in 2014, 2017 and 2018. These bonds are secured by letters of
credit issued pursuant to the senior secured credit facility.
Joint venture facility: Our joint venture, Gallatin Steel, has a $40.0
million revolving credit facility with $0.0 million outstanding as of September
30, 2003. Gallatin has $5.9 million of other bank indebtedness as of September
30, 2003. Under Canadian GAAP, 50% of the indebtedness is reflected on our
consolidated balance sheet. As a general partner of Gallatin Steel, however, we
could potentially be liable for all of the indebtedness of Gallatin Steel, in
the event that neither Gallatin Steel nor our joint venture partner, Dofasco
Inc., is able to satisfy those obligations.
AmeriSteel Bright Bar, Inc. term loan: The AmeriSteel Bright Bar, Inc.
$3.5 million term loan facility remains outstanding. The facility bears interest
at a fixed rate of 6% and expires in June 2011.
Capital leases: We have approximately $2.5 million of capital leases.
Leases: As of September 30, 2003 we had approximately $76.4 million of
future lease commitments. Of this amount, $54.1 million relates to leased real
estate including warehouses and $9.9 million relates to railcar leases.
109
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Existing Notes, the Issuers and the
Subsidiary Guarantors entered into a registration rights agreement dated June
27, 2003 with the initial purchasers of the Existing Notes (the "Registration
Rights Agreement") in which we agreed to file and use our reasonable best
efforts to cause to become effective with the SEC a registration statement with
respect to the exchange of Existing Notes for Exchange Notes which are
registered under the Securities Act and to conduct this Exchange Offer after the
Registration Statement becomes effective. This Exchange Offer is being made to
satisfy our contractual obligations under this Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, if the Exchange Offer is not
completed or, if required, the shelf registration statement is not declared
effective on or before the date that is 210 days after June 27, 2003 (January
23, 2004), the annual interest rate borne by the Existing Notes will be
increased by 0.25% per annum (which rate will be increased by an additional
0.25% per annum for each subsequent 90-day period that such additional interest
continues to accrue, provided that the rate at which such additional interest
accrues may in no event exceed 1% per annum) until the Exchange Offer is
completed or the shelf registration statement is declared effected. Upon
completion of the Exchange Offer or effectiveness of such shelf registration
statement, the interest rate payable with respect to the Existing Notes will
revert to their original interest rate and holders of the Existing Notes will
not be entitled to any further registration rights. A copy of the Registration
Rights Agreement is attached as an exhibit to the Registration Statement of
which this prospectus forms a part.
TERMS OF THE EXCHANGE OFFER
Upon the terms and conditions described in this prospectus and in the
accompanying Letter of Transmittal, which together constitute the Exchange
Offer, we will accept for exchange Existing Notes that are properly tendered on
or before the Expiration Date and not withdrawn as permitted below. As used in
this prospectus, the term "Expiration Date" means 5:00 p.m., New York City time,
on January 23, 2004. However, if we, in our sole discretion, have extended the
period of time for which the Exchange Offer is open, the term "Expiration Date"
means the latest time and date to which we extend the Exchange Offer.
As of the date of this prospectus, $405 million aggregate principal amount
of the Existing Notes are outstanding. This prospectus, together with the Letter
of Transmittal, is first being sent on or about December 24, 2003 to all holders
of Existing Notes known to us. Our obligation to accept Existing Notes for
exchange in the Exchange Offer is subject to the conditions described below
under "Conditions to the Exchange Offer". The Exchange Notes will evidence the
same indebtedness as, and will replace, the Existing Notes tendered in exchange
therefor and will be issued pursuant to, and entitled to the benefits of, the
Indenture.
We reserve the right to extend the period of time during which the Exchange
Offer is open. We would then delay acceptance for exchange of any Existing Notes
by giving oral or written notice of an extension to the holders of Existing
Notes as described below. During any extension period, all Existing Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by us. Any Existing Notes not accepted for exchange will
be returned to the tendering holder after the expiration or termination of the
Exchange Offer.
Existing Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple of $1,000.
We reserve the right to amend or terminate the Exchange Offer, and not to
accept for exchange any Existing Notes not previously accepted for exchange,
upon the occurrence of any of the conditions of the Exchange Offer specified
below under "Conditions to the Exchange Offer". We will give oral or written
notice of any extension, amendment, non-acceptance or termination to the holders
of the Existing Notes as promptly as practicable. If we materially change the
terms of the Exchange Offer, we will resolicit tenders of the Existing Notes,
file a post-effective amendment to the prospectus and provide notice to the
noteholders. If the change is made less than five business days before the
expiration of the Exchange Offer, we will extend the offer so that the
noteholders have at least five business days to tender or withdraw. We will
notify you of any extension by means of a press release or other public
announcement no later than 9:00 a.m., New York City time on that date.
Our acceptance of the tender of Existing Notes by a tendering holder will
form a binding agreement upon the terms and subject to the conditions provided
in this prospectus and in the accompanying Letter of Transmittal.
110
PROCEDURES FOR TENDERING
Except as described below, a tendering holder must, on or prior to the
Expiration Date:
- transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by the Letter of Transmittal, to
SouthTrust Bank at the address listed below under the heading "Exchange
Agent"; or
- if Existing Notes are tendered in accordance with the book-entry
procedures listed below, the tendering holder must transmit an agent's
message to the Exchange Agent at the address listed below under the
heading "Exchange Agent."
In addition:
- the Exchange Agent must receive, on or before the Expiration Date,
certificates for the Existing Notes; or
- the Exchange Agent must receive, on or before the Expiration Date, a
timely confirmation of book-entry transfer of the Existing Notes into
the Exchange Agent's account at DTC, the book-entry transfer facility,
along with the Letter of Transmittal or an agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
The Depository Trust Company will be referred to as DTC in this prospectus.
The term "agent's message" means a message, transmitted to DTC and received
by the Exchange Agent and forming a part of a book-entry transfer, that states
that DTC has received an express acknowledgment that the tendering holder agrees
to be bound by the Letter of Transmittal and that we may enforce the Letter of
Transmittal against this holder.
The method of delivery of Existing Notes, Letters of Transmittal and all
other required documents is at your election and risk. If the delivery is by
mail, we recommend that you use registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. You should not send letters of transmittal or Existing Notes to
us.
If you are a beneficial owner whose Existing Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee, and
wish to tender, you should promptly instruct the registered holder to tender on
your behalf. Any registered holder that is a participant in DTC's book-entry
transfer facility system may make book-entry delivery of the Existing Notes by
causing DTC to transfer the Existing Notes into the Exchange Agent's account.
Signatures on a Letter of Transmittal or a notice of withdrawal must be
guaranteed unless the Existing Notes surrendered for exchange are tendered:
- by a registered holder of the Existing Notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal, or
- for the account of an "eligible institution."
If signatures on a Letter of Transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by an "eligible institution."
An "eligible institution" is a financial institution, including most banks,
savings and loan associations and brokerage houses, that is a participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchanges Medallion Program.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of Existing Notes tendered for exchange. This discretion
extends to the determination of all questions concerning the timing of receipts
and acceptance of tenders. These determinations will be final and binding.
We reserve the right to reject any particular Existing Note not properly
tendered or any which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Existing
Note either before or after the Expiration Date, including the right to waive
the ineligibility of any tendering holder. Our interpretation of the terms and
conditions of the Exchange Offer as to any particular Existing Note either
before or after the Expiration Date, including the Letter of Transmittal and the
instructions to the Letter of Transmittal, shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Existing Notes must be cured
111
within a reasonable period of time. Neither we, the Exchange Agent nor any other
person will be under any duty to give notification of any defect or irregularity
in any tender of Existing Notes. Nor will we, the Exchange Agent or any other
person incur any liability for failing to give notification of any defect or
irregularity.
If the Letter of Transmittal is signed by a person other than the
registered holder of Existing Notes, the Letter of Transmittal must be
accompanied by a written instrument of transfer or exchange in satisfactory form
duly executed by the registered holder with the signature guaranteed by an
eligible institution. The Existing Notes must be endorsed or accompanied by
appropriate powers of attorney. In either case, the Existing Notes must be
signed exactly as the name of any registered holder appears on the Existing
Notes.
If the Letter of Transmittal or any Existing Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing. Unless waived by us,
proper evidence satisfactory to us of their authority to so act must be
submitted.
By tendering, each holder will represent to us that, among other things,
- the Exchange Notes are being acquired in the ordinary course of business
of the person receiving the Exchange Notes, whether or not that person
is the holder; and
- neither the holder nor the other person has any arrangement or
understanding with any person to participate in the distribution of the
Exchange Notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent to us that the holder is not engaged in, and does
not intend to engage in, a distribution of the Exchange Notes.
If any holder or other person is an "affiliate" of ours, as defined under
Rule 405 of the Securities Act, or is engaged in, or intends to engage in, or
has an arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes, that holder or other person cannot rely on
the applicable interpretations of the staff of the SEC and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Existing Notes, where the Existing Notes were acquired by it as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus that meets the requirements of the Securities
Act in connection with any resale of the Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "Plan of Distribution".
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
we will accept, promptly after the Expiration Date, all Existing Notes properly
tendered. We will issue the Exchange Notes promptly after acceptance of the
Existing Notes. See "Conditions to the Exchange Offer" below. For purposes of
the Exchange Offer, we will be deemed to have accepted properly tendered
Existing Notes for exchange when, as and if we have given oral or written notice
to the Exchange Agent, with prompt written confirmation of any oral notice.
For each Existing Note accepted for exchange, the holder of the Existing
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Existing Note. The Exchange Notes will evidence the same
indebtedness as, and will replace, the Existing Notes tendered in exchange
therefor. Holders of Existing Notes whose Existing Notes are accepted for
exchange will not receive any payment for accrued interest on the Existing Notes
at the time of exchange. Registered holders of Exchange Notes will be entitled,
on the relevant record date for the first interest payment date following the
completion of the Exchange Offer, to receive interest accruing from the most
recent date to which interest has been paid in respect of the Existing Notes.
In all cases, issuance of Exchange Notes for Existing Notes will be made
only after timely receipt by the Exchange Agent of:
- certificates for the Existing Notes, or a timely book-entry confirmation
of the Existing Notes into the Exchange Agent's account at the
book-entry transfer facility;
112
- a properly completed and duly executed Letter of Transmittal or an
agent's message; and
- all other required documents.
Unaccepted or non-exchanged Existing Notes will be returned without expense
to the tendering holder of the Existing Notes. In the case of Existing Notes
tendered by book-entry transfer in accordance with the book-entry procedures
described below, the non-exchanged Existing Notes will be credited to an account
maintained with the book-entry transfer facility, as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account for the
Existing Notes at DTC for purposes of the Exchange Offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in DTC's systems must make book-entry delivery of Existing Notes by
causing DTC to transfer those Existing Notes into the Exchange Agent's account
at DTC in accordance with DTC's procedure for transfer. This participant should
transmit its acceptance to DTC on or prior to the Expiration Date or comply with
the guaranteed delivery procedures described below. DTC will verify this
acceptance, execute a book-entry transfer of the tendered Existing Notes into
the Exchange Agent's account at DTC and then send to the Exchange Agent
confirmation of this book-entry transfer. The confirmation of this book-entry
transfer will include an agent's message confirming that DTC has received an
express acknowledgment from this participant that this participant has received
and agrees to be bound by the Letter of Transmittal and that we may enforce the
Letter of Transmittal against this participant. Delivery of Exchange Notes
issued in the Exchange Offer may be effected through book-entry transfer at DTC.
However, the Letter of Transmittal or facsimile of it or an agent's message,
with any required signature guarantees and any other required documents, must:
- be transmitted to and received by the Exchange Agent at the address
listed below under "-- Exchange Agent" on or prior to the Expiration
Date; or
- comply with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Existing Notes desires to tender the Existing
Notes, and the Existing Notes are not immediately available, or time will not
permit the holder's Existing Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer described above cannot be completed on a timely basis, a tender may
nonetheless be made if:
- the tender is made through an eligible institution;
- prior to the Expiration Date, the Exchange Agent received from an
eligible institution a properly completed and duly executed Letter of
Transmittal, or a facsimile of it or an agent's message, and notice of
guaranteed delivery, substantially in the form provided by us, by
facsimile transmission, mail or hand delivery,
(1) stating the name and address of the holder of Existing Notes and the
amount of Existing Notes tendered;
(2) stating that the tender is being made; and
(3) guaranteeing that within three New York Stock Exchange trading days
after the Expiration Date, the certificates for all physically
tendered Existing Notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the
eligible institution with the Exchange Agent; and
- the certificates for all physically tendered Existing Notes, in proper
form for transfer, or a book-entry confirmation, as the case may be, and
all other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date.
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time before 5:00 p.m.,
New York City time, on the Expiration Date.
113
For a withdrawal to be effective, the Exchange Agent must receive a written
notice of withdrawal at the address or, in the case of eligible institutions, at
the facsimile number, indicated below under "Exchange Agent" before 5:00 p.m.,
New York City time, on the Expiration Date. Any notice of withdrawal must:
- specify the name of the person, referred to as the depositor, having
tendered the Existing Notes to be withdrawn;
- identify the Existing Notes to be withdrawn, including the certificate
number or numbers and principal amount of the Existing Notes;
- contain a statement that the holder is withdrawing his election to have
the Existing Notes exchanged;
- be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which the Existing Notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer to have the trustee with respect to the Existing
Notes register the transfer of the Existing Notes in the name of the
person withdrawing the tender; and
- specify the name in which the Existing Notes are registered, if
different from that of the depositor.
If certificates for Existing Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of these
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and signed notice of withdrawal with
signatures guaranteed by an eligible institution unless this holder is an
eligible institution. If Existing Notes have been tendered in accordance with
the procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the book-entry transfer
facility to be credited with the withdrawn Existing Notes. We will determine all
questions as to the validity, form and eligibility, including time of receipt,
of notices of withdrawal. Any Existing Notes so withdrawn will be deemed not to
have been validly tendered for exchange. No Exchange Notes will be issued unless
the Existing Notes so withdrawn are validly re-tendered. Any Existing Notes that
have been tendered for exchange, but which are not exchanged for any reason,
will be returned to the tendering holder without cost to the holder. In the case
of Existing Notes tendered by book-entry transfer, the Existing Notes will be
credited to an account maintained with the book-entry transfer facility for the
Existing Notes. Properly withdrawn Existing Notes may be re-tendered by
following the procedures described under "Procedures for Tendering" above at any
time on or before 5:00 p.m., New York City time, on the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, we will not be
required to accept for exchange, or to issue Exchange Notes in exchange for, any
Existing Notes, and may terminate or amend the Exchange Offer, if at any time
before the acceptance of the Existing Notes for exchange or the exchange of the
Exchange Notes for the Existing Notes, any of the following events occurs:
- there is threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree issued by, any court or
governmental agency or other governmental regulatory or administrative
agency or commission:
(1) seeking to restrain or prohibit the making or completion of the
Exchange Offer or any other transaction contemplated by the Exchange
Offer, or assessing or seeking any damages as a result of this
transaction;
(2) resulting in a material delay in our ability to accept for exchange
or exchange some or all of the Existing Notes in the Exchange Offer;
or
(3) any statute, rule, regulation, order or injunction has been sought,
proposed, introduced, enacted, promulgated or deemed applicable to
the Exchange Offer or any of the transactions contemplated by the
Exchange Offer by any governmental authority, domestic or foreign;
or
- any action has been taken, proposed or threatened, by any governmental
authority, domestic or foreign, that in our sole judgment might directly
or indirectly result in any of the consequences referred to in clauses
(1), (2) or (3) above or, in our sole judgment, might result in the
holders of Exchange Notes having obligations with respect to resales and
transfers of Exchange Notes which are greater than those described in
the interpretation of the SEC referred to above, or would otherwise make
it inadvisable to proceed with the Exchange Offer; or
114
- the following has occurred:
(1) any general suspension of or general limitation on prices for, or
trading in, securities on any national securities exchange or in the
over-the-counter market; or
(2) any limitation by a governmental authority, which may adversely
affect our ability to complete the transactions contemplated by the
Exchange Offer; or
(3) a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the
extension of credit; or
(4) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the preceding events existing at
the time of the commencement of the Exchange Offer, a material
acceleration or worsening of these calamities; or
- any change, or any development involving a prospective change, has
occurred or been threatened in our business, financial condition,
operations or prospects and those of our subsidiaries taken as a whole
that is or may be adverse to us, or we have become aware of facts that
have or may have an adverse impact on the value of the Existing Notes or
the Exchange Notes; which in our sole judgment in any case makes it
inadvisable to proceed with the Exchange Offer and/or with such
acceptance for exchange or with such exchange.
These conditions to the Exchange Offer are for our sole benefit and we may
assert them regardless of the circumstances giving rise to any of these
conditions, or we may waive them in whole or in part in our sole discretion. If
we do so, the Exchange Offer will remain open for at least 5 business days
following any waiver of the preceding conditions. Our failure at any time to
exercise any of the foregoing rights will not be deemed a waiver of any right.
In addition, we will not accept for exchange any Existing Notes tendered,
and no Exchange Notes will be issued in exchange for any Existing Notes, if at
this time any stop order is threatened or in effect relating to the Registration
Statement of which this prospectus constitutes a part or the qualification of
the Indenture under the Trust Indenture Act of 1939.
EXCHANGE AGENT
We have appointed SouthTrust Bank as the Exchange Agent for the Exchange
Offer. You should direct all executed Letters of Transmittal to the Exchange
Agent at the address indicated below. You should direct questions and requests
for assistance, requests for additional copies of this prospectus or of the
Letter of Transmittal and requests for notices of guaranteed delivery to the
Exchange Agent addressed as follows:
Delivery To: SouthTrust Bank, Exchange Agent
<Table>
By Hand Before 5:00 p.m.: By Registered or Certified Mail:
SouthTrust Bank SouthTrust Bank
110 Office Park Drive 110 Office Park Drive
2nd Floor 2nd Floor
Attention: Bond Holder Services Attention: Bond Holder Services
Mail Code: A-001-0B-0201 Mail Code: A-001-0B-0201
Birmingham, AL Birmingham, AL
35223 35223
</Table>
For Information Call:
205.254.5895
By Facsimile Transmission
(for Eligible Institutions only):
205.581.8983
Confirm by Telephone:
205.254.5895
115
If you deliver the Letter of Transmittal to an address other than any address
indicated above or transmit instructions via facsimile other than any facsimile
number indicated, then your delivery or transmission will not constitute a valid
delivery of the Letter of Transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the Exchange Offer. The estimated cash expenses to be incurred in
connection with the Exchange Offer will be paid by us. We estimate these
expenses in the aggregate to be approximately $300,000.
TRANSFER TAXES
The Issuers will pay all transfer taxes, if any, applicable to the transfer
of Existing Notes to the registered holder or its order pursuant to the Exchange
Offer. If, however, Exchange Notes and/or substitute Existing Notes not
exchanged are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder, or if tendered Existing Notes
are registered in the name of any person other than the person tendering such
Existing Notes, or if a transfer tax is imposed for any reason other than the
transfer of Existing Notes to the Issuers or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE EXISTING NOTES
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes in the Exchange Offer will continue to be subject to the
provisions in the Indenture regarding transfer and exchange of the Existing
Notes and the restrictions on transfer of the Existing Notes as described in the
legend on the Existing Notes as a consequence of the issuance of the Existing
Notes under exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except under an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.
Under existing interpretations of the Securities Act by the SEC's staff
contained in several no-action letters to third parties, and subject to the
immediately following sentence, we believe that the Exchange Notes would
generally be freely transferable by holders after the Exchange Offer without
further registration under the Securities Act, subject to certain
representations required to be made by each holder of Exchange Notes, as set
forth below. However, any purchaser of Exchange Notes who, is one of our
"affiliates" (as defined in Rule 405 under the Securities Act) or who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes:
- will not be able to rely on the interpretation of the SEC's staff; and
- must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the
notes unless such sale or transfer is made pursuant to an exemption from
such requirements. See "The Exchange Offer".
We do not intend to seek our own interpretation regarding the Exchange
Offer and there can be no assurance that the SEC's staff would make a similar
determination with respect to the Exchange Notes as it has in other
interpretations to other parties, although we have no reason to believe
otherwise.
EXCHANGE OFFER AND REGISTRATION RIGHTS AGREEMENT
As part of the offering pursuant to which the Existing Notes were issued,
the Issuers and the Subsidiary Guarantors entered into a Registration Rights
Agreement with the initial purchasers of the Existing Notes dated June 27, 2003.
The Issuers have filed the Registration Statement of which this prospectus forms
a part pursuant to that Registration Rights Agreement. Assuming the Exchange
Offer is completed, thereafter, holders of any Exchange Notes or Existing Notes,
other than such holders who were ineligible to participate in the Exchange
Offer, will not be entitled to any registration rights with respect to the
Existing Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for the Existing Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
116
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. See "The Exchange Offer".
In the event that:
- the Issuers and the Subsidiary Guarantors determine that the Exchange
Offer is not available or may not be completed as soon as practicable
after Expiration Date because it would violate any applicable law or
applicable interpretations of the Staff of the SEC or the Canadian
securities regulatory authorities;
- the Exchange Offer is not for any other reason completed by January 23,
2004; or
- upon completion of the Exchange Offer, but in no event later June 27,
2005, any of the initial purchasers makes a request for a shelf
registration statement in connection with any offering or sale of
Existing Notes;
the Issuers and the Subsidiary Guarantors shall use their reasonable best
efforts to cause to be filed as soon as practicable after such determination,
date or request, as the case may be, a shelf registration statement providing
for the sale of all the Existing Notes by the holders thereof and to have such
shelf registration statement declared effective by the SEC.
In the event that the Issuers and the Subsidiary Guarantors are required to
file a shelf registration statement pursuant to the third bullet above, the
Issuers and the Subsidiary Guarantors shall use their reasonable best efforts to
file and have declared effective by the SEC both an exchange offer registration
statement with respect to all Existing Notes and a shelf registration statement
(which may be a combined registration statement with the exchange offer
registration statement) with respect to offers and sales of Existing Notes held
by the initial purchasers after completion of the Exchange Offer.
The Issuers and the Subsidiary Guarantors agree to use their reasonable
best efforts to keep the shelf registration statement continuously effective
until the expiration of the period referred to in Rule 144(k) under the
Securities Act with respect to the Existing Notes or such shorter period that
will terminate when all the Existing Notes covered by the shelf registration
statement have been sold pursuant to the shelf registration statement (the
"shelf effectiveness period"). The Issuers and the Subsidiary Guarantors further
agree to supplement or amend the shelf registration statement and the related
prospectus if required by the rules, regulations or instructions applicable to
the registration form used by the Issuers and the Subsidiary Guarantors for such
shelf registration statement or by the Securities Act or by any other rules and
regulations thereunder for shelf registration or if reasonably requested by a
holder of Existing Notes with respect to information relating to such holder,
and to use their reasonable best efforts to cause any such amendment to become
effective and such shelf registration statement and prospectus to become usable
as soon as thereafter practicable. The Issuers and the Subsidiary Guarantors
agree to furnish to the holders of Existing Notes copies of any such supplement
or amendment promptly after its being used or filed with the SEC.
The Issuers and the Subsidiary Guarantors shall pay all registration
expenses in connection with an exchange offer registration statement or shelf
registration statement. Except as described in the section titled "The Exchange
Offer -- Transfer Taxes", each holder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such holder's Existing Notes pursuant to the shelf registration statement.
In the event that either the Exchange Offer is not completed or the shelf
registration statement, if required hereby, is not declared effective on or
prior to January 23, 2004, the interest rate on the Existing Notes will be
increased by (i) 0.25% per annum for the first 90-day period immediately
following January 23, 2004 and (ii) an additional 0.25% per annum with respect
to each subsequent 90-day period, in each case until the Exchange Offer is
completed or the shelf registration statement, if required hereby, is declared
effective by the SEC or the Existing Notes become freely tradable under the
Securities Act, up to a maximum of 1.00% per annum of additional interest.
If the shelf registration statement has been declared effective and
thereafter either ceases to be effective or the prospectus contained therein
ceases to be usable at any time during the shelf effectiveness period, and such
failure to remain effective or usable exists for more than 30 days (whether or
not consecutive) in any 12-month period, then the interest rate on the Existing
Notes will be increased by 1.00% per annum commencing on the 31st day in such
12-month period and ending on such date that the shelf registration statement
has again been declared effective or the prospectus again becomes usable.
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DESCRIPTION OF NOTES
The terms of the Exchange Notes to be issued in the Exchange Offer are
identical in all material respects to the terms of the Existing Notes, except
for the transfer restrictions relating to the Existing Notes. Any Existing Notes
that remain outstanding after the Exchange Offer, together with Exchange Notes
issued in the Exchange Offer, will be treated as a single class of securities
under the Indenture for voting purposes. The Notes are governed by an Indenture
(the "Indenture") dated June 27, 2003 among the Issuers, the Subsidiary
Guarantors and SouthTrust Bank, as trustee (the "Trustee"). The terms of the
Exchange Notes include those expressly set forth in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
This description of the Exchange Notes is intended to be a useful overview
of the material provisions of the Exchange Notes and the Indenture. Since this
description of the Exchange Notes is only a summary, you should refer to the
Indenture for a complete description of the obligations of the Issuers and your
rights. Copies of the Indenture will be made available to you without charge
upon request.
You will find the definitions of capitalized terms used in this description
under the heading "Certain Definitions." For purposes of this description,
references to "the Company," refer only to Gerdau Ameristeel Corporation and not
to its subsidiaries, and references to "the Issuers," "we," "our," and "us"
refer only to the Company and GUSAP Partners, and not any of the Company's other
subsidiaries. All accounting terms not otherwise defined herein are in
accordance with GAAP. "Subsidiary Guarantors" refers to Co-Steel Benefit Plans
Inc., Co-Steel Benefit Plans USA Inc., Co-Steel C.S.M. Corp., Gerdau Ameristeel
Lake Ontario Inc., Gerdau Ameristeel MRM Special Sections Inc., Gerdau
Ameristeel Perth Amboy Inc., Gerdau Ameristeel Sayreville Inc., Gerdau
Ameristeel US Inc., Gerdau USA Inc., MFT Acquisition, Corp., N.J.S.C. Investment
Co., Inc., PASUG LLC, Porter Bros. Corporation, Raritan River Urban Renewal
Corporation, 1062316 Ontario Limited, 1300554 Ontario Limited, 1551533 Ontario
Limited, 3038482 Nova Scotia Company, and any Restricted Subsidiary created or
acquired by the Company after the Issue Date, that is required to issue a
Subsidiary Guarantee or that elects to issue a Subsidiary Guarantee. "Notes"
refers to the Existing Notes and the Exchange Notes, collectively.
GENERAL
The Exchange Notes:
- are general unsecured, senior obligations of the Issuers;
- are limited to an aggregate principal amount of $405 million, subject to
our ability to issue Additional Notes;
- mature on July 15, 2011;
- will be issued in denominations of $1,000 and integral multiples of
$1,000;
- will be represented by one or more registered Exchange Notes in global
form, but in certain circumstances may be represented by Exchange Notes
in definitive form. See "Book-Entry Settlement and Clearance";
- rank equally in right of payment to any existing and future senior
Indebtedness of the Company, without giving effect to collateral
arrangements;
- rank senior in right of payment to any existing and future subordinated
Indebtedness;
- are unconditionally guaranteed on a senior basis by the Subsidiary
Guarantors, representing each subsidiary of the Company (that is
providing a guarantee under the Senior Secured Credit Agreement). See
"Subsidiary Guarantees"; and
- are freely tradeable and eligible for trading in the PORTAL market.
PRINCIPAL AND INTEREST
The Issuers issued the Existing Notes initially with a maximum aggregate
principal amount of $405 million. Under the Indenture, we may issue an unlimited
principal amount of additional notes having identical terms and conditions as
the Exchange Notes (the "Additional Notes"). We will only be permitted to issue
such Additional Notes if at the time of such issuance, we were in compliance
with the covenants contained in the Indenture. Any Additional Notes will be part
of the same issue as the Exchange Notes that we are currently offering and will
vote
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on all matters with the holders of the Exchange Notes. Interest on the Exchange
Notes will compound semi-annually and:
- accrue at the rate of 10 3/8% per annum;
- accrue from the date of original issuance or, if interest has already
been paid, from the most recent interest payment date;
- be payable in cash semi-annually in arrears on January 15 and July 15,
commencing on January 15, 2004;
- be payable to the holders of record on December 31 and June 30
immediately preceding the related interest payment dates; and
- be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Under certain circumstances described below under the heading "-- Exchange
Offer and Registration Rights", we may be requested to pay additional interest
on the Exchange Notes.
PAYMENTS ON THE EXCHANGE NOTES; PAYING AGENT AND REGISTRAR
We will pay principal of, premium, if any, and interest on the Exchange
Notes at the office or agency designated by the Issuers, except that we may, at
our option, pay interest on the Exchange Notes by check mailed to holders of the
Exchange Notes at their registered address as it appears in the Registrar's
books. We have initially designated the corporate trust office of the Trustee in
Birmingham, Alabama to act as our Paying Agent and Registrar. We may, however,
change the Paying Agent or Registrar without prior notice to the holders of the
Exchange Notes, and the Issuers or any of the Restricted Subsidiaries may act as
Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, Exchange Notes
in global form registered in the name of or held by The Depository Trust Company
or its nominee in immediately available funds to The Depository Trust Company or
its nominee, as the case may be, as the registered holder of such global
Exchange Note.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents. No service charge will
be imposed by the Issuers, the Trustee or the Registrar for any registration of,
transfer or exchange of Notes, but the Issuers may require a holder to pay a sum
sufficient to cover any transfer tax or other governmental taxes and fees
required by law or permitted by the Indenture. The Issuers are not required to
transfer or exchange any Note selected for redemption. Also, the Issuers are not
required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes are not redeemable until July
15, 2007. On and after July 15, 2007, the Issuers may redeem all or, from time
to time, a part of the Exchange Notes upon not less than 30 nor more than 60
days' notice, at the following redemption prices (expressed as a percentage of
principal amount) plus accrued and unpaid interest on the Exchange Notes, if
any, to the applicable redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the twelve-month period beginning on
July 15th of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2007........................................................ 105.375%
2008........................................................ 103.583%
2009........................................................ 101.792%
2010 and thereafter......................................... 100.000%
</Table>
Prior to July 15, 2006, the Issuers may on any one or more occasions redeem
up to 35% of the original principal amount of the Exchange Notes with the Net
Cash Proceeds of one or more Equity Offerings at a redemption price of 110.75%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided that
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(1) at least 65% of the original principal amount of the Exchange Notes
remains outstanding after each such redemption; and
(2) the redemption occurs within 60 days after the closing of such Equity
Offering.
If the optional redemption date is on or after an interest record date and
on or before the related interest payment date, the accrued and unpaid interest,
if any, will be paid to the Person in whose name the Exchange Note is registered
at the close of business, on such record date, and no additional interest will
be payable to holders whose Exchange Notes are subject to redemption by the
Issuers.
In the case of any partial redemption, selection of the Exchange Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Exchange Notes
are listed or, if the Exchange Notes are not listed, then on a pro rata basis,
by lot or by such other method as the Trustee in its sole discretion will deem
to be fair and appropriate, although no Exchange Note of $1,000 in original
principal amount or less will be redeemed in part. If any Exchange Note is to be
redeemed in part only, the notice of redemption relating to such Exchange Note
will state the portion of the principal amount thereof to be redeemed. A new
Exchange Note in principal amount equal to the unredeemed portion thereof will
be issued in the name of the holder thereof upon cancellation of the original
Exchange Note.
The Issuers are not required to make mandatory redemption payments or
sinking fund payments with respect to the Exchange Notes. However under certain
circumstances we may be required to offer to purchase the Exchange Notes as
discussed under "-- Limitation on Sales of Assets and Subsidiary Stock" and "--
Change of Control". We may, at any time and from to time, make purchases of
Exchange Notes in the open market.
SPECIAL TAX REDEMPTION
The Exchange Notes may be redeemed at the option of either of the Issuers,
in whole but not in part, upon not less than 30 nor more than 60 days' notice,
at any time, at a redemption price equal to the principal amount of the Exchange
Notes plus accrued and unpaid interest to the date fixed for redemption only if,
as a result of (1) any change in or amendment to the laws of Canada or the
United States (or of any political subdivision or taxing authority therein or
thereof) or any regulations or rulings promulgated thereunder or any change in
the official interpretation or official application of such laws, regulations or
rulings (including a judgment, holding or order by a court of competent
jurisdiction) which is publicly announced after the date of the Indenture, or
(2) any change in the official application or interpretation (including a
judgment, holding or order by a court of competent jurisdiction) of, or any
execution of or amendment to, any treaty or treaties affecting taxation to which
Canada or the United States (or such political subdivision or taxing authority)
is a party, which change, amendment or treaty becomes publicly available after
the date of the Indenture, either of the Issuers is or would be required on the
next succeeding due date for a payment with respect to the Exchange Notes to pay
any Canadian Additional Amounts or U.S. Additional Amounts with respect to the
Exchange Notes as described under "-- Withholding Taxes".
It is not anticipated that the Guarantees will be called upon and the mere
fact that a Subsidiary Guarantor might have to pay withholding tax if ever
required to make a payment should not give rise to a right to redeem.
Prior to the publication of any notice of redemption of the Exchange Notes,
the Issuers shall deliver to the Trustee an Officers' Certificate stating that
the Issuers are entitled to effect such redemption, accompanied by an opinion of
tax counsel satisfactory to the Trustee, acting reasonably, that the condition
precedent to the right of redemption has occurred. The Issuers will be bound to
redeem the Exchange Notes on the date fixed for redemption.
RANKING
The Exchange Notes will be general unsecured obligations of the Issuers
that rank senior in right of payment to all existing and future subordinated
Indebtedness. The Exchange Notes will rank equally in right of payment with all
existing and future Indebtedness of the Issuers that is not so subordinated and
will be effectively subordinated to all of our secured Indebtedness and
Indebtedness of the Company's Restricted Subsidiaries (other than GUSAP
Partners) that do not guarantee the Exchange Notes. In the event of bankruptcy,
liquidation, reorganization or other winding up of the Issuers or the Subsidiary
Guarantors or upon a default in payment with respect to, or the acceleration of,
any Indebtedness under the Senior Secured Credit Agreement or other secured
Indebtedness, the assets of the Issuers and the Subsidiary Guarantors that
secure secured Indebtedness will be available to pay obligations on the Exchange
Notes and the Subsidiary Guarantees only after all Indebtedness under the Senior
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Secured Credit Agreement and other secured Indebtedness has been repaid in full
from such assets. We advise you that there may not be sufficient assets
remaining to pay amounts due on any or all the Exchange Notes and the Subsidiary
Guarantees then outstanding.
As of September 30, 2003:
- outstanding Indebtedness of the Issuers and the Subsidiary Guarantors
(excluding intercompany liabilities, guarantees under the Senior Secured
Credit Agreement and the Subsidiary Guarantees) was $595.4 million,
$150.0 million of which would have been secured; and
- Non-guarantor Subsidiaries had $35.1 million of liabilities (excluding
intercompany obligations). Additionally, our joint ventures had $11.2
million of liabilities, for which we could become liable under certain
circumstances.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors have jointly and severally guaranteed, on a
senior unsecured basis, the Issuers' obligations under the Existing Notes and
all the obligations under the Indenture and will, jointly and severally,
unconditionally guarantee on a senior unsecured basis the Issuers' obligations
under the Exchange Notes and all obligations under the Indenture. Such
Subsidiary Guarantors will agree to pay, in addition to the amount stated above,
any and all reasonable out-of-pocket costs, fees and expenses (including
reasonable out-of-pocket counsel fees and expenses) Incurred by the Trustee or
the holders in enforcing any rights under the Subsidiary Guarantees. The
obligations of Subsidiary Guarantors under the Subsidiary Guarantees will rank
equally in right of payment with other Indebtedness of such Subsidiary
Guarantor, except to the extent such other Indebtedness is subordinate to the
obligations arising under the Subsidiary Guarantees.
As of September 30, 2003, outstanding Indebtedness of Subsidiary Guarantors
(excluding intercompany obligations) was $150.0 million, all of which was
secured.
Although the Indenture will limit the amount of Indebtedness that
Subsidiary Guarantors may Incur, such Indebtedness may be substantial.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law. See "Risk Factors".
In the event a Subsidiary Guarantor is sold or disposed of (whether by
merger, consolidation, liquidation, amalgamation, the sale of its Capital Stock
or the sale of all or substantially all of its assets), and whether or not the
Subsidiary Guarantor is the surviving corporation in such transaction, to a
Person which is not the Company or a Restricted Subsidiary, such Subsidiary
Guarantor will be automatically released from its obligations under the
Indenture, its Subsidiary Guarantee and the Registration Rights Agreement (if
any) if:
(1) such sale or other disposition is in compliance with the Indenture,
including the covenants "-- Limitation on Sales of Assets and
Subsidiary Stock" and "-- Limitation on Sale of Capital Stock of
Restricted Subsidiaries"; and
(2) all the obligations of such Subsidiary Guarantor under all Credit
Facilities and related documentation and any other agreements relating
to any other indebtedness of the Company or its Restricted
Subsidiaries terminate upon consummation of such transaction.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, its Subsidiary Guarantee and the Registration Rights
Agreement (if any) if the Company designates such Subsidiary Guarantor as an
Unrestricted Subsidiary and such designation complies with the other applicable
provisions of the Indenture.
CHANGE OF CONTROL
If a Change of Control occurs, unless the Issuers have exercised their
right to redeem all of the Exchange Notes as described under "Optional
Redemption", then such Change of Control shall constitute a triggering event
which shall trigger the obligation of the Issuers to offer to repurchase from
each holder all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Exchange Notes at a purchase price in cash equal to 101% of the
principal amount of the Exchange Notes plus accrued and unpaid interest, if any,
to the date of purchase
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(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
Within 30 days following any Change of Control, unless the Issuers have
exercised their right to redeem all outstanding Exchange Notes as described
under "Optional Redemption", the Issuers will mail a notice (the "Change of
Control Offer") to each holder, with a copy to the Trustee, stating:
(1) that a Change of Control has occurred and that such holder has the
right to require the Issuers to purchase such holder's Notes at a
purchase price in cash equal to 101% of the principal amount of such
Exchange Notes plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on a record
date to receive interest on the relevant interest payment date) (the
"Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of
Control Payment Date"); and
(3) the procedures determined by the Issuers, consistent with the
Indenture, that a holder must follow in order to have its Exchange
Notes repurchased.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
(1) accept for payment all Exchange Notes or portions of Exchange Notes
(in integral multiples of $1,000) properly tendered pursuant to the
Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all Exchange Notes or portions of Exchange Notes
so tendered; and
(3) deliver or cause to be delivered to the Trustee the Exchange Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Exchange Notes or portions of Exchange Notes being
purchased by the Issuers.
The Paying Agent will promptly mail to each holder of Exchange Notes so
tendered the Change of Control Payment for such Exchange Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each holder a new Exchange Note equal in principal amount to any unpurchased
portion of the Exchange Notes surrendered, if any; provided that each such new
Exchange Note will be in a principal amount of $1,000 or an integral multiple
thereof.
If the Change of Control Payment Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest, if any, will be paid to the Person in whose name an Exchange Note is
registered at the close of business on such record date, and no additional
interest will be payable to holders who tender pursuant to the Change of Control
Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders to require that the Company repurchase or
redeem the Exchange Notes in the event of a takeover, recapitalization or
similar transaction.
Prior to mailing a Change of Control Offer, and as a condition to such
mailing (i) the requisite holders of each issue of Indebtedness issued under an
indenture or other agreement that may be violated by such payment shall have
consented to such Change of Control Offer being made and waived the event of
default, if any, caused under such indenture or other agreement by the Change of
Control or (ii) the Issuers will repay all outstanding Indebtedness issued under
an indenture or other agreement that may be violated by a payment to the holders
of Exchange Notes under a Change of Control Offer or (iii) the Issuers must
offer to repay all such Indebtedness, and make payment to the holders of such
Indebtedness that accept such offer, and obtain waivers of any event of default
from the remaining holders of such Indebtedness. The Issuers covenant to effect
such repayment or obtain such consent and/or waiver within 30 days following any
Change of Control, it being a default of the Change of Control provisions of the
Indenture if the Issuers fail to comply with such covenant. A default under the
Indenture will result in a cross-default under the Senior Secured Credit
Agreement.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
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set forth in the Indenture applicable to a Change of Control Offer made by the
Issuers and purchases all Exchange Notes validly tendered and not withdrawn
under such Change of Control Offer.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations conflict
with provisions of the Indenture, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached their
obligations described in the Indenture by virtue of the conflict.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of "Change
of Control" includes a sale, lease, transfer, conveyance or other disposition of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any Person other than a Permitted Holder.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve a
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of a Person. As a result, it may be unclear as to whether a
Change of Control has occurred and whether a holder of Exchange Notes may
require the Issuers to make an offer to repurchase the Exchange Notes as
described above. The provisions under the Indenture relative to the Issuers'
obligation to make an offer to repurchase the Exchange Notes as a result of a
Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount of the Exchange Notes.
The Issuers' ability to repurchase Exchange Notes pursuant to a Change of
Control Offer may be limited by a number of factors. The occurrence of certain
of the events that constitute a Change of Control may constitute a default under
the Senior Secured Credit Agreement. In addition, certain events that may
constitute a change of control under the Senior Secured Credit Agreement and
cause a default under that agreement may not constitute a Change of Control
under the Indenture. Future Indebtedness of the Company and its Subsidiaries may
also contain prohibitions of certain events that would constitute a Change of
Control or require such Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Issuers to
repurchase the Exchange Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Issuers' ability to pay cash to the
holders upon a repurchase may be limited by the Issuers' then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
Even if sufficient funds were otherwise available, the terms of the Senior
Secured Credit Agreement and future Indebtedness may prohibit the Issuers'
prepayment of the Exchange Notes before their scheduled maturity. Consequently,
if the Issuers are not able to prepay the Bank Indebtedness and any such other
Indebtedness containing similar restrictions or obtain requisite consents, as
described above, the Issuers will be unable to fulfill their repurchase
obligations if holders of the Exchange Notes exercise their repurchase rights
following a Change of Control, resulting in a default under the Indenture. A
default under the Indenture may result in a cross-default under the Senior
Secured Credit Agreement.
CERTAIN COVENANTS
EFFECTIVENESS OF COVENANTS
Following the first day:
(a) the Notes have an Investment Grade Rating from both of the Ratings
Agencies; and
(b) no Default has occurred and is continuing under the Indenture;
the Company and its Restricted Subsidiaries will not be subject to the
provisions of the Indenture summarized under the subheadings below:
- "Limitation on Indebtedness";
- "Limitation on Restricted Payments";
- "Limitation on Restrictions on Distributions from Restricted
Subsidiaries";
- "Limitation on Sales of Assets and Subsidiary Stock";
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- "Limitation on Affiliate Transactions";
- "Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries"; and
- Clause (3) of "Merger and Consolidation"
(collectively, the "Suspended Covenants"). If at any time the Notes' credit
rating is downgraded from Investment Grade Rating, then the Suspended Covenants
will thereafter be reinstated as if such covenants had never been suspended and
be applicable pursuant to the terms of the Indenture (including in connection
with performing any calculation or assessment to determine compliance with the
terms of the Indenture), unless and until the Notes subsequently attain
Investment Grade Rating (in which event the Suspended Covenants shall no longer
be in effect for such time that the Notes maintain Investment Grade Rating);
provided, however, that no Default, Event of Default or breach of any kind shall
be deemed to exist under the Indenture, the Notes or the Subsidiary Guarantees
with respect to the Suspended Covenants based on, and none of the Company or any
of its Subsidiaries shall bear any liability for, any actions taken or events
occurring after the Notes attain Investment Grade Rating and before any
reinstatement of such Suspended Covenants as provided above, or any actions
taken at any time pursuant to any contractual obligation arising prior to such
reinstatement, regardless of whether such actions or events would have been
permitted if the applicable Suspended Covenants remained in effect during such
period.
LIMITATION ON INDEBTEDNESS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness);
provided, however, that the Issuers or any of the Subsidiary Guarantors may
Incur Indebtedness if on the date thereof:
(1) the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries is at least 2.00 to 1.00; and
(2) no Default or Event of Default will have occurred or be continuing or
would occur as a consequence of Incurring the Indebtedness or
transactions relating to such Incurrence.
The first paragraph of this covenant will not prohibit the Incurrence of
the following Indebtedness:
(1) Indebtedness of the Issuers or any of the Subsidiary Guarantors
Incurred pursuant to a Credit Facility in an aggregate amount up to
the greater of (a) the Borrowing Base and (b) $350 million less the
aggregate principal amount of all principal repayments with proceeds
from Asset Dispositions utilized in accordance with clause (3)(a) of
"-- Limitation on Sales of Assets and Subsidiary Stock" that
permanently reduce the commitments thereunder;
(2) Guarantees by the Issuers and Subsidiary Guarantors of Indebtedness
Incurred in accordance with the provisions of the Indenture; provided
that in the event such Indebtedness that is being Guaranteed is a
Subordinated Obligation or a Guarantor Subordinated Obligation, then
the related Guarantee shall be subordinated in right of payment to the
Subsidiary Guarantee;
(3) Indebtedness of the Company owing to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and
held by the Company or any other Restricted Subsidiary; provided,
however, (a) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated in right of payment to the
Exchange Notes, or (b) if a Subsidiary Guarantor is the obligor on
such Indebtedness and the Company or a Subsidiary Guarantor is not the
obligee, such Indebtedness is subordinated in right of payment to the
Subsidiary Guarantees of such Subsidiary Guarantor, then (i) any
subsequent issuance or transfer of Capital Stock or any other event
which results in any such Indebtedness being beneficially held by a
Person other than the Company or a Restricted Subsidiary, or (ii) any
sale or other transfer of any such Indebtedness to a Person other than
the Company or a Restricted Subsidiary shall be deemed, in each case,
to constitute an Incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be;
(4) Indebtedness represented by (a) the Existing Notes and the Subsidiary
Guarantees and the Exchange Notes and exchange guarantees evidencing
the same Indebtedness as the Existing Notes and the Subsidiary
Guarantees issued in this Exchange Offer, (b) any Indebtedness (other
than the Indebtedness described in clauses (1), (2), (3), (6), (8),
(9), (10), (11) and (12)) outstanding on the
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Issue Date and (c) any Refinancing Indebtedness Incurred in respect of
any Indebtedness described in this clause (4) or clause (5) or
Incurred pursuant to the first paragraph of this covenant;
(5) Indebtedness of a Person Incurred and outstanding on the date on which
such Person was acquired by the Company or a Restricted Subsidiary and
became a Restricted Subsidiary or part of a Restricted Subsidiary or
the Company or merged, consolidated, amalgamated or liquidated with or
into a Restricted Subsidiary or the Company (other than Indebtedness
Incurred (a) to provide all or any portion of the funds utilized to
consummate the transaction or series of related transactions pursuant
to which such Person became a Restricted Subsidiary or was otherwise
acquired by the Company or a Restricted Subsidiary or merged,
consolidated, amalgamated or liquidated with or into a Restricted
Subsidiary or the Company or (b) otherwise in connection with, or in
contemplation of, such acquisition); provided, however, that at the
time such transactions or series of transactions is consummated, the
Company would have been able to Incur $1.00 of additional Indebtedness
pursuant to the first paragraph of this covenant after giving effect
to the Incurrence of such Indebtedness pursuant to this clause (5);
(6) Indebtedness under Currency Agreements and Interest Rate Agreements;
provided that such agreements are entered into for bona fide hedging
purposes of the Company or its Restricted Subsidiaries (as determined
in good faith by the Board of Directors or senior management of the
Company), and not for speculative purposes, in the ordinary course of
business;
(7) the Incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings, conditional sale obligations, obligations under title
retention agreements or purchase money obligations with respect to
assets other than Capital Stock or other Investments, in each case
Incurred for the purpose of financing all or any part of the purchase
price, leasing or cost of acquisition, construction, development or
improvements of property or assets used in the business of the Company
or such Restricted Subsidiary, in an aggregate principal amount not to
exceed $5.0 million outstanding at the time of determination;
(8) Indebtedness Incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety, appeal and similar
bonds and completion guarantees provided by the Company or a
Restricted Subsidiary in the ordinary course of business;
(9) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price
or similar obligations, in each case, Incurred or assumed in
connection with the disposition of any business, property, assets or
Capital Stock, provided that the maximum aggregate liability in
respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by the Company and its Restricted
Subsidiaries in connection with such disposition;
(10) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided,
however, that such Indebtedness is extinguished within five business
days of Incurrence;
(11) Indebtedness arising out of any Earn-Out Payment obligation relating
to any Investment made in accordance with clause (1) or (2) of the
definition "Permitted Investment";
(12) Indebtedness of the Issuers and the Subsidiary Guarantors extended by
Gerdau S.A. or any of its wholly-owned Subsidiaries in an aggregate
outstanding principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this
clause (12) and then outstanding, will not exceed $25.0 million at any
time outstanding; and
(13) in addition to the items referred to in clauses (1) through (12)
above, Indebtedness of the Issuers and the Subsidiary Guarantors in an
aggregate outstanding principal amount which, when taken together with
the principal amount of all other Indebtedness Incurred pursuant to
this clause (13) and then outstanding, will not exceed $25.0 million
at any time outstanding.
The Issuers will not Incur any Indebtedness under the preceding paragraph
if the proceeds thereof are used, directly or indirectly, to refinance any
Subordinated Obligations of the Issuers unless such Indebtedness will be
subordinated to the Exchange Notes to at least the same extent as such
Subordinated Obligations. No Subsidiary Guarantor will Incur any indebtedness if
the proceeds thereof are used, directly or indirectly, to refinance any
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Guarantor Subordinated Obligations of such Subsidiary Guarantor unless such
Indebtedness will be subordinated to the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee to at least the same extent as such
Guarantor Subordinated Obligations. No Restricted Subsidiary other than a
Subsidiary Guarantor or GUSAP Partners may Incur any Indebtedness if the
proceeds are used to refinance Indebtedness of the Company.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in this covenant, the Company, in
its sole discretion, will classify such item of Indebtedness on the
date of Incurrence and only be required to include the amount and type
of such Indebtedness in one of such clauses;
(2) all Indebtedness outstanding on the date of the Indenture under the
Senior Secured Credit Agreement shall be deemed initially Incurred on
the Issue Date under clause (1) of the second paragraph of this
covenant and not the first paragraph or clause (4) of the second
paragraph of this covenant;
(3) Guarantees of, or obligations in respect of letters of credit relating
to, Indebtedness which is otherwise included in the determination of a
particular amount of Indebtedness shall not be included;
(4) if obligations in respect of letters of credit are Incurred pursuant
to a Credit Facility and are being treated as Incurred pursuant to
clause (1) of the second paragraph above and the letters of credit
relate to other Indebtedness, then such other Indebtedness shall not
be included;
(5) the principal amount of any Disqualified Stock of the Company or a
Restricted Subsidiary, or Preferred Stock of a Restricted Subsidiary
that is not a Subsidiary Guarantor, will be equal to the greater of
the maximum mandatory redemption or repurchase price (not including,
in either case, any redemption or repurchase premium) or the
liquidation preference thereof at the time of determination;
(6) Indebtedness permitted by this covenant need not be permitted solely
by reference to one provision permitting such Indebtedness but may be
permitted in part by one such provision and in part by one or more
other provisions of this covenant permitting such Indebtedness; and
(7) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability
in respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock or Disqualified
Stock will not be deemed to be an Incurrence of Indebtedness for purposes of
this covenant. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof in the case of any Indebtedness issued with
original issue discount and (ii) the principal amount or liquidation preference
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
In addition, the Company will not permit any of its Unrestricted
Subsidiaries to Incur any Indebtedness or issue any shares of Disqualified
Stock, other than Non-Recourse Debt. If at any time an Unrestricted Subsidiary
becomes a Restricted Subsidiary, any Indebtedness of such Subsidiary shall be
deemed to be Incurred by a Restricted Subsidiary as of such date (and, if such
Indebtedness is not permitted to be Incurred as of such date under this
"Limitation on Indebtedness" covenant, the Company shall be in Default of this
covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-dominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-dominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that the
Company may Incur pursuant to this covenant shall not be deemed to be exceeded
solely as a result of fluctuations in the exchange rate of currencies. The
principal amount of any Indebtedness Incurred to refinance other Indebtedness,
if Incurred in a different currency from the Indebtedness
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being refinanced, shall be calculated based on the currency exchange rate
applicable to the currencies in which such Refinancing Indebtedness is
denominated that is in effect on the date of such refinancing.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries, directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect
of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries) except:
(a) dividends or distributions payable in Capital Stock of the Company
(other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock of the Company; and
(b) any dividends or distributions payable to the Company or a
Restricted Subsidiary (and if such Restricted Subsidiary is not a
Wholly-Owned Subsidiary, to its other holders of common Capital
Stock on a pro rata basis);
(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of the Company or any direct or indirect parent of the Company
held by Persons other than the Company or a Restricted Subsidiary
(other than in exchange for Capital Stock of the Company (other than
Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations or
Guarantor Subordinated Obligations (other than the purchase,
repurchase, redemption, defeasance or other acquisition or retirement
of Subordinated Obligations or Guarantor Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one
year of the date of purchase, repurchase, redemption, defeasance or
other acquisition or retirement); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Restricted Investment
referred to in clauses (1) through (4) shall be referred to herein as a
"Restricted Payment"), if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom); or
(b) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to the first paragraph under the "Limitation
on indebtedness" covenant after giving effect, on a pro forma
basis, to such Restricted Payment; or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date
would exceed the sum of:
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date occurs to the end of
the most recent fiscal quarter ending prior to the date of
such Restricted Payment for which financial statements are
available (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit);
(ii) 100% of the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock (other
than Disqualified Stock) or other capital contributions
subsequent to the Issue Date (other than Net Cash Proceeds
received from an issuance or sale of such Capital Stock to a
Subsidiary of the Company or an employee stock ownership plan,
option plan or similar trust to the extent such sale to an
employee stock ownership plan or similar trust is financed by
loans from or Guaranteed by the Company or any Restricted
Subsidiary unless such loans have been repaid with cash on or
prior to the date of determination);
(iii) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the
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Company or its Restricted Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Stock)
of the Company (less the amount of any cash, or the fair
market value of any other property, distributed by the Company
upon such conversion or exchange); and
(iv) the amount equal to the net reduction in Restricted Investments
made by the Company or any of its Restricted Subsidiaries in
any Person resulting from:
(A) repurchases, redemptions or liquidations of such Restricted
Investments by such Person, proceeds realized upon the sale
or other transfer of such Restricted Investment to an
unaffiliated purchaser, repayments of loans or advances or
other transfers of assets (including by way of dividend or
distribution) by such Person to the Company or any
Restricted Subsidiary; or
(B) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary,
which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; provided, however,
that no amount will be included under this clause (iv) to the extent
it is already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase, repurchase, redemption, defeasance or other acquisition,
cancellation or retirement of Capital Stock, Disqualified Stock or
Subordinated Obligations of the Issuers or Guarantor Subordinated
Obligation of any Subsidiary Guarantor made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital Stock of
the Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary or an employee stock ownership
plan or similar trust to the extent such sale to an employee stock
ownership plan or similar trust is financed by loans from or
Guaranteed by the Company or any Restricted Subsidiary unless such
loans have been repaid with cash on or prior to the date of
determination); provided, however, that (a) such purchase, repurchase,
redemption, defeasance, acquisition, cancellation or retirement will
be excluded in subsequent calculations of the amount of Restricted
Payments and (b) the Net Cash Proceeds from such sale of Capital Stock
will be excluded from clause (c)(ii) of the preceding paragraph;
(2) any prepayment, repayment, purchase, repurchase, redemption,
defeasance or other acquisition or retirement of Subordinated
Obligations of the Issuers or any Guarantor Subordinated Obligation of
any Subsidiary Guarantor made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Subordinated Obligations of
the Company or any prepayment, repayment, purchase, repurchase,
redemption, defeasance or other acquisition or retirement of Guarantor
Subordinated Obligations made by exchange for or out of the proceeds
of the substantially concurrent sale of Guarantor Subordinated
Obligations that, in each case, is permitted to be Incurred pursuant
to the covenant described under "Limitation on Indebtedness" and that
in each case constitutes Refinancing Indebtedness; provided, however,
that such prepayment, repayment, purchase, repurchase, redemption,
defeasance, acquisition or retirement will be excluded in subsequent
calculations of the amount of Restricted Payments;
(3) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement of Disqualified Stock of the Company or a Restricted
Subsidiary made by exchange for or out of the proceeds of the
substantially concurrent sale of Disqualified Stock of the Company or
such Restricted Subsidiary, as the case may be, that, in each case, is
permitted to be Incurred pursuant to the covenant described under
"Limitation on Indebtedness" and that in each case constitutes
Refinancing Indebtedness; provided, however, that such purchase,
repurchase, redemption, defeasance, acquisition or retirement will be
excluded in subsequent calculations of the amount of Restricted
Payments;
(4) so long as no Default or Event of Default has occurred and is
continuing, any purchase, prepayment, repayment, repurchase,
retirement, defeasance or other acquisition or redemption of
Subordinated Obligations or Guarantor Subordinated Obligations of a
Subsidiary Guarantor from Net Available Cash to the extent permitted
under "-- Limitation on Sales of Assets and Subsidiary Stock" below;
provided,
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however, that such purchase, prepayment, repayment, repurchase,
retirement, defeasance or other acquisition or redemption will be
excluded in subsequent calculations of the amount of Restricted
Payments;
(5) dividends paid within 60 days after the date of declaration if at such
date of declaration such dividend would have complied with this
provision; provided, however, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
(6) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, repurchase, redemption or other acquisition,
cancellation or retirement for value of Capital Stock, or options,
warrants, equity appreciation rights or other rights to purchase or
acquire Capital Stock of the Company or any Restricted Subsidiary
or any parent of the Company held by any existing or former
directors, employees or management of the Company or any Subsidiary
of the Company or their assigns, transferees, estates or heirs, in
each case in connection with the repurchase provisions under
employee stock option or stock purchase agreements or other
agreements to compensate management employees; provided that such
redemptions or repurchases pursuant to this clause will not exceed
$1.0 million in the aggregate during any calendar year and $5.0
million in the aggregate for all such purchases, repurchases,
redemptions or other acquisitions, cancellations and retirements;
provided, however, that the amount of any such purchase,
repurchase, redemption or other acquisition, cancellation or
retirement will be included in subsequent calculations of the
amount of Restricted Payments; and
(b) loans or advances to employees or directors of the Company or any
Subsidiary of the Company the proceeds of which are used to
purchase Capital Stock of the Company, in an aggregate amount not
in excess of $2.0 million at any one time outstanding; provided,
however, that the amount of such loans and advances will be
included in subsequent calculations of the amount of Restricted
Payments;
(7) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of the Company and Preferred
Stock of any Restricted Subsidiary (other than Subsidiary Guarantors
and GUSAP Partners) issued in accordance with the terms of the
Indenture to the extent such dividends are included in the definition
of "Consolidated Interest Expense"; provided that the payment of such
dividends will be excluded from the calculation of Restricted
Payments;
(8) repurchases of Capital Stock deemed to occur upon the exercise of
stock options, warrants or other convertible securities if such
Capital Stock represents a portion of the exercise price thereof;
provided, however, that such repurchases will be excluded from
subsequent calculations of the amount of Restricted Payments;
(9) the distribution, as a dividend or otherwise, of shares of Capital
Stock and/or assets of any Unrestricted Subsidiary; provided, however,
that such distribution shall be excluded in subsequent calculations of
the amount of Restricted Payments;
(10) the repurchase, redemption or other acquisition or retirement for
value of any Subordinated Obligation (i) at a purchase price not
greater than 101% of the principal amount of such Subordinated
Obligation in the event of a Change of Control in accordance with
provisions similar to the "-- Change of control" covenant or (ii) at a
purchase price not greater than 100% of the principal amount thereof
in accordance with provisions similar to the "-- Limitation on Sales
of Assets and Subsidiary Stock" covenant; provided that, prior to or
simultaneously with such repurchase, the Company has made the Change
of Control Offer or Asset Disposition Offer, as applicable, as
provided in such covenant with respect to the Exchange Notes and has
repurchased all Exchange Notes validly tendered for payment in
connection with such Change of Control Offer or Asset Disposition
Offer; and
(11) Restricted Payments in an amount not to exceed $15.0 million; provided
that the amount of such Restricted Payments will be included in the
calculation of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by the Company or such
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Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The fair market value of any cash Restricted Payment shall be its face amount
and any non-cash Restricted Payment shall be determined conclusively by the
Board of Directors of the Company acting in good faith whose resolution with
respect thereto shall be delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value is
estimated in good faith by the Board of Directors of the Company to exceed $5.0
million. Not later than the date of making any Restricted Payment pursuant to
the first paragraph of this covenant, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
LIMITATION ON LIENS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, Incur or suffer to exist any
Lien (other than Permitted Liens) upon any of its property or assets (including
Capital Stock of Restricted Subsidiaries), whether owned on the date of the
Indenture or acquired after that date, which Lien is securing any Indebtedness,
unless contemporaneously with the Incurrence of such Liens, effective provision
is made to secure the Indebtedness due under the Indenture and the Exchange
Notes or, in respect of Liens on any Restricted Subsidiary's property or assets,
any Subsidiary Guarantee of such Restricted Subsidiary, equally and ratably with
(or prior to in the case of Liens with respect to Subordinated Obligations or
Guarantor Subordinated Obligations, as the case may be) the Indebtedness secured
by such Lien for so long as such Indebtedness is so secured.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any Sale/Leaseback Transaction with respect to any
property unless:
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale/Leaseback Transaction
at least equal to the fair market value (as evidenced by a resolution
of the Board of Directors of the Company) of the property subject to
such transaction;
(2) the Company or such Restricted Subsidiary could have Incurred
Indebtedness in an amount equal to the Attributable Indebtedness in
respect of such Sale/Leaseback Transaction pursuant to the covenant
described under "-- Limitation on Indebtedness";
(3) the Company or such Restricted Subsidiary would be permitted to create
a Lien on the property subject to such Sale/Leaseback Transaction
without securing the Exchange Notes by the covenant described under
"-- Limitation on Liens"; and
(4) the Sale/Leaseback Transaction is treated as an Asset Disposition and
all of the conditions of the Indenture described under "-- Limitation
on Sales of Assets and Subsidiary Stock" (including the provisions
concerning the application of Net Available Cash) are satisfied with
respect to such Sale/Leaseback Transaction, treating all of the
consideration received in such Sale/Leaseback Transaction as Net
Available Cash for purposes of such covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
Restricted Subsidiary (it being understood that the priority of any
Preferred Stock in receiving dividends or liquidating distributions
prior to dividends or liquidating distributions being paid on Common
Stock shall not be deemed a restriction on the ability to make
distributions on Capital Stock);
(2) make any loans or advances to the Company or any Restricted Subsidiary
(it being understood that the subordination of loans or advances made
to the Company or any Restricted Subsidiary to other
130
Indebtedness Incurred by the Company or any Restricted Subsidiary
shall not be deemed a restriction on the ability to make loans or
advances); or
(3) transfer any of its property or assets to the Company or any
Restricted Subsidiary.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement or other
instrument in effect at or entered into on the date of the Indenture
and identified in an annex to the Indenture, including, without
limitation, the Indenture and the Senior Secured Credit Agreement in
effect on such date;
(ii) any encumbrance or restriction with respect to a Person pursuant to
an agreement relating to any Capital Stock or Indebtedness Incurred
by such Person on or before the date on which such Person was
acquired by the Company and became a Restricted Subsidiary or part
thereof or of the Company (other than Capital Stock or Indebtedness
Incurred as consideration in, or to provide all or any portion of the
funds utilized to consummate, the transaction or series of related
transactions pursuant to which such Person became a Restricted
Subsidiary or was acquired by the Company or a Restricted Subsidiary
or in contemplation of the transaction) and outstanding on such date;
provided that any such encumbrance or restriction may not extend to
any assets or property of the Company or any other Restricted
Subsidiary other than the assets and property of the Person so
acquired;
(iii) any encumbrance or restriction with respect to the Company or a
Restricted Subsidiary pursuant to an agreement or other instrument
relating to Refinancing Indebtedness that refinanced Indebtedness
Incurred pursuant to an agreement or other instrument referred to in
clause (i) or (ii) of this paragraph or this clause (iii) or
contained in any amendment to an agreement or other instrument
referred to in clause (i) or (ii) of this paragraph or this clause
(iii); provided, however, that the encumbrances and restrictions with
respect to the Company or such Restricted Subsidiary contained in any
such agreement or other instrument or amendment are no less favorable
in any material respect to the holders of the Exchange Notes than the
encumbrances and restrictions contained in such agreement or other
instrument or amendment referred to in clauses (i) or (ii) of this
paragraph on the Issue Date or the date such Person became a
Restricted Subsidiary, whichever is applicable;
(iv) in the case of clause (3) of the first paragraph of this covenant, any
encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment or
transfer of any property or asset that is subject to a lease,
sublease, license or similar contract, or the assignment or
transfer of any such lease, sublease, license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of the Company
or a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of the property subject to such
mortgages, pledges or other security agreements; or
(c) pursuant to customary provisions restricting dispositions of real
property interests set forth in any reciprocal easement agreements
of the Company or any Restricted Subsidiary;
(v) (a) purchase money obligations for assets or property acquired in the
ordinary course of business and (b) Capitalized Lease Obligations
permitted under the Indenture, in each case, that impose encumbrances
or restrictions of the nature described in clause (3) of the first
paragraph of this covenant on the property so acquired;
(vi) any restriction with respect to a Restricted Subsidiary (or any of its
property or assets) imposed pursuant to an agreement entered into for
the direct or indirect sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary (or the
property or assets that are subject to such restriction) pending the
closing of such sale or disposition;
(vii) customary provisions in joint venture agreements relating to joint
ventures that are not Restricted Subsidiaries and other similar
agreements entered into in the ordinary course of business;
(viii) net worth provisions in leases and other agreements entered into by
the Company or any Restricted Subsidiary in the ordinary course of
business; and
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(ix) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at least equal to the fair market value (such
fair market value to be determined on the date of contractually
agreeing to such Asset Disposition), as determined with respect to
transactions in excess of $2.0 million in good faith by the chief
executive officer or chief financial officer of the Company (including
as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition;
(2) at least 75% of the consideration from such Asset Disposition received
by the Company or such Restricted Subsidiary, as the case may be, is
in the form of cash or Cash Equivalents; provided that this clause (2)
shall not apply to dispositions of assets with a fair market value of
$1.0 million or less; provided further that the aggregate of the fair
market value of the transactions so excluded from this clause (2)
shall not exceed $5.0 million in any calendar year; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or such Restricted Subsidiary,
as the case may be:
(a) first, to the extent the Company or any Restricted Subsidiary, as
the case may be, elects (or is required by the terms of any
Indebtedness), to prepay, repay or purchase, repurchase, redeem,
retire, defease or otherwise acquire amounts payable under or in
respect of a Credit Facility or other Indebtedness of the Company
(other than any Disqualified Stock or Subordinated Obligations) or
Indebtedness of a Wholly-Owned Subsidiary (other than any
Disqualified Stock or Guarantor Subordinated Obligation) (in each
case other than Indebtedness owed to the Company or an Affiliate of
the Company) within 360 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash;
provided, however, that, in connection with any prepayment,
repayment, repurchase, redemption, retirement, defeasance or other
acquisition or purchase of Indebtedness pursuant to this clause
(a), the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid, purchased, repurchased, redeemed, retired,
defeased or otherwise acquired; and
(b) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (a), to the extent the
Company or such Restricted Subsidiary elects, to invest (or enter
into a binding agreement to invest within 90 days of the date of
such agreement) in Additional Assets within 360 days from the later
of the date of such Asset Disposition or the receipt of such Net
Available Cash;
provided that pending the final application of any such Net Available
Cash in accordance with clause (a) or clause (b) above, the Company and
its Restricted Subsidiaries may temporarily reduce Indebtedness or
otherwise invest such Net Available Cash in Cash Equivalents or any other
manner not prohibited by the Indenture.
Any Net Available Cash from Asset Dispositions that are not applied or
invested as provided in the preceding paragraph will be deemed to constitute
"Excess Proceeds". On the 361st day after an Asset Disposition, if the aggregate
amount of Excess Proceeds exceeds $5.0 million, a triggering event shall be
deemed to have occurred, which will trigger the obligation of the Company to
make an offer ("Asset Disposition Offer") to all holders of Exchange Notes and
to the extent required by the terms of other Pari Passu Indebtedness, to all
holders of other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Pari Passu Indebtedness
with the proceeds from any Asset Disposition ("Pari Passu Notes"), to purchase
the maximum principal amount of Exchange Notes and any such Pari Passu Notes to
which the Asset Disposition Offer applies that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount of the Exchange Notes and Pari Passu Notes plus accrued and
unpaid interest to the date of purchase, in accordance with the procedures set
forth in the Indenture or the agreements governing the Pari Passu
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Notes, as applicable, in each case in integral multiples of $1,000. To the
extent that the aggregate amount of Exchange Notes and Pari Passu Notes so
validly tendered and not properly withdrawn pursuant to an Asset Disposition
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of Exchange Notes surrendered by holders thereof and
other Pari Passu Notes surrendered by holders or lenders, collectively, exceeds
the amount of Excess Proceeds, the Trustee shall select the Exchange Notes and
Pari Passu Notes to be purchased on a pro rata basis on the basis of the
aggregate principal amount of tendered Exchange Notes and Pari Passu Notes. Upon
completion of such Asset Disposition Offer, the amount of Excess Proceeds shall
be reset at zero.
The Asset Disposition Offer will remain open for a period of 20 Business
Days following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later than
five Business Days after the termination of the Asset Disposition Offer Period
(the "Asset Disposition Purchase Date"), the Company will purchase the principal
amount of Exchange Notes and Pari Passu Notes required to be purchased pursuant
to this covenant (the "Asset Disposition Offer Amount") or, if less than the
Asset Disposition Offer Amount has been so validly tendered, all Exchange Notes
and Pari Passu Notes validly tendered in response to the Asset Disposition
Offer.
If the Asset Disposition Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name an Exchange Note is registered
at the close of business on such record date, and no additional interest will be
payable to holders who tender Exchange Notes pursuant to the Asset Disposition
Offer.
On or before the Asset Disposition Purchase Date, the Company will, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Disposition Offer Amount of Exchange Notes and Pari Passu Notes or
portions of Exchange Notes and Pari Passu Notes so validly tendered and not
properly withdrawn pursuant to the Asset Disposition Offer, or if less than the
Asset Disposition Offer Amount has been validly tendered and not properly
withdrawn, all Exchange Notes and Pari Passu Notes so validly tendered and not
properly withdrawn, in each case in integral multiples of $1,000. The Company
will deliver to the Trustee an Officers' Certificate stating that such Exchange
Notes or portions thereof were accepted for payment by the Company in accordance
with the terms of this covenant and, in addition, the Company will deliver all
certificates and notes required, if any, by the agreements governing the Pari
Passu Notes. The Company or the Paying Agent, as the case may be, will promptly
(but in any case not later than five Business Days after termination of the
Asset Disposition Offer Period) mail or deliver to each tendering holder of
Exchange Notes or holder or lender of Pari Passu Notes, as the case may be, an
amount equal to the purchase price of the Exchange Notes or Pari Passu Notes so
validly tendered and not properly withdrawn by such holder or lender, as the
case may be, and accepted by the Company for purchase, and the Company will
promptly issue a new Exchange Note, and the Trustee, upon delivery of an
Officers' Certificate from the Company, will authenticate and mail or deliver
such new Exchange Note to such holder, in a principal amount equal to any
unpurchased portion of the Exchange Note surrendered; provided that each such
new Exchange Note will be in a principal amount of $1,000 or an integral
multiple of $1,000. In addition, the Company will take any and all other actions
required by the agreements governing the Pari Passu Notes. Any Exchange Note not
so accepted will be promptly mailed or delivered by the Company to the holder
thereof. The Company will publicly announce the results of the Asset Disposition
Offer on the Asset Disposition Purchase Date.
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness (other than
Subordinated Obligations or Disqualified Stock) of the Company or
Indebtedness of a Wholly-Owned Subsidiary (other than Subordinated
Obligations of GUSAP Partners, Guarantor Subordinated Obligations or
Disqualified Stock of any Wholly-Owned Subsidiary that is a Subsidiary
Guarantor) and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition (in which case the Company will, without
further action, be deemed to have applied such deemed cash to
Indebtedness in accordance with clause (a) above); and
(2) securities, notes or other obligations received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted
by the Company or such Restricted Subsidiary into cash.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Notes pursuant to
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the Asset Disposition Offer. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Indenture by virtue of any
conflict.
LIMITATION ON AFFILIATE TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any transaction
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company (an "Affiliate
Transaction") unless:
(1) the terms of such Affiliate Transaction are no less favorable, taken
as a whole, to the Company or such Restricted Subsidiary, as the case
may be, than those that could be obtained in a comparable transaction
at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate
consideration in excess of $5.0 million, the terms of such transaction
have been approved by a majority of the members of the Board of
Directors of the Company and by a majority of the members of such
Board having no personal stake in such transaction, if any (and such
majority or majorities, as the case may be, determines that such
Affiliate Transaction satisfies the criteria in clause (1) above); and
(3) in the event such Affiliate Transaction involves an aggregate
consideration in excess of $10.0 million, the Company has received a
written opinion from an independent investment banking, accounting or
appraisal firm of nationally recognized standing that such Affiliate
Transaction is not materially less favorable than those that might
reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) any Restricted Payment permitted to be made pursuant to the covenant
described under "Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements and other compensation arrangements, options
to purchase Capital Stock of the Company, restricted stock plans,
long-term incentive plans, stock appreciation rights plans,
participation plans or similar employee benefits plans and/or
indemnity provided on behalf of directors, officers and employees
approved by the Board of Directors;
(3) loans or advances to employees or officers in the ordinary course of
business of the Company or any of its Restricted Subsidiaries but in
any event not to exceed $2.0 million in the aggregate outstanding at
any one time with respect to all loans or advances made since the
Issue Date;
(4) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries;
(5) Guarantees issued by the Company or a Restricted Subsidiary for the
benefit of the Company or a Restricted Subsidiary, as the case may be,
in accordance with "Certain covenants -- Limitations on indebtedness";
(6) the payment of reasonable and customary compensation and fees paid to,
and indemnity provided on behalf of, directors, officers or employees
of the Company or any Restricted Subsidiary providing services to the
Company or any Restricted Subsidiary; and
(7) the performance of obligations of the Company or any of its Restricted
Subsidiaries under the terms of any agreement to which the Company or
any of its Restricted Subsidiaries is a party as of or on the Issue
Date and identified on a schedule to the Indenture on the Issue Date,
as these agreements may be amended, modified, supplemented, extended
or renewed from time to time; provided, however, that any future
amendment, modification, supplement, extension or renewal entered into
after the Issue Date will be permitted to the extent that its terms
are not more disadvantageous to the holders of the Exchange Notes than
the terms of the agreements in effect on the Issue Date.
Notwithstanding the foregoing, the Company shall not be required to comply
with clause (3) of the first paragraph of this "Limitation on Affiliate
Transactions" covenant with respect to (i) any Indebtedness of the Company or
any Restricted Subsidiary to Gerdau S.A. or any of its Subsidiaries Incurred in
accordance with clauses (12) or (13) of the second paragraph of "Certain
Covenants -- Limitation on Indebtedness" and (ii) any
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commercial supply arrangements between Gerdau S.A. and/or any of its
Subsidiaries, on the one hand, and the Company and/or any Restricted Subsidiary,
on the other hand.
LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
transfer, convey, sell, lease or otherwise dispose of any Voting Stock of any
Restricted Subsidiary or to issue any of the Voting Stock of a Restricted
Subsidiary (other than, if necessary, shares of its Voting Stock constituting
directors' qualifying shares) to any Person except:
(1) to the Company or a Wholly-Owned Subsidiary; or
(2) in compliance with the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock" and immediately after giving
effect to such issuance or sale, such Restricted Subsidiary would
continue to be a Restricted Subsidiary.
Notwithstanding the preceding paragraph, the Company or any Restricted
Subsidiary may sell all the Voting Stock of a Restricted Subsidiary as long as
the Company complies with the terms of the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock".
SEC REPORTS
Notwithstanding that the Issuers may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted
by the Exchange Act, the Issuers will file with the SEC, and make available to
the Trustee and the registered holders of the Exchange Notes, the annual reports
and the information, documents and other reports (or copies of such portions of
any of the foregoing as the SEC may by rules and regulations prescribe) that are
specified in Sections 13 and 15(d) of the Exchange Act within the time periods
specified therein. In the event that the Issuers are not permitted to file such
reports, documents and information with the SEC pursuant to the Exchange Act,
the Issuers will nevertheless make available such Exchange Act information to
the Trustee and the holders of the Exchange Notes as if the Issuers were subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act within
the time periods specified therein.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes to the financial
statements and in Management's Discussion and Analysis of Results of Operations
and Financial Condition, of the financial condition and results of operations of
the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing, in the event that the Company qualifies to
report under the U.S./Canadian multijurisdictional disclosure system, such
annual reports and such information, documents and other reports will be deemed
to refer to those reports required of a Canadian company eligible to use
Canadian continuous disclosure filings to satisfy its reporting requirements
under such system; provided further, however, that notwithstanding anything to
the contrary permitted by such U.S./Canadian multijurisdictional disclosure
system, now or in the future, the reports required of a Canadian company under
such system will be deemed to include (1) a reconciliation of such annual
reports and such information, documents and other reports to accounting
principles generally accepted in the United States, (2) a quarterly balance
sheet and (3) a quarterly or annual, as the case may be, management's discussion
and analysis of financial condition and results of operations substantially in
the form that would be required by a U.S. Person subject to such Sections.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation, organized and existing under the
federal laws of Canada, any province or territory thereof, the laws of
the United States of America, any State of the United States or the
District of Columbia and the Successor Company (if not the Company)
will expressly assume, by supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Exchange Notes and the Indenture;
135
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or
any Subsidiary of the Successor Company as a result of such
transaction as having been Incurred by the Successor Company or such
Subsidiary at the time of such transaction), no Default or Event of
Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00
of Indebtedness pursuant to the first paragraph of the "Limitation on
Indebtedness" covenant;
(4) each Subsidiary Guarantor (unless it is the other party to the
transactions above, in which case clause (1) shall apply) shall have
by supplemental indenture confirmed that its Subsidiary Guarantee
shall apply to the Successor Company's obligations in respect of the
Indenture and the Exchange Notes and its obligations under the
Registration Rights Agreement shall continue to be in effect; and
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all of its assets, the predecessor
Company will not be released from the obligation to pay the principal of and
interest on the Exchange Notes.
Although there is a limited body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary may
amalgamate, consolidate or merge with, or liquidate into or transfer all or part
of its properties and assets to the Company or a Wholly-Owned Subsidiary and (y)
the Company may amalgamate, consolidate or merge with or liquidate into an
Affiliate incorporated for the purpose of reincorporating the Company in another
jurisdiction so long as the amount of Indebtedness of the Company and its
Restricted Subsidiaries is not increased thereby; provided that, in the case of
the foregoing clause (x), the Company will not be required to comply with the
preceding clause (5).
In addition, the Company will not permit any Subsidiary Guarantor to
consolidate with or merge with or into any Person (other than the Company or
another Subsidiary Guarantor), and will not convey, transfer or lease all or
substantially all of the assets of any Subsidiary Guarantor (other than to the
Company or another Subsidiary Guarantor), unless:
(1) (a) the resulting, surviving or transferee Person will be a
corporation, partnership, trust or limited liability company organized
or formed and existing under the laws of the United States of America,
any State of the United States or the District of Columbia, Canada or
any province or territory of Canada and such Person (if not the
Company or such Subsidiary Guarantor) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, all the
obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee; (b) immediately after giving effect to such transaction
(and treating any Indebtedness that becomes an obligation of the
resulting, surviving or transferee Person or any Restricted Subsidiary
as a result of such transaction as having been Incurred by such Person
or such Restricted Subsidiary at the time of such transaction), no
Default of Event of Default shall have occurred and be continuing; and
(c) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture; or
(2) the transaction is made in compliance with the covenant described
under "-- Limitation on Sales of Assets and Subsidiary Stock".
136
Furthermore, the Company will not permit GUSAP Partners to consolidate with
or merge with or into any Person (other than the Company or a Wholly-Owned
Subsidiary), and will not convey, transfer or lease all or substantially all of
the assets of GUSAP Partners (other than to the Company or a Wholly-Owned
Subsidiary), unless (a) the resulting, surviving or transferee Person will be a
corporation, partnership, trust or limited liability company organized or formed
and existing under the laws of the United States of America, any State of the
United States or the District of Columbia, Canada or any province or territory
of Canada and such Person (if not the Company or GUSAP Partners) will expressly
assume, by supplemental indenture, executed and delivered to the Trustee, all
the obligations of GUSAP Partners under the Exchange Notes and the Indenture;
(b) after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been Incurred by such Person at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; and (c) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
FUTURE SUBSIDIARY GUARANTORS
After the Issue Date, the Company will cause each Restricted Subsidiary
that is not at that time a Subsidiary Guarantor and that is required to
Guarantee either any Indebtedness of either of the Issuers or Indebtedness under
a Credit Facility to execute and deliver to the Trustee a Subsidiary Guarantee
pursuant to which such Restricted Subsidiary will unconditionally Guarantee, on
a joint and several basis, the full and prompt payment of the principal of,
premium, if any, and interest on the Exchange Notes on a senior basis and all
other obligations under the Indenture.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Restricted Subsidiaries will, directly
or indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any holder of any Exchange Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Exchange Notes unless such consideration is offered to
be paid or is paid to all holders of the Exchange Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or amendment.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) default in any payment of interest or additional interest (if any) (as
required by the Registration Rights Agreement) on any Exchange Note
when due, which continues for 30 days;
(2) default in the payment of principal of or premium, if any, on any
Exchange Note when due at its Stated Maturity, upon required
repurchase or redemption (including after any exercise of an optional
redemption right) or upon declaration or otherwise;
(3) failure by the Issuers or any Subsidiary Guarantor to comply with its
obligations under "Certain Covenants -- Merger and Consolidation";
(4) failure by the Issuers to comply for 30 days after written notice with
any of its obligations under the covenants described under "Change of
Control" above or under the covenants described under "Certain
Covenants" above (in each case, other than a failure to purchase
Exchange Notes which will constitute an Event of Default under clause
(2) above and other than a failure to comply with "Certain Covenants
-- Merger and Consolidation" which is covered by clause (3));
(5) failure by the Issuers to comply for 60 days after written notice with
its other agreements contained in the Indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries or is recourse to the
Company or its Restricted Subsidiaries, by contract or operation of
137
law), other than Indebtedness owed to the Company or a Restricted
Subsidiary, whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default:
(a) is caused by a failure to pay any Indebtedness at maturity prior to
the expiration of the grace period provided in such Indebtedness
("payment default"); or
(b) results in the acceleration of such Indebtedness prior to its final
maturity (the "cross acceleration provision");
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a payment default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(7) certain events of bankruptcy, insolvency or reorganization of either
of the Issuers or a Significant Subsidiary or group of Restricted
Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries), would constitute a Significant Subsidiary (the
"bankruptcy provisions");
(8) failure by the Company or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries), would constitute a Significant Subsidiary to pay final
judgments aggregating in excess of $10.0 million (net of any amounts
that a reputable and creditworthy insurance company has acknowledged
liability for in writing), which judgments are not paid, discharged,
waived or stayed for a period of 60 days (the "judgment default
provision"); or
(9) any Subsidiary Guarantee ceases to be in full force and effect (except
as contemplated by the terms of the Indenture) or is declared null and
void in a judicial proceeding or any Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or its Subsidiary
Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Exchange Notes notify the Issuers of the
default and the Issuers do not cure such default within the time specified in
clauses (4) and (5) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(7) above) occurs and is continuing, the Trustee by notice to the Issuers, or
the holders of at least 25% in principal amount of the outstanding Exchange
Notes by notice to the Issuers and the Trustee, may, and the Trustee at the
request of such holders shall, declare the principal of, premium, if any, and
accrued and unpaid interest, if any, on all the Exchange Notes to be due and
payable. Upon such a declaration, such principal, premium and accrued and unpaid
interest will be due and payable immediately. In the event of a declaration of
acceleration of the Exchange Notes because an Event of Default described in
clause (6) under "Events of Default" has occurred and is continuing, the
declaration of acceleration of the Exchange Notes shall be automatically
annulled if the event of default or payment default triggering such Event of
Default pursuant to clause (6) shall be remedied or cured by the Company or a
Restricted Subsidiary or waived by the holders of the relevant Indebtedness
within 20 days after the declaration of acceleration with respect thereto and if
(1) the annulment of the acceleration of the Exchange Notes would not conflict
with any judgment or decree of a court of competent jurisdiction and (2) all
existing Events of Default, except nonpayment of principal, premium or interest
on the Exchange Notes that became due solely because of the acceleration of the
Exchange Notes, have been cured or waived. If an Event of Default described in
clause (7) above occurs and is continuing, the principal of, premium, if any,
and accrued and unpaid interest on all the Exchange Notes will become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holders. The holders of a majority in principal amount of the
outstanding Exchange Notes may waive all past defaults (except with respect to
nonpayment of principal, premium or interest) and rescind any such acceleration
with respect to the Exchange Notes and its consequences if (1) rescission would
not conflict with any judgment or decree of a court of competent jurisdiction
and (2) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Exchange Notes that have
become due solely by such declaration of acceleration, have been cured or
waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity
138
or security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium, if any, or interest when due, no
holder may pursue any remedy with respect to the Indenture or the Exchange Notes
unless:
(1) such holder has previously given the Trustee written notice that an
Event of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
Exchange Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt of the written request and the offer of security or
indemnity; and
(5) the holders of a majority in principal amount of the outstanding
Exchange Notes have not given the Trustee a direction that, in the
opinion of the Trustee, is inconsistent with such request within such
60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Exchange Notes are given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. The
Indenture provides that in the event an Event of Default has occurred and is
continuing, the Trustee will be required in the exercise of its powers to use
the degree of care that a prudent person would use in the conduct of its own
affairs. The Trustee, however, may refuse to follow any direction that conflicts
with law or the Indenture or that the Trustee determines is unduly prejudicial
to the rights of any other holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs or 30 days after it is actually known to a trust
officer or written notice of it is received by the Trustee. Except in the case
of a Default in the payment of principal of, premium, if any, or interest on any
Note, the Trustee may withhold notice if and so long as a committee of trust
officers of the Trustee in good faith determines that withholding notice is in
the interests of the holders. In addition, the Issuers are required to deliver
to the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the executive officers signing such certificate know of any
Default that occurred during the previous year. The Issuers also are required to
deliver to the Trustee, within 10 days after the occurrence thereof, written
notice of any events which would constitute certain Defaults, their status and
what action the Issuers are taking or proposing to take in respect thereof.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuers with
the intention of avoiding payment of the premium that the Issuers would have had
to pay if the Issuers then had elected to redeem the Exchange Notes pursuant to
the optional redemption provisions of the Indenture or were required to
repurchase the Exchange Notes, an equivalent premium shall also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the Exchange Notes. If an Event of Default occurs prior to July 15, 2007 by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Issuers with the intention of avoiding the prohibition on redemption of
the Exchange Notes prior to July 15, 2007, the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Exchange Notes.
WITHHOLDING TAXES
CANADIAN WITHHOLDING TAXES
All payments made by or on behalf of the Issuers under or with respect to
the Exchange Notes, or payments made by or on behalf of the Subsidiary
Guarantors in respect of the Subsidiary Guarantees, must be made free and clear
of, and without withholding or deduction for, or on account of, any present or
future tax, duty, levy, impost, assessment or other governmental charge imposed
by Canada, any province or municipality or local taxing authority (including
penalties, interest and other liabilities related thereto) (hereinafter
"Canadian Taxes"), unless an Issuer, or any Subsidiary Guarantor, as the case
may be, is required to withhold or deduct Canadian Taxes by law or by the
interpretation or administration thereof by the relevant government authority or
agency. If an Issuer, or a Subsidiary
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Guarantor, as the case may be, is so required to withhold or deduct any amount
for or on account of Canadian Taxes from any payment made under or with respect
to the Exchange Notes, the Issuer, or the Subsidiary Guarantor, as the case may
be, will be required to pay such additional amounts ("Canadian Additional
Amounts") as may be necessary so that the net amount received by each holder
(including Canadian Additional Amounts) after such withholding or deduction will
not be less than the amount the holder would have received if such Canadian
Taxes had not been withheld or deducted; provided, however, that no Canadian
Additional Amounts will be payable with respect to a payment made to a holder
(an "Excluded Holder") in respect of a beneficial owner
(1) with which the Issuers and the Subsidiary Guarantors do not deal at
arm's length (for the purposes of the Income Tax Act (Canada)) at the
time of the making of such payment or
(2) which is subject to such Canadian Taxes by reason of its being
connected with the jurisdiction imposing such taxes other than by the
mere holding of Exchange Notes or the receipt of payments thereunder.
The Issuers, or the Subsidiary Guarantors, as the case may be, will also
make such withholding or deduction and remit the full amount deducted or
withheld to the relevant authority as and when required in accordance with
applicable law. The Issuers will furnish to the holders, within 30 days after
the date the payment of any Canadian Taxes is due pursuant to applicable law,
certified copies of tax receipts evidencing such payment by the Issuers, or the
Subsidiary Guarantors, as the case may be. The Issuers, or the Subsidiary
Guarantors, as the case may be, will upon written request of each holder (other
than an Excluded Holder), reimburse each such holder for the amount of
(1) any Canadian Taxes so levied or imposed and paid by such holder as a
result of payments made under or with respect to the Exchange Notes
and
(2) any Canadian Taxes so levied or imposed and paid by such holder with
respect to any reimbursement under the foregoing clause (1) this
clause (2) or so that the net amount received by such holder after
such reimbursement will not be less than the net amount the holder
would have received if Canadian Taxes on such reimbursement had not
been imposed.
Upon request, the Issuers will provide the Trustee with official receipts
or other documentation satisfactory to the Trustee evidencing the payment of the
Canadian Taxes with respect to which Canadian Additional Amounts are paid.
UNITED STATES WITHHOLDING TAXES
All payments of principal, premium, if any, and interest with respect to
the Exchange Notes will be made without withholding or deduction at source for,
or on account of, any present or future taxes, fees, duties, assessments or
governmental charges of whatever nature imposed or levied by the United States
or any political subdivision or taxing authority thereof or therein, unless such
withholding or deduction is required by (i) the laws (or any regulations or
rulings promulgated thereunder) of the United States or any political
subdivision or taxing authority thereof or therein or (ii) an official position
regarding the application, administration, interpretation or enforcement of any
such laws, regulations or rulings (including, without limitation, a holding by a
court of competent jurisdiction or by a taxing authority in the United States or
any political subdivision thereof). If a withholding or deduction at source is
required, the Issuer or Subsidiary Guarantors, as the case may be, will, subject
to certain limitations and exceptions (set forth below), pay to a holder of
Exchange Notes on behalf of an owner of a beneficial interest therein (an
"Owner") who is a United States Alien (as defined herein) such additional
amounts ("U.S. Additional Amounts") as may be necessary so that every net
payment of principal, premium, if any, or interest with respect to such Exchange
Notes after such withholding or deduction, will not be less than the amount
provided for in the Exchange Notes. However, neither the Issuers nor the
Subsidiary Guarantors shall be required to make any payment of U.S. Additional
Amounts for or on account of:
(a) any tax, fee, duty, assessment or other governmental charge which
would not have been imposed but for (i) the existence of any present
or former connection between such Owner (or between a fiduciary,
settlor, beneficiary, member or shareholder of such Owner, if such
Owner is an estate, trust, partnership or corporation) and the United
States, including, without limitation, such Owner (or such fiduciary,
settlor, beneficiary, member or shareholder) being or having been a
citizen or resident thereof or being or having been present or engaged
in trade or business therein or having or having had a permanent
establishment therein, or (ii) the presentation of an Exchange Note
for payment on a date more than
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15 days after the date on which such payment became due and payable or
the date on which payment thereof is duly provided for, whichever
occurs later;
(b) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, assessment or other governmental charge;
(c) any tax, fee, duty, assessment or other governmental charge imposed by
reason of such Owner's past or present status as a personal holding
company, foreign personal holding company or controlled foreign
corporation with respect to the United States or as a corporation
which accumulates earnings to avoid United States federal income tax;
(d) any tax, fee, duty, assessment or other governmental charge which is
payable otherwise than by withholding from payments of principal or
interest with respect to the Exchange Notes;
(e) any tax, fee, duty, assessment or other governmental charge imposed on
interest received by anyone who owns (actually or constructively) 10%
or more of the total combined voting power of all classes of stock of
either Issuer;
(f) any tax, fee, duty, assessment or other governmental charge imposed on
interest received by a bank on an extension of credit made pursuant to
a loan agreement entered into in the ordinary course of its trade or
business;
(g) any tax, fee, duty, assessment or other governmental charge which
would not have been imposed but for the failure to comply with
certification, information or other reporting requirements concerning
the nationality, residence, identity or connection with the United
States of the Owner of such Exchange Note, if such compliance is
required by statute or by regulation of the United States Treasury
Department as a precondition to relief or exemption from such tax,
assessment or other governmental charge; or
(h) any combination of items (a), (b), (c), (d), (e), (f) and (g); nor
shall U.S. Additional Amounts be paid to any holder of a Note on
behalf of any Owner who is a fiduciary or partnership or other than
the sole Owner to the extent a beneficiary or settlor with respect to
such fiduciary or a member of such partnership or Owner would not have
been entitled to payment of the U.S. Additional Amounts had such
beneficiary, settlor, member or Owner been the sole Owner of the
Exchange Note.
The term "United States Alien" means any corporation, individual, fiduciary
or partnership that for United States federal income tax purposes is a foreign
corporation, nonresident alien individual, nonresident alien fiduciary of a
foreign estate or trust, or foreign partnership one or more members of which is
a foreign corporation, nonresident alien individual or nonresident alien
fiduciary of a foreign estate or trust.
Whenever there is mentioned herein or in the Indenture, in any context, the
payment of the principal of, or premium, if any, or interest on or in respect of
an Exchange Note, or any other amount payable on or in respect of an Exchange
Note, such mention shall be deemed to include mention of the payment of U.S.
Additional Amounts and Canadian Additional Amounts as described in
"--Withholding Taxes" to the extent that, in such context, U.S. Additional
Amounts or Canadian Additional Amounts are, were or would be payable in respect
thereof pursuant to the provisions of such Exchange Note and express mention of
the payment of U.S. Additional Amounts or Canadian Additional Amounts (if
applicable) in any provisions hereof shall not be construed as excluding U.S.
Additional Amounts or Canadian Additional Amounts in those provisions hereof
where such express mention is not made.
The Issuers, or the Subsidiary Guarantors, as the case may be, will pay any
present or future stamp, court or documentary taxes or any other excise or
property taxes, charges or similar levies that arise in any jurisdiction from
the execution, delivery, enforcement or registration of the Exchange Notes, the
Indenture or any other document or instrument in relation thereof, or the
receipt of any payments with respect to the Exchange Notes, excluding such
taxes, charges or similar levies imposed by any jurisdiction outside of Canada,
the jurisdiction of incorporation of any successor of the Company or any
Canadian Subsidiary Guarantor or any jurisdiction in which a paying agent is
located, and will agree to indemnify the holders for any such taxes paid by such
holders.
The foregoing obligations will survive any termination, defeasance or
discharge of the Indenture and will apply mutatis mutandis to any jurisdiction
in which any successor Person to the Company or any Issuer is organized or any
political subdivision or taxing authority or agency thereof or therein. For a
discussion of withholding taxes
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applicable to payments under or with respect to the Exchange Notes, see "Certain
United States and Canadian Tax Considerations".
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture and the Exchange Notes may be
amended or supplemented by the Issuers, the Subsidiary Guarantors and the
Trustee with the consent of the holders of a majority in aggregate principal
amount of the Exchange Notes then outstanding (including without limitation,
consents obtained in connection with a purchase of or tender offer for Exchange
Notes) and, subject to certain exceptions, any past default or compliance with
any provisions may be waived with the consent of the holders of a majority in
principal amount of the Exchange Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of or tender offer
for Exchange Notes). However, without the consent of each holder of an
outstanding Exchange Note affected, no amendment may, among other things:
(1) reduce the principal amount of Exchange Notes outstanding whose
holders must consent to an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any Exchange Note;
(3) reduce the principal of or extend the Stated Maturity of any Exchange
Note;
(4) reduce the premium payable upon the redemption or repurchase of any
Note or change the time at which any Note may be redeemed or
repurchased as described above under "Optional Redemption" or "Change
of Control", whether through an amendment or waiver of provisions in
the covenants, definitions or otherwise;
(5) make any Note payable in money other than that stated in the Exchange
Note;
(6) impair the right of any holder to receive payment of, principal of and
interest on and premium, if any, on such holder's Exchange Notes on or
after the due dates therefore or to institute suit for the enforcement
of any payment on or with respect to such holder's Exchange Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions; or
(8) modify the Subsidiary Guarantees in any manner adverse to the holders
of the Exchange Notes.
Notwithstanding the foregoing, without the consent of any holder (provided
that such amendment does not adversely affect the tax treatment of the holders),
the Issuers, the Subsidiary Guarantors and the Trustee may amend the Indenture
and the Exchange Notes to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation of the
obligations of the Company, or a successor Person of the obligations
of GUSAP Partners or any Subsidiary Guarantor, as applicable, under
the Indenture;
(3) provide for uncertificated Exchange Notes in addition to or in place
of certificated Exchange Notes (provided that the uncertificated
Exchange Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated
Exchange Notes are described in Section 163(f)(2)(B) of the Code);
(4) add Subsidiary Guarantees with respect to the Exchange Notes or
release a Subsidiary Guarantor upon its designation as an Unrestricted
Subsidiary or otherwise in accordance with the Indenture;
(5) secure the Exchange Notes;
(6) add to the covenants of the Issuers for the benefit of the holders or
surrender any right or power conferred upon the Issuers;
(7) make any change that does not materially adversely affect the rights
of any holder of Exchange Notes;
(8) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act; or
(9) provide for the issuance of exchange securities which shall have terms
substantially identical in all respects to the Exchange Notes and
evidence the same Indebtedness as the Exchange Notes (except that
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the transfer restrictions contained in the Exchange Notes shall be
modified or eliminated as appropriate) and which shall be treated,
together with any outstanding Exchange Notes, as a single class of
securities.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. A consent to any amendment or
waiver under the Indenture by any holder of Exchange Notes given in connection
with a tender of such holder's Exchange Notes will not be rendered invalid by
such tender. After an amendment under the Indenture becomes effective, the
Issuers are required to mail to the holders a notice briefly describing such
amendment. However, the failure to give such notice to all the holders entitled
to receive such notice, or any defect in the notice will not impair or affect
the validity of the amendment.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the
Exchange Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust, to replace
mutilated, destroyed, lost or stolen Exchange Notes and to maintain a registrar
and paying agent in respect of the Exchange Notes. If the Issuers exercise their
legal defeasance option, the Subsidiary Guarantees in effect at such time will
terminate.
The Issuers at any time may terminate the obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"), the
operation of the cross-default upon a payment default, cross acceleration
provisions, the bankruptcy provisions with respect to Significant Subsidiaries,
the judgment default provision and the Subsidiary Guarantee provision described
under "Events of Default" above and the limitations contained in clause (3)
under "Certain Covenants -- Merger and Consolidation" above ("covenant
defeasance").
The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the Exchange Notes may not be
accelerated because of an Event of Default with respect to the Exchange Notes.
If the Issuers exercise their covenant defeasance option, payment of the
Exchange Notes may not be accelerated because of an Event of Default specified
in clause (4), (5), (6), (7) (with respect only to Significant Subsidiaries),
(8) or (9) under "Events of Default" above or because of the failure of the
Company to comply with clause (3) under "Certain Covenants -- Merger and
Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Exchange Notes to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivery to the Trustee
of (1) an Opinion of Counsel (subject to customary exceptions and exclusions) to
the effect that holders of the Exchange Notes will not recognize income, gain or
loss for U.S. Federal income tax purposes as a result of such deposit and
defeasance and will be subject to U.S. Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable U.S. or Canadian income tax law) and (2)
an Opinion of Counsel in the jurisdictions of organization of each of the
Issuers (if other than the United States) to the effect that holders of the
Exchange Notes will not recognize income, gain or loss for income tax purposes
of such jurisdiction as a result of such deposit and defeasance and will be
subject to income tax of such jurisdiction on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Issuers,
as such, shall have any liability for any obligations of the Issuers under the
Exchange Notes, the Indenture or the Subsidiary Guarantees or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Exchange Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
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CONCERNING THE TRUSTEE
SouthTrust Bank is the Trustee under the Indenture and has been appointed
by the Issuers as Registrar and Paying Agent with regard to the Exchange Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein, contain limitations on the rights of
the Trustee thereunder should it become Issuers' creditor to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided that if it acquires any conflicting
interest it must eliminate such conflict, apply to the SEC for permission to
continue to act or resign.
GOVERNING LAW
The Indenture provides that it and the Exchange Notes will be governed by,
and construed in accordance with, the laws of the State of New York.
ENFORCEABILITY OF JUDGEMENTS
Since significant assets of the Company are located outside of the United
States, any judgement obtained in the United States against the Company,
including judgements with respect to the payment of principal or premium on the
Exchange Notes, may not be enforceable within the United States.
The Issuers have been informed by their Canadian counsel, Torys LLP, that
the laws of the Province of Ontario permit an action to be brought in a court of
competent jurisdiction in the Province of Ontario (a "Canadian Court") on any
final and conclusive judgment in personam of any federal or state court located
in the Borough of Manhattan in The City of New York ("New York Court") that is
not impeachable as void or voidable under the internal laws of the State of New
York for a sum certain if (i) the court rendering such judgment had jurisdiction
over the judgment debtor, as recognized by a Canadian Court (and submission by
the Company in the Indenture to the jurisdiction of the New York Court will be
sufficient for the purpose); (ii) such judgment was not obtained by fraud or in
a manner contrary to natural justice and the enforcement thereof would not be
inconsistent with public policy, as such term is understood under the laws of
the Province of Ontario; (iii) the enforcement of such judgment does not
constitute, directly or indirectly, the enforcement of foreign revenue,
expropriatory or penal laws; and (iv) the action to enforce such judgment is
commenced within the applicable limitation period. In the opinion of such
counsel, a Canadian Court would not avoid enforcement of judgments of New York
Court respecting the Indenture or the Exchange Notes on the basis of public
policy, as the term is understood under the laws of the Province of Ontario and
the federal laws of Canada applicable therein.
CONSENT TO JURISDICTION AND SERVICE
Each of the Subsidiary Guarantors have appointed Gerdau Ameristeel US Inc.
(located at 5100 West Lemon Street, Tampa, Florida, 33609) as their agent for
actions brought under United States Federal or state securities laws brought in
any United States Federal or state court located in the Borough of Manhattan in
the City of New York and will submit to such jurisdiction.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness (i) of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
(ii) assumed in connection with the acquisition of assets from a Person, in each
case whether or not Incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition. Acquired Indebtedness shall be deemed to have been
Incurred, with respect to clause (i) of the preceding sentence, on the date such
Person becomes a Restricted Subsidiary and, with respect to clause (ii) of the
preceding sentence, on the date of consummation of such acquisition of assets.
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"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by the Company or a Restricted Subsidiary in a Related
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary;
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; or
(4) capital expenditures, or commitments to make capital expenditures, by
the Company or its Restricted Subsidiaries;
provided, however, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control unless another Person (and any other Person
who directly or indirectly controls, is controlled by or is under direct or
indirect common control with such Person) has beneficial ownership of more than
50% of such Voting Stock.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease or sublease entered into in the ordinary course of business),
transfer, conveyance, issuance or other disposition, or a series of related
sales, leases, transfers, conveyances, issuances or dispositions that are part
of a common plan, of shares of Capital Stock of a Subsidiary (other than
directors' qualifying shares), property or other assets (each referred to for
the purposes of this definition as a "disposition") by the Company or any of its
Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary;
provided that in the case of a sale by a Restricted Subsidiary to
another Restricted Subsidiary, the Company directly or indirectly owns
an equal or greater percentage of the Common Stock of the transferee
than of the transferor;
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory in the ordinary course of business;
(4) a disposition of obsolete, retired or worn out equipment or equipment
that is no longer useful in the conduct of the business of the Company
and its Restricted Subsidiaries and that is disposed of in each case
in the ordinary course of business;
(5) transactions permitted under "Certain Covenants -- Merger and
Consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary to the Company
or to a Wholly-Owned Subsidiary;
(7) for purposes of "Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" only, the making of a Permitted Investment or a
disposition subject to "Certain Covenants -- Limitation on Restricted
Payments";
(8) dispositions of assets with an aggregate fair market value since the
Issue Date of less than $10.0 million;
(9) dispositions in connection with Permitted Liens;
(10) dispositions of receivables in connection with the compromise,
settlement or collection thereof in the ordinary course of business or
in bankruptcy or similar proceedings and dispositions of accounts
receivable, chattel paper, intangibles, documents, or other
instruments pursuant to bona fide factoring arrangements;
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(11) the licensing or sublicensing of intellectual property or other
general intangibles and licenses, leases or subleases of other
property in the ordinary course of business which do not materially
interfere with the business of the Company and its Restricted
Subsidiaries; and
(12) foreclosure on assets.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Exchange Notes, compounded semi-annually) of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or Incurred after the Issue Date, payable by the Company under or in
respect of the Senior Secured Credit Agreement and any related notes, collateral
documents, letters of credit and guarantees and any Interest Rate Agreement
entered into in connection with the Senior Secured Credit Agreement, including
principal, premium, if any, interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company at the rate specified therein whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means, as to any Person, the board of directors of
such Person (or if such Person is a partnership, the Board of Directors or other
governing body of the general partner of such partnership) or any duly
authorized committee thereof.
"Borrowing Base" means, as of the date of determination, an amount equal to
the sum, without duplication of (1) 85% of the net book value of the Company's
and its Restricted Subsidiaries' accounts receivable at such date and (2) 65% of
the net book value of the Company's and its Restricted Subsidiaries' inventories
at such date, until March 27, 2004, and thereafter the lesser of (A) 65% of the
net book value and (B) 85% of the appraised net recovery value of the Company's
and its Restricted Subsidiaries' inventories at such date. Net book value shall
be determined in accordance with GAAP and shall be that reflected on the most
recent available balance sheet (it being understood that the accounts receivable
and inventories of an acquired business may be included if such acquisition has
been completed on or prior to the date of determination).
"Business Day" means each day that is not a Saturday, Sunday or other day
on which banking institutions in New York, New York and Birmingham, Alabama are
authorized or required by law to close.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participation or other equivalents of or
interests in (however designated and whether voting or non-voting) equity of
such Person, including any Preferred Stock, but excluding any debt securities
convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease prior to the first date such lease may be
terminated or prepaid by the lessee without penalty.
"Cash Equivalents" means:
(1) U.S. dollars, Canadian dollars, euros or such other local currencies
held by the Company or any of its Subsidiaries from time to time in
the ordinary course;
(2) securities issued or directly and fully guaranteed or insured by the
United States Government or the Canadian Government or any agency or
instrumentality of the United States or Canada (provided that the full
faith and credit of the United States or Canada is pledged in support
thereof), having maturities of not more than one year from the date of
acquisition;
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(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of
not more than one year from the date of acquisition thereof issued by
any commercial bank the long-term debt of which is rated at the time
of acquisition thereof at least "A" or the equivalent thereof by
Standard & Poor's Ratings Services, or "A" or the equivalent thereof
by Moody's Investors Service, Inc., and having combined capital and
surplus in excess of $500 million;
(4) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified in
clause (3) above;
(5) commercial paper rated at the time of acquisition thereof at least
"A-2" or the equivalent thereof by Standard & Poor's Ratings Services
or "P-2" or the equivalent thereof by Moody's Investors Service, Inc.,
or carrying an equivalent rating by a nationally recognized rating
agency, if both of the two named rating agencies cease publishing
ratings of investments, and in any case maturing within one year after
the date of acquisition thereof; and
(6) interests in any investment company or money market fund which invests
95% or more of its assets in instruments of the type specified in
clauses (1) through (6) above.
"Change of Control" means:
(1) (A) any "person" or "group" of related persons (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more Permitted Holders, is or becomes the beneficial owner (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that for the
purpose of this clause such person or group shall be deemed to have
"beneficial ownership" of all shares that any such person or group has
the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than
35% of the total voting power of the Voting Stock of the Company (or
its successor by merger, consolidation or purchase of all or
substantially all of its assets) (for the purposes of this clause,
such person or group shall be deemed to beneficially own any Voting
Stock of the Company held by a parent entity, if such person or group
"beneficially owns" (as defined above), directly or indirectly, more
than 35% of the voting power of the Voting Stock of such parent
entity) and (B) the Permitted Holders "beneficially own" (as defined
in Rules 13d-3 and 13d-5 of the Exchange Act), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of the
Voting Stock of the Company (or its successor by merger, consolidation
or purchase of all or substantially all of its assets) than such other
person or group and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of the Company or such successor (for the
purposes of this clause, such other person or group shall be deemed to
beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person or group "beneficially owns"
directly or indirectly, more than 35% of the voting power of the
Voting Stock of such parent entity and the Permitted Holders
"beneficially own" directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
entity and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the
board of directors of such parent entity); or
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board
of Directors of the Company or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of
the directors of the Company then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the
Company then in office;
(3) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger, amalgamation or consolidation), in one or a series
of related transactions, of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole to any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) other than a Permitted Holder; or
(4) the adoption by the stockholders of the Company of a plan or proposal
for the liquidation or dissolution of the Company.
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"Code" means the U.S. Internal Revenue Code of 1986, as amended.
"Common Stock" means with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence (the "Four-Quarter Period") to (y) Consolidated
Interest Expense for such Four-Quarter Period, provided, however, that:
(1) if the Company or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such
Four-Quarter Period that remains outstanding on such date of
determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving pro forma effect to
such Indebtedness as if such Indebtedness had been Incurred on the
first day of such Four-Quarter Period (except that in making such
computation, the amount of Indebtedness under any revolving credit
facility outstanding on the date of such calculation will be deemed
to be (i) the average daily balance of such Indebtedness during
such Four-Quarter Period or such shorter period for which such
facility was outstanding or (ii) if such facility was created after
the end of such Four-Quarter Period, the average daily balance of
such Indebtedness during the period from the date of creation of
such facility to the date of such calculation) and the discharge of
any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such Four-Quarter
Period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the Four-Quarter Period that is
no longer outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio involves a discharge of Indebtedness (in each case
other than Indebtedness Incurred under any revolving credit
facility unless such Indebtedness has been permanently repaid and
the related commitment terminated), Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated
after giving pro forma effect to such discharge of such
Indebtedness, including with the proceeds of such new Indebtedness,
as if such discharge had occurred on the first day of such Four-
Quarter Period;
(2) if since the beginning of such Four-Quarter Period the Company or any
Restricted Subsidiary will have made any Asset Disposition or disposed
of any company, division, operating unit, segment, business, group of
related assets or line of business or if the transaction giving rise
to the need to calculate the Consolidated Coverage Ratio is such an
Asset Disposition:
(a) the Consolidated EBITDA for such Four-Quarter Period will be
reduced by an amount equal to the Consolidated EBITDA (if positive)
directly attributable to the assets which are the subject of such
Asset Disposition for such period or increased by an amount equal
to the Consolidated EBITDA (if negative) directly attributable
thereto for such Four-Quarter Period; and
(b) Consolidated Interest Expense for such Four-Quarter Period will be
reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition
for such Four-Quarter Period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale);
(3) if since the beginning of such Four-Quarter Period the Company or any
Restricted Subsidiary (by merger or otherwise) will have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary or is merged, consolidated or amalgamated with
or into the Company or
148
a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of a company, division, operating unit, segment,
business, group of related assets or line of business, Consolidated
EBITDA and Consolidated Interest Expense for such Four-Quarter Period
will be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such Four-Quarter Period; and
(4) if since the beginning of such Four-Quarter Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Company or any Restricted Subsidiary since the beginning of such
Four-Quarter Period) will have Incurred any Indebtedness or discharged
any Indebtedness, made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant
to clause (2) or (3) above if made by the Company or a Restricted
Subsidiary during such Four-Quarter Period, Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto as if such Asset Disposition or
Investment or acquisition of assets occurred on the first day of such
Four-Quarter Period.
For purposes of this definition, whenever pro forma effect is to be given
to any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of the
Company (including pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act). If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness will be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
Four-Quarter Period (taking into account any Interest Rate Agreement applicable
to such Indebtedness if such Interest Rate Agreement has a remaining term in
excess of 12 months). If any Indebtedness that is being given pro forma effect
bears an interest rate at the option of the Company, the interest rate shall be
calculated by applying such optional rate chosen by the Company.
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated depreciation expense;
(4) consolidated amortization expense or impairment charges recorded in
connection with the application of Financial Accounting Standard No.
142 "Goodwill and Other Intangibles";
(5) other non-cash charges reducing Consolidated Net Income (excluding any
such non-cash charge to the extent it represents an accrual of or
reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period not included in
the calculation); and
(6) any cash restructuring charges not to exceed $5.0 million from the
Issue Date, including any one-time costs incurred in connection with
acquisitions or restructurings consummated after the Issue Date (which
cash charges shall only be included in calculations of Consolidated
EBITDA for the quarter such charge is incurred and the succeeding
three fiscal quarters).
Notwithstanding the preceding sentence, clauses (2) through (6) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated Net
Income to compute Consolidated EBITDA of such Person only to the extent (and in
the same proportion) that the net income (loss) of such Restricted Subsidiary
was included in calculating the Consolidated Net Income of such Person and, to
the extent the amounts set forth in clauses (2) through (6) are in excess of
those necessary to offset a net loss of such Restricted Subsidiary or if such
Restricted Subsidiary has net income for such period included in Consolidated
Net Income, only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted
149
Subsidiaries (to the extent such income or profits were included in computing
Consolidated Net Income for such period), regardless of whether such taxes or
payments are required to be remitted to any governmental authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, whether
paid or accrued, plus, to the extent not included in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and the
interest portion of rent expense associated with Attributable
Indebtedness in respect of the relevant lease giving rise thereto,
determined as if such lease were a capitalized lease in accordance
with GAAP and the interest component of any deferred payment
obligations;
(2) amortization or write-offs of debt discount and debt issuance cost
(provided that any amortization of bond premium will be credited to
reduce Consolidated Interest Expense unless, pursuant to GAAP, such
amortization of bond premium has otherwise reduced Consolidated
Interest Expense);
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(5) the interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries;
(6) net costs associated with Hedging Obligations (including amortization
of fees) provided, however, that if Hedging Obligations result in net
benefits rather than net costs, such benefits shall be credited to
reduce Consolidated Interest Expense unless, pursuant to GAAP, such
net benefits are otherwise reflected in Consolidated Net Income;
(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(8) the product of (a) all dividends paid or payable, in cash, Cash
Equivalents or Indebtedness or accrued during such period on any
series of Disqualified Stock of such Person or on Preferred Stock of
its Restricted Subsidiaries payable to a party other than the Company
or a Wholly-Owned Subsidiary, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then
current combined federal, state, provincial and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP;
(9) Receivables Fees; and
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust.
For the purpose of calculating Consolidated Interest Expense with respect
to the fiscal quarter in which the Issue Date occurs and the first fiscal
quarter after the Issue Date, any one-time expenses (including non-cash charges)
not to exceed $8.0 million relating to the termination of any Interest Rate
Agreement or the write-off of deferred financing costs in connection with the
Transactions shall be excluded, provided that such amounts will not be included
in the calculation of Consolidated EBITDA. Additionally, for the purpose of
calculating the Consolidated Coverage Ratio in connection with the Incurrence of
any Indebtedness described in the final paragraph of the definition of
"Indebtedness", the calculation of Consolidated Interest Expense shall include
all interest expense (including any amounts described in clauses (1) through
(10) above) relating to any Indebtedness of the Company or any Restricted
Subsidiary described in the final paragraph of the definition of "Indebtedness".
For purposes of the foregoing, total interest expense will be determined
(i) after giving effect to any net payments made or received by the Company and
its Subsidiaries with respect to Interest Rate Agreements and (ii) exclusive of
amounts classified as other comprehensive income in the balance sheet of the
Company. Notwithstanding anything to the contrary contained herein, commissions,
discounts, yield and other fees and charges Incurred in connection with any
transaction pursuant to which the Company or its Restricted Subsidiaries
150
may sell, convey or otherwise transfer or grant a security interest in any
accounts receivable or related assets shall be included in Consolidated Interest
Expense.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Restricted Subsidiaries determined in
accordance with GAAP; provided, however, that there will not be included in such
Consolidated Net Income:
(1) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's or a Restricted Subsidiary's equity in the net
income of any such Person for such period will be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to a Restricted
Subsidiary, to the limitations contained in clause (2) below);
provided that such cash dividend or other distribution relates to
the net income of such Person for such fiscal year or net income of
such Person for the fiscal year that commenced no earlier than 24
months prior to such cash dividend or distribution; and
(b) the Company's equity in a net loss of any such Person (other than
an Unrestricted Subsidiary) for such period will be included in
determining such Consolidated Net Income to the extent such loss
has been funded with cash from the Company or a Restricted
Subsidiary;
(2) any net income (but not loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that:
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's equity in the net income of any such
Restricted Subsidiary for such period will be included in such
Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary during
such period to the Company or another Restricted Subsidiary as a
dividend (subject, in the case of a dividend to another Restricted
Subsidiary, to the limitation contained in this clause); and
(b) the Company's equity in a net loss of any such Restricted
Subsidiary for such period will be included in determining such
Consolidated Net Income;
(3) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the
ordinary course of business and any gain (loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(4) any extraordinary gain or loss; and
(5) the cumulative effect of a change in accounting principles.
"Credit Facility" means, with respect to the Company or any Subsidiary
Guarantor, one or more debt facilities (including, without limitation, the
Senior Secured Credit Agreement) or commercial paper facilities with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
(and whether or not with the original administrative agent and lenders or
another administrative agent or agents or other lenders and whether provided
under the original Senior Secured Credit Agreement or any other credit or other
agreement or indenture).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement, futures contract, option contract or other
similar agreement as to which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely
at the option of the Company or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder of the Capital Stock in
whole or in part,
in each case on or prior to the date that is 91 days after the earlier of the
date (a) of the Stated Maturity of the Exchange Notes or (b) on which there are
no Exchange Notes outstanding, provided that only the portion of Capital Stock
which so matures or is mandatorily redeemable, is so convertible or exchangeable
or is so redeemable at the option of the holder thereof prior to such date will
be deemed to be Disqualified Stock; provided, further that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof have
the right to require the Company to repurchase such Capital Stock upon the
occurrence of a change of control or asset sale (each defined in a substantially
identical manner to the corresponding definitions in the Indenture) shall not
constitute Disqualified Stock if the terms of such Capital Stock (and all such
securities into which it is convertible or for which it is ratable or
exchangeable) provide that the Company may not repurchase or redeem any such
Capital Stock (and all such securities into which it is convertible or for which
it is ratable or exchangeable) pursuant to such provision prior to compliance by
the Company with the provisions of the Indenture described under the captions
"Change of Control" and "Limitation on Sales of Assets and Subsidiary Stock" and
such repurchase or redemption complies with "Certain Covenants -- Limitation on
Restricted Payments."
"Earn-Out Payment" means any contingent consideration based on future
operating or other performance relating to an Investment of the type described
in clause (1) or (2) of the definition "Permitted Investment," following the
consummation of such Investment, based on criteria set forth in the
documentation governing or relating to the Investment.
"Equity Offering" means an offering for cash by the Company of its Common
Stock, or options, warrants or rights with respect to its Common Stock, other
than public offerings with respect to the Company's Common Stock, or options,
warrants or rights, registered on Form F-4.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is expressly subordinate in right
of payment to the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee pursuant to a written agreement.
152
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"holder" means a Person in whose name an Exchange Note is registered on the
Registrar's books.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, amalgamation, acquisition or otherwise) will be deemed
to be Incurred by such Person at the time it becomes a Restricted Subsidiary;
and the terms "Incurred" and "Incurrence" have meanings correlative to the
foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) the principal component of all obligations of such Person in respect
of letters of credit, bankers' acceptances or other similar
instruments (including reimbursement obligations with respect thereto
except to the extent such reimbursement obligation relates to a trade
payable and such obligation is satisfied within 30 days of
Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property or services (except
trade payables and accrued expenses), which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto;
(5) Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;
(6) the principal component or liquidation preference of all obligations
of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any
Subsidiary, other than Subsidiary Guarantors and GUSAP Partners, any
Preferred Stock;
(7) the principal component of all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided, however, that the
amount of such Indebtedness will be the lesser of (a) the fair market
value of such asset at such date of determination and (b) the amount
of such Indebtedness of such other Persons;
(8) the principal component of Indebtedness of other Persons to the extent
Guaranteed by such Person; and
(9) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest Rate
Agreements (the amount of any such obligations to be equal at any time
to the termination value of such agreement or arrangement giving rise
to such obligation that would be payable by such Person at such time).
The amount of Indebtedness of any Person at any date will be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to pre-fund the payment of interest on
such Indebtedness shall not be deemed to be "Indebtedness" provided that such
money is held to secure the payment of such interest.
In addition, "Indebtedness" of any Person shall include Indebtedness
described in the preceding paragraphs (other than Indebtedness under the Amended
and Restated Financing and Security Agreement, dated as of December 31, 2002, by
and among Gallatin Steel Company and the lenders parties thereto, as such
agreement may be amended, restated, modified, renewed, refunded or replaced in
whole or in part; provided that the principal amount of Indebtedness under such
agreement does not exceed $40.0 million) that would not appear as a liability on
the balance sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
153
(3) there is recourse, by contract or operation of law, with respect to
the payment of such Indebtedness to property or assets of such Person
or a Restricted Subsidiary of such Person; and then such Indebtedness
shall be included in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and (ii)
the amount of such obligations to the extent that there is
recourse, by contract or operation of law, to the property or
assets of such Person or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is
recourse to such Person or a Restricted Subsidiary of such Person,
if the Indebtedness is evidenced by a writing and is for a
determinable amount.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances or extensions of credit to customers
in the ordinary course of business) or other extensions of credit (including by
way of Guarantee or similar arrangement, but excluding any debt or extension of
credit represented by a bank deposit other than a time deposit) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by, such other Person and all other items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP; provided that none of the following will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of business
and in compliance with the Indenture;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by the
Company or a Subsidiary for consideration to the extent such
consideration consists of Common Stock of the Company.
For purposes of "Certain Covenants -- Limitation on Restricted Payments",
(1) "Investment" will include the portion (proportionate to the Company's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary at the time that such Restricted Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that upon
a redesignation of such Subsidiary as a Restricted Subsidiary, the
Company will be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary in an amount (if positive) equal to (a) the
Company's "Investment" in such Subsidiary at the time of such
redesignation less (b) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the
net assets (as conclusively determined by the Board of Directors of
the Company in good faith) of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary will be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of the
Company.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's Investors Service, Inc. and BBB- (or the equivalent)
by Standard & Poor's Ratings Services with at least a stable outlook.
"Issue Date" means June 27, 2003.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and net
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proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring person of
Indebtedness or other obligations relating to the properties or assets that are
the subject of such Asset Disposition or received in any other non-cash form)
therefrom, in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses Incurred, and all
Federal, state, provincial, foreign and local taxes required to be
paid or accrued as a liability under GAAP (after taking into account
any available tax credits or deductions and any tax sharing
agreements), as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable
law be repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually Incurred in connection with such issuance or sale and net of taxes paid
or payable as a result of such issuance or sale (after taking into account any
available tax credit or deductions and any tax sharing arrangements).
"Non-Recourse Debt" means Indebtedness of a Person:
(1) as to which neither the Company nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) the terms of which provide there is no recourse against any of the
assets of the Company or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer or the
Secretary of the Company. Officer of GUSAP Partners and any Subsidiary Guarantor
has a correlative meaning.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of each of
the Issuers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Issuers or the Trustee.
"Pari Passu Indebtedness" means Indebtedness of the Company that ranks
equally in right of payment to the Exchange Notes.
"Permitted Holder" means Gerdau S.A. and any of its wholly-owned
Subsidiaries.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company or a Restricted Subsidiary or a Person which will, upon
the making of such Investment, become a Restricted Subsidiary;
provided, that any Earn-Out Payment made after the date such Person
becomes a Restricted Subsidiary shall also be deemed to be a Permitted
Investment made pursuant to
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this clause (1); provided, further, that the primary business of such
Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged, consolidated or amalgamated with or into, or transfers or
conveys all or substantially all its assets to or is liquidated into,
the Company or a Restricted Subsidiary; provided, that any Earn-Out
Payment made after the date of such transaction shall also be deemed
to be a Permitted Investment made pursuant to this clause (2);
provided, further, that such Person's primary business is a Related
Business;
(3) cash and Cash Equivalents;
(4) receivables owing to the Company or any Restricted Subsidiary created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses in accordance with GAAP and that are made in the ordinary
course of business;
(6) loans or advances to employees (other than executive officers) made in
the ordinary course of business consistent with past practices of the
Company or such Restricted Subsidiary;
(7) Capital Stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments
or pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of a debtor;
(8) Investments made as a result of the receipt of non-cash consideration
from an Asset Disposition that was made pursuant to and in compliance
with "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock";
(9) Investments in existence on the Issue Date;
(10) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in
compliance with "Certain Covenants -- Limitation on Indebtedness";
(11) Investments by the Company or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (11), in
an aggregate amount at the time of such Investment not to exceed $15.0
million outstanding at any one time (with the fair market value of
such Investment being measured at the time made and without giving
effect to subsequent changes in value); and
(12) Guarantees of Indebtedness Incurred by the Company or a Restricted
Subsidiary that are issued in accordance with "Certain Covenants --
Limitations on Indebtedness".
"Permitted Liens" means, with respect to any Person:
(1) Liens existing on the Issue Date securing Indebtedness and other
obligations under or in connection with the Senior Secured Credit
Agreement, including Liens on all of the Company's and any
Subsidiary's accounts receivable, accounts (including inter-company
loans), inventory (including "rolls inventory") and other goods held
for sale or lease, chattel paper, documents of title, instruments
(including letters of credit, cheques and bills of exchange), general
intangibles (including intellectual property rights), bank accounts
(including collateral proceeds accounts and investment accounts),
books and records, money, Capital Stock in all Subsidiaries of the
Company, products and proceeds therefrom and from any of the
foregoing, and related property or rights, but excluding Liens on real
estate, improvements thereon, fixtures and equipment of the Company
and its Restricted Subsidiaries;
(2) Liens imposed, and pledges or deposits made by such Person, under
workmen's compensation laws, unemployment insurance laws, Canadian
Pension Plan laws or similar legislation, or good faith deposits made
in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits made to secure public or statutory or regulatory obligations
of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to
156
which such Person is a party, or deposits as security for contested
taxes or import or customs duties or for the payment of rent, in each
case Incurred in the ordinary course of business;
(3) Liens imposed by law, including carriers', warehousemen's, suppliers',
materialmen's, repairmen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate
proceedings if a reserve or other appropriate provisions, if any, as
shall be required by GAAP shall have been made in respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet due
or payable subject to penalties for non-payment or which are being
contested in good faith by appropriate proceedings provided
appropriate reserves required pursuant to GAAP have been made in
respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or letters of
credit or bankers' acceptances issued pursuant to the request of and
for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute
Indebtedness;
(6) encumbrances, ground leases, easements or reservations of, or rights
of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning,
building codes or other restrictions (including, without limitation,
minor defects or irregularities in title and similar encumbrances) as
to the use of real properties or Liens incidental to the conduct of
the business of such Person or to the ownership of its properties
which do not in the aggregate materially adversely affect the value of
said properties or materially impair their use in the ordinary course
operation of the business of such Person;
(7) Liens securing Hedging Obligations so long as the related Indebtedness
is, and is permitted to be under the Indenture, secured by a Lien on
the same property securing such Hedging Obligation;
(8) leases, licenses, subleases and sublicenses of assets (including,
without limitation, real property and intellectual property rights)
which do not materially interfere with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded or adequate cash reserves have been set
aside to cover such obligations in respect of such Lien and any
appropriate legal proceedings which may have been duly initiated for
the review of such judgment have not been finally terminated or the
period within which such proceedings may be initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of the
purchase price of, or Capitalized Lease Obligations, purchase money
obligations or other payments Incurred to finance the acquisition,
improvement, repair or construction of, assets or property improved,
repaired, acquired or constructed in the ordinary course of business;
provided that:
(a) the aggregate principal amount of Indebtedness secured by such
Liens is otherwise permitted to be Incurred under the Indenture and
does not exceed the cost of the assets or property so acquired,
improved, repaired or constructed; and
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any
other assets or property of the Company or any Restricted
Subsidiary other than such assets or property and assets affixed or
appurtenant thereto;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained
with a depositary institution; provided that:
(a) such deposit account is not a dedicated cash collateral account and
is not subject to restrictions against access by the Company in
excess of those set forth by regulations promulgated by the Federal
Reserve Board; and
(b) such deposit account is not intended by the Company or any
Restricted Subsidiary to provide collateral to the depository
institution;
(12) Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases or subleases entered into by the Company
and its Restricted Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date (other than Liens relating to the
Senior Secured Credit Agreement);
157
(14) Liens on property, assets or shares of Capital Stock of a Person at
the time such Person becomes a Restricted Subsidiary or becomes part
of the Company or a Restricted Subsidiary; provided, however, that
such Liens are not created, Incurred or assumed in connection with, or
in contemplation of, such other Person becoming a Restricted
Subsidiary; provided further, however, that any such Lien may not
extend to any other property owned by the Company or any Restricted
Subsidiary;
(15) Liens on property at the time the Company or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger,
liquidation, consolidation or amalgamation with or into the Company or
any Restricted Subsidiary; provided, however, that such Liens are not
created, Incurred or assumed in connection with, or in contemplation
of, such acquisition; provided further, however, that such Liens may
not extend to any other property owned by the Company or any
Restricted Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly-Owned Subsidiary;
(17) Liens securing the Exchange Notes and Subsidiary Guarantees;
(18) Liens securing Refinancing Indebtedness Incurred to refinance
Indebtedness that was previously so secured, provided that any such
Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or, under the written arrangements
under which the original Lien arose, could secure) the Indebtedness
being refinanced or is in respect of property that is the security for
a Permitted Lien hereunder;
(19) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(20) Liens in favor of customs and revenue authorities to secure the
payment of custom duties in connection with the exporting or importing
of goods;
(21) Liens on the Capital Stock of an Unrestricted Subsidiary in order to
secure Indebtedness of such Unrestricted Subsidiary; and
(22) Liens securing Indebtedness (other than Subordinated Obligations and
Guarantor Subordinated Obligations) in an aggregate principal amount
outstanding at any one time not to exceed $25.0 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such corporation, over shares of Capital Stock of any other class
of such corporation.
"Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the Exchange Notes
publicly available, a nationally recognized statistical rating agency or
agencies, as the case may be, selected by the Company (as certified by a
resolution of the Board of Directors) which shall be substituted for Standard &
Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. or both, as the
case may be.
"Receivable" means a right to receive payment arising from a sale or lease
of goods or the performance of services by a Person pursuant to an arrangement
with another Person pursuant to which such other Person is obligated to pay for
goods or services under terms that permit the purchase of such goods and
services on credit and shall include, in any event, any items of property that
would be classified as an "account," "chattel paper," "payment intangible" or
"instrument" under the Uniform Commercial Code as in effect in the State of New
York and any "supporting obligations" as so defined.
"Receivables Fees" means any fees or interest paid to purchasers or lenders
providing the financing in connection with a factoring agreement or other
similar agreement, including any such amounts paid by discounting the face
amount of Receivables or participations therein transferred in connection with a
factoring agreement or other similar arrangement, regardless of whether any such
transaction is structured as on-balance sheet or off-balance sheet or through a
Restricted Subsidiary or an Unrestricted Subsidiary.
158
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, exchange, renew, repay, prepay, redeem, retire or extend
(including pursuant to any defeasance or discharge mechanism) (collectively,
"refinance," "refinances," and "refinanced" shall have a correlative meaning)
any Indebtedness existing on the Issue Date or Incurred in compliance with the
Indenture (including Indebtedness of the Company that refinances Indebtedness of
any Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness, provided, however, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the Exchange Notes, the
Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced or (b) if the
Stated Maturity of the Indebtedness being refinanced is later than the
Stated Maturity of the Exchange Notes, the Refinancing Indebtedness
has a Stated Maturity at least 91 days later than the Stated Maturity
of the Exchange Notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding or, if greater, the
committed amount of the Indebtedness being refinanced (plus, without
duplication, any additional Indebtedness Incurred to pay interest or
premiums required by the instruments governing such existing
Indebtedness and fees Incurred in connection therewith); and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the Exchange Notes or the Subsidiary Guarantee, such
Refinancing Indebtedness is subordinated in right of payment to the
Exchange Notes or the Subsidiary Guarantee on terms at least as
favorable to the holders as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Registration Rights Agreement" means that certain registration rights
agreement dated as of the date of the Indenture by and among the Issuers, the
Subsidiary Guarantors and the initial purchasers set forth therein.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person
(other than the Company or a Restricted Subsidiary) and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the United States Securities and Exchange Commission.
"Senior Secured Credit Agreement" means the Credit Facility dated as of
June 20, 2003 entered into among the Issuers, The CIT Group/Business Credit,
Inc., as Administrative Agent, and CIT Business Credit Canada Inc., as Canadian
Administrative Agent, and the lenders parties thereto from time to time, as the
same may be amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or part from time to time (including increasing the amount
loaned thereunder provided that such additional Indebtedness is Incurred in
accordance with the covenant described under "Limitation on Indebtedness");
provided that a Senior Secured Credit Agreement shall not include Indebtedness
issued, created or Incurred pursuant to a registered offering of securities
under the Securities Act or a private placement of securities (including under
Rule 144A or Regulation S) pursuant to an exemption from the registration
requirements of the Securities Act.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory
159
redemption provision, but shall not include any contingent obligations to repay,
redeem or repurchase any such principal prior to the date originally scheduled
for the payment thereof.
"Subordinated Obligation" means any Indebtedness of the Issuers (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Exchange Notes pursuant to a written
agreement.
"Subsidiary" of any Person means (a) any corporation, association or other
business entity (other than a partnership, joint venture, limited liability
company or similar entity) of which more than 50% of the total ordinary voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof (or persons performing similar functions) or (b) any partnership, joint
venture limited liability company or similar entity of which more than 50% of
the capital accounts, distribution rights, total equity and voting interests or
general or limited partnership interests, as applicable, is, in the case of
clauses (a) and (b), at the time owned or controlled, directly or indirectly, by
(1) such Person, (2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person. Unless otherwise specified herein,
each reference to a Subsidiary will refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Exchange Notes issued pursuant to the Exchange Offer by a Subsidiary Guarantor
pursuant to the terms of the Indenture and any supplemental indenture thereto,
and, collectively, all such Guarantees. Each such Subsidiary Guarantee will be
in the form prescribed by the Indenture.
"Subsidiary Guarantor" means (i) all of the Restricted Subsidiaries that
are guarantors under the Senior Secured Credit Agreement, which includes
Co-Steel Benefit Plans Inc., Co-Steel Benefit Plans USA Inc., Co-Steel C.S.M.
Corp., Gerdau Ameristeel Lake Ontario Inc., Gerdau Ameristeel MRM Special
Sections Inc., Gerdau Ameristeel Perth Amboy Inc., Gerdau Ameristeel Sayreville
Inc., Gerdau Ameristeel US Inc., Gerdau USA Inc., MFT Acquisition, Corp.,
N.J.S.C. Investment Co., Inc., PASUG LLC, Porter Bros. Corporation, Raritan
River Urban Renewal Corporation, 1062316 Ontario Limited, 1300554 Ontario
Limited, 1551533 Ontario Limited and 3038482 Nova Scotia Company, and (ii) any
Restricted Subsidiary created or acquired by the Company after the Issue Date,
that is required to issue a Subsidiary Guarantee or that elects to issue a
Subsidiary Guarantee.
"Total Tangible Assets" means the total consolidated assets of the Company
and its Restricted Subsidiaries, as shown on the most recent balance sheet of
the Company, less goodwill, patents, trademarks and other intangible assets as
determined in accordance with GAAP.
"Transactions" means the issuance of the Existing Notes, borrowing made
under the Senior Secured Credit Agreement on the Issue Date, and the repayment
of a portion of the Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date using the proceeds thereof.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors of
the Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary or a Person
becoming a Subsidiary through merger or consolidation, amalgamation or
Investment therein) to be an Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any
Lien on any property of, any other Subsidiary of the Company which is
not a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall, at
the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt;
(3) such designation and the Investment of the Company in such Subsidiary
complies with "Certain Covenants -- Limitation on Restricted
Payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly,
all or substantially all of the business of the Company and its
Subsidiaries;
160
(5) such Subsidiary is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or indirect
obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating
results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement
or understanding with the Company or any Restricted Subsidiary with
terms substantially less favorable to the Company than those that
might have been obtained from Persons who are not Affiliates of the
Company.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board of
Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that immediately after giving
effect to such designation, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof and the Company could
Incur at least $1.00 of additional Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant on a pro forma basis taking into account
such designation.
"U.S. Government Obligations" means securities that are (a) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (b) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation of the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depositary receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligations or a specific payment of principal of or interest on any
such U.S. Government Obligations held by such custodian for the account of the
holder of such depositary receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligations or the specific payment
of principal of or interest on the U.S. Government Obligations evidenced by such
depositary receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests of such Person then outstanding and normally entitled to vote (without
regard to the occurrence of any contingency) in the election of directors,
managers or trustees, as applicable.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary, all of the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or another Wholly-Owned Subsidiary.
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BOOK-ENTRY SETTLEMENT AND CLEARANCE
THE GLOBAL NOTES
The Exchange Notes will be issued in the form of several registered notes
in global form, without interest coupons (the "global notes").
Upon issuance, each of the global notes will be deposited with the Trustee
as custodian for The Depository Trust Company ("DTC") and registered in the name
of Cede & Co., as nominee of DTC.
Ownership of beneficial interests in each global note will be limited to
persons who have accounts with DTC ("DTC participants") or persons who hold
interests through DTC participants. We expect that under procedures established
by DTC:
- upon deposit of each global note with DTC's custodian, DTC will credit
portions of the principal amount of the global note to the accounts of
the DTC participants designated by the initial purchasers; and
- ownership of beneficial interests in each global note will be shown on,
and transfer of ownership of those interests will be effected only
through, records maintained by DTC (with respect to interests of DTC
participants) and the records of DTC participants (with respect to other
owners of beneficial interests in the global note).
Beneficial interests in the global notes may not be exchanged for notes in
physical, certificated form except in the limited circumstances described below.
Each global note and beneficial interests in each global note will be
subject to restrictions on transfer as described under "Transfer Restrictions".
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
All interests in the global notes will be subject to the operations and
procedures of DTC, Euroclear and Clearstream. We provide the following summaries
of those operations and procedures solely for the convenience of investors. The
operations and procedures of each settlement system are controlled by that
settlement system and may be changed at any time. We are not responsible for
those operations or procedures.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York State
Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
- a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants. DTC's
participants include securities brokers and dealers; banks and trust companies;
clearing corporations and other organizations. Indirect access to DTC's system
is also available to others such as banks, brokers, dealers and trust companies;
these indirect participants clear through or maintain a custodial relationship
with a DTC participant, either directly or indirectly. Investors who are not DTC
participants may beneficially own securities held by or on behalf of DTC only
through DTC participants or indirect participants in DTC.
So long as DTC's nominee is the registered owner of a global note, that
nominee will be considered the sole owner or holder of the notes represented by
that global note for all purposes under the Indenture (except with respect to
the payment of Additional Amounts, if any). Except as provided below, owners of
beneficial interests in a global note:
- will not be entitled to have Exchange Notes represented by the global
note registered in their names;
- will not receive or be entitled to receive physical, certificated
Exchange Notes; and
- will not be considered the owners or holders of the Exchange Notes
(except with respect to the payment of Additional Amounts, if any) under
the Indenture for any purpose, including with respect to the giving of
any direction, instruction or approval to the Trustee under the
Indenture.
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As a result, each investor who owns a beneficial interest in a global note
must rely on the procedures of DTC to exercise any rights of a holder of notes
under the indenture (and, if the investor is not a participant or an indirect
participant in DTC, on the procedures of the DTC participant through which the
investor owns its interest).
Payments of principal, premium (if any) and interest with respect to the
Exchange Notes represented by a global note will be made by the Trustee to DTC's
nominee as the registered holder of the global note. Neither we nor the Trustee
will have any responsibility or liability for the payment of amounts to owners
of beneficial interests in a global note, for any aspect of the records relating
to or payments made on account of those interests by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to those interests.
Payments by participants and indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing instructions
and customary industry practice and will be the responsibility of those
participants or indirect participants and DTC.
Transfers between participants in DTC will be effected under DTC's
procedures and will be settled in same-day funds. Transfers between participants
in Euroclear or Clearstream will be effected in the ordinary way under the rules
and operating procedures of those systems.
Cross-market transfers between DTC participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
within DTC through the DTC participants that are acting as depositaries for
Euroclear and Clearstream. To deliver or receive an interest in a global note
held in a Euroclear or Clearstream account, an investor must send transfer
instructions to Euroclear or Clearstream, as the case may be, under the rules
and procedures of that system and within the established deadlines of that
system. If the transaction meets its settlement requirements, Euroclear or
Clearstream, as the case may be, will send instructions to its DTC depository to
take action to effect final settlement by delivering or receiving interests in
the relevant global notes in DTC, and making or receiving payment under normal
procedures for same-day funds settlement applicable to DTC. Euroclear and
Clearstream participants may not deliver instructions directly to the DTC
depositaries that are acting for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant that purchases an interest in a global note from a DTC
participant will be credited on the business day for Euroclear or Clearstream
immediately following the DTC settlement date. Cash received in Euroclear or
Clearstream from the sale of an interest in a global note to a DTC participant
will be received with value on the DTC settlement date but will be available in
the relevant Euroclear or Clearstream cash account as of the business day for
Euroclear or Clearstream following the DTC settlement date.
DTC, Euroclear and Clearstream have agreed to the above procedures to
facilitate transfers of interests in the global notes among participants in
those settlement systems. However, the settlement systems are not obligated to
perform these procedures and may discontinue or change these procedures at any
time. Neither we nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Clearstream or their participants or indirect
participants of their obligations under the rules and procedures governing their
operations.
CERTIFICATED EXCHANGE NOTES
Exchange Notes in physical, certificated form will be issued and delivered
to each person that DTC identifies as a beneficial owner of the related Exchange
Notes only if:
- DTC notifies us at any time that it is unwilling or unable to continue
as depositary for the global notes and a successor depositary is not
appointed within 90 days;
- DTC ceases to be registered as a clearing agency under the Exchange Act
and a successor depositary is not appointed within 90 days;
- we, at our option, notify the Trustee that we elect to cause the
issuance of certificated Exchange Notes; or
- certain other events provided in the indenture should occur.
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CERTAIN UNITED STATES AND CANADIAN TAX CONSIDERATIONS
PART I: CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of the material United States federal tax
consequences of the exchange of Existing Notes for Exchange Notes in accordance
with the Exchange Offer and the ownership and disposition of the Exchange Notes
as of the date hereof. The summary is based upon the Code, the existing Treasury
Regulations, rulings and judicial decisions. The Internal Revenue Service (the
"IRS") and ultimately a court may reach different conclusions than are described
herein. This discussion may become inaccurate because the law or administrative
practice may be changed, possibly retroactively, whether by way of legislative,
judicial or governmental action or interpretation.
Please consult with your tax advisors concerning the U.S. federal tax
consequences to you having regard to your own personal circumstances.
This general discussion of the United States federal tax consequences
applies to you if you hold the Exchange Notes at all relevant times as a
"capital asset," within the meaning of Section 1221 of the Code. This summary
does not consider any tax consequences arising under the tax laws of any state,
local or foreign jurisdiction (but in respect of Canada please refer to Part II
of this section for a discussion of the principal Canadian federal income tax
consequences that may be applicable to you). In addition, it does not include
all of the rules which may affect the United States federal tax treatment of
your investment in the Exchange Notes. For example, special rules not discussed
here may apply to you if you are:
- a broker-dealer, a dealer in securities or foreign currency, or a
financial institution;
- a pass-through entity (e.g., a partnership) or an investor who holds the
Exchange Notes through a pass-through entity (e.g., a partner in a
partnership);
- an insurance company;
- a tax-exempt organization;
- subject to the alternative minimum tax provisions of the Code;
- holding the Exchange Notes as part of a hedge, straddle or other risk
reduction or constructive sale transaction; or
- a United States expatriate, "controlled foreign corporation", "passive
foreign investment company", "foreign personal holding company" or a
corporation that accumulates earnings to avoid U.S. federal income tax.
If a partnership holds Exchange Notes, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding Exchange Notes, you
should consult your tax advisors.
EXCHANGE OF EXISTING NOTES FOR EXCHANGE NOTES
The exchange of Existing Notes for Exchange Notes in accordance with the
Exchange Offer will not constitute a taxable exchange for United States federal
income tax purposes. Consequently, a holder of Existing Notes will not recognize
any gain or loss upon the exchange of the Existing Notes for Exchange Notes in
accordance with the Exchange Offer. For purposes of determining gain or loss
upon the subsequent sale or other taxable disposition of the Exchange Notes, the
holder will have the same adjusted tax basis and holding period in the Exchange
Notes as such holder had in the Existing Notes immediately before the exchange.
UNITED STATES HOLDERS
If you are a "United States Holder," as defined below, this section applies
to you. Otherwise, the next section, "Non-United States Holders," applies to
you.
Definition of United States Holder. You are a "United States Holder" if
you hold the Exchange Notes and you are:
- an individual citizen or resident of the United States for United States
federal income tax purposes, including an alien individual who is a
lawful permanent resident of the United States or meets the "substantial
presence" test under Section 7701(b) of the Code;
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- a corporation (or other entity taxable as a corporation) or partnership
created or organized in or under the laws of the United States or of any
of its political subdivisions;
- an estate, the income of which is subject to United States federal
income tax regardless of its source; or
- a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons
can control all substantial decisions of the trust, or if the trust was
in existence on August 20, 1996 and has properly elected to continue to
be treated as a United States person.
As used herein, a "Non-United States Holder" means a beneficial owner of
Exchange Notes who is not a United States Holder.
We intend to take the position that all interest and other payments made
with respect to the Exchange Notes are U.S. source income as obligations of or
co-borrowed by GUSAP and we intend to withhold U.S. taxes on that basis where
applicable.
Taxation of Stated Interest. Interest received on the Exchange Notes is
generally taxable to you as ordinary income. You generally must pay United
States federal income tax on the interest on the Exchange Notes:
- when it accrues, if you use the accrual method of accounting for United
States federal income tax purposes; or
- when you receive it, if you use the cash method of accounting for United
States federal income tax purposes.
Market Discount. If a United States Holder purchased Existing Notes
subsequent to the initial offering for less than the stated redemption price of
the Existing Notes at maturity, the difference is considered market discount,
subject to a statutory de minimis exception. If a United States Holder exchanges
Existing Notes, with respect to which there is a market discount, for Exchange
Notes pursuant to the Exchange Offer, the market discount applicable to the
Existing Notes should carry over to the Exchange Notes received. If a United
States Holder acquired Existing Notes at a market discount, the United States
Holder will be required to treat as ordinary income any partial principal
payment or gain recognized on the disposition of the Existing Notes to the
extent of the market discount which has not previously been included in such
United States Holder's income and is treated as having accrued at the time of
the payment or disposition. In addition, a United States Holder may be required
to defer the deduction of a portion of the interest on any indebtedness incurred
or maintained to purchase or carry the Exchange Notes until the Exchange Notes
are disposed of in a taxable transaction, unless the United States Holder elects
to include market discount in income as it accrues.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Notes, unless
the United States Holder elects to accrue on a constant yield method. A United
States Holder may elect to include market discount in income currently as it
accrues on either a ratable or constant yield method, in which case the rule
described above regarding deferral of interest deductions will not apply. This
election to include market discount in income currently, once made, applies to
all market discount obligations acquired on or after the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
Amortizable Premium. If a United States Holder acquired Existing Notes
subsequent to the initial offering for an amount which is greater than its
principal amount, the United States Holder will be considered to have purchased
the Existing Notes with amortizable bond premium equal to the amount of that
excess. If a United States Holder exchanges Existing Notes, with respect to
which there is bond premium, for Exchange Notes pursuant to the Exchange Offer,
the bond premium applicable to the Existing Notes should carry over to the
Exchange Notes received. A United States Holder may elect to amortize the
premium using a constant yield method over the period from the acquisition date
to the maturity date of the Exchange Notes. Amortized amounts may be offset only
against interest paid with respect to the Exchange Notes. Once made, an election
to amortize and offset interest on the Exchange Notes may be revoked only with
the consent of the IRS and will apply to all notes a United States Holder holds
on the first day of the taxable year to which the election relates and to
subsequent taxable years and to all notes a United States Holder subsequently
acquires.
Sale or Other Taxable Disposition of the Exchange Notes. Upon a sale or
other taxable disposition of Exchange Notes, you must recognize taxable gain or
loss, if any, equal to the difference between the amount you receive for the
Exchange Notes (in cash or other property, valued at fair market value), minus
the amount
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attributable to accrued interest on the Exchange Notes (which will be taxable as
interest income if not previously included in gross income), and your adjusted
tax basis in the Exchange Notes. Your initial tax basis in a note equals the
price you paid for the note.
Any such gain or loss on a sale or other taxable disposition of Exchange
Notes as described in the foregoing paragraph will generally constitute capital
gain or loss and will be long-term capital gain or loss if you hold such note
for more than one year. Under current law, net capital gains of non-corporate
taxpayers under certain circumstances are taxed at lower rates than items of
ordinary income. The deduction of capital losses is subject to certain
limitations.
Information Reporting and Backup Withholding. You will generally be
subject to information reporting and may also be subject to backup withholding
tax, currently at a rate of 28%, when you receive interest payments on the
Exchange Notes or proceeds upon the sale or other disposition of Exchange Notes.
Certain holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to information reporting or backup
withholding. In addition, the backup withholding tax will not apply to you if
you provide your taxpayer identification number ("TIN") in the prescribed manner
unless:
- the IRS notifies us or our agent that the TIN you provided is incorrect;
- you fail to report interest and dividend payments that you receive on
your tax return and the IRS notifies us or our agent that withholding is
required; or
- you fail to certify under penalties of perjury that you are not subject
to backup withholding.
Backup withholding tax is not an additional tax and you may use the amounts
withheld as a refund or credit against your United States federal income tax
liability as long as you provide certain information to the IRS.
NON-UNITED STATES HOLDERS
This section applies only to you if you are a Non-United States Holder.
U.S. Federal Withholding Tax
You generally will not be subject to United States federal withholding tax
on payments of principal or interest including any additional interest paid on
the Exchange Notes because of the "portfolio interest exemption" if:
- you are not a United States person for United States federal income tax
purposes; and
- either (i) you provide your name and address to us or our paying agent
on a properly executed IRS Form W-8BEN (or a suitable substitute form)
certifying under penalties of perjury that you are not a United States
person; or (ii) a securities clearing organization, bank, or other
financial institution that holds customers' securities in the ordinary
course of its business holds the Exchange Notes on your behalf, and the
certification requirements of applicable U.S. Treasury regulations are
satisfied. Special certification and other rules apply to certain
Non-United States Holders that are entities rather than individuals.
You will not, however, qualify for the portfolio interest exemption
described above if:
- interest paid on the Exchange Notes is effectively connected with your
conduct of a trade or business in the United States;
- you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our voting shares;
- you are a controlled foreign corporation with respect to which we are a
"related person" within the meaning of Section 864(d)(4) of the Code; or
- you are a bank receiving interest described in Section 881(c)(3)(A) of
the Code.
If you do not claim, or do not qualify for, the benefit of the portfolio
interest exemption, you may be subject to 30% United States federal withholding
tax on interest payments made on the Exchange Notes. However, you may be able to
claim the benefit of a reduced withholding tax rate under an applicable income
tax treaty. The required information for claiming treaty benefits is generally
submitted on Form W-8BEN. You may also be exempt from United States federal
withholding tax if you provide a properly completed Form W-8ECI (or other
applicable form) stating that interest paid on the Exchange Notes is not subject
to withholding tax because it is effectively connected
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with your conduct of a trade or business in the United States (as discussed
below under "United States Federal Income Tax").
You will not be subject to United States federal withholding tax on gain
recognized on a sale, exchange, redemption, repurchase, retirement, or other
disposition of Exchange Notes.
United States Federal Income Tax. If you are engaged in a trade or
business in the United States and interest on the Exchange Notes is effectively
connected with the conduct of that trade or business, you will be subject to
U.S. federal income tax on that interest on a net income basis (although exempt
from the 30% withholding tax, provided you comply with certain certification and
disclosure requirements discussed above in "United States Federal Withholding
Tax") in the same manner as if you were a United States Holder. In addition, if
you are a foreign corporation, you may be subject to a branch profits tax equal
to 30% (or lower applicable income tax treaty rate) of such amount, subject to
adjustments.
Any gain realized on the sale, exchange, retirement or other disposition of
Exchange Notes (other than gain representing accrued but unpaid interest, which
will be treated as such) generally will not be subject to United States federal
income tax unless:
- the gain is effectively connected with the conduct of a trade or
business in the United States by you; or
- you are an individual who is present in the United States for 183 days
or more in the taxable year of that sale, exchange, retirement or other
disposition, and certain other conditions are met.
United States Federal Estate Tax. Your estate will not be subject to
United States federal estate tax on Exchange Notes beneficially owned by you at
the time of your death provided that:
- any payment to you on the Exchange Notes would be eligible for exemption
from the 30% United States federal withholding tax under the rules
described in the bullet points under "United States Federal Withholding
Tax," without regard to the certification requirements described
therein; and
- interest on those Exchange Notes would not have been, if received at the
time of your death, effectively connected with your conduct of a trade
or business in the United States.
Information Reporting and Backup Withholding. We must report annually to
the IRS and to you the amount of payments we make to you and the tax withheld
with respect to such payments, regardless of whether withholding was required.
Copies of the information returns reporting such payments and withholding may
also be made available to the tax authorities in the country in which you reside
under the provisions of an applicable income tax treaty. Backup withholding will
not apply to payments of principal and interest on the Exchange Notes if you
comply with certain procedures and certify as to your status as a Non-United
States Holder under penalties of perjury, generally on a Form W-8BEN (or
substitute form), or otherwise establish an exemption, and provided that we do
not have actual knowledge or reason to know that you are a U.S. person.
The payment of the proceeds from the disposition of the Exchange Notes to
or through the United States office of any broker, United States or foreign,
will be subject to information reporting and possibly backup withholding, and
payments made by the foreign office of a broker that has certain connections to
the United States may be subject to information reporting, but not backup
withholding. Exemptions apply if you certify as to your non-United States status
under penalty of perjury or otherwise establish an exemption, provided that the
broker does not have actual knowledge or reason to know that you are a United
States person or that the conditions of any other exemption are not, in fact,
satisfied.
Backup withholding tax is not an additional tax and you may use the amounts
withheld as a refund or a credit against your United States federal income tax
liability as long as you provide certain information to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
UNITED STATES HOLDERS AND NON-UNITED STATES HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF EXCHANGING EXISTING
NOTES FOR EXCHANGE NOTES IN ACCORDANCE WITH THE EXCHANGE OFFER, HOLDING EXCHANGE
NOTES AND DISPOSING OF THE EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED
CHANGES IN APPLICABLE LAW.
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PART II: CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
SCOPE OF DISCUSSION:
This discussion represents our best attempt to describe what the Canada
Customs and Revenue Agency (the "CCRA") and ultimately a court would consider to
be the Canadian federal income tax consequences that may apply to you based upon
the Income Tax Act (Canada) (the "Tax Act"), the regulations made under the Tax
Act (in this section, the "Regulations"), current published administrative and
assessing practices of the CCRA published prior to the date hereof and all
specific proposals to amend the Tax Act and the Regulations publicly announced
prior to the date hereof, and assumes that all proposals will be enacted
substantially as proposed, although no assurance in this regard can be given.
Unless otherwise indicated, the Canadian federal income tax consequences
applicable to the exchange of Existing Notes for Exchange Notes in accordance
with the Exchange Offer and the acquisition, ownership and disposition of the
notes will not be materially different if the proposals are not enacted. For
purposes of this discussion, any reference to notes includes the Exchange Notes
described under the heading "Registration Rights".
The CCRA and ultimately a court may reach different conclusions than we
have in our best attempt. This discussion may become inaccurate because the law
or administrative practice may be changed, possibly retroactively, whether by
way of legislative, judicial or governmental action or interpretation. This
summary may not cover your particular circumstances because it does not consider
foreign, state, provincial or local tax rules and disregards all Canadian
federal tax changes other than those that are publicly released prior to the
date hereof.
Please consult with your tax advisor concerning the income tax consequences
to you having regard to your own personal circumstances.
This general discussion of certain Canadian federal income tax consequences
applies to you if you exchange the Existing Notes for Exchange Notes in
accordance with the Exchange Offer and thereafter hold the notes at all relevant
times for purposes of the Tax Act as "capital property", and at all relevant
times for purposes of the Tax Act you deal at "arm's length" with us and are not
"affiliated" with us. The notes will generally be considered to be capital
property to a holder unless the notes are held in the course of carrying on a
business of trading or dealing in securities or otherwise as part of a business
of buying and selling securities or were acquired in a transaction or
transactions considered to be an adventure or concern in the nature of trade.
This summary does not consider any tax consequences arising under provincial,
state, local or foreign jurisdictions (but in respect of the United States,
please refer to Part I for a discussion of the principal United States federal
income tax consequences that may be applicable to you). In addition, it does not
include all of the rules which may affect the Canadian tax treatment of your
investment in the notes. For example, special rules not discussed here may apply
to you if you are:
- a broker-dealer, a dealer in securities or foreign currency, or a
"financial institution", as defined in the Tax Act;
- an insurance company;
- a tax-exempt organization;
- subject to the alternative minimum tax provisions of the Tax Act;
- holding the notes as part of a hedge, straddle or other risk reduction
or constructive sale transaction; or
- a "tax shelter investment", as defined in the Tax Act.
For purposes of the Tax Act, all amounts relating to our notes issued
pursuant to this offering must be expressed in Canadian dollars including
interest, "adjusted cost base", as defined in the Tax Act, and proceeds of
disposition; amounts denominated in United States dollars generally must be
converted into Canadian dollars based on the prevailing United States dollar
exchange rate at the time of the relevant transactions. You may therefore
realize additional income or gains due to changes in foreign exchange rates. For
purposes of this discussion, any reference to notes includes Exchange Notes
described under the heading "Registration rights".
NON-CANADIAN HOLDERS
If you are a "Non-Canadian Holder," as defined below, this section applies
to you. Otherwise, the next section, "Canadian Holders," may apply to you.
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Definition of Non-Canadian Holder. You are a "Non-Canadian Holder" if you
are the beneficial owner of the notes and:
- you are or are deemed to be a non-resident of Canada, at all relevant
times, for purposes of the Tax Act; and
- your notes are not used or held by you in, or described in an inventory
of, a business carried on in Canada.
Exchange of Existing Notes for Exchange Notes. The exchange by a
Non-Canadian Holder of an Existing Note for an Exchange Note will not constitute
a taxable event for purposes of the Tax Act and accordingly, a Non-Canadian
Holder will not be subject to tax under the Tax Act in respect of the exchange.
Taxation of Interest. Interest paid or credited (or deemed to be paid or
credited) to you on the notes will be exempt from Canadian withholding tax.
Sale or Other Disposition of the Notes. You will not be subject to
Canadian federal income tax or withholding tax on a gain recognized on a
disposition or deemed disposition of a note (including, on a sale, exchange,
redemption, repurchase, retirement discharge or payment on maturity of a note).
Reporting. We will report annually to the CCRA and to you, the amount of
interest paid to, and the tax withheld, if any, on payments made to you.
CANADIAN HOLDERS
If you are a "Canadian Holder" as defined below, this section applies to
you.
Definition of Canadian Holder. You are a Canadian Holder if, at all
relevant times, you are a beneficial owner of notes and you are a resident or
deemed resident of Canada for the purposes of the Tax Act.
United States Federal Income Tax Consequences to Canadian Holders. See
also Part I above.
Exchange of Existing Notes for Exchange Notes. The exchange by a Canadian
Holder of an Existing Note for an Exchange Note will not constitute a taxable
event for purposes of the Tax Act and accordingly, a Canadian Holder will not be
subject to tax under the Tax Act in respect of the exchange. For purposes of
determining the adjusted cost base of the Exchange Notes, it will be considered
to be the same property as the Existing Note.
Taxation of Interest. If you are a corporation, partnership, unit trust or
a trust of which a corporation or a partnership is a beneficiary, you will be
required to include in computing your income for a taxation year all interest
that accrues to you on a note to the end of that taxation year or that is
received or becomes receivable by you before the end of that taxation year,
except to the extent such amount was included in computing your income for a
preceding taxation year.
If you are a beneficial owner of notes not described in the foregoing
paragraph, including an individual:
- you will be required to include in computing your income for a taxation
year all interest on a note that is received or receivable by you in the
taxation year (depending on the method you regularly follow in computing
income); and
- you will be required to include in income, any interest that accrued to
you to the end of any "anniversary date" (as defined in the Tax Act), to
the extent that such amount was not otherwise included in your income
for that or a preceding taxation year.
The amount of interest will include any United States non-resident
withholding tax withheld on the interest. United States non-resident withholding
tax on the interest may be eligible for foreign tax credit or deduction
treatment subject to the detailed rules and limitations under the Tax Act.
Canadian Holders are advised to consult their own tax advisors with respect to
the availability of a credit or deduction to them having regard to their
particular circumstances.
Canadian-Controlled Private Corporations. If you are a Canadian-controlled
private corporation, as defined in the Tax Act, you may be liable to pay an
additional refundable tax of 6 2/3% on investment income, including interest
income and taxable capital gains (described below).
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Sale or Other Disposition of the Notes. If you dispose of or are deemed to
have disposed of a note (including on a sale, exchange (other than pursuant to
the exchange offer described under the heading "Registration rights"),
redemption, repurchase, retirement, discharge or payment on maturity) you must:
- include in computing your income for the taxation year in which the
disposition occurs an amount generally equal to the amount of interest
(and premium paid on redemption or repurchase, if any) in respect of the
note that has accrued on the note, to the extent such interest was not
otherwise included in computing your income for the taxation year or a
previous taxation year; and
- recognize a capital gain (or capital loss) equal to the difference
between the amount you receive as proceeds of disposition (net of
accrued interest (and premium paid on redemption or repurchase, if any)
on the note included in computing your income as described above, minus
any reasonable costs of disposition and minus your adjusted cost base of
the note immediately before the disposition).
One-half of any capital gain (the taxable capital gain) will be included in
the your income for the taxation year of disposition. You may deduct one-half of
any capital loss so realized (the allowable capital loss) against your taxable
capital gains in the year of disposition. Any excess of allowable capital losses
over taxable capital gains that you realize in the year of disposition may be
carried back up to three taxation years or forward indefinitely and deducted
against your net taxable capital gains in those other years to the extent and in
the circumstances prescribed in the Tax Act.
Capital gains realized by an individual or by most trusts may give rise to
alternative minimum tax under the Tax Act.
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase and holding of the Notes by employee benefit plans that are subject to
Title I of the United States Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), plans, individual retirement accounts and other arrangements
that are subject to Section 4975 of the Code or provisions under any federal,
state, local, non-United States or other laws, rules or regulations that are
similar to such provisions of ERISA or the Code (collectively, "Similar Laws"),
and entities whose underlying assets are considered to include plan assets of
such plans (as defined in the regulations promulgated under ERISA), accounts and
arrangements (each, a "Plan").
GENERAL FIDUCIARY MATTERS
ERISA and the Code impose certain duties on persons who are fiduciaries of
a Plan subject to Title I of ERISA or Section 4975 of the Code (an "ERISA Plan")
and prohibit certain transactions involving the assets of an ERISA Plan and its
fiduciaries or other interested parties. Under ERISA and the Code, any person
who exercises any discretionary authority or control over the administration of
such an ERISA Plan or the management or disposition of the assets of such an
ERISA Plan, or who renders investment advice for a fee or other compensation to
such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the Notes of a portion of the assets of any
Plan, a fiduciary should determine whether the investment is in accordance with
the documents and instruments governing the Plan and the applicable provisions
of ERISA, the Code or any Similar Law relating to a fiduciary's duties to the
Plan including, without limitation, the prudence, diversification, delegation of
control and prohibited transaction provisions of ERISA, the Code and any other
applicable Similar Laws.
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from
engaging in specified transactions involving plan assets with persons or
entities who are "parties in interest," within the meaning of ERISA, or
"disqualified persons", within the meaning of Section 4975 of the Code, unless
an exemption is available. A party in interest or disqualified person who
engages in a non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In addition, the
fiduciary of the ERISA Plan that engages in such a non-exempt prohibited
transaction may be subject to penalties and liabilities under ERISA and the
Code. The acquisition and/or holding of Notes by an ERISA Plan with respect to
which we or the initial purchasers are considered a party in interest or
disqualified person may constitute or result in a direct or indirect prohibited
transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless
the investment
170
is acquired and is held in accordance with an applicable statutory, class or
individual prohibited transaction exemption. In this regard, the United States
Department of Labor has issued prohibited transaction class exemptions ("PTCEs")
that may apply to the acquisition and holding of the Notes. These class
exemptions include, without limitation, PTCE 84-14 respecting transactions
determined by independent qualified professional asset managers, PTCE 90-1,
respecting insurance company pooled separate accounts, PTCE 91-38, respecting
bank collective investment funds, PTCE 95-60, respecting life insurance company
general accounts and PTCE 96-23, respecting transactions determined by in-house
asset managers, although there can be no assurance that all of the conditions of
any such exemptions will be satisfied.
Because of the foregoing, the Notes should not be purchased or held by any
person investing "plan assets" of any Plan, unless such purchase and holding
will not constitute a non-exempt prohibited transaction under ERISA and the Code
or similar violation of any applicable Similar Laws.
REPRESENTATION
Accordingly, by acceptance of a Note, each purchaser and subsequent
transferee will be deemed to have represented and warranted that either (i) no
portion of the assets used by such purchaser or transferee to acquire and hold
the Notes constitutes assets of any Plan or (ii) the purchase and holding of the
Notes by such purchaser or transferee will not constitute a non-exempt
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or
similar violation under any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be
all-inclusive. Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering purchasing
the Notes on behalf of, or with the assets of, any Plan, consult with their
counsel (including Canadian counsel) regarding the potential applicability of
ERISA, Section 4975 of the Code and any Similar Laws to such transactions and
whether an exemption would be applicable.
171
PLAN OF DISTRIBUTION
The Exchange Offer is not being made to, nor will we accept tenders for
exchange from, holders of Existing Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities laws of such jurisdiction. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Issuers and the
Subsidiary Guarantors have agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, they will
make this prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until July 21, 2004,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
Neither the Issuers nor the Subsidiary Guarantors will receive any proceeds
from any sale of Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
resulting from any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Furthermore, any broker-dealer that acquired any
of its Existing Notes directly from the Issuers may not rely on the applicable
interpretation of the staff of the SEC's position contained in Exxon Capital
Holdings Corp., SEC no-action letter (13th April 1988), Morgan, Stanley & Co.
Inc., SEC no-action letter (5th June 1991) and Shearman & Sterling, SEC
no-action letter (2nd July 1993); and must also be named as a selling noteholder
in connection with the registration and prospectus delivery requirements of the
Securities Act relating to any resale transaction. For a period of 180 days
after the Expiration Date, the Issuers and the Subsidiary Guarantors will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Issuers and the Subsidiary Guarantors have
agreed to pay all expenses incident to the Exchange Offer other than commissions
or concessions of any brokers or dealers and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act. No "underwriter" within the meaning of
applicable Canadian securities legislation has been involved in the preparation
of this prospectus or performed any review of its content.
LEGAL MATTERS
The validity of the Exchange Notes and the Subsidiary Guarantees in
connection with this Exchange Offer will be passed upon for us by Torys LLP, New
York, New York and Toronto, Ontario. Members of the firm of Torys LLP own common
shares amounting to less than 1% of our outstanding shares.
AUDITORS, TRANSFER AGENT AND REGISTRAR
Our auditors are PricewaterhouseCoopers LLP, Certified Public Accountants,
whose Orlando office is located at Bank of America Building, 390 North Orange
Avenue, Suite 2400, Orlando, Florida, 32801, U.S.A.
The transfer agent and registrar for the common shares is CIBC Mellon Trust
Company at its principal offices in Toronto, Montreal and Calgary.
172
EXPERTS
The financial statements of Gerdau Ameristeel Corporation as of December
31, 2002, 2001 and 2000 and for the years then ended included in this
prospectus, except as they relate to the Gerdau Canada Group, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, Orlando,
Florida, independent certified public accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Co-Steel Inc. as of December 31, 2001 and for
each of the two years in the period ended December 31, 2001 included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, Toronto, Canada, chartered accountants, given on the
authority of said firm as experts in auditing and accounting.
The audited financial statements of Gerdau Canada Group, not separately
presented in this prospectus but forming part of the financial statements of
Gerdau Ameristeel, have been audited by Ernst & Young LLP, chartered
accountants. Such financial statements, to the extent they have been included in
the financial statements of Gerdau Ameristeel, have been so included in reliance
on the report of such independent accountants given on the authority of said
firm as experts in auditing and accounting.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been or will be filed with the SEC as part of
the Registration Statement on Form F-10 of which this prospectus forms a part:
- Certificate of Qualification;
- Calculation of Earnings Coverage;
- The documents referred to under the heading "Documents Incorporated by
Reference";
- Registration Rights Agreement dated June 27, 2003 among the Issuers, the
Subsidiary Guarantors and the initial purchasers of the Existing Notes;
- Indenture dated as of June 27, 2003 among the Issuers, Subsidiary
Guarantors and SouthTrust Bank, as Trustee;
- Form of Exchange Note (included in the Indenture);
- Consents of PricewaterhouseCoopers LLP;
- Consent of Ernst & Young LLP;
- Consent of Torys LLP; and
- Powers of Attorney (included on the signature pages of the Registration
Statement on Form F-10).
173
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF GERDAU AMERISTEEL
CORPORATION AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER
31, 2002, 2001 AND 2000................................... F-2
Report of independent certified public accountants........ F-3
Consolidated balance sheets............................... F-4
Consolidated statements of earnings (loss)................ F-5
Consolidated statements of shareholders' equity........... F-6
Consolidated statements of cash flows..................... F-7
Notes to the consolidated financial statements............ F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GERDAU
AMERISTEEL CORPORATION AND SUBSIDIARIES FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2003 AND 2002.................. F-35
Consolidated balance sheets............................... F-36
Consolidated statements of (loss) earnings................ F-37
Consolidated statements of shareholders' equity........... F-38
Consolidated statements of cash flows..................... F-39
Notes to the consolidated financial statements............ F-40
CONSOLIDATED FINANCIAL STATEMENTS OF CO-STEEL INC. FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000.................... F-52
Report of accountants..................................... F-53
Consolidated statements of (loss) earnings................ F-54
Consolidated statements of reinvested earnings............ F-55
Consolidated balance sheets............................... F-56
Consolidated statements of cash flows..................... F-57
Notes to the consolidated financial statements............ F-58
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CO-STEEL INC.
(RENAMED GERDAU AMERISTEEL CORPORATION) FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001.................. F-74
Consolidated statements of profit (loss).................. F-75
Consolidated statements of reinvested earnings............ F-76
Consolidated balance sheets............................... F-77
Consolidated statements of cash flows..................... F-78
Notes to the consolidated financial statements............ F-79
</Table>
F-1
CANADIAN GAAP/U.S. DOLLAR
CONSOLIDATED FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 2002, 2001 AND 2000
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Gerdau Ameristeel Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings (loss), of shareholders' equity, and
of cash flows present fairly, in all material respects, the financial position
of Gerdau Ameristeel Corporation and its subsidiaries (the Company) at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles which, as described in Note 2, are generally accepted
in Canada. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Gerdau Canada Group, a company under common control, as of December 31, 2001 and
for the two years then ended, which statements reflect total assets of
$330,463,000 as of December 31, 2001 and total revenues of $237,442,000 and
$253,644,000 for the years ended December 31, 2001 and 2000, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Gerdau Canada
Group, is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements, the
Company adopted the provisions of CICA Handbook Section 3062, Goodwill and Other
Intangible Assets, on January 1, 2002.
PricewaterhouseCoopers LLP
Certified Public Accountants
Orlando, Florida
January 24, 2003 except for certain information contained in
Notes 3 and 20, as to which the date is April 4, 2003
COMMENTS BY U.S. AUDITORS FOR CANADIAN READERS ON U.S.-CANADA REPORTING
DIFFERENCE
Generally accepted auditing standards ("GAAS") in the United States
expressly permit the reference in an auditor's report to the report of a
secondary auditor. Canadian GAAS does not permit such a reference. Such
reference in a U.S. audit report is not to be construed as a qualification or a
reservation of the opinion, but rather as an indication of the divided
responsibility between the auditors who conducted the audits of the various
components of the overall financial statements. Other than this reporting
difference, the form and content of the U.S. GAAS audit report is substantially
the same as a Canadian GAAS audit report.
In addition, auditing standards generally accepted in the United States are
substantially equivalent to Canadian GAAS.
PricewaterhouseCoopers LLP
Certified Public Accountants
Orlando, Florida
January 24, 2003
F-3
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
------------------------
2002 2001
---------- ----------
(U.S.$ in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,361 $ 5,087
Accounts receivable, net of allowance for doubtful
accounts of $4,688 (2001 -- $2,210).................... 172,745 97,327
Inventories (note 4)...................................... 351,400 211,420
Future tax assets (note 10)............................... 11,417 5,320
Other current assets...................................... 2,997 1,096
---------- ----------
Total current assets........................................ 554,920 320,250
Property, plant and equipment (note 5)...................... 898,948 530,885
Goodwill.................................................... 114,374 114,374
Other assets (note 8)....................................... 3,159 96,430
---------- ----------
Total assets................................................ $1,571,401 $1,061,939
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 170,334 $ 99,647
Accrued salaries, wages and employee benefits............. 43,932 16,826
Other current liabilities (note 12)....................... 20,110 9,453
Taxes payable............................................. 6,567 --
Interest payable.......................................... 3,395 6,563
Bank Indebtedness (note 7)................................ 23,379 4,083
Current portion of long-term borrowings (note 7).......... 83,942 62,977
---------- ----------
Total current liabilities................................... 351,659 199,549
Long-term borrowings, less current portion (note 7)......... 411,833 251,346
Related party borrowings (note 8)........................... -- 405,227
Accrued benefit obligation (note 11)........................ 70,166 20,746
Other liabilities (note 12)................................. 29,175 5,530
Future tax liabilities (note 10)............................ 82,158 99,109
Minority interest........................................... 33,312 30,634
---------- ----------
Total liabilities........................................... 978,303 1,012,141
---------- ----------
Shareholders' equity:
Capital stock (note 14)..................................... 513,400 58,364
Convertible debentures (note 9)............................. 79,134 --
Retained earnings (deficit)................................. 1,329 (7,622)
Cumulative translation adjustment........................... (765) (944)
---------- ----------
Total shareholders' equity.................................. 593,098 49,798
---------- ----------
Total liabilities and shareholders' equity.................. $1,571,401 $1,061,939
========== ==========
</Table>
See notes to consolidated financial statements.
F-4
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---------- -------- --------
(U.S.$ in thousands,
except earnings per share data)
Net sales................................................... $1,036,055 $840,836 $899,683
Operating expenses:
Cost of sales............................................. 867,091 680,084 722,038
Selling and administrative................................ 62,173 56,431 57,394
Depreciation.............................................. 58,683 54,877 51,348
Amortization of goodwill.................................. -- 6,582 6,269
Other operating (income) expense (note 17)................ (5,072) (463) 2,738
---------- -------- --------
982,875 797,511 839,787
Income from operations...................................... 53,180 43,325 59,896
Other expenses:
Interest, net............................................. 38,598 48,852 50,360
Foreign exchange loss (gain).............................. 230 249 (211)
Loss on marketable securities............................. -- 707 --
Amortization of deferred financing costs.................. 1,172 1,180 1,461
---------- -------- --------
40,000 50,988 51,610
Income (loss) before income taxes........................... 13,180 (7,663) 8,286
Income tax expense (benefit)................................ 341 (2,581) 2,177
---------- -------- --------
Income (loss) before minority interest...................... 12,839 (5,082) 6,109
Minority interest........................................... (1,707) (984) (2,166)
---------- -------- --------
Net income (loss)........................................... $ 11,132 $ (6,066) $ 3,943
---------- -------- --------
Earnings per common share -- basic (note 14)................ $ 0.07 $ (0.05) $ 0.03
Earnings per common share -- diluted........................ $ 0.07 $ (0.05) $ 0.03
</Table>
See notes to consolidated financial statements.
F-5
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
RETAINED CUMULATIVE
INVESTED CONVERTIBLE EARNINGS TRANSLATION DEFERRED
SHARES CAPITAL DEBENTURES (DEFICIT) ADJUSTMENT COMPENSATION TOTAL
----------- -------- ----------- --------- ----------- ------------ --------
(U.S.$ in thousands, except share data)
Balance --
December 31, 1999................. 133,388,400 $ 59,022 $ -- $11,132 $ -- $(192) $ 69,962
----------- -------- ------- ------- ----- ----- --------
Net income........................ 3,943 3,943
Subsidiary stock activity......... (403) (403)
Foreign exchange.................. (11) (11)
Reduction in deferred
compensation.................... 116 116
Dividends paid.................... -- (16,631) -- -- (16,631)
----------- -------- ------- ------- ----- ----- --------
Balance --
December 31, 2000................. 133,388,400 58,619 -- (1,556) (11) (76) 56,976
----------- -------- ------- ------- ----- ----- --------
Net loss.......................... -- -- (6,066) -- -- (6,066)
Subsidiary stock activity......... (255) -- -- -- -- (255)
Foreign exchange.................. -- -- -- (933) -- (933)
Reduction in deferred
compensation.................... 76 76
----------- -------- ------- ------- ----- ----- --------
Balance --
December 31, 2001................. 133,388,400 58,364 -- (7,622) (944) -- 49,798
----------- -------- ------- ------- ----- ----- --------
Net income........................ -- -- 11,132 -- -- 11,132
Subsidiary stock activity......... (187) -- -- -- -- (187)
Foreign exchange.................. -- -- -- 179 -- 179
Debt converted to equity (note
8).............................. 325,948 -- -- -- -- 325,948
Acquisition (note 3).............. 51,503,960 129,275 79,134 -- -- -- 208,409
Dividends paid.................... -- -- (2,181) -- -- (2,181)
----------- -------- ------- ------- ----- ----- --------
Balance --
December 31, 2002................. 184,892,360 $513,400 $79,134 $ 1,329 $(765) $ -- $593,098
----------- -------- ------- ------- ----- ----- --------
</Table>
See notes to consolidated financial statements.
F-6
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
-------- -------- ---------
(U.S.$ in thousands)
Operating activities
Net income (loss)........................................... $ 11,132 $ (6,066) $ 3,943
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 58,683 54,877 51,348
Amortization.............................................. 1,172 7,762 7,730
Deferred income taxes..................................... (10,428) (2,284) (7,047)
Loss (Gain) on disposition of property, plant and
equipment.............................................. 1,044 (17) (595)
Unrealized foreign exchange on related party loans........ 436 (6,253) (6,444)
Accrued interest on related party loans................... (2,561) 14,144 6,651
Loss on sale of marketable securities..................... -- 3,658 --
Deferred compensation..................................... -- 76 116
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... 21,433 12,159 (14)
Inventories............................................... (17,991) 18,640 1,460
Other assets.............................................. (9,061) 6 (350)
Liabilities............................................... (19,791) 5,878 (28,198)
-------- -------- ---------
Net cash provided by operating activities................... 34,068 102,580 28,600
-------- -------- ---------
Investing activities
Additions to property, plant and equipment................ (33,482) (28,419) (52,690)
Purchase price for acquisitions........................... (6,856) (51,184) --
Cash acquired in acquisition.............................. 18,465 -- --
Purchase of minority interest............................. -- -- (35,640)
Proceeds from dispositions................................ 489 811 518
-------- -------- ---------
Net cash used in investing activities....................... (21,384) (78,792) (87,812)
-------- -------- ---------
Financing activities
Term debt payments........................................ (29,503) (58,906) (109,997)
Revolving credit borrowings (payments).................... 27,273 (31,279) 75,253
Increase in related party loans payable................... -- 64,638 97,217
Reductions (additions) to deferred financing costs........ 705 (4) (1,765)
Foreign exchange (loss) gain.............................. (195) 142 1
Changes in minority interest.............................. 2,678 984 2,166
Subsidiary stock activity................................. (187) (232) (1,814)
Dividends paid............................................ (2,181) -- --
-------- -------- ---------
Net cash provided by (used in) financing activities......... (1,410) (24,657) 61,061
-------- -------- ---------
Increase (decrease) in cash and cash equivalents............ 11,274 (869) 1,849
Cash and cash equivalents at beginning of period............ 5,087 5,956 4,107
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 16,361 $ 5,087 $ 5,956
-------- -------- ---------
Supplemental cash flow information
Cash paid for interest.................................... $ 57,610 $ 45,882 $ 50,040
-------- -------- ---------
Cash paid for income taxes................................ $ 2,289 $ 690 $ 10,132
-------- -------- ---------
</Table>
See notes to consolidated financial statements.
F-7
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(United States Dollars in thousands, except per share amounts)
NOTE 1 -- BASIS OF PRESENTATION
The 2001 and 2000 consolidated financial statements include the results and
accounts of companies controlled by Gerdau Ameristeel Corporation, a Canadian
corporation, whose ultimate parent is Gerdau S.A., a Brazilian Company. The
financial statements include the accounts of Gerdau Ameristeel Cambridge Inc.
and Gerdau MRM Holdings Inc. and their consolidated subsidiaries Gerdau
Ameristeel MRM Special Sections Inc., Gerdau MRM America Holding Corp., Porter
Bros. Corporation, GUSAP Partners, Mandak Car Crusher Inc., MFT Acquisition
Corp., 3038482 Nova Scotia Company, PASUG Inc., (combined, referred to as Gerdau
Canada Group), and Gerdau USA, Inc. and its consolidated subsidiaries FLS
Holdings Inc., AmeriSteel Corporation and AmeriSteel Bright Bar, Inc. ("GUSA"),
collectively, the "Gerdau North America Group". All significant intercompany
transactions and accounts have been eliminated in consolidation.
On October 23, 2002, the ultimate parent company of the Gerdau North America
Group entered into a transaction agreement with Co-Steel Inc. ("Co-Steel"), a
Canadian public company. This transaction agreement resulted in Co-Steel
acquiring all of the issued and outstanding shares of the companies included in
the Gerdau North America Group, in exchange for Co-Steel common shares
representing approximately 74% of Co-Steel's total common shares. As part of
this transaction, certain related party loans payable of the Gerdau North
America Group were converted into equity in October 2002. The transaction was
accounted for by using the reverse-take-over method of purchase accounting. The
Gerdau North America Group is deemed to be the acquirer and is assumed to be
purchasing the assets and liabilities of Co-Steel, since the original
shareholder of the Gerdau North America Group became owner of more than 50
percent of the voting shares of Co-Steel on a fully-diluted basis following the
transaction. As a result, the Gerdau North America Group's historical accounts
became the historical accounts of Co-Steel for all periods prior to the date of
merger. In connection with the merger, Co-Steel's name was changed to Gerdau
Ameristeel Corporation (the "Company" or "Gerdau Ameristeel").
The Company operates steel minimills, producing primarily steel bars and special
sections for commercial and industrial building construction and original
equipment manufacturers. Its principal market area is the eastern United States
and Canada. Principal suppliers to the Company include scrap metal producers and
electric utilities.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are presented by management in
accordance with accounting principles generally accepted in Canada. All dollar
amounts are reported in United States dollars unless otherwise indicated.
CONSOLIDATION: These consolidated financial statements include the accounts of
the Company and its subsidiaries. They include full year results for the Gerdau
North America operations, and results for the Co-Steel operations for the period
from October 23, 2002 through December 31, 2002, which represents the period
subsequent to the date of acquisition.
JOINT VENTURES AND OTHER INVESTMENTS: The Company's investments in Gallatin
Steel Company, Bradley Steel Processors and MRM Guide Rail are 50% joint
ventures, and are proportionately consolidated. Other investments where the
Company does not exercise significant influence are accounted for by the cost
method. The Company evaluates the carrying value of the investments to determine
if there has been an impairment in value considered other than temporary, which
is assessed by review of cash flows, operating income and takes into
consideration trading values on recognized stock exchanges. If impairment is
considered other than temporary, a provision is recorded.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company recognizes
revenues from sales and the allowance for estimated costs associated with
returns from these sales when the product is shipped and title transferred to
the buyer. Provisions are made for estimated product returns and customer claims
based on estimates and actual historical experience. If the historical data used
in the estimates does not reflect future returns and claims trends, additional
provisions may be necessary. An allowance for doubtful accounts is maintained
for estimated losses resulting from the inability of customers to make required
payments. If the financial condition of customers was to deteriorate, resulting
in the impairment of their ability to make payments, additional allowance may be
required.
CASH AND CASH EQUIVALENTS: The Company considers all cash on deposit and term
deposits with original maturities of three months or less, to be cash
equivalents. Cash held in the joint venture operations are for the sole use of
the joint ventures.
INVENTORIES: Billets and finished goods are valued at the lower of cost or
market value. Scrap, consumables and spare parts are valued at the lower of cost
(calculated on an average basis) or replacement value. Consumables include
rolls, which are recorded at cost and amortized based on usage.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Major renewals and betterments are capitalized and depreciated over their
estimated useful lives. Maintenance and repairs are charged against operations
as incurred. Upon retirement or other disposition of property, plant and
equipment, the cost and related allowances for depreciation are removed from the
accounts and any resulting gain or loss is recorded in the statement of
operations.
Interest incurred in connection with significant capital projects is
capitalized. Interest costs for property, plant and equipment construction
expenditures of approximately $100 thousand was capitalized for the year ended
December 31, 2002 (2001 -- $800 thousand; 2000 -- $97 thousand). For financial
reporting purposes, the Company provides for depreciation of property, plant and
equipment using the straight-line method over the estimated useful lives of 15
to 30 years for buildings and improvements and 4 to 15 years for other
equipment. During 2002, the
F-8
Company changed the depreciable lives of certain buildings and equipment to
reflect their updated estimated economic lives. The effect of this change in
accounting estimate reduced depreciation expense in 2002 by approximately $3.2
million.
Property, plant and equipment Held for Sale is carried at the lower of cost or
net realizable value.
GOODWILL: Goodwill represents the cost of investments in operating companies in
excess of the fair value of the net identifiable assets acquired. On January 1,
2002, the Company adopted CICA Handbook Section 3062, Goodwill and Other
Intangible Assets. This section requires that goodwill and intangible assets
with indefinite lives are not amortized, but rather their fair value be assessed
at least annually and written down for any impairment in value. For acquisitions
made subsequent to July 1, 2001, and as of January 1, 2002 for all existing
goodwill and intangible assets with indefinite lives, such assets will no longer
be amortized, but will be evaluated annually for impairment. There was
amortization of goodwill and intangible assets recorded under the prior
accounting standard for 2001 and 2000. In 2001 and 2000, goodwill resulting from
acquisitions was amortized over 20 to 25 years, the estimated lives of the
related benefit.
Had goodwill not been amortized, net loss in 2001 would have been $2.1 million
(versus a loss of $6.1 million), or $(0.02) per share, and net income in 2000
would have been $7.7 million (versus net income of $3.9 million), or $0.06 per
share.
DEFERRED FINANCING COSTS: Deferred financing costs were incurred in relation to
long term debt and are reflected net of accumulated amortization and are
amortized over the term of the respective debt instruments, which range from 5
to 22 years from the debt inception date.
FUTURE INCOME TAXES: The liability method of accounting for income taxes is
used whereby future income taxes arise from temporary differences between the
book value of assets and liabilities and their respective tax value. Future
income tax assets and liabilities are measured using substantially enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on future income
tax assets and liabilities of a change in tax rates is recognized in operations
in the period that includes the substantive enactment date. A valuation
allowance is recorded to the extent the recoverability of future income tax
assets is considered more likely than not.
PENSIONS AND POST-RETIREMENT BENEFITS: The Company accrues its obligations
under employee benefit plans and the related costs, net of plan assets. The
Company has adopted the following policies:
- The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected benefit method prorated on
service and management's best estimate of expected plan investment
performance for funded plans, salary escalation, retirement ages of
employees and expected health care costs. The discount rate used for
determining the liability for future benefits is the current interest
rate at the balance sheet date on high quality fixed income investments
with maturities that match the expected maturity of the obligations.
- Pension assets are valued at fair market value.
- Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at
the date of amendment.
- The excess of the net actuarial gain or loss over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized
over the average remaining service period of the active employees.
- A plan curtailment will result if there has been a significant reduction
in the expected future service of present employees. A net curtailment
loss is recognized when the event is probable and can be estimated, a
net curtailment gain is deferred until realized.
ENVIRONMENTAL LIABILITIES: The Company has reserved for potential environmental
liabilities based on the best estimates of potential clean-up and remediation
estimates for known environmental sites. The Company employs a staff of
environmental experts to administer all phases of its environmental programs,
and uses outside experts where needed. These professionals develop estimates of
potential liabilities at these sites based on projected and known remediation
costs. This analysis requires the Company to make significant estimates, and
changes in facts and circumstances could result in material changes in the
environmental accrual.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION: Operating revenue and
expenses arising from foreign currency transactions are translated into U.S.
dollars at exchange rates in effect on the date of the transactions. Monetary
assets and liabilities are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date. Gains or losses arising from these
translations are included in earnings, with the exception of unrealized foreign
exchange gains or losses on long-term monetary items that hedge net investments
in foreign operations which are accumulated in the foreign currency translation
adjustment account in shareholders' equity, until there is a reduction in the
net investment in the foreign operation.
Assets and liabilities of self-sustaining foreign operations are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date. Operating
revenue and expense items are translated at average exchange rates prevailing
during the year. Any corresponding foreign exchange gains and losses are
deferred and disclosed separately as part of shareholders' equity and are
recognized in earnings when the ownership interest in the foreign operations is
reduced.
The consolidated financial statements have been prepared in U.S. dollars as the
majority of the Company's transactions occur in this currency.
EARNINGS PER SHARE: The Company's diluted earnings per share is determined
using the treasury stock method for the effect of outstanding share purchase
options and the dilution impact of the convertible debenture at the stated
conversion price.
STOCK OPTION PLAN: The Company has a stock option plan described in Note 15. No
compensation expense is recognized when stock options are issued to employees as
the option price is equivalent to the market value of the shares at the date of
grant. Consideration paid on exercise of stock options is credited to share
capital. No options were granted in 2002.
DEFERRED SHARE UNIT PLAN: The Corporation offers a Deferred Share Unit Plan
(DSUP) for members of the Board of Directors. Under the DSUP each director
receives a percentage of their annual compensation in the form of deferred share
units (DSUs) which are notional Common
F-9
Shares of the Company. The issue price of each DSU is based on the closing
trading value of the Common Shares on the meeting dates and an expense is
recognized at that time. The DSU account of each director includes the value of
dividends, if any, as if reinvested in additional DSUs. The director is not
permitted to convert DSUs into cash until retirement from the Board. The value
of the DSUs, when converted to cash, will be equivalent to the market value of
the Common Shares at the time the conversion takes place. The value of the
outstanding DSUs as at December 31, 2002 was $141 thousand (2001 -- $67
thousand).
USE OF ESTIMATES: The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 3 -- ACQUISITIONS
On October 23, 2002, Brazilian Steelmaker Gerdau S.A. and Canadian steelmaker
Co-Steel combined their North American operations. In the transaction, Co-Steel
acquired all of the issued and outstanding shares of the Gerdau North America
Group in exchange for shares of Co-Steel representing approximately 74% of the
shares of the combined entity. A portion of these shares will be issued to
minority shareholders of AmeriSteel Corporation on March 31, 2003, as described
below. The name of Co-Steel was changed to Gerdau Ameristeel Corporation as part
of the transaction.
For accounting purposes, the business combination of the Gerdau North America
Group and Co-Steel has been accounted for using the reverse take-over method of
purchase accounting. Gerdau North America is deemed to be the acquirer and is
assumed to be purchasing the assets and liabilities of Co-Steel, since the
original shareholders of the Gerdau North America Group have become owners of
more than 50% of the voting shares of Co-Steel on a fully diluted basis. The
results of the operations of Co-Steel are included from the date of the
transaction.
The following table summarizes the fair value of assets and liabilities acquired
at the date of the acquisition ($000s):
<Table>
Net assets (liabilities) acquired
Current assets............................................ $242,252
Current liabilities....................................... (130,345)
Property, plant and equipment............................. 389,915
Other assets.............................................. (177)
Long-term debt............................................ (219,969)
Other long-term liabilities............................... (81,386)
Net future income taxes................................... 15,768
Convertible debenture (recorded as equity)................ (80,113)
--------
$135,945
--------
Purchase consideration, representing 51,503,960 Co-Steel
shares at $2.51 per share................................. $129,275
Plus transaction costs...................................... 6,670
--------
$135,945
========
</Table>
Effective March 31, 2003, non-controlling shareholders holding, in the
aggregate, approximately 13% of the issued and outstanding shares of AmeriSteel
Corporation ("Ameristeel"), will have their holdings exchanged for Gerdau
Ameristeel common shares in a ratio of 9.4617 Gerdau Ameristeel shares for each
common share of Ameristeel exchanged. The acquisition of the minority interest
of Ameristeel will be accounted for as a step acquisition under the purchase
method of accounting, whereby the purchase price of the shares will be allocated
to the net assets acquired based upon their relative fair values. The exchange
will result in the issuance of an additional 13,199,260 shares of Gerdau
Ameristeel (see Note 20).
On June 24, 2002, the Company acquired certain assets and assumed certain
liabilities of Republic Technologies' cold drawn plant in Cartersville, Georgia.
The purchase price was $8.4 million and the transaction was accounted for as a
business combination. The plant commenced operations under Gerdau Ameristeel
ownership on July 2, 2002.
On December 28, 2001, AmeriSteel acquired certain assets and assumed certain
liabilities of the Cartersville, Georgia mill (Cartersville), a producer of
structural steel products, from Birmingham Steel Corporation. In a separate
transaction on the same date, AmeriSteel acquired certain assets that were being
leased by Cartersville from the existing lessor group for cash and negotiated a
new operating lease. The two transactions are being accounted for as a business
combination for financial reporting purposes. The results of operations for
Cartersville have been included in the accompanying combined statement of
financial position as of December 31, 2001, but had no significant impact on the
results of operations for the year ended December 31, 2001. The aggregate
purchase price was $49.4 million, including $41.5 million cash, $0.2 million
marketable securities and $7.7 million assumed liabilities.
F-10
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition ($000s).
<Table>
<Caption>
AT DECEMBER 28,
2001
---------------
Inventory................................................... $20,674
Property, plant and equipment............................... 28,757
-------
Total assets acquired....................................... 49,431
-------
Accounts payable............................................ (6,756)
Accrued liabilities......................................... (959)
-------
Total liabilities assumed................................... (7,715)
-------
Net assets acquired......................................... $41,716
=======
</Table>
On March 13, 2001, AmeriSteel acquired 80% of the operations of American Bright
Bar of Orrville, Ohio, a producer of cold drawn flat bar, for total
consideration of $4.2 million cash and $5.3 million of debt. The transaction was
accounted for as a purchase and goodwill of approximately $4.8 million was
recorded.
NOTE 4 -- INVENTORIES
Inventories consist of the following ($000s):
<Table>
<Caption>
AT DECEMBER 31,
--------------------
2002 2001
-------- --------
Ferrous and non-ferrous scrap............................... $ 40,983 $ 18,999
Work in-process............................................. 33,701 19,077
Finished goods.............................................. 195,893 127,818
Raw materials (excluding scrap) and operating supplies...... 80,823 45,526
-------- --------
$351,400 $211,420
======== ========
</Table>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following ($000s):
<Table>
<Caption>
AT DECEMBER 31, 2002
----------------------------------------
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
---------- ------------ ----------
Land and improvements....................................... $ 65,021 $ 1,769 $ 63,252
Buildings and improvements.................................. 142,971 14,472 128,499
Machinery and equipment..................................... 889,779 203,119 686,660
Construction in progress.................................... 14,315 -- 14,315
Property, plant and equipment held for sale................. 6,222 -- 6,222
---------- -------- --------
$1,118,308 $219,360 $898,948
========== ======== ========
</Table>
<Table>
<Caption>
AT DECEMBER 31, 2001
--------------------------------------
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
-------- ------------ ----------
Land and improvements....................................... $ 31,098 $ 1,177 $ 29,921
Buildings and improvements.................................. 84,545 10,011 74,534
Machinery and equipment..................................... 562,151 154,995 407,157
Construction in progress.................................... 12,724 -- 12,724
Property, plant and equipment held for sale................. 6,550 -- 6,550
-------- -------- --------
$697,068 $166,183 $530,885
======== ======== ========
</Table>
NOTE 6 -- JOINT VENTURES
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and SSS/MRM Guide Rail are 50% joint ventures. The Company's interests in the
joint ventures have been accounted for using the proportional consolidation
method under which the Company's proportionate share of assets, liabilities,
revenues and expenses of the joint ventures have been included in these
consolidated financial statements.
F-11
The Company's interest in the joint ventures is as follows ($000s):
<Table>
<Caption>
AT DECEMBER 31,
-----------------
2002 2001
------- ------
BALANCE SHEET
Current assets (1)(2)....................................... $45,234 $3,984
Property, plant and equipment (3)
Land...................................................... 4,525 --
Buildings................................................. 19,740 38
Machinery and equipment................................... 81,378 2,519
Construction in progress.................................. 1,778 --
Current liabilities......................................... 26,505 88
Long-term debt.............................................. 3,415 --
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2002 2001 2000
-------- ------- -------
STATEMENT OF EARNINGS
Sales....................................................... $ 53,591 $14,141 $14,579
Operating earnings.......................................... 6,836 1,833 2,196
Earnings before income taxes................................ 6,275 1,774 2,196
CHANGES IN CASH FLOWS
Cash provided from (used in)
Operating activities...................................... 6,098 973 1,073
Investing activities...................................... (1,809) (738) (457)
Financing activities...................................... (17,026) (198) (61)
-------- ------- -------
Proportionate share of increase (decrease) in cash.......... $(12,737) $ 37 $ 555
======== ======= =======
</Table>
- ---------------
(1) Includes $4.8 million (2001 -- $1.5 million) of cash and cash equivalents.
(2) Current assets are net of allowance for doubtful accounts of $2.2 million
(2001 -- $9 thousand).
(3) Net of accumulated depreciation of $5.9 million (2001 -- $2.6 million).
NOTE 7 -- LONG-TERM DEBT
The Company has debt agreements that are specific to the Gerdau Canada Group,
GUSA and former Co-Steel entities.
Gerdau Ameristeel debt includes the following ($000s):
<Table>
<Caption>
AT DECEMBER 31,
---------------------
2002 2001
--------- --------
Gerdau Canada Group:
Bank indebtedness......................................... $ 17,243 $ 4,083
U.S. Dollar Floating Rate Term Loan....................... 61,743 85,855
Canadian dollar revolving loan (Cdn $35.0 million)........ 22,157 15,068
Other..................................................... 1,444 1,458
GUSA:
AmeriSteel Revolving Credit Agreement..................... 100,800 80,000
AmeriSteel Term Loan...................................... 68,750 93,750
Industrial Revenue Bonds.................................. 36,795 33,195
AmeriSteel Bright Bar..................................... 3,522 3,867
Other..................................................... 809 1,130
Co-Steel Group:
Bank Indebtedness......................................... 6,136 --
Canadian dollar revolving loan (Cdn$48.3 million)......... 30,577 --
U.S. Dollar Fixed Rate Reducing Term Loan................. 96,784 --
Fair value of early payment penalty of fixed rate reducing
term loans.............................................. 9,065 --
U.S. dollar revolving loan................................ 59,768 --
Other..................................................... 3,561 --
--------- --------
519,154 318,406
Less current portion...................................... (107,321) (67,060)
--------- --------
$ 411,833 $251,346
========= ========
</Table>
F-12
GERDAU CANADA GROUP
The Gerdau Canada Group has a total authorized revolver facility of Cdn$73
million ($46 million) that bears interest at floating market rates approximating
the bank's prime rate (as defined in the agreement) plus 1.75% (2001 -- 2.25%)
or Bankers' Acceptance plus 2.75% (2001 -- 3.25%). Companies in the Gerdau
Canada Group have pledged accounts receivable and inventory as collateral. The
revolver facility expires on September 30, 2003 and is renewable through January
15, 2004.
The total authorized Canadian term facility is Cdn$97.5 million [$61.7 million]
(2001 -- Cdn$135 million [$84.8 million]) with a due date of January 15, 2004,
bearing interest at floating market rates approximating the bank's prime rate
(as defined in the agreement) plus 1.75% (2001 -- 2.25%). Interest rate swap
agreements related to this facility were entered into with the Gerdau Canada
Group's bank as the counterparty in November 1999 that effectively fixes the
rate of interest on approximately 50% of the balance. The agreement is for $17
million and bears interest at 6.425% for a term of five years expiring in 2004.
The aggregate fair value of the interest rate swap agreements, which represents
the amount that would be paid by the Gerdau Canada Group if the agreements were
terminated at December 31, 2002, was $1.2 million (2001 -- $2.2 million).
The Canadian banking agreement, which includes Gerdau Steel Inc. (the
controlling shareholder of Gerdau Ameristeel), contains various restrictive
covenants with respect to maintenance of certain financial ratios. At December
31, 2002, the Company was not in compliance with certain covenants and requested
and received a waiver of compliance (see Note 20).
In addition, the Gerdau Canada Group banking agreement requires additional
principal repayments of 50% of surplus combined cash flow as defined by the
banking agreement for years 2001 -- 2003. Based on the cash flows recorded in
2002, Gerdau Canada will be required to make an additional principal repayment
of $4.1 million in 2003. Collateral for the Canadian credit facility includes:
(i) Cdn$350 million demand debentures given by each of Gerdau Steel Inc., Gerdau
MRM Holdings Inc., Gerdau Ameristeel MRM Special Sections Inc. and Gerdau
Ameristeel Cambridge Inc., each granting a first priority fixed charge on real
estate, machinery and equipment, a first priority floating charge on all other
assets and a first priority fixed charge on inventory and accounts receivable to
a maximum of $20 million, (ii) pledges and guaranties of various Gerdau Canada
Group members, and (iii) a guaranty by Gerdau S.A. In addition, an "all risks"
insurance policy for full insurable value on a replacement cost basis has been
pledged to the lenders.
At December 31, 2002, Gerdau Canada Group was not in compliance with certain
covenants and requested and received a waiver of compliance from its lenders.
GUSA
GUSA's primary financial obligation outstanding as of December 31, 2002 is a
$285 million credit facility (the "Revolving Credit Agreement"). It is
collateralized by first priority security interests in substantially all
accounts receivable and inventories of GUSA as well as a lien on the Company's
Charlotte Mill property, plant and equipment. The Revolving Credit Agreement was
amended in September 2000 and increased the total facility from $150 million to
$285 million, of which $100 million is a term loan that amortizes at the rate of
25% per year beginning in December 2001. The Revolving Credit Agreement matures
in September 2005. Loans under the Revolving Credit Agreement bear interest at a
per annum rate equal to one of several rate options (LIBOR, Fed Funds or Prime
Rate, as defined in the agreement) based on the facility chosen at the time of
borrowing plus an applicable margin determined by tests of performance from time
to time. The effective interest rate at December 31, 2002 and 2001 was
approximately 3.8% and 4.2%, respectively. The Revolving Credit Agreement
contains certain covenants including the requirement to maintain financial
ratios and limitations on indebtedness, liens, investments and disposition of
assets and dividends. Letters of credit are subject to an aggregate sublimit of
$50 million.
GUSA's industrial revenue bonds ("IRBs") were issued to obtain funding to
construct facilities in Jackson, Tennessee; Charlotte, North Carolina;
Jacksonville, Florida; and Plant City, Florida. GUSA incurred an additional $3.6
million IRB with the acquisition of the Cartersville cold drawn facility in June
2002. The interest rates on these bonds range from 50% to 75% of the prime rate
(3.8% to 4.3% at December 31, 2002); $9.4 million of the IRBs mature in 2003,
$3.8 million matures in 2015, $20.0 million matures in 2017, and $3.6 million
matures in 2018. Irrevocable letters of credit issued pursuant to the Revolving
Credit Agreement back the IRBs. As of December 31, 2002, GUSA had approximately
$44.8 million of outstanding letters of credit, primarily for IRBs and
insurance.
The AmeriSteel Bright Bar Loan represents a bank loan of GUSA's majority-owned
subsidiary, secured by machinery and equipment. The loan matures in 2011 with
amortization payments that began in July 2001. The loan currently bears interest
at a rate of approximately 6.0% per year with the rate having been reset in June
2002 and every three years thereafter based on prime plus 1%. AmeriSteel is a
guarantor of the loan.
In order to reduce its exposure to interest-rate fluctuations, GUSA entered into
interest-rate swap agreements in August and September 2001. The interest-rate
swaps have a notional value of $55 million, with the Company paying a fixed
interest rate and receiving a variable interest rate based on three-month LIBOR.
The underlying hedged instruments are specific tranches of LIBOR-based revolving
credit and term loan borrowings under the Company's Revolving Credit Agreement.
The aggregate fair value of the effective portion of the interest rate
agreements, which represents the amount that would be paid by GUSA if the
agreements were terminated at December 31, 2002, was approximately $4.6 million.
As the hedged transaction occurs, this amount will be charged as interest
expense.
CO-STEEL GROUP
The Co-Steel entities at December 31, 2002 have revolving facilities of
Cdn$133.9 million and Cdn$22.2 million which can be drawn in either Canadian or
U.S. dollars. These facilities come due on January 15, 2004 and bear interest at
the bankers' acceptance rate or LIBOR plus 2% to 5% depending on debt to EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
The fixed rate reducing term loan at December 31, 2002 was $96.8 million. This
facility is reduced by $59.3 million on January 15, 2004 and then reduces by
U.S.$12.5 million on July 15 in each of the years 2004 to 2006 and bears
interest at a fixed rate of 8.9% to 10.9% depending on debt to EBITDA ratios.
The terms of this facility include a make-whole provision (in the event of
prepayment) that requires the Company to pay a
F-13
penalty if interest rates had decreased since the original inception of the
loan. At December 31, 2002, the amount of the make-whole provision (which was
included in the fair value adjustments related to the acquisition of Co-Steel)
was $9.1 million.
The facilities are secured by a first charge against substantially all assets of
the former Co-Steel entities.
The maturities of borrowings for the years subsequent to December 31, 2002 are
as follows ($000s):
<Table>
<Caption>
AMOUNT
--------
2003........................................................ $107,321
2004........................................................ 233,056
2005........................................................ 133,188
2006........................................................ 13,483
2007........................................................ 730
Thereafter.................................................. 31,376
--------
$519,154
========
</Table>
NOTE 8 -- RELATED PARTY TRANSACTIONS
Amounts due from (to) related companies at December 31, 2001 are as follows
($000's):
<Table>
Notes receivable from Gerdau Steel Inc.
Interest ranging from 0.0%-10.25% (included in Other
Assets)................................................... $ 90,682
---------
Notes payable to Gerdau Steel Inc.
Interest ranging from 0.0%-9.775%........................... $(213,516)
Notes payable to GTL Financial Corporation B.V.
Interest ranging from 0.0%-9.10%............................ (156,071)
Notes payable by GUSA to Gerdau Steel Inc.
Interest rate of 9.23%...................................... (35,640)
---------
Long-term related party loans payable....................... $(405,227)
=========
</Table>
The Company is affiliated with a group of companies controlled by Gerdau S.A.
The related parties noted in the table above are related to Gerdau S.A. Related
party loans bear interest that is expensed but is not payable on a current
basis. Except for the $35.6 million debt of GUSA to Gerdau Steel Inc., interest
is added to the loan balance. All advances were repayable on demand with no
collateral. The related parties indicated that it was not their intent to demand
repayment during 2002 and, as a result, the amounts were classified as
long-term. Intercompany charges for interest income (expense) of $4.3
million/($18.3 million), $6.6 million/($31.6 million) and $6.6 million/($(18.7)
million) in 2002, 2001 and 2000, respectively. Intercompany charges for
management fees and royalties from related parties were $2.1 million, $2.8
million and $3.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
The $35.6 million note payable by GUSA to Gerdau Steel Inc. related to the
September 2000 acquisition by Gerdau of the outstanding common stock of FLS
formerly owned by Kyoei Steel Ltd. The loan accrued interest at the rate of
9.23% and had no stated maturity date. Gerdau Steel Inc. had represented that no
repayments are required prior to December 31, 2003, and therefore the loan was
classified as long-term.
As part of the Co-Steel transaction (see Note 1), all of the related party notes
payable, net of the notes receivable from Gerdau Steel Inc., were converted to
equity in October 2002.
NOTE 9 -- CONVERTIBLE DEBENTURES
The Company's unsecured, subordinated convertible debentures bear interest at
6.5% per annum, mature on April 30, 2007, and, at the holders' option, are
convertible into Common Shares of the Company at a conversion price of Cdn$26.25
per share. Under the terms of the Trust Indenture for the Convertible
Debentures, no adjustment to the conversion price is required if the Company
issues Common Shares in a customary offering. The debentures are redeemable
after April 30, 2002, at the option of the Company at par plus accrued interest.
The Company has the right to settle the principal amount by the issuance of
Common Shares based on their market value at that the time of redemption.
As the convertible debentures can be redeemed by the Company by the issuance of
Common Shares, the debenture obligations are classified as shareholders' equity.
Interest on the shareholders' equity component, net of related income taxes, has
been charged to retained earnings, and was deducted from the net earnings or
added to net loss in calculating basic earnings per share.
F-14
NOTE 10 -- INCOME TAXES
The effective income tax rate on earnings (loss) is influenced by the geographic
mix of the consolidated earnings (loss), as well as various tax incentives
introduced by governments from time to time to encourage investment. The
following table reconciles income tax recovery (expense) calculated at a
combined U.S. federal/state and Canadian federal/provincial tax rate with the
income tax provision ($000s):
<Table>
<Caption>
2002 2001 2000
------- ------- ------
Income (loss) before provision for income taxes............. $13,180 $(7,663) $8,286
------- ------- ------
Tax provision at Canadian statutory rates of 38.62%, (43% in
2000)..................................................... $ 5,091 $(2,402) $3,844
Increased (decreased) by the tax effect of:
Foreign (losses) taxed at lower rates..................... (4,437) (9,933) (8,341)
Canadian manufacturing and processing credit.............. (215) 532 (747)
Capital losses not tax affected........................... 4,719 3,186
Goodwill amortization..................................... -- 2,531 2,508
Other items, net.......................................... (98) 1,972 1,727
------- ------- ------
Income tax expense (recovery)............................... $ 341 $(2,581) $2,177
======= ======= ======
</Table>
The components of the future tax assets and liabilities consisted of the
following:
<Table>
<Caption>
2002 2001
--------- ---------
CURRENT ASSETS
Allowance for doubtful accounts............................. $ 3,716 $ 497
Liabilities not currently deductible for tax purposes....... 7,701 4,823
--------- ---------
Gross current future tax assets............................. $ 11,417 $ 5,320
--------- ---------
NON-CURRENT ASSETS
Operating loss carry forwards............................. $ 37,244 $ --
Recycling and AMT credits................................. 6,694 --
Pension and retirement accruals........................... 23,722 9,461
Long-term liabilities not currently deductible............ 25,171 2,605
--------- ---------
Gross non-current future tax assets......................... 92,831 12,066
--------- ---------
NON-CURRENT LIABILITIES
Property, plant and equipment............................. (164,406) (109,715)
Assets held for sale...................................... (2,161) (2,183)
Other..................................................... (8,422) 723
--------- ---------
Gross future tax liabilities................................ (174,989) (111,175)
--------- ---------
Net long-term future tax liability.......................... $ (82,158) $ (99,109)
========= =========
</Table>
The provision for income tax recovery (expense) by jurisdiction is as follows:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Earnings (loss) before income taxes
Canada.................................................... $ 4,863 $46,788 $(4,884)
U.S....................................................... 4,691 (54,451) 12,714
Other..................................................... 3,626 -- --
------- ------- -------
$13,180 $(7,663) $ 7,830
Current income tax recovery (expense)
Canada.................................................... $ 2,889 $ 20 $ 3,694
U.S....................................................... 8,255 (317) 5,530
Other..................................................... (375) -- --
------- ------- -------
10,769 (297) 9,224
------- ------- -------
Future income tax expense
Canada.................................................... (830) (1,201) (1,726)
U.S....................................................... (9,598) (1,083) (5,321)
Other..................................................... -- -- --
------- ------- -------
(10,428) (2,284) (7,047)
------- ------- -------
Net income tax expense (recovery)........................... $ 341 $(2,581) $ 2,177
======= ======= =======
</Table>
NOTE 11 -- POST RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan covering the majority of
employees. The benefits are based on years of service and compensation during
the period of employment. Annual contributions are made in conformity with
minimum funding requirements and
F-15
maximum deductible limitations. The remaining employees are covered by defined
contribution retirement plans for which Company contributions and expense
amounted to approximately $8.2 million (2001 -- $1.1 million, 2000 -- $0.7
million).
The Company currently provides specified health care benefits to retired
employees. Employees who retire after a certain age with specified years of
service become eligible for benefits under this unfunded plan. The Company has
the right to modify or terminate these benefits.
The following tables summarize the accumulated pension benefits and
postretirement medical benefit obligations included in the Company's
consolidated statements of financial position ($000s):
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFIT PLANS
-------------------------------------------- --------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost................ $ 5,606 $ 4,947 $ 4,168 $ 341 $ 247 $ 210
Interest cost............... 12,830 10,921 10,098 876 586 564
Expected return on plan
assets.................... (13,536) (12,258) (11,494) -- -- --
Amortization of prior
service cost.............. 388 282 (35) -- -- (11)
Recognized actuarial gain... 4 (134) 106 -- -- (18)
---------- ---------- ---------- ----------- --------- ---------
Net periodic benefit cost... $ 5,292 $ 3,758 $ 2,843 $ 1,217 $ 833 $ 745
---------- ---------- ---------- ----------- --------- ---------
CHANGE IN BENEFIT
OBLIGATIONS
Benefit obligation at
beginning of period....... $ 164,260 $ 146,934 $ 131,935 $ 9,068 $ 7,858 $ 7,834
Acquisition of Co-Steel..... 111,531 -- -- 22,048 -- --
Service cost................ 5,606 4,947 4,168 341 247 210
Interest cost............... 12,829 10,921 10,098 876 585 564
Plan participants'
contributions............. -- -- -- 532 466 429
Amendments.................. 2,232 973 -- -- 135 --
Actuarial loss.............. 13,659 7,777 7,758 444 1,180 50
Benefits and administrative
expenses paid............. (8,765) (7,292) (7,025) (1,331) (1,403) (1,229)
---------- ---------- ---------- ----------- --------- ---------
Benefit obligation at end of
period.................... $ 301,352 $ 164,260 $ 146,934 $ 31,978 $ 9,068 $ 7,858
---------- ---------- ---------- ----------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of period....... $ 133,827 $ 140,599 $ 134,964 $ -- $ -- $ --
Acquisition of Co-Steel..... 79,628 -- -- -- -- --
Actual return on plan
assets.................... (8,762) (1,390) 11,455 -- -- --
Employer contribution....... 10,142 1,910 1,205 799 937 800
Plan participants'
contributions............. -- -- -- 532 466 429
Benefits and administrative
expenses paid............. (8,765) (7,292) (7,025) (1,331) (1,403) (1,229)
---------- ---------- ---------- ----------- --------- ---------
Fair value of plan assets at
end of period............. $ 206,070 $ 133,827 $ 140,599 $ -- $ -- $ --
---------- ---------- ---------- ----------- --------- ---------
RECONCILIATION OF FUNDED
STATUS -- END OF PERIOD
Funded status............... $ (95,282) $ (30,433) $ (6,476) $ (31,979) $ (9,068) $ (7,858)
Unrecognized transition
liability................. 1,702 1,845 5,286 -- -- --
Unrecognized prior service
cost...................... 2,564 578 (257) -- -- (135)
Unrecognized actuarial
loss...................... 52,139 16,086 (8,729) 690 246 (933)
---------- ---------- ---------- ----------- --------- ---------
Net amount recognized....... $ (38,877) $ (11,924) $ (10,176) $ (31,289) $ (8,822) $ (8,926)
---------- ---------- ---------- ----------- --------- ---------
ASSUMPTIONS
Rate of return on plan
assets.................... 7.5%-9.25% 7.0%-9.25% 7.0%-9.25%
Discount rate............... 6.5%-6.75% 7.0%-7.25% 7.0%-7.5% 6.5%-6.75% 7.25% 7.5%
Rate of compensation
increases................. 4.25%-4.5% 2.5%-4.5% 2.5%-4.5%
Trend rate -- beginning next
year...................... 10.0%-12.0% 8.6% 9.3%
Trend rate -- ending year
2008...................... 5.5% 5.5%-6.0% 5.5%-6.0%
</Table>
The Company also has a voluntary savings plan available to substantially all of
its employees. Under this plan, the Company contributes amounts based upon a
percentage of the savings paid into the plan by employees. The Company matches
50% of the employees' contributions up to 4% of
F-16
employees' salaries. Costs under this plan for the period ended December 31,
2002 were $1.9 million (2001 -- $1.8 million, 2000 -- $1.8 million).
NOTE 12 -- OTHER LIABILITIES
Other liabilities consist of the following ($000s):
<Table>
<Caption>
AT DECEMBER 31,
------------------
2002 2001
------- -------
Unfavorable long-term lease obligations (a)................. $18,510 $ --
Environmental remediation costs (note 16)................... 14,900 1,755
Royalties and management fees payable to parent............. 6,410 11,024
Other....................................................... 9,475 2,204
------- -------
49,295 14,983
Less current portion........................................ (20,120) (9,453)
------- -------
$29,175 $ 5,530
======= =======
</Table>
- ---------------
(a) Certain of the operating lease commitments of the former Co-Steel entities
were at lease rates in excess of fair value as of the acquisition date.
Accordingly, a purchase accounting liability has been recorded by the
Company for the present value of the unfavorable lease commitments.
NOTE 13 -- FINANCIAL INSTRUMENTS
The Company's use of derivative instruments is limited. Derivative instruments
are not used for speculative purposes but they are used to manage well-defined
foreign exchange and interest rate risks arising out of the normal course of
business.
At certain times throughout the year the Company enters into forward foreign
exchange contracts and put and call options (collectively "foreign exchange
contracts") to hedge accounts receivable and future revenues denominated in U.S.
dollars. At December 31, 2002, the Company had no forward foreign exchange
contracts outstanding. Unrealized gains and losses on outstanding forward
foreign exchange contracts are recorded in the financial statements for accounts
receivable and not recorded in the financial statements for hedges against
future foreign currency revenue.
The Company's estimate of the fair value of the financial instruments, which
include receivables, accounts payable, long-term debt and the liability
component of the convertible debentures, approximates their carrying value due
to their short maturity.
NOTE 14 -- CAPITAL STOCK
CAPITAL STOCK:
Capital stock consists of the following shares:
<Table>
<Caption>
AUTHORIZED ISSUED INVESTED
NUMBER NUMBER CAPITAL
---------- ----------- --------------
(In thousands)
DECEMBER 31, 2001
COMMON...................................................... Unlimited 133,388,400 $ 58,364
PREFERRED................................................... Unlimited -- --
----------- --------
133,388,400 $ 58,364
=========== ========
December 31, 2002
Common...................................................... Unlimited 184,892,360 $513,400
Preferred................................................... Unlimited -- --
----------- --------
184,892,360 $513,400
=========== ========
</Table>
The predecessor of the Company is the Gerdau North America Group, which was
not a legal entity but a combination of Gerdau companies in North America and
therefore had no capital structure of its own. The 133,388,400 issued shares
as of December 31, 2001 represent those shares issued to Gerdau as a result
of the acquisition which occurred on October 23, 2002.
The Company has two stock options plans; one, the former Co-Steel Stock-Based
Option Plan, and the other, a plan administered by the Ameristeel subsidiary.
The following discussion relates to the former Co-Steel Stock-Based Option
Plan. Please see Note 15 -- Subsidiary Stock Compensation Plans for details
regarding the AmeriSteel plans.
Under the Company's Stock-Based Option Plan, the Company was permitted to
grant options to employees and directors to acquire up to a maximum of
3,041,335 Common Shares. The exercise price was based on the closing price of
Common Shares on the trading date previous to the date the options are
issued. The options have a maximum term of 10 years, have a vesting term of
various periods as determined by the Plan administrator at the time of grant,
and are exercisable in installments.
F-17
A summary of all share purchase options is as follows:
<Table>
<Caption>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE AGGREGATE
SHARES PRICE OPTION PRICE
--------- --------- --------------
(In thousands)
Balance -- December 31, 2002................................ 1,367,400 Cdn$14.69 Cdn$20,092
========= ========= ==========
</Table>
The following table summarizes information about share purchase options
outstanding at December 31, 2002:
<Table>
<Caption>
WEIGHTED AVG. WEIGHTED AVG.
EXERCISE PRICE RANGE NUMBER OUTSTANDING AT REMAINING EXERCISE PRICE NUMBER EXERCISABLE AT
CDN$ DECEMBER 31, 2002 CONTRACTUAL LIFE CDN$ DECEMBER 31, 2002
-------------------- --------------------- ---------------- -------------- ---------------------
18.60 to 19.75.................... 295,500 4.5 years 19.07 295,500
22.00 to 30.625................... 1,071,900 3.2 years 24.35 1,071,900
</Table>
The options expire on various dates up to April 13, 2008.
On October 23, 2002, the Gerdau companies in North America, consisting of
GUSA, Gerdau Courtice Steel Inc. and Gerdau MRM Steel Inc., among other
holding companies, were combined with Co-Steel Inc., a Canadian minimill
steel producer. The combined entity was renamed Gerdau Ameristeel Corporation
and is publicly traded on the Toronto Stock Exchange under the ticker symbol
GNA.TO. As part of this transaction, minority shareholders of AmeriSteel,
consisting primarily of management and other employees, are required to
exchange their shares of AmeriSteel stock for shares of Gerdau Ameristeel.
Gerdau Ameristeel has filed Form F-4 with the Securities and Exchange
Commission and the exchange of shares is expected to be completed on or about
March 31, 2003. As a result, an additional 13,199,794 shares of Gerdau
Ameristeel will be issued.
On October 23, 2002, the sole owner (Gerdau U.S.A., Inc., or "GUSA1") of
AmeriSteel's parent (FLS Holdings, Inc., or "FLS") was merged into FLS, which
then changed its name to Gerdau USA Inc. As a result, AmeriSteel is a
majority-owned subsidiary of GUSA whose only business is to own common stock
of AmeriSteel. GUSA, which owns 87% of the common stock of AmeriSteel, is an
indirect majority owned subsidiary of Gerdau Ameristeel Corporation, a
Canadian corporation. GUSA acquired 88% of FLS in September 1999, and the
remaining 12% in September 2000, in each instance from Kyoei Steel Ltd. An
institutional investor owns approximately 4% of the common stock of
AmeriSteel. Executives, other employees and related persons own the remaining
9% of AmeriSteel's common stock.
EARNINGS PER SHARE:
The following table identifies the components of basic and diluted earnings
per share ($000s except per share data):
<Table>
<Caption>
2002 2001 2000
------------ ------------ ------------
Net income (loss)........................................... $ 11,132 $ (6,066) $ 3,943
Less interest on equity component of convertible
debentures................................................ (631) -- --
------------ ------------ ------------
Adjusted net income (loss).................................. $ 10,501 $ (6,066) $ 3,943
------------ ------------ ------------
Weighted average shares outstanding -- Basic................ 143,045,393 133,388,400 133,388,400
------------ ------------ ------------
Earnings per share -- Basic................................. $ 0.07 $ (0.05) $ 0.03
------------ ------------ ------------
Weighted average shares outstanding -- Diluted.............. 143,045,393 133,388,400 133,388,400
------------ ------------ ------------
Earnings per share -- Diluted............................... $ 0.07 $ (0.05) $ 0.03
</Table>
At December 31, 2002, options to purchase 1,367,400 (2001 -- 1,801,209; 2000
-- 1,810,209) common shares were not included in the computation of diluted
earnings (loss) per share because the options' exercise price was greater
than the market price of the common shares.
The conversion into common shares of the convertible debentures has not been
included in the diluted earnings (loss) per share calculations as the
conversion rate of Cdn$26.25 per share is antidilutive.
NOTE 15 -- SUBSIDIARY STOCK COMPENSATION PLANS
A subsidiary of the Company, AmeriSteel Corporation, has a number of stock
compensation plans for its employees. Under the terms of the Transaction
Agreement relating to the acquisition of Co-Steel, minority shareholders of
AmeriSteel will exchange shares of AmeriSteel stock and options for stock and
options of Gerdau Ameristeel at an exchange rate of 9.4617 Gerdau Ameristeel
shares and options for each AmeriSteel share or option. This exchange is
scheduled to occur by March 31, 2003.
In March 2000, AmeriSteel's Board of Directors approved a long-term incentive
plan available to executive management (the "Stakeholder Plan") to ensure
AmeriSteel's senior management's interest is congruent with AmeriSteel's
shareholders. Awards are determined by a formula based on AmeriSteel's return on
capital employed in a given plan year. Earned awards vest and are paid out over
a period of four years. Participants may elect cash payout or investments in
phantom stock of AmeriSteel and Gerdau, for which a 25% premium is earned if
elected. Benefits charged to expense under this plan for the years ended
December 31, 2002, 2001 and 2000, were $90 thousand, $257 thousand and $300
thousand, respectively.
F-18
In July 1999, AmeriSteel's Board of Directors approved a Stock Purchase/SAR Plan
(the "SAR Plan") available to essentially all employees. The SAR Plan authorizes
100,000 shares of common stock to be sold to employees during three offering
periods, July through September in each of 1999, 2002 and 2005. Employees who
purchase stock are awarded stock appreciation rights ("SARs") equal to four
times the number of shares purchased. In the 1999 offering period, a total of
42,321 shares were sold under the SAR Plan at a purchase price of $15.30 per
share, with 28,683 of these shares outstanding as of December 31, 2002. SARs
were granted at fair value at the date of the grant, determined based on an
independent appraisal as of the previous year-end. In the 1999 offering period,
a total of 169,284 SARs were granted under the SAR Plan, with 114,451 of these
rights outstanding as of December 31, 2002. In the 2002 offering period, a total
of 44,299 shares were sold under the SAR Plan at a purchase price of $14.45 per
share, with 44,299 of these shares outstanding as of December 31, 2002. SARs
were granted at fair value at the date of the grant, determined based on an
independent appraisal as of the previous year-end. In the 2002 offering period,
a total of 177,196 SARs were granted under the SAR Plan, with 177,048 of these
rights outstanding as of December 31, 2002. The SARs become exercisable at the
rate of 25% annually from the grant date and may be exercised for 10 years from
the grant date.
In September 1996, AmeriSteel's Board of Directors also approved the AmeriSteel
Corporation Equity Ownership Plan (the "Equity Ownership Plan"), which provides
for grants of common stock, options to purchase common stock and SARs. The
maximum number of shares that can be issued under the plan is 438,852. The
Company has granted 493,350 incentive stock options and 52,100 shares of common
stock under the Equity Ownership Plan through December 31, 2002, with 279,553
incentive stock options and 22,006 shares of common stock outstanding at
December 31, 2002. All issued options and shares of issued common stock become
one-third vested two years from the grant date, and one third in each of the
subsequent two years from the grant date. All grants were at the fair market
value of the common stock on the grant date, determined based on an independent
appraisal as of the end of the previous year-end. Options may be exercised for
10 years from the grant date.
In May 1995, AmeriSteel's Board of Directors approved a Stock Purchase/Option
Plan (the "Purchase Plan") available to essentially all employees. Employees who
purchased stock were awarded stock options equal to six times the number of
shares purchased. A total of 37,689 shares were sold under the Purchase Plan at
a purchase price of $10.63 per share, with 397 of these shares outstanding as of
December 31, 2002. The options were granted at fair value at the date of the
grant, determined based on an independent appraisal as of the end of the
previous year-end. A total of 226,134 options were granted under the Purchase
Plan, with 1,644 of these options outstanding as of December 31, 2002. No
options remain available for future grant. All options outstanding are currently
vested. Options may be exercised for 10 years from the grant date.
The following tables summarize AmeriSteel's stock option activity for the years
ended December 31, 2002, 2001 and 2000:
<Table>
<Caption>
EQUITY OWNERSHIP PLAN
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding, beginning of period.......... 305,840 $19.22 204,006 $19.22 192,467 $15.86
Granted................................... 58,650 17.00 121,000 13.00 51,900 28.00
Exercised................................. (17,053) 12.75 (9,631) 13.42 (31,281) 13.12
Forfeited................................. (67,884) 14.02 (9,535) 19.31 (9,080) 19.74
------- ------ ------- ------ ------- ------
Outstanding, end of period................ 279,553 $17.91 305,840 $16.94 204,006 $19.22
------- ------ ------- ------ ------- ------
Options vested at end of period........... 115,395 $18.29 92,977 $15.57 64,389 $14.24
------- ------ ------- ------ ------- ------
Weighted-average fair value of options
granted during the period............... $ 3.22 $ 2.87 $12.50
------ ------ ------
</Table>
<Table>
<Caption>
PURCHASE PLAN
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding, beginning of period.......... 1,824 $12.50 3,468 $12.50 15,960 $12.50
Granted................................... -- -- -- -- -- --
Exercised................................. (180) 12.50 (1,644) 12.50 (12,492) 12.50
Forfeited................................. -- 12.50 -- 12.50 -- 12.50
----- ------ ------ ------ ------- ------
Outstanding, end of period................ 1,644 $12.50 1,824 $12.50 3,468 $12.50
===== ====== ====== ====== ======= ======
Options vested at end of period........... 1,644 $12.50 1,824 $12.50 3,468 $12.50
===== ====== ====== ====== ======= ======
</Table>
The weighted-average remaining contractual life of the options under the Equity
Ownership Plan and the Purchase Plan as of December 31, 2002, is 4.1 years for
options granted through 1997 at a price between $12.50 and $13.50 per share, and
6.6 years for those options granted between 1998 and 2000 at a price between
$20.00 and $28.00 per share, and 8.9 years for options granted between 2001 and
2002 at a price between $13.00 and $17.00 per share. The weighted-average
exercise price of the options under the Equity Ownership Plan as of December 31,
2002 is $13.21 for options granted through 1997 at a price between $12.50 and
$13.50 per share, $22.17 for those options granted between 1998
F-19
and 2000 at a price between $20.00 and $28.00 per share, and $14.95 for options
granted in 2001 and 2002 at a price between $13.00 and $17.00 per share. The
weighted-average exercise price of the options under the Purchase Plan as of
December 31, 2002 is $12.50.
NOTE 16 -- CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL
As the Company is involved in the manufacture of steel, it produces and uses
certain substances that may pose environmental hazards. The principal
hazardous waste generated by current and past operations is electric arc
furnace ("EAF") dust, a residual from the production of steel in electric arc
furnaces. Environmental legislation and regulation at both the federal and
state level over EAF dust is subject to change, which may change the cost of
compliance. While EAF dust is generated in current production processes, such
EAF dust is being collected, handled and disposed of in a manner that the
Company believes meets all current federal, state and provincial
environmental regulations. The costs of collection and disposal of EAF dust
are being expensed as operating costs when incurred. In addition, the Company
has handled and disposed of EAF dust in other manners in previous years, and
is responsible for the remediation of certain sites where such dust was
generated and/or disposed.
In general, the Company's estimate of remediation costs is based on its
review of each site and the nature of the anticipated remediation activities
to be undertaken. The Company's process for estimating such remediation costs
includes determining for each site the expected remediation methods, and the
estimated cost for each step of the remediation. In such determinations, the
Company may employ outside consultants and providers of such remedial
services to assist in making such determinations. Although the ultimate costs
associated with the remediation are not known precisely, the Company
estimated the total remaining costs as at December 31, 2002 to be
approximately $6.3 million (2001 -- $2.9 million), with these costs recorded
as a liability at December 31, 2002, of which the Company expects to pay
approximately $5.1 million within the year ended December 31, 2003.
An additional liability of $8.6 million has been recorded in respect of
certain environmental obligations which were triggered by the change in
control of Co-Steel in certain jurisdictions in which Co-Steel operated. This
liability was recorded at the present value of the estimated future costs of
these obligations.
Based on past use of certain technologies and remediation methods by third
parties, evaluation of those technologies and methods by the Company's
consultants and third-party estimates of costs of remediation-related
services provided to the Company or which the Company and its consultants are
aware, the Company and its consultants believe that the Company's cost
estimates are reasonable. Considering the uncertainties inherent in
determining the costs associated with the clean-up of such contamination,
including the time periods over which such costs must be paid, the extent of
contribution by parties which are jointly and severally liable, and the
nature and timing of payments to be made under cost sharing arrangements,
there can be no assurance the ultimate costs of remediation may not differ
from the estimated remediation costs.
In April 2001, the Company was notified by the United States Environmental
Protection Agency (the "EPA") of an investigation that identifies the Company
as a potential responsible party ("PRP") in a Superfund Site in Pelham,
Georgia. The Pelham site was a fertilizer manufacturer in operation from 1910
through 1992, lastly operated by Stoller Chemical Company, a now bankrupt
corporation. The EPA offered a settlement to the named PRPs under which the
Company's allocation was approximately $1.8 million. The Company objects to
its inclusion as a PRP in this site and is pursuing legal alternatives,
including the addition to the allocation of larger third parties which the
Company believes were incorrectly excluded from the original settlement
offer. The EPA has filed suit with the Company named as a defendant. As the
ultimate exposure to the Company, if any, is uncertain, no liability has been
established for this site.
Carbon monoxide and other emissions at Gerdau Ameristeel Perth Amboy exceeded
permitted levels on several occasions during 2001 and early 2002. Gerdau
Ameristeel is conducting investigations to determine the cause of these
episodes, what steps can be taken to reduce emissions and whether the Gerdau
Ameristeel Perth Amboy environmental permits require modification.
Discussions with the NJDEP regarding permit and compliance issues are in a
preliminary stage. Penalty assessments of approximately $400 thousand have
been accrued.
OTHER CLAIMS
In the normal course of its business, various lawsuits and claims are brought
against the Company. The Company vigorously contests any claim which it
believes is without merit. Management believes that any settlements will not
have a material effect on the financial position or the consolidated earnings
of the Company.
F-20
OPERATING LEASE COMMITMENTS
The Company leases certain equipment and real property under non-cancelable
operating leases. Aggregate future minimum payments under these leases are as
follows ($000s):
<Table>
<Caption>
YEAR ENDING
DECEMBER 31 AMOUNT
----------- -------
2003........................................................ $13,242
2004........................................................ 10,757
2005........................................................ 9,417
2006........................................................ 6,859
2007........................................................ 5,981
Thereafter.................................................. 38,095
-------
$84,351
=======
</Table>
SERVICE COMMITMENTS
The Company has long-term contracts with several raw material suppliers. The
Company typically realizes lower costs and improved service from these
contracts. The Company believes these raw materials would be readily
available in the market without such contracts.
NOTE 17 -- OTHER (INCOME) EXPENSE
Other income, net of other expenses for the year ended December 31, 2002,
consists of $6.1 million proceeds from an insurance settlement relating to
environmental costs incurred by the Company in prior years, partially offset by
$1.0 million relating to the closing of the Wilmington, Delaware and St. Albans,
West Virginia fabricating plants.
Other income, net of other expenses for the year ended December 31, 2001,
includes prior year tax refunds ($.7 million income), expenses relating to the
melting of a small amount of cesium at the Jacksonville mill ($.4 million
expense), a settlement with electrode suppliers ($2.8 million income), and the
loss on sale of marketable securities ($2.6 million expense.)
Other expenses, net of other income for the year ended December 31, 2000,
includes $3.0 million startup costs associated with a new melt shop at the
Knoxville mill partially offset by a $300 thousand settlement with electrodes
suppliers for price fixing violations.
NOTE 18 -- SEGMENT INFORMATION
The Company is organized into two primary business segments: (a) Mills and (b)
Downstream. Steel products sold to the downstream divisions are sold at market
prices with intracompany transactions eliminated upon consolidation. Performance
is evaluated and resources allocated based on specific segment requirements and
measurable factors. Segment assets are those assets that are specifically
identified with the operations in each operational segment. Corporate assets
include primarily: cash; assets held for sale; some property, plant and
equipment; deferred income taxes; and deferred financing costs. Corporate
expense includes: corporate headquarters staff, including executive management;
human resources; finance and accounting; procurement and environmental; and
management information systems. Included in these respective areas are payroll
costs, travel and entertainment, professional fees and other costs that may not
be directly attributable to either specific segment.
Operational results and other financial data for the geographic and two business
segments for the years ended December 31 are presented below ($000s):
<Table>
<Caption>
MILLS DOWNSTREAM TOTAL
---------- ---------- ----------
2002
Revenue from external customers............................. $ 771,906 $264,149 $1,036,055
Intersegment revenues....................................... 159,027 -- 159,027
Depreciation and amortization expense....................... 46,460 3,775 50,235
Segment profit.............................................. 49,973 8,842 58,815
Total assets................................................ 1,424,363 122,425 1,546,788
Expenditures for long-lived assets.......................... 24,581 7,131 31,712
</Table>
<Table>
<Caption>
MILLS DOWNSTREAM TOTAL
---------- ---------- ----------
2001
Revenue from external customers............................. $ 562,216 $278,620 $ 840,836
Intersegment revenues....................................... 176,846 -- 176,846
Depreciation and amortization expense....................... 44,842 4,650 49,492
Segment profit.............................................. 42,852 13,008 55,860
Total assets................................................ 1,052,211 113,531 1,165,742
Expenditures for long-lived assets.......................... 24,176 3,748 27,924
</Table>
F-21
<Table>
<Caption>
MILLS DOWNSTREAM TOTAL
---------- ---------- ----------
2000
Revenue from external customers............................. $ 617,124 $282,559 $ 899,683
Intersegment revenues....................................... 184,617 -- 184,617
Depreciation and amortization expense....................... 43,628 3,921 47,549
Segment profit.............................................. 52,099 23,087 75,186
Total assets................................................ 1,042,259 108,206
Expenditures for long-lived assets.......................... 47,439 5,083
</Table>
Geographic data is as follows:
<Table>
<Caption>
UNITED STATES CANADA TOTAL
------------- -------- ----------
2002
Revenue from external customers............................. $862,300 $173,754 $1,036,055
Long-lived assets........................................... 665,055 233,251 898,948
2001
Revenue from external customers............................. $704,474 $136,362 $ 840,836
Long-lived assets........................................... 395,844 135,041 530,885
2000
Revenue from external customers............................. $769,438 $130,245 $ 899,683
</Table>
The reconciliation of reportable segments to combined totals is as follows
($000s):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
REVENUE
Total segments revenue...................................... $1,195,082 $1,017,682 $1,084,300
Elimination of intersegment revenues........................ (159,027) (176,846) (184,617)
---------- ---------- ----------
Combined revenues........................................... $1,036,055 $ 840,836 $ 899,683
---------- ---------- ----------
DEPRECIATION AND AMORTIZATION
Total segments depreciation and amortization................ $ 50,235 $ 49,492 $ 47,549
Corporate depreciation and amortization..................... 9,620 13,147 11,529
---------- ---------- ----------
Combined depreciation and amortization...................... $ 59,855 $ 62,639 $ 59,078
---------- ---------- ----------
PROFIT
Total segments profit....................................... $ 58,815 $ 55,860 $ 75,186
Other income (expense)...................................... 5,072 1,079 (2,738)
Elimination of intersegment profits......................... 899 (480) (4,276)
Unallocated amounts:
Corporate expense......................................... (11,606) (13,134) (8,983)
Interest expense.......................................... (39,770) (50,032) (51,114)
Foreign exchange loss..................................... (230) (249) 211
Taxes (expense) benefit................................... (341) 2,581 (2,177)
Loss on investment........................................ -- (707) --
Minority interest......................................... (1,707) (984) (2,166)
---------- ---------- ----------
Consolidated profit (loss)................................ $ 11,132 $ (6,066) $ 3,943
---------- ---------- ----------
ASSETS
Total segments assets....................................... $1,546,788 $1,165,742
Elimination of intersegment assets.......................... (133,085) (241,726)
Other unallocated assets.................................... 157,698 137,923
---------- ----------
Combined assets............................................. $1,571,401 $1,061,939
---------- ----------
EXPENDITURES FOR LONG-LIVED ASSETS
Total segments expenditures................................. $ 31,712 $ 27,924 $ 52,522
Corporate expenditures...................................... 1,770 495 168
---------- ---------- ----------
Combined expenditures for long-lived assets................. $ 33,482 $ 28,419 $ 52,690
========== ========== ==========
</Table>
F-22
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
REVENUES BY PRODUCT LINES
Mill finished goods:
Stock rebar............................................... $ 198,460 $185,032 $177,025
Merchant bar/special sections............................. 440,909 338,218 396,565
Rods...................................................... 47,060 16,925 20,744
Flat rolled............................................... 38,572 -- --
---------- -------- --------
Total mill finished goods:.................................. 725,001 540,175 594,334
Billets..................................................... 15,313 5,790 10,630
---------- -------- --------
Total mill products......................................... 740,314 545,965 604,964
Other mill segments......................................... 31,101 15,913 --
Fabricating and downstream.................................. 264,640 278,958 294,719
---------- -------- --------
Total segment revenues...................................... $1,036,055 $840,836 $899,683
========== ======== ========
</Table>
NOTE 19 -- LIQUIDITY
The Company's Canadian credit facilities are scheduled to be reduced by
approximately $120 million on January 15, 2004 and total debt to be repaid under
existing repayment terms in fiscal 2004 totals $233 million. In March 2003, the
Company commenced a $750 million refinancing program which the Company expects
to complete in the second quarter of 2003. If successful, the proceeds from the
refinancing program will be used to repay existing revolving credit facilities
and term loans.
NOTE 20 -- SUBSEQUENT EVENTS
In the first quarter of 2003, Gerdau S.A. made loans totaling $30 million to
GUSA to increase liquidity within Gerdau Ameristeel. These loans will be used
for working capital purposes and bear interest at the rate of 6.5%. The loans do
not have a stated maturity, but it is the intent of the Company to repay these
loans as soon as practicable.
In April 2003, AmeriSteel received a waiver from its lenders as it expected to
exceed its leverage ratio covenant of 3.75 to one due to weak operating margins
in the first quarter. The Company believes AmeriSteel will be able to comply
with the covenants during the remainder of 2003.
In April 2003, the Gerdau Canada Group requested and received waivers for
non-compliance with certain covenants for the December quarter and expected
non-compliance for fiscal 2003.
On March 31, 2003, under the terms of the Transaction Agreement relating to the
acquisition of Co-Steel, the Company completed an exchange of minority shares of
AmeriSteel for shares of Gerdau Ameristeel. Minority shareholders of AmeriSteel,
mostly executives and employees, exchanged 1,395,041 shares of AmeriSteel for
13,199,260 shares of Gerdau Ameristeel, an exchange ratio of 9.4617 to one. As a
result, AmeriSteel became a wholly owned subsidiary of Gerdau Ameristeel.
NOTE 21 -- DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements are prepared in accordance with
Canadian GAAP. The most significant differences between Canadian and United
States GAAP, in terms of impact on the Company's consolidated financial
statements, relate to the accounting for pensions, convertible debentures,
derivative instruments and the reporting of comprehensive income.
F-23
The following table reconciles the consolidated statements of (loss) earnings as
reported under Canadian GAAP with those that would have been reported under
United States GAAP:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------- ------- ------
NET INCOME (LOSS) -- CANADIAN GAAP.......................... $11,132 $(6,066) $3,943
Increase in interest expense related to convertible
debentures(a)............................................. (590) -- --
Adjustment to purchase price allocation relating to
differences in treatment of Joint Ventures(b)............. (450) -- --
Changes in fair value of interest rate derivatives(d)....... 368 (1,021) (339)
Unrealized loss on investment held for sale(e).............. -- 707 --
Other....................................................... 589 -- --
------- ------- ------
NET INCOME (LOSS) -- UNITED STATES GAAP..................... 11,049 (6,380) 3,604
------- ------- ------
OTHER COMPREHENSIVE (LOSS) INCOME:
Derivative loss (d)....................................... (2,310) (163) --
Foreign currency translation adjustment................... 179 (933) (125)
Minimum unfunded pension liability (f).................... (16,309) (195) (352)
------- ------- ------
(18,440) (1,291) (477)
------- ------- ------
COMPREHENSIVE (LOSS) INCOME -- UNITED STATES GAAP........... $(7,391) $(7,671) $3,127
======= ======= ======
Net (loss) earnings per share -- United States GAAP
Basic..................................................... $ 0.08 $ (0.05) $ 0.03
------- ------- ------
Diluted................................................... $ 0.08 $ (0.05) $ 0.03
======= ======= ======
</Table>
(A) CONVERTIBLE DEBENTURES
Under Canadian GAAP, the convertible debenture obligation is classified as an
equity instrument. For Canadian GAAP, the interest, net of taxes, of the
equity component of the convertible debentures is recorded as an after-tax
charge to reinvested earnings. Under US GAAP, the convertible debenture
obligation would be accounted for entirely as a liability and, accordingly,
interest costs would be recorded as interest expense. The Company has the
ability to redeem the convertible debenture at par plus accrued interest by
the issuance of Common Shares or cash. As a result, for US GAAP, the
convertible debenture would be classified as current debt in the 12-month
period in advance of the redemption date, and as long-term debt during the
remainder of the 20 year term. Therefore, for US GAAP the liability would be
classified as long term debt for 2002, 2001 and 2000.
(B) ADJUSTMENT TO PURCHASE PRICE ALLOCATION RELATING TO JOINT VENTURES
Under Canadian GAAP, joint ventures are accounted for using the proportionate
consolidation method, while under US GAAP, joint ventures are accounted for
under the equity method. The different accounting treatment affects only the
display and classification of financial statement items and not net income or
shareholders' equity. See note 6 for summarized financial information in
respect of the Company's joint ventures.
Because of the different treatment of joint ventures between Canadian GAAP
and US GAAP, a permanent difference results in the allocation of the purchase
price. Under purchase accounting, the excess of the value of the assets over
the purchase price (negative goodwill) is allocated to the long term assets
acquired. Under Canadian GAAP, because the joint venture assets are
proportionately accounted for and therefore there is no investment in
subsidiary long term asset, the negative goodwill is allocated only against
property, plant and equipment. Under US GAAP, the negative goodwill is
allocated to both property, plant and equipment and to investment in
subsidiary. As a result, there is a difference in depreciation expense.
(C) COMPREHENSIVE INCOME
United States accounting standards for reporting comprehensive income are set
forth in SFAS No. 130. Comprehensive income represents the change in equity
during a reporting period from transactions and other events and
circumstances from non-owner sources. Components of comprehensive income
include items such as net earnings (loss), changes in the fair value of
investments not held for trading, minimum pension liability adjustments,
derivative instruments and certain foreign currency translation gains and
losses.
(D) DERIVATIVE INSTRUMENTS
The Company has interest rate swap agreements. Under US GAAP, unrealized
gains and losses on the mark-to-market valuation of the swaps may be subject
to hedge treatment under SFAS No. 133 whereby all or a portion of the
mark-to-market gain or loss is recorded to other comprehensive income and the
swap recorded at fair value. Any ineffective portion is recorded against
income. In 2002, a portion of the US interest rate swap mark-to-market value
was deemed to be ineffective and therefore recorded as an expense under US
GAAP. Under Canadian GAAP, which does not recognize Comprehensive Income on
the face of the financial statements, mark-to-market valuation changes are
only reported in the footnotes.
(E) INVESTMENTS
United States accounting standards for equity investments, which are set
forth in SFAS No. 115, require that certain equity investments not held for
trading be recorded at fair value with unrealized holding gains and losses
excluded from the determination of earnings and reported
F-24
as a separate component of other comprehensive income. At December 31, 2001,
the Company had an investment held for sale which was below market value.
(F) ACCUMULATED UNFUNDED PENSION LIABILITY
Under U.S. GAAP, the Company should recognize an additional minimum pension
liability charged to other comprehensive income in shareholders' equity to
the extent that the unfunded accumulated benefit obligation ("ABO") exceeds
the fair value of the plan assets and this amount is not covered by the
pension liability already recognized in the balance sheet. The calculation of
the ABO is based on the actuarial present value of the vested benefits to
which the employee is currently entitled, based on the employee's expected
date of separation or retirement. Canadian GAAP does not require the
recognition of an additional minimum liability.
(G) FREIGHT COSTS
For Canadian GAAP, sales are recorded net of freight costs for delivery. US
GAAP would require that freight costs be included in cost of sales. The
impact of this adjustment is to increase sales and cost of sales by $70.6
million in 2002, $58.3 million in 2001, and $56.4 million in 2000.
The following table indicates the cumulative effect of the above adjustments
on balance sheet accounts, displaying results under Canadian GAAP and US
GAAP:
<Table>
<Caption>
CANADIAN GAAP UNITED STATES GAAP
-------------------- --------------------
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
$ $ $ $
ASSETS
Current assets............................................ 554,920 320,250 518,144 316,454
Property, plant & equipment............................... 898,948 530,885 765,644 528,300
Goodwill................................................ 114,374 114,374 114,374 114,374
Other assets............................................ 3,159 96,430 115,562 99,428
LIABILITIES
Current liabilities (excl indebtedness)................. 244,338 132,489 222,471 130,810
Current portion of long-term debt....................... 107,321 67,060 101,090 68,545
Long-term debt & related party debt..................... 411,833 251,346 463,423 251,346
Related party borrowings................................ -- 405,227 -- 405,227
Other long-term liabilities............................. 99,341 26,276 132,894 26,548
Deferred income taxes................................... 82,158 99,109 67,341 97,718
Minority interest....................................... 33,312 30,634 33,312 30,634
SHAREHOLDERS' EQUITY
Invested capital........................................ 513,400 58,364 513,393 58,357
Convertible debentures.................................. 79,134 -- -- --
Retained earnings (deficit)............................. 1,329 (7,622) (107) (8,975)
Cumulative translation adjustment....................... (765) (944)
Accumulated other comprehensive loss.................... (20,094) (1,654)
</Table>
Changes in shareholders' equity under US GAAP were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------- ------ -------
$ $ $
Shareholders' equity at beginning of year................... 47,728 55,799 69,599
Net (loss) earnings......................................... 11,049 (6,380) 3,604
Subsidiary stock activity................................... (187) (476) (403)
Changes in deferred compensation............................ -- 76 116
Foreign currency translation adjustment..................... 179 (933) (125)
Debt converted to equity.................................... 325,948 -- --
Acquisition................................................. 129,275 -- --
Other comprehensive loss.................................... (18,619) (358) (352)
Dividends................................................... (2,181) -- (16,640)
------- ------ -------
Shareholders' equity at end of year......................... 493,192 47,728 55,799
======= ====== =======
</Table>
F-25
The difference in consolidated shareholders' equity may be reconciled as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- ------ ------
$ $ $
Shareholders' equity based on Canadian GAAP................. 593,098 49,798 56,976
Debenture reclassified to debt.............................. (79,134) -- --
Adjust purchase price for Gallatin joint venture............ (450) -- --
Accumulated unfunded pension................................ (16,856) (547) (352)
Unrealized losses on interest rate derivatives.............. (3,466) (1,523) (339)
Other....................................................... -- -- (486)
------- ------ ------
Cumulative reduction under US GAAP.......................... (99,906) (2,070) (1,177)
------- ------ ------
Shareholders' equity based on US GAAP....................... 493,192 47,728 55,799
======= ====== ======
</Table>
There are no significant differences with respect to the consolidated
statement of cash flows between US GAAP and Canadian GAAP for 2002, 2001 and
2000.
NOTE 22 -- FINANCIAL INFORMATION RELATED TO SUBSIDIARY GUARANTORS
Consolidating financial information related to the Company and its Subsidiary
Guarantors and non-Guarantors as of December 31, 2002 and 2001 and for the years
ended December 31, 2002, December 31, 2001 and December 31, 2000 is disclosed to
comply with the reporting requirements of the Company's Subsidiary Guarantors.
The Subsidiary Guarantors are wholly-owned Subsidiaries of the Company which
have fully and unconditionally guaranteed the Company's 10 3/8% Senior Notes due
2011 which may be delivered upon the exchange of the Company's 10 3/8% Senior
Notes due 2011. The non-Guarantors are subsidiaries of the Company, and
non-wholly-owned subsidiaries like Ameristeel Bright Bar, which have not fully
and unconditionally guaranteed the Company's 10 3/8% Senior Notes due 2011 which
may be delivered upon the exchange of the Company's 10 3/8% Senior Notes due
2011. Consolidating financial information follows:
F-26
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
December 31, 2002
($ in thousands)
<Table>
<Caption>
GERDAU
AMERISTEEL NON-
CORPORATION GUSAP GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------- ---------- ---------- ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents.................. $ 9,118 $ -- $ 2,161 $ 5,082 $ -- $ 16,361
Accounts receivable, net................... 25,950 -- 129,113 21,480 (3,798) 172,745
Inventories................................ 47,883 -- 281,879 21,797 (159) 351,400
Deferred tax assets and recoverable
taxes.................................... 32,019 -- (57,001) 36,399 -- 11,417
Other current assets....................... -- -- 2,923 74 -- 2,997
-------- ------- ---------- -------- --------- ----------
Total Current Assets......................... 114,970 -- 359,075 84,832 (3,957) 554,920
Property, Plant and Equipment................ 100,040 -- 656,939 141,616 353 898,948
Goodwill..................................... -- -- 109,687 4,687 -- 114,374
Investment in subsidiaries................... -- 94,208 8,356 (562) (102,002)
Other Assets................................. 5,593 1,201 (3,678) 43 -- 3,159
-------- ------- ---------- -------- --------- ----------
Total Assets................................. $220,603 $95,409 $1,130,379 $230,616 $(105,606) $1,571,401
======== ======= ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable................... $ 30,298 $ -- $ 121,968 $ 22,445 $ (4,377) $ 170,334
Accrued salaries, wages and employee
benefits............................... 4,436 -- 35,950 3,546 -- 43,932
Other current liabilities................ -- -- 20,069 41 -- 20,110
Taxes Payable............................ 1,939 (837) 5,451 14 -- 6,567
Interest Payable......................... 1,497 145 1,723 30 -- 3,395
Bank indebtedness........................ 24,880 -- (7,185) 5,684 -- 23,379
Current maturities of long-term
borrowings............................. -- 14,501 68,907 535 -- 83,942
-------- ------- ---------- -------- --------- ----------
Total Current Liabilities.................... 63,050 13,809 246,883 32,295 (4,377) 351,659
Long Term Borrowings, Less Current Portion... 146,967 35,500 222,803 6,562 -- 411,833
Related party borrowings..................... -- 23,398 (23,398) -- --
Accrued Benefit obligation................... -- -- 70,166 -- -- 70,166
Other Liabilities............................ 13,099 -- 16,076 -- -- 29,175
Future Tax Liabilities....................... -- -- 81,583 222 353 82,158
Minority Interest............................ -- -- 33,312 -- -- 33,312
-------- ------- ---------- -------- --------- ----------
Total Liabilities............................ 223,116 72,707 647,425 39,079 (4,024) 978,303
Shareholder's Equity
Invested capital......................... (81,647) 22,385 483,473 190,610 (101,421) 513,400
Convertible debentures................... 79,134 -- -- -- -- 79,134
Retained (deficit) earnings.............. -- 317 246 927 (161) 1,329
Cumulative foreign currency
translation............................ -- -- (765) -- -- (765)
-------- ------- ---------- -------- --------- ----------
Total Shareholders' Equity................... (2,513) 22,702 482,954 191,537 (101,582) 593,098
-------- ------- ---------- -------- --------- ----------
Total Liabilities and Shareholders' Equity... $220,603 $95,409 $1,130,379 $230,616 $(105,606) $1,571,401
======== ======= ========== ======== ========= ==========
</Table>
F-27
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
December 31, 2001
($ in thousands)
<Table>
<Caption>
GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents.......... $ -- $ 5,086 $ 1 $ -- $ 5,087
Accounts receivable, net........... -- 94,635 2,934 (242) 97,327
Inventories........................ -- 208,644 2,924 (148) 211,420
Deferred tax assets and recoverable
taxes........................... -- 5,320 -- -- 5,320
Other current assets............... -- 973 123 -- 1,096
-------- ---------- ------- --------- ----------
Total Current Assets................. -- 314,658 5,982 (390) 320,250
Property, Plant and Equipment........ -- 523,980 6,391 514 530,885
Goodwill............................. -- 109,687 4,687 -- 114,374
Investment in subsidiaries........... 227,519 8,298 (534) (235,283)
Other Assets......................... 1,906 94,474 50 -- 96,430
-------- ---------- ------- --------- ----------
Total Assets......................... $229,425 $1,051,097 $16,576 $(235,159) $1,061,939
======== ========== ======= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable............. $ -- $ 96,614 $ 3,849 $ (816) $ 99,647
Accrued salaries, wages and
employee benefits............... -- 16,797 29 -- 16,826
Other current liabilities.......... (592) 9,855 190 -- 9,453
Interest payable................... -- 6,536 27 -- 6,563
Bank indebtedness.................. 461 5,119 (1,497) -- 4,083
Current maturities of long-term
borrowings...................... -- 62,694 283 -- 62,977
-------- ---------- ------- --------- ----------
Total Current Liabilities............ (131) 197,615 2,881 (816) 199,549
Long Term Borrowings, Less Current
Portion............................ 50,006 197,740 3,600 -- 251,346
Related party borrowings............. 160,761 244,466 -- -- 405,227
Accrued benefit obligation........... -- 20,746 -- -- 20,746
Other Liabilities.................... (2,839) 8,369 -- -- 5,530
Future Tax Liabilities............... -- 98,411 184 514 99,109
Minority Interest.................... -- 30,634 -- -- 30,634
-------- ---------- ------- --------- ----------
Total Liabilities.................... 207,797 797,981 6,665 (302) 1,012,141
Shareholder's Equity
Invested capital................... 22,202 263,682 7,186 (234,706) 58,364
Retained (deficit) earnings........ (574) (9,622) 2,725 (151) (7,622)
Cumulative foreign currency
translation..................... -- (944) -- -- (944)
-------- ---------- ------- --------- ----------
Total Shareholders' Equity........... 21,628 253,116 9,911 (234,857) 49,798
-------- ---------- ------- --------- ----------
Total Liabilities and Shareholders'
Equity............................. $229,425 $1,051,097 $16,576 $(235,159) $1,061,939
======== ========== ======= ========= ==========
</Table>
F-28
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2002
($ in thousands)
<Table>
<Caption>
GERDAU
AMERISTEEL NON-
CORPORATION GUSAP GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- --------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net (loss) income........................... $ (743) $ 7,098 $ 2,633 $ 4,158 $(2,014) $ 11,132
Adjustment to reconcile net income (loss) to
net cash
Provided by (used for) operating
activities:
Depreciation.............................. 1,576 -- 52,782 4,242 83 58,683
Amortization.............................. -- -- 1,167 5 -- 1,172
Deferred income taxes..................... (1,518) -- (10,017) 1,268 (161) (10,428)
Gain on disposition of property, plant and
equipment............................... -- -- 1,044 -- -- 1,044
Unrealized foreign exchange on related
party loans............................. -- -- 436 -- -- 436
Accrued interest on related party loans... -- -- (2,561) -- -- (2,561)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable....................... 16,125 -- 878 874 3,556 21,433
Inventories............................... (3,535) -- (15,261) 794 11 (17,991)
Other assets.............................. (4,410) 705 (5,544) 188 -- (9,061)
Liabilities............................... (3,710) 2,739 (10,579) (5,156) (3,085) (19,791)
------- --------- --------- -------- ------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES................................ 3,785 10,542 14,978 6,373 (1,610) 34,068
INVESTING ACTIVITIES
Additions to property, plant and
equipment............................... (265) -- (34,620) 1,325 78 (33,482)
Purchase price for acquisitions........... -- -- (6,856) -- -- (6,856)
------- --------- --------- -------- ------- --------
Cash acquired in acquisition.............. 1,688 -- 131 16,646 -- 18,465
------- --------- --------- -------- ------- --------
Proceeds from dispositions................ -- -- 489 -- -- 489
------- --------- --------- -------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES....... 1,423 -- (40,856) 17,971 78 (21,384)
FINANCING ACTIVITIES
Term debt payments........................ -- (466) (29,037) -- -- (29,503)
Revolving credit borrowings (payments).... 3,910 -- 39,344 (15,981) -- 27,273
Increase in related party loans........... -- (137,363) 139,113 (1,750) --
Additions to deferred financing costs..... -- -- 705 -- -- 705
Foreign exchange loss..................... -- -- (195) -- -- (195)
Changes in minority interest.............. -- -- 2,678 -- -- 2,678
Issuance of common stock.................. -- 127,287 (127,287) (1,532) 1,532 --
------- --------- --------- -------- ------- --------
Subsidiary stock activity................. -- -- (187) -- -- (187)
------- --------- --------- -------- ------- --------
Dividends paid............................ -- -- (2,181) -- -- (2,181)
------- --------- --------- -------- ------- --------
NET CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES................................ 3,910 (10,542) 22,953 (19,263) 1,532 (1,410)
------- --------- --------- -------- ------- --------
(INCREASE) DECREASE IN CASH AND CASH
EQUIVALENTS............................... 9,118 -- (2,925) 5,081 -- 11,274
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................... -- -- 5,086 1 -- 5,087
------- --------- --------- -------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................... $ 9,118 $ -- $ 2,161 $ 5,082 $ -- $ 16,361
======= ========= ========= ======== ======= ========
</Table>
F-29
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2001
($ in thousands)
<Table>
<Caption>
NON-
GUSAP GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net (loss) income......................... $ 17,525 $(24,286) $ 543 $ 152 $(6,066)
Adjustment to reconcile net income (loss)
to net cash
Provided by (used for) operating
activities:
Depreciation............................ -- 54,006 786 85 54,877
Amortization............................ -- 7,613 149 -- 7,762
Deferred income taxes................... -- (2,333) 25 24 (2,284)
Gain on disposition of property, plant
and equipment........................ -- (17) -- -- (17)
Unrealized foreign exchange on related
party loans.......................... 3,249 (9,502) -- -- (6,253)
Accrued interest on related party
loans................................ -- 14,144 -- -- 14,144
Loss on sale of marketable securities... -- 3,658 -- -- 3,658
Deferred compensation................... -- 76 -- -- 76
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable..................... -- 13,149 (978) (12) 12,159
Inventories............................. -- 20,286 (1,539) (107) 18,640
Other assets............................ -- (19) 25 -- 6
Liabilities............................. 1,970 1,949 2,101 (142) 5,878
-------- -------- ------- ----- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. 22,744 78,724 1,112 -- 102,580
INVESTING ACTIVITIES
Additions to property, plant and
equipment............................ -- (24,064) (4,355) -- (28,419)
Purchase price for acquisitions......... -- (50,921) (263) -- (51,184)
Proceeds from dispositions.............. -- 811 -- -- 811
-------- -------- ------- ----- -------
NET CASH USED IN INVESTING ACTIVITIES..... -- (74,174) (4,618) -- (78,792)
-------- -------- ------- ----- -------
FINANCING ACTIVITIES
Term debt payments...................... -- (58,906) -- -- (58,906)
Revolving credit borrowings
(payments)........................... (23,237) (11,962) 3,920 -- (31,279)
Increase in related party loans
payable.............................. -- 65,001 (363) -- 64,638
Additions to deferred financing costs... -- 46 (50) -- (4)
Foreign exchange loss................... 493 (351) -- -- 142
Changes in minority interest............ -- 984 -- -- 984
Subsidiary stock activity............... -- (232) -- -- (232)
-------- -------- ------- ----- -------
NET CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES.............................. (22,744) (5,420) 3,507 -- (24,657)
-------- -------- ------- ----- -------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................. -- (870) 1 -- (869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................. -- 5,956 -- -- 5,956
-------- -------- ------- ----- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................. $ -- $ 5,086 $ 1 $ -- $ 5,087
-------- -------- ------- ----- -------
</Table>
F-30
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2000
($ in thousands)
<Table>
<Caption>
NON-
GUSAP GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net (loss) income........................ $(18,812) $ 21,514 $1,172 $ 69 $ 3,943
Adjustment to reconcile net income (loss)
to net cash
Provided by (used for) operating
activities:
Depreciation........................... -- 50,772 576 -- 51,348
Amortization........................... -- 7,730 -- -- 7,730
Deferred income taxes.................. -- (7,048) 1 -- (7,047)
Gain on disposition of property, plant
and equipment....................... -- (595) -- -- (595)
Unrealized foreign exchange on related
party loans......................... 8,637 (15,081) -- -- (6,444)
Accrued interest on related party
loans............................... -- 6,651 -- -- 6,651
Deferred compensation.................. -- 116 -- -- 116
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................... 3,849 (3,204) (659) -- (14)
Inventories............................ -- 1,370 90 -- 1,460
Other assets........................... -- (388) 38 -- (350)
Liabilities............................ -- (27,112) (1,017) (69) (28,198)
-------- --------- ------ ----- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES............................. (6,326) 34,725 201 -- 28,600
INVESTING ACTIVITIES
Additions to property, plant and
equipment........................... -- (51,555) (1,135) -- (52,690)
Purchase of minority interest.......... -- (35,640) -- -- (35,640)
Proceeds from dispositions............. -- 518 -- -- 518
-------- --------- ------ ----- ---------
NET CASH USED IN INVESTING ACTIVITIES.... -- (86,677) (1,135) -- (87,812)
FINANCING ACTIVITIES
Term debt payments..................... -- (109,997) -- -- (109,997)
Revolving credit borrowings
(payments).......................... (58,155) 132,853 555 -- 75,253
Increase in related party loans
payable............................. 64,481 32,357 379 -- 97,217
Additions to deferred financing
costs............................... -- (1,765) -- -- (1,765)
Foreign exchange loss.................. -- 1 -- -- 1
Changes in minority interest........... -- 2,166 -- -- 2,166
Subsidiary stock activity.............. -- (1,814) -- -- (1,814)
-------- --------- ------ ----- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 6,326 53,801 934 -- 61,061
-------- --------- ------ ----- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.... -- 1,849 -- -- 1,849
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. -- 4,107 -- -- 4,107
-------- --------- ------ ----- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ -- $ 5,956 $ -- $ -- $ 5,956
======== ========= ====== ===== =========
</Table>
F-31
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended December 31, 2002
($ in thousands)
<Table>
<Caption>
GERDAU
AMERISTEEL
CORPORATION GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------- ---------- -------------- ------------ ------------
Net Sales................... $ -- $40,547 $937,612 $64,353 $(6,457) $1,036,055
Operating Expenses
Cost of sales............. -- 38,777 784,516 50,245 (6,447) 867,091
Selling and
administrative......... 725 1,591 57,570 2,288 (1) 62,173
Depreciation.............. -- 1,576 52,782 4,242 83 58,683
Other operating expense... (17,385) -- 12,300 13 -- (5,072)
-------- ------- -------- ------- ------- ----------
(16,660) 41,944 907,168 56,788 (6,365) 982,875
Income (Loss) From
Operations................ 16,660 (1,397) 30,444 7,565 (92) 53,180
Other Expenses
Interest.................. 8,304 1,918 25,082 1,289 2,005 38,598
Foreign exchange (gains)
losses................. -- -- 230 -- -- 230
Amortization of deferred
financing costs........ -- -- 1,167 5 -- 1,172
-------- ------- -------- ------- ------- ----------
8,304 1,918 26,479 1,294 2,005 40,000
(Income) Loss Before
Taxes..................... 8,356 (3,315) 3,965 6,271 (2,097) 13,180
Income Tax (Expense)
Benefit................... 1,258 (2,572) (375) 2,113 (83) 341
-------- ------- -------- ------- ------- ----------
(Income) Loss before
Minority Interest......... 7,098 (743) 4,340 4,158 (2,014) 12,839
Minority Interest........... -- -- (1,707) -- -- (1,707)
-------- ------- -------- ------- ------- ----------
Net (Income) Loss........... $ 7,098 $ (743) $ 2,633 $ 4,158 $(2,014) $ 11,132
======== ======= ======== ======= ======= ==========
</Table>
F-32
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended December 31, 2001
($ in thousands)
<Table>
<Caption>
GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net Sales.............................. $ -- $841,095 $18,889 $(19,148) $840,836
Operating Expenses
Cost of sales........................ -- 684,543 14,796 (19,255) 680,084
Selling and administrative........... 735 54,157 1,532 7 56,431
Depreciation......................... -- 54,006 786 85 54,877
Amortization of goodwill............. -- 6,437 145 -- 6,582
Other operating expense.............. -- (475) 12 -- (463)
-------- -------- ------- -------- --------
735 798,668 17,271 (19,163) 797,511
Income (Loss) From Operations.......... (735) 42,427 1,618 15 43,325
Other Expenses
Interest............................. (18,260) 66,839 302 (29) 48,852
Foreign exchange (gains) losses...... -- 249 -- -- 249
Loss on marketable securities........ -- 707 -- -- 707
Amortization of deferred financing
costs............................. -- 1,176 4 -- 1,180
-------- -------- ------- -------- --------
(18,260) 68,971 306 (29) 50,988
(Loss) Income Before Taxes............. 17,525 (26,544) 1,312 44 (7,663)
Income Tax (Benefit) Expense........... -- (3,242) 769 (108) (2,581)
-------- -------- ------- -------- --------
(Loss) Income before Minority
Interest............................. 17,525 (23,302) 543 152 (5,082)
Minority Interest...................... -- (984) -- -- (984)
-------- -------- ------- -------- --------
Net (Loss) Income...................... $ 17,525 $(24,286) $ 543 $ 152 $ (6,066)
======== ======== ======= ======== ========
</Table>
F-33
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2000
($ in thousands)
<Table>
<Caption>
GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net Sales.............................. $ -- $891,042 $14,579 $(5,938) $899,683
Operating Expenses
Cost of sales........................ -- 717,129 10,847 (5,938) 722,038
Selling and administrative........... 754 55,692 958 (10) 57,394
Depreciation......................... -- 50,772 576 -- 51,348
Amortization of goodwill............. -- 6,269 -- -- 6,269
Other operating expense.............. 22 2,716 -- -- 2,738
-------- -------- ------- ------- --------
776 832,578 12,381 (5,948) 839,787
Income (Loss) From Operations.......... (776) 58,464 2,198 10 59,896
Other Expenses
Interest............................. 18,036 32,292 2 30 50,360
Foreign exchange (gains) losses...... -- (211) -- -- (211)
Amortization of deferred financing
costs............................. -- 1,461 -- -- 1,461
-------- -------- ------- ------- --------
18,036 33,542 2 30 51,610
(Loss) Income Before Taxes............. (18,812) 24,922 2,196 (20) 8,286
Income Tax (Benefit) Expense........... -- 1,242 1,024 (89) 2,177
-------- -------- ------- ------- --------
(Loss) Income before Minority
Interest............................. (18,812) 23,680 1,172 69 6,109
Minority Interest...................... -- (2,166) -- -- (2,166)
-------- -------- ------- ------- --------
Net (Loss) Income...................... $(18,812) $ 21,514 $ 1,172 $ 69 $ 3,943
======== ======== ======= ======= ========
</Table>
F-34
CANADIAN GAAP/U.S. DOLLAR
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2003 AND 2002
F-35
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(U.S.$ in thousands)
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,411 $ 16,361
Accounts receivable, net.................................. 225,829 172,745
Inventories............................................... 374,053 351,400
Deferred tax assets and recoverable taxes................. 17,514 11,417
Other current assets...................................... 10,913 2,997
---------- ----------
Total current assets........................................ 648,720 554,920
Property, plant and equipment............................... 917,789 898,948
Goodwill.................................................... 116,564 114,374
Deferred financing costs.................................... 15,491 2,514
Future tax assets........................................... 8,364 --
Other assets................................................ 2,033 645
---------- ----------
Total assets................................................ $1,708,961 $1,571,401
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 212,853 $ 170,334
Accrued salaries, wages and employee benefits............. 26,220 27,342
Other current liabilities................................. 57,819 46,662
Bank indebtedness......................................... 2,810 23,379
Current maturities of long-term borrowings................ 10,771 83,942
---------- ----------
Total current liabilities................................... 310,473 351,659
Long term borrowings, less current portion.................. 581,816 411,833
Other liabilities........................................... 105,542 99,341
Future tax liabilities...................................... 60,991 82,158
Minority interest........................................... -- 33,312
---------- ----------
Total liabilities........................................... 1,058,822 978,303
Shareholder's equity
Invested capital.......................................... 547,601 513,400
Convertible debentures.................................... 92,565 79,134
Retained (deficit) earnings............................... (16,813) 1,329
Cumulative foreign currency translation................... 26,786 (765)
---------- ----------
Total shareholders' equity.................................. 650,139 593,098
---------- ----------
Total liabilities and shareholders' equity.................. $1,708,961 $1,571,401
========== ==========
</Table>
See notes to consolidated financial statements.
F-36
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS
Nine months ended September 30, 2003
<Table>
<Caption>
NINE MONTHS ENDING
----------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
(U.S.$ in thousands, except earnings
per share data) (unaudited)
Net Sales................................................... $1,401,270 $697,622
Operating Expenses
Cost of sales............................................. 1,283,916 571,298
Selling and administrative................................ 59,312 45,369
Depreciation.............................................. 60,467 38,520
Other operating expense................................... 144 1,007
---------- --------
1,403,839 656,194
Income (Loss) From Operations............................... (2,569) 41,428
Other Expenses
Interest.................................................. 30,147 30,562
Foreign exchange (gains) losses........................... 186 386
Amortization of deferred financing costs.................. 4,130 879
---------- --------
34,463 31,827
(Loss) Income Before Taxes.................................. (37,032) 9,601
Income Tax (Benefit) Expense................................ (21,525) 565
---------- --------
(Loss) Income before Minority Interest...................... (15,507) 9,036
Minority Interest........................................... 217 (1,430)
---------- --------
Net (Loss) Income........................................... $ (15,290) $ 7,606
EPS -- Basic................................................ (0.09) $ 0.06
EPS -- Diluted.............................................. (0.09) $ 0.06
</Table>
See notes to consolidated financial statements.
F-37
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
RETAINED CUMULATIVE
NUMBER OF CONVERTIBLE EARNINGS TRANSLATION
SHARES CAPITAL STOCK DEBENTURES (DEFICIT) ADJUSTMENT TOTAL
----------- ------------- ----------- --------- ----------- --------
(U.S.$ in thousands, except share data)
(Unaudited)
Balance December 31, 2001.... 133,388,400 $ 58,364 $ -- $ (7,622) $ (944) $ 49,798
Net income................. 7,606 7,606
Subsidiary stock
activity................ (418) (418)
Foreign exchange........... (1,649) (1,649)
Debt converted to equity... 325,948 325,948
----------- -------- ------- -------- ------- --------
Balance September 30, 2002... 133,388,400 $383,894 $ -- $ (16) $(2,593) $381,285
=========== ======== ======= ======== ======= ========
Balance December 31, 2002.... 184,892,360 $513,400 $79,134 $ 1,329 $ (765) $593,098
Net Loss................... -- -- (15,290) -- (15,290)
Acquisition of minority
shares.................. 13,198,501 34,201 -- -- -- 34,201
Foreign exchange........... -- 13,431 -- 27,551 40,982
Interest on convertible
debentures.............. -- -- (2,852) -- (2,852)
----------- -------- ------- -------- ------- --------
Balance September 30, 2003... 198,090,861 $547,601 $92,565 $(16,813) $26,786 $650,139
=========== ======== ======= ======== ======= ========
</Table>
See notes to consolidated financial statements.
F-38
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003
<Table>
<Caption>
NINE MONTHS ENDING
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
(U.S.$ in thousands)
(Unaudited)
Operating activities
Net (loss) income........................................... $(15,290) $ 7,606
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 60,467 38,520
Amortization.............................................. 4,130 879
Deferred income taxes..................................... (20,739) (4,861)
Gain on disposition of property, plant and equipment...... (93) --
Unrealized foreign exchange on related party loans........ 7,241 181
Accrued interest on related party loans................... (2,884) (594)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (56,501) (36,320)
Inventories............................................... (2,808) (3,467)
Other assets.............................................. (10,034) (5,152)
Liabilities............................................... 39,691 12,736
-------- --------
Net cash provided by operating activities................... 3,180 9,528
Investing activities
Additions to property, plant and equipment................ (40,475) (21,787)
Assets acquisition........................................ -- (8,356)
Proceeds from dispositions................................ 77 134
-------- --------
Net cash used in investing activities....................... (40,398) (30,009)
Financing activities
Proceeds from issuance of new debt........................ 542,357
(Payment) borrowing of short-term and long-term
borrowings, net........................................ (484,554) 20,572
Additions to deferred financing costs..................... (15,034) --
Foreign exchange loss..................................... (520) --
Changes in minority interest.............................. (218) 2,365
Subsidiary stock activity................................. (763) 947
-------- --------
Net cash provided by financing activities................... 41,268 23,884
-------- --------
Increase in cash and cash equivalents....................... 4,050 3,403
Cash and cash equivalents at beginning of period............ 16,361 5,087
-------- --------
Cash and cash equivalents at end of period.................. $ 20,411 $ 8,490
======== ========
</Table>
See notes to consolidated financial statements.
F-39
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(United States Dollars in thousands, except per share amounts)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include the results and accounts of
companies controlled by Gerdau Ameristeel Corporation, a Canadian corporation,
whose indirect majority shareholder is Gerdau S.A., a Brazilian company. Gerdau
Ameristeel's financial statements are presented in United States dollars and in
accordance with Canadian generally accepted accounting principles ("GAAP").
The 2002 consolidated financial statements include the accounts of "Gerdau North
America Group" consisting of the Gerdau Canada Group (Gerdau Ameristeel
Cambridge Inc. and Gerdau MRM Holdings Inc. and their consolidated subsidiaries)
and Gerdau USA, Inc. and its consolidated subsidiaries FLS Holdings Inc.,
Ameristeel Corporation and AmeriSteel Bright Bar, Inc. (collectively, "GUSA").
All significant intercompany transactions and accounts have been eliminated in
consolidation.
On October 23, 2002, Gerdau S.A., parent company of the Gerdau North America
Group, entered into a transaction agreement with Co-Steel Inc. ("Co-Steel"), a
Canadian public company. This transaction agreement resulted in Co-Steel
acquiring all of the issued and outstanding shares of the companies included in
the Gerdau North America Group, in exchange for Co-Steel common shares
representing approximately 74% of Co-Steel's total common shares The transaction
was accounted for using the reverse-takeover method of purchase accounting. The
Gerdau North America Group is deemed to be the acquirer and is assumed to be
purchasing the assets and liabilities of Co-Steel, since the original
shareholder of the Gerdau North America Group became owner of more than 50
percent of the voting shares of Co-Steel on a fully-diluted basis following the
transaction. As a result, the Gerdau North America Group's historical accounts
became the historical accounts for all periods prior to the date of merger. In
connection with the merger, Co-Steel's name was changed to Gerdau Ameristeel
Corporation (the "Company" or "Gerdau Ameristeel"). As part of this transaction,
certain related party loans of the Gerdau North America Group were converted
into equity in October 2002.
On March 31, 2003, under the terms of the Transaction Agreement relating to the
acquisition of Co-Steel, the Company completed an exchange of minority shares of
AmeriSteel Corporation for shares of Gerdau Ameristeel. Minority shareholders of
AmeriSteel, mostly executives and employees, exchanged 1,395,041 shares of
AmeriSteel for 13,198,501 shares of Gerdau Ameristeel, an exchange ratio of
9.4617 to 1. As a result, AmeriSteel became a wholly owned subsidiary of Gerdau
Ameristeel.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for interim period reports and, therefore,
do not include all the information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash flows in
conformity with Canadian GAAP. However, all adjustments which, in the opinion of
management, are necessary for a fair presentation have been included. Such
adjustments consisted of only normally recurring items. These condensed
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report and have
been prepared using the same accounting policies as described in Note 2 of the
latest annual report. Certain amounts have been reclassified to conform to the
current-period financial statement presentation. The results of the three and
nine month periods ended September 30, 2003 and 2002 are not necessarily
indicative of the results to be expected for future periods. The Company
operates steel mini-mills, producing primarily steel bars and special sections
for commercial and industrial building construction, steel service centers and
original equipment manufacturers. Its principal market area is the eastern
United States and Canada. Principal suppliers to the Company include scrap metal
producers, electric utilities, natural gas suppliers, rail and truck carriers.
NOTE 2 -- INVENTORIES
Inventories consist of the following ($000s):
<Table>
<Caption>
AT SEPTEMBER 30, AT DECEMBER 31,
2003 2002
---------------- ---------------
(Unaudited)
Ferrous and non-ferrous scrap............................... $ 65,628 $ 40,983
Work in-process............................................. 44,076 33,701
Finished goods.............................................. 161,288 195,893
Raw materials (excluding scrap) and operating supplies...... 103,061 80,823
-------- --------
$374,053 $351,400
======== ========
</Table>
F-40
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following ($000s):
<Table>
<Caption>
AT SEPTEMBER 30, 2003
---------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
---------- ------------ -----------
(Unaudited)
Land and improvements....................................... $ 81,956 $ 11,511 $ 70,445
Buildings and improvements.................................. 220,474 113,266 107,208
Machinery and equipment..................................... 891,128 200,540 690,588
Construction in progress.................................... 38,953 38,953
Property, plant and equipment held for sale................. 10,595 10,595
---------- -------- --------
$1,243,106 $325,317 $917,789
========== ======== ========
</Table>
NOTE 4 -- STOCK BASED COMPENSATION
The Company accounts for stock options granted to employees using the intrinsic
value based method of accounting. Under this method, the Company does not
recognize compensation expense for the stock options because the exercise price
is equal to the market price of the underlying stock on the date of grant. Had
the Company applied the fair value based method of accounting, net loss and loss
per share and net income and income per share would be as shown on the following
table. The Black-Scholes option pricing model was used to estimate the fair
value of each option grant on the date of grant and calculate the pro forma
stock-based compensation costs. For purposes of the pro forma disclosures, the
assumed compensation expense is amortized over the option's vesting periods and
includes option granted subsequent to January 1, 2002 and excludes options
issued prior to January 1, 2002. The following assumptions were used:
<Table>
Expected dividend yield..................................... 0%
Expected share price volatility............................. 25%
Risk-free rate of return.................................... 4%
Expected period until exercise.............................. 5 years
</Table>
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
(Unaudited)
(Amounts in $000 except
per share data)
Net (loss) income, as reported.............................. $(15,290) $7,606
Pro forma stock-based
Compensation cost......................................... 75 75
Pro forma, net income....................................... $(15,365) $7,531
Earnings per share
Basic, as reported........................................ $ (0.09) $(0.06)
Basic, pro forma.......................................... (0.09) (0.06)
Diluted, as reported...................................... (0.09) (0.06)
Diluted, pro forma........................................ (0.09) (0.06)
</Table>
NOTE 5 -- JOINT VENTURES
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and SSS/MRM Guide Rail are 50% joint ventures. The results for Gallatin Steel
are presented from the date of acquisition, October 23, 2002; therefore the
results for the nine months ending September 30, 2002 exclude Gallatin Steel.
The Company's interests in the joint ventures have been accounted for using the
proportional consolidation method under which the Company's proportionate share
of assets, liabilities, revenues and expenses of the joint ventures have been
included in the consolidated financial statements. The Company's interest in the
joint ventures is as follows ($000s):
<Table>
<Caption>
AT AT
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Unaudited)
BALANCE SHEET
Current assets.............................................. $ 45,976 $ 45,234
Property, plant and equipment............................... 108,991 107,421
Current liabilities......................................... 21,215 26,505
Long-term debt.............................................. 4,670 3,415
</Table>
F-41
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- -------
(Unaudited)
STATEMENT OF EARNINGS
Sales....................................................... $163,072 $10,674
Operating earnings.......................................... 13,980 1,045
Earnings before income taxes................................ 1,729 1,052
</Table>
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2003 2002
------- ----
(Unaudited)
CHANGES IN CASH FLOWS
Cash provided by (used in)
Operating activities...................................... $ 5,673 $ 36
Investing activities...................................... (4,592) (36)
Financing activities...................................... (2,146) --
------- ----
Proportionate share of decrease in cash..................... (1,065) --
======= ====
</Table>
NOTE 6 -- LONG-TERM DEBT
At September 30, 2003, Gerdau Ameristeel debt includes the following ($000s):
<Table>
Senior Notes, 10 3/8% due 2011, net of original issue
discount.................................................. $397,087
Senior Secured Credit Facility.............................. 149,991
Industrial Revenue Bonds.................................... 36,795
AmeriSteel Bright Bar Term Loan........................... 3,368
Gallatin Joint Venture Debt............................... 6,375
Other..................................................... 1,781
--------
595,397
Less current portion...................................... 13,581
--------
$581,816
========
</Table>
At December 31, 2002, the Company had debt agreements that were specific to the
Gerdau Canada Group, GUSA and former Co-Steel entities and included the
following ($000s):
<Table>
Gerdau Canada Group:
Bank indebtedness......................................... $ 17,243
U.S. Dollar Floating Rate Term Loan....................... 61,743
Canadian dollar revolving loan (Cdn$35.0 million)......... 22,157
Other..................................................... 1,444
GUSA:
AmeriSteel Revolving Credit Agreement..................... 100,800
AmeriSteel Term Loan...................................... 68,750
Industrial Revenue Bonds.................................. 36,795
AmeriSteel Bright Bar..................................... 3,522
Other..................................................... 809
Co-Steel Group:
Bank Indebtedness......................................... 6,136
Canadian dollar revolving loan (Cdn$48.3 million)......... 30,577
U.S. Dollar Fixed Rate Reducing Term Loan................. 96,784
Fair value of early payment penalty of fixed rate reducing
term loans.............................................. 9,065
U.S. dollar revolving loan................................ 59,768
Other..................................................... 3,561
---------
519,154
Less current portion...................................... (107,321)
---------
$ 411,833
=========
</Table>
On June 27, 2003, the Company refinanced its debt by issuing $405 million
aggregate principal 10 3/8% Senior Notes, of which $35.0 million were sold to an
indirect wholly-owned subsidiary of the Company's parent, Gerdau S.A. The notes
mature July 15, 2011 and were issued at 98% of face value. The Company also
entered into a new Senior Secured Credit Facility, with a term of up to five
years, which provides commitments of
F-42
up to $350 million. The borrowings under the Senior Secured Credit Facility are
secured by the Company's inventory and accounts receivable. The proceeds were
used to repay existing indebtedness. At September 30, 2003, approximately $103.5
million was available under the Senior Secured Credit Facility.
Gerdau Ameristeel US Inc. issued industrial revenue bonds ("IRBs") in prior
years to obtain funding to construct facilities in Jackson, Tennessee;
Charlotte, North Carolina; Jacksonville, Florida; and Plant City, Florida. The
Company assumed an additional $3.6 million IRB with the acquisition of the
Cartersville cold drawn facility in June 2002. The interest rates on these bonds
range from 50% to 75% of the prime rate. $9.4 million of the IRBs mature in the
fourth quarter of 2003, $3.8 million matures in 2015, $20.0 million matures in
2017, and $3.6 million matures in 2018. Irrevocable letters of credit issued
pursuant to the Senior Secured Credit Facility back the IRBs.
The AmeriSteel Bright Bar Term Loan represents a bank loan of Gerdau Ameristeel
US Inc.'s majority-owned subsidiary, secured by machinery and equipment. The
loan matures in 2011 with amortization payments that began in July 2001. The
loan currently bears interest at a rate of approximately 6.0% per year. Gerdau
Ameristeel US Inc. is a guarantor of the loan. Gallatin Joint Venture Debt
represents the Company's proportionate 50% share of the joint venture's
outstanding debt, including borrowings under its $40 million credit facility and
capital leases. Other debt includes equipment loans and capital leases at
various subsidiaries.
In order to reduce its exposure to interest-rate fluctuations, the Company had
entered into four interest-rate swap agreements. The interest-rate swaps have a
notional value of $69 million, with the Company paying a fixed interest rate and
receiving a variable interest rate based on three-month LIBOR. The aggregate
mark-to-market (fair value) of the interest rate agreements, which represents
the amount that would be paid by GUSA if the agreements were terminated at
September 30, 2003, was approximately $5.4 million.
NOTE 7 -- ACQUISITION
On June 24, 2002, the Company acquired certain assets and assumed certain
liabilities of Republic Technologies' cold drawn plant in Cartersville, Georgia.
The purchase price was $8.4 million and the transaction was accounted for as a
business combination. The plant commenced operations under Gerdau Ameristeel's
ownership on July 2, 2002.
NOTE 8 -- SEGMENT INFORMATION
The Company is organized into two primary business segments: (a) Steel mills and
(b) Downstream products. Steel products sold to the downstream divisions are
sold at market prices with intra-company transactions eliminated upon
consolidation. Performance is evaluated and resources allocated based on
specific segment requirements and measurable factors. Segment assets are those
assets that are specifically identified with the operations in each operational
segment. Corporate assets include primarily cash, assets held for sale, some
property, plant and equipment, deferred income taxes and deferred financing
costs. Operational results and other financial data for the two business
segments for the nine months ended September 30, 2003 and 2002, are presented
below ($000s):
<Table>
<Caption>
NINE MONTHS ENDING
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
(Unaudited)
Revenue from external customers:
Steel mills............................................... $1,177,233 $ 483,258
Downstream products....................................... 224,037 214,364
---------- ---------
Total................................................... $1,401,270 $ 697,622
========== =========
Inter-company sales:
Steel mills............................................... $ 235,008 $ 126,006
Downstream products....................................... -- --
Corp/eliminations/other................................... (235,008) (126,006)
---------- ---------
Total................................................... $ -- $ --
========== =========
Total sales:
Steel mills............................................... $1,412,241 $ 609,264
Downstream products....................................... 224,037 214,364
Corp/eliminations/other................................... (235,008) (126,006)
---------- ---------
Total................................................... $1,401,270 $ 697,622
========== =========
Income (loss) from operations:
Steel mills............................................... $ 1,806 $ 43,345
Downstream products....................................... 4,343 12,179
Corp/eliminations/other................................... (8,718) (14,096)
---------- ---------
Total................................................... $ (2,569) $ 41,428
========== =========
</Table>
F-43
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Segment assets:
Steel mills............................................... $1,545,306 $1,424,363
Downstream products....................................... 134,110 122,425
Corp/eliminations/other................................... 29,545 24,613
---------- ----------
Total................................................... $1,708,961 $1,571,401
========== ==========
</Table>
Geographic data is as follows:
<Table>
<Caption>
UNITED STATES CANADA TOTAL
------------- -------- ----------
SEPTEMBER 30, 2003
Revenue from external customers............................. $1,078,686 $322,584 $1,401,270
Long-lived assets........................................... 655,496 262,293 917,789
SEPTEMBER 30, 2002
Revenue from external customers............................. $ 578,688 $118,934 $ 697,622
Long-lived assets........................................... 388,235 140,472 528,707
</Table>
NOTE 9 -- OTHER OPERATING EXPENSE
Other operating expense for the nine months ended September 30, 2003 was
approximately $0.1 million. This includes a $1.8 million charge from a
settlement of environmental warranties from the May 2000 sale of Co-Steel's
Mayer Parry Recycling unit in England, asset write-downs of $.8 million, $0.5
million charge relating to start-up costs associated with new process automation
controls at the Knoxville rolling mill and fabricating plant shutdown expenses
of $0.3 million. The charges were offset by income of $3.5 million in electric
power rebates from the Province of Ontario. Other operating expense for the nine
months ended September 30, 2002 was $1.0 million relating to the closing of
certain of the Company's fabricating plants.
NOTE 10 -- DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The most significant
differences between Canadian and United States GAAP, in terms of impact on the
Company's consolidated financial statements, relate to the accounting for
pensions, convertible debentures, derivative instruments and the reporting of
comprehensive income.
The following table reconciles the consolidated statements of (loss) earnings as
reported under Canadian GAAP with those that would have been reported under
United States GAAP:
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
-------- -------
NET (LOSS) INCOME -- CANADIAN GAAP.......................... $(15,290) $ 7,606
Increase in interest expense related to convertible
debentures (a)............................................ (2,852) --
Adjustment to purchase price allocation relating to
differences in treatment of Joint Ventures (b)............ (1,881) --
Changes in fair value of interest rate derivatives (d)...... (3,294) (144)
-------- -------
NET (LOSS) INCOME -- UNITED STATES GAAP..................... (23,317) 7,462
-------- -------
OTHER COMPREHENSIVE (LOSS) INCOME:
Derivative loss (d)....................................... 3,588 263
Foreign currency translation adjustment (c)............... 27,551 (1,649)
31,139 1,386
-------- -------
COMPREHENSIVE INCOME (LOSS) -- UNITED STATES GAAP........... $ 7,822 $ 6,076
======== =======
Net (loss) earnings per share -- United States GAAP
Basic..................................................... $ (0.12) $ 0.06
Diluted................................................... $ (0.12) $ 0.06
======== =======
</Table>
(A) CONVERTIBLE DEBENTURES
Under Canadian GAAP, the convertible debenture obligation is classified as an
equity instrument. For Canadian GAAP, the interest, net of taxes, of the equity
component of the convertible debentures is recorded as an after-tax charge to
reinvested earnings. Under US GAAP, the convertible debenture obligation would
be accounted for entirely as a liability and, accordingly, interest costs would
be recorded as interest expense. The Company has the ability to redeem the
convertible debenture at par plus accrued interest by the issuance of Common
Shares or cash. For US GAAP the liability is classified as long term debt.
F-44
(B) ADJUSTMENT TO PURCHASE PRICE ALLOCATION RELATING TO JOINT VENTURES
Under Canadian GAAP, joint ventures are accounted for using the proportionate
consolidation method, while under US GAAP, joint ventures are accounted for
under the equity method. Under an accommodation of the US Securities and
Exchange Commission, accounting for joint ventures need not be reconciled from
Canadian to US GAAP. The different accounting treatment affects only the display
and classification of financial statement items and not net income or
shareholders' equity. See note 6 for summarized financial information in respect
of the Company's joint ventures.
Because of the different treatment of joint ventures between Canadian GAAP and
US GAAP, a permanent difference results in the allocation of the purchase price.
Under purchase accounting, the excess of the value of the assets over the
purchase price (negative goodwill) is allocated to the long term assets
acquired. Under Canadian GAAP, because the joint venture assets are
proportionately accounted for and therefore there is no investment in subsidiary
long term asset, the negative goodwill is allocated only against property, plant
and equipment. Under US GAAP, the negative goodwill is allocated to both
property, plant and equipment and to investment in subsidiary. As a result,
there is a difference in depreciation expense.
(C) COMPREHENSIVE INCOME
United States accounting standards for reporting comprehensive income are set
forth in SFAS No. 130. Comprehensive income represents the change in equity
during a reporting period from transactions and other events and circumstances
from non-owner sources. Components of comprehensive income include items such as
net earnings (loss), changes in the fair value of investments not held for
trading, minimum pension liability adjustments, derivative instruments and
certain foreign currency translation gains and losses.
(D) DERIVATIVE INSTRUMENTS
The Company has interest rate swap agreements. Under US GAAP, unrealized gains
and losses on the mark-to-market valuation of the swaps may be subject to hedge
treatment under SFAS No. 133 whereby all or a portion of the mark-to-market gain
or loss is recorded to other comprehensive income and the swap recorded at fair
value. Any ineffective portion is recorded against income.
(E) FREIGHT COSTS
For Canadian GAAP, sales are recorded net of freight costs for delivery. US GAAP
would require that freight costs be included in cost of sales. The impact of
this adjustment is to increase sales and cost of sales by $87.0 million in the
nine months ended September 30, 2003 and by $53.2 million in the nine months
ended September 30, 2002.
The following table indicates the cumulative effect of the above adjustments on
balance sheet accounts, displaying results under Canadian GAAP and US GAAP:
<Table>
<Caption>
SEPTEMBER 30,
------------------------
CANADIAN UNITED STATES
GAAP GAAP
-------- -------------
2003 2003
-------- -------------
$ $
ASSETS
Current assets............................................ 648,720 602,743
Property, plant & equipment............................... 917,789 791,480
Goodwill.................................................. 116,564 116,564
Other assets.............................................. 25,888 187,430
LIABILITIES
Current liabilities (excl indebtedness)................... 296,892 282,336
Current portion of long-term debt......................... 13,581 12,198
Long-term debt & related party debt....................... 581,816 650,704
Other long-term liabilities............................... 105,542 131,474
Deferred income taxes..................................... 60,991 86,290
SHAREHOLDERS' EQUITY
Invested capital.......................................... 547,601 547,594
Convertible debentures.................................... 92,565 --
Retained earnings (deficit)............................... (16,813) (23,424)
Cumulative translation adjustment......................... 26,786 --
Other comprehensive income................................ -- 11,045
</Table>
F-45
Changes in shareholders' equity under US GAAP were as follows:
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
------- -------
$ $
Shareholders' equity at beginning of year................... 493,192 47,728
Net (loss) earnings......................................... (23,317) 7,339
Subsidiary stock activity................................... -- (418)
Minority interest exchange.................................. 34,201 --
Foreign currency translation adjustment..................... 27,551 (1,649)
Debt converted to equity.................................... -- 325,948
Other comprehensive income.................................. 3,588 318
Shareholders' equity at end of period....................... 535,215 379,266
</Table>
The difference in consolidated shareholders' equity may be reconciled as
follows:
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
-------- -------
$ $
Shareholders' equity based on Canadian GAAP................. 650,139 381,285
Debenture reclassified to debt.............................. (92,565) --
Adjust purchase price for Gallatin joint venture............ (2,331) --
Accumulated unfunded pension................................ (16,856) (547)
Unrealized losses on interest rate derivatives.............. (3,172) (1,404)
-------- -------
Cumulative reduction in net earnings under US GAAP.......... (114,923) (1,951)
Shareholders' equity based on US GAAP....................... 535,215 379,334
</Table>
There are no significant differences with respect to the consolidated statement
of cash flows between US GAAP and Canadian GAAP.
NOTE 11 -- FINANCIAL INFORMATION RELATED TO SUBSIDIARY GUARANTORS
Unaudited consolidating financial information related to the Company and its
Subsidiary Guarantors and non-Guarantors as of September 30, 2003 and for the
nine months ended September 30, 2003 and September 30, 2002 is disclosed to
comply with the reporting requirements of the Company's Subsidiary Guarantors.
The Subsidiary Guarantors are wholly-owned subsidiaries, and non-wholly-owned
like Ameristeel Bright Bar, of the Company which have fully and unconditionally
guaranteed the Company's 10 3/8% Senior Notes due 2011 which may be delivered
upon the exchange of the Company's 10 3/8% Senior Notes due 2011. The
non-Guarantors are subsidiaries of the Company which have not fully and
unconditionally guaranteed the Company's 10 3/8% Senior Notes due 2011 which may
be delivered upon the exchange of the Company's 10 3/8% Senior Notes due 2011.
Unaudited consolidating financial information follows:
F-46
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
September 30, 2003
($ in thousands)
<Table>
<Caption>
GERDAU
AMERISTEEL
CORPORATION GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
----------- -------- ---------- -------------- ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents..... $ 4,960 $ -- $ 8,669 $ 6,782 $ -- $ 20,411
Accounts receivable, net...... 52,914 -- 152,396 20,519 -- 225,829
Inventories................... 74,780 -- 277,691 21,582 -- 374,053
Deferred tax assets and
recoverable taxes.......... -- -- 17,514 -- -- 17,514
Other current assets.......... 9,610 -- 266 1,037 -- 10,913
-------- -------- ---------- --------- ----------- ----------
Total Current Assets............ 142,264 -- 456,536 49,920 -- 648,720
Property, Plant and Equipment... 176,863 -- 598,830 142,096 -- 917,789
Goodwill........................ -- -- 111,877 4,687 -- 116,564
Deferred Financing Costs........ -- 11,117 4,334 40 -- 15,491
Future Tax Assets............... -- -- 8,364 -- -- 8,364
Investment in subsidiaries...... 269,376 477,866 256,584 -- (1,003,826)
Other Assets.................... 11,058 -- (9,112) 87 -- 2,033
-------- -------- ---------- --------- ----------- ----------
Total Assets.................... $599,561 $488,983 $1,427,413 $ 196,830 $(1,003,826) $1,708,961
======== ======== ========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Trade accounts payable........ $ 43,855 $ -- $ 148,784 $ 20,214 $ -- $ 212,853
Accrued salaries, wages and
employee benefits.......... 3,141 -- 23,079 -- -- 26,220
Other current liabilities..... 9,502 (1,224) 48,469 1,072 -- 57,819
Intercompany.................. (51,142) 36,368 124,569 (109,795) --
Bank indebtedness............. (6,111) -- 7,696 1,225 -- 2,810
Current maturities of
long-term borrowings....... -- -- 10,162 609 -- 10,771
-------- -------- ---------- --------- ----------- ----------
Total Current Liabilities....... (755) 35,144 362,759 (86,675) -- 310,473
Long Term Borrowings, Less
Current Portion................. 85,686 407,942 81,303 6,885 -- 581,816
Other Liabilities............... 13,433 -- 92,109 -- -- 105,542
Future Tax Liabilities.......... (33,819) -- 129,130 (35,671) 1,351 60,991
Total Liabilities............... 64,545 443,086 665,301 (115,461) 1,351 1,058,822
Shareholder's Equity
Invested capital.............. 374,822 61,108 837,387 296,957 (1,022,673) 547,601
Convertible debentures........ 92,565 -- -- -- -- 92,565
Retained (deficit) earnings... 97,135 (9,313) (148,489) 36,598 7,256 (16,813)
Cumulative foreign currency
translation................ (29,506) (5,898) 73,214 (21,264) 10,240 26,786
-------- -------- ---------- --------- ----------- ----------
Total Shareholders' Equity...... 535,016 45,897 762,112 312,291 (1,005,177) 650,139
-------- -------- ---------- --------- ----------- ----------
Total Liabilities and
Shareholders' Equity.......... $599,561 $488,983 $1,427,413 $ 196,830 $(1,003,826) $1,708,961
======== ======== ========== ========= =========== ==========
</Table>
F-47
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 30, 2003
($ in thousands)
<Table>
<Caption>
GERDAU
AMERISTEEL
CORPORATION GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
----------- --------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES
Net (loss) income........................ $(12,153) $ (5,897) $ (13,869) $ 16,629 $ -- $ (15,290)
Adjustment to reconcile net income (loss)
to net cash
Provided by (used for) operating
activities:
Depreciation........................... 11,539 -- 41,903 7,025 -- 60,467
Amortization........................... 8,555 1,723 (6,150) 2 -- 4,130
Deferred income taxes.................. (1,800) -- (20,443) 506 998 (20,739)
Gain on disposition of property, plant
and equipment........................ (93) -- -- -- -- (93)
Unrealized foreign exchange on related
party loans.......................... -- 7,241 -- -- -- 7,241
Accrued interest on related party
loans................................ -- (2,884) -- -- -- (2,884)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................... (30,381) -- (23,283) 961 (3,798) (56,501)
Inventories............................ (7,052) -- 4,188 215 (159) (2,808)
Other assets........................... (20,093) 1,201 9,908 (1,050) -- (10,034)
Liabilities............................ 57,677 (14,520) (36,929) (11,186) 44,649 39,691
-------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES............................. 6,199 (13,136) (44,675) 13,102 41,690 3,180
INVESTING ACTIVITIES
Additions to property, plant and
equipment............................ (49,529) -- 16,206 (7,505) 353 (40,475)
Investments in subsidiaries............ (269,377) (383,658) (248,226) (562) 901,823
Proceeds from dispositions............. 77 -- -- -- -- 77
-------- --------- --------- --------- --------- ---------
NET CASH USED IN (PROVIDED BY) INVESTING
ACTIVITIES............................. (318,829) (383,658) (232,020) (8,067) 902,176 (40,398)
FINANCING ACTIVITIES
Proceeds from issuance of new debt..... (61,281) 357,941 (200,245) 397 445,545 542,357
(Payment) borrowing of short-term and
long-term borrowings, net............ (30,991) -- 14,881 (4,459) (463,985) (484,554)
Increase in related party loans
payable.............................. (51,142) 12,970 147,968 (109,796) -- --
Additions to deferred financing
costs................................ (2,194) (12,840) -- -- -- (15,034)
Foreign exchange loss.................. (520) -- -- -- -- (520)
Issuance of common stock............... 454,600 38,723 321,580 110,523 (925,426)
Changes in minority interest........... -- -- (218) -- -- (218)
Subsidiary stock activity.............. -- -- (763) -- -- (763)
-------- --------- --------- --------- --------- ---------
NET CASH (PROVIDED BY) USED FOR FINANCING
ACTIVITIES............................. 308,472 396,794 283,203 (3,335) (943,866) 41,268
-------- --------- --------- --------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (4,158) -- 6,508 1,700 -- 4,050
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. 9,118 -- 2,161 5,082 -- 16,361
-------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 4,960 $ -- $ 8,669 $ 6,782 $ -- $ 20,411
======== ========= ========= ========= ========= =========
</Table>
F-48
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months ended September 30, 2002
($ in thousands)
<Table>
<Caption>
GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- -------------- ------------ ------------
Operating Activities
Net (loss) income..................... $ (8,145) $ 16,069 $ 690 $ (1,008) $ 7,606
Adjustment to reconcile net income
(loss) to net cash
Provided by operating activities:
Depreciation........................ -- 37,865 592 63 38,520
Amortization........................ 544 331 4 -- 879
Deferred income taxes............... -- (4,861) -- -- (4,861)
Unrealized foreign exchange on
related party loans.............. -- 181 -- -- 181
Accrued interest on related party
loans............................ -- (594) -- -- (594)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................. -- (35,714) (606) -- (36,320)
Inventories......................... -- (3,229) (238) -- (3,467)
Other assets........................ -- (5,200) 48 -- (5,152)
Liabilities......................... 11,962 (56) 830 -- 12,736
--------- --------- ------ --------- --------
Net Cash Provided by Operating
Activities.......................... 4,361 4,792 1,320 (945) 9,528
Investing Activities
Additions to property, plant and
equipment...................... -- (21,359) (428) -- (21,787)
Investments in Subsidiary........ 96,125 (135,101) -- 38,976 --
Assets acquisition............... -- (8,356) -- -- (8,356)
Proceeds from dispositions....... -- 134 -- -- 134
--------- --------- ------ --------- --------
Net Cash Used in Investing
Activities.......................... 96,125 (164,682) (428) 38,976 (30,009)
Financing Activities
(Payment) borrowing of short-term
and long-term borrowings, net.... -- (206,121) (892) 227,585 20,572
Increase in related party debt...... (99,815) 1,604 -- 98,211 --
Issuance of Common Stock............ (671) 365,289 -- (364,618) --
Changes in minority interest........ -- 2,365 -- -- 2,365
Subsidiary stock activity........... -- 947 -- -- 947
--------- --------- ------ --------- --------
Net Cash Provided by Financing
Activities.......................... (100,486) 164,084 (892) (38,822) 23,884
Increase in Cash and Cash
Equivalents......................... -- 4,194 -- (791) 3,403
Cash and Cash Equivalents at Beginning
of Period........................... -- 5,086 1 -- 5,087
Cash and Cash Equivalents at End of
Period.............................. $ -- $ 9,280 $ 1 $ (791) $ 8,490
========= ========= ====== ========= ========
</Table>
F-49
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine months ending September 30, 2003
(U.S.$ in thousands)
(Unaudited)
<Table>
<Caption>
GERDAU
AMERISTEEL
CORPORATION GUSAP GUARANTORS NON-GUARANTORS CONSOLIDATED
----------- ------- ---------- -------------- ------------
Net Sales............................... $267,479 $ -- $962,492 $171,299 $1,401,270
Operating Expenses
Cost of sales......................... 245,414 -- 886,328 152,174 1,283,916
Selling and administrative............ 10,277 -- 43,838 5,197 59,312
Depreciation.......................... 11,539 -- 41,903 7,025 60,467
Other operating expense............... 582 -- 930 (1,368) 144
-------- ------- -------- -------- ----------
267,812 -- 972,999 163,028 1,403,839
Income(Loss) From Operations............ (333) -- (10,507) 8,271 (2,569)
Other Expenses
Interest.............................. 7,309 13,101 19,482 (9,745) 30,147
Foreign exchange (gains) losses....... 939 (8,668) 7,913 2 186
Amortization of deferred financing
costs.............................. 8,555 1,723 (6,150) 2 4,130
-------- ------- -------- -------- ----------
16,803 6,156 21,245 (9,741) 34,463
(Loss) Income Before Taxes.............. (17,136) (6,156) (31,752) 18,012 (37,032)
Income Tax (Benefit) Expense............ (4,983) (259) (17,666) 1,383 (21,525)
-------- ------- -------- -------- ----------
(Loss) Income before Minority
Interest.............................. (12,153) (5,897) (14,086) 16,629 (15,507)
Minority Interest....................... -- -- 217 -- 217
-------- ------- -------- -------- ----------
Net (Loss) Income....................... $(12,153) $(5,897) $(13,869) $ 16,629 $ (15,290)
======== ======= ======== ======== ==========
</Table>
F-50
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine months ending September 30, 2002
($ in thousands)
(Unaudited)
<Table>
<Caption>
GUSAP GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- -------------- ------------ ------------
Net Sales............................... $ -- $685,265 $17,329 $(4,972) $697,622
Operating Expenses
Cost of sales......................... -- 562,015 14,262 (4,979) 571,298
Selling and administrative............ (122) 44,336 1,154 1 45,369
Depreciation.......................... -- 37,865 592 63 38,520
Other operating expense............... -- 1,007 -- -- 1,007
------- -------- ------- ------- --------
(122) 645,223 16,008 (4,915) 656,194
Income (Loss) From Operations........... 122 40,042 1,321 (57) 41,428
Other Expenses
Interest.............................. 7,531 21,818 202 1,011 30,562
Foreign exchange (gains) losses....... 192 194 -- -- 386
Amortization of deferred financing
costs.............................. 544 331 4 -- 879
------- -------- ------- ------- --------
8,267 22,343 206 1,011 31,827
(Loss) Income Before Taxes.............. (8,145) 17,699 1,115 (1,068) 9,601
Income Tax (Benefit) Expense............ -- 200 425 (60) 565
------- -------- ------- ------- --------
(Loss) Income before Minority
Interest.............................. (8,145) 17,499 690 (1,008) 9,036
Minority Interest....................... -- (1,430) -- -- (1,430)
------- -------- ------- ------- --------
Net (Loss) Income....................... $(8,145) $ 16,069 $ 690 $(1,008) $ 7,606
======= ======== ======= ======= ========
</Table>
F-51
CANADIAN GAAP/CANADIAN DOLLAR
CONSOLIDATED FINANCIAL STATEMENTS
CO-STEEL INC.
DECEMBER 31, 2001 AND 2000
F-52
AUDITOR'S REPORT
To the Shareholders of
Co-Steel Inc.
We have audited the consolidated balance sheets of Co-Steel Inc. as at
December 31, 2001 and 2000 the consolidated statements of (loss) earnings,
reinvested earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2001 and 2000, and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
February 22, 2002
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
consolidated financial statements are affected by conditions and events that
cast substantial doubt on the Company's ability to continue as a going concern,
such as those described in Note 1 to the consolidated financial statements.
Reporting standards for auditors in the United States also require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's financial statements, such as the change described in Note 1 to
the financial statements. Our report to the shareholders, dated February 22,
2002 is expressed in accordance with Canadian reporting standards, which do not
permit references to such matters, events and conditions in the auditors' report
when these are adequately disclosed in the consolidated financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
February 22, 2002
F-53
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(Canadian dollars in
thousands, except per share
amounts)
Sales....................................................... $1,047,649 $1,278,814
---------- ----------
Costs of sales excluding depreciation and amortization...... 1,017,930 1,121,558
Depreciation and amortization............................... 76,887 71,032
Pension curtailment charge (note 15)........................ 13,000 --
Selling, general and administrative expense................. 40,968 36,738
---------- ----------
1,148,785 1,229,328
Operating (loss) earnings................................... (101,136) 49,486
Interest on long-term debt.................................. 32,209 26,359
Other interest expense...................................... 9,280 8,138
Interest and investment income.............................. (1,364) (1,594)
Gain sale of land (note 4).................................. (4,770) --
Write-down of portfolio investment (note 5)................. 23,250 --
---------- ----------
(Loss) earnings before income taxes......................... (159,741) 16,583
Income tax recovery (expense) (note 13)
Current................................................... 2,100 (6,243)
Future.................................................... 41,889 9,710
---------- ----------
43,989 3,467
---------- ----------
(Loss) earnings from continuing operations.................. (115,752) 20,050
Net earnings from discontinued operations (note 2).......... -- 18,471
Net (loss) earnings......................................... $ (115,752) $ 38,521
========== ==========
(Loss) earnings per Common Share (note 11)
Basic -- Continuing operations.............................. $ (3.95) $ 0.50
-- Net (loss) earnings................................ $ (3.95) $ 1.10
Diluted -- Continuing operations............................ $ (3.95) $ 0.50
-- Net (loss) earnings.............................. $ (3.95) $ 1.10
Cash dividend per Common Share.............................. $ -- $ 0.40
</Table>
See notes to consolidated financial statements.
F-54
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000
------------- ------------
(Canadian dollars in
thousands, except per share
amounts)
Balance -- beginning of year................................ $ 277,911 $277,876
Cumulative adjustment due to change in accounting policy
(note 1).................................................. -- (21,427)
Net (loss) earnings......................................... (115,752) 38,521
Interest, net of taxes, on equity component of convertible
debentures................................................ (5,156) (4,820)
Dividends................................................... -- (12,239)
--------- --------
Balances -- end of year..................................... $ 157,003 $277,911
========= ========
</Table>
See notes to consolidated financial statements.
F-55
CO-STEEL INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(Canadian dollars in
thousands, except per share
amounts)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 34,484 $ 3,903
Accounts receivable, net of allowance for doubtful
accounts of $12,399 (2000 -- $8,951)................... 114,845 116,990
Inventories (note 3)........................................ 178,486 250,518
Future income taxes (note 13)............................... 11,486 9,003
Current assets of discontinued operations (note 2).......... -- --
---------- ----------
339,301 380,414
Property, plant and equipment (note 4)...................... 730,946 739,513
Other assets (note 5)....................................... 80,404 109,914
Accrued benefit asset (notes 1 and 15)...................... -- --
Future income taxes (note 13)............................... 36,374 --
Non-current assets of discontinued operations (note 2)...... -- --
---------- ----------
$1,187,025 $1,229,841
========== ==========
LIABILITIES
Current liabilities:
Bank indebtedness (note 7)................................ $ 96,562 $ 100,639
Accounts payable and accrued liabilities.................. 128,792 170,119
Current portion of long-term liabilities (notes 8 and
9)..................................................... 319,569 48,907
Current liabilities of discontinued operations (note 2)... -- --
---------- ----------
544,923 319,665
Long-term debt (note 8)..................................... 5,686 191,186
Convertible debenture liability (note 9).................... -- 3,807
Accrued benefit obligations (note 15)....................... 35,659 25,611
Future income taxes (note 13)............................... -- 934
Non-current liabilities of discontinued operations (note
2)........................................................ -- --
---------- ----------
$ 586,268 $ 541,203
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (notes 8c and 11)............................. 269,859 269,859
Convertible debentures (note 9)............................. 122,859 114,850
Reinvested earnings......................................... 157,003 277,911
Foreign currency translation adjustments (note 12).......... 51,036 26,018
---------- ----------
$ 600,757 $ 688,638
---------- ----------
$1,187,025 $1,229,841
========== ==========
</Table>
Basis of presentation -- Going concern (note 1)
Contingencies and commitments (note 14)
See notes to consolidated financial statements.
F-56
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
(Canadian dollars in
thousands, except per share
amounts)
Operating activities
(Loss) earnings from continuing operations.................. $(115,752) $ 20,050
Items not affecting cash
Depreciation and amortization............................. 76,887 71,032
Future income tax recovery................................ (41,889) (9,710)
Net pension and other benefit plans expense (funding)
(note 15).............................................. 9,691 (3,412)
Gain on sale of land (note 4)............................. (4,770) --
Write-down of portfolio investment (note 5)............... 23,250 --
Cash provided from (used for) working capital
Accounts Receivable....................................... 7,147 14,618
Inventories............................................... 79,571 (29,055)
Accounts payable and accrued liabilities.................. (40,825) (48,907)
--------- ---------
Cash provided by (used for) operations...................... $ (6,690) $ 14,616
--------- ---------
Financing activities
(Repayment of) additions to bank indebtedness............... (7,954) 38,795
Additions to (repayment of) long-term debt.................. 63,999 (115,210)
Issue of shares............................................. -- 130
Dividends................................................... -- (12,239)
--------- ---------
Cash provided by (used for) financing....................... $ 56,045 $ (88,524)
--------- ---------
Investing activities
Additions to property, plant and equipment.................. (24,989) (17,327)
Proceeds from sale of land (note 4)......................... 4,875 --
Cash proceeds on sale of discontinued operations............ -- 84,987
Additions to other assets................................... 1,340 (2,237)
--------- ---------
Cash (used for) provided by investing....................... $ (18,774) $ 65,423
--------- ---------
Change in cash.............................................. 30,581 (8,485)
Cash and cash equivalents -- Beginning of year.............. 3,903 12,388
--------- ---------
Cash and cash equivalents -- End of year.................... $ 34,484 $ 3,903
--------- ---------
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 34,820 $ 35,721
Cash paid (received) for income taxes..................... $ 2,097 $ (5,557)
========= =========
</Table>
See notes to consolidated financial statements.
F-57
CO-STEEL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(Canadian Dollars in thousands, except per share amounts)
Co-Steel Inc. (the "Company" or "Co-Steel") is a minimill steel producer and
steel scrap processor with operations in Canada and the United States. The
Company manufactures steel bar and rod, structural shapes and flat rolled steel
for a large number of customers in many steel markets, including the
construction, automotive, appliance and machinery and equipment industries.
Co-Steel also processes and trades ferrous scrap, the principal raw material in
the minimill process, and non-ferrous scrap for its own use and for sale to
third parties.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada. All
amounts are reported in Canadian dollars unless otherwise indicated.
BASIS OF PRESENTATION -- GOING CONCERN
These consolidated financial statements have been prepared using Canadian
Generally Accepted Accounting Principles applicable to, and assuming, a
"going concern". "Going concern" assumes that the Company will continue in
operation for the foreseeable future and will be able to realize its assets
and discharge its liabilities in the normal course of business.
Since March 31, 2001, the Company has been in breach of financial covenants
contained in its credit agreements and as a result, the debt has been
reclassified from long-term to current liabilities. Principal payments
amounting to $12.5 million due on July 15, 2001 and $15 million due on
January 15, 2002, have not been made.
The appropriateness of the "going concern" assumption is dependent upon,
amongst other things, the Company successfully renegotiating its senior
lending facilities (note 8) and the ability of the Company to generate
sufficient cash from operations. On February 19, 2002, the Company reached an
agreement in principle with its senior lenders which is subject to the
preparation and execution of definitive agreements -- see note 8b.
If the going concern basis was not appropriate then significant adjustments
would be necessary to the carrying value of the assets and liabilities of the
Company.
CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its subsidiaries.
REVENUE RECOGNITION
The Company recognizes revenue when title is transferred to the customers in
accordance with the sale agreement.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on deposit and term deposits with
remaining maturities of less than three months at the date of purchase. Cash
held in the joint venture operation is for the sole use of the joint venture
operations.
JOINT VENTURES AND OTHER INVESTMENTS
The Company's investment in Gallatin Steel Company, a 50% joint venture, is
proportionately consolidated. Other investments where the Company does not
exercise significant influence are accounted for by the cost method. The
Company evaluates the carrying value of the investments to determine if there
has been an impairment in value considered other than temporary, which is
assessed by review of cash flows, operating income and takes into
consideration trading values on recognized stock exchanges. If an impairment
is considered other than temporary, a provision is recorded.
INVENTORIES
Inventories are valued at the lower of average cost and net realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Interest incurred in
connection with construction of major new facilities is capitalized.
Depreciation is provided for buildings, machinery and equipment so as to
amortize their cost on a straight-line basis principally over a period of 15
to 20 years. No depreciation is provided on assets under construction.
GOODWILL
Goodwill, which arose from the acquisition of subsidiary companies, is
amortized on a straight-line basis over its estimated benefit life. Effective
January 1, 2001, the Company reduced the amortization period for goodwill
from 40 years to 20 years. This change in estimate has been applied
prospectively and its impact was to increase depreciation and amortization
expense by approximately $6.9 million for the year ended December 31, 2001.
F-58
The Company evaluates the carrying value of goodwill to determine if there
has been a decline in value, based on estimates of current and expected
undiscounted cash flows from operations of each underlying business, taking
into consideration operating trends and other relevant factors.
FOREIGN CURRENCY TRANSLATION
Operating revenue and expenses arising from foreign currency transactions are
translated into Canadian dollars at exchange rates in effect on the date of
the transactions. Monetary assets and liabilities are translated into
Canadian Dollars at the exchange rate in effect at the balance sheet date.
Gains or losses arising from these translations are included in earnings,
with the exception of unrealized foreign exchange gains or losses on
long-term monetary items that hedge net investments in foreign operations
which are accumulated in the foreign currency translation adjustment account
in shareholders' equity, until there is a reduction in the net investment in
the foreign operation.
Assets and liabilities of self-sustaining foreign operations are translated
into Canadian dollars at the exchange rate in effect at the balance sheet
date. Operating revenue and expense items are translated at average exchange
rates prevailing during the year. Any corresponding foreign exchange gains
and losses are deferred and disclosed separately as part of shareholders'
equity and are recognized in earnings when the ownership interest in the
foreign operations is reduced.
FUTURE INCOME TAXES
The liability method of accounting for income taxes is used whereby future
income taxes arise from temporary differences between the book value of
assets and liabilities and their respective tax value.
Future income tax assets and liabilities are measured using substantially
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on future income tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the substantive
enactment date. A valuation allowance is recorded to the extent the
recoverability of future income tax assets is not considered more likely than
not.
PENSIONS AND POST-RETIREMENT BENEFITS
Effective January 1, 2000, the Company changed its method of accounting for
employee future benefits to conform with the recommendations of The Canadian
Institute of Chartered Accountants. Under the new method, the discount rate
used for determining the liability for future benefits is the current
interest rate at the balance sheet date on high quality fixed income
investments with maturities that match the expected maturity of the
obligations. In prior years, the discount rate used for pensions was
management's best estimate of the long-term interest rate.
The financial statements for the years ended December 31, 2001 and 2000 have
been prepared on the new basis. As a result of the adoption, at January 1,
2000, the accrued pension obligation was increased by $33.5 million, the
future income tax asset increased by $12.1 million and the reinvested
earnings was reduced by $21.4 million.
The Company accrues its obligations under employee benefit plans and the
related costs, net of plan assets. The Company has adopted the following
policies:
- The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected benefit method prorated on
service and management's best estimate of expected plan investment
performance for funded plans, salary escalation, retirement ages of
employees and expected health care costs.
- Pension assets are valued at fair market value.
- Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at
the date of amendment.
- The excess of the net actuarial gain or loss over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized
over the average remaining service period of the active employees.
- A plan curtailment will result if there has been a significant reduction
in the expected future service of present employees (greater than 5%). A
net curtailment loss is recognized when the event is probable and can be
estimated, a net curtailment gain is deferred until realized.
EARNINGS PER SHARE
The Company's diluted earnings per share is determined using the treasury
stock method for the effect of outstanding share purchase options and the
dilution impact of the convertible debenture at the stated conversion price.
STOCK-BASED OPTION PLAN
The Company has a stock-based option plan which is described in note 11. No
compensation expense is recognized when stock options are issued to
employees, as the option price is equivalent to the market value of the
shares at the date of grant. Consideration paid on the exercise of stock
options is credited to share capital.
DEFERRED SHARE UNIT PLAN
The Corporation offers a Deferred Share Unit Plan (DSUP) for members of the
Board of Directors. Under the DSUP each director may elect to receive all, or
a percentage of, their annual compensation in the form of deferred share
units (DSUs) which are notional Common Shares of the Company. The issue price
of each DSU is based on the closing trading value of the Common Shares on the
meeting dated and an expense is recognized at that time. The DSU account of
each director includes the value of dividends, if any, as if reinvested in
additional
F-59
DSUs. The director is not permitted to convert DSUs into cash until
retirement from the Board. The value of the DSUs, when converted to cash,
will be equivalent to the market value of the Common Shares at the time the
conversion takes place. The value of the outstanding DSUs as at December 31,
2001, was $107,401 (2000 -- $115,295).
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPARATIVE RESULTS
Certain comparative amounts have been reclassified to conform to the current
year's presentation.
2. DISCONTINUED OPERATIONS
On May 4, 2000, the Company completed its sale of Mayer Parry Recycling Ltd.
(MPR) to European Metal Recycling Ltd., a third party. The cash transaction
was valued at L50 million of which Co-Steel's share was 76%.
During 2000, the Company procured insurance to mitigate certain contingent
environmental liabilities related to its 1999 sale of Co-Steel Sheerness. As
a result, the Company reevaluated its provision requirements resulting in
$1.4 million being recorded as income from discontinued operations in 2000.
The income from discontinued operations recorded in the 2000 results is as
follows:
<Table>
<Caption>
2000
--------
Sales....................................................... $121,707
--------
Earnings before income taxes................................ 12,879
Income taxes................................................ (3,936)
Non-controlling shareholders' interest...................... (2,247)
--------
Net earnings from operations................................ 6,696
--------
Net gain on disposition of MPR.............................. 10,341
Adjustments recorded to provisions related to 1999 sale of
Co-Steel Sheerness........................................ 1,434
--------
Net earnings from discontinued operations................... 18,471
========
Earnings from discontinued operations per Common Share
Basic..................................................... $ 0.60
Diluted................................................... $ 0.60
========
</Table>
The net earnings on the 2000 disposition of MPR includes an allocation of
interest expense (net of income taxes) of $0.5 million. The net gain on
disposition includes transaction costs and other estimated provisions.
Cash from (used for) discontinued operations is as follows:
<Table>
<Caption>
2000
-------
Operating activities........................................ $ (143)
Financing activities........................................ (697)
Investing activities........................................ (387)
-------
$(1,227)
=======
</Table>
3. INVENTORIES
<Table>
<Caption>
2001 2000
-------- --------
Ferrous and non-ferrous scrap............................... $ 19,767 $ 33,500
Billets..................................................... 18,990 25,931
Finished goods.............................................. 69,427 126,399
Plant supplies.............................................. 70,302 64,688
-------- --------
$178,486 $250,518
======== ========
</Table>
F-60
4. PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
2001 2000
------------------------------------ ------------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
---------- ------------ -------- ---------- ------------ --------
Land....................................... $ 44,413 $ -- $44,413 $ 42,556 $ -- $ 42,556
Buildings.................................. 139,433 62,360 77,073 135,062 59,764 75,298
Machinery and equipment.................... 1,226,265 618,904 607,361 1,149,193 531,433 617,760
Construction-in-progress................... 2,099 -- 2,099 3,899 -- 3,899
---------- -------- -------- ---------- -------- --------
$1,412,210 $681,264 $730,946 $1,330,710 $591,197 $739,513
========== ======== ======== ========== ======== ========
</Table>
During 2001, the Company sold 22 acres of surplus land for net cash proceeds
of $4.9 million, and recorded a gain of $4.8 million.
5. OTHER ASSETS
<Table>
<Caption>
2001 2000
------- --------
Goodwill (1)................................................ $68,665 $ 73,557
Portfolio investment (2).................................... 4,488 27,738
Debenture (3)............................................... 4,587 4,587
Deferred financing expenses (4)............................. 626 2,169
------- --------
Share loan receivable (5)................................... 2,038 1,863
------- --------
$80,404 $109,914
======= ========
</Table>
-------------------
(1) Goodwill is net of accumulated amortization of $20,412 (2000 -- $10,848)
(2) The portfolio investment represents 64.9 million shares of ASW and is
accounted for at cost less provisions recorded. During the year, the
Company determined that the decline in value of ASW can no longer be
considered temporary and accordingly recorded a provision of $23.3
million to reflect an estimated decline in value. Based on the trading
value of the shares on the London Stock Exchange of 2.3p per share on
December 31, 2001, the value of the 64.9 million shares of ASW was L1.5
million or $3.5 million (2000 -- $8.7 million). Management currently
believes that the difference between the adjusted cost of $4.5 million
and the trading value of $3.5 million represents a temporary decline in
value. Accordingly, no further provision has been recorded.
(3) The debenture represents an 8% unsecured junior subordinated loan note
from ASW (note 2).
(4) The deferred financing expenses are amortized over the life of the
financing arrangements.
(5) The share loan receivable is from key management employees. The funds
loaned were used by the employees to purchase 184,105 (2000 -- 151,155)
shares of the Company. The loans are interest free, secured by the
shares and life insurance policies, and are repayable at the earlier of
10 years from the date of the loan, or 90 days after employment
termination. The trading value of the Company shares at December 31,
2001 which are held by the Company as security for the loans was $319
(2000 -- $937).
6. JOINT VENTURE PARTNERSHIP
The Company owns 50% of Gallatin Steel Company ("Gallatin"), a joint venture
partnership with Dofasco Inc. Gallatin is a minimill in Kentucky specializing
in the production of flat rolled steel.
F-61
Summarized below is the Company's 50% proportionate share of Gallatin
included in the Company's accounts. As Gallatin Steel Company is a
partnership, these accounts do not include a provision for income taxes since
taxes are imposed upon the partners.
<Table>
<Caption>
2001 2000
-------- --------
BALANCE SHEET
Current assets (1)(2)....................................... $ 54,661 $ 58,921
Property, plant and equipment (3)
Land...................................................... 11,506 10,838
Buildings................................................. 18,496 18,531
Machinery and equipment................................... 201,656 209,608
Construction-in-progress.................................. 589 1,276
Current liabilities......................................... 48,584 43,251
Long-term debt.............................................. 5,686 5,608
STATEMENT OF EARNINGS (LOSS)
Sales....................................................... 235,248 266,154
Operating (loss) earnings................................... (28,630) 15,208
(Loss) earnings before income taxes......................... (29,298) 13,835
CASH FLOWS
Cash provided from (used in)
Operating activities...................................... 419 19,729
Investing activities...................................... (4,244) (9,629)
Financing activities...................................... 7,832 (10,168)
-------- --------
Proportionate share of increase (decrease) in cash.......... $ 4,007 $ (68)
======== ========
</Table>
-------------------
(1) Includes $4,010 of cash and cash equivalents (2000 -- nil).
(2) Current assets are net of allowance for doubtful accounts of $6,397 (2000
-- $1,599).
(3) Net of accumulated depreciation of $132.9 million in 2001 (2000 -- $103.0
million).
At December 31, 2001 Gallatin was in non-compliance with certain of its
financial covenants under its credit agreement. Subsequent to year end,
Gallatin has obtained a waiver of the covenant violations and negotiated an
amendment to the credit agreement modifying certain of the existing terms and
conditions.
7. BANK INDEBTEDNESS
The weighted average interest rate on bank indebtedness at December 31, 2001
was 7.1% (2000 -- 8.35%). These credit facilities expire at various dates
until March 31, 2004. See note 8b.
The Company has outstanding letters of credit at December 31, 2001 of $14.2
million (2000 -- $3.6 million).
8. LONG-TERM DEBT
a.
<Table>
<Caption>
2001 2000
-------- --------
Fixed Rate Reducing Term Loans (note 10)
$45 million (2000 -- $60 million) (1)..................... $ 71,667 $ 90,012
$75 million (2000 -- $75 million) (2)..................... 119,445 112,515
Floating Rate Loans (note 10)
$78.1 million revolving term loans (2000 -- $16.2 million)
(3)..................................................... 124,382 24,303
Other Loans................................................. 5,951 5,999
-------- --------
321,445 232,829
Less: Current portion....................................... 315,759 41,643
-------- --------
$ 5,686 $191,186
======== ========
</Table>
-------------------
(1) Interest is payable semi-annually and at December 31, 2001, the rate was
8.75% (2000 -- 8.07%). Scheduled principal repayments are in three
instalments: $15 million in each of the years 2002 to 2004.
(2) Interest is payable quarterly and at December 31, 2001, the rate was
9.09% (2000 -- 8.59%;). Scheduled principal repayments are in six
instalments: $12.5 million in each of the years 2001 to 2006.
(3) At December 31, 2001, the interest rate on the loans was 9.0% (2000 --
8.69%).
Since March 31, 2001, the Company has been in breach of financial covenants
contained in its credit agreements and as a result, the debt has been
reclassified from long-term to current liabilities (Note 1). Principal
payments amounting to $12.5 million due on July 15, 2001 and $15 million due
on January 15, 2002 have not been made but will be deferred under the new
credit arrangements described in note 8b.
F-62
b. On February 19, 2002, Co-Steel reached an agreement in principle with
its senior lenders which will cure existing defaults and increase total
credit facilities to approximately $420 million. The agreement in
principle provides Co-Steel with approximately $20 million of additional
liquidity. Under this agreement in principle, the term of financing will
be extended to September 30, 2003 and will be further extended to
January 15, 2004 if Co-Steel is able to obtain at least $50 million of
new financing, either through equity or subordinated debt. If new
financing is not obtained, Co-Steel may be required to redeem its 6.5%
convertible unsecured subordinated debentures for Common Shares by
December 31, 2002. Implementation of the revised credit arrangements is
subject to the preparation and execution of definitive agreements,
including the granting of security over all the Company's material
assets.
c. On February 20, 2002, the Company entered into an agreement to sell
15,000,000 Common Shares to a group of underwriters at a price of $3.35
per Common Share representing aggregate gross proceeds of $50,250,000.
The Company has granted the underwriters an option to purchase up to an
additional 6,000,000 Common Shares exercisable until 48 hours prior to
the closing date. Closing is expected on or about March 12, 2002. This
offering satisfies the new financing requirements (referred to in note
8b) contained in the agreement in principle with its senior lenders, and
results in the proposed covenants being neutral on whether the
Convertible Debentures must be redeemed.
9. CONVERTIBLE DEBENTURES
<Table>
<Caption>
2001 2000
-------- --------
Current liability component................................. $ 3,810 $ 7,264
Long-term liability component............................... -- 3,807
Equity component............................................ 122,859 114,850
-------- --------
$126,669 $125,921
======== ========
</Table>
On April 23, 1997, the Company issued unsecured subordinated convertible
debentures in the aggregate principal amount of $125 million. After deducting
issue costs of $3.8 million, the proceeds of the issue amounted to $121.2
million.
The debentures bear interest at 6.5% per annum, mature on April 30, 2007,
and, at the holders' option, are convertible into Common Shares of the
Company at a conversion price of $26.25 per share. Under the terms of the
Trust Indenture for the Convertible Debentures, no adjustment to the
conversion price is required if the Company issues Common Shares in a
customary offering. The debentures are redeemable after April 30, 2002, at
the option of Co-Steel at par plus accrued interest. The Company has the
right to settle the principal amount by the issuance of Common Shares based
on their market value at the time of the redemption.
As the convertible debentures can be redeemed by the Company by the issuance
of Common Shares, the debenture obligations were classified partly as a
liability and partly as shareholders' equity. The liability component was
calculated as the present value of the required interest payments discounted
(for the period to April 30, 2002) at an interest rate approximating that
which would have been applicable to non-convertible subordinate debt at the
time the debentures were issued.
<Table>
Issue Price................................................. $125,000
Less: Liability component................................... (33,409)
--------
Shareholders' equity component.............................. 91,591
Less: Issue costs applicable to shareholders' equity
component net of related income taxes..................... (1,798)
--------
Net amount classified as shareholders' equity at issuance... $ 89,793
========
</Table>
Interest on the liability component has been included in the computation of
earnings (loss) for the period. Interest on the shareholders' equity
component, net of related income taxes, has been charged to reinvested
earnings, and was deducted from the net earnings or added to net loss in
calculating basic earnings per share.
10. FINANCIAL INSTRUMENTS
a. The Company's use of derivative instruments is limited. Derivative
instruments are not used for speculative purposes but they are used to
manage well-defined foreign exchange and interest rate risks arising out
of the normal course of business.
At certain times throughout the year the Company enters into forward
foreign exchange contracts and put and call options (collectively "foreign
exchange contracts") to hedge accounts receivable and future revenues
denominated in U.S. dollars. At December 31, 2001, the Company had no
forward foreign exchange contracts outstanding. At December 31, 2000 the
Company had forward foreign exchange contracts to sell U.S. dollars in the
amount of $19 million on U.S. and various European currencies) which
expired on various dates up to March 27, 2001. The market value of such
foreign exchange contracts was such that if these contracts had been
closed out at December 31, 2000, the Company would have recorded a gain of
$0.2 million.
Unrealized gains and losses on outstanding forward foreign exchange
contracts are recorded in the financial statements for accounts receivable
and not recorded in the financial statements for hedges against future
foreign currency revenue.
b. The Company's estimate of the fair value of the financial instruments,
which include receivables, accounts payable, long-term debt and the
liability component of the convertible debentures, approximates their
carrying value due to their short maturity.
F-63
11. CAPITAL STOCK
a. Capital stock consists of the following shares:
<Table>
<Caption>
AUTHORIZED NUMBER ISSUED NUMBER (IN THOUSANDS)
----------------- ------------- --------------
December 31, 2001
Common...................................................... Unlimited 30,596,960 $269,859
Preferred................................................... Unlimited -- --
------------- --------------
30,596,960 $269,859
============= ==============
December 31, 2000
Common...................................................... Unlimited 30,596,960 $269,859
Preferred................................................... Unlimited -- --
------------- --------------
30,596,960 $269,859
============= ==============
</Table>
b. During fiscal 2000, 8,600 Common Shares were issued for cash
consideration of $130 under the stock option plan. No Common Shares were
issued in 2001. -- See note 8c.
c. Under the Company's Stock-Based Option Plan, the Company may grant
options to employees and directors to acquire up to a maximum of
3,041,335 Common Shares. The exercise price will be based on the closing
price of Common Shares on the trading date previous to the date the
options are issued. The options have a maximum term of 10 years, have a
vesting term of various periods as determined by the Plan administrator
at the time of grant, and are exercisable in instalments. A summary of
all share purchase options is as follows:
<Table>
<Caption>
WEIGHTED AGGREGATE
NUMBER OF AVERAGE OPTION PRICE
SHARES EXERCISE PRICE (IN THOUSANDS)
--------- -------------- --------------
Balance -- December 31, 1998................................ 2,305,160 $21.60 $49,793
Balance -- December 31, 1999................................ 2,193,209 $21.55 $47,254
Exercised during the year................................... (8,600) 15.13 (130)
Cancelled during the year................................... (374,400) 15.85 (5,936)
--------- ------ -------
Balance -- December 31, 2000................................ 1,810,209 $22.75 $41,188
Cancelled during the year................................... (9,000) 26.25 (236)
--------- ------ -------
Balance -- December 31, 2001................................ 1,801,209 $22.74 $40,952
========= ====== =======
</Table>
No options have been granted since 1998.
The following table summarizes information about share purchase options
outstanding at December 31, 2002.
<Table>
<Caption>
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT
DECEMBER 31, REMAINING AVERAGE DECEMBER 31,
EXERCISE PRICE RANGE 2001 CONTRACTUAL LIFE EXERCISE PRICE 2001
-------------------- -------------- ---------------- -------------- --------------
15.125 to 19.75.................................. 496,006 3.4 years $18.77 484,009
22.00 to 30.625.................................. 1,305,200 3.7 years $24.24 1,305,200
</Table>
The options expire on various dates beginning February 12, 2002 and ending
on April 13, 2008.
d. Earnings per share
The following table reconciles the numerators and denominators of the
basic and fully diluted earnings (loss) per share calculations.
<Table>
<Caption>
2001 2000
----------------------------------- -----------------------------------
NUMERATOR DENOMINATOR PER SHARE NUMERATOR DENOMINATOR PER SHARE
--------- ----------- --------- --------- ----------- ---------
(Loss) earnings from continuing
operations......................... $(115,752) -- -- $20,050 -- --
Less interest on equity component of
convertible earnings............... (5,156) -- -- (4,820) -- --
--------- ---------- ------ ------- ---------- -----
Adjusted (loss) earnings............. $(120,908) 30,596,960 $(3.95) 15,320 30,596,310 $0.50
--------- ---------- ------ ------- ---------- -----
Effect of dilutive options........... -- -- -- -- -- --
--------- ---------- ------ ------- ---------- -----
$(120,908) 30,596,960 $(3.95) $15,230 30,596,310 $0.50
Net (loss) earnings.................. $(115,752) -- -- $38,521 -- --
Less interest on equity component of
convertible debenture.............. (5,156) -- -- (4,820) -- --
--------- ---------- ------ ------- ---------- -----
(120,908) 30,596,960 (3.95) 33,701 30,596,310 1.10
Effect of dilutive options........... -- -- -- -- -- --
--------- ---------- ------ ------- ---------- -----
Adjusted (loss) earnings............. $(120,908) 30,596,960 $(3.95) $33,701 30,596,310 $1.10
========= ========== ====== ======= ========== =====
</Table>
F-64
At December 31, 2001, options to purchase 1,801,209 (2000 -- 1,810,209)
common shares were not included in the computation of diluted earnings
(loss) per share because the options' exercise price was greater than the
market price of the common shares.
The conversion into Common Shares of the convertible debentures has not
been included in the diluted earnings (loss) per share calculations as the
conversion rate of $26.25 per share is antidilutive.
12. FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Transactions reflected in the statement of cash flows have been translated at
the rates of exchange in effect when the related transactions took place.
They do not reflect the changes in the balance sheet accounts which arise
from changes in exchange rates during the year. Significant foreign exchange
adjustments impacting the carrying value of assets and liabilities during the
periods are noted as follows:
<Table>
<Caption>
2001 2000
------ ------
(IN MILLIONS)
Assets -- increase (decrease)
Non -- cash net working capital............................. $ 4.4 $ 2.8
Property, plant and equipment............................... 34.2 22.0
Other assets................................................ 4.1 0.7
------ ------
$ 42.7 $ 25.5
====== ======
Liabilities -- (increase) decrease
Long-term debt.............................................. $(17.4) $(11.7)
Future income taxes......................................... (0.3) (0.2)
------ ------
$(17.7) $(11.9)
------ ------
Discontinued operations -- decrease......................... -- --
Foreign currency translation adjustments Increase........... $ 25.0 $ 13.6
====== ======
</Table>
13. INCOME TAXES
The effective income tax rate on earnings (loss) is influenced by the
geographic mix of the consolidated earnings (loss), as well as tax incentives
introduced by governments from time to time to encourage investment.
The following table reconciles income tax (expense) recovery calculated at a
combined Canadian federal/provincial tax rate with the income tax provision.
<Table>
<Caption>
2001 2000
--------- -------
(Loss) earnings before provision for income taxes........... $(159,741) $16,583
--------- -------
Income taxes recovery (expense) at Canadian statutory rates
of 41.74% (2000 -- 43.96%)................................ 66,676 (7,290)
Increased (decreased) by the tax effect of:
Foreign earnings taxed at lower rates..................... 9,856 12,359
Canadian manufacturing and processing credit.............. (9,124) (3,190)
Valuation allowance on certain net operating losses....... (11,000) --
Capital losses not tax affected........................... (9,704) --
Other..................................................... (2,715) 1,588
--------- -------
Total income tax recovery................................... $ 43,989 $ 3,467
========= =======
</Table>
Income tax recovery (expense) by jurisdiction is as follows:
<Table>
<Caption>
2001 2000
--------- --------
Earnings (loss) before income taxes
Canada.................................................... $(132,585) $(30,330)
Foreign................................................... (27,156) 46,913
--------- --------
$(159,741) $ 16,583
--------- --------
Current income tax recovery (expense)
Canada.................................................... $ (1,322) $ (2,006)
Foreign................................................... 3,422 (4,237)
--------- --------
Future income tax recovery (expense)........................ $ 2,100 $ (6,243)
Canada.................................................... $ 35,120 $ 10,097
Foreign................................................... 6,769 (387)
--------- --------
$ 41,889 $ 9,710
--------- --------
Total income tax recovery................................... $ 43,989 $ 3,467
========= ========
</Table>
F-65
Components of future income taxes are summarized on the balance sheet as
follows:
<Table>
<Caption>
2001 2000
--------- ---------
CURRENT ASSETS
Allowance for doubtful accounts............................. $ 4,011 $ 2,134
Liabilities not currently deductible for tax purposes....... 7,475 6,869
--------- ---------
Gross current future tax assets............................. $ 11,486 $ 9,003
--------- ---------
NON-CURRENT ASSETS
Operating loss carry forwards............................... $ 151,491 $ 132,852
Recycling credits........................................... 8,571 8,041
AMT credits................................................. 6,745 11,073
Long-term liabilities not currently deductible.............. 19,930 12,831
--------- ---------
Gross non-current future tax assets......................... $ 186,737 $ 164,797
--------- ---------
LIABILITIES
Property, plant and equipment............................... $(139,540) $(148,446)
Other....................................................... (10,823) (17,285)
--------- ---------
Gross future tax liabilities................................ $(150,363) $(165,731)
--------- ---------
Net non-current future income tax asset (liability)......... $ 36,374 $ (934)
========= =========
</Table>
The total gross non-tax affected operating loss carry forwards are $502
million. A valuation allowance with respect to $57 million of operating
losses ($20 million tax affected) has been provided as at December 31, 2001.
Of these losses, $410 million are in the United States and expire on various
dates up to December 31, 2021; $92 million are in Canada and expire on
various dates but primarily in 2008.
14. CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL
The Company's principal raw material is ferrous scrap and recycling this
material makes a significant positive contribution to the environment. In
addition, as part of an ongoing commitment to environmental improvement, the
Company continues to invest in new equipment and processes. Nevertheless,
rapidly changing environmental legislation and approval processes will
require future expenditures to modify operations and treat waste products.
The Company believes, with respect to both its operations and real property,
that it is in material compliance with environmental laws or is in the
process of effecting remedial actions that will bring the Company into
material compliance. Based on known existing conditions and the Company's
experience in complying with emerging environmental issues, the Company is of
the view that future costs relating to environmental compliance will not have
a material adverse effect on its financial position. However, there can be no
assurance that unforeseen changes in the laws or enforcement policies of
relevant governmental bodies, or the discovery of changed conditions on the
Company's real property or in its operations, will not result in the
incurrence of significant costs.
ENERGY
In order to manage some of the volatility in the price of natural gas, the
Company entered into various contracts to fix the price with respect to a
portion of its natural gas purchase requirements. At December 31, 2001, the
Company had entered into various contracts to purchase 2.6 million Gigajoules
of natural gas. These contracts expire on various dates up to November 2003.
The market value of the contracts was such that if the contracts had been
closed on December 31, 2001, the Company would have recorded a loss of $8.2
million.
The Company's New Jersey and Kentucky operations have long-term contracts
with major utilities for the supply of electricity. These contracts typically
have two components to them, a firm portion, which supplies a base load for
each plant's rolling mill and auxiliary services, and an interruptible
portion which supplies the electric arc furnace load. The interruptible
portion of the contract represents up to 60% to 70% of the total load and,
for the most part, is based on a spot market price of electricity at the time
it is being used and as such the Company has significant exposures to the
electricity spot market.
The Company is currently soliciting offers to supply electricity to its
Whitby plant in anticipation of electricity deregulation in Ontario. The
Company expects to structure this power contract similar to those in New
Jersey and Kentucky where the base load would be established at fixed
consumption and cost, and the balance of the load purchased at spot market
rates.
The Company also has long-term oxygen contracts. The Company believes that
the current market price of oxygen is approximately equal to the cost
contained in the supply contracts.
OTHER CLAIMS
In the normal course of its business, various lawsuits and claims are brought
against the Company. The Company vigorously contests any claim which it
believes is without merit. Management believes that any settlements will not
have a material effect on the financial position or the consolidated earnings
of the Company.
F-66
OPERATING LEASE COMMITMENTS
At December 31, 2001, the Company's operating lease commitments, consisting
primarily of machinery and equipment and real property were:
<Table>
2002........................................................ $ 14,301
2003........................................................ 10,947
2004........................................................ 8,549
2005........................................................ 7,420
2006........................................................ 7,298
Thereafter.................................................. 64,131
--------
$112,646
========
</Table>
15. ACCRUED BENEFIT OBLIGATIONS--PENSIONS AND POST-RETIREMENT BENEFITS
PENSION PLANS
The Company sponsors several defined benefit plans for the majority of
Canadian and certain employees in the United States. Most of the Canadian
plans are funded, with pension assets held separately from those of the
Company. The remaining employees are covered by defined contribution
retirement plans for which Company contributions and expense amount to
approximately $1.6 million (2000 -- $2.4 million).
OTHER POST-RETIREMENT BENEFITS
The Company's Canadian and its wholly-owned U.S. operations maintain certain
health and other similar benefits for qualifying retirees. These plans are
not funded.
Information about the Company's defined benefit plans as at December 31, 2001
and 2000 is as follows:
<Table>
<Caption>
PENSION BENEFIT
PLANS OTHER BENEFIT PLANS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year.................................. $132,854 $107,688 $ 21,649 $ 19,934
Change in accounting principle.............................. -- 33,547 -- --
Adjustment to unamortized accrued benefits.................. -- (14,964) -- --
Current service cost........................................ 3,599 3,305 420 731
Interest cost............................................... 10,067 8,893 1,595 1,431
Benefits paid............................................... (7,225) (5,729) (1,505) (658)
Actuarial loss (gain)....................................... (2,039) 597 868 2
Plan Amendments............................................. 4,864 -- -- --
Restructuring curtailment & settlement...................... 11,122 (828) 1,363 --
Foreign exchange loss....................................... 535 345 388 209
-------- -------- -------- --------
Balance, end of year........................................ $153,777 $132,854 $ 24,778 $ 21,649
-------- -------- -------- --------
PLAN ASSETS AT MARKET VALUE
Fair value, beginning of year............................... $129,066 $113,574 $ -- $ --
Actual return on assets..................................... (63) 12,963 -- --
Employer contributions...................................... 8,224 8,727 1,505 658
Benefits paid............................................... (7,225) (5,729) (1,505) (658)
Restructuring curtailment & settlement...................... (362) (693) -- --
Foreign exchange gain (loss)................................ 331 224 -- --
-------- -------- -------- --------
Fair value, end of year..................................... $129,971 $129,066 $ -- $ --
-------- -------- -------- --------
ACCRUED BENEFIT ASSET (LIABILITY)
Funded status -- (deficit).................................. $(23,806) $ (3,788) $(24,778) $(21,649)
Unamortized net actuarial loss (gain)....................... 4,386 (4,123) 661 (324)
Unamortized past service costs.............................. 4,540 604 3,338 3,669
Unamortized transitional obligation......................... -- -- -- --
-------- -------- -------- --------
$(14,880) $ (7,307) $(20,779) $(18,304)
-------- -------- -------- --------
</Table>
F-67
<Table>
<Caption>
PENSION BENEFIT
PLANS OTHER BENEFIT PLANS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
ASSUMPTIONS
Rate of return on plan assets............................... 8.0% 8.0%
Discount rate............................................... 6.75% to 7.0% to 6.75% to 7.0% to
7.0% 7.5% 7.0% 7.5%
Rate of compensation increases.............................. 2.5% to 2.5% to
4.25% 4.5%
Trend rate -- beginning next year........................... 8.2% to 9.0%
9.5%
Trend rate -- ending year 2007.............................. 4.5% to 4.5% to
5.5% 5.5%
NET BENEFIT PLAN EXPENSE
Current service cost........................................ $ 3,599 $ 3,305 $ 420 $ 731
Interest cost............................................... $ 10,067 $ 8,893 $ 1,595 $ 1,431
Expected return on plan assets.............................. (9,933) (8,818) -- --
Amortization of net actuarial loss.......................... (188) (55) 101 (21)
Amortization of past service costs.......................... 402 77 348 339
Amortization of transitional obligation..................... -- -- -- --
Restructuring Curtailment................................... 11,700 27 1,300 --
Restructuring Settlement.................................... 9 64 -- --
-------- -------- -------- --------
Net benefit plan expense.................................... $ 15,656 $ 3,493 $ 3,764 $ 2,480
======== ======== ======== ========
</Table>
Under the March 2001 collective agreement with the hourly employees of
Co-Steel Lasco, Co-Steel offered special retirement benefits whereby hourly
employees had until August 31, 2001 to accept. As at August 31, 2001
approximately 60 employees elected retirement under these special
arrangements. This resulted in a significant reduction in the expected years
of future service for the remaining active employees. An actuarially
determined pre-tax charge of $13 million representing the immediate expense
of the unamortized portion of the past service costs of the early retirees
was recorded. "Pension Curtailment Charge".
The Company is currently preparing a funding valuation with respect to the
defined benefit pension plan for the hourly employees of Co-Steel Lasco as at
January 1, 2002. The Company estimates that funds of approximately $14
million will be required in 2002 for this plan.
16. SEGMENTED INFORMATION
Co-Steel is a minimill steel producer and a steel scrap processor with
operations in Canada and the United States. The Company manufactures steel
bar and rod, structural shapes and flat rolled steel for a large number of
customers in many steel markets, including the construction, automotive,
appliance and machinery and equipment industries. Co-Steel also processes and
trades ferrous scrap, the principal raw material in the minimill process, and
non-ferrous scrap for its own use and for sale to third parties.
F-68
The Company's treasury function, including worldwide tax planning, is
centrally managed by the corporate office and has not been allocated to the
segments identified below.
<Table>
<Caption>
STEEL
-------------------
NORTH NORTH
AMERICAN AMERICAN
LONG FLAT
2001 PRODUCTS ROLLED RECYCLING CORPORATE TOTAL
---- -------- -------- --------- --------- ----------
SALES
United States............................................... $532,623 $235,248 $ -- $ -- $ 767,871
Canada...................................................... 201,908 -- 159,702 -- 361,610
-------- -------- -------- -------- ----------
734,531 235,248 159,702 -- 1,129,481
-------- -------- -------- -------- ----------
Inter-segment............................................... 27,574 -- 54,258 -- 81,832
$706,957 $235,248 $105,444 $ -- $1,047,649
Export sales of Canadian segment............................ $103,069 $ -- $ 60,984 $ -- $ 164,053
-------- -------- -------- -------- ----------
OPERATING EARNINGS (LOSS)BEFORE DEPRECIATION AND
AMORTIZATION
United States............................................... $21,197 $(4,695) $ -- $ -- $ 16,502
Canada...................................................... (36,091) -- 6,724 -- $ (29,367)
Corporate................................................... -- -- -- (11,384) (11,384)
-------- -------- -------- -------- ----------
$(14,894) $(4,695) $ 6,724 $(11,384) $ (24,249)
-------- -------- -------- -------- ----------
DEPRECIATION AND AMORTIZATION
United States............................................... $31,891 $24,603 $ -- $ -- $ 56,494
Canada...................................................... 16,237 -- 2,439 -- 18,676
Corporate................................................... -- -- -- 1,717 1,717
-------- -------- -------- -------- ----------
$48,128 $24,603 $ 2,439 $ 1,717 $ 76,887
-------- -------- -------- -------- ----------
ASSETS
United States............................................... $519,530 $292,724 $ -- $ -- $ 812,254
Canada...................................................... 268,344 -- 41,587 -- 309,931
Corporate................................................... -- -- -- 64,840 64,840
-------- -------- -------- -------- ----------
$787,874 $292,724 $ 41,587 $ 64,840 $1,187,025
-------- -------- -------- -------- ----------
ADDITIONS TO PROPERTY, PLANTAND EQUIPMENT
United States............................................... $13,080 $ 4,183 $ -- $ -- $ 17,263
Canada...................................................... 5,970 -- 1,088 -- 7,058
Corporate................................................... -- -- -- 668 668
-------- -------- -------- -------- ----------
$19,050 $ 4,183 $ 1,088 $ 668 $ 24,989
======== ======== ======== ======== ==========
</Table>
F-69
The gain on sale of land of $4.8 million relates to the Canadian Long
Products segment and the write-down of the portfolio investment relates to
the Corporate segment.
<Table>
<Caption>
STEEL
-------------------
NORTH NORTH
AMERICAN AMERICAN
LONG FLAT
2000 PRODUCTS ROLLED RECYCLING CORPORATE TOTAL
---- -------- -------- --------- --------- ----------
SALES
United States............................................... $623,531 $266,154 $ -- $ -- $ 889,685
Canada...................................................... 305,865 -- 217,854 -- 523,719
-------- -------- -------- ------- ----------
929,396 266,154 217,854 -- 1,413,404
-------- -------- -------- ------- ----------
Inter-segment............................................... 21,827 -- 112,763 -- 134,590
$907,569 $266,154 $105,091 $ -- $1,278,814
Export sales of Canadian segment............................ $163,830 $ -- $ 38,015 $ -- $ 201,845
-------- -------- -------- ------- ----------
OPERATING EARNINGS (LOSS) BEFORE DEPRECIATION AND
AMORTIZATION
United States............................................... $53,626 $37,327 $ -- $ -- $ 90,953
Canada...................................................... 28,163 -- 8,668 -- $ 36,831
Corporate................................................... -- -- -- (7,266) (7,266)
-------- -------- -------- ------- ----------
$81,789 $37,327 $ 8,668 $(7,266) $ 120,518
-------- -------- -------- ------- ----------
DEPRECIATION AND AMORTIZATION
United States............................................... $32,501 $22,119 $ -- $ -- $ 54,620
Canada...................................................... 13,720 -- 2,487 -- 16,207
Corporate................................................... -- -- -- 205 205
-------- -------- -------- ------- ----------
$46,221 $22,119 $ 2,487 $ 205 $ 71,032
ASSETS
United States............................................... $557,649 $303,507 $ -- $ -- $ 861,156
Canada...................................................... 282,302 -- 34,080 -- 316,382
Corporate................................................... -- -- -- 52,303 52,303
-------- -------- -------- ------- ----------
$839,951 $303,507 $ 34,080 $52,303 $1,229,841
-------- -------- -------- ------- ----------
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
United States............................................... $ 3,614 $ 9,426 $ -- $ -- $ 13,040
Canada...................................................... 2,788 -- -- -- 2,788
Corporate................................................... -- -- -- 1,499 1,499
-------- -------- -------- ------- ----------
$ 6,402 $ 9,426 $ -- 1,499 $ 17,327
======== ======== ======== ======= ==========
</Table>
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). The most
significant differences between Canadian and United States GAAP, in terms of
impact on the Company's consolidated financial statements, relate to the
accounting for pensions, convertible debentures, derivative instruments and
the reporting of comprehensive income.
F-70
The following table reconciles the consolidated statements of (loss) earnings
as reported under Canadian GAAP with those that would have been reported
under United States GAAP:
<Table>
<Caption>
YEAR ENDED DECEMBER 31 2001 2000
---------------------- --------- -------
Earnings (loss) from continuing operations -- Canadian
GAAP...................................................... $(115,752) $20,050
Increase in pension expense(a).............................. (1,559) (1,544)
Increase in interest expense related to convertible
debentures(b)............................................. (5,156) (4,820)
Unrealized net loss on gas contracts(c)..................... (5,700) --
Changes in fair value of foreign exchange derivatives(c).... (200) 100
--------- -------
Earnings (loss) from continuing operations -- United
States GAAP................................................. (128,367) 13,786
Discontinued operations..................................... -- 18,471
--------- -------
Net earnings (loss) -- United States GAAP................... $(128,367) $32,257
========= =======
Other comprehensive income (loss):(d)
Unrealized losses on investments(e)..................... 18,000 (13,700)
Currency translation adjustment(d)...................... 25,018 13,643
--------- -------
Other comprehensive income (loss) -- United States
GAAP(d)................................................... 43,018 (57)
--------- -------
Comprehensive income (loss) -- United States GAAP(d)........ $ (85,349) $32,200
========= =======
Earnings (loss) from continuing operations per share --
United States GAAP
Basic................................................... $ (4.20) $ 0.45
Diluted................................................. $ (4.20) $ 0.38
========= =======
Net earnings (loss) per share -- United States GAAP
Basic................................................... $ (4.20) $ 1.05
Diluted................................................. $ (4.20) $ 0.74
========= =======
</Table>
(A) PENSIONS
United States accounting standards for pensions are set forth in Statement
of Financial Accounting Standards (SFAS) No. 87. In 2001, the Company
adopted, for Canadian GAAP reporting purposes, a new accounting standard
in respect of pensions. The new standard, Canadian Institute of Chartered
Accountants ("CICA") Section 3461, was adopted on a retroactive basis
without a prior period restatement, with effect as of January 1, 2000. The
new accounting standard is substantially identical to accounting standards
for pensions in the United States.
For prior years, the Company used the former CICA accounting standard for
pensions, CICA Section 3460, which calculates the projected pension
benefit obligation and rate of return on plan assets based on management's
best estimates of long term interest rates and actuarial assumptions. SFAS
No. 87 "Employers' Accounting for Pensions" in the United States requires
that the projected pension benefit obligation be calculated using a
discount rate that reflects the rate at which pension benefits can be
effectively settled at the date of the financial statements. The Company
was unable to determine the effect of implementing SFAS No. 87 for the
original effective implementation date of January 1, 1989 due to the
unavailability of actuarial data for the periods required. Accordingly,
the Company has adopted the standard at the beginning of the first period
for which U.S. GAAP reconciled data has been presented in these financial
statements -- January 1, 1999. As the standard has been implemented on a
date later than the effective date specified in the standard, a portion of
the transitional obligation has been charged to reinvested earnings
directly at the date of adoption, based on a ratio of: a) the years that
have elapsed between the effective date of the standard and the adoption
date, and b) the remaining service period of employees expected to receive
benefits. The impact of this difference at January 1, 1999 is an increase
in the accrued pension obligation of $29.1 million, a decrease in future
tax liabilities of $10.4 million, and a reduction of reinvested earnings
of $18.7 million. The remaining transitional obligation has been amortized
to periods following the adoption date on a straight-line basis, resulting
in an extinguishment of the liability to occur at a similar date as if the
standard had been adopted on the original effective implementation date.
The impact of this adjustment is an increase in pension expense of $2.4
million in 2001 (2000 -- $2.4 million with a corresponding future tax
recovery of $0.8 million in 2001 (2000 -- $0.9 million) resulting in a net
of tax adjustment of $1.6 million in 2001 (2000 -- $1.5 million).
Under U.S. GAAP, if the accumulated benefit obligation exceeds the market
value of plan assets, a minimum liability for the excess is recognized to
the extent that the liability recorded in the balance sheet is less than
the minimum liability. Any portion of this additional liability that
relates to past service cost is recognized as an intangible asset while
the remainder is charged to Other Comprehensive Income. Canadian GAAP has
no such requirement to record a minimum liability. At December 31, 2001,
the minimum additional pension liability would have been $4.0 million
(2000 -- nil), which entirely relates to unrecognized past service cost
and, accordingly, has been allocated to intangible pension asset.
The Company accounts for other post-retirement benefits on a basis
consistent with U.S. GAAP.
(B) CONVERTIBLE DEBENTURES
Under Canadian GAAP, a portion of the convertible debenture obligation is
classified as an equity instrument. The equity portion of the convertible
debenture obligation accretes over the period from issuance to April 30,
2002 at which time the value at maturity is recorded entirely as equity.
For Canadian GAAP, the interest, net of taxes, of the equity component of
the convertible debentures is
F-71
recorded as an after-tax charge to reinvested earnings. Under U.S. GAAP,
the convertible debenture obligation would be accounted for entirely as a
liability and, accordingly, interest costs would be recorded as interest
expense. The Company has the ability to redeem the convertible debenture
at par plus accrued interest by the issuance of Common Shares or cash. As
a result, for U.S. GAAP, the convertible debenture would be classified as
current debt in the 12-month period in advance of the redemption date, and
as long-term debt during the remainder of the 20 year term. Therefore, for
U.S. GAAP the liability would be classified as long term debt for 2001 and
2000.
(C) DERIVATIVE INSTRUMENTS
The Company enters into contacts to fix the price with respect to a
portion of its natural gas purchase requirements. At December 31, 2001 an
unrealized net loss of $8.2 million (2000 -- nil), with a corresponding
future tax recovery of $2.5 million for 2001 (2000 -- nil) resulting in a
net of tax loss of $5.7 million for 2001 (2000 -- nil) would have been
recorded in earnings.
At certain times throughout the year, the Company enters into foreign
exchange contracts and put and call options (collectively "foreign
exchange contracts") to hedge accounts receivable and future revenues
denominated in U.S. dollars. The unrealized loss, net of tax, at December
31, 2001 was $0.2 million (2000 -- $0.1 million gain) on outstanding
foreign exchange contracts would have been reflected in earnings under
U.S. GAAP.
(D) COMPREHENSIVE INCOME
United States accounting standards for reporting comprehensive income are
set forth in SFAS No. 130. Comprehensive income represents the change in
equity during a reporting period from transactions and other events and
circumstances from non-owner sources. Components of comprehensive income
include items such as net earnings (loss), changes in the fair value of
investments not held for trading, minimum pension liability adjustments,
derivative instruments and certain foreign currency translation gains and
losses.
(E) INVESTMENTS
United States accounting standards for equity investments, which are set
forth in SFAS No. 115, require that certain equity investments not held
for trading be recorded at fair value with unrealized holding gains and
losses excluded from the determination of earnings and reported as a
separate component of other comprehensive income. At December 31, 2001,
other assets would have decreased by $1.0 million (2000 -- $19.0 million),
and accumulated other comprehensive loss would have increased by $1.0
million (2000 -- $19.0 million).
(F) JOINT VENTURE
Under Canadian GAAP, joint ventures are accounted for using the
proportionate consolidation method, while under U.S. GAAP, joint ventures
are accounted for under the equity method. Under an accommodation of the
U.S. Securities and Exchange Commission, accounting for joint ventures
need not be reconciled from Canadian to U.S. GAAP. The different
accounting treatment affects only the display and classification of
financial statement items and not net income or shareholders' equity. See
note 6 for summarized financial information in respect of the Company's
joint ventures.
(G) FREIGHT COSTS
For Canadian GAAP, sales are recorded net of freight costs for delivery.
U.S. GAAP would require that freight costs be included in cost of sales.
The impact of this adjustment is to increase sales and cost of sales by
$79.6 million (2000 -- $90.7 million).
The following table indicates the cumulative effect of the above
adjustments on balance sheet accounts, displaying results under Canadian
GAAP and U.S. GAAP:
<Table>
<Caption>
DECEMBER 31,
--------------------------------------
UNITED STATES
CANADIAN GAAP GAAP
------------------ -----------------
2001 2000 2001 2000
------- -------- ------- -------
ASSETS
Other Assets.............................................. $80,404 $109,914 $83,425 $91,114
Future Income Taxes....................................... 36,374 -- 39,846 --
LIABILITIES
Accounts payable and accrued liabilities.................. 128,792 170,119 138,661 171,040
Current portion of long-term liabilities.................. 319,569 48,907 315,759 41,643
Long-term debt............................................ 5,686 191,186 130,686 316,186
Accrued benefit obligations............................... 35,659 25,611 42,884 26,393
Future income taxes....................................... -- 934 -- 825
SHAREHOLDERS' EQUITY
Convertible Debentures.................................... 122,859 114,850 -- --
Reinvested Earnings....................................... 157,003 277,911 149,071 277,438
Accumulated other comprehensive loss...................... -- -- 50,036 7,018
Foreign currency translation adjustments.................. 51,036 26,018 -- --
</Table>
F-72
Changes in reinvested earnings and accumulated other comprehensive loss
under U.S. GAAP were as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------
2001 2000
--------- --------
Reinvested earnings at beginning of year.................... $ 277,438 $257,420
Implementation of FAS 87.................................... -- --
Net (loss) earnings......................................... (128,367) 32,257
Dividends................................................... -- (12,239)
--------- --------
Reinvested earnings at end of year.......................... $ 149,071 $277,438
========= ========
Accumulated other comprehensive loss at beginning of year... $ 7,018 $ 7,075
Other comprehensive loss.................................... 43,018 (57)
--------- --------
Accumulated other comprehensive loss at end of year......... $ 50,036 $ 7,018
========= ========
</Table>
The difference in consolidated shareholders' equity may be reconciled as
follows:
<Table>
<Caption>
2001 2000
--------- ---------
Shareholders' equity based on Canadian GAAP................. $ 600,757 $ 688,638
Other comprehensive income-write down of investment......... (1,000) (19,000)
Debenture reclassified to debt.............................. (122,859) (114,850)
Pension expense adjustment.................................. (1,559) (1,544)
Minimum pension adjustment.................................. -- --
Foreign exchange contracts.................................. (200) 100
Adjustment for change in accounting policy.................. -- 21,427
Loss on gas contracts....................................... (5,700) --
Cumulative reduction in net earnings under U.S. GAAP........ (473) (20,456)
--------- ---------
Shareholders' equity based on U.S. GAAP..................... $ 468,966 $ 554,315
========= =========
</Table>
There are no significant differences with respect to the consolidated
statement of cash flows between U.S. GAAP and Canadian GAAP for 2001 and
2000.
F-73
CANADIAN GAAP/CANADIAN DOLLAR
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CO-STEEL INC. (RENAMED GERDAU AMERISTEEL CORPORATION)
SEPTEMBER 30, 2002 AND 2001
F-74
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF PROFIT (LOSS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2002 2001
-------- ---------
(Unaudited)
(Canadian dollars in
thousands)
Sales....................................................... $922,839 $ 811,040
Costs of sales excluding depreciation and amortization...... 817,308 786,375
Depreciation and amortization............................... 50,474 55,504
Electrode settlement (note 2)............................... (6,272) --
Pension curtailment charge.................................. -- 13,000
Selling, general and administrative expense................. 27,213 28,809
-------- ---------
888,723 883,688
-------- ---------
Operating earnings (loss)................................... 34,116 (72,648)
Interest on long-term debt.................................. 23,774 23,550
Other interest expense...................................... 3,067 6,895
Interest and investment income.............................. (411) (724)
Write-down of portfolio investment (note 3)................. 9,075 18,000
-------- ---------
Income (loss) before income taxes........................... (1,389) (120,369)
Income tax recovery (expense)
Current................................................... (2,146) (4,827)
Future.................................................... 6,146 36,012
-------- ---------
4,000 31,185
Net income (loss)........................................... 2,611 (89,184)
======== =========
Net income (loss) per share
Basic..................................................... $ (0.03) $ (3.04)
Diluted................................................... $ (0.03) $ (3.04)
======== =========
</Table>
F-75
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
--------- ---------
(Unaudited)
(Canadian dollars in
thousands)
Reinvested earnings -- beginning of period.................. $157,003 $277,911
Cumulative adjustment due to change in accounting policy
(note 1).................................................. (68,665) --
Net income (loss)........................................... 2,611 (89,184)
Interest, net of taxes, on equity component of convertible
debentures................................................ (4,164) (3,867)
-------- --------
Reinvested earnings -- end of period........................ $ 86,785 $184,860
======== ========
</Table>
F-76
CO-STEEL INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- --------------
(Unaudited)
(Canadian dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,595 $ 34,484
Accounts receivable (net of allowance for doubtful
accounts).............................................. 152,529 114,845
Inventories............................................... 201,157 178,486
Future income taxes....................................... 11,355 11,486
---------- ----------
374,636 339,301
Property, plant and equipment............................... 696,310 730,946
Goodwill (note 1)........................................... -- 68,665
Other assets................................................ 6,168 11,739
Future income taxes......................................... 47,251 36,374
---------- ----------
$1,124,365 $1,187,025
---------- ----------
LIABILITIES
Current liabilities:
Bank indebtedness......................................... $ -- $ 96,562
Accounts payable and accrued liabilities.................. 162,073 128,792
Current portion of long-term liabilities (note 4)......... 244 319,569
---------- ----------
162,317 544,923
Long-term debt (note 4)..................................... 335,394 5,686
Accrued benefit obligations................................. 28,499 35,659
---------- ----------
526,210 586,268
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (note 5)...................................... 336,596 269,859
Convertible debentures (note 1)............................. 125,000 122,859
Reinvested earnings......................................... 86,785 157,003
Foreign currency translation adjustments.................... 49,774 51,036
---------- ----------
598,155 600,757
---------- ----------
$1,124,365 $1,187,025
========== ==========
</Table>
F-77
CO-STEEL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
--------- ---------
(Unaudited)
(Canadian dollars in
thousands)
Operating activities
Net Income (loss)........................................... $ 2,611 $(89,184)
Items not affecting cash
Depreciation and amortization............................. 50,474 55,504
Future income tax (recovery) expense...................... (6,146) (36,012)
Net pension and other benefit plans (funding) expense
(note 7)............................................... (7,143) 11,228
Write-down of portfolio investment.......................... 9,075 18,000
-------- --------
48,871 (40,464)
Cash provided from (used for) working capital
Accounts receivable....................................... (40,564) (17,062)
Inventories............................................... (22,564) 75,037
Accounts payable and accrued liabilities.................. 29,494 (8,124)
-------- --------
Cash provided by operations................................. 15,237 9,387
-------- --------
Financing activities
(Repayment of) additions to bank indebtedness............... (22,948) (17,776)
(Repayment of) additions to long-term debt.................. (62,371) 67,752
Issue of shares............................................. 66,737 --
-------- --------
Cash used for financing..................................... (18,582) 49,976
-------- --------
Investing activities
Additions to property, plant and equipment.................. (17,462) (20,199)
Additions to other assets................................... (4,082) (764)
-------- --------
Cash used for investing..................................... (21,544) (20,963)
-------- --------
Change in cash.............................................. (24,889) 38,400
Cash -- Beginning of period................................. 34,484 3,903
-------- --------
Cash -- End of period....................................... $ 9,595 $ 42,303
======== ========
</Table>
F-78
CO-STEEL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Canadian dollars in thousands) (unaudited)
1. ACCOUNTING POLICIES
These are financial statements of Co-Steel Inc. (renamed Gerdau Ameristeel
Corporation) and its subsidiaries and joint ventures (the "Company"). These
statements include the results of Co-Steel Inc. and its subsidiaries and
joint ventures and do not give effect to the combination with Gerdau Steel
Inc. which was completed on October 23, 2002.
The accounting policies of the interim financial statements are the same as
those described in the Company's 2001 Annual Report except that effective
January 1, 2002, the Company changed its method of accounting for goodwill
and the stock based option plan to conform to the new recommendations of the
Canadian Institute of Chartered Accountants.
Under the new method of accounting for goodwill, no amortization expense is
recorded, however goodwill is recorded at the lower of cost and fair market
value. With the effect of the recent high levels of unfairly priced imports,
North American steel producers have experienced a significant deterioration
in operating margins. This resulted in a reduction in the enterprise value of
the Sayreville and Perth Amboy mills (the U.S. long products group) which has
caused the Company to write down the value of goodwill associated with these
operations to zero. This resulted in a $68,665 write-down, and in accordance
with the transitional rules of implementing this new standard, has been
charged to opening reinvested earnings. The change in policy with respect to
the amortization of goodwill is applied prospectively. The financial
statements for the nine month period ended September 30, 2002 have been
prepared on the new accounting policy.
The financial statements for the nine month period ended September 30, 2001
have not been adjusted. The new standard requires disclosure, on a pro forma
basis, as if no amortization of goodwill were charged to expense.
The pro forma impact for the prior period is as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
2001 2000
------ --------
Reported net income (loss).................................. 2,611 (89,184)
Add back: Goodwill amortization............................. -- 3,242
------ --------
Adjusted net income (loss).................................. 2,611 (85,942)
Basic income (loss) per share............................... $(0.03) $ (3.04)
Goodwill amortization....................................... -- 0.11
------ --------
Adjusted income (loss) per share............................ $(0.03) $ (2.93)
Diluted income (loss) per share............................. $(0.03) $ (3.04)
Goodwill amortization....................................... -- 0.11
Adjusted diluted income (loss) per share.................... $(0.03) $ (2.93)
====== ========
</Table>
Under the fair value based method of accounting for Stock Based Option Plans,
the Company's policy is that the compensation cost of any options that the
Company grants after January 1, 2002 will be charged to earnings based on
their fair value amortized over their vesting period in the period in which
granted. This change in policy has been applied prospectively and therefore
there is no impact relating to options outstanding at January 1, 2002. No
options have been granted in 2002. Details of outstanding options are
disclosed in note 11 of the Company's 2001 Annual Report.
The disclosures in the interim financial statements do not conform in all
respects to the requirements of generally accepted accounting principles for
annual financial statements. The interim financial statements should be read
in conjunction with the financial statements included in the Company's 2001
Annual Report.
2. ELECTRODE SETTLEMENT
During the first quarter of fiscal 2002, the Company received $6.3 million in
cash in full settlement of claims arising from past purchases of electrodes.
This has been recorded as income for the nine months ended September 30,
2002.
3. PORTFOLIO INVESTMENT
On July 10, 2002 ASW Holdings PLC ("ASW") announced that it had invited its
bankers to appoint administrative receivers over the business and assets of
ASW. As part of the consideration on the 1999 sale of Co-Steel Sheerness, the
Company received approximately 30% of the ordinary shares of ASW and holds a
L2.0 million subordinated debenture in ASW (its "Investment in ASW"). The
Company was not permitted to have representation on ASW's Board of Directors
and had no influence over ASW. Accordingly, the investment was accounted for
as a portfolio investment. The Company recorded a provision of $9.1 million
during the second quarter of fiscal 2002 to write-off its remaining
Investment in ASW. At September 30, 2002, the Company carries no further
Investment in ASW.
F-79
Included in the results for the nine months ended September 30, 2001 is a
charge of $18.0 million that also resulted from a write-down of the shares of
ASW.
4. LONG-TERM DEBT
In May 2002, the Company completed negotiations with its senior lenders. The
credit arrangements currently provide revolving facilities of $151,421 and
U.S.$25,074 (which can be drawn in Canadian or U.S. dollars) and term
facilities of U.S.$109,489. The revolving facilities expire on January 15,
2004 and the term facilities reduces by U.S.$72.0 million on January 15, 2004
and reduces by U.S.$12.5 million on July 15th in each of the years 2004 to
2006. The facilities are secured by a first charge against substantially all
assets of the Company and its subsidiaries.
The revolving facilities bear interest at the bankers' acceptance rate or
LIBOR plus 2% to 5% depending on debt to EBITDA ratios. The term loans bear
interest at a fixed rate of 8.9% to 10.9% depending on debt to EBITDA ratios.
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited)
(In thousands of dollars)
CANADIAN DOLLAR DEBT
Floating Rate Revolving Loan................................ $ 31,000 $ --
U.S. DOLLAR DEBT
FIXED RATE REDUCING TERM LOANS
U.S.$41.1 million (December 31, 2001, and September 30, 2001
-- U.S.$45.0 million)..................................... 65,110 71,667
U.S.$68.4 million (December 31, 2001, and September 30, 2001
-- U.S.$75.0 million)..................................... 108,517 119,445
FLOATING REVOLVING FACILITIES LOANS
U.S.$79.0 million revolving term loans (December 31, 2001
and September 30, 2001 -- U.S.$78.1 million).............. 125,304 124,382
OTHER LOANS................................................. 5,707 5,951
-------- --------
335,638 321,445
Less: Current portion....................................... 244 315,759
-------- --------
$335,394 $ 5,686
======== ========
</Table>
5. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted income (loss) per share calculations.
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
NUMERATOR DENOMINATOR PER SHARE NUMERATOR DENOMINATOR PER SHARE
--------- ----------- --------- --------- ----------- ---------
Net income (loss)......................... $ 2,611 -- -- $(89,184) -- $ --
Less Interest on equity component of
convertible debentures.................. (4,164) -- $ -- (3,867) -- --
------- ---------- ------ -------- ---------- ------
$(1,553) 46,143,191 $(0.03) $(93,051) 30,596,960 $(3.04)
======= ========== ====== ======== ========== ======
</Table>
On March 12, 2002, the Company completed the sale of 20,907,000 Common Shares
to a group of underwriters at a price of $3.35 per Common Share representing
gross proceeds of $70,038. After deducting expenses, the net proceeds were
$66,737. At September 30, 2002 there were 51,503,960 Common Shares
outstanding and during the three months and nine months ended September 30,
2002, the weighted average number of Common Shares outstanding were
51,503,960 and 46,143,191 respectively.
6. CONVERTIBLE DEBENTURES
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
------------- ------------ -------------
(Unaudited)
(In thousands of dollars)
Current liability component................................. $ -- $ 3,810 $ 7,495
-------- -------- --------
Equity component............................................ 125,000 122,859 120,856
======== ======== ========
</Table>
On April 23, 1997, the Company issued unsecured subordinated convertible
debentures in the aggregate principal amount of $125 million. After deducting
issue costs of $3.8 million, the proceeds of the issue amounted to $121.2
million.
The debentures bear interest at 6.5% per annum, mature on April 30, 2007,
and, at the holders' option, are convertible into Common Shares of the
Company at a conversion price of $26.25 per share. The Company's 2001 Annual
Financial Statements incorrectly stated that the conversion price was
adjusted if the Company issued Common Shares. Under the terms of the Trust
Indenture for the Convertible Debentures, no adjustment to the conversion
price is required if the Company issues Common Shares in a customary
offering. The
F-80
debentures are redeemable after April 30, 2002, at the option of Co-Steel at
par plus accrued interest. The Company has the right to settle the principal
amount by the issuance of Common Shares based on their market value at that
the time of redemption.
As the convertible debentures can be redeemed by the Company by the issuance
of Common Shares, the debenture obligations were classified partly as a
liability and partly as shareholders' equity. The liability component was
calculated as the present value of the required interest payments discounted
(for the period to April 30, 2002) at an interest rate approximating that
which would have been applicable to non-convertible subordinate debt at the
time the debentures were issued.
<Table>
Issue price................................................. $125,000
Less: Liability component................................... (33,409)
Shareholders' equity component.............................. 91,591
Less: Issue costs applicable to shareholders' equity
component net of related income taxes..................... (1,798)
--------
Net amount classified as shareholders' equity at issuance... $ 89,793
========
</Table>
Interest on the liability component has been included in the computation of
earnings (loss) for the period. Interest on the shareholders' equity
component, net of related income taxes, has been charged to reinvested
earnings, and was deducted from the net earnings or added to net loss in
calculating basic earnings per share.
7. PENSION PLAN FUNDING
During the second quarter of fiscal 2002, the Company made a one-time $5,415
special payment to maintain the transfer ratio of the Pension Plan for the
Hourly-rated Employees of Gerdau Ameristeel Whitby ("the Plan"). This payment
related to the Plan curtailment which took place in 2001. In addition, the
Company has made other normal pension funding payments resulting in total
pension funding being in excess of pension expense for the nine months ended
September 30, 2002 by $7,143.
8. SUBSEQUENT EVENT
On August 13, 2002, the Company announced that it had executed a definitive
agreement to combine with the North American operations of Gerdau S.A.
Subsequently, the shareholders of the Company voted in favour of issuing
146,588,194 Common Shares to facilitate the merger. The transaction closed on
October 23, 2002 and will be accounted for as a reverse take-over. At the
close of the transaction, the Company changed its name to Gerdau Ameristeel
Corporation.
9. SEGMENTED INFORMATION
The Company is a minimill steel producer and a ferrous and non-ferrous scrap
processor. The Company manufactures and markets merchant bar, structural
shapes, reinforcing bar, wire rod and flat rolled steel used principally in
the construction, automotive, appliance, machinery and equipment industries.
The Company also processes and trades steel scrap, the principal raw material
in the minimill process, for its own use and for sale to third parties. The
Company's treasury function, including worldwide tax planning, is centrally
managed by the corporate office and has not been allocated to the segments
identified on the following page.
SEGMENTED INFORMATION
<Table>
<Caption>
2002
-------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------------
FLAT
LONG PRODUCTS ROLLED
------------------- -------- RECYCLING
UNITED UNITED ---------
STATES CANADA STATES CANADA CORPORATE TOTAL
-------- -------- -------- --------- --------- ----------
(Thousands of dollars)
Sales.............................................. 435,284 $196,336 $247,013 $149,155 $ -- $1,027,788
Inter-segment Sales................................ 35,705 -- -- 69,244 -- 104,949
-------- -------- -------- -------- ------- ----------
$399,579 $196,336 $247,013 $ 79,911 $ -- $ 922,839
-------- -------- -------- -------- ------- ----------
Export Sales of Canadian segment................... $ -- $ 81,352 $ -- $ 38,509 $ -- 119,861
-------- -------- -------- -------- ------- ----------
Operating Earnings (Loss) before Depreciation and
Amortization..................................... $ 42,219 $ (6,634) $ 51,115 $ 6,562 $(8,672) $ 84,590
-------- -------- -------- -------- ------- ----------
Depreciation and Amortization...................... 20,926 8,499 18,628 2,348 73 50,474
-------- -------- -------- -------- ------- ----------
Segment Assets..................................... $471,661 $252,233 $293,734 $ 37,983 $68,754 $1,124,365
======== ======== ======== ======== ======= ==========
Additions to Property, Plant and Equipment......... $ 4,164 $ 7,500 $ 5,491 $ 307 $ -- $ 17,462
</Table>
F-81
<Table>
<Caption>
2001
-------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------------
FLAT
LONG PRODUCTS ROLLED
------------------- -------- RECYCLING
UNITED UNITED ---------
STATES CANADA STATES CANADA CORPORATE TOTAL
-------- -------- -------- --------- --------- ----------
(Thousands of dollars)
Sales.............................................. $415,802 $150,257 $182,536 $121,980 $ -- $ 870,575
Inter-segment Sales................................ 22,204 -- -- 37,331 -- 59,535
-------- -------- -------- -------- ------- ----------
$393,598 $150,257 $182,536 $ 84,649 $ -- $ 811,040
-------- -------- -------- -------- ------- ----------
Export Sales of Canadian segment................... $ -- $ 77,301 $ -- $ 50,074 $ -- $ 127,375
-------- -------- -------- -------- ------- ----------
Operating Earnings (Loss) before Depreciation and
Amortization..................................... $ 9,768 $(27,652) $ 2,865 $ 5,795 $(7,920) $ (17,144)
-------- -------- -------- -------- ------- ----------
Depreciation and Amortization...................... 23,260 10,446 17,977 1,960 1,861 55,504
-------- -------- -------- -------- ------- ----------
Segment Assets (1)................................. $556,396 $278,115 $293,290 $ 40,345 $70,234 $1,238,380
======== ======== ======== ======== ======= ==========
Additions to Property, Plant and Equipment......... $ 11,612 $ 4,651 $ 3,078 $ 157 $ 701 $ 20,199
</Table>
-------------------
(1) Included in the segment assets is $4,173 of goodwill in the Canadian
long products group and $69,692 of goodwill in the U.S. long products
group.
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company's consolidated financial statements are prepared in accordance
with Canadian GAAP. The most significant differences between Canadian and
U.S. GAAP, in terms of impact on the Company's consolidated financial
statements, relate to the accounting for pensions, convertible debentures,
derivative instruments and the reporting of comprehensive income.
The following table reconciles the consolidated statements of (loss) earnings
as reported under Canadian GAAP with those that would have been reported
under U.S. GAAP:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2002 2001
------- --------
(Unaudited)
Net earnings (loss) -- Canadian GAAP........................ 2,611 (89,184)
Increase in pension expense (a)............................. (1,148) (1,264)
Increase in interest expense related to convertible
debentures (b)............................................ (4,164) (3,867)
Unrealized net gain (loss) on gas contracts (c)............. 4,880 (6,962)
Changes in fair value of foreign exchange derivatives (c)... -- (200)
Changes in accounting policy(h)............................. (68,665) --
------- --------
Net loss -- U.S. GAAP....................................... (66,486) (101,477)
Other comprehensive income (loss): (d)
Unrealized losses on investments (e)...................... 1,000 13,900
Minimum additional pension liability adjustment (a)....... (1,044) --
Currency translation adjustment (d)....................... (1,262) 23,027
------- --------
Other comprehensive income (loss) -- U.S. GAAP (d).......... (1,306) 36,927
------- --------
Comprehensive income (loss) -- U.S. GAAP (d)................ (67,792) (64,550)
======= ========
Net earnings (loss) per share -- U.S. GAAP
Basic..................................................... (2.17) (3.28)
Diluted................................................... (2.17) (3.28)
======= ========
</Table>
(A) PENSIONS
United States accounting standards for pensions are set forth in Statement
of Financial Accounting Standards (SFAS) No. 87. In 2001, the Company
adopted, for Canadian GAAP reporting purposes, a new accounting standard
in respect of pensions. The new standard, Canadian Institute of Chartered
Accountants ("CICA") Section 3461, was adopted on a retroactive basis
without a prior period restatement, with effect as of January 1, 2000. The
new accounting standard is substantially identical to accounting standards
for pensions in the United States.
For 1999 and prior years, the Company used the former CICA accounting
standard for pensions, CICA Section 3460, which calculates the projected
pension benefit obligation and rate of return on plan assets based on
management's best estimates of long term interest rates and actuarial
assumptions. SFAS No. 87 "Employers' Accounting for Pensions" in the
United States requires that the projected pension benefit obligation be
calculated using a discount rate that reflects the rate at which pension
benefits can be
F-82
effectively settled at the date of the financial statements. The Company
was unable to determine the effect of implementing SFAS No. 87 for the
original effective implementation date of January 1, 1989 due to the
unavailability of actuarial data for the periods required. Accordingly,
the Company has adopted the standard at the beginning of the first period
for which U.S. GAAP reconciled data has been presented in these financial
statements -- January 1, 1999. As the standard has been implemented on a
date later than the effective date specified in the standard, a portion of
the transitional obligation has been charged to reinvested earnings
directly at the date of adoption, based on a ratio of: a) the years that
have elapsed between the effective date of the standard and the adoption
date, and b) the remaining service period of employees expected to receive
benefits. The impact of this difference at January 1, 1999 is an increase
in the accrued pension obligation of $29.1 million, a decrease in future
tax liabilities of $10.4 million, and a reduction of reinvested earnings
of $18.7 million. The remaining transitional obligation has been amortized
to periods following the adoption date on a straight-line basis, resulting
in an extinguishment of the liability to occur at a similar date as if the
standards had been adopted on the original effective implementation date.
The impact of this adjustment is an increase in pension expense of $1.6
million for the nine months ended September 30, 2002 (nine months ended
September 30, 2001 -- $1.8 million) with a corresponding future tax
recovery of $0.5 million for the nine months ended September 30, 2002
(nine months ended September 30, 2001 $0.5 million) resulting in a net of
tax adjustment of $1.1 million for the nine months ended September 30,
2002 (nine months ended September 30, 2001 -- $1.3 million).
Under U.S. GAAP, if the accumulated benefit obligation exceeds the market
value of plan assets, a minimum liability for the excess is recognized to
the extent that the liability recorded in the balance sheet is less than
the minimum liability. Any portion of this additional liability that
relates to past service cost is recognized as an intangible asset while
the remainder is charged to Other Comprehensive Income. Canadian GAAP has
no such requirement to record a minimum liability. At September 30, 2002,
the minimum additional pension liability would have been $5.7 million
(2001 -- $2.0 million); the allocation to intangible assets would have
been $4.1 million (2001 -- $2.0 million), with a net of tax charge of $1.0
million (2001 -- nil) to accumulated other comprehensive income (future
tax recovery of $0.6 million in 2002; (2001 -- nil).
The Company accounts for other post-retirement benefits on a basis
consistent with U.S. GAAP.
(B) CONVERTIBLE DEBENTURES
Under Canadian GAAP, a portion of the convertible debenture obligation is
classified as an equity instrument. The equity portion of the convertible
debenture obligation accretes over the period from issuance to April 30,
2002 at which time the value at maturity is recorded entirely as equity.
For Canadian GAAP, the interest, net of taxes, of the equity component of
the convertible debentures is recorded as an after-tax charge to
reinvested earnings. Under U.S. GAAP, the convertible debenture obligation
would be accounted for entirely as a liability and, accordingly, interest
costs would be recorded as interest expense. The Company has the ability
to redeem the convertible debenture at par plus accrued interest by the
issuance of Common Shares or cash.
(C) DERIVATIVE INSTRUMENTS
The Company enters into contacts to fix the price with respect to a
portion of its natural gas purchase requirements. At September 30, 2002 an
unrealized gain of $8.8 million (2001 -- a loss of $9.9 million), with a
corresponding future tax expense of $2.6 million for 2002 (2001 a recovery
of $2.9 million) resulting in a net of tax gain of $4.9 million for 2002
(2001 -- a net loss of $7.0 million) would have been recorded in earnings
under U.S. GAAP.
At certain times throughout the year, the Company enters into foreign
exchange contracts and put and call options (collectively "foreign
exchange contracts") to hedge accounts receivable and future revenues
denominated in US dollars. The unrealized loss, net of tax, for the nine
months ended September 30, 2002 of nil (nine months ended September 30,
2001 -- $0.2 million) on outstanding foreign exchange contracts would have
been reflected in earnings under U.S. GAAP.
(D) COMPREHENSIVE INCOME
United States accounting standards for reporting comprehensive income are
set forth in SFAS No. 130. Comprehensive income represents the change in
equity during a reporting period from transactions and other events and
circumstances from non-owner sources. Components of comprehensive income
include items such as net earnings (loss), changes in the fair value of
investments not held for trading, minimum pension liability adjustments,
derivative instruments and certain foreign currency translation gains and
losses.
(E) INVESTMENTS
United States accounting standards for equity investments, which are set
forth in SFAS No. 115, require that certain equity investments not held
for trading be recorded at fair value with unrealized holding gains and
losses excluded from the determination of earnings and reported as a
separate component of other comprehensive income. At September 30, 2002,
other assets would have decreased by nil (2001 -- $5.1 million), and
accumulated other comprehensive income would have decreased by nil (2001
-- $5.1 million).
(F) JOINT VENTURE
Under Canadian GAAP, joint ventures are accounted for using the
proportionate consolidation method, while under U.S. GAAP, joint ventures
are accounted for under the equity method. Under an accommodation of the
US Securities and Exchange Commission, accounting for joint ventures need
not be reconciled from Canadian to U.S. GAAP. The different accounting
treatment affects only the display and classification of financial
statement items and not net income or shareholders' equity.
F-83
(G) FREIGHT COSTS
For Canadian GAAP, sales are recorded net of freight costs for delivery.
U.S. GAAP would require that freight costs be included in cost of sales.
The impact of this adjustment is to increase sales and cost of sales by
$44,321 (2001 -- $45,559) respectively.
(H) CHANGE IN ACCOUNTING POLICY
Effective January 1, 2002, the Company changed its method of accounting
for goodwill to conform to the new recommendations of the Canadian
Institute of Chartered Accountants (note 1). This resulted in a $68,665
write-down, and in accordance with the transitional rules of implementing
this new standard, has been charged to opening reinvested earnings for
Canadian GAAP reporting purposes. For U.S. GAAP, this write-down has been
included in earnings for the period, as a cumulative effect of an
accounting change.
The pro forma impact for the prior period is as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2002 2001
------- --------
(Unaudited)
Reported net loss -- U.S. GAAP.............................. (66,486) (101,477)
Add back goodwill amortization.............................. -- 3,242
------- --------
Adjusted net loss........................................... (66,486) (98,235)
Basic and diluted loss per share............................ (2.17) (3.28)
Goodwill amortization....................................... -- 0.11
------- --------
Adjusted loss (and diluted loss) per share.................. (2.17) (3.17)
======= ========
</Table>
The following table indicates the cumulative effect of the above
adjustments on balance sheet accounts, displaying results under Canadian
GAAP and U.S. GAAP:
<Table>
<Caption>
SEPTEMBER 30,
--------------------------------------
CANADIAN GAAP U.S. GAAP
------------------ -----------------
2002 2001 2002 2001
-------- ------- ------- -------
(Unaudited)
ASSETS
Other assets.............................................. $ 6,168 $16,647 $10,293 $13,557
Future income taxes....................................... 47,251 34,419 49,643 38,053
LIABILITIES
Accounts payable and accrued liabilities.................. 162,073 165,556 163,245 178,852
Current portion of long-term liabilities.................. 244 320,593 244 313,098
Long-term debt............................................ 335,394 5,683 460,394 130,683
Accrued benefit obligation................................ 28,499 36,542 39,089 41,140
SHAREHOLDERS' EQUITY
Convertible debenture..................................... 125,000 120,856 0 0
Reinvested earnings....................................... 86,785 184,860 82,585 175,961
Accumulated other comprehensive loss...................... -- -- 48,730 43,945
Foreign currency translation adjustments.................. 49,774 49,045 -- --
</Table>
Changes in reinvested earnings and accumulated other comprehensive loss
under U.S. GAAP were as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2002 2001
------- --------
(Unaudited)
Reinvested earnings at beginning of year.................... 149,071 277,438
Net loss.................................................... (66,486) (101,477)
------- --------
Reinvested earnings at end of period........................ 82,585 175,961
Accumulated other comprehensive loss at beginning of year... 50,036 7,018
Other comprehensive income.................................. (1,306) 36,927
------- --------
Accumulated other comprehensive loss at end of period....... 48,730 43,945
======= ========
</Table>
F-84
The difference in consolidated shareholders' equity may be reconciled as
follows:
<Table>
<Caption>
SEPTEMBER 30,
-------------------
2002 2001
-------- --------
Shareholders' equity based on Canadian GAAP................. 598,155 624,620
Other comprehensive income -- write-down of investment...... -- (5,100)
Debenture reclassified to debt.............................. (125,000) (120,856)
Pension expense adjustment.................................. (1,148) (1,264)
Minimum pension adjustment.................................. (1,044) --
Foreign exchange contracts.................................. -- (200)
Gain (loss) on gas contracts................................ 4,880 (6,962)
Cumulative reduction in net earnings under U.S. GAAP........ (7,932) (473)
-------- --------
Shareholders' equity based on U.S. GAAP..................... 467,911 489,765
======== ========
</Table>
There are no significant differences with respect to the consolidated
statement of cash flows between U.S. GAAP and Canadian GAAP for the nine
months ended September 30, 2002 and September 30, 2001.
F-85
REGISTERED OFFICE OF GERDAU AMERISTEEL CORPORATION
Hopkins Street South
Whitby, Ontario
Canada L1N 5T1
REGISTERED OFFICE OF GUSAP PARTNERS
c/o Corporation Trust Company
1209 Orange Street
Delaware
U.S.A. 19801
LEGAL ADVISORS TO GERDAU AMERISTEEL CORPORATION
AS TO U.S. LAW
Torys LLP
237 Park Avenue
New York, New York
U.S.A. 10017
AS TO CANADIAN LAW
Torys LLP
Suite 3000, P.O. Box 270
79 Wellington Street West, TD Centre
Toronto, Ontario
Canada M5K 1N2
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Bank of America Building
3900 North Orange Avenue, Suite 2400
Orlando, FL
U.S.A. 32801
TRUSTEE, REGISTRAR AND TRANSFER AGENT
SouthTrust Bank
110 Office Park Drive
2nd Floor
Attention: Bond Holder Services
Mail Code: A-001-0B-0201
Birmingham, AL
U.S.A 35223
PAYING AGENT AND EXCHANGE AGENT
SouthTrust Bank
110 Office Park Drive
2nd Floor
Attention: Bond Holder Services
Mail Code: A-001-0B-0201
Birmingham, AL
U.S.A. 35223
FORM F-10 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1(1) Certificate of Qualification
1.2(1) Calculation of Earnings Coverage
2.1(1) Registration Rights Agreement dated June 27, 2003 by and among
Gerdau Ameristeel, GUSAP Partners, Gerdau MRM Holdings Inc.,
Co-Steel Benefit Plans USA Inc., Co-Steel C.S.M. Corp., Co-Steel
Finance Corp., Co-Steel USA Holdings, Inc., Co-Steel (U.S.) Ltd.,
Gerdau MRM America Holding Corp., Gerdau Ameristeel Distribution
US Inc., Gerdau Ameristeel Sayreville Inc., Gerdau Ameristeel
Lake Ontario Inc., Gerdau USA Inc., PASUG LLC, MFT Acquisition,
Corp., Gerdau Ameristeel US Inc., Gerdau Ameristeel Perth Amboy
Inc., N.J.S.C. Investment Co., Inc., Raritan River Urban Renewal
Corporation, Porter Bros. Corporation, Gerdau Nova Scotia Holding
Company, 3038482 Nova Scotia Company, Co-Steel Benefit Plans
Inc., Gerdau Ameristeel Distribution Canada Ltd., 1062316 Ontario
Limited, 1102590 Ontario Limited, 1300554 Ontario Limited,
1551533 Ontario Limited, 2017387 Ontario Limited, Gerdau
Ameristeel Cambridge Inc. , Gerdau Ameristeel MRM Special
Sections Inc., J.P. Morgan Securities Inc., Banc of America
Securities LLC, CIBC World Markets Corp., TD Securities (USA)
Inc. and ABN AMRO Incorporated
4.1(2) Gerdau Ameristeel Corporation's Management Information Circular
dated March 31, 2003 relating to or distributed in connection
with the 2003 Annual and Special Meeting of Gerdau Ameristeel
Corporation's shareholders held on May 6, 2003
4.2(3) Gerdau Ameristeel Corporation's Annual Information Form for the
year ended December 31, 2002 dated May 20, 2003
4.3(3) Gerdau Ameristeel Corporation's Management's Discussion and
Analysis of Financial Condition and Results of Operations for
the year ended December 31, 2002 found at pages 10 to 19 of
Gerdau Ameristeel Corporation's Annual Report to Shareholders
for the year ended December 31, 2002
4.4(3) Gerdau Ameristeel Corporation's audited consolidated financial
statements for the year ended December 31, 2002, together with
the notes thereto and the auditor's report thereon, dated January
24, 2003, except for certain information contained in Notes 3 and
20, as to which the date is April 4, 2003 found at pages 20 to 39
of Gerdau Ameristeel Corporation's Annual Report to Shareholders
for the year ended December 31, 2002
4.5(4) Material change report dated June 9, 2003 with respect to the
announcement of Gerdau Ameristeel Corporation's intention to
raise $400 million through a private offering of Senior Secured
Notes due 2011
4.6(5) Material change report dated July 2, 2003 with respect to the
pricing and closing of the private offering of the Existing Notes
4.7(6) Gerdau Ameristeel Corporation's 2003 First Quarter Report to
Shareholders for the three month period ended March 31, 2003
4.8(7) Gerdau Ameristeel Corporation's 2003 Second Quarter Report to
Shareholders for the six month period ended June 30, 2003
4.9(8) Gerdau Ameristeel Corporation's 2003 Third Quarter Report to
Shareholders for the nine month period ended September 30, 2003
5.1 Consent of PricewaterhouseCoopers LLP (Orlando, Florida)
(included as Exhibit 23.1 in Form F-4 Exhibits)
5.2 Consent of PricewaterhouseCoopers LLP (Toronto, Canada)
(included as Exhibit 23.2 in Form F-4 Exhibits)
5.3 Consent of Ernst & Young LLP (Kitchener, Canada)
(included as Exhibit 23.3 in Form F-4 Exhibits)
6.1(1) Powers of Attorney (included on the signature pages of this
Registration Statement on Form F-10)
7.1(1) Indenture dated as of June 27, 2003 between Gerdau Ameristeel
Corporation, GUSAP Partners, Gerdau MRM Holdings Inc., Co-Steel
Benefit Plans USA Inc., Co-Steel C.S.M. Corp., Co-Steel Finance
Corp., Co-Steel USA Holdings, Inc., Co-Steel (U.S.) Ltd., Gerdau
MRM America Holding Corp., Gerdau Ameristeel Distribution US
Inc., Gerdau Ameristeel Sayreville Inc., Gerdau Ameristeel Lake
Ontario Inc., Gerdau USA Inc., PASUG LLC, MFT Acquisition, Corp.,
Gerdau Ameristeel US Inc., Gerdau Ameristeel Perth Amboy Inc.,
N.J.S.C. Investment Co., Inc., Raritan River Urban Renewal
Corporation, Porter Bros. Corporation, Gerdau Nova Scotia Holding
Company, 3038482 Nova Scotia Company, Co-Steel Benefit Plans
Inc., Gerdau Ameristeel Distribution Canada Ltd., 1062316 Ontario
Limited, 1102590 Ontario Limited, 1300554 Ontario Limited,
1551533 Ontario Limited, 2017387 Ontario Limited, Gerdau
Ameristeel Cambridge Inc., Gerdau Ameristeel MRM Special
Sections Inc., and SouthTrust Bank, as trustee
Form F-10 II-2
7.2(1) Form of Rule 144A Global Note (included in Exhibit 7.1)
7.3(1) Form of Regulation S Global Note (included in Exhibit 7.1)
7.4(1) Form of IAI Global Note (included in Exhibit 7.1)
7.5(1) Form of Exchange Note (included in Exhibit 7.1)
- ------------
(1) Previously filed on December 5, 2003 on Form F-10 (File No. 333-110951)
(2) Previously filed on April 17, 2003 on Form 6-K (File No. 333-101591)
(3) Previously filed on May 21, 2003 on Form 40-F (File No. 333-101591)
(4) Previously filed on July 9, 2003 on Form 6-K (File No. 333-101591)
(5) Previously filed on July 3, 2003 on Form 6-K (File No. 333-101591)
(6) Previously filed on May 30, 2003 on Form 6-K (File No. 333-101591)
(7) Previously filed on October 22, 2003 on Form 6-K (File No. 333-101591)
(8) Previously filed on November 26, 2003 on Form 6-K (File No. 333-101591)
(9) Previously filed on December 5, 2003 on Form F-4 (File No. 333-110957)
Form F-10 II-3
FORM F-10 PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. UNDERTAKING
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the SEC staff, and to furnish
promptly, when requested to do so by the SEC staff, information relating to the
securities registered pursuant to Form F-10 or to transactions in said
securities.
ITEM 2. CONSENT TO SERVICE OF PROCESS
Concurrently with the original filing of this Form F-10, the Registrant
filed with the Commission a written irrevocable consent and power of attorney on
Form F-X.
Any changes to the name or address of the agent for service of the
Registrant shall be communicated promptly to the SEC by amendment to Form F-X
referencing the file number of the relevant registration statement.
Form F-10 III-1
ITEM 21. EXHIBITS
FORM F-4 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(1) Statement of Partnership Existence of GUSAP Partners including
amendments thereto
3.2(1) Amended and Restated General Partnership Agreement of GUSAP
Partners
3.3(1) Certificate of Conversion to Limited Liability Company of PASUG
Inc. to PASUG LLC and Certificate of Formation of PASUG LLC
3.4(1) Limited Liability Company Agreement of PASUG LLC
3.5(1) Certificate of Incorporation of Gerdau Ameristeel Sayreville Inc.
including amendment thereto and related Certificate of Merger
3.6(1) By-Laws of Gerdau Ameristeel Sayreville Inc.
3.7(1) Amended and Restated Certificate of Incorporation of Gerdau
Ameristeel Perth Amboy Inc. including amendment thereto and
related certificates of merger
3.8(1) By-Laws of Gerdau Ameristeel Perth Amboy Inc.
3.9(1) Certificate of Incorporation of Gerdau Ameristeel Lake Ontario
Inc. including amendment thereto and Statement of Change of
Registered Agent/Office
3.10(1) By-Laws of Gerdau Ameristeel Lake Ontario Inc.
3.11(1) Articles of Incorporation of Porter Bros. Corporation including
Statement of Change of Registered Agent/Office
3.12(1) By-Laws of Porter Bros. Corporation
3.13(1) Certificate of Incorporation of MFT Acquisition, Corp. including
Certificate of Correction thereto
3.14(1) By-Laws of MFT Acquisition, Corp.
3.15(1) Certificate and Articles of Continuance of Gerdau Ameristeel MRM
Special Sections Inc. including amendments thereto
3.16(1) By-Laws of Gerdau Ameristeel MRM Special Sections Inc.
3.17(1) Articles of Incorporation of 1062316 Ontario Limited
3.18(1) By-Laws of 1062316 Ontario Limited
3.19(1) Articles of Incorporation of Co-Steel Benefit Plans Inc.
3.20(1) By-Laws of Co-Steel Benefit Plans Inc.
3.21(1) Articles of Incorporation of 1300554 Ontario Limited
3.22(1) By-Laws of 1300554 Ontario Limited
3.23(1) Articles of Continuance of 1551533 Ontario Limited
3.24(1) By-Laws of 1551533 Ontario Limited
3.25(1) Certificate of Incorporation of 3038482 Nova Scotia Company
3.26(1) Articles of Association of 3038482 Nova Scotia Company
3.27(1) Amended and Restated Certificate of Incorporation of Gerdau USA
Inc. and related certificates of merger
3.28(1) By-Laws of Gerdau USA Inc.
3.29(1) Amended and Restated Articles of Incorporation of Gerdau
Ameristeel US Inc. including amendments thereto and related
Articles of Merger
3.30(1) By-Laws of Gerdau Ameristeel US Inc.
Form F-4 II-1
3.31(1) Certificate of Incorporation of Co-Steel C.S.M. Corp. including
Certificate of Renewal and Revival thereto
3.32(1) By-Laws of Co-Steel C.S.M. Corp.
3.33(1) Certificate of Incorporation of Raritan River Urban Renewal Corp.
including certificates of correction thereto
3.34(1) By-Laws of Raritan River Urban Renewal Corp.
3.35(1) Certificate of Incorporation of Co-Steel Benefit Plans USA Inc.
including amendments thereto
3.36(1) By-Laws of Co-Steel Benefit Plans USA Inc.
3.37(1) Certificate of Incorporation of N.J.S.C. Investment Co., Inc.
3.38(1) By-Laws of N.J.S.C. Investment Co., Inc.
4.1(2) Registration Rights Agreement dated June 27, 2003 by and among
Gerdau Ameristeel Corporation, GUSAP Partners, Gerdau MRM
Holdings Inc., Co-Steel Benefit Plans USA Inc., Co-Steel C.S.M.
Corp., Co-Steel Finance Corp., Co-Steel USA Holdings, Inc.,
Co-Steel (U.S.) Ltd., Gerdau MRM America Holding Corp., Gerdau
Ameristeel Distribution US Inc., Gerdau Ameristeel Sayreville
Inc., Gerdau Ameristeel Lake Ontario Inc., Gerdau USA Inc., PASUG
LLC, MFT Acquisition, Corp., Gerdau Ameristeel US Inc., Gerdau
Ameristeel Perth Amboy Inc., N.J.S.C. Investment Co., Inc.,
Raritan River Urban Renewal Corporation, Porter Bros.
Corporation, Gerdau Nova Scotia Holding Company, 3038482 Nova
Scotia Company, Co-Steel Benefit Plans Inc., Gerdau Ameristeel
Distribution Canada Ltd., 1062316 Ontario Limited, 1102590
Ontario Limited, 1300554 Ontario Limited, 1551533 Ontario
Limited, 2017387 Ontario Limited, Gerdau Ameristeel Cambridge
Inc. , Gerdau Ameristeel MRM Special Sections Inc., and J.P.
Morgan Securities Inc., as representative of the Initial
Purchasers
4.2(2) Indenture dated as of June 27, 2003 between Gerdau Ameristeel
Corporation, GUSAP Partners, Gerdau MRM Holdings Inc., Co-Steel
Benefit Plans USA Inc., Co-Steel C.S.M. Corp., Co-Steel Finance
Corp., Co-Steel USA Holdings, Inc., Co-Steel (U.S.) Ltd., Gerdau
MRM America Holding Corp., Gerdau Ameristeel Distribution US
Inc., Gerdau Ameristeel Sayreville Inc., Gerdau Ameristeel Lake
Ontario Inc., Gerdau USA Inc., PASUG LLC, MFT Acquisition, Corp.,
Gerdau Ameristeel US Inc., Gerdau Ameristeel Perth Amboy Inc.,
N.J.S.C. Investment Co., Inc., Raritan River Urban Renewal
Corporation, Porter Bros. Corporation, Gerdau Nova Scotia Holding
Company, 3038482 Nova Scotia Company, Co-Steel Benefit Plans
Inc., Gerdau Ameristeel Distribution Canada Ltd., 1062316 Ontario
Limited, 1102590 Ontario Limited, 1300554 Ontario Limited,
1551533 Ontario Limited, 2017387 Ontario Limited, Gerdau
Ameristeel Cambridge Inc. , Gerdau Ameristeel MRM Special
Sections Inc., and SouthTrust Bank, as trustee
4.3(2) Form of Rule 144A Global Note
4.4(2) Form of Regulation S Global Note
4.5(2) Form of IAI Global Note
4.6(2) Form of Exchange Note
5.1(1) Opinion of Torys LLP with respect to the Exchange Notes of GUSAP
Partners and the exchange guarantees of the subsidiary guarantors
10.1(1) Credit Agreement dated as of June 20, 2003 by and among PASUG
LLC, GUSAP Partners, Gerdau Ameristeel Sayreville Inc., Gerdau
Ameristeel Perth Amboy Inc., Gerdau Ameristeel US Inc., Gerdau
Ameristeel Lake Ontario Inc.,
Form F-4 II-2
Gerdau Ameristeel Distribution US Inc., Porter Bros. Corporation,
MFT Acquisition, Corp., as the U.S. Borrowers, Gerdau Ameristeel
Corporation, Gerdau Ameristeel MRM Special Sections Inc., Gerdau
Ameristeel Distribution Canada Ltd., Gerdau Ameristeel Cambridge
Inc., as the Canadian Borrowers, The CIT Group/Business Credit,
Inc., as the Administrative Agent, CIT Business Credit Canada
Inc., as the Canadian Administrative Agent, and the financial
institutions, now or hereafter parties thereto, as the Lenders
12.1(1) Statement regarding the computation of ratio of earnings to fixed
charges
21.1(1) Organizational Chart setting forth the significant subsidiaries
of Gerdau Ameristeel Corporation
23.1 Consent of PricewaterhouseCoopers LLP (Orlando, Florida)
23.2 Consent of PricewaterhouseCoopers LLP (Toronto, Canada)
23.3 Consent of Ernst & Young LLP (Kitchener, Canada)
23.4(1) Consent of Torys LLP
24.1(1) Powers of Attorney
25.1(1) Statement of Eligibility on Form T-1 of SouthTrust Bank, the
Trustee for the $405 million Senior Notes due 2011 to be issued
in the Exchange Offer
99.1(1) Form of Letter of Transmittal
99.2(1) Form of Notice of Guaranteed Delivery
99.3(1) Form of Letter to Clients
99.4(1) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees
- ------------
(1) Previously filed on December 5, 2003 on Form F-4 (File No. 333-110957)
(2) Previously filed on December 5, 2003 on Form F-10 (File No. 333-110951)
Form F-4 II-3
ITEM 22. UNDERTAKINGS
Each of the undersigned co-registrants hereby undertakes:
(i) that, for purposes of determining any liability under the Securities Act of
1933, each filing of such co-registrants' annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(ii) insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of any
registrant pursuant to any charter provision, by-law, contract, arrangement,
statute, or otherwise, the registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
any registrant of expenses incurred or paid by a director, officer or
controlling person of such registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue;
(iii) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means;
(iv) to arrange or provide for a facility in the U.S. for the purpose of
responding to such requests. The undertaking in subparagraph (iii) above
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request; and
(v) to supply by means of a post-effective amendment all information concerning
a transaction and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became effective.
Form F-4 II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-10 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
United States, on this 17th day of December, 2003.
GERDAU AMERISTEEL CORPORATION
By: /s/ Phillip E. Casey
------------------------------------
Name: Phillip E. Casey
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------- ------------------
* Director, President and Chief December 17, 2003
- ----------------------------------- Executive Officer (Principal
Phillip E. Casey Executive Officer)
* Vice-President, Chief Financial December 17, 2003
- ----------------------------------- Officer and Secretary (Principal
Tom J. Landa Financial and Accounting Officer)
* Director December 17, 2003
- -----------------------------------
Jorge Gerdau Johannpeter
* Director December 17, 2003
- -----------------------------------
Kenneth W. Harrigan
* Director December 17, 2003
- -----------------------------------
Joseph J. Heffernan
* Director December 17, 2003
- -----------------------------------
J. Spencer Lanthier
Director
- -----------------------------------
Michael D. Sopko
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------- ------------------
* Director December 17, 2003
- -----------------------------------
Frederico C. Gerdau Johannpeter
* Director December 17, 2003
- -----------------------------------
Andre Bier Johannpeter
* Director December 17, 2003
- -----------------------------------
Arthur Scace
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
United States, on this 17th day of December, 2003.
GUSAP PARTNERS
By: /s/ Tom J. Landa
------------------------------------
Name: Tom J. Landa
Title: Vice-President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------- ------------------
* Manager and President (Principal December 17, 2003
- ----------------------------------- Executive Officer)
Glen A. Beeby
* Vice-President (Principal Financial December 17, 2003
- ----------------------------------- and Accounting Officer)
Tom J. Landa
* Manager December 17, 2003
- -----------------------------------
Garry Leach
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
United States, on this 17th day of December, 2003.
PASUG LLC
By: /s/ Tom J. Landa
------------------------------------
Name: Tom J. Landa
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------- ------------------
/s/ Tom J. Landa Director and President (Principal December 17, 2003
- ----------------------------------- Executive, Financial and Accounting
Tom J. Landa Officer)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
United States, on this 17th day of December, 2003.
GERDAU AMERISTEEL SAYREVILLE INC.
By: /s/ Phillip E. Casey
---------------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- ----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director, Executive Vice-President, December 17, 2003
- ------------------------------ Finance & Administration and
Tom J. Landa Secretary (Principal Financial and
Accounting Officer)
* Director December 17, 2003
- ------------------------------
William E. Rider
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
</Table>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
United States, on this 17th day of December, 2003.
GERDAU AMERISTEEL PERTH AMBOY INC.
By: /s/ Phillip E. Casey
--------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- ----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director, Executive Vice-President, December 17, 2003
- ------------------------------ Finance & Administration and
Tom J. Landa Secretary (Principal Accounting
Officer)
* Director December 17, 2003
- ------------------------------
Robert L. Bullard
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
</Table>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
GERDAU AMERISTEEL LAKE ONTARIO INC.
By: /s/ Phillip E. Casey
-----------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- ----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director, Vice-President, December 17, 2003
- ------------------------------ Secretary, Treasurer and Chief
Glen A. Beeby Financial Officer (Principal
Financial Officer)
* Director and Executive December 17, 2003
- ------------------------------ Vice-President, Finance &
Tom J. Landa Administration (Principal
Accounting Officer)
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
</Table>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, Province of Ontario,
Canada, on this 17th day of December, 2003.
PORTER BROS. CORPORATION
By: /s/ Glen A. Beeby
-----------------------------------
Name: Glen A. Beeby
Title: Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Garry Leach
* Secretary and Treasurer (Principal December 17, 2003
- ------------------------------ Financial and Accounting Officer)
Glen A. Beeby
* Director December 17, 2003
- ------------------------------
Phillip E. Casey
* Director December 17, 2003
- ------------------------------
Tom J. Landa
</Table>
*By: /s/ Glen A. Beeby
-------------------------
Glen A. Beeby
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Selkirk, Province of Manitoba, Canada,
on this 17th day of December, 2003.
MFT ACQUISITION, CORP.
By: /s/ Bruce Irvine
--------------------------------
Name: Bruce Irvine
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive, Financial and Accounting
Bruce Irvine Officer)
* Director December 17, 2003
- ------------------------------
Garry Leach
</Table>
*By: /s/ Bruce Irvine
-------------------------
Bruce Irvine
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, Province of Ontario,
Canada, on this 17th day of December, 2003.
GERDAU AMERISTEEL MRM SPECIAL SECTIONS INC.
By: /s/ Glen A. Beeby
--------------------------------
Name: Glen A. Beeby
Title: Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Garry Leach
* Director, Secretary and Treasurer December 17, 2003
- ------------------------------ (Principal Financial and Accounting
Glen A. Beeby Officer)
* Director December 17, 2003
- ------------------------------
Andre B. Johannpeter
</Table>
*By: /s/ Glen A. Beeby
-------------------------
Glen A. Beeby
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
1062316 ONTARIO LIMITED
By: /s/ Phillip E. Casey
----------------------------------
Name: Phillip E. Casey
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director, President and Chief December 17, 2003
- ------------------------------ Executive Officer (Principal
Phillip E. Casey Executive Officer)
* Director, Vice-President, December 17, 2003
- ------------------------------ Secretary, Treasurer and Chief
Valerie Boughey Financial Officer (Principal
Financial and Accounting Officer)
* Director December 17, 2003
- ------------------------------
Glen A. Beeby
</Table>
*By: /s/ Glen A. Beeby
-------------------------
Glen A. Beeby
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, Province of Ontario,
Canada, on this 17th day of December, 2003.
CO-STEEL BENEFIT PLANS INC.
By: /s/ Glen A. Beeby
------------------------------------
Name: Glen A. Beeby
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive, Financial and Accounting
Glen A. Beeby Officer)
* Director December 17, 2003
- ------------------------------
James S. Rogers
</Table>
*By: /s/ Glen A. Beeby
-------------------------
Glen A. Beeby
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
1300554 ONTARIO LIMITED
By: /s/ Tom J. Landa
---------------------------------------
Name: Tom J. Landa
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director, President and Chief December 17, 2003
- ------------------------------ Executive Officer (Principal
Tom J. Landa Executive Officer)
* Director, Vice-President, December 17, 2003
- ------------------------------ Secretary, Treasurer and Chief
Valerie Boughey Financial Officer (Principal
Financial and Accounting Officer)
* Director December 17, 2003
- ------------------------------
Glen A. Beeby
</Table>
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Porto Alegre, Brazil on this 17th day
of December, 2003.
1551533 ONTARIO LIMITED
By: /s/ Paul Lawrence
----------------------------------
Name: Paul Lawrence
Title: President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
/s/ Paul Lawrence Director, President and Secretary December 17, 2003
- ------------------------------ (Principal Executive, Financial and
Paul Lawrence Accounting Officer)
</Table>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
3038482 NOVA SCOTIA COMPANY
By: /s/ Tom J. Landa
---------------------------------
Name: Tom J. Landa
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President December 17, 2003
- ------------------------------ (Principal Executive, Financial
Glen A. Beeby and Accounting Officer)
* Director December 17, 2003
- ------------------------------
Tom J. Landa
</Table>
*By: /s/ Tom J. Landa
----------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
GERDAU USA INC.
By: /s/ Phillip E. Casey
--------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director and Treasurer (Principal December 17, 2003
- ------------------------------ Financial and Accounting Officer)
Tom J. Landa
* Director December 17, 2003
- ------------------------------
Mike Mueller
</Table>
*By: /s/ Tom J. Landa
----------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
GERDAU AMERISTEEL US INC.
By: /s/ Phillip E. Casey
---------------------------------
Name: Phillip E. Casey
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director, President and Chief December 17, 2003
- ------------------------------ Executive Officer (Principal
Phillip E. Casey Executive Officer)
* Director, Chief Financial Officer December 17, 2003
- ------------------------------ and Secretary (Principal Financial
Tom J. Landa and Accounting Officer)
* Director December 17, 2003
- ------------------------------
Mike Mueller
</Table>
*By: /s/ Tom J. Landa
----------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
CO-STEEL C.S.M. CORP.
By: /s/ Phillip E. Casey
-------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director and Executive December 17, 2003
- ------------------------------ Vice-President, Finance &
Andre B. Johannpeter Administration (Principal Financial
and Accounting Officer)
* Director December 17, 2003
- ------------------------------
Paulo B. de Vasconcellos
</Table>
*By: /s/ Phillip E. Casey
--------------------
Phillip E. Casey
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
RARITAN RIVER URBAN RENEWAL CORPORATION
By: /s/ Phillip E. Casey
-------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director, Executive Vice-President, December 17, 2003
- ------------------------------ Finance and Administration and
Tom J. Landa Secretary (Principal Financial and
Accounting Officer)
* Director December 17, 2003
- ------------------------------
Robert L. Bullard
</Table>
*By: /s/ Tom J. Landa
----------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
CO-STEEL BENEFIT PLANS USA INC.
By: /s/ Phillip E. Casey
--------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive, Financial and Accounting
Phillip E. Casey Officer)
* Director December 17, 2003
- ------------------------------
James S. Rogers
* Director December 17, 2003
- ------------------------------
Tom J. Landa
</Table>
*By: /s/ Tom J. Landa
-----------------
Tom J. Landa
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, United
States, on this 17th day of December, 2003.
N.J.S.C. INVESTMENT CO., INC.
By: /s/ Phillip E. Casey
--------------------------------
Name: Phillip E. Casey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- -----------------
* Director and President (Principal December 17, 2003
- ------------------------------ Executive Officer)
Phillip E. Casey
* Director, Executive Vice-President, December 17, 2003
- ------------------------------ Finance and Administration and
Tom J. Landa Secretary (Principal Financial and
Accounting Officer)
* Director December 17, 2003
- ------------------------------
William E. Rider
</Table>
*By: /s/ Tom J. Landa
-------------------------
Tom J. Landa
Attorney-in-fact
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933,
the undersigned certifies that it is the duly authorized United States
representative of the registrant on Form F-10 and each of the applicable
co-registrants on Form F-4 and has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tampa, State of Florida, United States, on this
17th day of December, 2003.
GERDAU AMERISTEEL US INC.
(Authorized U.S. Representative)
By: /s/ Tom J. Landa
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Name: Tom J. Landa
Title: Chief Financial Officer